UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
[X] Annual Report Pursuant to Section 13 or 15(d) of The Securities Exchange
Act of 1934
For the Fiscal Year Ended June 30, 2005
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
(Issuers telephone number, including area code)
N/A
(former name or former address, if changed since last report)
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, $0.0001 par value
(Title of Class)
Check whether the Issuer (1) 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. Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-X contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K/A
or any amendment to this Form 10-K/A. [ ]
Indicate by checkmark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The aggregate market value of the voting stock held by non affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock as September 23, 2005 was $2,036,206, based
on the last sale price of $.03 as reported on the bulletin board.
The Registrant had 68,562,852 shares of common stock, $0.0001 par value,
outstanding as of September 23, 2005.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
Documents incorporated by reference: None
FRANCHISE CAPITAL CORPORATION
TABLE OF CONTENTS
PART I
ITEM 1. BUSINESS 3
ITEM 2. PROPERTIES 6
ITEM 3. LEGAL PROCEEDINGS 6
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 6
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 7
ITEM 6. SELECTED FINANCIAL DATA 7
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS 8
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK 10
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 12
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE 12
ITEM 9A. CONTROLS AND PROCEDURES 13
ITEM 9B. OTHER INFORMATION 13
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 14
ITEM 11. EXECUTIVE COMPENSATION 15
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS 16
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 17
ITEM 14. PRINCIPAL ACCOUNTANTS FEES AND SERVICES 17
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULE 17
SIGNATURES 18
2
PART I
FORWARD LOOKING STATEMENTS
This document includes statements that may constitute forward-looking statements
made pursuant to the Safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. The Company would like to caution certain readers regarding
certain forward-looking statements in this document and in all if its
communications to shareholders and others, on management's projections,
estimates and all other communications. Statements that are based on
management's projections, estimates and assumptions are forward-looking
statements. The words believe, expect, anticipate, intend and similar
expressions generally identify forward-looking statements. While the Company
believes in the veracity of all statements made herein, forward-looking
statements are necessarily based upon a number of estimates, and assumptions
that, while considered reasonable by the Company, are inherently subject to
significant business, economic and competitive uncertainties and contingencies
and know and unknown risks. Many of the uncertainties and contingencies,
including those specific matters described in the second paragraph of Item 7
below, can affect events and the Company's actual results and could cause its
actual results to differ materially from that expressed in any forward-looking
statements made by, or on behalf, of the Company.
ITEM 1. DESCRIPTION OF BUSINESS
Franchise Capital Corporation ("The Company") was formed as a Nevada corporation
on July 6, 2001 under the name Cortex Systems, Inc. They were originally a
development stage company that intended to establish memory clinics in several
different locations in North America. Unfortunately, the Company was unable to
successfully execute its business plan. In July of 2003, the Company changed its
name to BGR Corporation. Along with the name change came a new management and
ownership team. The intention of management is to acquire new innovative
fast-casual restaurant concepts, develop them into a profitable working design,
and franchise them across the country. The Corporation's partner, American
Restaurant Development Company, is a professional restaurant designer,
franchiser, and restaurant management company where principles have extensive
experience in the industry. In December of 2004 the Company changed its name to
Franchise Capital Corporation. The names "Franchise Capital Corporation", "we",
"our" and "us" used in this report refer to Franchise Capital Corporation.
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 plans to focus on current
opportunities available to this attractive business model in these somewhat
uncertain economic times.
INVESTMENT STRATEGY
As a Business Development Company, the Company is required to have at lease 70%
of its assets in "eligible portfolio companies." It is stated in the Investment
Committee Charter that the Company will endeavor to maintain this minimum asset
ratio.
PORTFOLIO INVESTMENTS
COMSTOCK JAKE'S FRANCHISE CO., LLC
Comstock Jake's is a fast-casual/full-service family style dinner house concept.
Jake's is designed for end-cap and/or in-line locations with the typical square
footage being 2800-3200 sq./ft, and seating for 80-100 inside and 30 in a patio
setting. The principle feature of the restaurant is their special blend of top
sirloin hamburgers, sized to their specifications, delivered fresh, never
frozen. They serve all sandwiches on fresh-baked buns, baked daily in each
store. Jake's offers a unique variety of foods beyond their hamburgers, as the
menu is designed to appeal to a diverse guest mix, including young, old, and the
young-at-heart. Such tasty fare as grilled ribs, grilled chicken breast
sandwiches, roasted chicken, gourmet salads, homemade hearty soups, corn bread,
beer and wine, and ice cream shakes and sundaes, along with fast, friendly
service, will play a part in Comstock Jake's success
3
COUSIN VINNIE'S FRANCHISE CO., LLC
Cousin Vinnie's Italian Diner is a Roman-inspired Italian Diner offering
appetizers, made-to-order pasta dishes, thin crust pizzas, special meats,
seafood and chicken (delivered fresh, never frozen), paninis, soups, salads and
desserts all made to order in the customer's full view. This Italian eatery is
set in a casual, sophisticated, upscale environment that is incredibly fresh and
consistently satisfying. Cousin Vinnie's is postured closer to casual dining
than the typical fast-casual format. This will position Cousin Vinnie's to
realize a $20-per-person daylong check average, with a solid lunch business with
an $8-$9 average check. Cousin Vinnie's is designed for end-cap and/or in-line
locations, a third of the cost paying for a typical freestanding building. The
typical square footage is 2800-3200 sq/ft, with seating for 85-110 inside and 30
in a patio setting.
KIRBY FOO'S FRANCHISE CO., LLC
Kirby Foo's is a high-end, full-service/fast-casual Asian Grill concept and is
positioned closer to casual dining than the typical fast-casual format. Kirby
Foo's is designed for end-cap and/or in-line locations with the typical square
footage being 2500-3000 sq./ft, and seating for 70-90 inside and 30 in a patio
setting. Kirby Foo's food is simply prepared and of the highest quality and they
offer a wide variety of food products, all of which are prepared in a casual
dining environment. They serve special meats, seafood, and chicken all prepared
to their specifications, delivered fresh, never frozen. Kirby Foo's is unique in
the variety of foods they offer beyond the typical Asian fare, such as Blackened
Ahi Katsu, Panko Fried Filet of Beef, Nori Crusted Seabass, Crispy Pork Won
Tons, Shrimp Thai-Fu, and Peking Roasted Duck. All designed to contribute to a
diverse guest mix and high guest frequency.
KOKOPELLI FRANCHISE CO., LLC
Kokopelli Sonoran Grill, founded in Phoenix, Arizona in 1997, specializes in
Sonoran/Mexican cuisine featuring made-to-order big-burritos, tacos, fajitas,
and other Mexican favorites. Kokopelli's uses only the freshest ingredients with
no preservatives, additives, or conditioners and only the highest quality meats,
chicken, and seafood products at a reasonable price. Kokopelli differentiates
itself from other fast-casual chains such as Chipotle, QDOBA, and Baja Fresh by
serving authentic hand-blended Sonoran spices, beans slow-cooked everyday (never
refried) and tortillas steamed to order, not held in a warmer. Additionally,
Kokopelli serves many items found in full service Mexican restaurants such as
Grilled Salmon with Mango Salsa, Steak Verde with Tomatilla Salsa, Pollo
Colorado with Smoked Cheese and Peppers, beer, wine and frozen-margaritas, and
also offers a variety of healthful and low-carb meal options.
FATHOM BUSINESS SYSTEMS, INC.
Fathom Business Systems is a licensed dealer of Point of Sale (POS) systems for
restaurants of all types and sizes. Its president, James Medeiros, who has over
25 years of experience in the foodservice industry, heads the company. With a
thorough working knowledge of restaurants, the company strives for
cost-effective POS solutions for its clients. Fathom does not just sell register
systems to restaurants, but also installs, services, and maintains them. The
company is known for its fast, friendly, and personalized service.
FIT-N-HEALTHY FRANCHISE COMPANY, LLC
Fit & Healthy Market Cafe is a concept that will serve great tasting, nutritious
meal that fits into a healthy lifestyle. Each Fit-n-Healthy Market Cafe combines
a quick-serve restaurant with a convenience-style retail store that carries the
best health-oriented consumable products available for purchase.
CHANGES IN OUR CORPORATE STRUCTURE
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.
4
Effective January 14, 2005, we implemented a one for 10 reverse split of our
common stock. All share and per share amounts presented in our financial
statements which are part of this Annual Report on Form 10-K/A, have been
restated retroactively to reflect the split as if it had occurred on the first
day of the first period presented, or July 1, 2004.
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.
EMPLOYEES
During the fiscal year ended June 30, 2005, Franchise Capital Corporation had
one employee. Management intends to hire additional employees only as needed and
as funds are available. In such cases compensation to management and employees
will be considered with prevailing wages for services rendered.
COMPLIANCE WITH THE SARBANES-OXLEY ACT OF 2002
On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002
(the "Sarbanes-Oxley Act"). The Sarbanes-Oxley Act imposes a wide variety of new
regulatory requirements on publicly held companies and their insiders. Many of
these requirements will affect us. For example:
- Our chief executive officer and chief financial officer must now
certify the accuracy of the financial statements contained in our
periodic reports;
- Our periodic reports must disclose our conclusions about the
effectiveness of our controls and procedures;
- Our periodic reports must disclose whether there were significant
changes in our 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
- We may not make any loan to any director or executive officer and we
may not materially modify any existing loans.
The Sarbanes-Oxley Act has required us to review our current policies and
procedures to determine whether we comply with the Sarbanes-Oxley Act and the
new regulations promulgated thereunder. We will continue to monitor our
compliance with all future regulations that are adopted under the Sarbanes-Oxley
Act and will take actions necessary to ensure that we are in compliance
therewith.
CODE OF ETHICS, AUDIT COMMITTEE CHARTER AND INVESTMENT COMMITTEE CHARTER
The Board of Directors of the Company adopted a Code of Ethics, an Audit
Committee Charter and an Investment Committee Charter on December 23, 2004.
The Code of Ethics in general prohibits any officer, director or advisory person
(collectively, "Access Person") of the Company from acquiring any interest in
any security which the Company (i) is considering a purchase or sale thereof,
(ii) is being purchased or sold by the Company, or (iii) is being sold short by
the Company. The Access Person is required to advise the Company in writing of
his or her acquisition or sale of any such security. Franchise Capital
Corporation's code of ethics was filed as an exhibit to its Form 10-K filed
September 29, 2005.
