UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended December 31, 2004
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from _____________ to _______________
Commission File Number 000-26887
FRANCHISE CAPITAL CORPORATION
(Exact name of registrant as specified in its charter)
Nevada 98-0353403
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
8655 E. Via De Ventura Suite G-217
Scottsdale, AZ 85058
(Address of principal executive offices)
(480) 355-8142
(Issuer's telephone number)
N/A
(former name, former address and former fiscal year
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
The Registrant had 5,341,701 shares of its common stock, $.0001 par value
per share and 13,500,000 shares of its Series C Preferred Stock, $.0001 par
value per share, outstanding as of February 11, 2005. Series C Preferred Stock
is convertible to common stock on a one for one share basis.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
INDEX TO FORM 10-Q/A FILING
FOR THE QUARTER ENDED DECEMBER 31, 2004
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS 3
Notes to Financial Statements 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 15
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS 18
ITEM 4. CONTROLS AND PROCEDURES 20
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 21
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 21
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 21
ITEM 4. SUBMSISION OF MATTERS TO A VOTE OF SECURITY HOLDERS 21
ITEM 5. OTHER INFORMATION 22
ITEM 6. EXHIBITS 22
SIGNATURES 22
EXPLANATORY NOTE:
On December 23, 2004, the company elected to be regulated as a Business
Development Company (BDC) as outlined in the Investment Company Act of 1940 by
filing a Form N-54A. As a BDC, the Company is no longer eligible to report on
Form 10-QSB because it is an investment company and, therefore, does not qualify
as a small business issuer. The Company has therefore elected to file this
amended Form 10Q/A to properly present its financial information to comply with
Regulation S-X. Because the Company was only operating as a BDC for the final 8
days of the period the presentation as an investment company has been omitted,
since information would be misleading in light of the Company's operations
during the periods presented. The Company's operations during the final 8 days
were immaterial.
2
FRANCHISE CAPITAL CORPORATION
STATEMENT OF ASSETS AND LIABILITES/BALANCE SHEET
December 31, 2004 June 30, 2004
----------------- -------------
(unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 2,213 $ 46,001
Deferred financing costs, net 2,666 --
Accounts receivable -- 10,826
Interest receivable -- 1,414
----------- -----------
Total Current Assets 4,879 58,241
----------- -----------
PROPERTY AND EQUIPMENT:
Computers and equipment, net $ 1,538 $ 8,376
----------- -----------
OTHER ASSETS:
Investments in and advances to controlled
companies, at fair value (cost $315,709) $ 315,709 $ --
Investments/advances 303,390 --
----------- -----------
Total Investments 619,099 --
Franchise rights -- 18,037
Goodwill -- 270,545
----------- -----------
Total Other Assets 619,099 288,582
----------- -----------
Total Assets $ 625,516 $ 355,199
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 153,646 $ 281,332
Advances from shareholders 2,350 6,058
Debentures payable (See Note 4) 207,741 127,500
----------- -----------
Total current liabilities 363,737 414,890
----------- -----------
NONCURRENT LIABILITIES:
Notes payable (See Note 4) $ 300,000 $ 100,000
Minority interest -- 2,510
----------- -----------
Total noncurrent liabilities -- 102,510
----------- -----------
TOTAL LIABILITIES 663,737 517,400
----------- -----------
STOCKHOLDERS' EQUITY:
Preferred Series A stock, $10.00 par value, 125,000 authorized,
0 and 0 shares issued and outstanding, respectively -- --
Preferred Series B stock, $.001 par value, 1,000,000 authorized,
0 and 10,000 shares issued and outstanding, respectively -- 3,800,000
Preferred Series C stock, $0.0001 par value, 13,500,000 authorized,
13,500,000 and 0 shares issued and outstanding, respectively 1,350 --
Common stock, $0.0001 par value, 5,000,000,000 shares
authorized, 4,847,235 and 3,465,240 shares issued and outstanding,
respectively 485 347
Additional paid-in capital 5,821,969 1,727,457
Deferred compensation (192,000) (208,000)
Accumulated deficit (5,670,025) (5,482,005)
----------- -----------
Total stockholders' equity (deficit) (38,221) (162,201)
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 625,516 $ 355,199
NET ASSET VALUE PER SHARE $ 0.008 $ 0.05
=========== ===========
See accompanying notes to the financial statements.
3
FRANCHISE CAPITAL CORPORATION
SCHEDULE OF INVESTMENTS DECEMBER 31, 2004 (UNAUDITED)
Principal Acquisition
Amount/Shares Date Value
------------- ---- -----
PRIVATE COMPANIES (1)
Common Stocks
Restaurant companies
1,000,000
shares common
stock Fathom Business Systems, Inc. 12/2004 $225,709
75,000,000
shares common
stock Iceberg Food Systems, Inc. 12/2004 --
INVESTMENTS IN CONTROLLED COMPANIES:
Membership 72.5% Comstock Jake's Franchise Co., LLC 12/2004 7,500
Membership 50% Cousin Vinnie's Franchise Co., LLC 12/2004 --
Membership 100% Kirby Foo's Franchise Co., LLC 12/2004 7,500
Membership 50% Kokopelli Mexican Grill Franchise Co. LLC 12/2004 75,000
ADVANCES TO CONTROLLED COMPANIES:
Iceberg Food Systems, Inc. 12/2004 27,013
Fathom Business Systems, Inc. 12/2004 29,847
Comstock Jake's Franchise Co., LLC 12/2004 77,550
Cousin Vinnie's Franchise Co., LLC 12/2004 88,006
Kirby Foo's Franchise Co., LLC 12/2004 76,842
Kokopelli Mexican Grill Franchise Co. LLC 12/2004 4,132
--------
TOTAL -- PRIVATE COMPANIES (Cost $619,099) 619,099
--------
TOTAL INVESTMENTS (Cost $619,099) $619,099
--------
----------
1. At December 31, 2004 the Company owned 25% or more of each of the private
company's outstanding common stock thereby making each a controlled
affiliate as defined by the Investment Company Act of 1940. Total market
value of controlled affiliated securities owned at December 31, 2004 was
$619,099.
