ITEM 1. Business
General
Shearson American REIT, Inc. (“we” or the “Company”) is a Nevada corporation whose business purpose now is to become a real estate investment trust. We currently intend to focus on the development and construction of multi-family properties in urban areas of cities of various sizes in the United States, although we may also purchase properties with existing improvements. We anticipate allocating up to 10% of each project’s total square footage to synergistic commercial uses, such as dry cleaners, car rental, day care, travel agency, deli/restaurant and the like. We anticipate that many of these properties will qualify for financing under Sections 221(d)(3) for acquisition and 221(d)(4) for construction of the National Housing Act administered by HUD that insures mortgage loans to facilitate the new construction or substantial rehabilitation of multi-family rental or cooperative housing for moderate-income families, elderly, and the handicapped. Our broad investment policies do not, however, require us to invest in these kinds of properties.
We currently believe that we do not qualify, but intend to qualify, as a real estate investment trust (“REIT”) under federal tax law. In general, a REIT is a company that combines the capital of many investors to acquire real estate and/or real estate related assets and meets certain other qualifications. The benefits of a REIT may include the following:
A greater diversified real estate portfolio under professional management;
A REIT is not subject to federal corporate income taxes on its income that it distributes to its shareholders, which substantially eliminates “double taxation” (i.e., taxation at both the corporate and shareholder levels).
We do not have any employees. Instead, we intend to rely on Shearson American Advisors, LLC, a Delaware limited liability company (the "Advisor"), to conduct our day-to-day affairs.
We anticipate that each of our properties will be owned under a separate limited partnership managed with our Advisor. As of December 31, 2013, the Company owns interests in two joint ventures that plan to develop urban properties in Las Vegas, Nevada and Beaumont, Texas. The joint ventures are subject to financing and other conditions and there is no assurance that the joint ventures will accomplish their business purposes.
Our shares of common stock are currently not traded on a stock exchange or other public market.
History
Overview of Registrant
Shearson American Reit, Inc. ("Shearson" or “we” or the “Company”) was originally incorporated as PSA, Inc. (“PSA”), a California corporation, on May 27, 1994. PSA, Inc. became a publicly-held company upon completion of its merger in April 1998 with American Telecommunications Standard International, Inc. ("ASAT"), originally incorporated in Nevada in 1985. In connection with the merger, ASAT changed its trading symbol from ASAT to PSAZ. On September 22, 1998, the Company changed its trading symbol to PSAX and then back to PSAZ on July 31, 2001. The Company's shares of common stock were traded on the OTC Bulletin Board.
Upon effectiveness of the merger, pursuant to Rule12g-3(a) of the General Rules and Regulations of the Securities and Exchange Commission, PSA elected to change its name from ASAT to PSA, INC. for reporting purposes under the Securities Exchange Act of 1934, as amended (the “Act”), and elected to report under the Act effective February 18, 2000.
Subsequently, PSA, Inc., a Nevada corporation, acquired all of the outstanding shares of common stock of Canticle corporation ("Canticle"), a Delaware corporation, from the shareholders thereof in an exchange for an aggregate of 56,000 shares of common stock of PSA (the "Acquisition"). As a result, Canticle became a wholly-owned subsidiary of PSA.
The Acquisition of Canticle was approved by the unanimous consent of the Board of Directors of PSA on February 11, 2000. The Acquisition was effective February 18, 2000. The Acquisition was intended to qualify as a reorganization within the meaning of Section 368(a)(1)(B) of the Internal Revenue Code of 1986, as amended.
PSA had 31,500,235 shares of common stock issued and outstanding prior to the Acquisition and 31,556,235 shares issued and outstanding following the Acquisition.
Upon effectiveness of the Acquisition, pursuant to Rule12g-3(a) of the General Rules and Regulations of the Securities and Exchange Commission, PSA elected to become the successor issuer to Canticle for reporting purposes under the Securities Exchange Act of 1934, as amended, and elected to report under the Act effective February 18, 2000.
Ownership control of the Company has not changed since the original incorporation of PSA, Inc. in California on May 27, 1994.
Business
The Company changed its name on October 16, 2009 to Shearson American REIT, Inc. with the sole purpose of becoming a Real Estate Investment Trust (REIT). The Company and its management have no experience in operating or creating a REIT. Management has not previously had any experience in raising funds from passive investors for investment in real estate.
The Board of Directors authorized the development of a Business Plan and an implementation document to qualify as a Real Estate Investment Trust (REIT).
We intend to acquire or develop multi-family residential rental real estate initially in the United States. We intend to focus on acquiring or developing properties located in urban areas in markets and submarkets that we believe to have high growth potential.
Our investment strategy may also include investments in real estate-related assets that we believe present opportunities for significant current income. Such investments may also have what we believe to be opportunities for capital gain, whether as a result of a discount purchase or related equity participations. By related equity participations, we mean that we may not acquire 100% interest in a property but rather a fractional share such as an interest in a joint venture, which would also present an opportunity for capital gains when the entire property or our interest in the property is sold.
In addition, our investment strategy may include development projects that we will build or participate in building for sale or lease. For example, depending upon a variety of economic factors such as cost and availability of construction financing and land and labor costs in a specific region in which we intend to operate, we may determine that it may be more profitable to construct real estate ourselves and either lease it and hold for eventual resale or resell directly rather than to acquire existing real estate. We currently believe that we would concentrate on multi-family residential construction projects.
Assuming we raise sufficient funding, our investment strategy is designed to provide investors with a diversified portfolio primarily consisting of multi-family residential real estate projects. It is possible that we may only secure funding to acquire or develop one property, in which case our portfolio will not be diversified. Although we have reviewed the real estate markets in the states in which we intend to acquire or develop properties, we have had no contract, agreement or commitment to acquire or develop any property as of the date of this report, other than as described in this Annual Report under “Item 1. Business - Joint Venture Agreements with Windsor.”
We have already undertaken significant operational activities in furtherance of our business plan. Specifically, besides entering into two Joint Venture Agreements with Windsor, we have taken the following steps in furtherance of our business plan: We have enriched our knowledge in the real estate market in various states, such as North Carolina, Texas, Illinois and Florida, by studying the existing statistics on those markets and by having extensive discussions with many experts in those markets as follows:
● Overall we have reviewed 10 properties for development in four states.
● The types of properties we have reviewed are all residential multi-family.
● Overall we have met with three real estate agents in four states.
