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 June 30, 2002
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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
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(Exact name of registrant specified in its charter)
Delaware 13-3419202
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
450 Park Avenue, 10th Floor, New York, New York 10022
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 486-2323
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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 Corporation 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 August 12, 2002 was
1,064,500.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Balance Sheets
Statements of Operations
Statements of Cash Flows
Statements of Changes in Net Assets
Portfolio of Investments
Notes to Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Critical Accounting Policies
Statement of Operations
Financial Condition
Proposed Merger with Change Technology Partners, Inc.
Investments
Results of Operations
Liquidity and Capital Resources
Risks
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
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
The information furnished in the accompanying financial statements
reflects all adjustments consisting of normal recurring accruals that are, in
the opinion of management, necessary for a fair presentation of the results for
the interim period presented.
3
FRANKLIN CAPITAL CORPORATION
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BALANCE SHEETS
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JUNE 30, DECEMBER 31,
2002 2001
(UNAUDITED)
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ASSETS
Marketable investment securities, at market value (cost: June 30,
2002 - $57,660; December 31, 2001 - $34,675) (Note 2) $ 51,675 $ 34,675
Investments, at fair value (cost: June 30, 2002 - $3,640,000;
December 31, 2001 - $3,876,430) (Note 2)
Excelsior Radio Networks, Inc. 5,500,000 2,325,000
Other investments 1,000,000 1,369,197
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6,500,000 3,694,197
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Cash and cash equivalents (Note 2) 181,215 279,728
Other assets 78,980 90,266
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TOTAL ASSETS $ 6,811,870 $ 4,098,866
============ ============
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LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Note payable $ 1,000,000 $ 1,000,000
Accounts payable and accrued liabilities 668,310 177,121
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TOTAL LIABILITIES 1,668,310 1,177,121
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Commitments and contingencies (Note 5)
STOCKHOLDERS' EQUITY
Convertible preferred stock, $1 par value, cumulative 7% dividend:
5,000,000 shares authorized; 16,450 shares issued and outstanding
at June 30, 2002 and December 31, 2001
(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:1,065,100 shares outstanding at June 30,
2002 and 1,074,700 at December 31,2001 (Note 6) 1,505,888 1,505,888
Additional paid-in capital 10,571,610 10,271,610
Unrealized appreciation (depreciation) of investments (Notes 2 and 3) 2,854,015 (182,233)
Accumulated deficit (7,249,801) (6,170,614)
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7,698,162 5,441,101
Deduct common stock held in treasury, at cost, 440,788 shares at
June 30, 2002, and 431,188 shares at December 31, 2001 (Note 4) (2,554,602) (2,519,356)
------------ ------------
Net assets (See Note 9 for per share information) 5,143,560 2,921,745
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,811,870 $ 4,098,866
============ ============
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The accompanying notes are an integral part of these financial statements.
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FRANKLIN CAPITAL CORPORATION
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STATEMENTS OF OPERATIONS
(UNAUDITED)
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THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2002 2001 2002 2001
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INVESTMENT INCOME
Interest and dividend income $560 $14,802 $2,109 $57,359
Management fees 120,000 -- 210,000 --
----------- ----------- ----------- -----------
120,560 14,802 212,109 57,359
----------- ----------- ----------- -----------
EXPENSES
Salaries and employee benefits 212,115 225,081 393,891 477,271
Professional fees 35,325 41,325 71,250 82,650
Rent 28,242 29,783 63,396 59,567
Insurance 10,982 10,599 22,130 21,199
Directors' fees 501 501 1,001 19,001
Taxes other than income taxes 9,194 8,505 28,090 29,259
Newswire and promotion 999 1,000 1,999 2,000
Depreciation and amortization 4,242 4,999 8,485 9,997
Interest expense 8,850 -- 17,700 --
Expenses related to proposed merger 200,000 -- 200,000 --
General and administrative 44,565 64,300 93,063 117,803
----------- ----------- ----------- -----------
555,015 386,093 901,005 818,747
----------- ----------- ----------- -----------
Net investment loss from operations (434,455) (371,291) (688,896) (761,388)
Net realized (loss) gain on portfolio of investments:
Investment securities:
Affiliated -- -- -- 137,757
Unaffiliated (309,209) 499,911 (332,716) 587,198
----------- ----------- ----------- -----------
Net realized (loss) gain on portfolio of investments (309,209) 499,911 (332,716) 724,955
Benefit for current income taxes -- (12,208) -- (1,676)
----------- ----------- ----------- -----------
Net realized (loss) gain (743,664) 140,828 (1,021,612) (34,757)
Increase (decrease) in unrealized appreciation of investments
Investment securities:
Affiliated 3,000,000 -- 3,000,000 419,699
Unaffiliated (1,585) (555,140) 36,248 (1,952,420)
----------- ----------- ----------- -----------
Increase (decrease) in unrealized appreciation of investments 2,998,415 (555,140) 3,036,248 (1,532,721)
----------- ----------- ----------- -----------
Net increase (decrease) in net assets from operations 2,254,751 (414,312) 2,014,636 (1,567,478)
Preferred dividends 28,787 28,788 57,575 57,575
----------- ----------- ----------- -----------
Net increase (decrease) in net assets attributable to
common stockholders $2,225,964 ($443,100) $1,957,061 ($1,625,053)
========== =========== =========== ===========
Basic net increase (decrease) per share in net assets
attributable to common stockholders per share (Note 8) $2.08 ($0.41) $1.83 ($1.49)
========== =========== =========== ===========
Diluted net increase (decrease) per share in net assets
attributable to common stockholders per share (Note 8) $1.89 ($0.41) $1.69 ($1.49)
========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements.