Notes to Financial Statements are an integral part of
these Financial Statements
4
FRANCHISE CAPITAL CORPORATION
STATEMENT OF OPERATIONS
(UNAUDITED)
For the For the For the For the
three three six six
months months months months
ended ended ended ended
December 31, December 31, December 31, December 31,
2004 2003 2004 2003
--------- --------- --------- ---------
INCOME $ 31,025 $ 8,407 $ 62,334 $ 8,407
COST OF GOODS SOLD 8,304 4,975 13,808 4,975
--------- --------- --------- ---------
Gross profit 22,721 3,432 48,526 3,432
COSTS AND EXPENSES:
General and administrative expense 255,378 268,199 694,497 401,009
--------- --------- --------- ---------
Total 255,378 268,199 694,497 401,009
--------- --------- --------- ---------
INCOME (LOSS) FROM OPERATIONS (232,657) (264,767) (645,971) (397,577)
OTHER INCOME (EXPENSE)
Goodwill impairment -- -- (44,836) --
Minority interest -- -- 2,510 --
Interest income -- -- 3,024 --
Financial and interest expense (48,120) -- (52,472) --
See accompanying notes to the financial statements.
5
FRANCHISE CAPITAL CORPORATION
STATEMENT OF OPERATIONS
CONTINUED - (UNAUDITED)
For the For the For the For the
three three six six
months months months months
ended ended ended ended
December 31, December 31, December 31, December 31,
2004 2003 2004 2003
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES (280,777) (264,767) (737,745) (397,577)
INCOME TAXES -- -- -- --
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGES (280,777) (264,767) (737,745) (397,577)
CUMULATIVE EFFECT OF ACCOUNTING CHANGE
NO INCOME TAX EFFECT 549,727 -- 549,727 --
----------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN STOCKHOLDERS'
EQUITY RESULTING FROM NET INCOME (LOSS) $ 268,950 $ (264,767) $ (188,018) $ (397,577)
NET INCOME (LOSS) PER COMMON SHARE
Basic and diluted:
Before cumulative effect of accounting change $ (0.06) $ (0.01) $ (0.18) $ (0.01)
Cumulative effect of accounting change $ 0.13 $- $ 0.14 $-
Total $ 0.07 $ (0.01) $ (0.04) $ (0.01)
WEIGHTED AVERAGE COMMON SHARES 4,060,278 21,557,527 3,868,572 27,934,157
See accompanying notes to the financial statements.
6
FRANCHISE CAPITAL CORPORATION
STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the For the
six months six months
ended ended
December 31, December 31,
2004 2003
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) $(188,018) $(397,577)
Adjustments to reconcile net loss to net cash
used in operating activities:
Common stock issued as consideration for services 296,000 347,466
Depreciation 3,909 --
Amortization of deferred financing cost 1,334 --
Amortization of deferred compensation 16,000 --
Amortization of beneficial conversion feature 30,303 --
Impairment of goodwill 44,836 --
Minority interest (2,510) --
Cumulative effect of accounting change (549,727) --
Changes in assets and liabilities:
Prepaid expenses (85,086) (24,963)
Accounts receivable (219,703) 2,307
Inventories -- 13,567
Accounts payable and accrued liabilities 75,335 (18,319)
Deferred revenue 325,000 --
--------- ---------
Net cash used in operating activities (252,327) (77,519)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash invested in portfolio companies (29,166) --
Equipment (3,586) --
Cash acquired in business combination -- 3,619
--------- ---------
Net cash provided by/(used in) investing activities (32,752) 3,619
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from shareholders, officers and affiliates (8,647) 19,059
Proceeds from notes payable and convertible debentures 249,938 --
Common stock issued for cash -- 55,000
--------- ---------
Net cash provided by financing activities 241,291 74,059
--------- ---------
INCREASE/(DECREASE) IN CASH (43,788) 159
CASH BEGINNING OF PERIOD 46,001 --
--------- ---------
CASH END OF PERIOD $ 2,213 $ 159
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ -- $ --
========= =========
Income taxes paid $ -- $ --
========= =========
7
FRANCHISE CAPITAL CORPORATION
STATEMENTS OF CASH FLOWS CONTINUED
(UNAUDITED)
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Preferred stock converted to common stock $3,800,000 $ --
========== ==========
Note payable issued to acquire business $ -- $ 349,805
========== ==========
Common stock issued to acquire businesses $ -- $ 525,000
========== ==========
Common stock issued to acquire treasury stock $ -- $1,130,000
========== ==========
See accompanying notes to the financial statements.
