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UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10-Q

| (Mark One) [X ]                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | QUARTERLY REPORT UNDER    SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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| For the quarterly period ended ___December 31, 2005______________________________[ ] TRANSITION REPORT    UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT 
For the transition period from _________________ to    _________________ Commission file number    ___**333-29903**____________________________________
 

SOVEREIGN EXPLORATIONASSOCIATES INTERNATIONAL, INC.

(exact name of smallbusiness issuer as specified in its charter)

 

___UTAH_____________________________________    (State or other jurisdiction of incorporation or organization)**30-0123229_______________    (IRS Employer Identification No.)
 

**503 Washington Ave, Suite 2d**

**Newtown, PA 18940**

(address of principalexecutive offices)

 

Issuers telephonenumber: (781) 246-7512

(Registrant'stelephone number, including area code)

 

(Former name, former address and former fiscal year, if changed since lastreport)

Check whether the issuer
- filed all documents and reports required to be filed by Section 13 or  15(d) of the Exchange Act during the last 12months(or for such shorter period  that the registrant was required to file such reports)and
- has been subject to such filing requirements for the past 90 days              (X) Yes ( ) No 

Indicate by check mark whether the registrant is a shell company (as definedin Rule 12b-2 of the Exchange Act). Yes _____ No X
As of December 31, 2005, there were   shares of common stockissued and outstanding

Transitional Small Business Disclosure Format (Check one): Yes [ ] No [ X  ]
** 

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Company Activities

Sovereign Exploration Associates International, Inc. (the"Company") was incorporated in the state of Utah in 1980. The company wasformerly known as CALI Holdings, Inc. On October 26, 2005 the Company changedits name from CALI Holdings, Inc. to Sovereign Exploration AssociatesInternational, Inc.

On January 5, 2004 the Company's shareholders consented tothe proposal to allow the Company to adopt business development company ("BDC")status under the Investment Company Act of 1940 ("1940 Act"). A BDC is aspecialized type of Investment Company under the 1940 Act. A BDC may primarilybe engaged in the business of furnishing capital and managerial expertise tocompanies that do not have ready access to capital through conventionalfinancial channels; such companies are termed "eligible portfolio companies".The Company as a BDC, may invest in other securities, however such investmentsmay not exceed 30% of the Company's total asset value at the time of suchinvestment. The Company filed its BDC election with the SEC (Form N-54A) onJanuary 13, 2004.

The Company provides equity and long-term debt financing tosmall and medium--sized private companies in a variety of industries throughoutthe United States. The Company's investment objective is to achieve long-termcapital appreciation in the value of its investments and to provide currentincome primarily from interest, dividends and fees paid by its portfoliocompanies.

Basis of Presentation

Different accounting principles are used in the preparationof financial statements of a business development company under the InvestmentCompany Act of 1940 and therefore, the financial statements is presented usingthe guidelines outlined under the 1940 Act. By becoming a BDC, the Company haseffected a change in accounting principle and no longer consolidates itsinvestments in portfolio companies in accordance with Article 6 of RegulationS-X under the Securities Act of 1933 and Securities Act of 1934 in which a BDCdoes not consolidate portfolio company investments, including those in which ithas a controlling interest. 

Revenue Recognition

The Company recognizes revenue using the accrual method ofaccounting. The accrual method provides for a better matching of revenues andexpenses.

The Company also accrues interest income on loans made tovarious portfolio companies. The Company accrues the interest on such loansuntil the portfolio company has the necessary cash flow to repay such interest.If the Company's analysis of the portfolio company's performance indicates thatthe portfolio company may not have the ability to pay the interest and principalon a loan, the Company will make an allowance provision on that entity and ineffect cease recognizing interest income on that loan until all principal hasbeen paid. However, the Company will make exceptions to this policy if theinvestment is well secured and in the process of collection.

For certain investment companies, the Company providesmanagement services and recognizes an agreed upon fixed monthly fee andexpenses.

 

Use of Estimates

The preparation of financial statements in conformity with generally acceptedaccounting principles requires management to make estimates and assumptions.These estimates and assumptions affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenues and expensesduring the reporting period. Actual results could differ from these estimates.

Net (Loss) Per Common Share

Net (Loss) per common share is computed using the weightedaverage of shares outstanding during the periods presented in accordance with *Statement of Financial Accounting Standards No. 128, Earnings Per Share*. Asdiscussed further in Note O, any references to amounts per share or weightedaverage common shares have been restated to reflect reverse splits.

Cash and Cash Equivalents

Cash and cash equivalents include time deposits with originalmaturities of three months or less.

Segments

The Company operates as one segment as defined by theStatement of Financial Accounting Standards No. 131 *Disclosures aboutSegments of an Enterprise and Related Information.*
Fixed Assets

Fixed assets are stated at cost. The cost of equipment ischarged against income over their estimated useful lives, using thestraight-line method of depreciation. Repairs and maintenance which areconsidered betterments and do not extend the useful life of equipment arecharged to expense as incurred. When property and equipment are retired orotherwise disposed of, the asset and accumulated depreciation is removed fromthe accounts and the resulting profit and loss are reflected in income.

Goodwill and Other Intangibles

The Company records Goodwill in accordance with *Statementof Financial Accounting Standards No.142, Goodwill and Other Intangible Assets.*Intangible assets such as goodwill are not amortized; instead the Companywill review the goodwill not less frequently than annually to see if it has beenimpaired. If impairment occurs, it will be recorded as an expense in thatperiod. During the three months ending December 31, 2005, goodwill was adjustedto zero pursuant to the calculation of the divesture of the assets in Note K.
**NOTE B - INVESTMENTS**
Valuation of Investments

The most significant estimate inherent in the preparation ofthe Company's financial statements is the valuation of its investments and therelated unrealized appreciation or depreciation.

The Company has engaged independent business valuationexperts to value selected portfolio companies, which will have significantactivity in the Company's first year operating under the new registrant. TheBoard of Directors states all other portfolio companies and investments at fairmarket value, which approximates cost, as determined under a good faithstandard. The Company analyzes the investments on a regular basis and recordsunrealized gains or losses if and when an investment significantly gains orloses market value as determined by a good faith standard.

The Company has investments in three (3) controlled portfoliocompanies as of December 31, 2005.
-  Sovereign Exploration Associates International, Inc. *(private company)*Sovereign Exploration Associates International of Spain,  Inc. (SEAI - SPAIN)Gulf Coast Records, LLC
The portfolio companies consist of Sovereign ExplorationAssociates International, Inc. *(private company),* which in the process ofchanging its name in order to avoid any confusion with the public company SVXA.Artifact Recovery & Conservation, Inc. and Sea Research, Inc. (SR) are whollyowned subsidiaries of Sovereign Exploration Associates International, Inc. *(private company)
Artifact Recovery & Conservation, Inc. (ARC)*
Artifact Recovery & Conservation, Inc.(ARC) has secured the rights to five (5) sites; several of the sites haverevealed multiple ships with historic and intrinsic value. Currently ARCoperates recovery operations on two of the five sites. ARC manages its own diveteams and oversees operations for contracted recovery team. Management is in theprocess of preparing time lines and operating plans for the other sites.*****
*Sea Research, Inc. (SR)*
Sea Research, Inc. (SR) has secured the rights to seven (7)sites; several of the sites have revealed multiple ships with historic andintrinsic value. Currently SR is preparing to initiate recovery operations onone of the seven sites and developing timelines for the remainder of theportfolio. 
*Sovereign Exploration Associates International of Spain, Inc.(SEAI - SPAIN)*
Sovereign Exploration Associates International of Spain, Inc.(SEAI-SPAIN) has secured the finder's rights to four (4) shipwrecks in Spainwith potential historic and intrinsic value, thereby expanding SR's currentholdings.
*Gulf Coast Records, LLC*
Gulf Coast Records, LLC is an independent record label.Currently, Gulf Coast is developing record artist Glenn Cummings. Gulf CostRecords has recently released Glenn Cummings' debut album entitled "BIG". TheGulf Cost Records team includes, H.L. Voelker who was a production consultant onGlenn's album, and Lisa Berg of Berg & Associates directs Glenn's press andpublicity. On June 30, 2004, Gulf Coast Records formed Hare Scramble, LLC. HareScramble, LLC is a Florida Limited Liability Corporation involved in musicpublishing and is 100% owned by Gulf Coast Records, LLC. Current management isreviewing its options regarding this portfolio company and whether it wants tomaintain its position or divest its holdings in the future.
** 

NOTE C - FIXED ASSETS**
Prior to the effective execution of the Exchange Agreement onOctober 17, 2005, the fixed assets of the Company consisting of computer andoffice equipment were sold pursuant to a warranty bill of sale for $10 to KMACapital Partners Ltd. Inc of Texas. Depreciation expense for the six monthsended December 31, 2005 and 2004 was $615 and $642, respectively.
**NOTE D - STOCK ISSUED FOR SERVICES**
During the six month ended December 31, 2005, the Company didnot issue any stock for services.

