FACT Corporation
November 28, 2005
Securities and Exchange Commission
Division of Corporate Finance
100 F Street, N.E.
Washington, D.C. 20549-7010
Attention: Karl Hiller – Branch Chief
By Facsimile and Electronic Filing
RE:
FACT Corporation
Form 10-KSB for the Fiscal Year Ended December 31, 2004
File April 15, 2005
SEC Response Letter dated September 19, 2005
File No. 000-17232
Dear Mr. Hiller:
In response to your letter of September 19, 2005, we provide the following written response.
General
Comment:
1.
You did not electronically file your response letter dated August 19, 2005, as required by Subparts 232.100 and 232.101 of Regulation S-T. Please electronically file this response letter, as well as all future correspondence.
Response:
1.
We have previously addressed in this comment in our written correspondence dated September 30, 2005.
Comment
2.
In your next response, please provide the representations regarding the adequacy and accuracy of your disclosures requested at the end of this letter.
1530 9th Avenue SE
Calgary, Alberta
T2G 0T7
Phone: (403) 204-0260
Fax: (403) 272-3620
www.factfoods.com
Response:
2.
We have included the representations regarding the adequacy and accuracy of our disclosures as requested at the end of this letter.
Form 10-KSB for the Fiscal Year Ended December 31, 2004
Note 2 – Acquisition of Food and Culinary Technologies Group Inc. (FACT), Intellectual Property and Issuance of Class C Common Stock, page F-13
Comment:
3.
We have read your response to prior comment 2, indicating that the conversion rights extended to holders of your Class C common shares were not impacted by the four-for-one reverse stock split that occurred during 2003. However, you have not addressed how the economic and voting equivalency of the Class A and Class C common shares were impacted, as we had requested. Please explain how these compared before and after your reverse stock split, and cite the specific language in your agreement with the Class C stockholders governing the conversion.
Response:
3.
As at the time of the reverse split undertaken during 2003 the economic and voting equivalency of the Class A and Class C common shares were not impacted. The Articles of Amendment as approved on November 19, 2001 by the shareholders and as filed with the Secretary of State on November 19, 2001 provided as follows:
“(b) Voting. The holders of Class A Common stock shall be entitled to one vote for each shares of Class A Common stock held. The holders of the Class C Common Stock shall be entitled to one vote for each shares of Class C Common Stock held. No holder of Class A Common Stock or Class C Common Stock shall be entitled to cumulative voting in the election of directors.
“(e)Conversion: The holders of Class A Common stock shall have no right to convert the Class A Common Stock into any other class of securities of the Corporation. The shares of Class C Common Stock may be converted to Class A Common Stock as follows: (a) upon Food and Culinary Technology Group Inc. achieving U.S. $9,000,000.00 in total sales, one-third of the Class C shares may be converted; (b) upon Food and Culinary Technology Group Inc. achieving U.S. $27,500,000.00 in total sales, one-third of the Class C shares may be converted; (c) upon Food and Culinary Technology Group Inc. achieving U.S. $56,150,000.00 in total sales, one-third of the Class C shares may be converted. Shares of Class C Common Stock shall be converted into shares of Class A Common Stock at the rate of 1 share of Class C Common Stock into 6 shares of Class A Common Stock. Such conversion rate sha ll be adjusted as appropriate in the case of a stock split, dividend, or recapitalization of the Class A Common Stock.”
The reverse split of the Class A common stock took place on August 6, 2003.
.
Subsequent to the reverse split, on February 2, 2004 the conversion provision was amended as follows:
“(e) Conversion:
The holders of Class A Common Stock shall have no right to convert the Class A Common Stock into any other class of securities of the Corporation. The shares of Class C Common Stock may be converted to Class A Common Stock at any time upon the election of the holder of such shares. Shares of Class C Common Stock shall be converted into shares of Class A Common Stock at the rate of 1 (one) share of Class C Common Stock into 6 (six) shares of Class A Common Stock.”
This amendment to the conversion was negotiated pursuant to the settlement of certain litigation, and the forgiveness of certain liabilities and obligations of the Company and its subsidiary Food and Culinary Technology Group Inc. The Class C stockholders entered into a fourth Amendment to the Share Exchange Agreement which we have appended hereto as Exhibit “A”. The Class C shares were amended so as to allow the Class C shareholders to continue to maintain effective control in consideration for their agreement to settle the litigation.
We will file a copy of the foregoing amendment to FACT’s articles of incorporation as Exhibit 3 with our amended 10KSB for this fiscal year ended December 31, 2004 to be filed pursuant to our further advice in this letter.
Comment:
4.