5
FRANKLIN CAPITAL CORPORATION
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STATEMENTS OF CASH FLOWS
(UNAUDITED)
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For the Six Months Ended June 30, 2002 2001
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Cash flows from operating activities:
Net increase (decrease) in net assets from operations $2,014,636 ($1,567,478)
Adjustments to reconcile net increase (decrease) in net assets from
operations to net cash used in operating activities:
Depreciation and amortization 8,485 9,997
(Increase) decrease in unrealized appreciation of investments (3,036,248) 1,532,721
Net realized loss (gain) on portfolio of investments, net of current income taxes 332,715 (726,631)
Changes in operating assets and liabilities:
Decrease in other assets 2,801 7,556
Decrease (increase) in accounts payable and accrued liabilities,
excluding change in current income taxes payable 241,189 (97,041)
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Total adjustments (2,451,058) 726,602
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Net cash used in operating activities (436,422) (840,876)
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Cash flows from investing activities:
Proceeds from sale of affiliates -- 1,519,421
Proceeds from sale of other investments 78,715 985,583
Proceeds from sale of marketable investment securities -- 442,960
Loan payments from majority-owned affiliate 75,000 --
Purchases of other investments -- (49,095)
Purchases of marketable investment securities (22,985) (512,449)
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Net cash provided by investing activities 130,730 2,386,420
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Cash flows from financing activities:
Payment of preferred dividends (57,575) (57,575)
Proceeds for conversion right 300,000 --
Purchases of treasury stock (35,246) (115,359)
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Net cash provided by (used in) financing activities 207,179 (172,934)
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Net (decrease) increase in cash and cash equivalents (98,513) 1,372,610
Cash and cash equivalents at beginning of period 279,728 647,565
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Cash and cash equivalents at end of period $181,215 $2,020,175
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The accompanying notes are an integral part of these financial statements.
6
FRANKLIN CAPITAL CORPORATION
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STATEMENTS OF CHANGES IN NET ASSETS
(UNAUDITED)
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Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
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(Decrease) increase in net assets from operations:
Net investment loss ($434,455) ($371,291) ($688,896) ($761,388)
Net realized (loss) gain on portfolio of investments,
net of current income taxes (309,209) 512,119 (332,716) 726,631
Increase (decrease) in unrealized appreciation of investments 2,998,415 (555,140) 3,036,248 (1,532,721)
----------- ----------- ----------- -----------
Net increase (decrease) in net assets from operations 2,254,751 (414,312) 2,014,636 (1,567,478)
Capital stock transactions:
Payment of dividends on preferred stock (28,787) (28,788) (57,575) (57,575)
Proceeds for conversion right 300,000 -- 300,000 --
Purchase of treasury stock (35,246) (105,700) (35,246) (115,359)
----------- ----------- ----------- -----------
Total increase (decrease) in net assets 2,490,718 (548,800) 2,221,815 (1,740,412)
----------- ----------- ----------- -----------
Net assets at beginning of period 2,652,842 4,387,468 2,921,745 5,579,080
----------- ----------- ----------- -----------
Net assets at end of period $ 5,143,560 $ 3,838,668 $ 5,143,560 $ 3,838,668
=========== =========== =========== ===========
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The accompanying notes are an integral part of these financial statements.