The primary responsibility of the Audit Committee is to oversee the Company's
financial reporting process on behalf of the Company's Board of Directors and
report the result of their activities to the Board. Such responsibilities shall
exclude but shall not be limited to, the selection, and if necessary the
5
replacement of the Company's independent auditors, review and discuss with such
independent auditors and the Company's internal audit department (i) the overall
scope and plans for the audit, (ii) the adequacy and effectiveness of the
accounting and financial controls, including the Company's system to monitor and
manage business risks, and legal and ethical programs, and (iii) the results of
the annual audit, including the financial statements to be included in the
Company's annual report on Form 10-K. Franchise Capital Corporation's audit
committee charter was filed as an exhibit to its Form 10-K filed September 29,
2005.
The Investment Committee shall have oversight responsibility with respect to
reviewing and overseeing the Company's contemplated investments and portfolio
companies and investments on behalf of the Board and shall report the results of
their activities to the Board. Such Investment Committee shall (i) have the
ultimate authority for and responsibility to evaluate and recommend investments,
and (ii) review and discuss with management (a) the performance of portfolio
companies, (b) the diversity and risk of the Company's investment portfolio,
and, where appropriate, make recommendations respecting the role or addition of
portfolio investments and (c) all solicited and unsolicited offers to purchase
portfolio companies. Franchise Capital Corporation's investment committee
charter was filed as an exhibit to its Form 10-K filed September 29, 2005.
ITEM 2. PROPERTIES
The Company maintains it offices at 7400 E. McDonald Suite 121, Scottsdale, AZ
85050, where it subleases three offices spaces at a monthly rate of $2,889.00.
The lease term is month to month. Management believes that its facilities are
adequate for its present business.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A special meeting of shareholders of Franchise Capital Corporation was held on
December 16, 2004 where the following matters were voted upon, and approved, by
the shareholders:
a) To authorize 5,030,000,000 shares of capital stock of the Company, of
which 5 billion shares will relate to Common Stock and 30,000,000
million shares will relate to preferred stock, subject to further
designation by the Board of Directors of the Company; and
b) To amend Article I of the Articles of Incorporation to read as
follows: "The name of this corporation is Franchise Capital
Corporation", and
c) To effect one-for-ten reverse stock split of the Company's common
stock (the "Common Stock") by reducing the number of issued and
outstanding shares of Common Stock from 48,458,351 to approximately
4,845,835 (the "Reverse Split"); and
d) To authorize the Company's Board of Directors, without the consent of
the stockholders of the corporation, to adopt any recapitalization
affecting the outstanding shares of capital stock of the corporation
by effecting a forward or reverse split of all of the outstanding
shares of any class of capital stock of the corporation, with
appropriate adjustments to the corporation's capital accounts,
provided that the recapitalization does not affect the ratio of
unissued to authorized capital stock of that class; and
e) To approve the issuance of 2,777,500 warrants to purchase shares of
the Company's common stock.
f) To approve the Company's Stock Option Plans.
6
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS
MARKET INFORMATION
The Company's Common Stock is traded on the OTCBB (Over-The-Counter Bulletin
Board) under the symbol "FCCN". The following table sets forth the trading
history of the Common Stock on the Bulletin Board for each quarter since June
2004 through June 30, 2005, as reported by Dow Jones Interactive. The quotations
reflect inter-dealer prices, without retail mark-up, markdown or commission and
may not represent actual transactions.
Quarter Ending Quarterly High Quarterly Low Quarterly Close
-------------- -------------- ------------- ---------------
9/30/2004 0.053 0.046 0.051
12/31/2004 0.015 0.013 0.013
3/31/2005 0.10 0.083 0.91
6/30/2005 0.027 0.020 0.022
HOLDERS OF RECORD
As of June 30, 2005 there were approximately 72 holders of record of the
Company's common stock.
DIVIDENDS
The Company has never paid a cash dividend on its common stock. Payment of
dividends is at the discretion of the Board of Directors. The Board of Directors
plans to retain earnings, if any, for operations and does not intend to pay
dividends in the foreseeable future.
RECENT SALES OF UNREGISTERED SECURITIES
Except as otherwise noted, the securities described in this Item 5 were issued
pursuant to the exemption from registration \provided by Section 4(2) of the
Securities Act of 1933. Each such issuance was made pursuant to individual
contracts which are discrete from one another and are made only with persons who
were sophisticated in such transactions and who had knowledge of and access to
sufficient information about the Company to make an informed investment
decision. Among the information provided was the fact that the securities issued
were restricted securities. No commissions were paid in connection with the
transactions described below unless specifically noted.
As of June 30, 2005 Franchise Capital Corporation had 32,927,305 shares of
common stock outstanding.
ITEM 6. SELECTED FINANCIAL DATA
Financial Position as of June 30:
2005 2004 2003 2002
----------- ----------- ----------- ----------
Total asset $ 1,026,177 $ 355,199 $ -- $ 73,772
Total liabilities $ 678,868 $ 517,400 $ 25 $ 34,444
Net assets $ 347,309 $ (162,201) $ (25) $ 39,328
Net asset value per outstanding share $ 0.01 $ (0.005) $ (0.00) $ 0.007
Shares outstanding, end of fiscal year 32,927,305 34,652,400 34,573,800 5,762,300
7
Operating Data:
January 1, 2005 July 1, 2004
to June 30, to December 31, June 30, June 30, June 30,
2005(1) 2004 2004 2003 2002
---------- ---------- ----------- ---------- ---------
Total investment income $ -- $ 62,334 $ 108,974 $ 2,625 $ 68
Total expenses $ 750,103 $ 791,805 $ 5,341,766 $ 41,978 $ 37,590
Net operating (loss) income $ (584,499) $ (188,018) $(5,405,130) $ (39,353) $ (37,522)
Total tax expense (benefit) $ -- $ -- $ -- $ -- $ --
Net realized income (loss) from
investments $ (293,480) $ -- $ -- $ -- $ --
Net unrealized income (loss) from
investments $ 459,084 $ -- $ --- $ --- $ --
----------
(1) The Company began operating as a Business Development Corporation on
December 23, 2004, all prior period figures are based on the operations of
present portfolio companies.
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following information should be read in conjunction with the consolidated
financial statements and notes thereto appearing elsewhere in this Form 10-K/A.
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 10K/A. The 10K/A, 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 Annual
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,
8
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.
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.
On May 16, 2004 the Company gained an additional 50% control of Kokopelli
Franchise Company, LLC for a total of 100% by the way of a "Buy-Sell" offer
within the operating agreement the Company had with AZTECA Wrap Foods, LLC. The
purchase price for the 50% was $250,000.
In June of 2005 the Company created Fit-n-Healthy Franchise Company, LLC. Fit &
Healthy Market Cafe is a concept that will serve great tasting, nutritious meal
9
that fits into a healthy lifestyle. Each Fit-n-Healthy Market Cafe combines a
quick-serve restaurant with a convenience-style retail store that carries the
best health-oriented consumable products available for purchase.
PLAN OF OPERATION
On December 23, 2004 the Company's Board of Directors elected to be regulated as
a business investment company under the Investment Company Act of 1940. As a
business development company ("BDC"), the Company is required to maintain at
least 70% of its assets invested in "eligible portfolio companies", which are
loosely defined as any domestic company which is not publicly traded or that has
assets less than $4 million.
As of December 29, 2004, management has recognized that there is a deficiency in
liquidity. Such deficiency has been noted in the notes to the financial
statements and the audit opinion. To remedy this situation, the Board of
Directors authorized management to file Form 1-E with the Commission notifying
of its intent to sell up to $5 million of the Company's common stock under a
Regulation E exemption.
As of June 30, 2005 Franchise Capital Corporation held six portfolio companies.
In August of 2005 the Company sold Fit-n-Healthy Franchise Company, LLC and
presently has five portfolio investment, Fathom Business Systems, Inc., Comstock
Jakes' Franchise Co., LLC, Cousin Vinnie's Franchise Co., LLC, Kirby Foo's
Franchise Co., LLC and Kokopelli Franchise Co., LLC.
Currently, there are no commitments for material expenditures. It should be
noted that the Company's auditors Epstein, Weber & Conover, P.L.C. have
expressed in their audit opinion letter that there is substantial doubt about
the Company's ability to continue as a going concern.
LIQUIDITY AND CAPITAL RESOURCES
The Company's financial statements present an impairment in terms of liquidity.
As of June 30, 2005 the Company had $1,026,177 in assets and the Company's total
assets exceeded total liabilities by approximately $347,309. The Company has
accumulated $6,254,522 of net operating losses through June 30, 2005, which may
used to reduce taxes in future years through 2022. The use of these losses to
reduce future income taxes will depend on the generation of sufficient taxable
income prior to the expiration of the net operating loss carry-forwards. The
potential tax benefit of the net operating loss carry-forwards have been offset
by a valuation allowance of the same amount. The Company has not yet established
revenues to cover its operating costs. Management believes that the Company will
soon be able to generate revenues sufficient to cover its operating costs
through the acquisition of operating subsidiaries. In the event the Company is
unable to do so, and if suitable financing is unavailable, there is substantial
doubt about the Company's ability to continue as a going concern.
RESULTS OF OPERATION
For the year ended June 30, 2005 the Company had a net loss of $772,517 compared
to a net loss of $5,405,130 for year ended June 30, 2004.
RECENT DEVELOPMENTS -- PORTFOLIO COMPANIES
Kokopelli Franchise Company, LLC, a portfolio company specializing in the
franchising of fast, casual Sonoran style food, opened its first franchised
restaurant in April. We anticipate receiving management fee income from the
management of this location. Also, on August 29, 2005 Franchise Capital
Corporation signed a purchase agreement with Azteca Wrap Foods, LLC. The
property acquired was an additional fifty percent (50%) interest in Kokopelli
Franchise Company, LLC
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are subject to various risks that may materially harm our business, financial
condition and results of operations. You should carefully consider the risks and
uncertainties described below and the other information in this filing before
deciding to purchase our common stock. If any of these risks or uncertainties
actually occurs, our business, financial condition or operating results could be
materially harmed. In that case, the trading price of our common stock could
decline and you could lose all or part of your investment.