In response to prior comment 3, you explain that while FACT was the co-creation of FACT Group LLC and International Securities Group Inc. (ISG), it was jointly owned by three of your four directors, and all three directors of FACT Group LLC prior to your acquisition. Given the shared interest of the directors you have identified, it is not clear that fair value accounting is the appropriate treatment under GAAP. Explain to us which of these entities are under common control at the time of each transaction. As part of your response, provide us a matrix showing the equity ownership percentages of all owners of both entities prior and immediately after each transaction.
Response:
4.
We have undertaken a more thorough review of the minute books of Food and Culinary Technology Group Inc. (FACT) and Capital Reserve Corporation (now FACT Corporation), as well as the pertinent transactional documents to provide the matrix you require. We have clarified our prior advice and advise as follows:
FACT was incorporated in the State of Nevada on August 14, 2001 for the purpose of acquiring the rights to certain assets held by FACT Group LLC from the owners of FACT Group LLC and the Murdoch Group (comprised of TMAmercian Holdings, SN Global Investments Inc., Gallus Importations Inc., and Food Information Services Inc.).
The original shareholder of FACT was:
International Securities Group Inc. – 6,000 shares issued August 15, 2001
The sole director and officer of FACT at that time was W. Scott Lawler. W. Scott Lawler was also the beneficial owner, and sole officer and director of International Securities Group Inc. as well as a member of the board of directors of Capital Reserve Corporation (now FACT Corporation).
At the time of the acquisition of FACT by Capital Reserve Corporation (now FACT Corporation) on November 7, 2001, the directors of Capital Reserve Corporation were Jacqueline Danforth, W. Scott Lawler and Sharon Patmore.
On November 7, 2001, Jacqueline Danforth was appointed to the Board of Directors of FACT.
On November 7, 2001, FACT and FACT Group LLC entered into an Acquisition Agreement and concurrently Capital Reserve Corporation (now FACT Corporation) and FACT entered into a Share Exchange Agreement. At the time of the execution of the agreements, all parties save, Mr. Lawler, were arms length to FACT and Capital Reserve Corporation (now FACT Corporation). For this reason we believe that fair value accounting is the appropriate treatment of this transaction. The value of the acquisition related to the sole interested party, Mr. W. Scott Lawler, has been eliminated from the transaction as detailed in the worksheet appended as Exhibit “B” hereto.
On November 7, 2001, the Board of Directors of FACT approved the issuance of the following subscribed for shares of FACT:
TM American Holdings Ltd. – 1,325 shares – beneficial owner Thomas Murdoch
SN Global Investments Inc. – 825 shares – beneficial owner Susan Niedermayr
Gallus Importations Inc. – 525 shares – beneficial owner Paul Niedermayr
Food Information Services Inc. – 825 shares – beneficial owner Dr. Brian Raines
Pursuant to those agreements on November 7, 2001, the following parties were appointed to the Board of Directors and as officers of FACT:
Thomas Murdoch – Director and Chief Executive Officer
Paul Niedermayr - Director and Chairman of the Board
The Acquisition Agreement between FACT and FACT Group LLC also required the issuance of 500 shares of FACT to the shareholders of FACT Group LLC, and therefore on November 7, 2001 upon approval of the Acquisition Agreement, the following shares were issued by FACT to:
Steven M. Schechter – 125 shares
Jennifer Flynn – 125 shares
Steven Copadicasa – 125 shares
Richard Gibbs – 125 shares
Pursuant to those agreements the Board approved the appointment of Steven Schechter on November 7, 2001 to the Board of FACT which appointment was effected on December 1, 2001.
The Share Exchange Agreement with Capital Reserve Corporation and FACT called for all of the shareholders of FACT to deliver their shares in exchange for 2,000,000 Class C Common Shares of Capital Reserve Corporation.
As briefly noted above, we have also attached a spreadsheet detailing ownership of FACT prior to and following the above noted transactions in order to clarify the interests of directors at the time of the transaction and our resultant treatment of transaction for accounting purposes.
Comment:
5.
On a related point, in responding to prior comment 4, you explain that provisions governing the conversion of Class C shares to Class A shares were eliminated when you realized that a sales contract anticipated at the time of arranging the transfer of property from FACT to you would no longer be secured. However, since you did not impose other performance conditions on the transferees, and no economic benefits conveyed under the original transfer agreement were relinquished as a result of not being able to deliver the sales contract, it appears the conversion provisions were not substantive. Along with your response to the comment above, describe changes in the composition of your directors that occurred at the time of acquiring FACT, and upon conversion of the Class C shares. Identify the individuals who have appointed the directors for each entity prior to and after your ac quisition and the conversion.