● We have met with five real estate owners in four states.
● We have contacted a FHA/HUD Approved Mortgagee, Berkadia Mortgage, Raleigh, North Carolina, and preliminarily reviewed five of the properties as to the feasibility of FHA/HUD financing under the Section 221d(4) program. We are in the process of preparing the numerous required exhibits for submission to Berkadia Mortgage Corporation, including:
A. Exhibits Required for the Pre-application Review
1. Narrative Description of Proposed Project.
2. Form HUD-92013, “Application for Multi-family Housing Project,” including developer’s summary cost figures with application fee.
3. Form HUD-92013-E, Supplemental Application and Processing Form (Housing for the Elderly/Disabled).
4. Preliminary sketch plans, consisting of:
a. Survey and Site Plan.
b. Typical unit and building layouts.
c. Ground floor and typical floor plans.
d. Wall section plan.
5. Market Study with comparables.
6. An appraisal with comparable revenues and expenses (Forms HUD-92273 and HUD-92274). If the processing calls for tax credit and/or bond financed applications, a HUD-92264T must be included.
7. Photograph(s) of the property and immediate area.
8. Evidence of site control.
9. Location map or maps.
10. If commercial space involved, show estimated percentage of total square feet and estimated total income.
11. If pre-application is under Section 220, evidence that property is in eligible area.
12. Copy of ground lease (207 Lease Addenda), if any.
13. Phase I Environmental Site Assessment with a narrative environmental report; a Phase II, if applicable.
14. Marketing, Leasing, and (if applicable) Relocation Plan.
15. If state or local grants or loans are anticipated as part of the project, evidence that such funds will be available.
16. Resumes showing experience of owners/sponsor and key principals, organization chart, and sponsor’s current financial statement with HUD Certification.
17. Resumes of Lender’s underwriter, appraiser, and/or market analyst if not submitted prior to the pre-application.
18. If Sponsor is nonprofit, Form HUD-3433, “Request for Preliminary Determination as a Nonprofit Sponsor and/or Mortgagor” and supporting documents.
19. If Sponsor is non-profit, Developer’s Agreement or another document showing relationships and work responsibilities of all parties associated with the transaction.
20. Active Partner Performance System Participate Certification - Electronic or Paper 2530 are acceptable. Also applies to lessees.
21. Disc or removable drive of the underwriting file, exhibits and third party reports.
B. Additional Exhibits at Pre-Application for Substantial Rehabilitation
1. “As is” sketch plans in addition to preliminary sketch plans listed in 8 above.
2. Mortgagor’s architect’s basic work write-up, including summary cost estimates of major trade item groups if a partial (non-gut) rehabilitation.
3. LBP and asbestos test reports for projects constructed prior to 1978. (See Chapter 5 and Chapter 9).
4. Plans for relocation of existing residents affected by work.
5. Appraisal Exhibits. Forms HUD-92273, HUD-92274 and HUD-92264T (if applicable), dated no more than 120 days before the date of the pre-application package submission. If the processing calls for tax credit and/or bond financed applications, a HUD-92264T must also be included.
6. Financial statements for the property for the past three years.
Our discussions with various individuals concerning these properties and projects have included general discussions of acquiring properties directly either ourselves or in joint ventures with others or of developing properties either ourselves or in joint venture with others, as described in this Annual Report. As of the date of this document, besides our Joint Venture Agreements with Windsor High Rise Construction, Ltd., all such discussions have been general. We have no specific plan as to whether we will acquire or develop any specific properties or projects ourselves or jointly with prospective joint venture partners. There is no limitation in the amount of funds we may invest in either property acquisition or property development. There is no limitation on or percentage allocation of funds or assets between property acquisition and property development or between 100% ownership or joint venture ownership. All of the individuals and firms we have met with in furthering our business plan described above have indicated that we need to become a fully reporting company with the Securities and Exchange Commission with securities qualified for quotation on the Over the Counter Market before proceeding in any more formal manner and thus our plans remain general. This is because we believe the individuals and entities we are dealing with will have greater confidence in our ability to execute our business plan and we will have more credibility in dealing with them if we are a public reporting company with securities qualified for quotation on an Over the Counter Market.
Joint Venture Agreements With Windsor
On November 20, 2013, effective as of October 18, 2013, Shearson American REIT, Inc. entered into a Joint Venture Agreement with Windsor High-Rise Construction, Ltd., a Delaware company (“WHC”), to acquire the land, develop and construct a 400 unit, Leeds Certified High Rise Rental Apartment Project in Las Vegas, Nevada, named Sullivan Square, Phase One (collectively, the “Transactions”). Pursuant to the terms of the Joint Venture Agreement and a subsequent Limited Partnership Agreement to be made, the expected services and contributions by the parties are as follows:
1.1. WHC will act in the capacity of the Managing General Partner and discuss with Shearson the structure of the Transactions and actions to be taken by Shearson in preparation for and completion of the Transactions and the financing of the Transactions.
1.2. WHC will employ its best efforts to arrange for the financing of the project in the form of a HUD/ GNMA Construction First Mortgage Loan for 2 (two) years and a HUD/GNMA Permanent First Mortgage Loan for 40 (forty) years, both under Section 221d(4) of the Federal Housing Act.
1.3. WHC may in its capacity as Managing General Partner provide any of the additional services necessary to the development of the project such as act as the General Contractor, the Managing Agent or engage the marketing and leasing agents and may be paid for these services in accordance with the fee schedule determined by HUD.
1.4. WHC will cause to be prepared and filed with HUD through the HUD Mortgagee Berkadia Commercial Mortgage, LLC, all HUD/GNMA Forms describing, as they occur, the sale of mortgage securities, and the terms of the Transactions, and such other events as are required to comply with HUD/GNMA Regulations.
2.1. Shearson shall designate those persons that Shearson wishes to represent it for communications with the Limited Partnership contemplated to be formed in conjunction with the Joint Venture Agreement.
2.2. Upon formation of the Limited Partnership, Shearson will be a Limited Partner in said Limited Partnership and afforded all the protections in law of that of a Limited Partner.
2.3. Shearson will assign and convey any fee simple ownership interest in the land, if and when it has acquired such interest in the underling land to the Sullivan Square Real Estate Development, Phase I, to the Limited Partnership.