7
FRANKLIN CAPITAL CORPORATION
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PORTFOLIO OF INVESTMENTS
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MARKETABLE INVESTMENT SECURITIES
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NUMBER OF
SHARES OR MARKET
PRINCIPAL VALUE
JUNE 30, 2002 (2) AMOUNT ($) COST(1) (NOTE 2)
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Communications Intelligence Corporation (Common Stock) $22,985 $17,000
Certificate of Deposit - 1.21%, due 07/03/2002 34,675 34,675
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Total Marketable Investment Securities
(0.8% of total investments and 1.0% of net assets) $57,660 $51,675
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INVESTMENTS, AT FAIR VALUE
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NUMBER OF
SHARES OR DIRECTORS'
EQUITY PRINCIPAL VALUATION
JUNE 30, 2002 (2) INVESTMENT INTEREST AMOUNT($) COST(1) (NOTE 2)
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MAJORITY OWNED AFFILIATE
Excelsior Radio Networks, Inc. Common stock and warrants 100.00% 2,512,87 $2,500,000 $5,500,000
Total Excelsior Radio Networks, Inc.
(83.9% of total investments and 106.9% of net assets) 56.41%
(Radio production and advertising sales) (fully diluted)
AFFILIATES
Excom Ventures, LLC
(0.0% of total investments and 0.0% of net assets) Units 18.64% 140,000 140,000 --
(Purchase evaluation software)
OTHER INVESTMENTS
Alacra Corporation
(15.3% of total investments and
19.4% of net assets) Convertible Preferred Stock 1.68% 321,543 1,000,000 1,000,000
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(Internet-based information provider)
Investments, at Fair Value 3,640,000 6,500,000
========== =========
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(1) Book cost equals tax cost for all investments
(2) Total investments refers to investments and marketable investment
securities.
The accompanying notes are an integral part of these financial statements.
8
FRANKLIN CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2002
1. DESCRIPTION OF BUSINESS
Franklin Capital Corporation ("Franklin", or the "Corporation") is a Delaware
corporation operating 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 making available 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.
The accompanying financial statements have been prepared assuming that the
Corporation will continue as a going concern. For the six months ended June 30,
2002 and for the years ended December 31, 2001, and 2000, the Corporation has
incurred a net investment loss from operations of approximately $0.7 million,
$1.4 million, and $2.3 million, respectively, and has a working capital
deficiency of approximately $1.4 million at June 30, 2002. (Working capital is
defined as total liabilities less liquid assets.) These conditions raise
substantial doubt about the Corporation's ability to continue as a going
concern. In order to alleviate the substantial doubt about the Corporation's
ability to continue as a going concern, the Corporation is seeking a merger
partner or an alternative financing source. There can be no assurance that the
Corporation would be able to find a suitable merger partner or be able to obtain
alternative financing. The financial statements do not include any adjustments
to reflect the possible future effects on the recoverability of assets or the
amounts of liabilities that may result from the outcome of this uncertainty.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States 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.
STATEMENTS OF CASH FLOWS
For purposes of the Statements of Cash Flows, Franklin considers only highly
liquid investments such as money market funds and commercial paper with
maturities of 90 days or less at the date of their acquisition to be cash
equivalents.
The Corporation paid no interest or income taxes during the six months ended
June 30, 2002 and 2001.
At June 30, 2002 and 2001, the Corporation held cash and cash equivalents
primarily in money market funds at two commercial banking institutions, and one
broker/dealer.
VALUATION OF INVESTMENTS
Security investments which are publicly traded on a national exchange or Nasdaq
Stock Market 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
9
FRANKLIN CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 in good faith by
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 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 (LOSSES) ON PORTFOLIO OF INVESTMENTS
Amounts reported as realized gains (losses) are measured by the difference
between the proceeds of sale or exchange and the cost basis of the investment
without regard to unrealized gains (losses) reported in the prior periods. Gains
(losses) 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 INCREASE (DECREASE) IN NET ASSETS PER SHARE ATTRIBUTABLE TO COMMON
STOCKHOLDERS
Net increase (decrease) in net assets per share attributable to common
stockholders is calculated in accordance with the provisions of Statement of
Financial Accounting Standards No. 128, "Earnings per Share".
RECLASSIFICATION
Certain amounts in prior years have been reclassified to conform with the
current year presentation.