Response:
5.
Following is a table listing the directors, the dates appointed, and the individuals who made the appointments of the directors for both FACT and Capital Reserve Corporation:
FACT (Food and Culinary Technology Group Inc.)
Director | Date Appointed | Appointed By | Date Resigned |
W. Scott Lawler | August 15, 2001 | W. Scott Lawler as Incorporator |
Not Applicable |
Jacqueline Danforth | November 7, 2001 | W. Scott Lawler as Sole Shareholder | Not Applicable |
Thomas Murdoch | November 7, 2001 | Jacqueline Danforth and W. Scott Lawler | June 1, 2002 |
Paul Niedermayr | November 7, 2001 | Jacqueline Danforth and W. Scott Lawler | July 22, 2002 |
Steven Schechter | December 1, 2001 | Jacqueline Danforth, W. Scott Lawler, Thomas Murdoch, and Paul Niedermayr | July 23, 2003 (Mr. Schechter was not reelected at the Annual General Meeting held July 23, 2003) |
Paul Litwack | January 23, 2003 | Jacqueline Danforth, W. Scott Lawler and Steven Schechter | |
Mark Shapiro | January 23, 2003 | Jacqueline Danforth, W. Scott Lawler and Steven Schechter | April 16, 2003 |
Capital Reserve Corporation (now FACT Corporation)
Director | Date Appointed | Appointed By* | Date Resigned |
Sharon Patmore | October 6, 1998 | Ralph Newton Jr. and Linda Opfer | January 22, 2003 |
W. Scott Lawler | November 1, 1999 | Sharon Patmore | |
Jacqueline Danforth | August 7, 2001 | W. Scott Lawler and Sharon Patmore | |
Paul Litwack | January 22, 2003 | Jacqueline Danforth and W. Scott Lawler | |
Dr. Brian Raines | January 22, 2003 | Jacqueline Danforth and W. Scott Lawler | |
*Please note that each of the appointed directors has stood for re-election at any annual general meetings held during their term of office and have been elected by the shareholders of the corporation.
The Class C shares were converted on February 11, 2004 at which time the directors of each of FACT and Capital Reserve Corporation (now FACT Corporation) were as follows:
FACT: Jacqueline Danforth, Paul Litwack and W. Scott Lawler
Capital Reserve Corporation (now FACT Corporation): Jacqueline Danforth, Paul Litwack, Brian Raines and W. Scott Lawler.
There have been no changes to the Boards of Directors from the date of the Class C conversion to the date of this correspondence.
Comment:
6.
In response to prior comment 5, you explain that you believe recording a $2,000,000 royalty payable prior to the settlement agreement being reached is appropriate because you had the exclusive license for the use and exploitation of the intellectual property, and because it was probable the royalty payments would be made. Since the royalty payment were tied to future sales, establishing a liability in recording the transaction appears inconsistent with the guidance in paragraph 27 or SFAS 141. Further, if the provisions are profit sharing in nature, the guidance in EITF 95-8 would call for recognition against earnings in the periods the sales occur. Please submit the analysis that you performed, addressing each class of factors set forth in that guidance, which you believe supports your characterization of the amounts as additional purchase consideration.
Response:
6.
To further clarify our previous response regarding the recording of the $2,000,000 royalty payment we respond as follows:
When the Company initially entered into the acquisition agreement in November 2001 whereby the Company would acquire the formulations, recipes and trade secrets (the “intellectual property”), the agreements called for the payment of $2,000,000 in cash to the vendors and the issuance of 500 shares of the common stock of Food and Culinary Technology Group Inc., as the combined acquisition cost. The agreement further stated that the payment of the $2,000,000 in consideration shall come in the form of cash remittances in the total amount of $460,000 as various benchmarks were achieved by the Corporation, with the balance being payable in the form of a royalty of $0.05 per pound of premix sold until the total amount of $2,000,000 was paid in full. The $2,000,000 cash payment was the agreed to amount of consideration for the asset being acquired (the intellectual property). &n bsp;While timing of the payment was indeterminate due to the agreed to terms, the payment itself wasrequired to be made for the Company to acquire ownership of the intellectual property, and as such it was not considered contingent consideration. When the Company entered into a settlement agreement in August 2003 with the vendors of the asset, new payment terms were adopted regarding the $2,000,000 consideration. Presently the terms require specific annual payments over a term of 10 years with a final balloon payment at the end of the 10th year such payment being calculated by deducting from the $2,000,000 acquisition cost all previously remitted payments to arrive at a net amount due (if any). While the Company presently remits monthly payments based on a royalty of $0.05 per pound of product actually sold, this amount must be adjusted quarterly to meet minimum payment requirements according to the terms of the settlement agreement. Again, the Co mpany believes these terms support the recording of the total acquisition cost as a liability. Perhaps the reference to the liability as a “royalty payable” is inconsistent with the actual nature of the liability we have recorded on our records for the acquisition cost payable with respect to the intellectual property. We would be pleased to review our notes to adjust disclosure to further clarify.
