SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
X Quarterly Report Pursuant to Section 13 or 15(d) of the
- Securities and Exchange Act of 1934
For the Quarterly period ended SEPTEMBER 30, 2001
or
_ Transition report pursuant to Section 13 or 15(d) of the
Securities and Exchange Act of 1934
For the transition period from ________________ to ___________________.
Commission File No. 1-9727
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FRANKLIN CAPITAL CORPORATION
----------------------------
(Exact name of registrant specified in its charter)
DELAWARE 13-3419202
-------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
450 Park Avenue, 10th Floor, New York, New York 10022
----------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 486-2323
---------------------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No __
The number of shares of common stock outstanding as of October 31, 2001 was
1,074,700.
1
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Balance Sheets - September 30, 2001 and December 31, 2000
Statements of Operations - Three months and nine months ended
September 30, 2001 and 2000
Statements of Cash Flows - Nine months ended September 30,
2001 and 2000
Statements of Changes in Net Assets - Three months and nine months
ended September 30, 2001 and 2000
Portfolio of Investments - September 30, 2001
Notes to Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURE
EXHIBIT INDEX
FORWARD LOOKING STATEMENTS
WHEN USED IN THIS QUARTERLY REPORT ON FORM 10-Q, THE WORDS "BELIEVES,"
"ANTICIPATES," "EXPECTS" AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY
FORWARD-LOOKING STATEMENTS. STATEMENTS LOOKING FORWARD IN TIME ARE INCLUDED IN
THIS QUARTERLY REPORT ON FORM 10-Q. SUCH STATEMENTS ARE SUBJECT TO CERTAIN RISKS
AND UNCERTAINTIES WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY,
INCLUDING, BUT NOT LIMITED TO, THOSE SET FORTH IN "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS." READERS ARE
CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH
SPEAK ONLY AS OF THE DATE HEREOF. THE CORPORATION UNDERTAKES NO OBLIGATION TO
PUBLICLY REVISE THESE FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR
CIRCUMSTANCES OCCURRING AFTER THE DATE HEREOF OR TO REFLECT THE OCCURRENCE OF
UNANTICIPATED EVENTS.
2
FRANKLIN CAPITAL CORPORATION
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BALANCE SHEETS
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SEPTEMBER 30, DECEMBER 31,
2001 2000
(UNAUDITED)
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ASSETS
Marketable investment securities, at market value (cost: September 30,
2001 - $194,872; December 31, 2000 - $122,231) (Note 2) $119,675 $112,019
Investments, at fair value (cost: September 30, 2001 -$4,377,430;
December 31, 2000 - $3,505,159) (Note 2)
eCom Capital, Inc. 2,650,000 --
Affiliate investments 236,456 1,338,389
Other investments 1,350,000 3,548,504
---------- ---------
4,236,456 4,886,893
---------- ---------
Cash and cash equivalents (Note 2) 112,610 647,565
Other assets 98,638 120,235
------- -------
TOTAL ASSETS $4,567,379 $5,766,712
========== ==========
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LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accounts payable and accrued liabilities $132,229 $187,632
Note payable 1,000,000 --
---------- --------
TOTAL LIABILITIES 1,132,229 187,632
---------- -------
Commitments and contingencies
STOCKHOLDERS' EQUITY
Convertible preferred stock, $1 par value, cumulative 7% dividend:
5,000,000 shares authorized; 16,450 shares issued and outstanding
at September 30, 2001 and December 31, 2000
(Liquidation preference $1,645,000) (Note 4) 16,450 16,450
Common stock, $1 par value: 5,000,000 shares authorized;
1,505,888 shares issued:1,074,700 shares outstanding at September 30,
2001 and 1,098,200 at December 31, 2000 (Note 6) 1,505,888 1,505,888
Additional paid-in capital 10,271,610 10,271,610
Unrealized (depreciation) appreciation of investments,
net of deferred income taxes (Notes 2 and 3) (216,171) 1,371,522
Accumulated deficit (5,623,271) (5,190,908)
---------- ----------
5,954,506 7,974,562
Deduct common stock held in treasury, at cost, 431,188 shares at
September 30, 2001, and 407,688 shares at December 31, 2000 (Note 4) (2,519,356) (2,395,482)
---------- ----------
Net assets (See Note 8 for per share information) 3,435,150 5,579,080
---------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $4,567,379 $5,766,712
========== ==========
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The accompanying notes are an integral part of these financial statements.