10
FRANKLIN CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. INCOME TAXES
For the six months ended June 30, 2002 and 2001, Franklin's tax (provision)
benefit was based on the following:
2002 2001
----------- -----------
Net investment loss from operations .............................................. $ (688,896) $ (761,388)
Net realized (loss) gain on portfolio of investments ............................. (332,716) 724,955
Increase (decrease) in unrealized appreciation ................................... 3,036,248 (1,532,721)
----------- -----------
Pre-tax book income (loss) .................................................. $ 2,014,636 $(1,569,154)
=========== ===========
2002 2001
----------- -----------
Tax (provision) benefit at 34% on $2,014,636 and
$(1,569,154), respectively ..................................................... $ (685,000) $ 533,000
State and local, net of Federal benefit .......................................... -- 41,000
Other ............................................................................ (44,000) (7,000)
Change in valuation allowance .................................................... 729,000 (565,000)
----------- -----------
$ -- $ 2,000
=========== ===========
The components of the tax provision are as follows:
2002 2001
----------- -----------
Current state and local tax provision ............................................ $ -- $ 2,000
Deferred tax expense ............................................................. -- --
----------- -----------
Provision for income taxes ....................................................... $ -- $ 2,000
=========== ===========
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 June 30, 2002 and December 31, 2001, significant deferred tax assets and
liabilities consist of:
Asset (Liability)
-------------------------------------
June 30, December 31,
2002 2001
----------- -----------
Deferred Federal and state benefit from net operating
loss carryforward .............................................................. $ 2,293,000 $ 1,905,000
Deferred Federal and state provision on unrealized
(appreciation) depreciation of investments ..................................... (1,051,000) 66,000
Valuation allowance .............................................................. (1,242,000) (1,971,000)
----------- -----------
Deferred taxes ................................................................... $ -- $ --
=========== ===========
At December 31, 2001, Franklin had net operating loss carryforwards for income
tax purposes of approximately $5,291,000 that will begin to expire in 2011. At a
36% effective tax rate the after-tax net benefit from this loss would be
approximately $1,905,000.
4. STOCKHOLDERS' EQUITY
The accumulated deficit at June 30, 2002, consists of accumulated net realized
gains of $4,657,000 and accumulated investment losses of $11,907,000.
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FRANKLIN CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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. During the six months ended June 30, 2002,
Franklin purchased 9,600 shares of its common stock for an aggregate price of
$35,246. As of June 30, 2002, the Corporation has repurchased 491,950 shares of
its common stock of which 440,788 shares remain in treasury at June 30, 2002.
5. COMMITMENTS AND CONTINGENCIES
On October 15, 2001, Jeffrey A. Leve and Jeffrey Leve Family Partnership, L.P.
filed a lawsuit against Franklin, Sunshine Wireless, LLC ("Sunshine") and four
other defendants affiliated with Winstar Communications, Inc. in the Superior
Court of the State of California for the County of Los Angeles. The lawsuit,
which has subsequently been removed to the United States District Court for the
Central District of California, alleges that the Winstar defendants conspired to
commit fraud and breached their fiduciary duty to the plaintiffs in connection
with the acquisition of the plaintiffs' radio production and distribution
business. The complaint further alleges that Franklin and Sunshine joined the
alleged conspiracy. The business was initially acquired by certain entities
affiliated with Winstar Communications and, subsequently, the assets of such
business were sold to Franklin and Sunshine (see Note 6). Concurrently with such
purchase, Franklin transferred such assets to Excelsior. The plaintiffs seek
recovery of damages in excess of $10,000,000, costs and attorneys' fees. On
January 7, 2002, Franklin filed a motion to dismiss the lawsuit or, in the
alternative, to transfer venue to the United States District Court of the
Southern District of New York. The plaintiffs filed a motion opposing Franklin's
request on January 28, 2002. Franklin's motion for dismissal was granted on
February 25, 2002, due to improper venue. On June 7, 2002, the plaintiffs filed
their complaint to the United States District Court of the Southern District of
New York. On July 12, 2002, Franklin filed a motion to dismiss the complaint.
Franklin believes that plaintiffs' claims are without merit and intends to
defend this lawsuit vigorously, though the outcome cannot be predicted at this
time. An unfavorable outcome in this lawsuit may have a material adverse effect
on Franklin's business, financial condition and results of operations.
6. 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
dividends 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 then 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 year ended December 31, 2001, Franklin
sold 1,150,000 shares of Primal for total proceeds of $53,861, realizing a loss
of $130,139. During the six months ended June 30, 2002, Franklin sold its
remaining position of 383,938 shares for total proceeds of $28,715, realizing a
loss of $32,715.
On August 28, 2001, Franklin along with Sunshine Wireless LLC ("Sunshine")
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, Inc. ("Change"), a public company, provided $2.25
million of senior financing for the deal. The acquisition was consummated
through eCom Capital Inc., subsequently renamed Excelsior Radio Networks, Inc.