10
RISKS RELATED TO OUR BUSINESS
WE HAVE HISTORICALLY LOST MONEY AND LOSSES MAY CONTINUE IN THE FUTURE
We have historically lost money. The loss for the 2005 fiscal year was
approximately $772,517 and future losses are likely to occur. Accordingly, we
may experience significant liquidity and cash flow problems if we are not able
to raise additional capital as needed and on acceptable terms. No assurances can
be given that we will be successful in reaching or maintaining profitable
operations.
WE WILL NEED TO RAISE ADDITIONAL CAPITAL TO FINANCE OPERATIONS
Our operations have relied almost entirely on external financing to fund our
operations. Such financing has historically come from a combination of
borrowings and from the sale of common stock and assets to third parties. We
will need to raise additional capital to fund our anticipated operating expenses
and future expansion. Among other things, external financing will be required to
cover our operating costs. We cannot assure you that financing whether from
external sources or related parties will be available if needed or on favorable
terms. The sale of our common stock to raise capital may cause dilution to our
existing shareholders. Our inability to obtain adequate financing will result in
the need to curtail business operations. Any of these events would be materially
harmful to our business and may result in a lower stock price.
THERE IS SUBSTANTIAL DOUBT ABOUT OUR ABILITY TO CONTINUE AS A GOING CONCERN DUE
TO RECURRING LOSSES AND WORKING CAPITAL SHORTAGES, WHICH MEANS THAT WE MAY NOT
BE ABLE TO CONTINUE OPERATIONS UNLESS WE OBTAIN ADDITIONAL FUNDING
The report of our independent accountants on our June 30, 2004 financial
statements included an explanatory paragraph indicating that there is
substantial doubt about our ability to continue as a going concern due to
recurring losses and working capital shortages. Our ability to continue as a
going concern will be determined by our ability to obtain additional funding.
Our financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
OUR COMMON STOCK MAY BE AFFECTED BY LIMITED TRADING VOLUME AND MAY FLUCTUATE
SIGNIFICANTLY
There has been a limited public market for our common stock and there can be no
assurance that an active trading market for our common stock will develop. As a
result, this could adversely affect our shareholders' ability to sell our common
stock in short time periods, or possibly at all. Our common stock has
experienced, and is likely to experience in the future, significant price and
volume fluctuations that could adversely affect the market price of our common
stock without regard to our operating performance. In addition, we believe that
factors such as quarterly fluctuations in our financial results and changes in
the overall economy or the condition of the financial markets could cause the
price of our common stock to fluctuate substantially. Substantial fluctuations
in our stock price could significantly reduce the price of our stock.
OUR COMMON STOCK IS TRADED ON THE "OVER-THE-COUNTER BULLETIN BOARD," WHICH MAY
MAKE IT MORE DIFFICULT FOR INVESTORS TO RESELL THEIR SHARES DUE TO SUITABILITY
REQUIREMENTS
Our common stock is currently traded on the Over the Counter Bulletin Board
(OTCBB) where we expect it to remain for the foreseeable future. Broker-dealers
often decline to trade in OTCBB stocks given that the market for such securities
is often limited, the stocks are more volatile, and the risk to investors are
greater. These factors may reduce the potential market for our common stock by
reducing the number of potential investors. This may make it more difficult for
investors in our common stock to sell shares to third parties or to otherwise
dispose of them. This could cause our stock price to decline.
WE COULD FAIL TO RETAIN OR ATTRACT KEY PERSONNEL
Our future success depends, in significant part, on the continued services of
Edward Heisler our Chief Executive. We cannot assure you that we would be able
to find an appropriate replacement for key personnel. Any loss or interruption
of our key personnel's services could adversely affect our ability to develop
our business plan. We have no employment agreements or life insurance on Mr.
Heisler.
11
NEVADA LAW AND OUR CHARTER MAY INHIBIT A TAKEOVER OF OUR COMPANY THAT
STOCKHOLDERS MAY CONSIDER FAVORABLE
Provisions of Nevada law, such as its business combination statute, may have the
effect of delaying, deferring or preventing a change in control of our company.
As a result, these provisions could limit the price some investors might be
willing to pay in the future for shares of our common stock.
OUR OFFICERS AND DIRECTORS HAVE THE ABILITY TO EXERCISE SIGNIFICANT INFLUENCE
OVER MATTERS SUBMITTED FOR STOCKHOLDER APPROVAL AND THEIR INTERESTS MAY DIFFER
FROM OTHER STOCKHOLDERS
Our executive officers and directors have the ability to appoint a majority to
the Board of Directors. Accordingly, our directors and executive officers,
whether acting alone or together, may have significant influence in determining
the outcome of any corporate transaction or other matter submitted to our Board
for approval, including issuing common and preferred stock, and appointing
officers, which could have a material impact on mergers, acquisitions,
consolidations and the sale of all or substantially all of our assets, and also
the power to prevent or cause a change in control. The interests of these board
members may differ from the interests of the other stockholders.
RISKS RELATED TO OUR OPERATION AS A
BUSINESS DEVELOPMENT COMPANY
WE MAY CHANGE OUR INVESTMENT POLICIES WITHOUT FURTHER SHAREHOLDER APPROVAL
Although we are limited by the Investment Company Act of 1940 with respect to
the percentage of our assets that must be invested in qualified investment
companies, we are not limited with respect to the minimum standard that any
investment company must meet, nor the industries in which those investment
companies must operate. We may make investments without shareholder approval and
such investments may deviate significantly from our historic operations. Any
change in our investment policy or selection of investments could adversely
affect our stock price, liquidity, and the ability of our shareholders to sell
their stock.
OUR INVESTMENTS MAY NOT GENERATE SUFFICIENT INCOME TO COVER OUR OPERATIONS
We intend to make investments into qualified companies that will provide the
greatest overall return on our investment. However, certain of those investments
may fail, in which case we will not receive any return on our investment. In
addition, our investments may not generate income, either in the immediate
future, or at all. As a result, we may have to sell additional stock, or borrow
money, to cover our operating expenses. The effect of such actions could cause
our stock price to decline or, if we are not successful in raising additional
capital, we could cease to continue as a going concern.
ITEM 8. FINANCIAL STATEMENTS
See the financial statements annexed to this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
12
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures. Based on an evaluation under
the supervision and with the participation of the our management as of a date
within 90 days of the filing date of this Annual Report on Form 10-K/A, our
principal executive officer and principal financial officer have concluded that
our disclosure controls and procedures (as defined in Rules 13a-14(c) and
15d-14(c) under the Securities Exchange Act of 1934, are effective to ensure
that information required to be disclosed in reports that we file or submit
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in SEC rules and forms.
Changes in Internal Controls. There were no significant changes in our internal
controls or in other factors that could significantly affect these controls
subsequent to the date of their evaluation. There were no significant
deficiencies or material weaknesses, and therefore there were no corrective
actions taken. However, the design of any system of controls is based in part
upon certain assumptions about the likelihood of future events and there is no
certainty that any design will succeed in achieving its stated goal under all
potential future considerations, regardless of how remote.
ITEM 9B. OTHER INFORMATION
Not applicable.
13
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The executive officers and directors of the Company as of September 27, 2005 are
as follows:
Name Age Position
---- --- --------
Edward Heisler 39 Chief Executive Officer, President, Chief
Compliance Officer, Secretary and Chairman
Janet Crance 49 Treasurer
Robert Madia 71 Director
Gordon Sales 68 Director
Robert McCoy 62 Director
The business experience of each of the persons listed above is as follows:
EDWARD HEISLER, CHIEF EXECUTIVE OFFICER, PRESIDENT, CHIEF COMPLIANCE OFFICER,
SECRETARY AND CHAIRMAN, Mr. Heisler has focused his attention on the compliance
needs of small public companies. Drawing from his years of experience Mr.
Heisler has provided and continues to provide services such as preparing and
coordinating SEC filings, business and business plan development, investor
relations and other various consulting. As president and chief executive officer
of one publicly traded company, Mr. Heisler increased sales by 200% in his first
quarter. While with automotive giant DaimlerChrysler, he resolved union and
management training issues, acquired millions of dollars for training from state
and federal sources, facilitated seminars in lean manufacturing including
tracking techniques, communication, cost-cutting, and enhanced productivity. He
was also responsible for the training of over a thousand DaimlerChrysler
employees. As Continuous Improvement Specialist at DaimlerChrysler, he
implemented ongoing initiatives, facilitated in-plant tracking boards, and
developed procedures and data tracking for ISO 9002/QS 9000 compliance.
JANET CRANCE, CHIEF FINANCIAL OFFICER, TREASURER AND DIRECTOR, Ms. Crance, who
holds a Bachelor's Degree in Business Administration, has over 27 years
experience in the accounting profession. She is a Certified Public Accountant
and is President of Janet L. Crance, PC, a public accounting firm specializing
in small business accounting, tax compliance and business consulting.
ROBERT MADIA, INDEPENDENT DIRECTOR, Mr. Madia has owned and operated an
insurance agency in the Pittsburgh area since 1957. The agency handles all types
of insurance for individuals and businesses. Along with a couple of non-profit
organizations, he is also on the board of directors of a large, regional,
bottled water company in Virginia and North Carolina, Diamond Springs Water
Company.
ROBERT MCCOY, INDEPENDENT DIRECTOR, Mr. McCoy is an experienced senior
executive. As president of Marquis Elevator, Inc. from 1975 to 1990, he built
and then later sold the largest independent elevator company in Nevada.
Subsequent to selling Marquis Elevator, Mr. McCoy was the General Manager of
Canyon Investments, Inc. in Las Vegas Nevada from 1990 to 1996. Since 1996, Mr.
McCoy has served as Facilities Manager for the Church of Jesus Christ of Latter
Day Saints, responsible for 487,000 square feet of facilities in the Las Vegas
area. Mr. McCoy is a graduate of the University of Tennessee.
GORDON J. SALES, INDEPENDENT DIRECTOR, is the president and CEO of Crystal
Graphite Corporation. In addition, his past experiences have included several
executive positions with various public companies. Mr. Sales brings a high level
of operating management and marketing skills, and will provide Franchise Capital
Corporation with a wealth of experience as an outside director.
MEETINGS
During the year ended June 30, 2005 the Board of Directors met on twenty six
occasions. Each incumbent Director attended at least 70% of the total number of
meetings of the Board of Directors.