8
FRANCHISE CAPITAL CORPORATION
NOTES TO UNAUDITED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED DECEMBER 31, 2004
1. ORGANIZATION AND BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in accordance
with accounting principles generally accepted in the United States for interim
financial information and the instructions for Form 10-Q and Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by accounting principles generally accepted in the United States for complete
financial statements. All adjustments that, in the opinion of management, are
necessary for a fair presentation of the results of operations for the interim
periods have been made and are of a recurring nature unless otherwise disclosed
herein. The results of operations for the three months ended December 31, 2004
are not necessarily indicative of the results that will be realized for the
entire fiscal year. These financial statements should be read in conjunction
with the Company's Annual Report on Form 10-KSB for the year ended June 30,
2004.
a. General
Franchise Capital Corporation (the "Company") a Nevada corporation, was
incorporated on July 6, 2001 as Cortex Systems, Inc. In December of 2004 the
Company changed its name to Franchise Capital Corporation, to more accurately
reflect its true business nature. The Company invests in developing and
franchising casual dining restaurants. The Company is seeking to acquire
additional investments within this industry and has acquired the rights to at
least one concept. To date, the Company has had no revenues associated with
these activities. Effective December 23, 2004, the Company as an internally
managed, closed end investment company elected to be treated as a business
development company under the Investment Company Act of 1940, as amended.
As a business development company, we provide long-term debt and equity
investment capital to support the expansion of companies in the casual, fast
food restaurant industry. We generally invest in private, small to middle market
companies that lack access to public capital or whose securities may not be
marginable. Today, our investment and lending activity is generally focused in
private finance.
Our investment portfolio consists primarily of equity investments in companies,
which may or may not constitute a controlling equity interest. At December 31,
2004 our investment portfolio totaled $315,709 at cost. Our investment objective
is to achieve current income.
The Company did not elect to be treated for federal income tax purposes as a
regulated investment company under the Internal Revenue Code.
b. Going Concern
The Company faces many operating and industry challenges. There is no meaningful
operating history to evaluate the Company's prospects for successful operations.
Future losses for the Company are anticipated. The proposed plan of operations
would include seeking an operating entity with which to merge. Even if
successful, a merger may not result in cash flow sufficient to finance the
continued expansion of a business.
9
The accompanying financial statements reflect the accounts of Franchise Capital
Corporation, and the related results of operations. In accordance with Article 6
of Regulation S-X under the Securities Act of 1933 and Securities Exchange Act
of 1934, the Company does not consolidate portfolio company investments in which
the Company has a controlling interest. These financial statements have been
prepared assuming that the Company will continue as a going concern. The Company
has incurred material operating losses, has continued operating cash flow
deficiencies and has working capital deficit at December 31, 2004. These factors
raise substantial doubt about the Company's ability to continue as a going
concern. The Company believes that it will be successful in the management of
its investment portfolio. However, the Company will likely require additional
debt or equity capital in order to implement its business plan. The accompanying
financial statements do not include any adjustments that might result from this
uncertainty.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Franchise Capital Corporation changed to a Business Development Company,
effective December 23, 2004. Therefore, the prior periods are no longer directly
comparable. The balance sheet as of December 31, 2004, is presented to reflect
the change to a BDC. The statements of operations for the periods ended December
31, 2004, are presented as if the all of the Company's portfolio companies are
consolidated through the last day of the period. The Company determined that the
effect of segregating operations for December 18, through December 31, would not
be material. The Company's Board of Directors determined that absent any other
operating information, all investments are valued at fair market value.
CASH AND CASH EQUIVALENTS - Cash and cash equivalents include all short-term
liquid investments that are readily convertible to known amounts of cash and
have original maturities of three months or less.
INCOME TAXES - The Company provides for income taxes based on the provisions of
Statement of Financial Accounting Standards No. 109, ACCOUNTING FOR INCOME
TAXES, which among other things, requires that recognition of deferred income
taxes be measured by the provisions of enacted tax laws in effect at the date of
financial statements.
USE OF ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
INCOME (LOSS) PER COMMON SHARE - Basic income per share is computed using the
weighted average number of shares of common stock outstanding for the period.
The Company has a simple capital structure and therefore there is no
presentation for diluted loss per share.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS -
In October 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations," which requires companies to record the fair value of a liability
for asset retirement obligations in the period in which they are incurred. The
statement applies to a company's legal obligations associated with the
retirement of a tangible long-lived asset that results from the acquisition,
construction, and development or through the normal operation of a long-lived
asset. When a liability is initially recorded, the company would capitalize the
10
cost, thereby increasing the carrying amount of the related asset. The
capitalized asset retirement cost is depreciated over the life of the respective
asset while the liability is accreted to its present value. Upon settlement of
the liability, the obligation is settled at its recorded amount or the company
incurs a gain or loss. The statement is effective for fiscal years beginning
after June 30, 2002. The Company does not expect the adoption to have a material
impact to the Company's financial position or results of operations.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets". Statement 144 addresses the accounting and
reporting for the impairment or disposal of long-lived assets. The statement
provides a single accounting model for long-lived assets to be disposed of. New
criteria must be met to classify the asset as an asset held-for-sale. This
statement also focuses on reporting the effects of a disposal of a segment of a
business. This statement is effective for fiscal years beginning after December
15, 2001. The Company does not expect the adoption to have a material impact to
the Company's financial position or results of operations.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
With Exit or Disposal Activities". This Standard requires costs associated with
exit or disposal activities to be recognized when they are incurred. The
requirements of SFAS No. 146 apply prospectively after December 31, 2002, and as
such, the Company cannot reasonably estimate the impact of adopting these new
rules.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation - Transaction and Disclosure, which provides alternative methods of
transition for a voluntary change to fair value based method of accounting for
stock-based employee compensation as prescribed in SFAS 123, Accounting for
Stock-Based Compensation. Additionally, SFAS No. 148 requires more prominent and
more frequent disclosures in financial statements about the effects of
stock-based compensation. The provisions of this statement are effective for
fiscal years ending after December 15, 2002, with early application permitted in
certain circumstances.