("Excelsior"), a then wholly-owned subsidiary of
12
FRANKLIN CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Franklin. Franklin's total investment was $2.5 million consisting of $1.5
million in cash and a $1 million note payable to WRN. The note was due February
28, 2002 with interest at 3.54% and has a right of set-off against certain
representations and warranties made by WRN. In October 2001, a legal proceeding
was filed against WRN, which also named Franklin as a defendant, in which the
representations and warranties made by WRN have been challenged. Until the time
that this action is settled the due date of the note is extended indefinitely
(see Note 5). Additionally, Franklin provided a $150,000 note receivable to
Excelsior. The note bore interest at 10% per annum and was issued for a
ninety-day rolling period. In connection with this note, Franklin was granted
warrants to acquire 12,879 shares of Excelsior common stock at an exercise price
of $1.125 per share. As of June 30, 2002, this note has been repaid. In
contemplation of a proposed merger agreement between Franklin and Change (see
Note 11), Franklin sold to Change 250,000 shares of common stock in Excelsior
for $250,000. Franklin is obligated to repurchase the 250,000 shares of
Excelsior's common stock by August 29, 2002, for $250,000 plus interest at an
annual rate of 10% from December 4, 2001 to the date of repurchase. After its
repurchase of the shares from Change, Franklin will own 56.4% of Excelsior on a
fully diluted basis and will have 64.7% of voting control. In addition, Franklin
has the right to nominate four directors to Excelsior's seven-person board of
directors.
At the closing, Franklin entered into a services agreement with Excelsior
whereby Franklin will provide Excelsior with certain services. In consideration
for the services provided, for a period of six months Franklin would 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 Excelsior and
his salary and benefits will be allocated between Excelsior and Franklin on an
80/20 basis. During the six months ended June 30, 2002, Franklin earned $210,000
in management fees and was reimbursed $60,468 for salary and benefits for
Franklin's chief financial officer, which was recorded as a reduction of
expenses on Franklin.
On April 3, 2002, Dial Communications Global Media, Inc. ("DCGM"), a newly
formed wholly-owned subsidiary of Excelsior, a majority-owned affiliate of
Franklin, completed the acquisition of substantially all of the assets of Dial
Communications Group, Inc. ("DCGI"), and Dial Communications Group, LLC ("DCGL"
and together with DCGI, the "Dial Entities") used in connection with the Dial
Entities' business of selling advertising relating to radio programming (the
"Dial Acquisition"). The Dial Acquisition was completed pursuant to the Asset
Purchase Agreement (the "Purchase Agreement"), dated as of April 1, 2002, by and
among the Dial Entities, Franklin and Excelsior. Immediately prior to the
closing of the transactions contemplated by the Purchase Agreement, Excelsior
assigned all of its rights and obligations under the Purchase Agreement, as well
as certain other assets and liabilities relating to the portion of Excelsior's
business dedicated to the sale of advertising relating to radio programming, to
DCGM.
The total purchase price for the Dial Acquisition will be an amount between
$8,880,000 and $13,557,500. The initial consideration for the Dial Acquisition
consisted of $6,500,000 in cash and a three year promissory note bearing
interest at 4.5% issued by DCGM in favor of DCGL in the aggregate principal
amount of $460,000. In addition, the Purchase Agreement provides for the minimum
payment of $1,920,000 of additional consideration, which is subject to increase
to a maximum amount of $6,597,500 based upon the attainment of certain revenue
and earnings objectives in 2002 and 2003. The additional consideration will be
comprised of both cash and two additional promissory notes issued by DCGM in
favor of DCGL, each with an initial aggregate principal amount of $460,000
bearing interest at 4.5% that is subject to increase upon the
13
FRANKLIN CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
attainment of such revenue and earnings objectives. Each of the promissory notes
issued in consideration of the Dial Acquisition is convertible into shares of
Franklin's common stock at a premium of 115% to 120% of the average closing
prices of Franklin's common stock during a specified pre and post closing
measurement period. Excelsior has paid to Franklin an amount equal to $300,000
in consideration of Franklin's obligations in connection with any Franklin
common stock that may be issued pursuant to the terms of the Purchase Agreement
or the promissory notes issued in consideration of the Dial Acquisition. For
each share of common stock Franklin is required to issue under the Purchase
Agreement or the promissory notes, Franklin will receive 0.86 shares of common
stock in Excelsior.
Change and Sunshine, both existing stockholders of Excelsior, loaned Excelsior
an aggregate amount of $7,000,000 to finance the initial consideration of the
Dial Acquisition. The obligations under the loans are secured by certain of
Excelsior's assets.
7. STOCK OPTION PLANS
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 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 issuance of
options under the SOP was conditioned upon the granting of such order. The order
was granted by the Commission 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. Pro forma information
determined consistent with the fair value method required by FASB Statement No.