3.1. The Joint Venture Agreement shall be the written memorialization of the business arrangements and relationships between the parties until such time that the financing (HUD/GNMA) by Berkadia Commercial Mortgage, Inc. is ready to be funded (of which there can be no assurance). At that time and place the Limited Partnership Agreement will become the operative document memorializing the full relationship between the parties to the Joint Venture Agreement.
3.2. Ownership interests in the Limited Partnership to be formed at the closing of the construction mortgage loan will be as follows: 50% (fifty) Shearson and 50% (fifty) WHC. It is agreed that as appropriate, approximately every 2 (two) years the property would be refinanced and the proceeds would be distributed among Shearson and WHC on a 50/50 (fifty/fifty) basis. Profits will be shared in those ownership percentages.
4.1. WHC may terminate The Joint Venture Agreement, without further obligation or liability, at any time (i) that WHC has a reasonable basis to believe that any aspect of the Transactions covered by the Joint Venture Agreement would constitute a fraud or deception on the market or (ii) that Shearson fails to meet its obligations under the Joint Venture Agreement in a manner which would constitute a material breach. In any such case, WHC will be entitled to retain all payments made to it or accrued prior to such termination. Such right of termination shall not be exclusive and shall not preclude any other relief available to WHC including claims for damages and Shearson enforcement.
5.1. The parties agree to take any further actions and to execute any further documents, which may from time to time be necessary or appropriate to carry out the purposes of the Joint Venture Agreement.
5.2. The Joint Venture Agreement constitutes the entire understanding of the parties. No undertakings, warranties or representations have been made other than as contained herein, and no party shall assert otherwise. The Joint Venture Agreement may not be changed or amended orally.
5.3. All references to currency in the Joint Venture Agreement are to United States Dollars.
6.1. The Transaction as contemplated by the Joint Venture Agreement is contingent upon various third party approvals such as City, County and State Building Permit Approvals, environmental restrictions and HUD/GMMA rules and regulations, and the California Department of Business Oversight and the State of Nevada Department of Corporations.
On November 20, 2013, effective October 18, 2013 Shearson American REIT, Inc. entered into another Joint Venture Agreement with Windsor High-Rise Construction, Ltd., a Delaware company (“WHC”), to acquire the land and to develop and construct a 326 unit Leeds Certified High Rise Rental Apartment Project in Beaumont, Texas, named Beaumont Place, Phase One (collectively, the “Transactions”).
Pursuant to the terms of the Joint Venture Agreement and a subsequent Limited Partnership Agreement to be made, the expected services and contributions by the parties are as follows:
1.1. WHC will act in the capacity of the Managing General Partner and discuss with Shearson the structure of the Transactions and actions to be taken by Shearson in preparation for and completion of the Transactions and the financing of the Transactions.
1.2. WHC will employ its best efforts to arrange for the financing of the project in the form of a HUD/ GNMA Construction First Mortgage Loan for 2 (two) years and a HUD/GNMA Permanent First Mortgage Loan for 40 (forty) years, both under Section 221-d4 of the Federal Housing Act.
1.3. WHC may in its capacity as Managing General Partner provide any of the additional services necessary to the development of the project such as act as the General Contractor, the Managing Agent or engage the marketing and leasing agents and may be paid for these services in accordance with the fee schedule determined by HUD.
1.4. WHC will cause to be prepared and filed with the HUD through the HUD Mortgagee Berkadia Commercial Mortgage, LLC, all HUD/GNMA Forms describing, as they occur, the sale of mortgage securities, and the terms of the Transactions, and such other events as are required to comply with HUD/GNMA Regulations.
1.5. Take other actions appropriate to completion of the Transactions as contemplated by the agreement.
2.1. Shearson shall designate those persons that Shearson wishes to represent it for communications with the Limited Partnership contemplated to be formed in conjunction with the Joint Venture Agreement.
2.2. Upon formation of the Limited Partnership, Shearson will be a Limited Partner in said Limited Partnership and afforded all the protections in law of that of a Limited Partner.
2.3. Shearson will assign and convey any fee simple ownership interest it has, if and when it has acquired such interest in the underling land to the Beaumont Place, Phase I, to the Limited Partnership.
3.1. Joint Venture Agreement shall be the written memorialization of the business arrangements and relationships between the parties until such time that the (HUD/GNMA) financing by Berkadia Commercial Mortgage Inc., is ready to be funded (of which there can be no assurance). At that time the Limited Partnership Agreement will become the operative document memorializing the full relationship between the parties to the Joint Venture Agreement.
3.2. Ownership interests in the Limited Partnership to be formed at the closing of the construction mortgage loan will be as follows: 50% (fifty) Shearson and 50% (fifty) WHC. It is agreed that as appropriate, approximately every 2 (two) years the property would be refinanced and the proceeds would be distributed among Shearson and WHC on a 50/50 (fifty/fifty) basis. Profits will be shared in those ownership percentages.
4.1. WHC may terminate the Joint Venture Agreement, without further obligation or liability, at any time (i) that WHC has a reasonable basis to believe that any aspect of the Transactions covered by the Joint Venture Agreement would constitute a fraud or deception on the market or (ii) that Shearson fails to meet its obligations under the agreement in a manner which would constitute a material breach. In any such case, WHC will be entitled to retain all payments made to it or accrued prior to such termination. Such right of termination shall not be exclusive and shall not preclude any other relief available to WHC including claims for damages and Shearson enforcement.
5.1. The parties agree to take any further actions and to execute any further documents, which may from time to time be necessary or appropriate to carry out the purposes of the Joint Venture Agreement.
5.2. The agreement constitutes the entire understanding of the parties. No undertakings, warranties or representations have been made other than as contained herein, and no party shall assert otherwise. The agreement may not be changed or amended orally.
5.3. All references to currency in the Joint Venture Agreement are to United States Dollars.
6.1. The Transaction as contemplated by the Joint Venture Agreement is contingent upon various third party approvals such as City, County and State Building Permit Approvals, environmental restrictions and HUD/GMMA rules and regulations, and the California Department of Corporations and the State of Nevada Department of Business Oversight.
Emerging Growth Company
We are an emerging growth company under the JOBS Act. We shall continue to be deemed an emerging growth company until the earliest of:
(a) the last day of the fiscal year of the issuer during which it had total annual gross revenues of $1,000,000,000 (as such amount is indexed for inflation every 5 years by the Commission to reflect the change in the Consumer Price Index for All Urban Consumers published by the Bureau of Labor Statistics, setting the threshold to the nearest 1,000,000) or more;
(b) the last day of the fiscal year of the issuer following the fifth anniversary of the date of the first sale of common equity securities of the issuer pursuant to an effective IPO registration statement;
(c) the date on which such issuer has, during the previous 3-year period, issued more than $1,000,000,000 in non-convertible debt; or
(d) the date on which such issuer is deemed to be a ‘large accelerated filer’, as defined in section 240.12b-2 of title 17, Code of Federal Regulations, or any successor thereto.