During the six months ended December 31, 2004, priormanagement issued 12,250 shares of the Company's common stock for variousprofessional consulting services. The value assigned to the above shares($52,250) is based on the stocks- traded market price on or about the date theshares were issued and are included in professional fees.
**NOTE E - UNREALIZED GAINS (LOSSES) ON INVESTMENTS**
For the six months ended December 31, 2005 and 2004, theCompany recognized unrealized loss of the Company's investments in the amount of$600,832 and $7,071, respectively.
**NOTE F- INCOME TAXES**
At June 30, 2005, the Company had approximately $6,414,480 oftax net operating loss carryforwards. 

Pursuant to the Exchange Agreement dated October 17, 2005,substantial ownership of the Company was transferred and according to IRSRegulations, this is a transaction that will eliminate all of the losscarryforwards for federal income tax purposes starting with fiscal year endingJune 30, 2006.
**NOTE G - COMMITMENTS**
The Company leased office and operating facilities undershort-term operating leases located in Orlando, Florida. Pursuant to theExchange Agreement, the Company terminated its lease agreement for this officespace. Subsequent to the Exchange Agreement, the Company maintains shared officespace in Pennsylvania and Massachusetts with unrelated companies controlled bycertain officers of the Company. There are no formal lease arrangements,however, the Company shares in the cost for these offices on a monthly basis.

Rent expense for the six months ended December 31, 2005 and2004 was $36,717 and $69,778, respectively
**NOTE H - NOTES PAYABLE**
The following are convertible debentures as of December 31,2005 that were not converted as part of the Exchange Agreement dated October 17,2005:
    
 
8% convertible debenture to an individual dated May 27,    2005 with an initial principal balance of $21,000 due no later than May 27,    2006; outstanding principal and interest-  
$ 22,134
     
 
5.25% convertible debenture to Golden Gate Investors    dated June 29, 2005 with an initial principal balance of $40,000 due no    later than June 29, 2008; outstanding principal and interest-(this    convertible debenture is currently in dispute)  
$ 87,647
     
 
8% convertible debenture to an individual dated May 18,    2005 with an initial principal balance of $35,000 due no later than May 18,    2006; outstanding principal and interest'
 
 
$ 7,297
 
Total notes payable, current   
$117,078
 **NOTE I - NOTES RECEIVABLE** 
  
8% note receivable    due from Gulf Coast Records, LLC. There is no repayment schedule. 
 

$ 832,949  **NOTE J - RELATED PARTY NOTES PAYABLE**
As of December 31, 2005, $45,100 was owed to certain officersof the Company. These funds were advanced to the Company for cash flow purposes.There are no formal note agreements and no formal terms as to their repayment.

As of December 31, 2005, $600,000 was owed to Sea Hunt, Inc.,a related party to the Company. These funds were advanced to the Company for theobligations under the Exchange Agreement dated October 17, 2006. 
**NOTE K - DIVESTITURE OF ALL PORTOLIO COMPANIES AND OTHERASSETS**
Prior to the effective execution of theExchange Agreement on October 17, 2005, the Company was required to divest ofall of its assets including the investment in all portfolio companies, notesreceivable, and all remaining assets except for its investment in, and its notereceivable due from Gulf Coast Records, LLC and other assets consisting ofprepaid legal fees and security deposits of $7,375. As of December 31, 2005, theinvestment in and the note receivable due from Gulf Coast was recorded as$1,023,485. 
 

Prior to the effective date of the Exchange Agreement datedOctober 17, 2005, two separate bills of sales required the following lists ofassets of the Company to be sold to KMA Capital, Ltd. of Texas for totalconsideration of $10 and Kairos Holdings, Inc. for a total consideration of $10:
**Sold to KMA Capital Ltd. Of Texas**
Sports Nation,    Inc.

Buehler Earth &    Waterworks, LLC

Brokerage    account of CALI at NevWest

TS&B Financial    Services, Inc.

Wellstone    Acquisition Corporation

TS&B Gaming &    Entertainment Corp.

TSB Ventures,    Inc.

Three (3) Dell    notebook computers

Furniture and    fixtures

Office and    computer equipment
**Sold to Kairos Holdings, Inc.**
Interest in and    to investment in KMA

Capital Partners    Ltd - Nine (9) LP Units
 

Total loss on the divestiture of these assets of the Companywas $1,675,657; this amount was recorded as a realized loss on the sale ofinvestments.
**NOTE L - EXCHANGE AGREEMENT**
At closing of the Exchange Agreement on October 17, 2005, theCompany paid to Charles Giannetto, James E, Jenkins and KMA Capital, in totalthe sum of Six Hundred Thousand and no/100 dollars ($600,000) in completetermination and release of the Executive Management contracts from Cali toGiannetto and Jenkins and the consulting contract of Cali to KMA. Three hundredThousand ($300,000) was paid at closing and the balance of $300,000 shall bepaid on or before March 30, 2006. 

Pursuant the Exchange Agreement, the Company received inexchange for total consideration under the Exchange Agreement an interest in onecontrolled portfolio company; Sovereign Exploration Associates International,Inc. (SEAI) *(private company);*See Note B for a description of thisportfolio company.

The consideration for the acquisition of this portfoliocompany was $1,861,410 in the form of note obligations as outlined in Exhibit Gof the Exchange Agreement. 

Under the requirements of a BDC, management is required torecognize the fair market value of its ownership interest in its portfoliocompanies. As of December 31, 2005, management's good faith estimate of fairmarket value of its investment in Sovereign Exploration AssociatesInternational, Inc. (SEAI) (private company) equals its cost of $1,861,410 asfully disclosed in the Exchange Agreement. 

Senior Security Instruments 

Pursuant to the Exchange Agreement, there is a RevenueAgreement as outlined in Exhibit B that requires 20% revenue participationpayable to the original owners of the permits from the net recovery of theshipwrecks for the permits that have been assigned to the subsidiaries of theCompany's portfolio company, SEAI (private). 

The Fantome project (Fantome Cove Treasure Trove License 150,LLC. a subsidiary of ARC) sold a 2.06% equity interest for a capital investmentof $412,000, and the LeChameau project (Interspace Explorations, LLC., asubsidiary of ARC) sold a 26.0% ownership interest and 40% profit participationinterest for $390,000.

Management intends to assess it liability under theseagreements on a periodic basis. No liability has been recorded for theseagreements as of December 31, 2005.

 

 
**NOTE M - **STOCKHOLDERS' EQUITY**
As of December 31, 2005, the authorized capital of theCompany is 250,000,000,000 shares of common stock (with voting rights); parvalue $.001.

The Company has authorized 10,000,000 shares of Class A, nopar, preferred stock and has issued and outstanding 10,000,000 shares as ofDecember 31, 2005 and 3,725,000 shares as of December 31, 2004. The Class Apreferred stock has conversion rights to the Company's common stock (with votingrights) of 4-1. 

As of December 31, 2005 the Company has authorized and issued10,000,000 shares of convertible Class C, .001 per share, preferred stock. TheClass C preferred stock has conversion rights to the Company's common votingstock of 1-1. If at any time or time to time, there is a capital reorganizationof the common stock (reverse split, forward split, etc.) the number of Class Cpreferred stock authorized, issued and outstanding, and the number of shares ofcommon stock into which such Class C preferred shall not be entitled to votesuch shares (except as otherwise expressly provided herein or as required bylaw, voting together with the common stock as a single class), but shall beentitled to notice of any stockholders' meeting in accordance with the Company'sbylaws. In lieu of voting rights, the holders of Class C preferred, voting as aclass shall be entitled to elect two of the Board of Directors at each meeting.