The Company believes the treatment of the acquisition cost payable is correct, and that it does not fit the guidance put forth in SFAS 141, para. 27. Additionally the Company advises we have not performed any analysis under the guidance set forth in ETIF 95-8.
Comment:
7.
We note your response to prior comment 6, in which you propose a disclosure revision explaining that your intangible assets have an indeterminate useful life, and that you will periodically analyze the assets for impairment. Since you previously disclosed that once significant commercial operations commenced, an estimated useful life would be determined and amortization would begin, please explain how your view of the intangible assets has evolved to lead you to the notion that estimation is no longer possible. Note that under the guidance in paragraph B59 of SFAS 142, indefinite does not mean indeterminable, and even if the precise useful life is not determinable, the intangible asset should still be amortized over the best estimate of useful life. If you conclude the intangible assets have an indefinite useful life, please submit the impairment analysis that you perfo rmed, and disclose the information required under paragraphs 44 through 47 of SFAS 142.
Response:
7.
Further to our prior responses and disclosure regarding the useful life of our intangible assets, the Company has revisited this issue and reviewed all previous disclosure in detail. Upon completing this review the Company believes it is possible to estimate the useful life of the asset based on the occurrence of two events: (1) The successful completion of more than one year of commercial sales resulting from the use of the asset (intellectual property), at least one of such years providing significant revenues, and (2) the execution of a settlement agreement with the vendors of the asset which provides a specific term for payment of the acquisition cost relating to the asset. As such, the Company has determined to amortize the asset on a straight line basis over a period of ten (10) years, which period reflects the maximum time over which the acquisition cost payable in res pect of the asset may be remitted. The Company will commence amortization effective the fiscal year ended December 31, 2004, which year end represents our second year of significant commercial sales. The Company will remit proposed revisions in redline to the Form 10KSB filed for the year ended December 31, 2004 for your review prior to filing via Edgar. Additionally, the Company will continue to periodically analyze the asset for impairment.
Note 16 – Distribution of Capital Canada, page F-23
Comment:
8.
We note your response to prior comment 9, explaining that you are awaiting final review of the accounting literature relied upon in the treatment of the distribution of Capital Canada shares by your auditors, and will reply with the specific accounting literature in a separate letter. Please submit all correspondence that your receive from your auditor in the course of assembling your response to prior comment 9.
Please also ensure that you explain why Capital Canada was considered distributed for the fiscal year ended December 31, 2003, given that the spin-off was apparently subject to the approval of a 20-F registration statement which was not considered effective until May 2004. Clarify in your response and disclosure, the effective date of the spin-off and how the subsidiary was accounted for before and after the spin-off.
Response:
Please be advised that we have no correspondence to remit from our auditors regarding the treatment of the distribution of Capital Canada shares. In order to maintain the independence standards required, our auditor recommended we retain an independent consultant to review management’s treatment of the transaction for financial purposes. A detailed review of the aforementioned distribution with our consultant and legal counsel has confirmed that the spin off was subject to the approval of both a 20F registration statement and the distribution of an information statement to the shareholders of Capital Canada in order to become effective, which activities were completed on June 25, 2004. The operations of Capital Canada were included in our Form 10KSB filed for the fiscal year ended December 31, 2003. For purposes of accounting for this subsidiary in the financial statements (in the form as presently filed via Edgar), the Company ceased consolidating the operations of Capital Canada as at the commencement of the 2004 fiscal year due to the fact that it believed the conclusion of the spin off was imminent and that FACT Corporation no longer operated the entity as a controlled subsidiary.
Therefore, as our investigation has confirmed the effective date of the spin off was June 25, 2004, the Company is prepared to re-state the financial statements (quarterly and annual reporting periods) for the fiscal year ended December 31, 2004 in order to reflect consolidated operations, including Capital Canada up to the effective date of the spin off and, thereafter ceasing to include the operations of Capital Canada, should your offices require. We have attached the audited financial statements of Capital Canada as at December 31, 2004 as Exhibit “C” in order to assist in your determination of materiality of the omission and will await your further response.
Comment:
9.