3
FRANKLIN CAPITAL CORPORATION
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STATEMENTS OF OPERATIONS
(unaudited)
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THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2001 2000 2001 2000
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INVESTMENT INCOME
Dividend income $0 $10,500 $26,744 $31,500
Interest income 11,735 10,638 42,350 40,134
Other income 30,000 0 30,000 22,000
------- -- ------- -------
41,735 21,138 99,094 93,634
------- ------- ------- -------
EXPENSES
Salaries and employee benefits (Note 7) 215,216 366,020 692,487 1,068,331
Professional fees 41,325 57,400 123,975 270,681
Rent 29,784 31,484 89,351 72,452
Insurance 10,600 10,442 31,799 31,321
Directors' fees 501 19,875 19,502 53,625
Taxes other than income taxes 7,901 8,993 37,160 37,802
Newswire and promotion 1,000 1,500 3,000 4,500
Depreciation and amortization 4,998 5,416 14,995 16,052
General and administrative 47,556 62,517 165,359 204,943
------- ------- -------- --------
358,881 563,647 1,177,628 1,759,707
-------- -------- ---------- ----------
Net investment loss from operations (317,146) (542,509) (1,078,534) (1,666,073)
Net realized gain on portfolio of investments:
Investment securities:
Affiliated 1,000 43,558 138,757 165,254
Unaffiliated 4,902 3,737 591,277 946,862
------ ------ -------- --------
Total investment securities 5,902 47,295 730,034 1,112,116
Other than investment securities 0 202 823 3,819
-- ---- ---- ------
Net realized gain on portfolio of investments 5,902 47,497 730,857 1,115,935
------ ------- -------- ----------
Provision for current income taxes 0 1,001 (1,676) 20,001
-- ------ ------- -------
Net realized loss (311,244) (496,013) (346,001) (570,139)
(Decrease) increase in unrealized appreciation of
investments, net of deferred income taxes:
Investment securities:
Affiliated (140,974) 968,958 278,725 (709,163)
Unaffiliated 86,001 (3,394,358) (1,866,419) 1,268,742
------- ----------- ----------- ----------
Total investment securities (54,973) (2,425,400) (1,587,694) 559,579
Other than investment securities 0 0 0 (951,862)
-- -- -- ---------
Deferred income tax benefit 0 (855,000) 0 (159,000)
-- --------- -- ---------
Decrease in unrealized appreciation of investments,
net of deferred income taxes (54,973) (1,570,400) (1,587,694) (233,283)
-------- ----------- ----------- ---------
Net decrease in net assets from operations (366,217) (2,066,413) (1,933,695) (803,422)
--------- ----------- ----------- ---------
Preferred dividends 28,787 28,787 86,362 69,845
------- ------- ------- -------
Net decrease in net assets attributable to common
stockholders ($395,004) ($2,095,200) ($2,020,057) ($873,267)
========== ============ ============ ==========
Basic and diluted net decrease in net assets
from operations per common share (Note 7) ($0.37) ($1.92) ($1.86) ($0.80)
======= ======= ======= =======
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The accompanying notes are an integral part of these financial statements.
4
FRANKLIN CAPITAL CORPORATION
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STATEMENTS OF CASH FLOWS
(UNAUDITED)
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FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 2000
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Cash flows from operating activities:
Net decrease in net assets from operations ($1,933,695) ($803,422)
Adjustments to reconcile net decrease in net assets to net
cash used in operating activities:
Depreciation and amortization 14,995 16,052
Decrease in unrealized appreciation of investments,
net of deferred income tax expense 1,587,694 233,283
Net realized gain on portfolio of investments, net of current income taxes (732,533) (1,095,934)
Non-cash compensation expense from exercise of officer options - 326,505
Changes in operating assets and liabilities:
Increase in other assets 6,595 229,994
(Decrease) increase in accounts payable and accrued liabilities (53,727) 12,292
------- ------
Total adjustments 823,024 (277,808)
-------- --------
Net cash used in operating activities (1,110,671) (1,081,230)
---------- ----------
Cash flows from investing activities:
Proceeds from sale of affiliate 1,519,421 357,013
Proceeds from sale of other investments 1,044,782 3,819
Proceeds from sale of marketable investment securities 462,989 1,228,374
Purchase of investment in majority owned affiliate (1,650,000) -
Purchase of investment in affiliate - (100,000)
Purchases of investments (49,095) (1,631,936)
Purchases of marketable investment securities (542,146) (139,417)
-------- --------
Net cash provided by (used in) investing activities 785,951 (282,147)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of preferred stock - 1,645,000
Payment of preferred dividends (86,362) (69,845)
Cash paid to common shareholders in lieu of fractional shares
due to stock split of common shares - (1,449)
Purchase of treasury stock (123,873) (279,766)
-------- --------
Net cash (used in) provided by financing activities (210,235) 1,293,940
-------- ---------
Net decrease in cash and cash equivalents (534,955) (69,437)
Cash and cash equivalents at beginning of period 647,565 571,341
-------- -------
Cash and cash equivalents at end of period $112,610 $501,904
======== ========
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The accompanying notes are an integral part of these financial statements.
5
FRANKLIN CAPITAL CORPORATION
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STATEMENTS OF CHANGES IN NET ASSETS
(UNAUDITED)
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THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2001 2000 2001 2000
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Decrease in net assets from operations:
Net investment loss ($317,146) ($542,509) ($1,078,534) ($1,666,073)
Net realized gain on portfolio of investments,
net of current income taxes 5,902 46,496 732,533 1,095,934
Decrease in unrealized appreciation of investments,
net of deferred income taxes (54,973) (1,570,400) (1,587,694) (233,283)
-------- ----------- ----------- ---------
Net decrease in net assets from operations (366,217) (2,066,413) (1,933,695) (803,422)
Capital stock transactions:
Issuance of preferred stock - - - 1,645,000
Payment of dividends on preferred stock (28,787) (28,787) (86,362) (69,845)
Issuance of stock from treasury for exercise of officer options - 129,317 - 326,505
Cash paid to common shareholers in lieu of fractional shares - - - (1,449)
Purchase of treasury stock (8,514) (65,215) (123,873) (279,766)
------- -------- --------- ---------
Total (decrease) increase in net assets (403,518) (2,031,098) (2,143,930) 817,023
--------- ----------- ----------- -------
Net assets at beginning of period 3,838,668 11,288,503 5,579,080 8,440,382
--------- ---------- --------- ---------
Net assets at end of period $3,435,150 $9,257,405 $3,435,150 $9,257,405
========== =========== ========== ==========
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The accompanying notes are an integral part of these financial statements.