COMPENSATION OF DIRECTORS
Our independent directors are compensated $500.00 per board meeting and any
necessary expenses to attend meeting. Our independent directors received no
other consideration in exchange for their services to the company, nor did they
perform any service that would fall outside the scope of their duties as
directors.
14
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth the annual and long-term compensation for
services in all capacities for the years ended June 30, 2005, June 30, 2004 and
June 30, 2003 paid to Bradford Miller. On July 13, 2005, Bradford Miller
voluntarily resigned as President, CEO and Chairman. Effective as of the same
date, to fill the vacancies created by Bradford Miller's resignation, the Board
of Directors appointed Edward Heisler to be the Company's President, CEO and
Chairman. No other executive officers received compensation exceeding $100,000
during the year ended June 30, 2005.
Summary Compensation Table
Annual Compensation Long Term Compensation
-------------------------------- ---------------------------------------
Awards
----------
Other Restricted Securities
Annual Stock Underlying All Other
Name and Principal Position Year Salary Bonus Compensation Award(s) Options Compensation
--------------------------- ---- ------ ----- ------------ -------- ------- ------------
Brad Miller 2003 $ 0 $ 0 $ 0 -- -- --
President 2004 $100,000 $ 0 $ 0 1,000,000 -- --
2005 $100,000 $ 0 $ 0 -- -- --
EMPLOYMENT AGREEMENTS
The Company does not currently have any employment agreements in place.
INDEMNIFICATION
As permitted by the provisions of the General Corporation Law of the State of
Nevada, the Company has the power to indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that the person is or was a director,
officer, employee or agent of the corporation if such officer or director acted
in good faith and in a manner reasonably believed to be in or not opposed to the
best interest of the Company. Any such person may be indemnified against
expenses, including attorneys' fees, judgments, fines and settlements in defense
of any action, suit or proceeding. The Company does not maintain directors and
officers liability insurance.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires Franchise Capital
Corporation's executive officers and directors, and persons who own more than
ten percent (10%) of a registered class of Franchise Capital Corporation's
equity securities, to file an initial report of ownership on Form 3 and changes
in ownership on Form 4 or 5 with the Securities and Exchange Commission (the
"SEC"). Such officers, directors and ten percent (10%) shareholders are also
required by the SEC rules to furnish Franchise Capital Corporation with copies
of all Section 16(a) forms they file.
Based solely on its review of the copies of such forms received by it, or
written representations from certain reporting persons that no Forms 5 were
required for such persons, Franchise Capital Corporation believes that its
executive officers, directors and ten percent (10%) shareholders complied with
all Section 16(a) filing requirements applicable to them through the fiscal year
ended June 30, 2005, except for the following:
Robert Madia filed a Form 3 report on May 6, 2005 to report ownership of 152,245
shares of common stock and 125,000 shares of Franchise Capital Corporation
Series C preferred stock.
Bradford Miller filed a Form 3 report on April 26, 2005 to report ownership of
750,000 shares of Franchise Capital Corporation Series C preferred stock.
15
Edward Heisler filed a Form 3 report on April 26, 2005 to report ownership of
253,709 shares of common stock and 450,000 shares of Franchise Capital
Corporation Series C preferred stock.
Janet Crance filed a Form 3 report on April 26, 2005 to report ownership of
200,000 shares of Franchise Capital Corporation Series C preferred stock.
Alan Smith filed a Form 3 report on April 26, 2005 to report ownership of
450,000 shares of Franchise Capital Corporation Series C preferred stock.
Robert Madia filed a Form 3 report on April 26, 2005 to report ownership of
152,245 shares of common stock and 125,000 shares of Franchise Capital
Corporation Series C preferred stock.
Janet Crance filed a Form 3 report on November 30, 2004 to report ownership of
500,000 shares of Franchise Capital Corporation common stock.
Jerry Brown filed a Form 3 report on November 30, 2004 to report ownership of
2,350,000 shares of Franchise Capital Corporation common stock.
James Medeiros filed a Form 3 report on November 30, 2004 to report ownership of
1,000,000 shares of Franchise Capital Corporation common stock.
Bradford Miller filed a Form 3 report on November 30, 2004 to report ownership
of 1,333,333 shares of Franchise Capital Corporation common stock.
Alan Smith filed a Form 3 report on November 30, 2004 to report ownership of
1,166,666 shares of Franchise Capital Corporation common stock.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information, to the best knowledge of the
Company, as of September 23, 2005 with respect to each person known by Franchise
Capital Corporation to own beneficially more than 5% of the outstanding Common
Stock, each director and officer, and all directors and officers as a group.
Number of Shares Percentage of
Name and Address (1) Beneficially Owned Class Class (2)
-------------------- ------------------ ----- ---------
Edward Heisler
Chief Executive Officer, Chief 253,709 Common *
Compliance Officer, Secretary and 450,000 Series C Preferred(3) 3%
Chairman
Janet Crance
Chief Financial Officer, Treasurer 50,000 Common *
and Director 200,000 Series C Preferred 2%
Robert Madia 152,245 Common *
Director 450,000 Series C Preferred 3%
Gordon Sales 116,667 Common *
Director 450,000 Series C Preferred 3%
Robert McCoy
Director 0 Common *
All directors and executive 572,621 Common 1%
officers (5 persons) 1,550,000 Series C Preferred 12%
----------
* Denotes less than 1%
(1) Unless indicated otherwise, the address for each of the above listed is c/o
Franchise Capital Corporation at 7400 E. McDonald Suite 121, Scottsdale, AZ
85050.
(2) The above percentages are based on 68,562,852 shares of common stock and
13,187,500 shares of Series C Preferred Stock outstanding as of September
23, 2005
(3) Series C Preferred Stock has no voting rights, but is convertible in to
common stock on a 1:1 basis and can, as a class, elect three members of the
Board of Directors, provided that a majority of the Board is, at all times,
independent.
16
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company's officers and directors are subject to the doctrine of corporate
opportunities only insofar as it applies to business opportunities in which the
Company has indicated an interest, either through its proposed business plan or
by way of an express statement of interest contained in the Company's minutes.
If directors are presented with business opportunities that may conflict with
business interests identified by the Company, such opportunities must be
promptly disclosed to the Board of Directors and made available to the Company.
In the event the Board shall reject an opportunity that was presented to it and
only in that event, any of the Company's officers and directors may avail
themselves of such an opportunity. Every effort will be made to resolve any
conflicts that may arise in favor of the Company. There can be no assurance,
however, that these efforts will be successful.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
AUDIT FEES
The aggregate fees billed by the Company's auditors for the professional
services rendered in connection with the audit of the Company's annual financial
statements for fiscal 2005 and reviews of the financial statements included in
the Company's Forms 10-KSB for fiscal 2004 were approximately $19,000 and
$20,000, respectively.
AUDIT RELATED FEES
None
TAX FEES
None
ALL OTHER FEES
The aggregate fees billed by the Company's auditors for all other non-audit
services rendered to the Company, such as attending meetings and other
miscellaneous financial consulting in fiscal 2005 and 2004 were $0 and $0,
respectively.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULE
(a)(1)(2) FINANCIAL STATEMENTS. See index to financial statements and supporting
schedules.
(a)(3) EXHIBITS.
The following exhibits are filed as part of this statement:
The exhibits listed below are required by Item 601 of Regulation S-B. Each
management contract or compensatory plan or arrangement required to be filed as
an exhibit to this Form 10-K/A has been identified.
Exhibit No. Description Location
----------- ----------- --------
3.1 Articles of Incorporation *
3.3 Amendment to articles of incorporation, dated December 16, 2004 ***
3.2 Bylaws *
14 Code of Ethics adopted December 23,2004 **
31.1 Certification of Chief Executive Officer pursuant to Section 302 ***
of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to Section 302 ***
of the Sarbanes-Oxley Act of 2002
17
32.1 Certification of Chief Executive Officer pursuant to Section 906 ***
of the Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer pursuant to Section 906 ***
of the Sarbanes-Oxley Act of 2002
99(i) Audit Committee Charter adopted December 23, 2004 **
99.2(ii) Investment Committee Charter adopted December 23, 2004 **
----------
* Incorporated by reference from Franchise Capital Corporation's Registration
Statement on Form SB-2 filed on October 29, 2001.
** Incorporated by reference from Franchise Capital Corporation's Annual
Report on Form 10-K for the Year Ended June 30, 2005 filed on September 30,
2005.
*** Filed herewith.
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.
FRANCHISE CAPITAL CORPORATION
By: /s/ Edward Heisler
-----------------------------
Edward Heisler
Chief Executive Officer
Dated: April 18, 2006
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Robert Madia Director April 18, 2006
-----------------------------
Robert Madia
/s/ Robert McCoy Director April 18, 2006
-----------------------------
Robert McCoy
/s/ Don Allio Director April 18, 2006
-----------------------------
Don Allio
/s/ Donald Schwall Director April 18, 2006
-----------------------------
Donald Schwall
/s/ Janet Crance CFO April 18, 2006
-----------------------------
Janet Crance
18
FRANCHISE CAPITAL CORPORATION
FINANCIAL STATEMENTS
JUNE 30, 2005
CONTENTS
PAGE NUMBER
-----------
Report of Independent Registered Public Accounting Firm F-2
Portfolio of Investments F-3
Statements of Assets and Liabilities F-5
Statements of Operations F-6
Statements of Changes in Net Assets F-7
Statements of Stockholders' Equity (Deficit) F-8
Statements of Cash Flows F-10
Notes to the Financial Statements F-13
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors of
Franchise Capital Corporation:
We have audited the accompanying statement of assets and liabilities of
Franchise Capital Corporation (the "Company"), including the schedule of
investments, as of June 30, 2005, and the related statements of operations, and
cash flows for the six months and year then ended and the statements of changes
in net assets for each of the two years in the period ended June 30, 2005. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Standards Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, based on our audits, the financial statements referred to above
present fairly, in all material respects, the financial position of Franchise
Capital Corporation as of June 30, 2005, and the results of its operations and
cash flows for the year then ended and the changes in its net assets for each of
the two years in the period ended June 30, 2005, in conformity with accounting
principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has not yet generated adequate cash flow to
support its operations. These matters raise substantial doubt about the
Company's ability to continue as a going concern. The financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
Effective December 17, 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. The financial statements prior
to that date reflect historically reported information as not reporting as a
business development company. Periods subsequent to the effective date are
reported in accordance with Article 6 of Regulation S-X under the Securities Act
of 1933 and Securities Exchange Act of 1934, and the Company has not
consolidated portfolio company investments in which the Company has a
controlling interest.