In November 2002, the FASB issued Interpretation No. 45 ("FIN 45"), Guarantor's
Accounting and Disclosure Requirements for Guarantees, including Indirect
Guarantees of Indebtedness of Others. FIN 45 requires a company, at the time it
issues a guarantee, to recognize an initial liability for the fair value of
obligations assumed under the guarantees and elaborates on existing disclosure
requirements related to guarantees and warranties. The initial recognition
requirements are effective for the Company during the third quarter ending March
31, 2003. The adoption of FIN 45 did not have an impact on the Company's
financial position or results of operations.
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51.
FIN 46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 is
effective for all new variable interest entities created or acquired after
January 31, 2003. For variable interest entities created or acquired prior to
February 1, 2003, the provisions of FIN 46 must be applied for the first interim
or annual period beginning after June 15, 2003. The adoption of FIN 46 did not
have an impact on the Company's financial position or results of operations.
11
3. ACCOUNTING CHANGE
As a result of the Company converting to a Business Development Company, the
Company changed its accounting principles. The primary difference relates to the
accounting for investments. The investments that were previously consolidated,
are now reflected at the estimated fair value of those investments. The Company
estimated that the investments at cost approximate fair value. The effect of
recoding those investments at the original cost and adjusting for the previously
recorded consolidated net losses of those investments was $549,727.
4. CONVERTIBLE DEBENTURES
During the year ended June 30, 2004 the Company issued a 2-year 7.5% convertible
debenture to Golden Gate Investors, Inc. "Golden Gate" amounting to $85,000 with
interest payable monthly and due June 9, 2006. The debenture also included
non-detachable warrants for 2,500,000 shares of common stock. During the three
months ended December 31, 2004, this debenture was increased to $177,438.
Subsequent to December 31, 2004, the Company contacted Golden Gate regarding
what we believe may be securities law violations in connection with transactions
involving the convertible debenture and its related warrants and agreements.
Among other things, the Company believes Golden Gate violated Section 16 of the
Securities Exchange Act of 1934 when they converted nearly 12% of the Company's
outstanding shares and immediately resold shares in the market. The Company has
terminated all agreements with Golden Gate, and is currently seeking legal
counsel to advise it regarding pursuing Golden Gate for short swing profits
resulting from the purchase and sale of shares.
On October 14, 2004 the Company issued a six month convertible debenture
amounting to $25,000, with interest payable at the end of the term. The
debenture may be converted, at the option of the holder, into common shares of
the Company. The conversion price is 50% of the closing bid on the day the
Company receives notice of conversion. The debenture may be converted, at the
option of the Company, into common shares of the Company. The conversion price
is 50% of the closing bid on the day the Company receives notice of conversion.
On October 4, 2004, the Company issued a six month convertible debenture
amounting to $25,000, with interest payable at the end of the term. The
debenture may be converted, at the option of the holder, into common shares of
the Company. The conversion price is 50% of the closing bid on the day the
Company receives notice of conversion. The debenture may be converted, at the
option of the Company, into common shares of the Company. The conversion price
is 50% of the closing bid on the day the Company receives notice of conversion
On December 1, 2004, the Company issued a twelve month convertible debenture
amounting to $50,000, with interest of $1,250 payable quarterly beginning March
1, 2005. The debenture may be converted, at the option of the holder, into
common shares of the Company. The conversion price is 50% of the closing bid on
the day the Company receives notice of conversion. The debenture may be
converted, at the option of the Company, into common shares of the Company. The
conversion price is 50% of the closing bid on the day the Company receives
notice of conversion.
For the debentures issued in the period ended December 31, 2004, the Company
computed the beneficial conversion feature to be equal to the face amount of the
debentures. The $100,000 discount is being amortized over the terms of the debt.
During the three month period ended December 31, 2004, $30,303 of the discount
was amortized leaving a remaining discount of $69,697.
12
Subsequent to December 31, 2004, the Company was notified by the Securities and
Exchange Commission ("Commission") that the debentures issued by the Company
were considered "senior securities" as defined by the Investment Company Act of
1940. Franchise Capital Corporation believed at the time the debentures issued
were not senior securities. As a result, the Company may not be in compliance
with Section 18 of the Investment Company Act of 1940 which required that the
Company maintain net assets to senior security coverage of at least 200%.
Further, the Company was informed that the convertible nature of the debentures
made them subject to Section 61 of the Investment Company Act which requires,
among other things, that rights to acquire common stock:
* Expire within 10 years from date of grant
* Are approved by a vote of shareholders, and
* Are exercisable at a price not less than the fair market value on the
date of grant.
The convertible debentures did not comply with these provisions of Section 61 at
the time they were issued. The Company is in negotiations with the remaining
debenture holder to restructure the obligation into a format that is compliant
with the Investment Company Act.
5. CAPITAL STOCK
The Company declared a 6 for 1 stock split during the year ended June 30, 2003.
The number of shares presented in these financial statements has been
retroactively restated for all periods to reflect this stock split.
During the three months ended December 31, 2003, the Company sold 125,000 shares
of its common stock for $55,000. In connection with this sale of common stock,
the Company also granted 137,500 warrants to acquire the Company's common stock
at $0.50 per share.
Also during the three months ended December 31, 2003, the Company granted
275,000 shares of its common stock to consultants as consideration for services
rendered. The shares were valued at the trading price of the common shares
aggregating to $99,966.
Additionally, during the three months ended December 31, 2003, the Company
granted 675,000 shares of its common stock to consultants as consideration for
services rendered. The shares were valued at the trading price of the common
shares aggregating to $247,500.