6
FRANKLIN CAPITAL CORPORATION
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PORTFOLIO OF INVESTMENTS
(UNAUDITED)
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MARKETABLE INVESTMENT SECURITIES
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MARKET
NUMBER OF VALUE
SEPTEMBER 30, 2001 SHARES COST(1) (NOTE 2)
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New Media Spark - common stock 500,000 $160,197 $85,000
Certificate of Deposit - 3.26%, due 10/04/2001(2) 34,675 34,675
-------- --------
Total Marketable Investment Securities
(2.7% of total investments and 3.5% of net assets) $194,872 $119,675
======== ========
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INVESTMENTS, AT FAIR VALUE
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NUMBER OF
SHARES OR DIRECTORS'
EQUITY PRINCIPAL VALUATION
SEPTEMBER 30, 2001 INVESTMENT INTEREST AMOUNT($) COST(1) (NOTE 2)
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MAJORITY OWNED AFFILIATE
eCom Capital, Inc. Common stock 64.70% 2,500,000 $2,500,000 $2,500,000
eCom Capital, Inc. Note Receivable(2) - 150,000 150,000 150,000
------- ------- -------
Total eCom Capital, Inc. (60.8% of total investments
and 77.1% of net assets)
(Radio production and advertising sales) 64.70% 2,650,000 2,650,000 2,650,000
AFFILIATES
Excom Ventures, LLC
(3.2% of total investments and 4.1% of net assets) Units 18.64% 140,000 140,000 140,000
(Purchase evaluation software)
Primal Solutions, Inc.
(2.2% of total investments and 2.8% of net assets) Common Stock 7.30% 1,483,938 237,430 96,456
------- ------
(Internet-based Voice over IP billing software)
Total Affiliates 377,430 236,456
OTHER INVESTMENTS
Alacra Corporation
(23.0% of total investments and 29.1% of net assets) Convertible 1.68% 321,543 1,000,000 1,000,000
(Internet-based information provider) Preferred Stock
Structured Web, Inc.
(8.1% of total investments and 10.2% of net assets) Convertible
(Internet-based application service provider) Preferred Stock 3.60% 188,425 350,000 350,000
------- -------
Total Other Investments 1,350,000 1,350,000
--------- ---------
Total Investments, at Fair Value 4,377,430 4,236,456
========= =========
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(1) Book cost equals tax cost for all investments
(2) Income producing security
The accompanying notes are an integral part of these financial statements.
7
FRANKLIN CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2001
1. ORGANIZATION
The information furnished in the accompanying financial statements reflects all
adjustments that are, in the opinion of management, necessary for a fair
presentation of the results for the interim period presented.
Franklin Capital Corporation ("Franklin", or the "Corporation") is a Delaware
corporation registered as a Business Development Company ("BDC") under the
Investment Company Act of 1940 (the "Act"). A BDC is a specialized type of
investment company under the Act. A BDC must be primarily engaged in the
business of furnishing capital and managerial expertise to companies that do not
have ready access to capital through conventional financial channels. Such
companies are termed "eligible portfolio companies". The Corporation, as a BDC,
generally may invest in other securities; however, such investments may not
exceed 30% of the Corporation's total asset value at the time of any such
investment.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States have been condensed or omitted. It is suggested that these
condensed financial statements be read in conjunction with the financial
statements and notes thereto included in the Corporation's Annual Report on Form
10-K for the year ended December 31, 2000.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
STATEMENTS OF CASH FLOWS
The Corporation paid no interest or income taxes during the nine months ended
September 30, 2001 and 2000.
The Corporation issued a note payable in the amount of $1,000,000 as part of the
purchase price of a majority owned affiliate. See Note 5 for additional
information.
At September 30, 2001, the Corporation held cash and cash equivalents primarily
in money market funds and overnight commercial paper at two commercial banking
institutions and one broker/dealer.
VALUATION OF INVESTMENTS
Security investments which are publicly traded on a national exchange or NASDAQ
are stated at the last reported sales price on the day of valuation, or if no
sale was reported on that date, then the securities are stated at the last
quoted bid price. The Board of Directors of Franklin (the "Board of Directors")
may determine, if appropriate, to discount the value where there is an
impediment to the marketability of the securities held.
Investments for which there is no ready market are initially valued at cost and,
thereafter, at fair value based upon the financial condition and operating
results of the issuer and other pertinent factors as determined by the good
faith of the Board of Directors. The financial condition and operating results
have been derived utilizing both audited and unaudited data. In the absence of a
ready market for an investment, numerous assumptions are inherent in the
valuation process. Some or all of these assumptions may not materialize.
Unanticipated events and circumstances may occur subsequent to the date of the
valuation and values may change due to future events. Therefore, the actual
amounts eventually realized from each investment may
8
FRANKLIN CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
vary from the valuations shown and the differences may be material. Franklin
reports the unrealized gain or loss resulting from such valuation in the
Statements of Operations.
GAINS ON PORTFOLIO OF INVESTMENTS
Amounts reported as realized gains are measured by the difference between the
proceeds of sale or exchange and the cost basis of the investment without regard
to unrealized gains reported in the prior periods. Gains are considered realized
when sales or dissolution of investments are consummated.
INCOME TAXES
Franklin does not qualify for pass through tax treatment as a Regulated
Investment Company under Subchapter M of the Internal Revenue Code for income
tax purposes. Therefore, the Corporation is taxed under Regulation C.
Franklin accounts for income taxes in accordance with the provision of Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109"). The significant components of deferred tax assets and liabilities are
principally related to the Corporation's net operating loss carryforward and its
unrealized appreciation of investments.
DEPRECIATION AND AMORTIZATION
Depreciation is recorded using the straight-line method at rates based upon
estimated useful lives for the respective assets. Leasehold improvements are
included in other assets and are amortized over their useful lives or the
remaining life of the lease, whichever is shorter.
NET DECREASE IN NET ASSETS PER COMMON SHARE
Basic and diluted net decrease in net assets per common share is calculated in
accordance with the provisions of Statement of Financial Accounting Standards
No. 128, "Earnings per Share".