/s/ EPSTEIN, WEBER & CONOVER, P.L.C.
Scottsdale, Arizona
September 29, 2005
F-2
FRANCHISE CAPITAL CORPORATION
STATEMENT OF ASSETS AND LIABILITIES
June 30,
2005
------------
ASSETS:
Controlled Affiliated Issuers at value
(Cost $795,000 and $0, respectively) $ 1,014,430
Prepaid expenses and other assets 11,747
------------
TOTAL ASSETS $ 1,026,177
LIABILITIES:
Accounts payable and accrued expenses $ 120,712
Payable to shareholders --
Note payable (See Note 4) 200,000
Debentures payable (See Note 4) 358,156
Minority interest --
------------
TOTAL LIABILITIES 678,868
NET ASSETS $ 347,309
NET ASSETS CONSIST OF:
Preferred Series B, 0 shares outstanding $ --
Preferred Series C, 13,187,500 shares outstanding 1,319
Paid-in capital, 32,927,305 shares outstanding 6,600,512
Accumulated deficit (6,254,522)
------------
TOTAL NET ASSETS $ 347,309
============
Shares Outstanding (5,000,000,000 of $0.0001 par
value common stock authorized) 32,927,305
Notes to Financial Statements are an integral part of
these Financial Statements.
F-3
FRANCHISE CAPITAL CORPORATION
SCHEDULE OF INVESTMENTS
JUNE 30, 2005
Percent of
Value Net Assets
----- ----------
PORTFOLIO STRUCTURE
SHORT-TERM INVESTMENTS:
None $ -- --%
PRIVATE COMPANIES 1,014,430 292%
PUBLIC COMPANIES -- --%
PRIVATE INVESTMENT FUNDS -- --%
TOTAL INVESTMENTS 1,014,430 292%
OTHER ASSETS & LIABILITIES (NET) (667,121) (192)%
NET ASSETS $ 347,309 100%
Notes to Financial Statements are an integral part of
these Financial Statements.
F-4
FRANCHISE CAPITAL CORPORATION
SCHEDULE OF INVESTMENTS
JUNE 30, 2005
Principal Acquisition
Amount/Shares Date Value
------------- ---- -----
PRIVATE COMPANIES (1), (2) -- 292%
Common Stocks-- 100%
Restaurant companies-- 100%
Common Shares
1,000,000 Fathom Business Systems, Inc. 12/2004 $ 44,000
INVESTMENTS IN AND ADVANCES TO CONTROLLED COMPANIES:
Membership 72.50% Comstock Jake's Franchise Co., LLC 12/2004 -
Membership 50% Cousin Vinnie's Franchise Co., LLC 12/2004 7,500
Membership 97.50% Kirby Foo's Franchise Co., LLC 12/2004 7,500
Membership 100% Kokopelli Mexican Grill Franchise Co. LLC 12/2004 686,000
Membership 100% Fit N Healthy Cafe 6/2005 50,000
ADVANCES TO CONTROLLED COMPANIES:
Fathom Business Systems, Inc. 51,520
Comstock Jake's Franchise Co., LLC 42,445
Cousin Vinnie's Franchise Co., LLC 90,623
Kirby Foo's Franchise Co., LLC 26,842
Kokopelli Mexican Grill Franchise Co., LLC 8,000
----------
TOTAL-- PRIVATE COMPANIES (Cost $512,473) 1,014,430
----------
TOTAL INVESTMENTS (Cost $512,473 -- 292% 1,014,430
----------
OTHER ASSETS & LIABILITIES (NET) -- (192)% (667,121)
----------
NET ASSETS -- 100.00% $ 347,309
----------
----------
1. Non-income producing securities only.
2. At June 30, 2005 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 June 30, 2005 was
$1,014,430.
Notes to Financial Statements are an integral part of
these Financial Statements.
F-5
FRANCHISE CAPITAL CORPORATION
STATEMENTS OF OPERATIONS (UNAUDITED)
For the six Year
months ended Ended
June 30, June 30,
2005 2005
---------- -----------
INVESTMENT INCOME:
Interest income $ -- $ --
Dividend income -- --
---------- -----------
Total Income -- --
EXPENSES:
Administration expenses 750,103 1,487,848
---------- -----------
Total Expenses 750,103 1,487,848
NET INVESTMENT LOSS (750,103) (1,487,848)
NET REALIZED LOSS ON INVESTMENTS -- --
NET UNREALIZED GAIN ON INVESTMENTS 165,604 165,604
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGES (584,499) (1,322,244)
CUMULATIVE EFFECT OF ACCOUNTING CHANGE FOR
CONVERSION TO A BUSINESS DEVELOPMENT COMPANY -- 549,727
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS $ (584,499) $ (772,517)
Notes to Financial Statements are an integral part of
these Financial Statements.
F-6
FRANCHISE CAPITAL CORPORATION
STATEMENTS OF CHANGES IN NET ASSETS
For the year ended
June 30,
2005 2004
----------- -----------
Prior to BDC
OPERATIONS:
Net investment loss $(1,487,848) $ --
Loss from operations -- (5,405,130)
Change in unrealized appreciation/depreciation 165,604
Accounting change 549,727
Net decrease in net assets resulting from operations (772,517) (5,405,130)
SHAREHOLDER ACTIVITY:
Stock sales and conversion 1,282,027 5,242,954
NET INCREASE (DECREASE) IN ASSET VALUE 509,510 (162,176)
NET ASSETS:
Beginning of Period (162,201) (25)
End of Period $ 347,309 $ (162,201)
Notes to Financial Statements are an integral part of
these Financial Statements.
F-7
FRANCHISE CAPITAL CORPORATION
STATEMENTS OF CASH FLOWS
Prior to Effective
Date of BDC
-----------------
For the Six For the Six For the
Months Ended Months Ended Year Ended
June 30, 2005 December 31, 2004 June 30, 2005
------------- ----------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(584,499) $(188,018) $(772,517)
Adjustments to reconcile net loss to net cash used
by operating activities:
Common stock issued as consideration for services 296,000 296,000
Preferred stock issued as consideration for services -- --
Depreciation and amortization 1,661 5,243 6,904
Amortization of deferred compensation 192,000 16,000 208,000
Amortization of beneficial conversion feature 210,679 30,303 240,982
Amortization of deferred financing costs 2,666 2,666
Impairment of goodwill 44,836 44,836
Unrealized appreciation of portfolio investments (153,291) (153,291)
Other non-cash income (40,000) (40,000)
Minority interest (2,510) (2,510)
Expense of non-cash exercise of warrants 25,200 25,200
Cumulative effect of accounting change (549,727) (549,727)
Changes in assets and liabilities (net of business
acquisition)
Prepaid expenses (6,885) (85,086) (91,971)
Interest receivable --
Accounts receivable (219,703) (219,703)
Equipment, net of accumulated depreciation --
Inventories
Deferred revenue 325,000 325,000
Accounts payable and accrued liabilities (98,410) 75,335 (23,075)
--------- --------- ---------
Net Cash (Used) by Operating Activities (450,879) (252,327) (703,206)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash invested in portfolio companies (75,000) (29,166) (104,166)
Purchase of computer equipment (2,635) (3,586) (6,221)
Advances to affiliates/officers (2,350) (2,350)
Repayment of advances to affiliates 83,960 83,960
Investment in franchise development -- --
--------- --------- ---------
Net Cash Provided by(Used) by Investing Activities 3,975 (32,752) (28,777)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Common stock issued for cash 345,500 345,500
Bank overdraft 13,476 13,476
Proceeds from shareholder advances (8,647) (8,647)
Repayments of notes payable and convertible debentures (35,000) (35,000)
Proceeds from notes payable 120,715 249,938 370,653
--------- --------- ---------
Net Cash Provided by Financing Activities 444,691 241,291 685,982
--------- --------- ---------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS (2,213) (43,788) (46,001)
CASH AND EQUIVALENTS, BEGINNING OF PERIOD 2,213 46,001 46,001
--------- --------- ---------
CASH AND EQUIVALENTS, END OF PERIOD $ -- $ 2,213 $ --
========= ========= =========
Notes to Financial Statements are an integral part of
these Financial Statements.
F-8
FRANCHISE CAPITAL CORPORATION
STATEMENTS OF CASH FLOWS
(CONTINUED)
For the year ending
June 30,
2005 2004
-------- --------
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ -- $ --
======== ========
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Common stock issued for business acquisitions
and franchise rights $ -- $255,000
======== ========
Note payable issued for 50% interest in
portfolio company $200,000 $ --
======== ========
Debt converted to Equity $ 62,500 $ --
======== ========
Notes to Financial Statements are an integral part of
these Financial Statements.
F-9
FRANCHISE CAPITAL CORPORATION
NOTES TO AUDITED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED JUNE 30, 2005
1. ORGANIZATION AND BASIS OF PRESENTATION
Franchise Capital Corporation (the "Company") a Nevada corporation, was
incorporated on July 6, 2001. The Company was formerly named 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 five concepts. To date, the Company has had no revenues associated
with these activities. Effective December 17, 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.
The Company serves as a holding company for its wholly and majority owned
operating subsidiaries; Fathom Business Systems, Inc. ("Fathom"), Comstock
Jake's Franchise Company, ("Comstock's"), Kokopelli Franchise Company,
("Kokopelli"), Cousin Vinnie's Franchise Company ("CV"), Kirby Foo's Asian Grill
Franchise Company ("Kirby"), and Fit N Healthy Cafe . The Company owns 100% of
Fathom and Kokopelli and has ownership interests in Kirby of approximately
97.5%, 72.5% of Comstock Jake's, 100% of Fit N Healthy, and 50% of CV.
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.
The accompanying 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 June 30, 2005. 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 franchising its restaurant concepts which will result
in up front franchise fees and ongoing monthly royalties. However, the Company
will likely require additional debt or equity capital in order to implement its
business plan. The accompanying consolidated financial statements do not include
any adjustments that might result from this uncertainty.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION -
Franchise Capital Corporation changed to a Business Development Company,
effective December 17, 2004. Therefore, the prior periods are no longer directly
comparable. The balance sheet as of June 30, 2005, is presented to reflect the
change to a BDC. The statements of operations for the periods prior to December
31, 2004, are presented as if the all of the Company's portfolio companies are
consolidated through the last day of the period.