The Company reacquired 15,535,000 shares of its common stock in the three month
period ended December 31, 2003. The Company entered into an agreement to acquire
all of the outstanding shares of "ICEBERG FOOD SYSTEMS,CORP." ("IFSC"). IFSC was
owned by a former officer and director of the Company. The only holdings of IFSC
were 30,000,000 shares of the Company's common stock. As part of the agreement,
IFSC distributed 14,465,000 shares of the Company's common stock to its
shareholder. IFSC then became a wholly owned subsidiary of the Company with its
only holdings being the remaining 15,535,000 shares of the Company's common
stock. Effectively, the transaction was an acquisition of treasury stock by the
Company. In exchange, the Company would assume a commitment to raise capital and
develop the Iceberg Drive-In concept. The rights to develop that concept were
previously held by IFSC. The Company is to assist IFSC in providing up to
$1,130,000. The Company has accounted for this transaction as an acquisition of
treasury stock through the issuance of a note payable of $1,130,000.
During the three months ended September 30, 2004, the Company sold 140,000
shares of its common stock for $35,000.
13
Also during the three months ended September 30, 2004, the Company granted
3,050,000 shares of its common stock to consultants as consideration for
services rendered. The shares were valued at the trading price of the common
shares aggregating to $602,275.
On October 13, 2004, the Company negotiated a consulting agreement with Javelin
Holdings, Inc. The agreement with Javelin provides for $15,000 upon execution of
the agreement, $15,000 cash and a $30,000 60 day Convertible Note upon
successful filing of requisite SEC documents. In addition, Javelin receives 5%
of any Preferred Class of stock created for the benefit of the Company, 10% of
any bridge financing and 5% of any subsequent funding. During October, 2004,
Javelin earned finders fee of $5,000 from the Company for two short-term
convertible debentures in the amount of $25,000 each.
In November 2004, the Company converted its Preferred Series B stock into common
stock. This conversion resulted in the retiring of all Preferred Series B stock,
and issuance of 9,500,000 shares of common stock.
In December, 2004, the Company approved a reverse 1 for 10 common stock split.
In conjunction with the transactions discussed in Note 4, the Company issued an
aggregate of 5,015,000 shares of its common stock.
Effective December 17, 2004, the Company designated 30,000,000 shares of Series
C Preferred Stock. The Series C Preferred Stock is non-interest bearing, does
not have voting rights and is not entitled to receive dividends. Each share of
Series C issued can be converted into Common Stock on a 1:1 basis. In the event
of a liquidation event, the Series C stock automatically converts into common
stock based on the foregoing formula. By designation, the Series C Preferred
Stock is not affected by forward or reverse splits of the Company's common stock
or other adjustments to the Company's capital structure. The Series C is
entitled to name three members of the Company's Board of Directors at all times.
During the quarter ended December 31, 2004, the Company issued a total of
13,500,000 shares of Series C Preferred Stock for services rendered prior to the
Company's election to become a business development company.
Subsequent to December 31, 2004, the Company was notified by the Securities and
Exchange Commission ("Commission") that the terms of the Series C Preferred
Stock issued by the Company may be in violation of Section 23 of the Investment
Company Act of 1940. As a result, the Series C holders agreed to a 1:10 reverse
split of the Series C stock corresponding to the similar 1:10 reverse split of
the Company's common stock on January 14, 2005. Further, the Company has
restructured the terms of the Series C Preferred Stock. Most significantly, the
rights of the Series C Preferred Stock to convert to common stock and provisions
in the Series C Preferred Stock affording protections against capital
reorganization were eliminated.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information contained in this section should be read in conjunction with the
Selected Financial Data and our Financial Statements and notes thereto appearing
elsewhere in this 10Q. The 10Q, including the Management's Discussion and
Analysis of Financial Condition and Results of Operations, contains
forward-looking statements that involve substantial risks and uncertainties.
These forward-looking statements are not historical facts, but rather are based
on current expectations, estimates and projections about our industry, our
beliefs, and our assumptions. Words such as "anticipates", "expects", "intends",
"plans", "believes", "seeks", and "estimates" and variations of these words and
similar expressions are intended to identify forward-looking statements. These
statements are not guarantees of future performance and are subject to risks,
uncertainties, and other factors, some of which are beyond our control and
difficult to predict and could cause actual results to differ materially from
those expressed or forecasted in the forward-looking statements including
without limitation (1) any future economic downturn could impair our customers'
ability to repay our loans and increase our non-performing assets, (2) a
contraction of available credit and/or an inability to access the equity markets
could impair our lending and investment activities, (3) interest rate volatility
could adversely affect our results, (4) the risks associated with the possible
disruption in the Company's operations due to terrorism and (5) the risks,
uncertainties and other factors we identify from time to time in our filings
with the Securities and Exchange Commission, including our Form 10-Ks, Form
10-Qs and Form 8-Ks. Although we believe that the assumptions on which these
forward-looking statements are based are reasonable, any of those assumptions
could prove to be inaccurate, and as a result, the forward-looking statements
based on those assumptions also could be incorrect. In light of these and other
uncertainties, the inclusion of a projection or forward-looking statement in
this Quarterly Report should not be regarded as a representation by us that our
plans and objectives will be achieved. You should not place undue reliance on
these forward-looking statements, which apply only as of the date of this
Quarterly Report.
EXECUTIVE OVERVIEW
The Company was formed as a Nevada corporation on July 6, 2001 under the
name Cortex Systems, Inc. We were originally a development stage company that
intended to establish memory clinics in several different locations in North
America. We were unable to successfully execute this business plan. As a result,
in July of 2003, we changed the Company's name to BGR Corporation, replaced or
reconstituted the management and board of directors and changed our business
focus. The Company's focus was on acquiring new innovative fast-casual
restaurant concepts, develop them into a profitable working design, and
franchise them across the United States. On January 20, 2003, we entered into an
agreement with American Restaurant Development Corporation, or ARDC, to grow
restaurant concepts into a fully viable franchise system and to expand each
restaurant concepts nationwide. The controlling shareholder of ARDC is our
largest shareholder. To date, we have formed four joint ventures with different
restaurant concepts under this model.
