Application Pursuant to Section 8(f) of the Investment Company Act of 1940 for an
Order Declaring That Applicant has Ceased to be an Investment Company
Communications regarding this Application should be directed to:
David R. Fishkin, Esq.
Snow Becker Krauss P.C.
605 Third Avenue New York, New York10158 212-455-0408
I. NATURE OF RELIEF SOUGHT BY APPLICANT
American Vantage Companies, a Nevada corporation (the “Company”, “AVCS” or “Applicant”), seeks
an order pursuant to Section 8(f) of the Investment Company Act of 1940, as amended (the “Act”),
declaring that Applicant has ceased to be an investment company under the Act.
II. BACKGROUND
On March 21, 2006, the Company filed with the Securities and Exchange Commission (the
“Commission”) a Form N-8A Notification of Registration pursuant to Section 8(a) of the Act,
registering the Company as an investment company thereunder. On June 21, 2006, the Company filed a
Form N-2 Registration Statement for Closed End Investment Companies. The Company is a holding
company that operates through its subsidiaries primarily in the gaming and hospitality and
corporate staffing businesses. The Company is not primarily engaged in the business of investing,
reinvesting, owning, holding or trading in securities and, accordingly, does not believe that it is
an investment company within the meaning of the Act.
The Company’s rationale for filing a Form N-2 was that in both March 2005 and March 2006, the
Company held investment securities that had a value exceeding 40% of the Company’s total assets on
an unconsolidated basis. In March 2005, these securities principally consisted of 7,000,000 shares
of common stock, and warrants to purchase 1,400,000 shares of common stock, of Genius Products,
Inc., together with a 49% interest in the Border Grill restaurant (both as more fully described
below in Section III.A. below), which resulted, at the time, in the value of the Company’s
investment securities equaling approximately 77% of its total assets.
Until late 2005, the Company continued to operate the American Vantage/Hypnotic, Inc.
(“Hypnotic”) television and film content creation business. Hypnotic continued to be led by two
very well-known entertainment industry figures, Messrs. David Bartis and Doug Liman, had four
full-time employees and was located in Santa Monica, California. The Company searched for
businesses that might complement Hypnotic and, in particular, hasten the growth of Hypnotic’s
content creation business. As part of that effort, the Company entered into negotiations to
acquire an infomercial creation company. However, after extensive negotiations, management
concluded that it would not be able to consummate the transaction on terms acceptable to the
Company. As the Hypnotic division continued to generate operating losses and required periodic
working capital infusions from the parent company, during late 2005, the Hypnotic division was
shutdown.
From late 2005 to March 2006, the Company sought out other operating businesses, without
success; accordingly, in March 2006, in an abundance of caution, the Company believed it was
required to comply with the registration requirements of the Act due to the fact that its
percentage of investment securities was still in excess of 40%
(approximately 89%), and a full year had passed without the Company becoming re-engaged in any
substantial operating businesses, rendering the “safe harbor” provisions of Rule 3a-2 of the Act
(relating to “transient investment companies”) inapplicable. The Company registered under the Act
notwithstanding the fact that in 2005-2006, as at the present time, the Company was not in the
“business” of investing, reinvesting, owning, holding or trading in securities.”
III. DISCUSSION REGARDING DEREGISTRATION
The Commission has historically reviewed Section 8(f) applications on a case-by-case basis and
made determinations founded on the following general criteria: (A) the company’s historical
development, (B) its public representations of policy, (C) the activity of its directors, officers
and employees, (D) the nature of its present assets, and (E) the sources of its present
income.1 This Application will address each of these criteria as they apply to the
Company.
A. Historical Development
The Company was incorporated in Nevada in 1979 under the name Western Casinos, Inc. The
Company changed its name to American Casino Enterprises, Inc. in 1979 and then changed its name to
American Vantage Companies in March 1997. The Company was originally formed to engage in the
business of recreational and leisure time activities, including casino gaming and hospitality.
Royal Reservations, Inc. (no longer part of the Company)
The Company acquired Royal Reservations, Inc. (“Royal”) in 1982, and established a dominant
market presence as a successful Las Vegas inbound tourist service provider. Unique to their
services was the ability to attract a premium customer base which originated through
carefully-targeted relationships with hotels and casinos, tour operators, ground transportation
operators and other service providers.
The influence and effectiveness of Royal’s 24-hour call center was observable as gaming
properties eventually bid against each other to offer better room rates, better spiffs, etc. as an
incentive for Royal to steer targeted customers to their specific property. Royal was subsequently
sold as the Company’s business plan evolved to concentrate primarily on gaming and hospitality
development, operation and management.
Millerton Games, Inc. (no longer part of the Company)
In January 1991, the Company purchased all of the capital stock of Millerton Games, Inc.,
which held a management consulting contract with the Table Mountain Rancheria Band of Indians (the
“Table Mountain Tribe”). The Company, through its wholly-owned subsidiary Millerton, was engaged
in the business of providing gaming consulting services. The management consulting contract
required performance of
1
See SEC No-Action Letter, Tonopah Mining Company of Nevada, 26 SEC 426 (1947).
3
certain services, including gaming consulting, technical assistance, training and advice,
etc., for the Table Mountain Tribe’s existing bingo hall facility.
During the tenure of the Company’s management consulting service contract, the bingo hall
expanded from the original bingo hall facility to its current facility—a 250,000 square foot Las
Vegas-style casino, with 2,000 gaming machines, 38 table games and 10 poker tables (the “Table
Mountain Casino”). The Table Mountain Casino is located in Friant, California (near Fresno).
From 1991 through 1999, the Company provided comparable consulting, technical assistance,
training and advice to other California Native American Tribes, e.g., Pechanga Resort & Casino
(Temecula, California) and Cher Ae Heights Casino (Trinidad, California), on a project-by-project
basis. Such Tribal gaming and hospitality consulting services included, but were not limited to:
§
Assistance with raising capital
§
Assistance with architectural design and engineering
§
Assistance with legal and regulatory matters
§
Organization and administration
§
Planning and development
§
Gaming activities
§
Internal controls and accounting procedures
§
Cage operations
§
Engineering and maintenance
§
Housekeeping
§
Human resources (including recruitment)
§
Management information services
§
Marketing and advertising
§
Purchasing
§
Surveillance
§
Security
§
Food and beverage operations
During 1999, the Company’s gaming contract with the Table Mountain Tribe was prematurely
terminated following a change in the tribal government. For Tribal gaming services performed by
the Company and Millerton, the Company received fees aggregating more than $70,000,000.
4
American Care Group, Inc. (no longer part of the Company)
In May 1997, the Company acquired approximately 40 acres (the “40 Acre Parcel”) of undeveloped
land in North Las Vegas, Nevada which the Company had purchased to develop and manage as a funeral
home and cemetery. In February 1998, the Company acquired 20 acres of additional undeveloped land
(the “20 Acre Parcel”) which adjoined the 40 Acre Parcel. Development of the funeral home and
cemetery business was delayed while the Clark County, Nevada government finalized its plan for
construction of a flood control project for the area. Because of the delay, the Company cancelled
its plans for the funeral home and cemetery business operations. The 20 Acre Parcel and the 40
Acre Parcel were subsequently sold in June 2001 and January 2004, respectively.
Vantage Bay Group, Inc.
In November 1998, Vantage Bay Group, Inc., a wholly-owned subsidiary of the Company, together
with TT&T, LLC (“TT&T”), organized Border Grill Las Vegas, LLC (“Border Grill”) as a Nevada limited
liability company. Border Grill was formed for the purpose of developing and operating the Border
Grill Las Vegas Restaurant at the Mandalay Bay Hotel and Casino in Las Vegas, Nevada. Pursuant to
the Operating Agreement of Border Grill, between November 1998 and July 2000, Vantage Bay invested
a total of $3,001,000 to the capital of Border Grill and loaned Border Grill an additional $175,000
for the initial development and operation of the Border Grill Las Vegas Restaurant, which opened in
June 1999. From June 1999 through July 2004, the Company received approximately 80% of the Border
Grill Las Vegas Restaurant’s net cash flows until the Company recaptured its initial investment and
related accrued interest. Since inception, the Company has retained a 49% interest in Border
Grill.
The Company has no day-to-day management responsibility in connection with the restaurant.
However, the Company reviews Border Grill’s monthly and annual financial statements and annual
operating budgets. The Company also reviews major capital expenditure budgets and is involved with
financing efforts related to any major capital expenditures (see discussion below concerning the
2008 financing of the Border Grill renovation). Border Grill also consults with the Company on its
on-going marketing and promotional efforts, strategic planning and employment of key management.