3. INCOME TAXES
For the nine months ended September 30, 2001 and 2000, Franklin's tax
(provision) benefit was based on the following:
2001 2000
---------- ----------
Net investment loss from operations ............. $(1,078,534) $(1,666,073)
Net realized gain on portfolio of investments ... 730,857 1,115,935
Decrease in unrealized appreciation/depreciation (1,587,694) ( 392,283)
---------- ----------
Pre-tax book loss .......................... $(1,935,371) $( 942,421)
=========== ===========
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FRANKLIN CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2001 2000
---------- ----------
Tax benefit at 34% on $(1,935,371) and
$(942,421) respectively ....................... $ 658,000 $ 320,000
State and local, net of Federal benefit ......... 49,000 ( 20,000)
Book losses for which no benefit is provided .... ( 8,000) (141,000)
Change in valuation allowance ................... (697,000) --
-------- --------
$ 2,000 $ 139,000
============ ==========
The components of the tax benefit (provision) are as follows:
2001 2000
---------- ----------
Current state and local tax benefit (provision) . $ 2,000 $ (20,000)
Deferred tax benefit ............................ -- 159,000
------------ ----------
Benefit for income taxes ........................ $ 2,000 $ 139,000
============ ==========
Deferred income tax provision reflects the impact of "temporary differences"
between amounts of assets and liabilities for financial reporting purposes and
such amounts as measured by tax laws.
At September 30, 2001 and December 31, 2000, significant deferred tax assets and
liabilities consist of:
Asset (Liability)
-----------------------------
September 30, December 31,
2001 2000
------------ ------------
Deferred Federal and state benefit
from net operating loss carryforward .......... $ 1,763,000 $ 1,638,000
Deferred Federal and state benefit
(provision) on unrealized
appreciation of investments ................... 78,000 (494,000)
Valuation allowance ............................. (1,841,000) (1,144,000)
---------- ----------
Deferred taxes .................................. $ -- $ --
============ ============
At December 31, 2000, Franklin had net operating loss carryforwards for income
tax purposes of approximately $4,551,000 that will begin to expire in 2011. At a
36% effective tax rate the after-tax net benefit from this loss would be
approximately $1,638,000.
4. STOCKHOLDERS' EQUITY
The Accumulated Deficit at September 30, 2001 consists of accumulated net
realized gains of $5,287,000 and accumulated investment losses of $10,910,000.
On February 22, 2000, the Corporation issued 16,450 shares of convertible
preferred stock with a par value of $100 for $1,645,000. The stock has a
cumulative 7% quarterly dividend and is convertible into the number of shares of
common stock by dividing the purchase price for the convertible preferred stock
by conversion price in effect (which is currently $13.33), resulting in 123,375
shares of common stock. The convertible preferred stock has antidilution
provisions, which can change the conversion price in certain circumstances if
the Corporation issues additional shares of common stock. The holder has the
right to convert the shares of convertible preferred stock at any time until
February 22, 2010 into common stock.
10
FRANKLIN CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Upon liquidation, dissolution or winding up of the Corporation, the stockholders
of the convertible preferred stock are entitled to receive $100 per share plus
any accrued and unpaid dividends before distributions to any holder of the
Corporation's common stock.
The Board of Directors has authorized Franklin to repurchase up to an aggregate
of 525,000 shares of its common stock in open market purchases on the American
Stock Exchange when such purchases are deemed to be in the best interest of the
Corporation and its stockholders. As of December 31, 2000, the Corporation had
purchased 458,850 shares of its common stock of which 407,688 remained in
treasury. During the nine months ended September 30, 2001, the Corporation
purchased 23,500 shares of its common stock at a total cost of $123,873. To
date, Franklin has repurchased 482,350 shares of its common stock of which
431,188 shares remain in treasury at September 30, 2001.
5. TRANSACTIONS WITH AFFILIATES
On February 1, 2001, Franklin sold to Avery Communications, Inc. ("Avery")
1,183,938 shares of common stock and 350,000 shares of preferred stock of Avery
representing Franklin's entire holding in Avery, for $1,557,617 plus accrued
interest on the preferred stock for a realized gain net of expenses of $137,759.
As part of the sale Franklin retained the right to receive 1,533,938 shares of
Primal Solutions, Inc. ("Primal") a wholly-owned subsidiary of Avery. On
February 13, 2001, Primal announced that Avery had completed a spin-off of
Primal and Franklin received 1,533,938 fully registered and marketable shares of
Primal. During the nine months ended September 30, 2001, Franklin sold 50,000
shares of Primal for total proceeds of $9,000, realizing a gain of $1,000.
On August 28, 2001, Franklin along with Sunshine Wireless LLC purchased the
assets of Winstar Radio Networks, Global Media and Winstar Radio Productions
(collectively "WRN") for a total purchase price of $6.25 million. Change
Technology Partners, a public company, provided $2.25 million of senior
financing for the deal. The acquisition was consummated through eCom Capital
Inc., ("eCom") a wholly-owned subsidiary of Franklin. Franklin's total
investment was $2.65 million consisting of $1.65 million in cash and a $1
million note payable to Winstar. The note is due February 28, 2002 with interest
at 3.54% and has a right of set-off against certain representations and
warranties made by Winstar. As a result of the transaction, Franklin now owns
57.5% of eCom on a fully diluted basis and 100% of eCom's common equity. In
addition, Franklin has the right to nominate four directors to eCom's
seven-person board of directors.
At the closing, Franklin entered into a services agreement with eCom whereby
Franklin will provide eCom with certain services. In consideration for the
services provided, for a period of six-months Franklin will receive $30,000 per
month and be reimbursed for all direct expenses. Subsequently, Franklin's
monthly fee will be determined by a majority of the non-Franklin directors;
however, said management fee will be no less than $15,000 per month. Franklin
will continue to be reimbursed for all direct expenses. Finally, Franklin's
chief financial officer will serve in that capacity for eCom and his salary will
be allocated between eCom and Franklin on an 80/20 basis.
6. STOCK OPTIONS
On September 9, 1997, Franklin's stockholders approved two Stock Option Plans: a
Stock Incentive Plan ("SIP") to be offered to the Corporation's consultants,
officers and employees (including any officer or
11
FRANKLIN CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
employee who is also a director of the Corporation) and a Non-Statutory Stock
Option Plan ("SOP") to be offered to the Corporation's "outside" directors,
i.e., those directors who are not also officers or employees of Franklin.