On November 4, 2003, we acquired Fathom Business Systems, or Fathom. Fathom
is a company specializing in restaurant point of sales equipment. Fathom
generates additional revenue by providing its customers with the supplies and
service needed for the equipment.
On February 2, 2004, we executed an agreement with AZTECA Wrap Foods, LLC,
or AZTECA. AZTECA is the owner and operator of KoKopelli's Mexican Grill.
KoKopelli's is a fast casual Mexican restaurant specializing in made-to-order
Mexican-style food. Per the agreement, we own 50% of the joint venture entity,
while the other 50% is owned by AZTECA. Additionally, we are required to provide
the funding to initiate the franchising of KoKopelli's through ARDC. AZTECA will
provide exclusive rights to the "KoKopelli" name, trade marks, trade dress,
operating system and recipes.
15
In April 2004, we entered into a shareholders agreement with Alexis Group,
LLC, or ALEXIS. ALEXIS is the owner and operator of Pauli's Home of the
SteakBurger. Per the agreement, we own 50% of the joint venture entity, while
the other 50% is owned by ALEXIS. Additionally, we are required to provide the
funding to initiate the franchising of Pauli's through ARDC. ALEXIS will provide
exclusive rights to the "Pauli's" name, trade marks, trade dress, operating
system and recipes.
In April 2004, we executed a shareholders agreement with Brian Ruggiero,
the owner and operator of Cousin Vinnie's Italian Diner. The Cousin Vinnie's
concept was brought to FRANCHISE CAPITAL Corporation by American Restaurant
Development Corporation ("ARDC"). Per the agreement, we own 50% of the joint
venture entity, while the other 50% is owned by Ruggiero. Additionally, we are
required to provide the funding to initiate the franchising of Cousin Vinnie's
through ARDC. Ruggiero will provide exclusive rights to the "Cousin Vinnie's"
name, trade marks, trade dress, operating system and recipes.
In April 2004, the purchase agreement for us to acquire Deville, Inc. was
mutually cancelled. The agreement called for us to pay $700,000 in stock and
cash for the exclusive rights to the Lucky Lou's fast casual restaurant concept.
Stock that had been issued per the agreement has been returned to the Company's
treasury.
On April 15, 2004, our Board of Directors approved a stock dividend for all
shareholders of record as of May 15, 2004. Under he terms of the dividend
distribution, for every three shares held by a shareholder they will receive one
additional share. No fractional shares are to be issued.
On December 17, 2004 the Company changed its name to Franchise Capital
Corporation. The Board of Directors felt this name more closely defined its true
operations, of investing in small, start up companies.
Effective December 23, 2004, the Company converted to a Business
Development Company under the Investment Company Act of 1940. Upon completion of
this conversion, they became an internally managed, diversified, closed-end
investment company. Prior to the conversion they were a diversified holding
company. Since the conversion to a Business Development Company occurred at the
end of the quarter, the financials in this quarterly report reflect the Company
operating as a diversified holding company for the 3 months ended December 31,
2004.
RESULTS OF OPERATIONS
The Company generated revenues of $31,025 during the three months ending
December 31, 2004. Revenues in future periods will be generated from dividends
received from investments, gains on the sale of investments, management fees
charged to portfolio companies, and unrealized gains resulting from the
appreciation of investments.
Total general and administrative operating expenses for the three months
ending December 31, 2004 were $255,378. As a result, the Company recorded a net
loss from operations for the three months ending December 31, 2004 of $232,657.
This loss was primarily due to the expense related to legal and accounting fees.
16
LIQUIDITY AND CAPITAL RESOURCES
The Company experienced a cash outflow of $252,327 from operations during
the six months ending December 31, 2004, as compared to a net of $77,519 during
the six months ending December 31, 2003. This increase was due to legal and
accounting fees, as well as salaries for the officers.
CRITICAL ACCOUNTING ESTIMATES AND ASSUMPTIONS
The preparation of our financial statements in conformity with accounting
principles generally accepted in the United States of America requires our
management to make certain estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. As such, in accordance with
the use of accounting principles generally accepted in the United States of
America, our actual realized results may differ from management's initial
estimates as reported. A summary of our significant accounting policies are
detailed in the notes to the financial statements which are an integral
component of this filing.
The following summarizes critical estimates made by management in the
preparation of the financial statements:
Management evaluates the probability of the utilization of the deferred
income tax asset related to the net operating loss carry forwards. The Company
has estimated a $2,225,000 deferred income tax asset related to net operating
loss carry forwards and other book tax differences at December 31, 2004.
Management determined that because the Company has yet to generate taxable
income and that the generation of taxable income in the short term is uncertain,
it was appropriate to provide a valuation allowance for the total deferred
income tax asset.
The Company has reviewed ASR 118 that deals with the valuation of assets
held by investment companies. As a result of this review, the following
guidelines were adopted:
Where there is not a readily available source for determining the market
value of any investment, either because the investment is not publicly traded,
or is thinly traded, and in absence of a recent appraisal, the value of the
investment shall be based on the following criteria:
* Total amount of the Company's actual investment. This amount shall
include all loans, purchase price of securities and fair value of
securities given at the time of exchange
* Total revenues for the preceding twelve months
* Earnings before interest, taxes and depreciation
* Estimate of likely sales price of investment
* Net assets of investment
* Likelihood of investment generating positive returns
The estimated value of each investment shall be determined as follows:
* Where no or limited revenues or earnings are present, then the value
shall be the greater of the investments a) net assets, b) estimated
sales price, or c) total amount of actual investment.