The Company has received a return of all of its initial capital investment and the priority return
required under the Border Grill Operating Agreement and now receives pro rata distributions from
the Border Grill based on the Company’s percentage ownership.
During late-2006, the Company began discussions with MGM Mirage, the owner of the Mandalay Bay
Resort and Casino, regarding a potential Company-financed expansion and remodel of the Border
Grill. Through an expansion and renovation, the Company hoped to better accommodate the increased
volume anticipated from the newly opened 1,200,000 square foot convention center located directly
opposite the Border Grill
5
and the new 43-story luxury suites tower called “THE Hotel” adjoining the existing Mandalay Bay
Resort and Casino.
Effective May 1, 2007, MGM Mirage executed an extension of the Border Grill lease to June
2021. The lease extension was conditioned upon a minimum $2,000,000 expansion and refurbishment of
the Border Grill.
From May 2007 through November 2007, the Company was primarily responsible for coordinating
the funding efforts for the expansion, including discussions with financial institutions, reviews
of proposed term sheets, and negotiation of principal terms. During November 2007, the Border
Grill entered into a commitment letter with a bank for a non-revolving line of credit in the amount
of $2,500,000 for the expansion and refurbishment of the Border Grill.
Under the terms of the commitment letter, the term loan is subject to certain financial
reporting covenants and is conditioned upon the Company and TT&T providing joint and several
guaranties (the “Guaranty”) in the event of a default in payment by Border Grill. In the event
that the Company and TT&T are required to make any payments pursuant to the Guaranty, such payments
shall be in proportion to the member’s respective 49% and 51% equity ownership in Border Grill.
The Company and TT&T have provided reciprocal pledges of a first priority security interest in each
member’s equity ownership interest and rights to receive distributions, profits or capital from the
Border Grill if the Company and/or TT&T are unable to meet the Guaranty payment requirements.
YaYa Media, Inc. and Games Media Properties, LLC
In April 2003, the Company acquired substantially all of the assets and business and certain
of the liabilities of YaYa, LLC as a component to its strategy to develop a branded content
business. YaYa Media, Inc. (“YaYa”), a wholly-owned subsidiary of the Company, was formed
specifically to acquire the YaYa, LLC assets, business and liabilities and to continue YaYa’s
business and operations as the “Branded Content” division. YaYa was engaged as an “end-to-end”
interactive solutions provider. YaYa specialized in the creation and provision of
advertiser-driven interactive games and marketing solutions for its Fortune 1000 clients.
In addition, as a result of the YaYa, LLC asset acquisition, the Company, through YaYa,
obtained a non-controlling interest (less than 5% at December 31, 2008) in an unconsolidated
subsidiary, Games Media Properties, LLC (“Games Media”) that has entered into a joint venture
arrangement to create a promotional event known as a “video game touring festival.”
6
American Vantage Media Corporation (no longer part of the Company)
In December 2003, the Company formed American Vantage Media Corporation (“AVMC”) as a
wholly-owned subsidiary to manage acquired or internally-developed entertainment related
businesses.
Effective January 1, 2004, AVMC combined the YaYa operations and the Hypnotic branded
entertainment operations (see description below) into its “Branded Content” division. Hypnotic’s
ownership interest in two feature films and a television development and production arrangement
with Warner Bros. TV were combined into the Company’s Film and TV Production division.
On February 3, 2004, AVMC acquired all of the outstanding common stock of Wellspring Media,
Inc. (“Wellspring”), as further described below.
In December 2004, AVMC closed its Branded Content division and terminated the related staff
and consulting positions. The Branded Content division included all of YaYa’s operations and a
portion of Hypnotic’s operations.
American Vantage/Hypnotic, Inc.
On December 31, 2003, the Company acquired substantially all of the assets and business and
certain of the liabilities of Enigma Media, Inc., d/b/a Hypnotic, and began operations, effective
January 1, 2004, under a wholly-owned subsidiary, American Vantage/Hypnotic, Inc., formed
specifically to acquire the Enigma Media, Inc. assets, business and liabilities and to continue
Hypnotic’s business and operations. Hypnotic was operated under AVMC’s “Film and TV Production”
division.
Hypnotic provided high quality creative talent and valuable intellectual property. Hypnotic
focused on television creation and production, branded content, and distribution operations as well
as specific intellectual property, including an 800-title short film library plus an ownership
interest in two feature films, “Cry Wolf” and “Mail Order Bride.” With Warner Brothers, Hypnotic
co-produced “The O.C.”, a weekly television series for the FOX Broadcasting Network. The Film and
TV Production division also developed and produced traditional film and TV properties.
Film and TV Production employees provided the executive co-production services for the FOX
Broadcasting Network weekly television series. In addition, the division’s employees developed,
proposed and managed production of new television pilots. Independent screen writers were
contracted to write the pilot scripts accepted for production. Other independent contractors, such
as production personnel, were utilized on an as-needed basis.
The Film and TV Production division’s primary competition was from other independent
production studios. These independent production studios varied in size and in services provided.
The Film and TV Production division’s primary source of
7
differentiation was its ability to provide internal production services for the Branded Content
division as well as to provide production services to external customers.
Wellspring Media, Inc. and non-fiction films, inc. (no longer part of the Company)
On February 3, 2004, AVMC acquired all of the outstanding common stock of Wellspring and began
operating Wellspring under AVMC’s “Filmed Entertainment” division. The Wellspring assets comprised
the Filmed Entertainment division. In September 2004, AVMC began distributing documentary films,
under the brand name “non-fiction films,” as a successor to a former Wellspring subsidiary.
Wellspring was a distributor of world cinema and wellness programming. Wellspring’s assets
included a film library with approximately 750 titles distributed via its home video, direct
response, worldwide sales and theatrical units. Film library titles were generally acquired from
third parties.
Genius Products, Inc.
On March 21, 2005, the Company sold all of the outstanding common stock of AVMC to Genius
Products, Inc. (“Genius”) pursuant to an Agreement and Plan of Merger (the “Merger Agreement”) in
which the Company received 7,000,000 shares of common stock, which constituted 22.05% of Genius’
then outstanding common stock of 31,747,499 shares. The Company also received warrants to purchase
700,000 shares of common stock of Genius at an exercise price of $2.56 (the “$2.56 Warrants”) and
700,000 shares of common stock at an exercise price of $2.78 (the “$2.78 Warrants”).
Related to the transaction, the Company and Genius also entered into a pledge agreement
transferring to the Company certain assets and liabilities held by Hypnotic and YaYa. The assets
transferred back to the Company primarily consist of television and film creative projects and
co-executive producer fees generated from the television series “The O.C.” and Games Media.
Wellspring, as a wholly-owned subsidiary of AVMC, (together with non-fiction films, inc.) was
included in the Company’s disposition of AVMC to Genius.
In August 2005 and June 2005, the Company privately placed an aggregate of 3,125,000 and
2,500,000 shares, respectively, of its Genius common stock with unaffiliated third parties. In
conjunction with the June 2005 private placement, the Company also privately placed an aggregate of
225,000 $2.56 warrants. Related to the June 2005 private placements of the Genius securities, the
Company also surrendered to Genius for cancellation 225,000 $2.56 warrants. Gross proceeds from
the August 2005 and June 2005 private placements totaled $4,688,000 and $4,375,000, respectively.
Effective May 17, 2007, May 18, 2007 and May 21, 2007, the Company privately placed 89,000,
69,000 and 542,000 shares of Genius common stock, respectively, for gross proceeds of $2,024,000,
net of direct sales costs totaling $32,000. In conjunction with this transaction, the Company
recognized a gain of $88,000.
8
Net proceeds generated from these sales of Genius common stock have primarily been used for the
following:
•
Operating working capital
•
Loans to Hypnotic for working capital and other operating costs
•
Loan to the Big Sandy Rancheria Band of Western Mono Indians (see “Brownstone, LLC”)
•
Loans to Brownstone, LLC for working capital and other operating costs
•
Predevelopment costs for the GoldTown Hotel and Casino Resort (see “Brownstone GoldTown
CV, LLC”)
•
Loans to Brownstone GoldTown, LLC and Brownstone GoldTown CV, LLC for working capital
and other operating costs
•
Cash consideration for the purchase of Candidates on Demand Group, Inc. (see discussion
below)
•
Loans to Candidates on Demand Group, Inc. for working capital and other operating costs
On May 31, 2007, the Company was served with a Complaint for Damages and Equitable Relief (the
“Complaint”) filed by Genius for estimated damages and equitable relief totaling no less than
$2,400,000 exclusive of prejudgment interest, costs and reasonable attorneys’ fees. Genius
asserted that the Company made certain misrepresentations in connection with the Merger Agreement
to which the Company, AVMC and Genius are parties. These claims were the subject of a notice from
counsel for Genius on May 25, 2006 (“Notice”).