F-10
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.
The accompanying consolidated financial statements prior to becoming a BDC
contain the accounts of the Company and its wholly and majority owned
subsidiaries, Fathom, IFS, Pauli's, Kokopelli, CV and Kirby. All material
inter-company balances and transactions have been eliminated in consolidation.
The accompanying consolidated statement of operations includes the operating
activity of the subsidiaries from the respective dates of acquisition.
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.
REVENUE RECOGNITION - For periods prior to December 31, 2004, revenue was
recognized on hardware and installation of point-of-sale systems when the system
has been installed and the Company has received customer acceptance and there is
no material ongoing commitment on the part of the Company. Cost of revenues
includes the cost of hardware items and labor.
ACCOUNTS RECEIVABLE - Prior to December 31, 2004, accounts receivable consisted
primarily of amounts due from customers of Fathom's Point of Sale systems and
implementation projects. The Company has receivables from affiliates at June 30,
2005 of $219,430. These advances generally have no specific repayment terms. The
Company analyzes these receivables periodically to determine if there is any
impairment of such. This analysis includes an assessment of the portfolio
companies' ability to repay. The Company has a controlling interest in most of
the portfolio companies.
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.
PROPERTY AND EQUIPMENT - consists primarily of office equipment and furnishings
and is stated at cost less accumulated depreciation. Depreciation is recorded on
a straight-line basis over the estimated useful lives of the assets ranging from
3 to 5 years. Depreciation expense was $6,094, $7,962 and $-0- for the years
ended June 30, 2005, 2004 and 2003, respectively.
STOCK-BASED COMPENSATION - Statements of Financial Accounting Standards No. 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION, ("SFAS 123") established accounting and
disclosure requirements using a fair-value based method of accounting for
stock-based employee compensation. In accordance with SFAS 123, the Company has
elected to continue accounting for stock based compensation using the intrinsic
value method prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees."
There were no options granted in the years ended June 30, 2005 and 2004.
F-11
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS -
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. The Company presently does not intend to adopt the fair
value based method of accounting for its stock based compensation.
In June 2003 the FASB issued Statement No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity" SFAS
No. 150 requires certain instruments, including mandatorily redeemable shares,
to be classified as liabilities, not as part of shareholders' equity or
redeemable equity. For instruments that are entered into or modified after May
31, 2003, SFAS No. 150 is effective immediately upon entering the transaction or
modifying the terms. For other instruments covered by Statement 150 that were
entered into before June 1, 2003, Statement 150 is effective for the first
interim period beginning after June 15, 2003. The Company has evaluated the
provisions of SFAS No. 150 and implementation of such was not material.
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.
In December 2004 the FASB issued a revised Statement 123 (SFAS 123R),
"ACCOUNTING FOR STOCK-BASED COMPENSATION" requiring public entities to measure
the cost of employee services received in exchange for an award of equity
instruments based on grant date fair value. The cost will be recognized over the
period during which an employee is required to provide service in exchange for
the award -- usually the vesting period. The Company is evaluating the impact of
this new pronouncement and does not expect the effect of implementation will
have a significant impact on the Company's financial statements.
3. BUSINESS ACQUISITIONS
In the year ended June 30, 2004, the Company entered into an agreement to
acquire all of the outstanding voting shares of Fathom Business Systems, Inc.
("Fathom"). Fathom specializes in the sale, installation and service of
restaurant `Point-of-Sale' equipment. Fathom was a single employee business. The
Company issued 750,000 shares of its common stock to acquire all of the
outstanding shares of Fathom. On the basis of the trading price of the Company's
common stock at the time of the acquisition, the purchase price was $225,000.
The purchase price was allocated as follows:
Cash $ 3,619
Accounts receivable 10,232
Inventory 13,567
Accounts payable (72,963)
Intangible assets 270,545
---------
$ 225,000
=========
F-12
All revenue recognized in the accompanying statement of operations for the year
ended June 30, 2004, relates to sales and services provided by the Fathom
subsidiary. In connection with this acquisition, the Company allocated the
purchase price in excess of the tangible assets and liabilities acquired as
goodwill. The Company determined that the excess purchase price was not
specifically connected with such things as tradenames, customer lists or
existing contracts. If the acquisition of Fathom had occurred on July 1, 2003,
the consolidated revenues and net loss of the Company for the year ended June
30, 2004 would have been approximately $126,000 and $5,118,000 respectively
(unaudited).
In the year ended June 30, 2004, the Company entered into an agreement to
acquire all of the outstanding voting shares of Deville, Inc., a developer of
"LUCKY LOU'S" restaurants. The terms of the purchase agreement, required the
issuance of 1,000,000 of the Company's common shares and a note payable with a
face amount of $400,000. The note was discounted at 8% on the basis of its
repayment terms resulting in a principal amount of $349,805. The terms also
called for an ongoing payment to the seller based on royalty revenues generated
from "LUCKY LOU'S" restaurants. The total purchase price of Deville was
$649,805. There were no tangible assets or liabilities acquired in the purchase.
In March, 2004, the Company and Deville, Inc., agreed to rescind the
transaction. Accordingly, the shares were returned to the Company, the note
payable and the net assets of Deville were reversed and removed from the balance
sheet at June 30, 2004.
In the year ended June 30, 2004, the Company entered into various agreements
with American Restaurant Development Corp. ("ARDC"), an entity controlled by a
significant shareholder of the Company. As of June 30, 2004 the shareholder held
a beneficial interest in the Company totaling 11%. The Company contracted with
ARDC to provide restaurant concepts for franchising. For each concept introduced
to the Company, ARDC is to receive 500,000 shares of the Company's common stock
and $125,000, $75,000 of which is paid immediately and the $50,000 balance as
cash is received by the Company for franchise fees realized by the Company on
such concepts. In addition, ARDC is to receive 50% of all non-refundable
payments received by the Company for new franchise and area developer
agreements. Additionally, ARDC will receive royalties equal 1% of the system
wide revenues of each concept. During the year ended June 30, 2004, a total of
2,000,000 shares of the Company's common stock were issued to ARDC and the
Company incurred $300,000 in fees for the four franchise concepts brought to the
Company by ARDC.
In the year ended June 30, 2004, the Company entered into operating agreements
for three of the concepts (Pauli's, Kokopelli, and CV) with the owners of the
exclusive rights to the names, trademarks, menus, operating systems and recipes
for the concepts. The Company will provide the monies needed to start the sale
of the franchises and other operating services for its 72.5% interest in
Pauli's, 50% interest in Kokopelli and 50% interest in CV. As of the date of
this report, no monies had been contributed by the Company to the operations of
these three limited liability franchise companies.
4. INTANGIBLE ASSETS
In connection with the Company's acquisition of Fathom and sale of franchise
rights to the Pauli's and Kirby franchises, intangible assets were recorded.
The Company allocated $270,545 of its purchase price of Fathom to goodwill. The
Company does not amortize goodwill, and instead annually evaluates the carrying
value of goodwill for impairment. The Company believes that there has been no
impairment of the carrying value of goodwill of $270,545 as of June 30, 2004.
The Company acquired its interests in Pauli's and Kirby through the issuance of
100,000 shares valued at approximately $15,000. As a result of these
transactions, Pauli's and Kirby have capitalized the $18,037 cost of intangible
assets such as tradenames, franchise rights, menus, etc. The Company is
amortizing these assets on a straight line basis over the estimated useful lives
of ten years. Amortization expense for these assets was not material during the
year ended June 30, 2004.
F-13
5. INVESTMENT PORTFOLIO
In the year ended June 30, 2005, the Company entered into operating agreements
for five restaurant concepts (Comstock Jake's, Kokopelli, CV, Kirby and Fit N
Healthy) with the owners of the exclusive rights to the names, trademarks,
menus, operating systems and recipes for the concepts. The Company will provide
the monies needed to start the sale of the franchises and other operating
services for its 72.5% interest in Comstock Jake's, 100% interest in Kokopelli,
50% interest in CV, 100% interest in Kirby and 100% interest in Fit N Healthy.
As of June 30, 2005, the Company has invested $219,430 in advances to the
companies. The estimated fair value of the portfolio companies was $795,000.
As a business development company under the Investment Company Act of 1940, all
of the Company's investments must be carried at market value or fair value as
determined by our Board of Directors for investments which do not have readily
determinable market values. Most of the Company's assets were acquired in
privately negotiated transactions and have no readily determinable market
values. These securities are carried at fair value as determined by the Board of
Directors under our valuation policy. Currently, our valuation policy provides
for obtaining independent business valuations for those equity securities that
are not traded on a national securities exchange.
With respect to private equity securities, investments are valued as indicated
above by a independent business valuation company using industry valuation
benchmarks, and then the value is assigned a discount reflecting the illiquid
nature of the investment, as well as a minority, non-control position, if
applicable. When an external event such as a purchase transaction, public
offering, or subsequent equity sale occurs, the pricing indicated by the
external event will be used to corroborate our private equity valuation. At June
30, 2005, the fair values of Comstock Jake's, Kokopelli, CV and Fathom Business
systems was determined by a by a independent business valuation company. OF the
Company's investments, only Kokopelli and Fathom have operations. Kokopelli has
begun to sell franchises and Fathom has been operating since it was acquired.
The investment in Fit N Healthy was effective June 30, 2005. The value of Fit N
Healthy was determined based on the sale price of that investment which occurred
in August of 2005.
During the year ended June 30, 2005, the Company wrote down its investment in
Fathom by $293,480. During the year ended June 30, 2005, the Company reported an
unrealized gain o its investment in Kokopelli by approximately $459,000.