As an emerging growth company we are exempt from Section 404(b) of Sarbanes Oxley. Section 404(a) requires Issuers to publish information in their annual reports concerning the scope and adequacy of the internal control structure and procedures for financial reporting. This statement shall also assess the effectiveness of such internal controls and procedures. Section 404(b) requires that the registered accounting firm shall, in the same report, attest to and report on the assessment on the effectiveness of the internal control structure and procedures for financial reporting.
As an emerging growth company we are also exempt from Section 14A (a) and (b) of the Securities Exchange Act of 1934 which require the shareholder approval of executive compensation and golden parachutes.
Administrative Order
On January 26, 2010, the Company received notice from the U.S. Securities and Exchange Commission in connection with its Order Instituting Administrative Proceedings (“IAP”) pursuant to Section 12(J) of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”). The IAP was instituted since the Company had been deficient in complying with the Company’s obligations under Exchange Act for several years. Specifically, the Company failed to file Form 10-Ks for the years ended December 31, 2000 through December 31, 2007. In addition, the Form 10-Ks for the years ended December 31, 2008 and 2009 were not filed timely. In addition, the Form 10-Qs for 2001 through 2009 were not filed. As a consequence of the Company’s failure to file these reports, all of the Company’s securities were involuntarily deregistered pursuant to 12(j) of the Exchange Act, which in part prohibits broker dealers from effecting transactions in the Company’s securities until the securities are registered. Accordingly, the Company filed a registration statement on Form 10 with the Securities and Exchange Commission.
Employees
As of December 31, 2013, the Company had three employees, Richard Orcutt, President, John Williams, Chairman and Chief Financial Officer, and Jonathon Schatz, Treasurer. Each of the employees devote a portion of their time to their duties with the Company while devoting their remaining time to their other affairs. We presently have no employees apart from our management. All of our officers and directors are engaged in outside business activities and anticipate that they will devote limited time to our business until the acquisition of a successful business opportunity has been identified. We expect no significant changes in the number of our employees other than as a direct result, if any, incident to a specific joint venture project. The Company’s CEO, President, COO and CFO are expected to work full time, at no less than 40 hours per week, if and when the Company has commenced substantial operations.
ITEM 2.
ITEM 2. Description of Property
None
ITEM 3.
ITEM 3. Legal Proceedings
As of May 8, 2014 the Company has no outstanding or pending litigation matters.
ITEM 4.
ITEM 4. Mine Safety Procedures
N/A
PART II
ITEM 5.
ITEM 5. Market for the Registrant's Common Equity and Related Stockholder Matters
(a) General. As of December 31, 2013, Shearson had an authorized capitalization of 75,000,000 shares of common stock, $.001 par value per share, of which 52,518,999 shares had been issued and 52,514,749 shares were outstanding as of December 31, 2013. No preferred stock has been authorized or is issued or outstanding.
(b) Market Information. The common stock of Shearson was previously traded in the over-the-counter (“OTC”) market and quoted through the OTC Bulletin Board under the symbol "PSAZ." Historically, the level of trading in Shearson’s common stock has been sporadic and limited and there is no assurance that a stable trading market will develop for its stock or that an active trading market will be sustained.
The following table sets forth the range of high and low bid quotation per share for the Common Stock as reported by the OTC Bulletin Board for the quarterly periods of the calendar years indicated. The bid price reflects inter-dealer prices and does not include retail mark-up, markdown, or commission.
Shareholders
As of December 31, 2013 Shearson had 52,514,749 shares of common stock outstanding held by approximately 643 shareholders of record.
Dividends
Shearson has never declared or paid cash dividends on its Common Stock and anticipates that future earnings, if any, will be retained for development of its business.
ITEM 6.
ITEM 6. Selected Financial Data
Not applicable.
ITEM 7.
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Overview
The Company changed its name on October 16, 2009 to Shearson American REIT, Inc. with the sole purpose of becoming a Real Estate Investment Trust (REIT). The Company and its management have no experience in operating or creating a REIT. Management has not previously had any experience in raising funds from passive investors for investment in real estate.
The Board of Directors authorized the development of a Business Plan and an implementation document to qualify as a Real Estate Investment Trust (REIT).
We intend to acquire or develop multi-family residential rental real estate initially in the United States. We intend to focus on acquiring or developing properties located in urban areas in markets and submarkets that we believe to have high growth potential.
Our investment strategy may also include investments in real estate-related assets that we believe present opportunities for significant current income. Such investments may also have what we believe to be opportunities for capital gain, whether as a result of a discount purchase or related equity participations. By related equity participations, we mean that we may not acquire 100% interest in a property but rather a fractional share such as an interest in a joint venture, which would also present an opportunity for capital gains when the entire property or our interest in the property is sold.
In addition, our investment strategy may include development projects that we will build or participate in building for sale or lease. For example, depending upon a variety of economic factors such as cost and availability of construction financing and land and labor costs in a specific region in which we intend to operate, we may determine that it may be more profitable to construct real estate ourselves and either lease it and hold for eventual resale or resell directly rather than to acquire existing developed real estate. We currently believe that we would concentrate on multi-family residential construction projects.
Assuming we raise sufficient funding, our investment strategy is designed to provide investors with a diversified portfolio primarily consisting of multi-family residential real estate projects. However, it is possible that we may only secure funding to acquire or develop one property, in which case our portfolio will not be diversified. Although we have reviewed the real estate markets in the states in which we intend to acquire or develop properties, we have had no contract, agreement or commitment to acquire or develop any property as of the date of this report, other than our Joint Venture Agreements with Windsor High Rise Construction, Ltd., as described in this report under “Item 1. Business - Joint Venture Agreements with Windsor.”