The Notice set forth certain claims and demands of Genius arising out of the Merger Agreement.
In the Notice, Genius asserted that the Company represented that (i) at February 28, 2005, AVMC’s
consolidated accounts payable was no more than $5,275,000 and its accounts receivable was not less
than $4,531,000; (ii) AVMC had no pending suits, claims, actions, proceedings or investigations;
and (iii) all material taxes owed by AVMC had been paid. The Notice asserted that the Company
intentionally failed to disclose or concealed facts relating to these representations.
The Company believed that such representations were accurate when made and, in response to the
Complaint, in July 2007, filed a Motion to Strike in the Superior Court of the State of California.
9
Effective February 29, 2008, the Company held 675,000 shares of Genius common stock, the
250,000 $2.56 Warrants and the 700,000 $2.78 Warrants. At that date, the Company and Genius agreed
to a settlement of the Complaint and provided mutual releases principally on the following terms:
•
Release of 150,000 shares of the Genius common stock to Genius.
•
Extension of the expiration dates of the 250,000 $2.56 Warrants and 700,000
$2.78 Warrants from March 2, 2010 to September 2, 2012.
At December 31, 2008, the Company held a total of 525,000 shares of the Genius common stock,
which represented approximately 0.78% of Genius outstanding common stock (a total outstanding of
67,609,094 shares). At December 31, 2008, the Company also held the 250,000 $2.56 Warrants and
700,000 $2.78 Warrants.
In March 2009, Genius filed an Information Statement Pursuant to Section 14(c) of the
Securities Exchange Act of 1934, informing shareholders of record on March 9, 2009 of a 1:500
reverse stock split.
Upon giving consideration to the 1:500 reverse split, at June 30, 2009, the Company holds
1,050 shares of Genius common stock, 500 GNPR.PK warrants exercisable at $1,280 and 1,400 warrants
exercisable at $1,390. At June 30, 2009, the stock price of Genius common stock (GNPR.PK) was
$5.50.
American Casino and Resorts, Inc.
On April 11, 2006, the Company formed American Casinos and Resorts, Inc. (“ACR”), a
wholly-owned subsidiary that was intended to own and operate casino gaming resorts located in the
United States and internationally.
In May 2006, upon completion of initial due diligence and discussions with ACR’s independent
consulting advisor, ACR withdrew from consideration as a bidder for The Admiral Casino in St.
Louis, Missouri.
From June 2006 through June 30, 2009, ACR has not pursued other gaming opportunities as such
activities are primarily performed by the Company’s other subsidiaries, Brownstone, LLC and
Brownstone GoldTown, LLC and Brownstone Gaming and Hospitality, LLC (see following subsidiary
discussions).
ACR is now dormant.
10
Brownstone, LLC
In 2006, the Company formed Brownstone, LLC, a Nevada limited liability company, to provide
development and consulting or management services to the Tribal gaming community.
On March 25, 2007, Brownstone, LLC entered into a development and structuring fee arrangement
(the “Big Sandy Development Agreement”) with the Big Sandy Rancheria Band of Western Mono Indians
(the “Tribe”) and the Big Sandy Entertainment Authority. The Tribe’s $450,000,000 hotel and casino
resort is currently planned in Friant, near Fresno, California. From March 25, 2007 through
opening day of the hotel and casino resort, the Company’s portion of the development and
structuring fees, including performance bonus, are estimated to be in excess of $20,000,000.
Brownstone, LLC and the Tribe are also negotiating a three- to five-year consulting contract
to assist the Tribe in operating the hotel and gaming facility that would be effective post-opening
for the hotel and casino resort.
Brownstone GoldTown, LLC
In 2006, the Company formed Brownstone GoldTown, LLC, a Nevada limited liability company, to
develop, purchase, manage and/or consult for commercial (i.e., non-Tribal) gaming and hospitality
properties under the trademark name “GoldTown”. The Company owns a 51% equity interest in this
entity and it is therefore a majority-owned subsidiary.
Brownstone GoldTown CV, LLC
During 2007, Brownstone GoldTown, LLC formed Brownstone GoldTown CV, LLC, a Nevada limited
liability company that plans to construct, own and operate a hotel and casino project (“GoldTown
Hotel and Casino Resort”) to be located in Douglas County (within minutes of Nevada’s capital,
Carson City). The Company owns indirectly a 51% equity interest in this entity and it is therefore
a majority-owned subsidiary.
The GoldTown Hotel and Casino Resort is a two-phase development anticipated to be located on
approximately 45 acres of land in Douglas County, Nevada. The current Phase I plans, include an up
to 300-room/suite resort, approximately 95,000 sq. ft. full-service casino, restaurants, convention
facility, entertainment venues, and other related amenities. The project is planned to include
approximately 30 acres of mixed-use development.
At public meetings held in early 2008, the Douglas County Board of Commissioners approved
one-year permits on all phases of the GoldTown project. The Company planned to begin construction
during the second quarter of 2008. However,
11
due to the current difficulty under prevailing economic conditions in obtaining financing for
commercial gaming projects, the GoldTown project has been placed on hold pending a more favorable
financing market.
In March 2009, the Douglas County Board of Commissioners extended the permits for an
additional two years (i.e., to begin, but not necessarily complete, construction). The Company
anticipates that the two-year extension will facilitate completion of the project as favorable
capital markets become more available.
Candidates on Demand Group, Inc.
On September 14, 2007, the Company acquired Candidates on Demand Group, Inc., a recruiting and
placement agency and its subsidiaries, COD Consulting Services, Inc., DealSplit, Inc. and Candidate
Report Card Group, Inc. (collectively, “COD”). COD is currently a wholly-owned subsidiary of the
Company.
When acquired, COD was a national temporary placement and recruitment firm headquartered in
New York City with five regional offices, primarily on the East coast of the United States. COD’s
extended customer base includes Fortune 500 companies with operations in the IT, legal, accounting,
finance, engineering and pharmaceutical disciplines.
As a result of a February 2009 restructuring, COD downsized its full-time recruitment staff,
shut down its offices in North Palm Beach, Florida, Dallas, Texas and Lyndhurst, New Jersey, and
eliminated related operating costs. COD consolidated its remaining recruitment operations into two
New York locations, the Long Island corporate office and Brooklyn.
COD utilizes a customized sourcing strategy to reduce time to market and costs associated with
“on demand” hiring. Leveraging best-in-class tools and depth of executive/management experience
spanning more than two decades, COD has amassed a candidate database currently in excess of 1.5
million resumes.
As consideration of the acquisition of COD, Michael C. Woloshin, founder and sole stockholder
of COD, received $500,000 in cash and 500,000 shares of the Company’s common stock. The shares of
the Company’s common stock were issued in exchange for COD’s securities, and were issued in
compliance with Section 23(b) of the Act, i.e., at or above net asset value per share.
Brownstone Gaming and Hospitality, LLC
During May 2009, Brownstone Gaming and Hospitality, LLC was formed to conduct the future
jurisdictional and tribal gaming operations of the Company.
Brownstone Gaming and Hospitality, LLC is developing this company with Mr. Gross. For Mr.
Gross’s services, the Company is currently negotiating an equity interest
12
in Brownstone Gaming and Hospitality, LLC. To date, the Company and Mr. Gross anticipate
that, subject to certain to-be-negotiated contractual adjustments to Brownstone Gaming and
Hospitality, LLC’s reported net profits or losses, Mr. Gross will receive a 49% total equity
membership interest in Brownstone Gaming and Hospitality, LLC. However, no assurance can be given
that the contract negotiations will be finalized based on the currently anticipated terms, on terms
advantageous to the Company, or at all.
Summary of Historical Operations
Since the Company’s inception in 1979, the Company has never been, nor has it ever held itself
out to be, nor are the current and future business plans to be, primarily engaged in the business
of investing, reinvesting, owning, holding, or trading in securities. From inception, the Company
has primarily been involved in the gaming and hospitality, restaurant, media, and entertainment,
recruitment and temporary placement businesses and has publicly held itself out as being in such
businesses.
Current Business Operations
The gaming and hospitality operations of the Company are organized as follows:
*
The Company owns 100% of American Vantage Brownstone, LLC, 60% of Brownstone, LLC and 51% of
Brownstone GoldTown, LLC and Brownstone Gaming & Hospitality, LLC (with respect to the latter
three entities, these percentages reflect agreements in principle with Robert F. Gross; see
Section III.D. Nature of Present Assets for additional discussion).