112,500 shares of the Corporation's Common Stock have been reserved for issuance
under these plans, of which 67,500 shares have been reserved for the SIP and
45,000 shares have been reserved for the SOP. Shares subject to options that
terminate or expire prior to exercise will be available for future grants under
the Plans. Because the issuance of options to "outside" directors is not
permitted under the Act, without an exemptive order by the Securities and
Exchange Commission ("the Commission"), the issuance of options under the SOP
was conditioned upon the granting of such order. The Commission granted the
order on January 18, 2000.
Franklin accounts for the options issued to employees under APB Opinion No. 25,
under which no compensation cost has been recognized. Proforma information
determined consistent with the fair value method required by FASB Statement No.
123, is as follows:
Nine Months Ended
----------------------------------------------------
September 30, 2001 September 30, 2000
------------------ ------------------
Net decrease in net assets attributable to common stockholders:
As reported ($2,020,057) $(873,262)
Pro forma ($2,048,546) $(918,654)
Net decrease in net assets per common share:
As reported ($ 1.86) $( 0.80)
Pro forma - Basic ($ 1.89) $( 0.84)
Pro forma - Diluted ($ 1.89) $( 0.84)
Net Asset Value per common share:
As reported - Basic $ 3.20 $ 8.40
Pro forma - Basic $ 3.17 $ 8.36
Pro forma - As if converted basis $ 2.87 $ 7.50
Pro forma - As if liquidated basis $ 1.64 $ 6.93
The fair value of the options granted was estimated on the date of the grant
using the Black-Scholes option-pricing model with the following assumptions:
September 30, 2000
------------------
Stock volatility 41.3%
Risk-free interest rate 5.5%
Option term in years 4
Stock dividend yield -
No options were granted during the nine months ended September 30, 2001.
12
FRANKLIN CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The following is a summary of the status of the Stock Option Plans during the
nine months ended:
September 30, 2001 September 30, 2000
-------------------- -------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------ -------- ------ --------
Outstanding at beginning of
period 39,375 $11.27 65,625 $ 4.59
Granted - - 39,375 $11.27
Exercised - - 58,124 $ 4.55
Forfeited - - - -
Expired - - - -
------ ------
Outstanding at end of period 39,375 $11.27 46,876 $10.25
====== ======
Exercisable at end of period 26,875 $10.73 18,125 $11.61
====== ======
Weighted average fair value of
options granted - $2.58
The options issued under the SIP have a remaining contractual life of 7.25
years. The options issued under the SOP have a remaining contractual life of 8.4
years.
7. NET INCREASE IN NET ASSETS ATTRIBUTABLE TO COMMON STOCKHOLDERS PER SHARE
The following table sets forth the computation of basic and diluted change in
net assets per common share:
Three Months ended Nine months ended
September 30, September 30,
-----------------------------------------------------
2001 2000 2001 2000
-----------------------------------------------------
Numerator:
Net decrease in net assets from operations ($366,217) ($2,066,413) ($1,933,695) ($803,422)
Preferred stock dividends (28,787) (28,787) (86,362) (69,845)
------- ------- ------- -------
Numerator for basic and diluted earnings per share
net loss available for common stockholders (395,004) (2,095,200) (2,020,057) (873,267)
========= ========== ========== ========
Denominator:
Denominator for basic and diluted decrease in net
assets from operations weighted - average shares 1,076,012 1,092,779 1,083,408 1,092,346
Basic and diluted net decrease in net assets
attributable to common stockholders ($0.37) ($1.92) ($1.86) ($0.80)
====== ====== ====== ======
Preferred stock convertible into 123,375 shares of common stock was antidilutive
for the three months and nine months ended September 30, 2001 and 2000. Stock
options were antidilutive for the three and nine months ended September 30, 2001
and 2000.
13
FRANKLIN CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
For additional information on the Preferred Stock, see Note 4.
8. NET ASSET VALUE PER SHARE
The following table sets forth the computation of basic, as if converted basis
and as if liquidated basis net asset value per common share:
SEPTEMBER 30, DECEMBER 31,
---------------------------------------
2001 2000
---------------------------------------
Numerator:
Net assets, numerator for basic and as if converted
basis, net asset value per common share $3,435,150 $5,579,080
Liquidation value of convertible preferred
stock (1,645,000) (1,645,000)
---------- ----------
Numerator for as if liquidated basis, net asset value
per common share $1,790,150 $3,934,080
========== ==========
Denominator:
Number of common shares outstanding,
denominator for basic and as if liquidated
net asset value per common share 1,074,700 1,098,200
Number of shares of common stock to be
issued upon conversion of preferred stock 123,375 123,375
------- -------
Denominator for as if converted net asset value
per common share 1,198,075 1,221,575
========= =========
Net asset value per common share, basic $3.20 $5.08
===== =====
Net asset value per common share, as if converted basis $2.87 $4.57
===== =====
Net asset value per common share, as if liquidated basis $1.67 $3.58
===== =====
9. PURCHASES AND SALES OF INVESTMENT SECURITIES
The cost of purchases and proceeds from sales of investment securities excluding
short term investments, aggregated $3,091,241 and $3,026,363 respectively, for
the nine months ended September 30, 2001; $1,836,678 and $1,544,024
respectively, for the nine months ended September 30, 2000.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
STATEMENT OF OPERATIONS
The Corporation accounts for its operations under generally accepted
accounting principles for investment companies. On this basis, the principal
measure of its financial performance is captioned "Net increase (decrease) in
net assets from operations", which is composed of the following: "Net investment
loss from operations," which is the difference between the Corporation's income
from interest, dividends and fees and its operating expenses; "Net realized gain
on portfolio of investments," which is the difference between the proceeds
received from dispositions of portfolio securities and their stated cost; any
applicable income tax provisions (benefits); and "Net increase (decrease) in
unrealized appreciation of investments," which is the net change in the fair
value of the Corporation's investment portfolio, net of any increase (decrease)
in deferred income taxes that would become payable if the unrealized
appreciation were realized through the sale or other disposition of the
investment portfolio.