123, is as follows for the years ended:
June 30, 2002 June 30, 2001
------------- -------------
Net increase (decrease) in net assets
attributable to common stockholders:
As reported $ 1,957,061 ($1,625,053)
Pro forma $ 1,954,694 ($1,644,046)
Basic net increase (decrease) in net assets
attributable to common stockholders per share:
As reported $ 1.83 ($ 1.49)
Pro forma $ 1.83 ($ 1.51)
Diluted net increase (decrease) in net assets
attributable to common stockholders per share:
As reported $ 1.69 ($ 1.49)
Pro forma $ 1.69 ($ 1.51)
14
FRANKLIN CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
No options were granted during the six months ended June 30, 2002 and 2001.
The following is a summary of the status of the Stock Option Plans during the
six months ended:
June 30, 2002 June 30, 2001
------------- -------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------ --------- ------- ---------
Outstanding at beginning of
period 39,375 $ 11.27 39,375 $ 11.27
Granted -- -- -- --
Exercised -- -- -- --
Forfeited 18,750 $ 11.13 -- --
Expired -- -- -- --
------ ------
Outstanding at end of period 20,625 $ 11.39 39,375 $ 11.27
====== ======
Exercisable at end of period 20,625 $ 11.39 26,875 $ 10.73
====== ======
The options issued under the SIP have a remaining contractual life of 6.5 years.
The options issued under the SOP have a remaining contractual life of 7.6 years.
8. NET INCREASE (DECREASE) IN NET ASSETS ATTRIBUTABLE TO COMMON STOCKHOLDERS
PER SHARE
The following table sets forth the computation of basic and diluted change in
net assets attributable to common stockholders per share:
Three Months ended Six Months ended
June 30, June 30,
----------------------------------------------------------------
2002 2001 2002 2001
----------------------------------------------------------------
Numerator:
Net increase (decrease) in net
assets from operations $ 2,254,751 ($ 414,312) $ 2,014,636 ($1,567,478)
Preferred stock dividends (28,787) (28,788) (57,575) (57,575)
----------- ----------- ----------- -----------
Numerator for basic and diluted earnings per
share - net increase (decrease) in net assets
attributable to common stockholders $ 2,225,964 ($ 443,100) $ 1,957,061 ($1,625,053)
=========== =========== =========== ===========
Denominator:
Denominator for basic increase
(decrease) in net assets from
operations - weighted - average shares 1,069,232 1,086,081 1,068,534 1,091,624
Conversion of preferred stock 123,375 -- 123,375 --
----------- ----------- ----------- -----------
15
FRANKLIN CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Denominator for diluted increase
(decrease) in net assets from
operations - weighted - average shares 1,192,607 1,086,081 1,191,909 1,091,624
Basic net increase (decrease) in net
assets from operations per share $2.08 ($0.41) $1.83 ($1.49)
=========== =========== =========== ===========
Diluted net increase (decrease) in net
assets from operations per share $1.89 ($0.41) $1.69 ($1.49)
=========== =========== =========== ===========
The following securities have been excluded from the dilutive per share
computation as they are antidilutive:
Preferred stock convertible into 123,375 shares of common stock was antidilutive
for the three and six months ended June 30, 2001. Stock options were
antidilutive for the three and six months ended June 30, 2002.
For additional information on the above securities, see Note 7.
9. NET ASSET VALUE PER SHARE
The following table sets forth the computation of net asset value per common
share attributable to common stockholders:
June 30, December 31,
--------------------------------
2002 2001
--------------------------------
Numerator:
Numerator for net asset value per
common share, as if converted basis $5,143,560 $2,921,745
Liquidation value of convertible preferred
stock (1,645,000) (1,645,000)
----------- -----------
Numerator for net asset value per share
attributable to common stockholders $3,498,560 $1,276,745
=========== ===========
Denominator:
Number of common shares outstanding,
denominator for net asset value per share
attributable to common stockholders 1,065,100 1,074,700
Number of shares of common stock to be
issued upon conversion of preferred stock 123,375 123,375
----------- -----------
Denominator for net asset value per common
share as if converted basis 1,188,975 1,198,075
=========== ===========
Net asset value per share attributable to common stockholders $3.28 $1.19
=========== ===========
Net asset value per common share, as if converted basis $4.33 $2.44
=========== ===========
16
FRANKLIN CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. PURCHASES AND SALES OF INVESTMENT SECURITIES
The cost of purchases and proceeds from sales of investment securities excluding
short-term investments, aggregated $22,985 and $78,715 respectively, for the six
months ended June 30, 2002, and $561,544 and $2,947,141 respectively, for the
six months ended June 30, 2001.