* Where revenues and/or earnings are present, then the value shall be
the greater of one times (1x) revenues or three times (3x) earnings,
plus the greater of the net assets of the investment or the total
amount of the actual investment.
17
* Under both scenarios, the value of the investment shall be adjusted
down if there is a reasonable expectation that the Company will not be
able to recoup the investment or if there is a reasonable doubt about
the investment's ability to continue as a going concern.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
CERTAIN RISK FACTORS AFFECTING OUR BUSINESS
Our business involves a high degree of risk. Potential investors should
carefully consider the risks and uncertainties described below and the other
information in this report before deciding whether to invest in shares of our
common stock. If any of the following risks actually occur, our business,
financial condition, and results of operations could be materially and adversely
affected. This could cause the trading price of our common stock to decline,
with the loss of part or all of an investment in the common stock.
WE HAVE A LIMITED OPERATING HISTORY AND THERE IS NO ASSURANCE THAT OUR COMPANY
WILL ACHIEVE PROFITABILITY. Until recently, we have had no significant
operations with which to generate profits or greater liquidity. Although we have
recently established joint ventures with various fast-casual dining restaurants
in keeping with our proposed business model, we have not generated a meaningful
amount of operating revenue and we have a very limited current operating history
on which investors can evaluate our potential for future success. Our ability to
generate revenue is uncertain and we may never achieve profitability. Potential
investors should evaluate our company in light of the expenses, delays,
uncertainties, and complications typically encountered by early-stage
businesses, many of which will be beyond our control. These risks include the
following:
* lack of sufficient capital,
* unanticipated problems, delays, and expenses relating to acquisitions
of other businesses, concepts, or product development and
implementation,
* licensing and marketing difficulties,
* competition, and
* uncertain market acceptance of our products and services.
As a result of our limited operating history, our plan for growth, and the
competitive nature of the markets in which we may compete, our company's
historical financial data are of limited value in anticipating future revenue,
capital requirements, and operating expenses. Our planned capital requirements
and expense levels will be based in part on our expectations concerning
potential acquisitions, capital investments, and future revenue, which are
difficult to forecast accurately due to our company's current stage of
development. We may be unable to adjust spending in a timely manner to
compensate for any unexpected shortfall in revenue. Once we acquire new
restaurant concepts, product development and marketing expenses may increase
significantly as we expand operations. To the extent that these expenses precede
or are not rapidly followed by a corresponding increase in revenue or additional
sources of financing, our business, operating results, and financial condition
may be materially and adversely affected.
WE MAY NEED SIGNIFICANT INFUSIONS OF ADDITIONAL CAPITAL. Based upon our current
cash reserves and forecasted operations, we believe that we will need to obtain
outside funding. We may require significant additional financing in the future
in order to further satisfy our cash requirements. Our need for additional
capital to finance our business strategy, operations, and growth will be greater
should, among other things, revenue or expense estimates prove to be incorrect.
If we fail to arrange for sufficient capital in the future, we may be required
to reduce the scope of our business activities until we can obtain adequate
18
financing. We cannot predict the timing or amount of our capital requirements at
this time. We may not be able to obtain additional financing in sufficient
amounts or on acceptable terms when needed, which could adversely affect our
operating results and prospects. Debt financing must be repaid regardless of
whether or not we generate profits or cash flows from our business activities.
Equity financing may result in dilution to existing shareholders and may involve
securities that have rights, preferences, or privileges that are senior to our
common stock.
WE WILL FACE A VARIETY OF RISKS ASSOCIATED WITH ESTABLISHING AND INTEGRATING NEW
JOINT VENTURES. The growth and success of our company's business will depend to
a great extent on our ability to find and attract appropriate restaurant
concepts with which to form joint ventures in the future. We cannot provide
assurance that we will be able to
* identity suitable restaurant concepts,
* form joint ventures on commercially acceptable terms,
* effectively integrate the operations of any joint ventures with our
existing operations,
* manage effectively the combined operations of the businesses,
* achieve our operating and growth strategies with respect to the new
joint ventures, or
* reduce our overall selling, general, and administrative expenses
associated with the new joint ventures.
The integration of the management, personnel, operations, products, services,
technologies, and facilities of any businesses that we associate ourselves with
in the future could involve unforeseen difficulties. These difficulties could
disrupt our ongoing businesses, distract our management and employees, and
increase our expenses, which could have a material adverse affect on our
company's business, financial condition, and operating results.
WE DEPEND ON OUR CURRENT MANAGEMENT TEAM. Our company's success will depend to a
large degree upon the skills of our current management team and advisors and
upon our ability to identify, hire, and retain additional senior management,
sales, marketing, technical, and financial personnel. We may not be able to
retain our existing key personnel or to attract and retain additional key
personnel. The loss of any of our current executives, employees, or advisors or
the failure to attract, integrate, motivate, and retain additional key employees
could have a material adverse effect on our company's business. We do not have
"key person" insurance on the lives of any of our management team.
OUR COMPANY MAY NOT BE ABLE TO MANAGE ITS GROWTH. We anticipate a period of
significant growth. This growth could cause significant strain on our company's
managerial, operational, financial, and other resources. Success in managing
this expansion and growth will depend, in part, upon the ability of our senior
management to manage effectively the growth of our company. Any failure to
manage the proposed growth and expansion of our company could have a material
adverse effect on our company's business.