We have already undertaken significant operational activities in furtherance of our business plan. Specifically, we have taken the following steps in furtherance of our business plan: We have enriched our knowledge in the real estate market in various states, such as North Carolina, Texas, Illinois and Florida, by studying the existing statistics on those markets and by having extensive discussions with many experts in those markets
Shearson intends to acquire properties, on the advice of it’s Advisor for cash, stock, a combination of cash and stock and finance the acquisitions, when possible, with HUD/FHA insured or traditional financing sources. In implementing our investment strategy, we will use our management teams’ expertise to identify and evaluate attractive real estate investment opportunities. We expect that our management team will make decisions based on a variety of factors, including expected risk-adjusted return, credit fundamentals, liquidity, availability and cost of financing, market-specific conditions and macroeconomic conditions. In addition, all investment decisions will be made with a view to maintaining our qualification as a REIT. Financing is not expected to exceed 90% of the value of any one project. The Company will limit mortgages on any one property to a single first mortgage. Although the Company has not identified specific properties to purchase, other than those identified in its Joint Venture Agreements with Windsor, it anticipates making real estate investments. After the Company has made investments in 15 projects, we intend to limit the percentage of investment made in an individual project to 10% of the Company’s assets. Exceptions to these investment limitations will be considered only following authorization by the Board of Directors.
We have no plans to change our investment objectives. The process by which we decide to make a real estate investment will benefit from the experience, resources and relationships of our senior management team and from our operation-ready, in-house investment and asset management platform, including its full spectrum of real estate and finance professionals. This process initially will involve:
·
identifying opportunities for real estate investment consistent with our investment objectives;
·
assessing the opportunities to ensure that they meet preliminary screening criteria; and
·
reviewing the opportunities to determine whether to incur costs associated with more in-depth due diligence.
If the decision is made to proceed with full-scale diligence, the next phase of our investment process will involve assessing the risk-reward profile of the investment through, among other things:
·
intensive data collection by our in-house investment and asset management team and third-party providers, including, as appropriate, financial, physical, legal and environmental due diligence of investment opportunities;
·
data consolidation and comprehensive analysis of the key drivers affecting value, such as cash flows, asset capitalization and asset performance;
·
assessment of the general economic and demographic characteristics of the market;
·
thorough review of the investment capital structure, borrower and tenant analysis, legal structure and deal documentation;
·
evaluation of existing financing or new financing;
·
intensive evaluation and credit analysis of the rent stream; and
·
review of entitlements and zoning.
In assessing the suitability of a particular investment for our portfolio, we will evaluate the expected risk-adjusted return relative to the expected returns available from comparable investments. Our advisory investment and asset management team will also identify opportunities to enhance the asset’s value through, among other things, competitive repositioning, development and targeted physical enhancements. The in-house investment and asset management team will also consider our ability to extract excess value from the investment through active post-acquisition asset management, including regular leasing and operating reviews. Based on the foregoing criteria, among others, we will make an investment decision and, if the decision is made to proceed with an investment, will utilize our extensive knowledge of the market for our target assets, comprehensive investment return analysis and proprietary modeling systems to establish an appropriate price for such assets. Any changes in investment objectives will require the approval of the Board of Directors.
The following discussion of the financial condition and results of operations of Shearson should be read in conjunction with the financial statements and notes thereto included elsewhere in this report. This discussion contains forward-looking statements which involve risks and uncertainties. The Company’s actual results may differ materially from those anticipated in these forward-looking statements as a result of significant risk factors.
Results of Operations
For the year ended December 31, 2013 as compared to the year ended December 31, 2012
.
Revenues and cost of revenues. Since becoming inactive after the events of September 11, 2001, We have has not generated any revenue and have not incurred any cost of revenues.
General and administrative expenses. General and administrative expenses for the year ended December 31, 2013 were $57,761 as compared to $19,750 in 2012. These expenses consist primarily of filing costs and travel and entertainment costs and professional fees in both years. The increase of these expenses in 2013 results principally from an increase in costs of being a public entity and other general and administrative expenses.
Other (expense) income. Interest expense of $1,621 and $20,609 was incurred for the years ended December 31, 2013 and 2012. The interest expense incurred was principally accrued on an outstanding judgment of $100,501 against the Company in 2012 which was written off at the end of 2012 because of the expiration of the statute of limitations.
Liquidity and Capital Resources
Shearson has not generated any revenue since the events of September 11, 2001. As a result, the Company’s primary source of liquidity prospectively will be from equity or debt financing sources. There is no assurance that any such equity or debt sources will be available or available on the terms favorable or acceptable to the Company.
On January 26, 2010, the Company received notice from the U.S. Securities and Exchange Commission in connection with an Order Instituting Administrative Proceedings (“IAP”) pursuant to Section 12(j) of the Securities and Exchange Act of 1934, as amended (“the Exchange Act”). The IAP was instituted since the Company had been deficient in complying with the Company’s obligations under the Exchange Act for several years. Specifically, the Company failed to file Form 10-Ks for the years ended December 31, 2000 through December 31, 2007. In addition, the Form 10-Ks for the year ended December 31, 2009 was not filed timely. In addition, the Form 10-Qs for 2001 through 2009 were not filed. As a consequence of the Company’s failure to file these reports, all of the Company’s securities were involuntarily deregistered pursuant to 12(j) of the Exchange Act which, in part, prohibits broker dealers from effecting transactions in the Company’s securities until the securities are registered. Since the Company has not been active and has not attempted to raise capital, the deregistration has had no current impact on the Company’s liquidity or capital resources. However, the deregistration has a negative impact on the future liquidity and the Company’s ability to access capital resources. Accordingly, the Company filed a Form 10, General Form for Registration of Securities, with the Securities and Exchange Commission.
Working capital during 2013 and 2012 has been provided by affiliates of the Company in the form of direct payment of operating expenses.
Recent Accounting Pronouncements
The Company does not believe that recently issued accounting pronouncements will have a material impact on its financial statements.
Critical Accounting Policies and Estimates
Critical accounting estimates are those that management deems to be most important to the portrayal of our financial condition and results of operations, and that require management’s most difficult, subjective or complex judgments, due to the need to make estimates about the effects of matters that are inherently uncertain. We have identified our critical accounting estimates which are discussed in note 2 to the financial statements. The Company’s tax returns for all periods from December 31, 2000, are subject to audit by taxing authorities because of the Company’s net operating loss.
Going Concern
The Company’s financial statements are presented on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business.
The Company is in the development stage and has experienced a loss from operations as a result of its investment necessary to achieve its operating plan, which is long-range in nature. Although the Company has a net loss of $3,029 from inception to December 31, 2013, it has working capital and stockholder deficits of $193,121, respectively. In addition, the Company has no revenue generating operations and no full time employees. During 2013 and 2012, an officer of the Company contributed $12,000 and $6,000 in services to the Company, respectively.