13
The Company’s recruitment and temporary placement operations are organized as follows:
During the second half of 2008, recognizing the changing U.S. and international economies
and the resultant impact on declining employment and the labor markets, COD focused on improving
efficiencies and reducing operating costs.
In November 2008, to assist and support the Company’s gaming and hospitality industry base,
COD officially launched its Las Vegas division by exhibiting at the Global Gaming Expo (G2E). COD
continues to provide staffing services to the gaming and hospitality industry at the Company’s
corporate office located in Las Vegas, Nevada.
In January 2009, COD was restructured to provide temporary placement and/or recruitment
services in support of its core vertical expertise from the Melville, New York corporate office and
Brooklyn, New York office.
Future Business Operations
Due to the recent upturn in restructuring of gaming investments as well as general economic
market conditions, the Company is currently identifying potential opportunities to provide gaming
and hospitality consulting and management services to non-Tribal clients, e.g., financial
institutions holding troubled gaming property debt.
The Company also continues to focus on providing technical assistance, training and management
or consulting advice to Native American Tribes concerning all aspects pertaining to the gaming
operations and business activities.
The Company also continues to provide management consulting for its restaurant entity.
Current and future activities include but are not limited to, marketing and advertising,
promotional activity, internal controls and accounting procedures and general food and beverage
operations.
14
Capitalization and Trading Market; Compliance
The Company has authorized 100,000,000 shares of common stock, par value $.01 per share, of
which 6,229,107 shares are issued, outstanding and held of record by approximately 1,200
stockholders. The Company’s common stock is currently traded with Pink OTC Markets Inc. (“Pink
Sheets”).
The Company has not conducted any public offerings of its securities since the original
initial public offering in 1980. The Company has not made any sales of its securities pursuant to
its registration statement on Form N-2. The Company is current in all of its required filings
under the federal securities laws, with the exception of its
Semi-Annual Report for Registered Investment Companies on Form N-SAR and
its Certified Shareholder Report of Registered Management Investment Companies on Form N-CSR, each
for the reporting period ended December 31, 2009, which the Company, as reported in a press release on
March 1, 2010, is currently unable to file as a result of a continuing working capital shortage. The Company has attempted to raise
capital, and continues its efforts in this regard, to correct its working capital shortage. The Company undertakes to make such filings by January 31,2011. After receipt of the requested deregistration order, the Company will be subject to the reporting and other requirements of the Exchange Act and intends to
make all filings required by the Exchange Act.
Tax Consequences
Deregistration under the Act will not result in any unfavorable tax consequences to the
Company or its stockholders. The Company has not filed its federal tax returns on the basis that
it is qualified to be taxed as a “regulated investment company” (as such term is defined in the
applicable provisions of the Internal Revenue Code (“IRC”)). During the time that the Company has
been registered under the Act, upon advice of the Company’s independent tax accountants, it has
continued to file its federal tax returns as if it were an operating company subject to the
provisions of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
Equity Compensation Plan Information
At December 31, 2008, the Company has one active stock plan with 750,000 shares authorized and
410,000 shares available for issuance. In addition, the Company has three expired stock option
plans which authorized: (i) 500,000 shares for issuance to officers of the Company: (ii) 833,334
shares for issuance to key employees, including officers of the Company; and, (iii) 833,334 shares
for issuance to employees, officers and directors of the Company and others. Options, under all
plans, have generally not been granted at less than 100% of the market value of the Company’s
common stock on the date of grant.
Options outstanding — weighted
average remaining contractual
life (years) // range of exercise
prices
1.1
$
1.13
1.1
$
1.13 - $1.63
4.0
$
0.93 - $2.87
Options exercisable — weighted
average remaining contractual
life (years) // range of exercise
prices
1.1
$
1.13
1.1
$
1.13 - $1.63
3.9
$
0.93 - $2.87
C:
In connection with a 2003 asset acquisition agreement among Enigma Media, Inc. (“Enigma”)
and the Company, the Company issued warrants to Enigma, which were valued at $0.75 each, to
purchase a total of 1,000,000 shares of the Company’s common stock, par value $0.01 per share, at
an exercise price of $5.00 per share, expiring on December 31, 2013 (“Enigma Warrants”). The
Company and Enigma fixed the terms of the Enigma Warrants pursuant to arm’s-length negotiations.
Commencing on July 1, 2007, Enigma has the contractual right to redeem the Enigma Warrants, in
whole or in part, at a redemption price of $0.75 per Enigma Warrant, provided that the average of
the closing sale prices of the Company’s common stock as reported on the stock market or other
reporting system that provides last sale prices, has been at least 200% of the exercise price for a
period of 20 consecutive trading days ending on the third day prior to the date on which the
Company gives notice of redemption. Enigma has not yet redeemed, or sought to redeem, any of the
Enigma Warrants. Notwithstanding any contractual right of Enigma in connection with the Enigma
Warrants, from a regulatory perspective, the Company is not permitted to redeem any outstanding
warrants, including the Enigma Warrants, while registered under the Act.
Holders of the Enigma Warrants have the right to demand one registration for resale of the
shares underlying the Enigma Warrants at the expense of the Company and two additional
registrations at their own expense. They also have unlimited piggyback registrations with respect
to shares that have not been previously registered.
16
B. Public Representations of Policy
The Company has never represented or stated that it is involved in any business other than the
businesses in which it presently and has historically operated, which have included, as set forth
above, gaming, media, restaurants and entertainment. The Company’s periodic reports, reports to
stockholders and press releases have consistently stated that the business of the Company consists
of such enterprises and has never at any time characterized any portion of the Company’s business,
either explicitly or implicitly, as relating to the investment in securities. Further, the Company
has always emphasized operating results and has never emphasized investment income as a material
factor in its business or future growth.
C. Activities of Directors, Officers and Employees
AVCS Board of Directors
Set forth below is a brief description of the background of each of the Company’s current
directors, based on information provided to us by them.
Steven G. Barringerhas served as a Director of the Company since February 1998, as the
Company’s Corporate Governance Liaison since July 2003 and as Chairman of the Company’s Nominating
Committee since March 2007. Mr. Barringer has been a Partner of Holland & Hart LLP since April
2006. Mr. Barringer was a member of the government relations firm of MGN, Inc. in Washington, D.C.
from November 2000 to April 2006.
Douglas R. Sandersonwas appointed to the Company’s Board of Directors in October 2007 to fill
the vacancy created by the death of Audrey C. Tassinari. Mr. Sanderson currently is President of
La Jolla Gaming which specializes in server-based technology and offers a line of gaming software
through its offices in Las Vegas, San Diego, London and San Jose, Costa Rica. Mr. Sanderson served
as President and Chief Executive Officer from 2000 to February 2006 of the publicly-traded company
Fortune Entertainment Corporation. Mr. Sanderson is also the former President and Chief Executive
Officer of Sega Gaming Technology, Inc. and the former Vice-President of Worldwide Sales for Bally
Gaming, Inc. Mr. Sanderson serves on the Board of Directors of the Nevada Muscular Dystrophy
Association.
Brian T. Seagerwas appointed to the Company’s Board of Directors in September 2007 to fill
the vacancy created by the resignation of Randolph C. Read. Mr. Seager currently serves as the
President of Brilor, Inc. Brilor, Inc. acquires land and develops master plan communities in
Nevada, Arizona, Idaho and Utah. Mr. Seager serves as a Board of Trustee for Destination Funds.
Anna M. Morrison was appointed the Company’s Chief Accounting Officer in April 2003. In 2008
she was appointed the Company’s Chief Financial Officer. From August 2002 to April 2003, she
provided financial and accounting services to us as an outside consultant. She was President of
Morrison Business Resources, Inc. and an Associate with Resources Connection, Inc. and Robert Half
International, Inc. from 1997 to August 2002. Ms. Morrison served as a Manager and an Associate
for Price Waterhouse LLP, a predecessor of PricewaterhouseCoopers LLP from 1987 to 1992 and from
1993 to 1996. Ms. Morrison is a Certified Public Accountant.
The Company’s Chief Executive Officer and Chief Financial Officer spend nearly all of their
time on the Company’s current businesses, principally COD and the Brownstone group of companies, in
addition to seeking out and negotiating potential new strategic complementary businesses. The
activities of the Company’s officers and directors relating to the Company’s investment securities
and cash is extremely minimal, both in absolute terms and relative to the overall amount of time
dedicated to the Company’s business activities, and is limited to monitoring, and from time to
time, liquidation of, the investment securities. Further, as discussed in Section III.A. above,
the Company’s officers and directors are currently spending considerable time in developing casino
gaming and casino management opportunities for the Company.