The investment in Sovereign Exploration Associates, Inc.(private) and the investment in Sovereign Exploration Associates of Spain Inc.,individually and it total of the two investments, exceeds 25% of the totalinvestments, at fair value which approximates cost, reflected in the financialstatements presented herein. 

 

As of December 31, 2005, the Company has authorized but notissued 10,000,000 shares of Class D, no par, preferred stock. 

As of the date of this report no preferred shares have been converted tocommon stock.

 

ISSUANCE OF STOCK

On October 5, 2005, the prior management issued 800,000,000shares of restricted common stock (with voting rights) to KMA Capital. TheCompany is in dispute with prior management and related consulting firm, overthe sale of the restricted stock.

On October 14, 2005, the prior management issued the556,166,667 shares referred to in Note H of the September 30, 2005 Form 10-Q toSequoia International, Inc. and therefore, has satisfied the Escrow Agreementwith Sequoia International, Inc. *"Escrow Agreement with SequoiaInternational, Inc. in which the Company has received $166,850 and will in turndisburse 556,166,667 shares into an escrow account at the discretion ofSequoia."*
On October 14, 2005, the prior management issued the191,700,000 shares referred to in Note H of the September 30, 2005 Form 10-Q toan individual and therefore, has satisfied the Escrow Agreement with thatindividual. *"Escrow Agreement with an individual in which the Company hasreceived $95,850 and will in turn disburse 191,700,000 shares into an escrowaccount at the discretion of the individual"*
 
**NOTE N - **CONCENTRATION OF CREDIT RISK**
Financial instruments, which potentially expose the Companyto concentrations of credit risk, consist principally of cash, investments inportfolio companies, and notes receivable.

As of December 31, 2005, the Company maintains its cashaccounts with financial institutions located in Pennsylvania. Federal DepositInsurance Corporation (FDIC) guarantees the Company's deposits in financialinstitutions up to $100,000 per account.

The Company's deposits with financial institutions thatexceeded federally insured guarantees amounted to $0 as of December 31, 2005.Historically, the Company has not experienced any losses on its deposits inexcess of federally insured guarantees. 

As of December 31, 2005, the fair value of the investment inSovereign Exploration Associates, Inc. (private) or $1,861,400 is approximately65.7% of the total investments, at fair value, of $2,835,278.

 

The investment in Sovereign Exploration Associates, Inc.(private) and the investment in Sovereign Exploration Associates of Spain Inc.,individually and it total of the two investments, exceeds 25% of the totalinvestments, at fair value which approximates cost, reflected in the financialstatements presented herein. 

As of December 31, 2005, a note receivable as outlined inNote I is being recorded in the amount of $832,849. This note receivable will bedivested of as part of the overall divesture of the Company's investment in GulfCoast Records, LLC pursuant to the Exchange Agreement dated October 17, 2005.Current management is reviewing its options regarding this portfolio company andwhether it wants to maintain its position or divest its holdings in the future.
**NOTE O - REVERSE STOCK SPLITS**
On August 13, 2004, the Board of Directors authorized a 40 to1 reverse stock split of the Company's $.001 par value common stock. As a resultof the reverse split, 473,185,733 shares were returned to the Company andadditional paid in capital was increased by $473,186. All references in theaccompanying financial statements to the number of common shares and per shareamounts for 2005 and 2004 have been restated to reflect the reverse stock split.

On April 4, 2005, the Board of Directors authorized a 100 to1 reverse stock split of the Company's $.001 par value common stock. As a resultof the reverse split, 962,151,879 shares were returned to the Company andadditional paid in capital was increased by $962,152. All references to theaccompanying financial statements to the number of common shares and per shareamounts for 2005 and 2004 have been restated to reflect the reverse stock split.
**NOTE P - SUBSEQUENT EVENTS**
On January 17, 2006, the Board of Directors authorized a1,000 to 1 reverse stock split of the Company's $.001 par value common stock. Asa result of the reverse split, 2,535,359,053 shares were returned to the Companyand additional paid in capital was increased by $2,535,359. 

On January 17, 2006, the Board of Directors cancelled the10,000,000 shares of Series A Convertible Preferred Stock, no par value, and the9,990,000 shares of Series C Convertible Preferred Stock, no par value.

All references to the accompanying financial statements tothe number of common shares and per share amounts for 2005 and 2004 have beenrestated to reflect the reverse stock split. 
**Item 2. Management's Discussion and Analysis of FinancialCondition and Results of Operations**
The following discussion will assist in the understanding ofthe Company's financial position and results of operations. The informationbelow should be read in conjunction with the financial statements, the Company'sreport on Form 10Q and the Company's recently filed Form 8K describing theOctober 17 2005 definitive agreement with Sovereign Exploration AssociatesInternational, Inc. (SEAI).

 

Among other material items, the October 17, 2005 agreementrequired CALI Holdings, Inc. to divest all its portfolio companies in existenceat the time of the execution of the agreement, with the sole exception of GulfCoast Records. Current management is reviewing its options regarding thisportfolio company and whether it wants to maintain its position or divest itsholdings in the future. 

 

The reader of this discussion and related Form 10Q forDecember 31, 2005 and the recently filed Form 8K should understand that thePortfolio companies, the Senior Management team, and the Board of Directors haveall materially changed.

 

Overview

On January 5, 2004 the Company shareholders approved theproposal to allow the Company to adopt business development company ("BDC")status under the Investment Company Act of 1940 ("1940 Act"). A BDC is aspecialized type of Investment Company under the 1940 Act. A BDC may primarilybe engaged in the business of furnishing capital and managerial expertise tocompanies that do not have ready access to capital through conventionalfinancial channels; such companies are termed "eligible portfolio companies".The Company as a BDC, may invest in other securities, however such investmentsmay not exceed 30% of the Company's total asset value at the time of suchinvestment. The Company filed its BDC election with the SEC (Form N-54A) onJanuary 13, 2004.

The Company is a financial service company providingfinancing and advisory services to small and medium-sized companies throughoutthe United States. Effective January 5, 2004 the Company shareholders approvedthe proposal to allow the Company to convert to a business development company("BDC") under the Investment Company Act of 1940 ("1940 Act").

The Company's investments in portfolio companies typicallyrange from $100,000 to $2,500,000. The Company invests either directly in theequity of a company through equity shares or through a debt instrument. TheCompany's debt instruments usually do not have a maturity of more than fiveyears. Interest is either currently paid or deferred.

Investment opportunities are identified for the Company bythe management team. Investment proposals may, however, come to the Company frommany sources, and may include unsolicited proposals from the public and fromreferrals from banks, lawyers, accountants and other members of the financialcommunity. The management team brings an extensive network of investmentreferral relationships.

On October 26, 2005 the Company changed its name from CALIHoldings, Inc. to Sovereign Exploration Associates International, Inc. ("theCompany"). In conjunction with the Company's name change and the ExchangeAgreement dated October 17, 2005, its principal offices were relocated to 503Washington Avenue, Suite 2D, Newtown, Pennsylvania and 33 North Avenue, Suite2B, Wakefield, MA. These offices are equipped with an integrated network ofcomputers for word processing, financial analysis and accounting services. TheCompany believes its office space is suitable for its needs for the foreseeablefuture.