The Company’s ability to continue as a going concern is contingent upon its ability to secure additional financing, increase ownership equity and develop profitable operations. In addition, the Company’s ability to continue as a going concern must be considered in light of the problems, expenses and complications frequently encountered by entrance into established markets and the competitive environment in which the Company operates.
The Company is pursuing financing for its operations and seeking additional private investments. In addition, the Company is seeking to expand its revenue base and product distribution. Failure to secure such financing or to raise additional equity capital and to expand its revenue base and product distribution may result in the Company depleting its available resources and not being able pay its obligations.
The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the possible inability of the Company to continue as a going concern.
ITEM 7A.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
ITEM 8.
ITEM 8. Financial Statements
Pages 27 through 36.
ITEM 9.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
ITEM 9A.
ITEM 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, including our Chief Executive Officer (the CEO) and Chief Financial Officer (the CFO), reviewed and evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act) as of the end of the period covered by this annual report. Based on that review and evaluation, the Company’s CEO and CFO concluded that because of the material weakness described below, the Company’s disclosure controls and procedures were not effective to ensure that information required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Company’s CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.
The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Our internal control system was designed to, in general, provide reasonable assurance to the Company’s management and board regarding the preparation and fair presentation of published financial statements, but because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management’s Report on Internal Control Over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company, as such term is defined in Exchange Act Rule 13a-15(f). Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States. Internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Company’s assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of the financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only with proper authorizations; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. These inherent limitations are an intrinsic part of the financial reporting process. Therefore, although the Company’s management is unable to eliminate this risk, it is possible to develop safeguards to reduce it. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The Company’s management, under the supervision of and with the participation of the Chief Executive Officer and the Chief Financial Officer, assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2013 based on criteria for effective control over financial reporting described in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).
Based on that assessment, our management has determined that as of December 31, 2013, the Company’s internal control over financial reporting was not effective for the purposes for which it is intended based on the following material weakness:
We lack a functioning audit committee and our board lacks a recognized financial expert. We did not have adequate segregation of duties within accounting and management functions.
This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.
Changes in Internal Control Over Financial Reporting
There have not been changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B.
ITEM 9B. OTHER INFORMATION.
None
PART III
ITEM 10.
ITEM 10. Directors, Executive Officers, Promoters and Control Persons, Compliance with Section 16(a) of the Exchange Act
As of December 31, 2013, the officers and directors of the Company were:
John Williams has served as a Director of the Company since its inception and as Chairman and Chief Financial Officer since 2002. Mr. Williams has served as the Company's Chief Executive Officer since December, 2000. He is also Managing Director of John Williams and Partners, an architectural, civil engineering and construction management firm and has been with the firm since 1958. The firm has been certified as a minority business enterprise with the Department of Transportation, the City of Los Angeles, the L.A. Unified School District, Caltrans and the Department of Airports. Mr. Williams, AIA/NOMA, graduated from the University of Southern California with a Bachelor of Architecture Degree in 1955. He has been a member of the American Institute of Architects since 1958. Among his most noteworthy design accomplishments have been The Bradley International Terminal (LAX), The Willowbrook Shopping Center, and more than one hundred other projects from redevelopment projects to master planned communities; which included working drawings for mid-rise to high-rise residential and commercial, schools, government and public buildings. As a result of these and other professional experiences, Mr. Williams possesses particular knowledge and experience in key aspects of the real estate business, public company management and strategic planning that strengthen the Company and the Board’s collective qualifications, skills and experience.
Richard Orcutt has served as President and Chief Operating Officer of the Company since October, 2009. For 22 years Mr. Orcutt built and managed sales organizations opening offices both domestically and internationally. From 2004 to present Mr. Orcutt has served as Director of Sales with the startup Iovation, Inc. where he is directly responsible for generating all sales revenue. Iovation, Inc.’s products for Intel and SAP Software have been very successfully marketed to financial institutions. He graduated from Northern Illinois University with a B.S. degree in Education in 1973. Mr. Orcutt was employed from 1983 to 1997 and was Director of Sales for a startup company, Inacom, Inc., that grew to four billion dollars in revenue. Mr. Orcutt created sales management models, directed sales efforts, and business development activities and strategies that built Inacom into a $4 billion company. Mr. Orcutt possesses particular knowledge and experience in business development, strategic planning and team building that strengthen the Company and Board’s collective qualifications, skills and experience.
Jonathan Shatz has served as an independent director since October 2009. Mr. Shatz has been a Principal from 2009 through 2010 in Jonathan Shatz P.A., a consulting practice performing forensic, accounting, tax and general consulting to both private and public companies. In 2007 he served as a Chief Financial Officer for Bonds.com, an on-line trading firm that went public on the OTC Bulletin Board. Mr. Shatz served as the Practice Director for Accume Partner, an internal audit risk management and SOX compliance firm, from 2006 to 2007. From 2004 to 2006 Mr. Shatz worked for Resource Global Professionals as a consultant. He is a chartered accountant with extensive Big-4 accounting firm experience and tax lawyer with international accounting and tax compliance expertise. For the last six years Mr. Shatz has been a consultant. He is a former Senior Manager in the Ernst & Young Banking Group (from 1995 to 1998) and a Senior Manager at Pricewaterhouse External Audit and Tax Group (from 1982 to 1995). His experience includes preparation of SEC filings (10Qs, 10Ks, 8Ks) for Fortune 100 companies in advertising, healthcare, technology, and fire and security industries. As a result of these and other experiences, Mr. Shatz possesses particular knowledge and experience in key aspects of public company management that strengthen the Board’s collective qualifications, skills and experience.
All directors hold office until the next annual meeting of stockholders and until their successors have been duly elected and qualified. The executive officers serve at the pleasure of the Board of Directors.
There are no agreements with respect to electing directors or selecting officers. There are no agreements or understandings for any officer or director to resign at the request of another person, and none of the officers or directors are acting on behalf of, or will act at the direction of, any other person. There are no family relationships among our executive officers and directors.
We do not have an audit, nominating or compensation committee. We intend, however, to establish audit, nominating and a compensation committees of our Board of Directors in the future, once we have sufficient independent directors. We envision that the audit committee will be primarily responsible for reviewing the services performed by our independent auditor, evaluating our accounting policies and our system of internal controls. The compensation committee will be primarily responsible for reviewing and approving our salary and benefits policies (including stock options) and other compensation of our executive officers.