Robert F. Gross was appointed Chief Executive Officer for the Company’s gaming group in 2006.
Mr. Gross currently is President of RFG Gaming & Hospitality, LLC, an independent consultant. Mr.
Gross’s passion in the gaming industry has encompassed more than 35 years of executive management
experience. He has developed and managed commercial gaming properties and Native American-owned
gaming properties including Nez Perce Gaming Enterprises, Santa Ana Star Hotel Casino Resort, Dunes
Hotel & Casino, Rancho Mesquite Casino & Holiday Inn Hotel, WSR Corporation d/b/a Oasis Resort
Hotel & Casino, Santa Fe Hotel & Casino Resort, Table Mountain Casino & Bingo, and the Cher Ae
Heights Casino.
Anna
M. Morrison, Board member, Secretary and Treasurer.
Anna
M. Morrison, Board member, Secretary and Treasurer.
Paul J. Buonaiuto was appointed Chief Executive Officer for Candidates on Demand Group, Inc.,
a wholly-owned subsidiary of the Company, in June 2008. Prior to assuming the CEO post, Mr.
Buonaiuto was the Practice Lead for CDI Corp, responsible for day-to-day management of a
recruitment team of more than 40 individuals and expansion efforts in Asia Pacific and Japan. From
1995 — 2007, Mr. Buonaiuto served in various roles including Vice-President, Global Relationship
Management and National Recruiting Director for the publicly-traded company CA, Inc.
Employees
In addition to the Company’s CEO and CFO, the parent company also has a Corporate Controller
who oversees all of the financial operations, accounting and financial reporting, and communicates
with the CFO regularly, as well as an executive assistant who performs administrative duties for
the executive management as well as assisting the corporate controller with daily accounting
activities. The Company has never employed an investment advisor and there is not an employee who
is specifically assigned to manage the Company’s investments, this is the responsibility of the CEO
and CFO.
COD has 10 employees. Paul Buonaiuto, the CEO, manages the company as well as human resource
issues. The corporate controller of the parent company oversees all of the financial operations,
accounting and financial reporting, and communicates with the CEO regularly. The accounting
assistant supports the CEO and the corporate controller of the parent company with the daily
accounting activities. The marketing and sales manager maintains the marketing strategy.
Recruiting agents are responsible for interviewing and placement of potential candidates.
D. Nature of Present Assets
Description of Assets
As a result of its registration with the Commission as a non-diversified closed-end management
investment company under the Act, effective March 21, 2006, the Company changed its accounting to
carry its investments in non-traded investees at estimated fair values and otherwise report
utilizing specialized accounting principles applicable to registered investment companies.
The “value” of assets of a registered company for purposes of section 3 of the Act is defined
in section 2(a)(41) of the Act. The following schedule of assets presents American Vantage
Companies as if unconsolidated at June 30, 2009. For purposes of this Application, the schedule
values have been determined in accordance with Section 2(a)(41) of the Act:
“Interests in Wholly-Owned Subsidiaries” consists of the following
entities/operations:
•
American Vantage Brownstone, LLC — top organizational tier for the gaming and
hospitality division of companies
•
Candidates on Demand Group, Inc. — top organizational tier for the temporary placement
and recruitment services division of companies:
o
COD Consulting, Inc.
o
DealSplit, Inc.
o
Candidate Report Card Group, Inc.
•
Vantage Bay Group, Inc. — Vantage Bay Group, Inc. holds a 49% equity ownership interest
in Border Grill Las Vegas, LLC.
“Interests in Majority-Owned Subsidiaries” consists of the following
entities/operations:
•
Brownstone, LLC — Tribal gaming development and consulting/management operations
•
Brownstone GoldTown, LLC — Commercial gaming and hospitality development and management
operations
20
•
Brownstone GoldTown CV, LLC — Commercial gaming and hospitality development and
management operations
•
Brownstone Gaming & Hospitality, LLC — Tribal and commercial gaming and hospitality
development and consulting/management operations
The Company’s Chief Executive Officer and Chief Financial Officer spend nearly all of their
time on the Company’s current businesses, principally COD and the Brownstone group of companies, in
addition to seeking out and negotiating potential new strategic complementary businesses for the
Company’s casino gaming and hospitality operations.
“Interests in Subsidiaries that are not Majority-Owned Subsidiaries” consists of a 49% equity
ownership interest in Border Grill Las Vegas, LLC.
The Company has no day-to-day management responsibility in connection with the Border Grill.
However, the Company reviews Border Grill’s monthly and annual financial statements and annual
operating budgets. The Company also reviews major capital expenditure budgets and is involved with
financing efforts related to any major capital expenditures. Border Grill also consults with the
Company on its on-going marketing and promotional efforts, strategic planning and employment of key
management.
As of 2004, the Company had received a return of all of its 1998/1999 capital investment of
approximately $3,200,000 and subsequently received pro rata distributions from the Border Grill
based on the Company’s percentage ownership.
During November 2007, the Border Grill entered into a commitment letter with a bank for a
non-revolving line of credit in the amount of $2,500,000 for the expansion and refurbishment of the
Border Grill. Under the terms of the commitment letter, the Term Loan is subject to certain
financial reporting covenants and is conditioned upon the Company and the 51% equity interest
partners (“TT&T”) providing joint and several guaranties (the “Guaranty”) in the event of a default
in payment by Border Grill. In the event that the Company and TT&T are required to make any
payments pursuant to the Guaranty, such payments shall be in proportion to the members’ respective
49% and 51% equity ownership in Border Grill. The Company and TT&T have provided reciprocal
pledges of a first priority security interest in each member’s equity ownership interest and rights
to receive distributions, profits or capital from the Border Grill if the Company and/or TT&T are
unable to meet the Guaranty payment requirements.
21
E. Sources of Present Income
Sources of the Company’s Income and Nature of its Revenues
The following schedule presents sources of the Company’s revenues generated from “Operating
Interests” or income from “Investment Assets” as a percentage based on investment values for
American Vantage Companies (unconsolidated) at June 30, 2009. For purposes of this application,
the schedule values have been determined in accordance with section 2(a)(41) of the Act.
Brownstone GoldTown, LLC and
Brownstone GoldTown CV, LLC
51% Member shares
Gaming and hospitality
868,000
0.0
%
—
9,381,000
3.1
%
—
MINORITY-OWNED INTERESTS:
Border Grill Las Vegas, LLC
49% Member shares
Gaming property restaurant
1,960,000
—
1.2
%
COMMON STOCK:
Genius Products, Inc.
Common stock
GNPR.PK
1,050
6,000
—
0.0
%
PREFERRED STOCK:
Federated Premier Intermediate
Municipal Income Fund—Moodys: AAA
Series A
Auction-Rate Securities
9
225,000
—
0.0
%
Paine Webber Premium
Municipal Income—Moody’s
and S&P: AAA
Series B
Auction-Rate Securities
11
550,000
—
0.0
%
775,000
—
0.0
%
WARRANTS:
Genius Products, Inc.
$1,280 Warrants
GNPR.PK
500
3,000
—
0.0
%
Genius Products, Inc.
$1,390 Warrants
GNPR.PK
1,400
7,000
—
0.0
%
10,000
—
0.0
%
$
13,432,000
98.8
%
1.2
%
Note: From the above schedule, there are no expenses incurred on income derived from
Investment Assets.
22
The Company’s Operating Interests from majority-owned subsidiaries comprising the
Brownstone group of companies primarily generate consulting and/or management fees on a
project-by-project basis to the gaming and hospitality industry.
COD primarily earns its Operating Interest fee revenues by providing temporary placement and
permanent employee recruitment services to various industries including IT, legal, accounting,
finance, engineering and pharmaceutical. Prior to the Company’s acquisition of COD in September
2007, COD was a privately-held sole proprietorship.
The following are COD’s historical audited and unaudited operating results for the six months
ended June 30, 2009 and the five calendar years ended December 31, 2004 through 2008:
As indicated above, for the six months ended June 30, 2009, the Company derived 95.7% of
its Operating Interest revenues from COD, but COD also incurred an operating loss. The Company did
derive income from the Border Grill Investment Asset which the Company used to fund internal
working capital.
For the Brownstone group of companies, several factors including availability of gaming and
hospitality projects, length of project term(s), amount of project(s) fees and net income generated
from each individual project cause unpredictable fluctuations in comparing annual operating results
for the Brownstone group of companies. The gaming and hospitality industry has also been
significantly impacted by the current U.S. economic recession, limited available working capital
resources and heavily leveraged facilities. As a result, many Tribal and commercial/jurisdictional
gaming and hospitality development projects have been placed on hold or work delayed pending a
better gaming and hospitality market.