We understand from your response to prior comment 10 that the impairment charge related to the $650,559 receivable from Capital Reserve Canada Limited was recorded as a direct reduction to your common stock account. Tell us how you are able to support your accounting under the guidance in paragraph 13 of SFAS 114, which governs the treatment of loan impairment.
Response:
9.
Management of the Company does not believe paragraph 13 of SFAS 114 is the appropriate guidance with respect to the impairment charge related to the Capital Canada loan. To provide additional clarification, the initial loan receivable recorded on the books of the Company as it relates to Capital Canada was recorded as a debit to accounts’ receivable and a credit to the common stock account. This transaction reflected the issuance by the Company of shares of its common stock to a third party on behalf of Capital Canada in order to facilitate the acquisition of an operating oil and gas property. As such, management does not believe that impairment of the transaction through its expense accounts, as recommended under paragraph 13 of SFAS 114, is appropriate treatment. We believe the impairment of the loan directly to the common stock account is correct.
Closing:
The Company hereby acknowledges that:
-
the company is responsible for the adequacy and accuracy of the disclosure in the filing;
-
staff comments or changes to disclosure in response to staff comments do not foreclose the Commission from taking any action with respect to the filing; and
-
the Company may not assert staff comments as a defense in any proceeding initiated by the Commission or any person under the federal securities laws of the United States.
Sincerely,
/s/ Jacqueline Danforth
Jacqueline Danforth
Director
cc: Mark A. Wojciechowski – Staff Accountant
EXHIBIT A
FOURTH AMENDMENT TO SHARE EXCHANGE AGREEMENT
This Fourth Amendment to Share Exchange Agreement (this “Amendment”) is entered as of this 2nd day of February, 2004, to amend that certain Share Exchange Agreement (the “Exchange Agreement”) dated November 7, 2001, as previously amended by the Amendment to Share Exchange Agreement dated February 11, 2002, by the Second Amendment to Share Exchange Agreement dated April 30, 2002 and by the Third Amendment to Share Exchange Agreement dated June 11, 2002 (collectively, the “Exchange Agreement”) by and among FACT Corporation, previously known as Capital Reserve Corporation, a Colorado corporation (“Corp.”) and Food and Culinary Technology Group, Inc., a Nevada corporation ("Group"), and the shareholders of FACT, namely International Securities Group, Inc., a Nevada corporation, TMAmerican Holdings Limited, a Nova Scotia corporation , and Food Information Services Inc., a Florida corporation. The following entities, who were parties to the Exchange Agreement and the first three Amendments referenced above, are not parties to this Amendment are they ceased being shareholders of Group prior to the date hereof: SN Global Investments Inc. a Nova Scotia corporation, Gallus Importations Inc., a Quebec corporation, Steven M. Schechter, Jennifer Flynn and Steven Capodicasa.
WHEREAS, the Exchange Agreement provides in Section 3 thereof, among other things, that the shares of Corp. Class A common stock and the shares of Group common stock shall be released upon certain specified events; and
WHEREAS, the parties now wish to amend such provision of the Exchange Agreement as set forth below in this Amendment.
NOW THEREFORE, upon full and complete execution hereof, the Exchange Agreement is deemed to be amended as follows:
1. All undefined terms used herein shall have the meaning ascribed thereto in the Exchange Agreement.
2. All of the Group Shares stock held in escrow shall immediately be released and delivered to Corp. and that all of the FACT Shares issued to ISG, TM and FIS pursuant to Section 3 of the Exchange Agreement shall be released and delivered to such entities.
3. The Escrow is hereby closed and the Escrow Agent, upon delivery of the Group shares, shall have no further obligations, rights or duties under the Exchange Agreement.
4. Subsection 3.C of the Exchange Agreement is hereby deleted and shall have no further obligation on the Corp. or Group.
IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be executed the day and the year first above written.
FOOD AND CULINARY
FACT CORPORATION,
TECHNOLOGY GROUP INC.,a Nevada
a Colorado corporation
corporation
By:/s/ Jacqueline Danforth
By: /s/ Jacqueline Danforth
Name:
Jacqueline Danforth
Name: Jacqueline Danforth
Title: President
Title: President
INTERNATIONAL SECURITIES
FOOD INFORMATION SERVICES
GROUP INC.,a Nevada corporation
INC.,an Ontario corporation
By:/s/ W. Scott Lawler
By:/s/ Brian Raines
Name: W. Scott Lawler
Name:
Brian Raines
Title:
President
Title: President
TMAMERICAN HOLDINGS LTD.,
a Nova Scotia corporation
By:/s/ Thomas Murdoch
Name:
Thomas Murdoch
Title: President