CODE OF ETHICS
Our Board of Directors has not yet adopted a Code of Business Conduct and Ethics due to our small size.
Shareholder Nominations
There have been no material changes to the procedures by which our shareholders may recommend nominees to the Board of Directors during our 2013 fiscal year.
Compliance with Section16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 as amended (the “Exchange Act”) requires Shearson’s officers and directors, and persons who own more than ten percent (10%) of its common stock to file reports of ownership and changes of ownership with the Securities and Exchange Commission. Such persons are also required to furnish Shearson with copies of all Section 16(a) forms they file.
Based solely on Shearson review of the copies of those forms received by the Company, or written representations from such persons that no forms were required to be filed, it appears that all reports due were timely filed except as follows: Richard Orcutt (one Form 3), and Jonathan Shatz (one Form 3). To our knowledge, these forms have not been filed as of the date of this report.
ITEM 11.
ITEM 11. Executive Compensation
The following summary compensation table sets forth information concerning compensation for services rendered in all capacities during our past two fiscal years awarded to, earned by or paid to each of the following individuals. Salary and other compensation for these officers were set by the Board of Directors. No other officers or employees received any compensation during either of the last two fiscal years.
SUMMARY COMPENSATION TABLE
Outstanding Equity Awards at Fiscal Year End
None.
Equity Compensation, Pension or Retirement Plans
No retirement, pension, profit sharing, stock option or insurance programs or other similar programs have been adopted by the Company for the benefit of its employees.
Options/SARS Grants During Year
None.
Long-term Incentive Plan Awards in Last Year
None
Employment Agreements
None.
COMPENSATION OF DIRECTORS
At this time, the Company’s directors receive no remuneration for their services, nor does the Company reimburse directors for expenses incurred in their service to the Board of Directors.
ITEM 12.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
The following table contains information regarding the shareholdings, as of December 31, 2013, of Shearson’s current directors and executive officers and those persons or entities who beneficially own more than 5% of its common stock (giving effect to the exercise of any warrants held by each such person or entity which are currently exercisable or may be exercised within 60 days of December 31, 2013):
(1) Percentages based upon 52,518,999 shares of the Company’s common stock outstanding as of December 31, 2013.
ITEM 13.
ITEM 13. Certain Relationships and Related Transactions and Director Independence
John Williams, CEO, CFO and Chairman of the Board of Directors provided a $10,000 retainer to the Company’s audit firm in November, 2009. Subsequently, in 2010 this retainer was applied to the 2008 and 2009 audit fees and Mr. Williams was repaid the $10,000.
Director Independence
Using the standards of the NYSE Amex, which the Company is not subject to, the Company's Board has determined that Mr. Shatz qualifies under such standards as an independent director. No other directors are independent under these standards. The Company did not consider any relationship or transaction between itself and the directors not already disclosed in this report in making this determination.
ITEM 14.
ITEM 14. Principal Accounting Fees and Services
The Company paid or accrued the following fees in each of the prior two fiscal years to its principal accountants Kingery & Crouse P.A.:
No fees were paid or accrued during either of the 2012 or 2013 fiscal years. Instead, the audit expenses for the audits performed for these fiscal years were incurred and paid in a subsequent fiscal year.
As part of its responsibility for oversight of the independent registered public accountants, the Board of Directors has established a pre-approval policy for engaging audit and permitted non-audit services provided by our independent registered public accountants, Kingery & Crouse, P.A. In accordance with this policy, each type of audit, audit-related, tax and other permitted service to be provided by the independent auditors is specifically described and each such service, together with a fee level or budgeted amount for such service, is pre-approved by the Board.
The Company’s principal accountant, Kingery & Crouse, P.A, did not engage any other persons or firms other than the principal accountant’s full-time, permanent employees.
PART IV
ITEM 15.
ITEM 15. Exhibits
Exhibits
________________
(1) Incorporated by reference from the Company’s Report on Form 8-K filed with the Securities and Exchange Commission on November 20, 2013.
** XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.
SIGNATURES
Pursuant to the requirements of Section 13 of 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Name
Title
Date
/s/ John Williams
Chairman of the Board
May 19, 2014
John Williams
/s/ Richard Orcutt
Director
May 19, 2014
Richard Orcutt
/s/ Jonathan Schatz
Director
May 19, 2014
Johathan Schatz
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
Shearson American REIT, Inc. (formerly known as PSA, Inc.)
(a development stage company)
We have audited the accompanying balance sheets of Shearson American REIT, Inc. (formerly known as PSA, Inc.) (a development stage company) as of December 31, 2013 and 2012, and the related statements of operations, changes in stockholders’ (deficit), and cash flows for the years ended December 31, 2013 and 2012, and the period from October 16, 2009 (inception) to December 31, 2013. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Shearson American REIT, Inc. (formerly known as PSA, Inc.) (a development stage company) as of December 31, 2013 and 2012, and the results of its operations, and its cash flows for the years ended December 31, 2013 and 2012, and the period from October 16, 2009 (inception) to December 31, 2013, in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company is in the development stage, has negative working capital and a stockholders’ deficit and no revenue generating operations, which raises substantial doubt about its ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Kingery & Crouse, P.A.
Certified Public Accountants
Tampa, Florida
May 16, 2014
The accompanying notes are an integral part of the financial statements.
The accompanying notes are an integral part of the financial statements.
The accompanying notes are an integral part of the financial statements.
The accompanying notes are an integral part of the financial statements.
SHEARSON AMERICAN REIT, INC.
(Formerly Known As PSA, INC.)
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
December 31, 2013 and 2012
Note 1. Organization
Nature of the Company:
The Company changed its name on October 16, 2009 to Shearson American REIT, Inc. with the purpose of creating a Real Estate Investment Trust. On October 16, 2009 the Company became a development stage company. The Company wishes to be a fully integrated Real Estate Investment Trust and management firm that will acquire, develop, own, operate and sell real estate. It intends to invest primarily in institutional-quality multi-use and multi-family properties located throughout the United States. The Company contemplates utilizing HUD/GNMA securities backed financing for most of its projects.
Note 2. Summary of Significant Accounting Polices and Use of Estimates
Accounting Estimates:
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could materially differ from those estimates.