"Net realized gain (loss) on portfolio of investments" and "Net
increase (decrease) in unrealized appreciation of investments" are directly
related. When a security is sold to realize a gain, the net unrealized
appreciation decreases and the net realized gain increases. When a security is
sold to realize a loss, the net unrealized appreciation increases and the net
realized gain decreases.
FINANCIAL CONDITION
The Corporation's total assets and net assets were, respectively,
$4,567,379 and $3,435,150 at September 30, 2001, versus $5,766,712 and
$5,579,080 at December 31, 2000. Net asset value per share was $3.20 basic,
$2.87 as if converted basis, and $1.67 as if liquidated basis at September 30,
2001, versus $5.08 basic, $4.57 as if converted, and $3.58 as if liquidated at
December 31, 2000.
The Corporation's financial condition is dependent on the success of
its investments. A summary of the Corporation's investment portfolio is as
follows:
SEPTEMBER 30, 2001 DECEMBER 31, 2000
------------------ -----------------
Investments, at cost $4,572,302 $3,627,390
Unrealized (depreciation) appreciation,
net of deferred taxes (216,171) 1,371,522
---------- ----------
Investments, at fair value $4,356,131 $4,998,912
========== ==========
INVESTMENTS
At September 30, 2001, the Corporation had an investment in Alacra
Corporation ("Alacra"), valued at $1,000,000, which represents 21.9% of the
Corporation's total assets and 29.1% of its net assets. Alacra, headquartered in
New York and London, is a leading provider of Internet-based online information
services. Alacra provides a service called .xls, which aggregates and
cross-indexes over 70 premier business databases, delivering information
directly to Microsoft Excel, HTML, Microsoft Word or PDF formats at the desktop.
Other products include privatesuite(TM), a fast, easy, cost-effective way to
identify and retrieve profiles of privately held companies around the world;
compbook(TM), a tool for company peer analysis; and Portal B(TM), a fully
integrated business information portal.
15
On April 20, 2000, the Corporation purchased $1,000,000 worth of Alacra
Series F Convertible Preferred Stock. In connection with this investment,
Franklin was granted observer rights for Alacra Board of Directors meetings.
At September 30, 2001, the Corporation had an investment in Ecom
Capital, Inc. ("Ecom") valued at $2,650,000, which represents 58.0% of the
Corporation's total assets and 77.1% of its net assets. Ecom produces and
syndicates programs and services heard on more than 2,000 radio stations
nationwide across most major formats. Through its Global Media Sales unit, Ecom
also sells the advertising inventory radio stations provide in exchange for the
Ecom content. The programming and content includes prep services as well as long
form and short form programming. Additionally, Global Media has a number of
independent producer clients, which range from talk and music programs to news
and traffic services.
On August 28, 2001, the Corporation purchased $2,500,000 worth of Ecom
Common Stock and issued a secured note for $150,000.
At September 30, 2001, the Corporation had an investment in Excom
Ventures, LLC ("Excom") valued at $140,000, which represents 3.1% of the
Corporation's total assets and 4.1% of its net assets. Excom was formed as a
limited liability holding company for the purpose of investing in Expert
Commerce, Inc. ("Expert Commerce"). Expert Commerce is a Business-to-Business
purchase evaluation engine that simulates the way people make decisions. Based
on intelligent and proven technology, the engine helps structure complex
decisions and provides an audit trail to justify transactions, empowering buyers
to make purchase decisions with confidence.
On June 26, 2000, the Corporation purchased $140,000 worth of Excom
Units.
At September 30, 2001, the Corporation owned 1,483,938 shares of common
stock of Primal Solutions, Inc. ("Primal") valued at $96,456, which represents
2.1% of the Corporation's total assets and 2.8% of its net assets. Primal, based
in Irvine, California, is a leading provider of Web-based integrated customer
management and intelligence solutions that allow rapidly evolving communications
and Internet service providers to stay connected with and grow their customers.
It does this through an integrated suite of applications that can track and
analyze customer behavior and preferences, collect usage information, and
support billing and customer care back-office requirements, including those of
emerging IP billing markets.
On February 13, 2001, Primal was spun-off from Avery Communications,
Inc. ("Avery"). As a result of this spin-off Franklin received 1,533,938 fully
registered and marketable shares of common stock of Primal. Primal trades over
the counter on the OTC Bulletin Board. During the nine months ended September
30, 2001, Franklin sold 50,000 shares of common stock realizing a gain of
$1,000.
At September 30, 2001, the Corporation had an investment in Structured
Web, Inc. ("Structured Web") valued at $350,000, which represents 7.7% of the
Corporation's total assets and 10.2% of its net assets. Structured Web develops
web building blocks to enable small businesses to create and manage their own
digital nerve system easily and at an affordable price. Structured Web's
object-based proprietary technology enables customers to choose from a growing
selection of "WebBlocks" including content, communication, commerce and
services.
On August 8, 2000, the Corporation purchased $350,000 worth of
Structured Web convertible preferred stock. In connection with this investment,
Franklin was granted observer rights for Structured Web Board of Directors
meetings.
16
RESULTS OF OPERATIONS
INVESTMENT INCOME AND EXPENSES:
The Corporation's principal objective is to achieve capital
appreciation through long-term investments in businesses believed to have
favorable growth potential. Therefore, a significant portion of the investment
portfolio is structured to maximize the potential for capital appreciation and
provides little or no current yield in the form of dividends or interest. The
Corporation earns interest income from loans, preferred stocks, corporate bonds
and other fixed income securities. The amount of interest income varies based
upon the average balance of the Corporation's fixed income portfolio and the
average yield on this portfolio.