The Company provides equity and long-term debt financing tosmall and medium-sized private companies in a variety of industries throughoutthe United States. The company's investment objective is to achieve long-termcapital appreciation in the value of its investments and to provide currentincome primarily from interest, dividends and fees paid by its portfoliocompanies. 
*Portfolio Investments*
The Company has investments in three (3) controlled portfoliocompanies as of December 31, 2005.
-  Sovereign Exploration Associates International, Inc. *(private company)*Sovereign Exploration Associates International of Spain,  Inc. (SEAI - SPAIN)Gulf Coast Records, LLC
The portfolio companies consist of Sovereign ExplorationAssociates International, Inc. *(private company),* which in the process ofchanging its name in order to avoid any confusion with the public company SVXA.Artifact Recovery & Conservation, Inc. and Sea Research, Inc. (SR) are whollyowned subsidiaries of Sovereign Exploration Associates International, Inc. *(private company)
Artifact Recovery & Conservation, Inc. (ARC)*
Artifact Recovery & Conservation, Inc. (ARC) has secured therights to five (5) sites; several of the sites have revealed multiple ships withhistoric and intrinsic value. Currently ARC operates recovery operations on twoof the five sites. ARC manages its own dive teams and oversees operations forcontracted recovery team. Management is in the process of preparing time linesand operating plans for the other sites.
*****
Sea Research, Inc. (SR)*
Sea Research, Inc. (SR) has secured the rights to seven (7)sites; several of the sites have revealed multiple ships with historic andintrinsic value. Currently SR is preparing to initiate recovery operations onone of the seven sites and developing timelines for the remainder of theportfolio. 
*Sovereign Exploration Associates International of Spain, Inc.(SEAI - SPAIN)*
Sovereign Exploration Associates International of Spain, Inc.(SEAI-SPAIN) has secured the finder's rights to four (4) shipwrecks in Spainwith potential historic and intrinsic value, thereby expanding SR's currentholdings.
*Gulf Coast Records, LLC*
Gulf Coast Records, LLC is an independent record label.Currently, Gulf Coast is developing record artist Glenn Cummings. Gulf CostRecords has recently released Glenn Cummings' debut album entitled "BIG". TheGulf Cost Records team includes, H.L. Voelker who was a production consultant onGlenn's album, and Lisa Berg of Berg & Associates directs Glenn's press andpublicity. On June 30, 2004, Gulf Coast Records formed Hare Scramble, LLC. HareScramble, LLC is a Florida Limited Liability Corporation involved in musicpublishing and is 100% owned by Gulf Coast Records, LLC. Upon the effectiveexecution of the Exchange Agreement, SEAI has received a full release from GulfCoast Records, LLC.
*Dispositions of Investments*
Prior to the effective execution of the Exchange Agreement onOctober 17, 2005, the Company was required to divest of all of its assetsincluding the investment in all portfolio companies, notes receivable, and allremaining assets except for its investment in, and its note receivable due fromGulf Coast Records, LLC and other assets consisting of prepaid legal fees andsecurity deposits of $7,375. As of December 31, 2005, the investment in and thenote receivable due from Gulf Coast was recorded as $1,023,485. 

 

 

Prior to the effective date of the Exchange Agreement datedOctober 17, 2005, two separate bills of sales required the following lists ofassets of the Company to be sold to KMA Capital, Ltd. of Texas for totalconsideration of $10 and Kairos Holdings, Inc. for a total consideration of $10:
**Sold to KMA Capital Ltd. Of Texas**
Sports Nation,    Inc.

Buehler Earth &    Waterworks, LLC

Brokerage    account of CALI at NevWest

TS&B Financial    Services, Inc.

Wellstone    Acquisition Corporation

TS&B Gaming &    Entertainment Corp.

TSB Ventures,    Inc.

Three (3) Dell    notebook computers

Furniture and    fixtures

Office and    computer equipment
**Sold to Kairos Holdings, Inc.**
Interest in and    to investment in KMA

Capital Partners    Ltd - Nine (9) LP Units
 

Total loss on the divestiture of these assets of the Companywas $1,675,657; this amount was recorded as a realized loss on the sale ofinvestments.

On September 21, 2005, the company sold its 51% interest inBuehler Earth and Waterworks, LLC for $110,000 to Buehler's managing member.
*Valuation of Investments*
The most significant estimate inherent in the preparation ofthe Company's financial statements is the valuation of its investments and therelated unrealized appreciation or depreciation. 

Upon the Company's conversion to a business developmentcompany, the Company employed independent business valuation experts to valueselected portfolio companies. The Board of Directors determined all otherportfolio companies and investments at fair market value, which approximatescost, under a good faith standard. The Company analyzes and values eachindividual investment on a quarterly basis and records unrealized depreciationfor an investment that it believes has become impaired, including wherecollection of a loan or realization of an equity security is doubtful.Conversely, the Company will record unrealized appreciation if it believes thatthe underlying portfolio company has appreciated in value.
*Investments in Private Companies*
The Company provides privately negotiated long-term debt andequity investment capital. The Company provides capital in the form of debt withor without equity features, such as warrants or options, often referred to asmezzanine financing. In certain situations the Company may choose to take acontrolling equity position in a company. The Company's private financing isgenerally used to fund growth, buyouts and acquisitions and bridge financing.

As of the effective date of the Exchange Agreement datedOctober 17, 2005, the Company's private finance portfolio currently includesinvestments in a variety of industries including a record company and maritimeexploration and excavation services.

The Company funds new investments using cash through theissuance of common stock. The Company intends to reinvest accrued interest,dividends and management fees into its various investments. When the Companyacquires a controlling interest in a company, the Company may have theopportunity to acquire the company's equity with its common stock. The issuanceof its stock as consideration may provide the Company with the benefit ofraising equity without having to access the public markets in an underwrittenoffering, including the added benefit of the elimination of any underwritingcommission.

As a business development company, the Company is required toprovide significant managerial assistance available to the companies in itsinvestment portfolio. In addition to the interest and dividends received fromthe Company's private finance investments, the Company will often generateadditional fee income for the structuring, due diligence, transaction andmanagement services and guarantees provided to its portfolio companies.
*Governmental Regulation**Business Development Company*
A business development company is defined and regulated bythe 1940 Act. Although the 1940 Act exempts a business development company fromregistration under the Act, it contains significant limitations on theoperations of a business development company.

A business development company must be organized in theUnited States for the purpose of investing in or lending to primarily privatecompanies and making managerial assistance available to them. A businessdevelopment company may use capital provided by public shareholders and fromother sources to invest in long-term, private investments in businesses. Abusiness development company provides shareholders the ability to retain theliquidity of a publicly traded stock, while sharing in the possible benefits, ifany, of investing in primarily privately owned companies. To qualify as abusiness development company, a company must:

*
Have registered a class of its equity securities or have    filed a registration statement with the Securities and Exchange Commission    pursuant to Section 12 of the Securities and Exchange Act of 1934;
*
Operate for the purpose of investing in securities of    certain types of portfolio companies, namely emerging companies and    businesses suffering or just recovering from financial distress;
*
Extend significant managerial assistance to such    portfolio companies and;
*
Have a majority of "disinterested" directors (as defined    in the 1940 Act).
Generally, a business development company must be primarilyengaged in the business of furnishing capital and providing managerial expertiseto companies that do not have ready access to capital through conventionalfinancial channels. An eligible portfolio company is generally a domesticcompany that is not an investment company (other than a small businessinvestment company wholly owned by a business development company), and that:

*
Does not have a class of securities registered on an    exchange or included in the Federal Reserve Board's over-the-counter margin    list; or
*
Is actively controlled by a business development company    and has an affiliate of a business development company on its board of    directors; or
*
Meets such other criteria as may be established by the    Securities and Exchange Commission.
Control under the 1940 Act is presumed to exist where abusiness development Company beneficially owns more than 25% of the outstandingvoting securities of the portfolio company.

The 1940 Act prohibits or restricts companies subject to the1940 Act from investing in certain types of companies such as brokerage firms,insurance companies, investment banking firms and investment companies. 

As a business development company, the Company may notacquire any asset other than "qualifying assets" unless, at the time the Companymakes the acquisition, the value of its qualifying assets represent at least 70%of the value of its total assets. The principal categories of qualifying assetsrelevant to our business are:

*
Securities purchased in transactions not involving any    public offering, the issuer of which is an eligible portfolio company;
*
Securities received in exchange for or distributed with    respect to securities described in the bullet above or pursuant to the    exercise of options, warrants or rights relating to such securities; 
*
Securities of bankrupt or insolvent companies that were    eligible at the time of the business development company's initial    acquisition of their securities but are no longer eligible, provided that    the business development company has maintained a substantial portion of its    initial investment in those companies; and
*
Cash, cash items, government securities or high quality    debt securities (within the meaning of the 1940 Act), maturing in one year    or less from the time of investment.
A business development company is permitted to invest in thesecurities of public companies and other investments that are not qualifyingassets, but those kinds of investments may not exceed 30% of the businessdevelopment company's total asset value at the time of the investment.