For the employment industry, excluding the Great Depression of the 1930s, historical downturns
in U.S. employment patterns were generally centralized to an industry and/or region. For example,
the 1990s downturn in the U.S. high technology industry primarily impacted certain Northeast
(Boston) and Western regional cities (San Jose, San Francisco, Seattle and Portland), but had
minimal ‘ripple’ impact on other industries or in the Southern and Midwest regions. Generally,
when these isolated downturns occur, in lieu of hiring permanent staff, companies retain temporary
staff for
23
specific projects and begin a cycle of rehiring permanent staff as economic conditions
improve. As noted above, COD provides both permanent staffing services and temporary
placement services thus minimizing risk from a potential economic downturn in a specific industry
and/or region.
The following regional and industry unemployment rate data was compiled from the U.S. Bureau
of Labor Statistics. The schedule supports the unprecedented economic recessionary effect
(beginning in 2007) of increasing unemployment in all U.S. regions and across all industries:
2009
2008
2007
2006
2005
2004
Northeast
8.6
%
6.2
%
4.7
%
4.3
%
4.8
%
4.4
%
South
9.2
%
6.3
%
4.7
%
4.3
%
4.7
%
4.3
%
Midwest
10.2
%
6.7
%
5.5
%
4.9
%
5.3
%
5.0
%
West
10.2
%
7.2
%
5.3
%
4.5
%
4.8
%
4.5
%
National average
9.5
%
7.4
%
5.0
%
4.4
%
4.9
%
5.4
%
Wholesale and retail trade
—
5.9
%
4.7
%
4.9
%
5.4
%
5.8
%
Information systems
—
5.0
%
3.6
%
3.7
%
5.0
%
5.7
%
Financial
—
3.9
%
3.0
%
2.7
%
2.9
%
3.6
%
Professional and business
—
6.5
%
5.3
%
5.6
%
6.2
%
6.8
%
Education and health services
—
3.5
%
3.0
%
3.0
%
3.4
%
3.4
%
Leisure and hospitality
—
8.6
%
7.4
%
7.3
%
7.8
%
8.3
%
As indicated above, prior to the events of 2007, COD generated annual net operating
profits from operations. The current global and U.S. economic and capital market environment has
created singularly adverse market conditions for all U.S. companies, but the impact to COD and
other companies specializing in the employment industry has been particularly severe:
•
In 2007, as financial institutions began globally restricting companies’ existing
operating lines of credit, a company’s typical “first step” strategy was to curtail hiring
for new positions and/or not fill vacated positions. Unlike employee layoffs, this
strategy shift is generally imperceptible to the general public. However, as the result
of this practice expanded into multiple industries and geographic regions, before the
capital market/economic concerns were more publicly known, the employment industry was
already negatively impacted.
•
As the unemployment rate grew throughout the U.S., the permanent placement business
continued to significantly decrease during 2008, and in February 2009, COD shutdown its
permanent placement offices in North Palm Beach, Florida, Dallas, Texas and Lyndhurst, New
Jersey, and consolidated its remaining permanent placement operations into two New York
locations, the Long Island corporate office and Brooklyn.
24
Prior to 2007, the COD business plan focused on a higher revenue mix of permanent
placement business to temporary staffing business as margins generated from the permanent
placement business were substantially higher. For example, for the year ended December31, 2006, the revenue mix of permanent placement business to temporary staffing business
was 58% to 42%, respectively. However, the 58% of permanent placement business revenues
contributed 69% of gross margin to operating income with temporary staffing margins
contributing 31%.
For the six months ended June 30, 2009, the revenue mix was 15% to 85% of permanent
placement business to temporary staffing.
•
The current recessionary economic climate, limited working capital resources and
business foreclosures have resulted in a decreasing client pool in both the permanent
placement and temporary staffing businesses. Coupled with a decreasing client pool,
competitive pricing pressures are further deteriorating temporary staffing margins and
operating income.
The Commission has, in appropriate cases, considered a company’s sources of revenue in
addition or, or in place of, its sources of income to evaluate whether a company meets the
Tonopah2 standards. Based on the above, the Company believes that net income from its
Operating Interests in COD have been materially underemphasized due primarily to current global
economic conditions and related rising U.S. unemployment rates which has created an operating
environment requiring COD to shift from its core profitable business model focused on a higher
revenue mix of private placement business to consulting business. However, the Company also
believes that this situation is temporary as any initial economic improvement—in one or more
industry and/or one or more U.S. region, will again open permanent placement opportunities. As
such, the Company believes that its activities as an operating company are more appropriately
analyzed by looking at its revenues.
The Company expects to use future income generated from COD, Border Grill and the Brownstone
group of companies to fund its current and future operations, to purchase capital assets, to fund
acquisitions and for repayment of existing debt. Since substantially all of the Company’s revenues
are attributable to its operations, rather than from investments, the Company’s revenues support a
determination that the Company is primarily engaged in a business other than that of investing,
reinvesting, owning, holding or trading in securities.
See Certain Research and Development
Companies, Investment Company Act Rel. No. 26077 (June 16, 2003) (adopting Rule
3a-8); Pacificare of Arizona, Inc., Investment Company Act Rel. Nos. 26643
(October 25, 2004) (notice) and 26679 (November 22, 2004) (Orders under
Sections 3(b)(2) and 45(a) of the Act); and Russian Telecommunications
Development Corporation, Investment Company Rel. Nos. 25249 (October 31, 2001)
(notice) and 25298 (November 26, 2001) (order).
25
shareholder of COD, the Company acquired all of the outstanding common stock of COD. COD
began operations on September 15, 2007.
As required by the Act, effective September 15, 2007, the Company excludes the accounts of COD
in reporting its consolidated financial statements and carries its investment in COD at its
estimated fair value, reporting utilizing specialized accounting principles applicable to
registered investment companies. However, as indicated in the above schedule, during the six
months ended June 30, 2009, the Company earned a majority of its income from COD, a wholly-owned
subsidiary.
The March 2007 exclusive development agreement between Brownstone, LLC and the Big Sandy
Rancheria Tribe of Western Mono Indians provides for various contracted revenue streams:
•
A financing structuring fee equal to a percentage of the gross amount of all initial,
interim and permanent financings, which are currently anticipated to aggregate
approximately $540,000,000.
•
A development fee equal to a percentage of the aggregate for developing, constructing,
equipping and opening the hotel and casino resort.
•
A $2,500,000 bonus if the project opening date occurs within 24 months of the closing
of the permanent financing.
With the assistance of Brownstone, LLC, the Tribe completed a bridge financing of $39,900,000
in October 2007 to fund the pre-development activities of the Tribe’s hotel and casino project.
For the six months ended June 30, 2009, the Company received $49,000 in net capital
contributions from its 49% equity ownership in the Border Grill.
The Company’s investment in preferred stock is held through a Wells Fargo Investment brokerage
account for Auction-Rate Securities. Until early 2008, these Auction-Rate Securities were fully
liquid via auctions held every seven days. However, during early 2008, Wells Fargo Investment
notified the Company that these Auction-Rate Securities were no longer liquid, but were subject to
partial calls or redemptions via a lottery system conducted by the Depository Trust Company. Due
to the uncertainty of redeeming these securities, the Company arranged with Wells Fargo & Company
to borrow 90% of the total value of the investment in these Auction-Rate Securities. The Wells
Fargo borrowing does not provide for a stated repayment date, but is repaid from Auction-Rate
Securities that may become available for redemption from the Depository Trust Company lottery
system. Any related interest expense from the Wells Fargo & Company borrowing is offset by the
interest income earned on the Auction-Rate Securities.
26
Historical Financial Statement Information for Unconsolidated Subsidiaries
Border Grill
Until March 20, 2006, the Company recorded its equity interest in the Border Grill using the
equity method of accounting (based on the Company’s 49% equity interest in Border Grill’s net
assets and the terms of the Border Grill operating agreement).
Effective March 21, 2006, the Company excludes the accounts of Border Grill in reporting its
consolidated financial statements. As required by the Act, the Company carries its investments in
Border Grill at its estimated fair value, and otherwise reports utilizing specialized accounting
principles applicable to registered investment companies.
Games Media
Effective April 16, 2003, the Company holds a less than 5% investment in Games Media, an
unconsolidated subsidiary. Through March 20, 2006, the Company excluded the accounts of Games
Media using the cost method of accounting based on the Company’s less than 5% equity interest in
the net assets of Games Media. At December 31, 2006, the Company estimated that the fair value of
this investment was zero.