The Corporation had interest and dividend income of $69,094 and $71,634
for the nine months ended September 30, 2001 and 2000, respectively. The
Corporation had interest income and dividend income of $11,735 and $21,138 for
the three months ended September 30, 2001 and 2000, respectively. The decrease
in interest and dividend for the three and nine months ended September 30, 2001
when compared to September 30, 2000, was primarily the result of the sale of
Avery in February 2001. Avery was the major source of dividends during 2000.
During the three and nine months ended September 30, 2001, the Corporation
received a management fee of $30,000 for services provided to eCom. During the
three months ended September 30, 2000, Franklin had other income of $22,000
related to a one-time event.
Operating expenses were $1,177,628 and $1,759,707 for the nine months
ended and $358,881 and $563,647 for the three months ended September 30, 2001
and 2000, respectively. A majority of the Corporation's operating expenses
consist of employee compensation, office and rent expense, other expenses
related to identifying and reviewing investment opportunities and professional
fees. Professional fees consist of general legal fees, audit and tax fees and
investment related legal fees. The expenses decreased due to one-time expenses
in 2000 and a cost cutting effort in 2001.
Net investment losses from operations were $1,078,534 and $1,666,073
for the nine months ended and $317,146 and $542,509 for the three months ended
September 30, 2001 and 2000, respectively. The decrease resulted primarily from
the decrease in expenses noted above.
NET REALIZED GAINS AND LOSSES ON PORTFOLIO OF INVESTMENTS:
During the nine months and three months ended September 30, 2001 and
2000, the Corporation realized net gains before taxes of $730,857 and
$1,115,935, and $5,902 and $47,497 respectively, from the disposition of various
investments.
UNREALIZED APPRECIATION OF INVESTMENTS:
Unrealized appreciation of investments, net of deferred taxes,
decreased by $1,587,694 and $54,973 during the nine months and three months,
respectively, ended September 30, 2001, primarily from unrealized losses due to
the sale of Franklin's holdings in Go America. The decrease for the nine months
was partially offset by the sale of Franklin's investment in Avery
Communications.
Unrealized appreciation of investments, net of deferred taxes,
decreased by $233,283 and $1,570,400 during the nine months and three months,
respectively, ended September 30, 2000, primarily from the realization of gains
in Communications Intelligence Corporation and by a
17
decrease in the value of Franklin's investment in Avery. For the nine months,
this decrease was partially offset by unrealized gains due to the increase in
value of Franklin's investment in Go America.
LIQUIDITY AND CAPITAL RESOURCES
The Corporation's reported total cash and cash equivalents and
marketable investment securities (the primary measure of liquidity) at September
30, 2001, was $232,285 compared to $768,582 at December 31, 2000. Management
believes that these assets provide the Corporation with sufficient liquidity for
its operations in the short-term.
The Corporation has relied and continues to rely to a large extent upon
proceeds from sales of investments rather than investment income to defray a
significant portion of its operating expenses. Because such sales cannot be
predicted with certainty, the Corporation attempts to maintain adequate working
capital to provide for fiscal periods when there are no such sales.
RISKS
There are significant risks inherent in the Corporation's venture
capital business. The Corporation has invested a substantial portion of its
assets in small private companies and a bulletin board listed public
corporation. Because of the speculative nature of these investments, there is
significantly greater risk of loss than is the case with traditional investment
securities. The Corporation expects that from time to time its venture capital
investments may result in a complete loss of the Corporation's invested capital
or may be unprofitable. Other investments may appear likely to become
successful, but may never realize their potential. Neither the Corporation's
investments nor an investment in the Corporation is intended to constitute a
balanced investment program. The Corporation has in the past relied and
continues to rely to a large extent upon proceeds from sales of investments
rather than investment income to defray a significant portion of its operating
expenses.
INVESTING IN THE CORPORATION'S STOCK IS HIGHLY SPECULATIVE AND YOU
COULD LOSE SOME OR ALL OF THE AMOUNT YOU INVEST
The value of the Corporation's common stock may decline and may be
affected by numerous market conditions, which could result in the loss of some
or all of your investment in the Corporation's shares. The securities markets
frequently experience extreme price and volume fluctuation which affect market
prices for securities of companies generally, and technology companies in
particular. Because of the Corporation's focus on the technology sector, its
stock price is likely to be impacted by these market conditions. General
economic conditions and general conditions in the Internet and information
technology and other high technology industries will also affect the
Corporation's stock price.
INVESTING IN THE CORPORATION'S SHARES MAY BE INAPPROPRIATE FOR YOUR
RISK TOLERANCE
Investing in the Corporation's shares may be inappropriate for your
risk tolerance. The Corporation's investments in accordance with its investment
objective and principal strategies may result in an above average amount of risk
and volatility or loss of principal. The Corporation's investments in portfolio
companies are highly speculative and aggressive and, therefore, an investment in
its shares may not be suitable for you.
18
THE MARKET FOR VENTURE CAPITAL INVESTMENTS IS HIGHLY COMPETITIVE. IN
SOME CASES, THE CORPORATION'S STATUS AS A BUSINESS DEVELOPMENT COMPANY
MAY HINDER ITS ABILITY TO PARTICIPATE IN INVESTMENT OPPORTUNITIES.
The Corporation faces substantial competition in its investing
activities from private venture capital funds, investment affiliates of large
industrial, technology, service and financial companies, small business
investment companies, wealthy individuals and foreign investors. As a business
development company, the Corporation is required to disclose quarterly the name
and business description of portfolio companies and value of any portfolio
securities. Most of the Corporation's competitors are not subject to this
disclosure requirement. The Corporation's obligation to disclose this
information could hinder its ability to invest in certain portfolio companies.