As a business development company, the Company is entitled toissue senior securities in the form of stock or senior securities representingindebtedness, including debt securities and preferred stock, as long as eachclass of senior security has asset coverage of at least 200% immediately aftereach such issuance.

The Company is also prohibited under the 1940 Act fromknowingly participating in certain transactions with its affiliates without theprior approval of its board of directors who are not interested persons and, insome cases, prior approval by the Securities and Exchange Commission.

A business development company must make significantmanagerial assistance available to the issuers of eligible portfolio securitiesin which it invests. Making available significant managerial assistance meansamong other things, any arrangement whereby the business development company,through its directors, officers or employees, offers to provide and, if accepteddoes provide, significant guidance and counsel concerning the management,operation or business objectives and policies of a portfolio company.

The Company may be periodically examined by the Securitiesand Exchange Commission for compliance with the 1940 Act. As of the date of thisfiling the Company has not been examined by the Securities and ExchangeCommission and has not been notified of a pending examination.

As with other companies regulated by the 1940 Act, a businessdevelopment company must adhere to certain substantive regulatory requirements.A majority of its directors must be persons who are not interested persons, asthat term is defined in the 1940 Act. Additionally, the Company is required toprovide and maintain a bond issued by a reputable fidelity insurance company toprotect it against larceny and embezzlement.

Furthermore, as a business development company, the Companyis prohibited from protecting any director or officer against any liability tothe Company or its shareholders arising from willful malfeasance, bad faith,gross negligence or reckless disregard of the duties involved in the conduct ofsuch person's office.

The Company maintains a Code of Ethics that establishesprocedures for personal investment and restricts certain transactions by itspersonnel. The Company's Code of Ethics generally does not permit investment byits employees in securities that may be purchased or held by the Company.

The Company may not change the nature of its business so asto cease to be, or withdraw its election as, a business development companyunless authorized by vote of a "majority of the outstanding voting securities,"as defined in the 1940 Act, of its shares. A majority of the outstanding votingsecurities of a company is defined under the 1940 Act as the lesser of: (i) 67%or more of such company's shares present at a meeting if more than 50% of theoutstanding shares of such company are present and represented by proxy or (ii)more than 50% of the outstanding shares of such company. Since the Companyelected to become a business development company, it has not made anysubstantial change in the nature of its business.
*Regulated Investment Company*
The Company has not elected to be taxed as a regulatedinvestment company under Subchapter M of the Internal Revenue Code of 1986.
*Compliance with the Sarbanes-Oxley Act of 2002 and NYSECorporate Governance Regulations.*
On July 30, 2002, President Bush signed into law theSarbanes-Oxley Act of 2002 (the "Sarbanes-Oxley Act"). The Sarbanes-Oxley Actimposes a wide variety of new regulatory requirements on publicly held companiesand their insiders. Many of these requirements will affect the Company. Forexample:

*
The Company's chief executive officer and chief financial    officer must now certify the accuracy of the financial statements contained    in its periodic reports;
*
The Company's periodic reports must disclose conclusions    about the effectiveness of its disclosure controls and procedures;
*
The Company's periodic reports must disclose whether    there were significant changes in its internal controls or in other factors    that could significantly affect these controls subsequent to the date of    their evaluation, including any corrective actions with regard to    significant deficiencies and material weaknesses; and
*
The Company may not make any loan to any director or    executive officer and may not materially modify any existing loans.
The Sarbanes-Oxley Act has required the Company to review itscurrent policies and procedures to determine whether it complies with theSarbanes-Oxley Act and the new regulations promulgated thereunder. The Companywill continue to monitor its compliance with all future regulations that areadopted under the Sarbanes-Oxley Act and will take actions necessary to ensurethat we are in compliance.
*Employees*
As of December 31, 2005 the Company had five employees.
*Risk Factors and Other Considerations*
 

Investing in the Company's common stock involves a highdegree of risk. Careful consideration should be given to the risks describedbelow and all other information contained in this Quarterly Report, includingthe financial statements and the related notes and the schedules as exhibits tothis Quarterly Report.

 
*Limited Operating History as a Business Development CompanyWhich May Impair Your Ability to Assess Our Prospects.*
 

Prior to January 2004 the Company had not operated as abusiness development company under the Investment Company Act of 1940. As aresult the Company has limited operating results under this regulatory frameworkthat can demonstrate either its effect on its business or management's abilityto manage the Company under these frameworks. In addition, the Company'smanagement has no prior experience managing a business development company. TheCompany cannot assure that management will be able to operate successfully as abusiness development company.

 
*Because there is generally no established market for which tovalue its investments, the Company's board of directors' determination of thevalue of its investments may differ materially from the values that a readymarket or third party would attribute to these investments.*
 

Under the 1940 Act the Company is required to carry itsportfolio investments at market value, or, if there is no readily availablemarket value, at fair value as determined by the board. The Company is notpermitted to maintain a general reserve for anticipated loan losses. Instead,the Company is required by the 1940 Act to specifically value each individualinvestment and to record any unrealized depreciation for any asset that hasdecreased in value. Since there is typically no public market for the loans andequity securities of the companies in which it invests, the Company's board willdetermine the fair value of these loans and equity securities pursuant to itsvaluation policy. These determinations of fair value may necessarily be somewhatsubjective. Accordingly, these values may differ materially from the values thatwould be determined by a party or placed on the portfolio if there existed amarket for our loans and equity securities.

 
*Investing in Private Companies Involves a High Degree ofRisk.*
 

The Company's portfolio consists of primarily long-term loansto and investments in private companies. Investments in private businessesinvolve a high degree of business and financial risk, which can result insubstantial losses and accordingly should be considered speculative. There isgenerally no publicly available information about the companies in which theCompany invests, and the Company relies significantly on the due diligence ofits employees and agents to obtain information in connection with its investmentdecisions. If the Company is unable to uncover all material information aboutthese companies, it may not make a fully informed investment decision and theCompany may lose money on its investments.

 

In addition, some smaller businesses have narrower productlines and market shares than their competition, and may be more vulnerable tocustomer preferences, market conditions or economic downturns, which mayadversely affect the return on, or the recovery of, the Company's investment insuch business.

 
*The Lack of Liquidity of the Company's Privately HeldInvestments may Adversely Affect Our Business.*
 

Substantially all of the investments the Company expects toacquire in the future will be, subject to restrictions on resale, including insome instances, legal restrictions, or will otherwise be less liquid thanpublicly traded securities. The illiquidity of these investments may make itdifficult for the Company to quickly obtain cash equal to the value at which itrecords its investments if the need arises. This could cause the Company to missimportant business opportunities. In addition, if the Company were required toquickly liquidate all or a portion of its portfolio, it may realizesignificantly less than the value at which it had previously recorded itsinvestments.

 
*If the Industry Sectors in which the Company's Portfolio isConcentrated Experience Adverse Economic or Business Conditions, Our OperatingResults may be Negatively Impacted.*
 

The Company's customer base is primarily in the recordingindustry and marine exploration and excavation industry sectors. These customerscan experience adverse business conditions or risks related to their industries.Accordingly, if the Company's customers suffer due to these adverse businessconditions or risks or due to economic slowdowns or downturns in these industrysectors the Company will be more vulnerable to losses in its portfolio and ouroperating results may be negatively impacted. 

 

Some of these companies may be unable to obtain financingfrom public capital markets or from traditional credit sources, such ascommercial banks. Accordingly, advances made to these types of customers mayentail a higher degree of risk than advances made to customers who are able toutilize traditional credit sources. These conditions may also make it difficultfor us to obtain repayment of our loans.

 
*Economic downturns or recessions may impair the Company'scustomers' ability to repay its loans, harm its operating results.*
 

Many of the companies in which the Company has made or willmake investments may be susceptible to economic slowdowns or recessions. Aneconomic slowdown may affect the ability of a company to engage in a liquidityevent. The Company's non-performing assets are likely to increase and the valueof its portfolio is likely to decrease during these periods. These conditionscould lead to financial losses in its portfolio and a decrease in its revenues,net income and assets.