11. MERGER WITH CHANGE TECHNOLOGY PARTNERS, INC.
On July 1, 2002, Franklin executed its right to terminate the merger agreement
that had been entered into on December 4, 2001, between Change Technology
Partners, Inc. ("Change") and Franklin pursuant to which Change would have been
merged with and into Franklin. Had the merger gone through Change shareholders
would have owned approximately 80% of Franklin with the balance held by
Franklin's current stockholders.
Concurrently with the execution of the merger agreement, the parties entered
into a stock purchase agreement pursuant to which Change agreed to purchase
250,000 shares of common stock of Excelsior from Franklin for an aggregate
purchase price of $250,000. Since the merger between Franklin and Change has
terminated pursuant to the terms of the merger agreement, Franklin is required
to repurchase all of such common stock from Change at a repurchase price equal
to $250,000, plus interest thereon at an annual rate of 10% from December 4,
2001 to the date of repurchase. Franklin is obligated to repurchase the shares
no later than August 29, 2002. As of June 30, 2002, the $250,000 for the
repurchase as well as $200,000 in estimated expenses related to the merger have
been accrued for by Franklin.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CRITICAL ACCOUNTING POLICIES
Franklin's discussion and analysis of its financial condition and
results of operations are based upon the Corporation's financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these financial statements
requires the Corporation to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses and related
disclosure of contingent assets and liabilities. On an ongoing basis, the
Corporation evaluates its estimates, the most critical of which are those
related to the fair value of the portfolio of investments.
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,
$6,811,870 and $5,143,560 at June 30, 2002, versus $4,098,866 and $2,921,745 at
December 31, 2001. Net asset value per share attributable common stockholders
and on an as if converted basis was $3.28 and $4.33, respectively at June 30,
2002, versus $1.19 and $2.44 at December 31, 2001.
The Corporation's financial condition is dependent on the success of
its investments. A summary of the Corporation's investment portfolio is as
follows:
JUNE 30, 2000 DECEMBER 31, 2001
-------------- -----------------
Investments, at cost $3,697,660 $3,911,105
Unrealized appreciation (depreciation) 2,854,015 (182,233)
----------- -----------
Investments, at fair value $6,551,675 $3,728,872
=========== ===========
The accompanying financial statements have been prepared assuming that
the Corporation will continue as a going concern. For the six months ended June
30, 2002 and for the years ended December 31, 2001, and 2000, the Corporation
has incurred a net investment loss from operations of approximately $0.7
million, $1.4 million, and $2.3 million, respectively, and has a working capital
deficiency of approximately $1.4 million at June 30, 2002. (Working capital is
defined as total liabilities less liquid assets.) These conditions raise
substantial doubt about the Corporation's ability to continue as a going
concern. In order to alleviate the substantial doubt about the Corporation's
ability to continue as a going concern, the Corporation is seeking a merger
partner or an alternative financing source. There can be no assurance that the
Corporation would be able to find a suitable merger partner or be able to obtain
alternative financing.
18
The financial statements do not include any adjustments to reflect the possible
future effects on the recoverability of assets or the amounts of liabilities
that may result from the outcome of this uncertainty.
MERGER WITH CHANGE TECHNOLOGY PARTNERS, INC.
On July 1, 2002, Franklin executed its right to terminate the merger
agreement that had been entered into on December 4, 2001, between Change
Technology Partners, Inc. ("Change") and Franklin pursuant to which Change would
have been merged with and into Franklin. Had the merger gone through Change
shareholders would have owned approximately 80% of Franklin with the balance
held by Franklin's current stockholders.
Concurrently with the execution of the merger agreement, the parties
entered into a stock purchase agreement pursuant to which Change agreed to
purchase 250,000 shares of common stock of Excelsior from Franklin for an
aggregate purchase price of $250,000. Since the merger between Franklin and
Change has terminated pursuant to the terms of the merger agreement, Franklin is
required to repurchase all of such common stock from Change at a repurchase
price equal to $250,000, plus interest thereon at an annual rate of 10% from
December 4, 2001 to the date of repurchase. Franklin is obligated to repurchase
the shares no later than August 29, 2002. As of June 30, 2002, the $250,000 for
the repurchase as well as $200,000 in estimated expenses related to the merger
have been accrued for by Franklin.
INVESTMENTS
Franklin's primary investment is in Excelsior. A description of
Franklin's other investments follows the description of Excelsior.
EXCELSIOR
At June 30, 2002, the Corporation had an investment in Excelsior,
formerly known as eCom Capital, Inc., valued at $5,500,000, which represents
83.9% of the Corporation's total assets and 106.9% of its net assets. After its
repurchase of the shares from Change, Franklin will own 56.4% on a fully diluted
basis and have 64.7% of voting control.