6. CONVERTIBLE DEBENTURES PAYABLE
Debentures payable as of June 30, was comprised of the following:
2005 2004
--------- ---------
Debenture payable from an individual maturing February 2005
Debenture payable $55,000, interest at 12% per annum,
Interest due quarterly $ 40,000 $ --
Debenture payable from an individual maturing January 30, 2005
Debenture payable $50,000, interest at 12% per annum,
Interest due quarterly 15,000
F-14
Debenture payable from an individual maturing Dec 1, 2005
Debenture payable $50,000, interest at 10% per annum
Interest due quarterly 50,000
Debenture payable from an individual maturing April 2005
Debenture payable $25,000, interest at 8% per annum
Interest due quarterly 20,500
Debenture payable from an individual maturing April 2005
Debenture payable $25,000, interest at 8% per annum
Interest due quarterly 15,500
Debenture payable from a company maturing June 2006
Debenture payable $250,000, interest at 7.5% per annum
Interest due monthly 228,927 127,500
Debenture payable from a company maturing September 2005
Debenture payable $35,000, interest at 8% per annum
Interest due monthly 17,550
--------- ---------
Total 387,477 127,500
--------- ---------
Less: Debt discount (29,321)
--------- ---------
$ 358,156 $ 127,500
========= =========
Principal payments due as follows:
Years ended June 30: 2006 $387,477
2007 --
2008 --
2009 --
2010 --
Thereafter --
--------
$387,477
========
The Company is attempting to restructure repayment or induce conversion of these
obligations. Many of these obligations were in default as the maturity dates
have lapsed. During the year ended June 30, 2005, the Company amended conversion
rights on all of the convertible debentures other than the $228,927 debenture.
The conversion rate was reduced to $0.005. The Company recorded an expense of
$99,879 in the year ended June 30, 2005, resulting from changes made as an
inducement for conversion. During the year ended June 30, 2005, holders of
convertible debt converted $62,500 of principal to common stock.
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.
F-15
The debenture may be converted at the option of the holder into common shares of
the Company. The conversion price is the lesser of $0.25 or 80% of the average
of the five lowest volume weighted average price during the 20 trading days
prior to the election to convert. Upon conversion, the holder must
simultaneously purchase shares of the Company's common stock in a dollar amount
equal to 10 times the dollar amount of the debenture converted. The purchase
price for such shares shall be the same as the debenture conversion price. The
value of the beneficial conversion feature of $21,212 was recorded as a discount
to the principal balance of the debenture and amortized immediately as interest
expense because the debenture is convertible at any time at the option of the
holder.
The Company defaulted on the interest payment provisions in the debenture.
Consequently, the principal amount due under the debenture of $85,000 became
immediately due and payable in cash plus a default penalty of $42,500 (150% of
the principal amount) resulting in a total obligation of $127,500 plus any and
all accrued interest. The per diem interest is $26.04. The default penalty of
$42,500 was expensed as interest and financing costs in the accompanying
statement of operations for the year ended June 30, 2004.
The effective annual interest rate on the debenture is approximately 24% when
the beneficial conversion feature is considered and approximately 48% when the
beneficial conversion feature and the penalty interest are considered. As of
June 30, 2005, we currently owe $228,907.
Subsequent to June 30, 2005, 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.
As of June 30, 2005 a total of 1,900,000 shares of common stock were issued as
partial redemption of this debenture. Total balance at June 30, 2005 is $15,500,
and as of July 12, 2005 this debenture was paid in full.
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.
As of June 30, 2005 a total of 900,000 shares of common stock were issued as
partial redemption of this debenture. Total balance at June 30, 2005 is $20,500,
and as of July 21, 2005 this debenture was paid in full.
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. On August 15, 2005 we sold a portfolio investment, and as
part of the negotiated sales price, this debenture was assumed by the buyer.
F-16
On January 17, 2005 the Company issued a twelve month convertible debenture
amounting to $35,000, 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.
Total balance at June 30, 2005 is $17,550, and as of July 13, 2005 this
debenture was paid in full.
On July 21, 2004 the Company issued a twelve month convertible debenture
amounting to $50,000, with interest payable monthly. 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. Total balance
at June 30, 2005 is $15,000, and as of July 31, 2005 this debenture was paid in
full.
For the debentures issued in the period ended June 30, 2005, the Company
computed the beneficial conversion feature to be equal to the face amount of the
debentures. The $244,410 discount is being amortized over the terms of the debt.
During the year ended June 30, 2005, $215,089 of the discount was amortized
leaving a remaining discount of $29,321.
Convertible debt outstanding at June 30, 2005 is convertible into 60,325,875
shares of common stock.
7. NOTES PAYABLE
Notes payable as of June 30, was comprised of the following:
2005 2004
---- ----
Note payable to former partial owner of Kokopelli
Note is payable $200,000 and bears interest at
prime and is collateralized by 50% interest in
Kokopelli, payable in 12 quarter installments of
$16,667 commencing in November 2005. $200,000
Loan from an individual maturing June 30, 2007
Note payable $50,000, interest at 12% per annum,
Interest due quarterly. $50,000
Loan from an individual maturing June 30, 2007
Note payable $50,000, interest at 12% per annum,
Interest due quarterly. 50,000
-------- --------
Total 200,000 100,000
Less Current portion 50,000 --
-------- --------
Long-term portion $150,000 $100,000
======== ========
F-17
8. INCOME TAXES
The Company recognizes deferred income taxes for the differences between
financial accounting and tax bases of assets and liabilities. Income taxes for
the years ended June 30, consist of the following:
2005 2004 2003
----------- ----------- -----------
Current tax provision (benefit) $ 2,551,795 $(2,166,000) $ (5,900)
Deferred tax provision (benefit) (2,551,795) 2,166,000 5,900
----------- ----------- -----------
Total income tax provision (benefit) $ 0 $ 0 $ 0
=========== =========== ===========
There was a deferred tax asset of $2,776,000 and $2,178,000 at June 30, 2005 and
2004, respectively, relating primarily to net operating loss carryforwards of
approximately $2,689,000 and $223,000, differences in the income tax treatment
of certain stock based compensation of $86,000 and $1,953,000 and book/tax
differences in the bases of property and equipment of $2,000 and $2,000 at June
30, 2005 and 2004 respectively. The deferred income tax asset is fully offset by
a valuation allowance of $2,690,378 and $2,178,000 at June 30, 2005 and 2004
respectively. The valuation allowance was increased by $512,000 and $2,166,000
in the years ended June 30, 2005 and 2004 respectively. At June 30, 2005 there
were federal and state net operating loss carryforwards of approximately
$6,770,000 which begin to expire in 2021 and 2008 respectively.
A reconciliation of the differences between the effective and statutory
income tax rates for years ended June 30, is as follows:
2005 2004 2003
---- ---- ----
Federal statutory rates $(245,316) (34)% $(1,738,866) (34)% $(5,902) (15)%
State income taxes (43,291) (6)% (306,859) (6)% - 0 - --%
Increase in valuation allowance 512,378 71% 2,044,682 40% 5,902 15%
Effect of accounting change (219,891) (30)%
Other (3,880) (1)% 1,043 -- 0 --%
--------- ---- ----------- ---- ------- ----
Effective rate $ 0 0% $ 0 0% $ 0 0%
========= ==== =========== ==== ======= ====
9. STOCKHOLDERS' EQUITY
The Company declared a 6 for 1 stock split during the year ended June 30, 2003.
Additionally, The Company declared a 1 for 10 reverse stock split in the year
ended June 30, 2005. The number of shares presented in these financial
statements has been retroactively restated for all periods to reflect this
reverse stock split.
In July 2003, the Company amended it Articles of Incorporation to reflect
100,000,000 authorized shares of Common Stock having a par value of $0.001 and
1,125,000 shares of Preferred Stock having a $10.00 par value for Preferred A
and $0.001 par value for Preferred B. The authorized number of Class A Preferred
Stock authorized to be issued is 125,000 shares with voting rights equivalent to
five votes per share of Class A Preferred Stock. The Class A Preferred Stock is
cumulative, with an annual dividend of 6%. Additionally, Class A Preferred Stock
shall be convertible into five shares of common stock of the Company for every
one Class A Preferred share. The authorized number of Class B Preferred Stock
authorized to be issued is 1,000,000 shares. Each share of Class B Preferred
Stock shall be entitled to voting rights equivalent to one vote. Additionally,
50% of the Class B Preferred Stock may be converted after 50 franchise units are
sold and the remaining 50% may be converted after 50 additional franchise units
are sold.
In August 2003, the Company sold 275,000 common shares, plus warrants to
purchase 137,500 shares at a price of $0.50 per share for a total price of
$55,000.
F-18
In September 2003, the Company approved a 2003 Stock Compensation Plan for
1,000,000 shares to compensate employees and consultants. In addition, the
Company entered into an agreement with a consultant whereby the consultant
received 350,000 shares of the Company's common stock for services rendered.
In October 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 assumed 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 was to assist IFSC in providing up to
$1,130,000. The Company accounted for this transaction as an acquisition of
treasury stock through the issuance of a note payable of $1,130,000.
Subsequently, the note payable and an additional 1,125,000 shares were cancelled
for a total of 16,660,000 shares of common stock returned to the Company.
In November 2003, the Company acquired Fathom Business Systems in exchange for
750,000 shares of the Company's restricted common stock valued at $225,000.
Other stock transactions in November 2003 included the issuance of 10,000 shares
of Class B Convertible Preferred stock valued at $3,800,000 to 18 of the
Company's existing shareholders, employees and consultants for services
rendered; an agreement with a non-affiliate to acquire rights to a restaurant
concept in return for 1,000,000 shares of the Company's common stock and a note
payable for $400,000; and agreements with consultants whereby the consultants
were issued 600,000 shares (100,000 and 500,000 respectively) of the Company's
common stock for services to be rendered. The agreement for the rights to the
restaurant concept and the agreement with the consultant for 500,000 shares were
later rescinded, the shares were returned and the note payable was cancelled.
In January 2004, the Company approved a Company Qualified Stock Option Plan for
4,000,000 shares of common stock to compensate employees. As of the year ended
June 30, 2004 no stock options had been granted under the Plan. Subsequent to
June 30, 2004, the Company approved increasing the total number of shares of
common stock under the Plan to 15,000,000 with 5,000,000 of those shares to be
registered immediately. Other stock transactions in January 2004 included an
agreement with a consultant whereby the consultant received 650,000 shares of
the Company's common stock for services rendered and a consulting agreement with
a related party whereby the Company will receive six restaurant concepts in
exchange for 500,000 shares of the Company's common stock for each concept. As
of June 30, 2004 four concepts had been delivered to the Company and the Company
had issued 2,000,000 shares of common stock to the related party valued at
$375,000.