 

The Company's business of making private equity investmentsand positioning them for liquidity events also may be affected by current andfuture market conditions. The absence of an active senior lending environmentmay slow the amount of private equity investment activity generally. As aresult, the pace of the Company's investment activity may slow. In addition,significant changes in the capital markets could have an effect on thevaluations of private companies and on the potential for liquidity eventsinvolving such companies. This could affect the amount and timing of gainsrealized on its investments.

 
*The Company's Borrowers May Default on Their Payments, WhichMay Have an Effect on Financial Performance.*
 

Some of these companies may be unable to obtain financingfrom public capital markets or from traditional credit sources, such ascommercial banks. Accordingly, advances made to these types of customers mayentail a higher degree of risk than advances made to customers who are able toutilize traditional credit sources. These conditions may also make it difficultfor the Company to obtain repayment of its loans. Numerous factors may affect aborrower's ability to repay its loan; including the failure to meet its businessplan, a downturn in its industry, or negative economic conditions. Deteriorationin a borrower's financial condition and prospects may be accompanied bydeterioration in any related collateral.

 
*If the Company Fails to Manage Its Growth, its FinancialResults Could be Adversely Affected.*
 

The Company has expanded its operations and strategicrelationships at a rapid pace. The Company's growth has placed and continues toplace significant strain on its management systems and resources. The Companymust continue to refine and expand its marketing capabilities, its management ofthe investing process, access to financing resources and technology. As theCompany grows, it must continue to hire, train, supervise and manage newemployees. The Company may not develop sufficient lending and administrativepersonnel and management and operating systems to manage its expansioneffectively. If the Company is unable to manage its growth, operations could beadversely affected and the financial results could be adversely affected.

 
*The Company's Private Finance Investments May Not ProduceCurrent Returns or Capital Gains.*
 

The Company's private finance investments are typicallystructured as debt securities with a relatively high fixed rate of interest andwith equity features such as conversion rights, warrants or other options. As aresult, the Company's private finance investments are generally structured togenerate interest income from the time they are made and may also produce arealized gain from an accompanying equity feature. The Company cannot be surethat its portfolio will generate a current return or capital gain.

 
*The Company Operates in a Competitive Market for InvestmentOpportunities*
 

The Company competes for investments with a large number ofprivate equity funds and mezzanine funds, investment banks and other equity andnon-equity based investment funds, and other sources of financing, includingtraditional financial services companies such as commercial banks. Some of itscompetitors have greater resources than the Company. Increased competition wouldmake it more difficult for the Company to purchase or originate investments atattractive prices. As a result of this competition, sometimes the Company may beprecluded from making otherwise attractive investments.

 
*Investing in the Company's Stock Is Highly Speculative and anInvestor Could Lose Some or All of the Amount Invested*
 

The value of the Company's common stock may decline and maybe affected by numerous market conditions, which could result in the loss ofsome or the entire amount invested in its shares. The securities marketsfrequently experience extreme price and volume fluctuations, which affect marketprices for securities of companies generally, and very small capitalizationcompanies in particular. The price of its common stock may be higher or lowerthan the price paid for shares, depending on many factors, some of which arebeyond the Company's control and may not be directly related to its operatingperformance. These factors include the following:

 

*
Price and volume fluctuations in the overall stock market    from time to time;
*
Significant volatility in the market price and trading    volume of securities of business development companies or other financial    service companies;
*
Changes in the regulatory policies or tax guidance with    respect to business development companies;****
Actual or anticipated changes in the earnings or    fluctuations of operating results or changes in the experience of securities    analysts.
 
*The Company's Business Depends on Key Personnel*
 

The Company depends on the continued service of its executiveofficers and other key management personnel. If the Company were to lose any ofthese officers or other management personnel, such a loss could result ininefficiencies in the Company's operations and the loss of businessopportunities. The Company does not maintain any key man life insurance on anyof its officers or employees.

 
*The Company's Business Plan is dependent upon ExternalFinancing which may Expose the Company to Risks Associated with Leverage*
 

The Company will require a substantial amount of cash tooperate and grow. The Company may acquire additional capital from the followingsources:

Senior Securities. The Company intends to issue debtsecurities, other evidences and preferred stock, up to the maximum amountpermitted by the 1940 Act. The 1940 Act currently permits the Company, as abusiness development company, to issue debt securities and preferred stock, towhich it refers collectively as senior securities, in amounts such that theasset coverage, as defined in the 1940 Act, is at least 200% after each issuanceof senior securities. As a result of issuing senior securities, the Company willbe exposed to the risks associated with leverage. Although borrowing money forinvestments increases the potential for gain, it also increases the risk of aloss. A decrease in the value of investments will have a greater impact on thevalue of its common stock to the extent that the Company borrowed money to makeinvestments. There is a possibility that the costs of borrowing could exceed theincome received on the investments made with such borrowed funds. In addition,the ability to pay dividends or incur additional indebtedness would berestricted if asset coverage is not at least twice the Company's indebtedness.If the value of the Company's assets declines, it might be unable to satisfythat test. If this happens, it may be required to liquidate a portion of itsloan portfolio and repay a portion of its indebtedness at a time when a sale maybe disadvantageous. Furthermore, any amounts that the Company uses to serviceits indebtedness will not be available for distributions to stockholders.

Common Stock. Because the Company is limited in itsability to issue debt for the reasons given above, the Company is dependent onthe issuance of equity as a financing source. If the Company raises additionalfunds by issuing more common stock or debt securities convertible into orexchangeable for our common stock, the percentage ownership of its stockholdersat the time of the issuance would decrease and they may experience dilution. Inaddition, any convertible or exchangeable securities issued in the future mayhave rights, preferences and privileges more favorable than those of theCompany's common stock.

Securitization. In addition to issuing securities toraise capital as described above, the Company anticipates that in the future itwill securitize loans to generate cash for funding new investments. An inabilityto successfully securitize the Company's loan portfolio could limit its abilityto grow the business, fully execute the business strategy and impact itsprofitability. Moreover, successful securitization of the Company's loanportfolio might expose it to losses as the loans in which it does not plan tosell interests will be those that are riskier and more apt to generate losses.

 
*Shares of Closed-End Investment Companies Frequently Trade ata Discount from Net Asset Value.*
 

Shares of closed-end investment companies frequently trade ata discount from net asset value. This characteristic of shares of closed-endinvestment companies is separate and distinct from the risk that the Company'snet asset value per share will decline.
*Changes in the Law or Regulations That Govern the CompanyCould Have a Material Impact on its Operations*
 

The Company is regulated by the Securities and ExchangeCommission. In addition, changes in the laws or regulations that govern businessdevelopment companies may significantly affect its business. Any changes in thelaw or regulations that govern its business could have a material impact onoperations. The Company is subject to federal, state and local laws andregulations and is subject to judicial and administrative decisions that affectits operations. If these laws, regulations or decisions change, or if theCompany expands its business into jurisdictions that have adopted more stringentrequirements than those in which it currently conducts business, the Company mayincur significant expenses in order to comply or might restrict operations.

 
*Acts of God, Hurricane, Flood, etc. May Affect Operations andSubject the Company To Risk of Damage or Loss.*
 

The Company and its portfolio companies could be subject toacts of God, hurricane, fire, flood or other disaster, condition or event thatadversely affects the Company or its portfolio companies or their ability to dobusiness and could result in a loss of sales and revenue and impair operatingresults.

The following information should be read in conjunction withthe financial statements and notes thereto appearing elsewhere in this Form10-Q.