Effective March 21, 2006, as required by the Act, the Company carries its investments in Games
Media at its estimated fair value (zero at June 30, 2009), and otherwise reports utilizing
specialized accounting principles applicable to registered investment companies.
COD
Pursuant to a merger agreement dated as of September 14, 2007, as amended on March10, 2008, among the Company, COD and Michael C. Woloshin, founder and sole shareholder of COD, the
Company acquired all of the outstanding common stock of COD. COD began operating as a subsidiary
of the Company on September 15, 2007.
As required by the Act, effective September 15, 2007, the Company excludes the accounts of COD
in reporting its consolidated financial statements and carries its investment in COD at its
estimated fair value, reporting utilizing specialized accounting principles applicable to
registered investment companies.
Warrants
Since registering under the Act, the Company has neither issued any options or warrants nor
permitted the exercise of any outstanding options or warrants. The Company did not seek relief
from the Commission with respect to these outstanding options and warrants because the Company
intended to deregister from the Act as soon as practicable after filing its registration statement
on Form N-2.
27
The Company has undertaken not to grant any new options or warrants, nor permit any future exercise
thereof, while registered under the Act.
IV. DISCUSSION OF ASSETS RELATING TO THE 40% TEST
Section 3(a)(1)(C) of the Act provides that an issuer is an investment company if it is
engaged...in the business of investing, reinvesting, owning, holding, or
trading in securities, and owns or proposes to acquire investment
securities having a value exceeding 40 per centum of the value of such
issuer’s total assets (exclusive of Government securities and cash items)
on an unconsolidated basis.
The relevant formula for determining investment securities as a percentage of total assets,
and thereby investment company status under Section 3(a)(1)(C) of the Act, is as follows:
Total assets and cash as set forth above equal $16,848,000 and $48,000, respectively. Total
investment securities as set forth above equals $2,751,000.
Thus:
Accordingly, the Company has investment securities as a percentage of total assets equal to
approximately 16.4%, considerably less than 40% of the Company’s total assets on an unconsolidated
basis. Consequently, the Company should not be deemed to be an investment company under Section
3(a)(1)(C) of the Act.
3
Exclusive of securities issued by
majority-owned subsidiaries pursuant to Section 3(a)(2)(C) of the Act. None of
the excluded securities issued by majority-owned subsidiaries pursuant to
Section 3(a)(2)(C) can be defined as the securities of an “investment company”
under the Act, and no such subsidiary is a company relying on Section 3(c)(1)
or 3(c)(7) of the Act.
4
Exclusive of cash and government securities
pursuant to Section 3(a)(1)(C) of the Act. The “value” of assets of a
registered company for purposes of section 3 of the Act is defined in Section
2(a)(41) of the Act. The values stated in this application have been
determined in accordance with Section 2(a)(41) of the Act.
28
V. RATIONALE FOR REGISTRATION/HARDSHIP FOR COMPLIANCE
Rationale for Registration
The Company does not believe that it should be, or should ever have been, characterized as an
investment company. The Company’s rationale for filing a Form N-2 was that in both March 2005 and
March 2006, the Company held investment securities that had a value exceeding 40% of the Company’s
total assets on an unconsolidated basis. In March 2005, these securities principally consisted of
7,000,000 shares of common stock, and warrants to purchase 1,400,000 shares of common stock, of
Genius Products, Inc., together with a 49% interest in the Border Grill restaurant, which resulted,
at the time, in the value of the Company’s investment securities equaling approximately 77% of its
total assets.
Until late 2005, the Company continued to operate the American Vantage/Hypnotic, Inc.
(“Hypnotic”) television and film content creation business. Hypnotic continued to be led by two
very well-known entertainment industry figures, Messrs. David Bartis and Doug Liman, had four
full-time employees and was located in Santa Monica, California. The Company searched for
businesses that might complement Hypnotic and, in particular, hasten the growth of Hypnotic’s
content creation business. As part of that effort, the Company entered into negotiations to
acquire an infomercial creation company. However, after extensive negotiations, management
concluded that it would not be able to consummate the transaction on terms acceptable to the
Company. As the Hypnotic division continued to generate operating losses and required periodic
working capital infusions from the parent company during late 2005, the Hypnotic division was
shutdown.
From late 2005 to March 2006, the Company sought out other operating businesses, without
success; accordingly, in March 2006, in an abundance of caution, the Company believed it was
required to comply with the registration requirements of the Act due to the fact that its
percentage of investment securities was still in excess of 40% (approximately 89%), and a full year
had passed without the Company becoming re-engaged in any substantial operating businesses,
rendering the “safe harbor” provisions of Rule 3a-2 of the Act (relating to “transient investment
companies”) inapplicable. The Board of Directors and management deliberated on the issue of
registration under the Act on several occasions in 2005 and early 2006. Upon the advice of
counsel, management authorized the Company to file the initial Form N-8A Notification of
Registration and to take any further action necessary or appropriate to register the Company under
the Act. The Company registered under the Act notwithstanding the fact that in 2005-2006, as at
the present time, the Company was not in the “business” of investing, reinvesting, owning, holding
or trading in securities.” From 2007 through 2009, the Company sold certain shares of Genius, and
after giving effect to a reverse stock split of Genius that was effected in March 2009, as of June30, 2009, the Company held 1,050 shares of Genius Products, with an aggregate value equal to
$5,775. Accordingly, investment securities as defined by the Act now constitute less than 40% of
the Company’s total assets on an unconsolidated basis.
29
Hardship for Continued Compliance
Continued compliance with the Act would present an undue hardship to the Company. By design,
the Act is not intended to regulate operating companies, and as such, contains many proscriptions
and limitations with respect to activities normally within the scope of an operating company’s
business, operations and financial viability. Examples include a general prohibition on the
granting of warrants and the requirement to obtain stockholder approval prior to issuing securities
at less than the net asset value per share. Such restrictions present significant obstacles to
capital raising activities in which the Company would otherwise actively participate if it were not
for its status as a registered investment company.
Further, the basis for accounting and reporting under the Act, i.e., fair market value, does
not provide the Company’s stockholders with information pertinent to investing decisions as the
information does not reflect the actual operations or management of these operations, but rather is
primarily driven by current world and U.S. economic conditions. For example, for the year ended
December 31, 2008, the Company recorded net unrealized depreciation of $5,098,000 and $1,764,000,
respectively, for COD’s and Border Grill’s change in estimated fair market value. These decreased
valuations were based on analyses performed through independent appraisals. The third-party
appraisers evaluated comparable properties and/or companies that had been sold or are being sold,
economic market conditions, historical financial information and projected financial information.
Strong credence was given to the significant U.S. economic market turmoil during late-2008 and
continuing into 2009. Accordingly, management believes that having the ability to report such
depreciation using the accounting standards applicable to operating companies would present more
meaningful disclosure to investors.
Also, consistent with regulations under the Act, the Company does not consolidate the assets,
liabilities and operations of its wholly-owned subsidiary, COD. Management believes that the lack
of consolidation (as required by the Act) excludes information that could be pertinent to the
Company’s stockholders, such as operational results, balance sheet items, and the limited nature
and content of footnote disclosures that could otherwise provide relevant information to
stockholders. The Company believes it would be more appropriate to consolidate its assets,
liabilities and operations in order to present a more full and accurate picture of the Company’s
businesses and operations.
VI. APPLICABLE STATUTORY PROVISIONS
Applicant is seeking an order terminating its registration as an investment company
under the Act, pursuant to Section 8(f) thereof. Section 8(f) of the Act provides that “whenever
the Commission, on its own motion or upon application, finds that a registered investment company
has ceased to be an investment company, it shall so declare by order and upon the taking effect of
such order the registration of such
30
company shall cease to be in effect.” Applicant qualifies for an order under Section 8(f) because
it no longer meets the definition of an investment company under the Act.
Section 3(a)(1)(A) of the Act defines an investment company as an issuer which “is or holds
itself out as being engaged primarily . . . in the business of investing, reinvesting or trading in
securities.” Further, Section 3(a)(1)(B) of the Act defines an investment company as an issuer
which “is engaged or proposes to engage in the business of issuing face-amount certificates of the
installment type...” Finally, Section 3(a)(1)(C) of the Act defines an investment company as an
issuer which “is engaged or proposes to engage in the business of investing, reinvesting, owning,
holding, or trading in securities, and owns or proposes to acquire investment securities having a
value exceeding 40 per centum of the value of such issuer’s total assets (exclusive of Government
securities and cash items) on an unconsolidated basis.” Section 3(a)(2) provides, in pertinent
part, that “As used in this section, ‘investment securities’ includes all securities except (A)
Government securities, . . . and (C) securities issued by majority-owned subsidiaries of the owner
which (i) are not investment companies, and (ii) are not relying on the exception from the
definition of investment company in paragraph (1) or (7) of subsection (c).”