In February 2004, the Company sold 140,000 common shares, plus warrants to
purchase 140,000 shares at a price of $0.50 per share for a total price of
$35,000 and the Company entered into an agreement with a consultant to assist in
raising capital for the Company. The Company will pay the consultant 10% of all
funds raised, in cash, and 10% of all stock issued to investors. As of June 30,
2004 the Company had issued 14,000 shares of common stock to the consultant and
owed finder's fees totaling $3,500.
In March 2004, the Company entered into consulting agreements in exchange for a
total of 900,000 shares of common stock. Additionally, the Company entered into
an employment agreement in which part of the compensation was paid in stock. The
employee received 1,000,000 shares of common stock. The 1,000,000 shares must be
returned if the employee leaves within 90 days or 800,000 shares must be
returned if the employee leaves within one year of the date of the agreement.
F-19
In April 2004, the Company approved the issuance of a stock dividend to
shareholders of record on May 15, 2004. The stock dividend provided the Common
Stock shareholders with one share for every three shares held. Other stock
transactions in April 2004 included the issuance of 200,000 shares of common
stock in exchange for advisory services rendered; the issuance of 100,000 shares
of common stock valued at $15,000 for additional interests in Pauli's and Kirby;
and an agreement with a related party for consulting services. As part of the
related party agreement the affiliate would receive 30,000 shares of the
Company's Series B Convertible Preferred Stock. The agreement for the issuance
of the Series B stock was rescinded subsequent to June 30, 2004. The 30,000
shares were never issued.
In June 2004, the Company entered into an employment agreement in which part of
the compensation is paid in stock. The employee received 1,000,000 shares of
common stock. The 1,000,000 shares must be returned if the employee leaves
within 90 days or 800,000 shares must be returned if the employee leaves within
one year of the date of the agreement. Additionally, a second employee received
500,000 shares of common stock for their services to the Company. There were no
restrictions on these shares. Other stock transactions in June 2004 included an
agreement with an attorney for legal services in exchange for 800,000 shares of
the common stock.
During the year ended June 30, 2005, the Company issued $357,500 in the form of
convertible debentures, with interest payable at the end of the term. The
debentures may be converted, at the option of the holder, into common shares of
the Company at a conversion price of 50% of the closing bid for the Company's
common stock on the date of conversion. During the year ended June 30, 2005, the
Company converted $67,450 of these convertible debentures for a total of
16,950,909 shares of common stock under Regulation E.
During the year ended June 30, 2005 the Company issued 4,320,000 restricted
shares for consulting services valued at $215,000. These shares were issued
prior to the Company becoming a Business Development Company.
During the year ended June 30, 2005 Franchise Capital Corporation issued
10,650,000 shares of restricted common stock for $412,950 cash.
During the year ended June 30, 2005 the Company converted its Series B Preferred
Stock into common stock. This conversion resulted in the retiring of all Series
B Preferred Stock and the issuance of 9,500,000 shares of restricted common
stock.
On December 17, 2004 the Board of Directors approved a new series of preferred
stock, Series C Preferred. The Series C Preferred Stock is, 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 (a total of 13,500,000 shares
of common stock). 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 adjustment 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 year ended June 30 2005,
the Company had issued a total of 13,187,500 shares of Series C Preferred Stock.
Subsequent to June 30, 2005, 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.
F-20
Capital share transactions for the years ended June 30, 2005 and 2004 are
schedule as follows:
Convertible
Common Stock Preferred Stock
Shares Amount Shares Amount
------ ------ ------ ------
BALANCE, JUNE 30, 2002 3,457,380 $ 346 $ -- $ --
Net loss
----------- ------------ ------------ -----------
BALANCE, JUNE 30, 2003 3,457,380 346 -- --
Cancellation of shares previously issued (1,666,000) (167)
Shares issued for cash 42,900 4
Shares issued for services 550,000 55
Shares issued for business acquisition 85,000 9
Preferred Class B issued for services 10,000 3,800,000
Value of beneficial conversion feature
Shares issued for deferred compensation 200,000 20
Amortization of deferred compensation
Shares issued for stock dividend 795,960 80
Net loss --
----------- ------------ ------------ -----------
BALANCE, JUNE 30, 2004 3,465,240 347 10,000 3,800,000
Shares issued for services 432,000 43
Amortization of deferred compensation --
Fractional shares issued (2) -- --
Conversion of Preferred Class B to Common 950,000 95 (10,000) (3,800,000)
Preferred Class C issued for services -- 13,500,000 1,350
Record debt beneficial conversion feature --
Shares sold for cash/partial debenture
conversion 16,949,567 1,695
Shares sold for cash 10,650,000 1,065
Shares issued on cashless exercise of
warrants 168,000 17
Conversion of Preferred Class C 312,500 31 (312,500) (31)
Net loss
----------- ------------ ------------ -----------
BALANCE, JUNE 30, 2005 32,927,305 $ 3,293 13,187,500 $ 1,319
=========== ============ ============ ===========
Additional
Deferred Paid in Accumulated
Compensation Capital Deficit Total
------------ ------- ------- -----
BALANCE, JUNE 30, 2002 $ 76,504 $ (37,174) $ 39,328
Net loss (39,353) (39,353)
----------- ----------- ----------- -----------
BALANCE, JUNE 30, 2003 -- 76,504 (76,527) (25)
Cancellation of shares previously issued 167 --
Shares issued for cash 89,996 90,000
Shares issued for services 1,059,687 1,059,742
Shares issued for business acquisition 239,991 240,000
Preferred Class B issued for services 3,800,000
Value of beneficial conversion feature 21,212 21,212
Shares issued for deferred compensation (240,000) 239,800 --
Amortization of deferred compensation 32,000 32,000
Shares issued for stock dividend (80) --
Net loss (5,405,130) (5,405,130)
----------- ----------- ----------- -----------
BALANCE, JUNE 30, 2004 (208,000) 1,727,457 (5,482,005) (162,201)
Shares issued for services 214,955 214,998
Amortization of deferred compensation 208,000 208,000
Fractional shares issued
Conversion of Preferred Class B to Common 3,799,905 --
Preferred Class C issued for services 79,650 81,000
Record debt beneficial conversion feature 339,879 339,879
Shares sold for cash/partial debenture
conversion 305,755 307,450
Shares sold for cash 104,435 105,500
Shares issued on cashless exercise of
warrants 25,183 25,200
Conversion of Preferred Class C --
Net loss (772,517) (772,517)
----------- ----------- ----------- -----------
BALANCE, JUNE 30, 2005 $ -- $ 6,597,219 $(6,254,522) $ 347,309
=========== =========== =========== ===========
F-21
10. COMMITMENTS
The Company entered into an arrangement with Kokopelli to provide Kokopelli up
to $1,200,000 under a line of credit. Borrowings bear interest at 8% per annum.
At June 30, 2005, the Company has advanced and has due $8,000 under this
arrangement.
11. SUBSEQUENT EVENTS
Subsequent to June 30, 2005 the Company approved the sale of its Fit N Healthy
concept for $50,000, its appraised value at June 30, 2005. The buyer agreed to
assume a $50,000 note payable by the Company to a third party.
On September 27, 2005 the Company approved the sale of Fathom Business Systems
for $44,000. The Company took title to $44,000 in Fathom trade accounts
receivable as consideration for the sale This portfolio company has been
operating at a loss and its sale will improve the cash flow of the Company.
Subsequent to June 30, 2005, the Company entered into an agreement with Creative
Eateries Corporation ("Creative") where the Company agreed to sell all of its
remaining portfolio companies to Creative for $200,000 cash and 3,583,667 shares
of Creative's common stock. The Company has since rescinded the Purchase
Agreement with Creative because Creative failed to meet its obligations under
the Purchase Agreement. Since the rescission occurred during the quarter ending
December 31, 2005, financial information regarding the Purchase Agreement has
not, and will not, be a part of any of the Company's financial statements.
Subsequent to June 30, 2005, the Company was notified by a staff attorney at the
Securities and Exchange Commission ("Commission") that the Series C Preferred
Stock issued by the Company may be in violation of Section 23 of the Investment
Company Act of 1940. The Company is currently restructuring the Series C
Preferred Stock designation into a format acceptable with the Commission. The
restructuring will alter several sections of the designation, most significantly
the sections pertaining to the Preferred Stock conversion to common stock and
the capital reorganization of common stock via forward splits and reverse
splits.
12. RELATED PARTY TRANSACTIONS
The Company's former officers, directors and majority shareholders made advances
to the Company in order for the Company to pay its operating expenses. Advances
from shareholders were $6,058 and $14,500 for the years ended June 30, 2004 and
June 30, 2003, respectively. Repayments of advances were $0 and $12,170 for the
years ended June 30, 2004 and June 30, 2003, respectively. In addition, a
shareholder forgave the balance due to him of $2,330 during the year ended June
30, 2003.
In the year ended June 30, 2004, the Company entered into various agreements
with American Restaurant Development Corp. ("ARDC"), an entity controlled by a
significant shareholder of the Company. As of June 30, 2004 the shareholder held
a beneficial interest in the Company totaling 11%. The Company contracted with
ARDC to provide restaurant concepts for franchising. For each concept introduced
to the Company, ARDC is to receive 500,000 shares of the Company's common stock
and $125,000, $75,000 of which is paid immediately and the $50,000 balance as
cash is received by the Company for franchise fees realized by the Company on
such concepts. In addition, ARDC is to receive 50% of all non-refundable
payments received by the Company for new franchise and area developer
agreements. Additionally, ARDC will receive royalties equal 1% of the system
wide revenues of each concept. During the year ended June 30, 2004, a total of
2,000,000 shares of the Company's common stock was issued to ARDC and the
Company incurred $300,000 in fees for the four franchise concepts brought to the
Company by ARDC.
During the year ended June 30, 2004, the Company entered into an operating
agreement with ALEXIS GROUP, LLC "ALEXIS" to operate a franchise company. ALEXIS
is owned by Jerry Brown, who was the Company's Chairman of the Board at the
time. Pauli's Franchise Company, LLC was formed to provide an entity that is
equally controlled by ALEXIS and the Company. ALEXIS will provide the exclusive
rights of the Pauli's name, trademarks, menu, and recipes. The Company will
provide the funds for start-up and operating services. At June 30, 2004 the
Chairman of the Board held a 25% interest in Pauli's Franchise Company, LLC, the
Company held a 72.5% interest and an unrelated party held the remaining 2.5%
interest.
F-22