 
*Forward Looking Statements*
 

This Form 10-Q including the Management's Discussion andAnalysis of Financial Condition and Results of Operation containsforward-looking statements that involve substantial risk and uncertainties.These forward-looking statements are not historical facts but rather are basedon current expectations, estimates and projections about the Company's industry,beliefs, and assumptions. Such forward-looking statements involve risks anduncertainties that could cause risks or outcomes to differ materially from thoseexpressed in the forward-looking statements. Forward-looking statements mayinclude without limitation statements relating to the Company's plans,strategies, objectives, expectations and intentions and are intended to be madepursuant to the Safe Harbor provisions of the Private Securities LitigationReform Act of 1995. Words such as "anticipates", "expects", "intends", "plans","believes", "seeks", and "estimates" and variations of these words and similarexpressions are intended to identify forward-looking statements. Thesestatements are not guarantees of future performance and are subject to certainrisks, uncertainties, and other factors, some of which are beyond the Company'scontrol and difficult to predict and could cause actual results to differmaterially from those expressed or forecasted in the forward-looking statementsincluding without limitation:

 

*
The state of securities markets in which the securities    of the Company's portfolio company trade or could be traded;
*
The liquidity within the national financial markets;
*
Economic downturns or recessions may impair the Company's    customers' ability to repay its loans and increase its non-performing    assets;
*
A contraction of available credit and/or inability to    access the equity markets could impair its lending and investment    activities;
*
The risks associated with the possible disruption in the    Company's operations due to terrorism; and
*
The risks and uncertainties described under the caption    "Risk Factors and Other Considerations" contained in Part I, Item I, which    is incorporated herein by reference.
 

Although the assumptions on which these forward lookingstatements are based are reasonable, any of those assumptions also could beincorrect. In light of these and other uncertainties, the inclusion of aprojection or forward-looking statements in this Quarterly Report should beregarded as a representation of the Company that its plans and objectives willbe achieved. Undue reliance should not be placed on these forward-lookingstatements, which apply only as of the date of this Quarterly Report.

 
*Overview*
 

The Company is a financial service company providingfinancing and advisory services to small and medium-sized companies throughoutthe United States. Effective January 5, 2004 the Company shareholders approvedthe proposal to allow the Company to convert to a business development company("BDC") under the Investment Company Act of 1940 ("1940 Act").

The Company's investments in portfolio companies typicallyrange from $100,000 to $2,500,000. The Company invests either directly in theequity of a company through equity shares or through a debt instrument. TheCompany's debt instruments usually do not have a maturity of more than fiveyears. Interest is either currently paid or deferred.

Investment opportunities are identified for the Company bythe management team. Investment proposals may, however, come to the Company frommany sources, and may include unsolicited proposals from the public and fromreferrals from banks, lawyers, accountants and other members of the financialcommunity. The management team brings an extensive network of investmentreferral relationships.

The Company prepares its financial statements in accordancewith accounting principles generally accepted in the United States of Americafor investment companies. For a summary of all of its significant accountingpolicies, including the critical accounting policies, see financial statementsin Item 8.

The increasing complexity of the business environment andapplicable authoritative accounting guidance requires the Company to closelymonitor its accounting policies. The Company has identified three criticalaccounting policies that require significant judgment. The following summary ofthe Company's critical accounting policies is intended to enhance your abilityto assess its financial condition and results of operation and the potentialvolatility due to changes in estimates.

 
*Valuation of Investments*
At December 31, 2005, 75.36% ofthe Company's total assets represented investments recorded at fair value, whichapproximates cost. Value as defined in Section 2(a)(41) of the 1940 Act, is (i)the market price for those securities for which a market quotation is readilyavailable and (ii) for all other securities and assets, fair value is determinedin good faith by the board of directors. Since there is typically no readilyascertainable market value for the investments in its portfolio, the Companyvalues substantially all of its investments at fair value as determined in goodfaith by the board of directors pursuant to a valuation policy and consistentvaluation process. Because of the inherent uncertainty in determining the fairvalue of investments that do not have a readily ascertainable market value, thefair value of its investments determined in good faith by the board of directorsmay differ significantly from the values that would have been used had a readymarket existed for the investments, and the differences could be material.

Initially, the fair value of each such portfolio investmentis based upon original cost. There is no single standard for determining fairvalue in good faith. As a result, determining fair value requires the judgmentbe applied to the specific facts and circumstances of each portfolio investment.The Board of Directors considers fair value to be the amount which the Companymay reasonably expect to receive for portfolio securities when sold on thevaluation date. The Company analyzes and values each individual investment on aquarterly basis, and records unrealized depreciation for an investment that itbelieves has become impaired, including where collection of a loan orrealization of an equity security is doubtful. Conversely, the Company willrecord unrealized appreciation if it believes that the underlying portfoliocompany has appreciated in value and, therefore, the Company's equity securityhas also appreciated in value. Without a readily ascertainable market value andbecause of the inherent uncertainty of valuation the fair value of the Company'sinvestments determined in good faith by the Board of Directors may differsignificantly from the values that would have been used had a ready marketexisted for the investments, and the favorable or unfavorable differences couldbe material.

In the valuation process, the Company uses financialinformation received monthly, quarterly, and annually from the portfoliocompanies, which include both audited, and unaudited financial informationsupplied by portfolio companies management. This information is used todetermine financial condition, performance and valuation of the portfolioinvestments. Valuation should be reduced if a company's performance andpotential have significantly deteriorated. If the factors, which led to thereduction in valuation, are overcome, the valuation may be restated.

Another key factor used in valuation of the equityinvestments is recent arms-length equity transactions entered into by theinvestment company that the Company utilizes to form a basis for its underlyingvalue. Many times the terms of these equity transactions may not be identical tothose of the Company and the impact on these variations as it relates to marketvalue may be impossible to quantify.

Any changes in estimated fair value are recorded in thestatements of operations as "Net increase (decrease) in unrealized(depreciation) appreciation."

 
*Valuation of Equity Securities*
With respect to private equity securities, each investment isvalued using industry valuation benchmarks and then the value is assigned adiscount reflecting the illiquid nature of the investment, as well as theCompany's minority non-control positions. When an external event such as apurchase transaction, public offering, or subsequent equity sale occurs, thepricing indicated by the external event will be used to corroborate theCompany's private equity valuation. Securities that are traded in theover-the-counter market or on a stock exchange will generally be valued at theprevailing bid price on the valuation date. However, restricted and unrestrictedpublicly traded securities may be valued at discounts from the public marketvalue due to restrictions on sale, the size of its investment or marketliquidity concerns.
*Valuation of Loans and Debt Securities*
As a general rule, the Company does not value its loans ordebt securities above cost, but loans and debt securities will be subject tofair value write-down when the asset is considered impaired. 
*Financial Condition*
The Company's assets increased by $751,740 or 24.97%to$3,762,400 during the six months ending December 31, 2005.

The Company's financial condition is dependent on the successof its portfolio holdings. It has invested a substantial portion of its assetsin small and medium-sized companies. These businesses tend to be thinlycapitalized, small companies that may lack experienced management. The followingsummarizes the Company's investment portfolio as of December 31, 2005.

 

 
 
December 31, 2005
 
 
 
 
 
Investment at Cost
 
$ 
2,835,278
 
 
 
 
 
 
Unrealized appreciation, net
 
 
-
 
 
 
 
 
 
Investment at fair value
 
$
2,835,278
 
 

During the Company's fiscal year, the Company valued itsequity and investment holdings in accordance with the established valuationpolicies (see "Valuation of Investments and Equity Holdings") above.

The cash and cash equivalents approximated .67% of net assetsas of December 31, 2005.

 
*Results of Operations*
The results of operations for the six months ended December31, 2005 reflect the net effects of the Exchange Agreement completed on October17, 2005.

After October 17, 2005, a new management of officers anddirectors assumed control of the Company. 

The financial effect of this transaction is reflected in thefinancial statements for the three months ended December 31, 2005. Theaccounting treatment of this transaction increased the Company loss byapproximately $(2,220,121).