THERE IS NO ASSURANCE THAT OUR FUTURE PRODUCTS AND SERVICES WILL BE ACCEPTED IN
THE MARKETPLACE. Our products and services may not experience broad market
acceptance. Any market acceptance for our company's products and services may
not develop in a timely manner or may not be sustainable. New or increased
competition may result in market saturation, more competitive pricing, or lower
margins. Further, overall performance and user satisfaction may be affected by a
variety of factors, many of which will be beyond our company's control. Our
company's business, operating results, and financial condition would be
materially and adversely affected if the market for our products and services
fails to develop or grow, develops or grows more slowly than anticipated, or
becomes more competitive or if our products and services are not accepted by
targeted customers even if a substantial market develops.
WE MAY FACE STIFF COMPETITION. There are existing companies that offer or have
the ability to develop products and services that will compete with those that
our company may offer in the future. These include large, well-recognized
19
companies with substantial resources and established relationships in their
respective industries. Their greater financial, technical, marketing, and sales
resources may permit them to react more quickly to emerging technologies and
changes in customer requirements or to devote greater resources to the
development, promotion, and sale of competing products and services. Emerging
companies also may develop and offer products and services that compete with
those offered by our company.
WE OPERATE IN A HIGHLY REGULATED ENVIRONMENT. A business development company is
defined and regulated by the 1940 Act. A business development company must be
organized in the United States for the purpose of investing in or lending to
primarily private companies and making managerial assistance available to them.
A business development company may use capital provided by public shareholders
and from other sources to invest in long-term, private investments in
businesses. A business development company provides shareholders the ability to
retain the liquidity of a publicly traded stock, while sharing in the possible
benefits, if any, of investing in primarily privately owned companies.
As a business development company, we may not acquire any asset other than
"qualifying assets" unless, at the time we make the acquisition, the value of
our qualifying assets represent at least 70% of the value of our total assets.
An eligible portfolio company is generally a domestic company that is not an
investment company (other than a small business investment company wholly owned
by a business development company) and that:
* does not have a class of securities registered on an exchange or a
class of securities with respect to which a broker may extend margin
credit;
* is actively controlled by the 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 SEC.
Control under the 1940 act is presumed to exist where a business development
company beneficially owns more than 25% of the outstanding voting securities of
the portfolio company.
To include certain securities described above as qualifying assets for the
purpose of the 70% test, a business development company must make available to
the issuer of those securities significant managerial assistance such as
providing significant guidance and counsel concerning management, operations, or
business objectives and policies of a portfolio company or making loans to a
portfolio company. We offer to provide managerial assistance to each of our
portfolio companies.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure controls and procedures are designed with an objective of
ensuring that information required to be disclosed in our periodic reports filed
with the Securities and Exchange Commission, such as this Quarterly Report on
Form 10-Q, is recorded, processed, summarized and reported within the time
periods specified by the Securities and Exchange Commission. Disclosure controls
are also designed with an objective of ensuring that such information is
accumulated and communicated to our management, including our chief executive
officer and chief financial officer, in order to allow timely consideration
regarding required disclosures.
20
The evaluation of our disclosure controls by our principal executive
officer and principal financial officer included a review of the controls'
objectives and design, the operation of the controls, and the effect of the
controls on the information presented in this Quarterly Report. Our management,
including our chief executive officer and chief financial officer, does not
expect that disclosure controls can or will prevent or detect all errors and all
fraud, if any. A control system, no matter how well designed and operated, can
provide only reasonable, not absolute, assurance that the objectives of the
control system are met. Also, projections of any evaluation of the disclosure
controls and procedures to future periods are subject to the risk that the
disclosure controls and procedures may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
Based on their review and evaluation as of the end of the period covered by
this Form 10-Q, and subject to the inherent limitations all as described above,
our principal executive officer and principal financial officer have concluded
that our disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934) are effective as of the end
of the period covered by this report. They are not aware of any significant
changes in our disclosure 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. During the period covered by this Form 10-Q, there have not been any
changes in our internal control over financial reporting that have materially
affected, or that are reasonably likely to materially affect, our internal
control over financial reporting.
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not presently a party to any legal action.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the quarter ended December 31, 2004, the Company issued a total of
13,500,000 shares of Series C Preferred Stock for services The Company was not a
investment company at the time the stock was issued or the services were
performed.
Subsequent to December 31, 2004, the Company was notified by the Securities
and Exchange Commission ("Commission") that the terms of the Series C Preferred
Stock issued by the Company may be in violation of Section 23 of the Investment
Company Act of 1940. As a result, the Series C holders agreed to a 1:10 reverse
split of the Series C stock corresponding to the similar 1:10 reverse split of
the Company's common stock on January 14, 2005. Further, the Company has
restructured the terms of the Series C Preferred Stock. Most significantly, the
rights of the Series C Preferred Stock to convert to common stock and provisions
in the Series C Preferred Stock affording protections against capital
reorganization were eliminated.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None
21
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS
(a) The following exhibits are either attached hereto or incorporated herein by
reference as indicated:
Exhibit
Number Description
------ -----------
31.1 CEO Certification pursuant to SEC Release No. 33-8238, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 CFO Certification pursuant to SEC Release No. 33-8238, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 CEO Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 CFO Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
SIGNATURES
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.
Dated: April 18, 2006 /s/ Edward Heisler
---------------------------------------
Edward Heisler, Chief Executive Officer
Dated: April 18, 2006 /s/ Janet Crance
---------------------------------------
Janet Crance, Chief Financial Officer
Principal Accounting Officer
22