Additionally, other regulations, current and future, may make the Corporation
less attractive as a potential investor to a given portfolio company than a
private venture capital fund not subject to the same regulations.
REGULATORY RISKS
Securities and tax laws and regulations governing the Corporation's
activities may change in ways negative to the Corporation's and its
shareholders' interests and interpretations of such laws and regulations may
change with unpredictable consequences.
THE CORPORATION IS DEPENDENT UPON KEY MANAGEMENT PERSONNEL FOR FUTURE
SUCCESS
The Corporation is dependent for the selection, structuring, closing
and monitoring of its investments on the diligence and skill of its senior
management and other management members. The future success of the Corporation
depends to a significant extent on the continued service and coordination of its
senior management team, particularly the Chairman and Chief Executive Officer.
The departure of any of the executive officers or key employees could materially
adversely affect the Corporation's ability to implement its business strategy.
The Corporation does not maintain key man life insurance on any of its officers
or employees.
INVESTMENT IN SMALL, PRIVATE COMPANIES
There are significant risks inherent in the Corporation's venture
capital business. The Corporation has invested a substantial portion of its
assets in private development stage or start-up companies. These private
businesses tend to be thinly capitalized, unproven, small companies with risky
technologies that lack management depth and have not attained profitability or
have no history of operations. Because of the speculative nature and the lack of
a public market for these investments, there is significantly greater risk of
loss than is the case with traditional investment securities. The Corporation
expects that some of its venture capital investments will be a complete loss or
will be unprofitable and that some will appear to be likely to become successful
but never realize their potential. The Corporation has been risk seeking rather
than risk averse in its approach to venture capital and other investments.
Neither the Corporation's investments nor an investment in the Corporation is
intended to constitute a balanced investment program. The Corporation has in the
past relied, and continues to rely to a large extent, upon proceeds from sales
of investments rather than investment income to defray a significant portion of
its operating expenses.
19
ILLIQUIDITY OF PORTFOLIO INVESTMENTS
Most of the investments of the Corporation are or will be equity
securities acquired directly from small companies. The Corporation's portfolio
of equity securities is and will usually be subject to restrictions on resale or
otherwise have no established trading market. The illiquidity of most of the
Corporation's portfolio of equity securities may adversely affect the ability of
the Corporation to dispose of such securities at times when it may be
advantageous for the Corporation to liquidate such investments.
THE INABILITY OF THE CORPORATION'S PORTFOLIO COMPANIES TO SUCCESSFULLY
MARKET THEIR PRODUCTS WOULD HAVE A NEGATIVE IMPACT ON ITS INVESTMENT
RETURNS
Even if the Corporation's portfolio companies are able to develop
commercially viable products, the market for new products and services is highly
competitive and rapidly changing. Commercial success is difficult to predict and
the marketing efforts of the Corporation's portfolio companies may not be
successful.
VALUATION OF PORTFOLIO INVESTMENTS
There is typically no public market of equity securities of the small
private companies in which the Corporation invests. As a result, the valuation
of the equity securities in the Corporation's portfolio is subject to the good
faith determination of the Corporation's Board of Directors. In the absence of a
readily ascertainable market value, the estimated value of the Corporation's
portfolio of equity securities may differ significantly from the values that
would be placed on the portfolio if a ready market for the equity securities
existed. Any changes in estimated net asset value are recorded in the
Corporation's statement of operations as "Change in unrealized appreciation on
investments."
FLUCTUATIONS OF QUARTERLY RESULTS
The Corporation's quarterly operating results could fluctuate as a
result of a number of factors. These include, among others, variations in and
the timing of the recognition of realized and unrealized gains or losses, the
degree to which the Corporation encounters competition in its markets and
general economic conditions. As a result of these factors, results for any one
quarter should not be relied upon as being indicative of performance in future
quarters.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Corporation's business activities contain elements of risk. The
Corporation considers a principal type of market risk to be valuation risk.
Investments are stated at "fair value" as defined in the 1940 Act and in the
applicable regulations of the Securities and Exchange Commission. All assets are
valued at fair value as determined in good faith by, or under the direction of,
the Board of Directors.
Neither the Corporation's investments nor an investment in the
Corporation is intended to constitute a balanced investment program. The
Corporation has exposure to public-market price fluctuations to the extent of
its publicly traded portfolio.
The Corporation has invested a substantial portion of its assets in
private development stage or start-up companies. These private businesses tend
to be thinly capitalized, unproven, small companies that lack management depth
and have not attained profitability or have no
20
history of operations. Because of the speculative nature and the lack of public
market for these investments, there is significantly greater risk of loss than
is the case with traditional investment securities. The Corporation expects that
some of its venture capital investments will be a complete loss or will be
unprofitable and that some will appear to be likely to become successful but
never realize their potential.
Because there is typically no public market for the equity interests of
the small companies in which the Corporation invests, the valuation of the
equity interests in the Corporation's portfolio is subject to the estimate of
the Corporation's Board of Directors. In making its determination, the Board may
consider valuation information provided by an independent third party or the
investee corporation. In the absence of a readily ascertainable market value,
the estimated value of the Corporation's portfolio of equity interests may
differ significantly from the values that would be placed on the portfolio if a
ready market for the equity interests existed. Any changes in valuation are
recorded in the Corporation's consolidated statements of operations as "Net
increase (decrease) in unrealized appreciation on investments."
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities Holders
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits. The exhibits which are filed with the Form 10-Q or
incorporated herein by reference are set for in the Exhibit
Index on page 22.
(b) Reports on Form 8-K.
On September 14, 2001, the Corporation filed a report on Form
8-K regarding the Corporation's investment in Ecom Capital,
Inc.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FRANKLIN CAPITAL CORPORATION
Date: November 14, 2001 By: /s/
--------------------------------
Hiram M. Lazar
CHIEF FINANCIAL OFFICER
21
EXHIBIT INDEX
None.
22