Taking into account this one time treatment of the recordingof this transaction would reduce the loss for the quarter ended and six monthsended December 31, 2005 to $(217,513) and $(324,137) respectively.
*Dividends and Interest*
Dividends and interest income on investments for the sixmonths ended December 31, 2005 and December 31, 2004 was $40,283 and $31,315,respectively. The increase in interest and dividends was primarily due to thesources of income shifting from a transactional base business to the Companyreceiving interest income from its portfolio companies.
*Management Fees*
Management fees for the six months ended December 31, 2005and December 31, 2004 were $453,000 and $612,482 respectively. The managementfees decreased mainly due to the sale of the Company's portfolio investments inthe last quarter. The majority of these management fees were earned by the priormanagement in the quarter ending September 30, 2005.
*Operating Expenses*
Total operating expenses for the six months ended December31, 2005 and December 31, 2004 was $690,569 and $1,112,838. A significantcomponent of total operating expenses was general and administrative expenses of$617,798 and $908,556 for the six months ending December 31, 2005 and 2004,respectively. The decrease in general and administrative expenses would havebeen greater but for the bad debt expense of $143,232 for the non-portfoliocompany assets that were written-off in October 2005 as part of the divestitureof assets prior to the Exchange Agreement dated October 17, 2005. A secondcomponent of total operating expenses was professional fees of $72,156 for thesix months ending December 31, 2005 and $170,463 for the six months endingDecember 31, 2004.. The decrease in professional fees is primarily due to theCompany using employees rather than outside consultants to complete duediligence on potential portfolio companies.

Liquidity and Capital Resources

At December 31, 2005 and June 30, 2005, the Company had$25,130 and $31,034 respectively in cash and cash equivalents. The Company'sobjective is to have sufficient cash on hand to cover current fundingrequirements and operations.

The Company expects its cash on hand and cash generated fromoperations to be adequate to meet its cash needs at its current level ofoperations, including the next twelve months. The Company generally funds newinvestments using cash on hand and equity financing and outside investments.

Private Portfolio Company Investments

The following is a list of the private companies in which theCompany had an investment in and the fair market value which approximates costof such securities at December 31, 2005:

 
**Name of Company
 **Cost
 **FMV
 
 
 
 
 
 
 
 
 
 
 
 
 
Sovereign Exploration Associates International, Inc.
 
$
1,861,410
 
$
1,861,410
 
 
 
 
 
 
 
 
 
Gulf Coast Records, LLC
 
 
173,868
 
 
173,868
 
 
 
 
 
 
 
 
 
Sovereign Exploration Associates International of Spain,    Inc.
 
 
800,000
 
 
800,000
 
 
 
 
 
 
 
 
 
Total
 
$
2,835,278
 
$
$2,835,278
 **Item 3. Quantitative and QualitativeDisclosures About Market Risk**
The Company's investment activities contain elements of risk.The portion of the Company's investment portfolio consisting of equity orequity-linked debt securities in private companies is subject to valuation risk.Because there is typically no public market for the equity and equity-linkeddebt securities in which it invests, the valuation of the equity interest in theportfolio is stated at "fair value" and determined in good faith by the Board ofDirectors on a quarterly basis in accordance with the Company's investmentvaluation policy.

In the absence of a readily ascertainable market value, theestimated value of the Company's portfolio may differ significantly from thevalue that would be placed on the portfolio if a ready market for theinvestments existed. Any changes in valuation are recorded in the Company'sconsolidated statement of operations as "Net unrealized appreciation(depreciation) on investment".

At times a portion of the Company's portfolio may includemarketable securities traded in the over-the-counter market. In addition, theremay be a portion of the Company's portfolio for which no regular trading marketexists. In order to realize the full value of a security, the market must tradein an orderly fashion or a willing purchaser must be available when a sale is tobe made. Should an economic or other event occur that would not allow themarkets to trade in an orderly fashion the Company may not be able to realizethe fair value of its marketable investments or other investments in a timelymanner.

As of December 31, 2005, the Company did not have anyoff-balance sheet investments or hedging investments.
*Impact of Inflation*
The Company does not believe that its business is materiallyaffected by inflation, other than the impact inflation may have on thesecurities markets, the valuations of business enterprises and the relationshipof such valuation to underlying earnings all of which will influence the valueof the Company's investments.
**Item 4. Control & Procedures***Evaluation of Disclosure Control and Procedures*
Management, with the participation of the principal executiveofficer and principal financial officer, has evaluated the effectiveness ofdisclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)under the Securities Exchange Act of 1934, as amended (the "Exchange Act")), asof the end of the period covered by this Annual Report on Form 10-K. Based onsuch evaluation, the principal executive officer and principal financial officerhave concluded that as of such date, the disclosure controls and procedures weredesigned to ensure that information required to be disclosed by management inreports that are filed or submitted under the Exchange Act is recorded,processed, summarized and reported with the time periods specified in applicableSEC rules and forms were effective.
*Changes in Internal Control Over Financial Reporting*
There have been no significant changes in internal control orin other factors that could significantly affect those controls subsequent toour evaluation, including corrective actions with regard to significantdeficiencies and material weaknesses.
**PART II - OTHER INFORMATION****Item 1. Legal Proceedings**
There are no material pending legal proceedings to which theCompany or any of its subsidiaries is a party or to which any of its property issubject. A debenture holder has claimed that the Company has defaulted on theissuance of stock underlying the convertible debenture.  The Companydisputes the issuance of stock and the event of default; however, managementdoes not believe that the outcome of this dispute will materially affect theCompany. The Company is in dispute with prior management which filed forarbitration to recover stock and the balance owed on a note. The Company hascounter-claimed, *inter alia*, for the return of monies paid and breach offiduciary duties; however, management does not believe that the outcome of thisdispute will materially affect the Company.

 
**Item 2. Unregistered Sales of Equity Securities and Use ofProceeds**
NOT APPLICABLE
**Item 3. Defaults Upon Senior Securities**
A debenture holder has claimed that the Company has defaultedon the issuance of stock underlying the convertible debenture.  The Companydisputes the issuance of stock and the event of default; however, managementdoes not believe that the outcome of this dispute will materially affect theCompany.
**Item 4. Submission of Matters to a Vote of Security Holders**
NOT APPLICABLE
**Item 5. Other Information**
 

Effective October 17, 2005, the Company acquired all of theshares of Sovereign Exploration Associates International, Inc. ("SEAI") pursuantto the Exchange Agreement dated October 17, 2005 between the Company and SEAI("Exchange Agreement"). SEAI, a privately held company, is a marine explorationcompany headquartered in Pennsylvania. Pursuant to the Exchange Agreement, priormanagement disposed of all of its existing portfolio companies other than GulfCoast Records LLC. Current management is reviewing its options regarding thisportfolio company and whether it wants to maintain its position or divest itsholdings in the future.SEAI is replacing assets divested by CALI equal to orgreater than those divested. SEAI has received a full release from Gulf CoastRecords, LLC. As part of the transaction, SEAI was issued shares equal to ninetypercent of all of the issued and outstanding shares of the Company. Priormanagement agreed to indemnify SEAI from all claims for a period of 1 year, andcollateralized the indemnification with previous management's interest in theCompany's stock.
**Item 6. Exhibits****Exhibit No.**Description
31.1
Certification of President and Chief Executive Officer    pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of    the Sarbanes Oxley Act of 2002
 
 
31.2
Certification of Chief Financial Officer pursuant to 18    U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes    Oxley Act of 2002
 
 
32.1
Certification of President and Chief Executive Officer    pursuant to 18 U.S.C. Section 906, as adopted pursuant to Section 302 of the    Sarbanes Oxley Act of 2002
 
 
32.2
Certification of Chief Financial Officer pursuant to 18    U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes    Oxley Act of 2002
 

 

 

In accordance with Section 13 or 15(d) of the Exchange Act,the Registrant caused this report to be signed on its behalf by the undersigned,thereunto duly authorized.
**                                   **
 
 
 
 **Sovereign Exploration Associates International, INC.
  
  
  
Date: February 20, 2006
By:  
/s/ Robert D. Baca 
 
Robert D. Baca 
 
Chief Financial Officer
 

In accordance with the Exchange Act, this report has beensigned below by the following persons on behalf of the Registrant and in thecapacities and on the dates indicated:
**                                   **
 
 
 
 **Sovereign Exploration Associates International, INC.
  
  
  
Date: February 20, 2006
By:  
/s/ Robert D. Baca 
 
Robert D. Baca 
 
President, CEO**                                   **
 
 
 
 **Sovereign Exploration Associates International, INC.
  
  
  
Date: February 20, 2006
By:  
/s/ Robert D. Baca 
 
Robert D. Baca 
 
Chief Financial Officer**************************** |