Development Stage:
On October 16, 2009 the Company became a development stage company as defined in Accounting Standards Codification 915, “Development Stage Entities” and has accounted for operations in accordance with those standards commencing on October 16, 2009. The Company had been dormant since September, 2001 until the commencement of the development stage period on October 16, 2009. No revenue was earned during the dormant period. Expenses, comprising of $110,591 in interest, was accrued on a litigation judgment during the dormant period.
Revenue Recognition
In general, the Company records revenue when persuasive evidence of an arrangement exists, services have been rendered or product delivery has occurred, the sales price to the customer is fixed or determinable, and collectability is reasonably assured.
Cash
For purposes of the statement of cash flows, the Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents.
Net Loss per Share:
Accounting Standards Codification (“ASC”) 260, “Earnings per Share,” provides for the calculation of basic and diluted earnings per share. Basic earnings per share includes no dilution and is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflect the potential dilution of securities that could share in the earnings of an entity. Dilutive securities are not included in the weighted average number of shares when inclusion would be anti-dilutive.
Fair value of financial instruments
The Company has adopted FASB ASC 820-10-50, Fair Value Measurements. This guidance defines fair value, establishes a three-level valuation hierarchy for disclosures of fair value measurement and enhances disclosure requirements for fair value measures. The three levels are defined as follows:
·
Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
·
Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
·
Level 3 inputs to valuation methodology are unobservable and significant to the fair measurement.
The Company’s financial instruments include cash, accounts payable and accrued liabilities. The carrying amount of this financial instrument approximates fair value, due to the short-term nature of this item.
The Company does not hold or issue financial instruments for trading purposes nor does it hold or issue interest rate or leveraged derivative financial instruments.
Income taxes:
We compute income taxes in accordance with FASB ASC Topic 740, Income Taxes. Under ASC 740, provisions for income taxes are based on taxes payable or refundable during each reporting period and changes in deferred taxes. Deferred income taxes may arise from temporary differences resulting from income and expense items reported for financial accounting and tax purposes in different periods. Deferred tax assets and liabilities are included in the financial statements at currently enacted income tax rates applicable to the period in which the deferred tax assets and liabilities are expected to be realized or settled. Also, the effect on deferred taxes of a change in tax rates is recognized in income in the period that included the enactment date. Deferred taxes are classified as current or non-current depending on the classifications of the assets and liabilities to which they relate. Deferred taxes arising from temporary differences that are not related to an asset or liability are classified as current or non-current depending on the periods in which the temporary differences are expected to reverse. If available evidence suggests that it is more likely than not that some portion or all of the deferred tax assets will not be realized, a valuation allowance is required to reduce the deferred tax assets to the amount that is more likely than not to be realized. Future changes in such valuation allowance are included in the provision for deferred income taxes in the period of change.
We follow the guidance in FASB ASC Topic 740-10, Accounting for Uncertainty in Income Taxes, which prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. The Company does not believe that any uncertain tax positions exist at December 31, 2013.
The Company’s tax returns for all periods from December 31, 2000, are subject to audit by taxing authorities because of the Company’s net operating loss.
Going Concern
The Company’s financial statements are presented on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business.
The Company is in the development stage and has experienced a loss from operations as a result of its investment necessary to achieve its operating plan, which is long-range in nature. The Company has reported net losses of $3,029 from inception to December 31, 2013, and has working capital and stockholder deficits of $193,121. In addition, the Company has no revenue generating operations and no full time employees and during 2013 and 2012, an officer contributed $12,000 and $6,000 in services to the Company.
The Company’s ability to continue as a going concern is contingent upon its ability to secure additional financing, increase stockholders' equity and develop profitable operations. In addition, the Company’s ability to continue as a going concern must be considered in light of the problems, expenses and complications frequently encountered by entrance into established markets and the competitive environment in which the Company operates.
The Company is pursuing financing for its operations and seeking additional private investments. In addition, the Company is seeking to expand its revenue base. Failure to secure such financing or to raise additional equity capital and to expand its revenue base may result in the Company depleting its available funds and not being able pay its obligations.
The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the possible inability of the Company to continue as a going concern.
Recent Accounting Pronouncements:
There have been no recent accounting pronouncements or changes in accounting pronouncements during the year ended December 31, 2013 or subsequent thereto which would have a material impact on our financial statements.
Note 3. Accrued Liabilities
Accrued liabilities consisted of the following at January 1, 2012:
A judgment was entered against the Company in 2002 for $100,501. The Company has recorded the liability and the interest accrued thereon at a rate of 10% per annum. A judgment may be executed upon for 10 years from the date of entry. This time may be extended if the judgment creditor re-files the judgment in the county it was originally issued in.
From January 1 through September 30, 2012, the Company recorded an additional $18,987 in interest on the judgment and the balance of the judgment and accrued interest aggregated $272,152 at September 30, 2012.
Subsequent to September 30, 2012, the Company determined that the 10 year period of enforceability of the judgment had expired pursuant to California statutes and wrote off the liability which resulted in a gain of $272,152.
Note 4. Loans Payable - affiliates
During 2013 and 2012, two affiliates advanced the Company an aggregate of $37,084 and $13,500 for the direct payment of expenses. The advances from these affiliates do not bear interest. In addition, another affiliate had advanced the Company $50,000 in prior years. The $50,000 advance bears interest at 3.25% and $1,621 and $1,622 in interest was accrued on the interest bearing advance in 2013 and 2012. The balance due these affiliates aggregated $156,596 and $117,891 at December 31, 2013 and 2012.
Note 5. Income Taxes
Deferred tax assets and liabilities are recorded based on the differences between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes, referred to as temporary differences. Deferred tax assets and liabilities at the end of each period are determined using the currently enacted tax rates applied to taxable income in the periods in which the deferred tax assets and liabilities are expected to be settled or realized.
The provision for income taxes differs from the amount computed by applying the statutory federal income tax rate to income before provision for income taxes for the years ended December 31, 2013 and 2012. The sources and tax effects of the differences are as follows:
As a result of net operating losses, the Company has not recorded a provision for income taxes. The components of the deferred tax assets and related valuation allowance at December 31, 2013 and 2012, are as follows:
As of December 31, 2011, the Company has net operating loss carryforwards of approximately $4,200,000 expiring through 2033. The Company believes sufficient uncertainty exists regarding the realization of the deferred tax assets such that a full valuation allowance is required. The utilization of the net operating loss will be limited should a change in control of the Company occur. The Company’s income tax returns from its original inception are subject to audit as a result of the Company’s net operating losses.