Applicant is Neither a Section 3(a)(1)(A) nor 3(a)(1)(B) Investment Company
Applicant has never in the past, nor does it presently, hold itself out as being engaged
primarily, nor does it propose in the future to engage primarily, in the business of investing,
reinvesting, or trading in securities. Further, Applicant has never in the past, nor does it
presently, engage in, nor does it propose in the future to engage in, the business of issuing
face-amount certificates of the installment type, nor does it have any such certificate
outstanding.
Applicant is Not a Section 3(a)(1)(C) Investment Company
Although Applicant has in the past held investment securities having a value near or exceeding
40% of its total assets, Applicant does not currently do so and believes it is no longer an
investment company as defined in Section 3(a)(1)(C) of the Act. To come within the definition of
Section 3(a)(1)(C), an issuer must both be engaged, or propose to engage, in the business of
investing and reinvesting in securities and own or propose to acquire investment securities having
a value exceeding 40% of the value of the issuer’s total assets (exclusive of government securities
and cash items) on an unconsolidated basis.
Because Applicant represents that currently neither it nor any of its subsidiaries either (i)
are engaged, or propose to engage, in the business of investing and reinvesting in securities or
(ii) own or propose to acquire investment securities having a value exceeding 40% of the value of
its total assets (exclusive of government securities and cash items) on an unconsolidated basis,
Applicant is no longer an investment company under Section 3(a)(1)(C) of the Act. See “Nature of
Present Assets — Discussion of Assets Relating to the 40% Test,”infra above. We further note
that none of the
31
Company’s subsidiaries can be defined as an investment company for purposes of the Act, and none is
a company relying on Section 3(c)(1) or 3(c)(7) of the Act.
Upon the granting by the Commission of an order pursuant to Section 8(f) of the Act declaring
that the Company has ceased to be an investment company under the Act, the Company will
automatically, and with no further action required, revert to the status of a public operating
company under the Exchange Act. As such, it will continue to be publicly-held, subject to the
reporting requirements of the Exchange Act and the rules and regulations promulgated thereunder,
and traded on the “Pink Sheets.” As such, stockholders will continue to be afforded with the
protections of the federal securities laws.
VII. BOARD AND STOCKHOLDER APPROVAL
The Board of Directors of the Company discussed deregistering the Company from the Act on
several occasions. On March 27, 2008, the Board resolved that it would be in the best interest of
the Company to deregister from the Act, and thereby authorized and directed the Company to take all
action necessary and appropriate, including the filing of this Application, to so deregister. On
October 1, 2008, a Unanimous Written Consent was signed by the Board which resolved to include the
deregistration in the next proxy statement for consideration by the stockholders.
At the Company’s Annual Meeting of Stockholders held on November 14, 2008, stockholders
representing approximately 79.5% of the issued and outstanding common stock of the Company voted to
approve the proposal to deregister the Company from the Act.
VIII. CONCLUSION
The Company is no longer an investment company by virtue of the fact that neither Section
3(a)(1)(A) nor 3(a)(1)(B) of the Act are applicable to the Company, and the Company’s investment
securities equal approximately 16.4% of its total assets, well below the 40% threshold set forth in
Section 3(a)(1)(C) of the Act. Further, the Company maintains ongoing business operations in the
placement agency, restaurant, gaming and entertainment fields, all of which are unrelated to the
business of investing, reinvesting, owning, holding, or trading in securities. The Company fully
intends to manage its assets and any future cash earnings in a manner that will cause the Company
to continue to be excluded from the definition of an investment company under the Act. In
addition, after entry of the order requested by this application, the Company will continue to be
traded on the Pink Sheets and will be subject to the reporting and other requirements of the
Exchange Act. Accordingly, for the reasons set forth above, the Company asserts that it satisfies
the standards for an exemptive order under Section 8(f) of the Act.
IX. APPLICANT’S CONDITIONS
Applicant agrees that the requested order will be subject to the following conditions:
1.
Applicant will, by January 31, 2011, file Forms N-SAR, N-CSR and any other reports required by the Act for the periods up until it is
deregistered under the Act.
2.
Applicant acknowledges that any order granted pursuant to this Application shall be without prejudice to, and shall not limit the Commission’s
rights in any manner with respect to, any Commission investigation of, or administrative proceedings involving or against, Applicant, and the Company may not assert this
action as defense in any proceeding initiated by the Commission or any person under the federal securities laws of the United States.
32
AUTHORITY TO FILE THIS APPLICATION
Pursuant to Rule 0-2(c) under the Act, Applicant states that the Board, by resolution duly
adopted and attached hereto as Exhibit A, has authorized certain officers of Applicant to prepare,
or cause to be prepared, and to execute and file with the Commission, this Application.
The verification required by Rule 0-2(d) under the Act is attached hereto as Exhibit B. All
other requirements for the execution and filing of this Application in the name of, and on behalf
of, Applicant by the undersigned officer of Applicant have been complied with and such officer is
fully authorized to do so.
Pursuant to Rule 0-2(f) under the Act, Applicant states that its address is P. O. Box 81920,
Las Vegas, Nevada, 89180, and Applicant further states that all communications or questions
concerning this Application or any amendment thereto should be directed to David R. Fishkin, Snow
Becker Krauss P.C., 605 Third Avenue, New York, New York10158, telephone (212) 455-0408.
It is desired that the Commission issue an Order pursuant to Rule 0-5 under the Act without a
hearing being held.
Applicant
has caused this Application to be duly signed on its behalf as of
this 30th day of
March, 2010.
UNANIMOUS WRITTEN CONSENT
OF THE
BOARD OF DIRECTORS
The undersigned, constituting all of the members of the Board of Directors (the
“Board”) of American Vantage Companies, a Nevada corporation (the
“Corporation”), pursuant to Section 78.315 of the Nevada Revised Statutes, do
hereby consent to and adopt the following as the duly adopted resolutions of the Board and
to the taking of the actions authorized hereby:
RESOLVED, that the Board deems it advisable and in the best interest of the
Corporation for the Corporation to deregister from the Investment Company Act of
1940, as amended (the “1940 Act”) and to cease to be an investment company
(the “Deregistration”);
RESOLVED, that the Corporation be, and it hereby is, authorized, either at its
next annual meeting of stockholders, or pursuant to a special meeting of the
stockholders called for such purpose, to include in the proxy statement to be
filed with the Securities and Exchange Commission (the “Commission”) in
respect thereof, a proposal for consideration by the Corporation’s stockholders
for the approval of the Deregistration (the “Deregistration Proposal”);
RESOLVED, that the Board hereby deems it advisable and in the best interest of the
Corporation, and recommends to the stockholders of the Corporation, that the
stockholders approve and adopt the Deregistration Proposal at such meeting;
RESOLVED, that subject to such stockholder approval, the proper officers of the
Corporation be, and they hereby are, authorized and directed, for and on behalf of
the Corporation, to prepare, execute and file with the Commission an application
pursuant to Section 8(f) of the 1940 Act seeking an order from the Commission
deregistering the Corporation from the 1940 Act; and
RESOLVED, that the appropriate officers of the Corporation be, and each of them
hereby is, authorized to do and to perform all such acts and things and to
execute, deliver and/or file all such other instruments, documents or certificates
and take such other steps as they deem necessary or advisable in the name and on
behalf of the Corporation to effectuate the intent of the
foregoing resolutions,
the taking of such actions or steps or the execution or filing of such
instruments, documents or certificates being conclusive evidence of the necessity
or advisability thereof.
This Unanimous Written Consent may be executed in one or more counterparts, each of which shall be
deemed an original, and all of which, when taken together, shall constitute one and the same
instrument.
The execution of this Unanimous Written Consent and delivery thereof by facsimile or email
transmission shall be sufficient for all purposes and shall be binding upon any party who so
executes.
The undersigned,
Ronald J. Tassinari, being duly sworn, solemnly swears that I have duly executed
the attached dated March 30, 2010, for and on behalf of American Vantage Companies; that I am the
Chief Executive Officer of American Vantage Companies; and that all actions by stockholders,
directors, and other bodies necessary for my authorization to execute and file such instrument has
been taken. I further swear that I am familiar with such instrument and the contents thereof, and
that the facts contained therein are true to the best of my knowledge, information and belief.