Excelsior is a majority-owned affiliate of Franklin and was
incorporated in 1999 under the laws of the State of Delaware. Excelsior had no
operations until August 2001 when a group led by Franklin invested in Excelsior
for the purpose of acquiring certain assets from Winstar Radio Networks, LLC,
Winstar Global Media, Inc. and Winstar Radio Productions, LLC. Excelsior's
principal executive offices are located at 450 Park Avenue, 10th Floor, New
York, NY 10022.
On April 3, 2002, Dial Communications Global Media, Inc. ("DCGM"), a
newly formed wholly-owned subsidiary of Excelsior Radio Networks, Inc.
("Excelsior"), completed the acquisition of substantially all of the assets of
Dial Communications Group, Inc. ("DCGI"), and Dial Communications Group, LLC
("DCGL" and together with DCGI, the "Dial Entities") used in connection with the
Dial Entities' business of selling advertising relating to radio programming
(the "Dial Acquisition"). The Dial Acquisition was completed pursuant to the
Asset Purchase Agreement (the "Purchase Agreement"), dated as of April 1, 2002,
by and among the Dial Entities, Franklin and Excelsior. Immediately prior to the
closing of the transactions contemplated by the Purchase Agreement, Excelsior
assigned all of its rights and obligations under the Purchase Agreement, as well
as certain other assets and liabilities relating to the portion of Excelsior's
business dedicated to the sale of advertising relating to radio programming, to
DCGM.
The total purchase price for the Dial Acquisition will be an amount
between $8,880,000 and $13,557,500. The initial consideration for the Dial
Acquisition consisted of $6,500,000 in cash and a three year promissory note
bearing interest at 4.5% issued by DCGM in favor of DCGL in the aggregate
principal amount of $460,000. In addition, the Purchase Agreement provides for
the minimum payment of $1,920,000 of additional consideration, which is subject
to increase to a maximum amount of $6,597,500 based upon the attainment of
certain revenue and earnings objectives in 2002 and 2003. The additional
19
consideration will be comprised of both cash and two additional promissory notes
bearing interest at 4.5% issued by DCGM in favor of DCGL, each with an initial
aggregate principal amount of $460,000 that is subject to increase upon the
attainment of such revenue and earnings objectives. Each of the promissory notes
issued in consideration of the Dial Acquisition is convertible into shares of
Franklin's common stock at a premium of 115% to 120% of the average closing
prices of Franklin's common stock during a specified pre and post closing
measurement period. The promissory notes are not convertible for at least a
one-year period. Excelsior has paid to Franklin an amount equal to $300,000 in
consideration of Franklin's obligations in connection with any Franklin common
stock that may be issued pursuant to the terms of the Purchase Agreement or the
promissory notes issued in consideration of the Dial Acquisition.
The assets purchased in the Dial Acquisition were combined with
Excelsior's Global Media division to create a national radio sales
representation company with 2001 advertising sales revenues of almost $50
million and a client roster of over fifty independent radio production
companies.
Excelsior creates, produces, distributes and is a sales representative
for national radio programs and offers other miscellaneous services to the radio
industry. Excelsior offers radio programs to the industry in exchange for
commercial broadcast time, which Excelsior sells to national advertisers.
Excelsior currently offers approximately 150 programs to over 2,000 radio
stations across the country. The group of radio stations who contract with
Excelsior to broadcast a particular program constitutes a radio network.
Excelsior derives its revenue from selling the commercial broadcast time on its
radio networks to advertisers desiring national coverage.
Excelsior currently produces 23 network programs targeting the most
popular radio formats, including adult contemporary, rock, urban oldies, album
oriented rock, comedy and country. Excelsior produces both short form and long
form programs. Short form features are two to three minute daily vignettes and
include such programs as "African Americans Making History." Long form programs,
such as "Walt `Baby' Love's The Countdown" and "Gospel Traxx," "Keeping The
Seventies Alive," "Behind the Hits" and "All Star Mix Party" are programs that
range from one to four hours in length. Excelsior offers these programs to radio
stations free of charge. The radio stations airing these programs become
networks for Excelsior to sell advertising time. Excelsior sells the commercial
broadcast time inside of these networks to advertisers desiring national
coverage.
On August 28, 2001, the Corporation purchased $2,500,000 worth of
Excelsior Common Stock and issued a secured note for $150,000. In connection
with this note, Franklin was granted warrants to acquire 12,879 shares of
Excelsior common stock at an exercise price of $1.125 per share. On November 28,
2001, $75,000 of the secured note was paid back to Franklin. On February 28,
2002, the remaining $75,000 of the secured note was paid back to Franklin. As
part of the merger agreement between Franklin and Change, Franklin sold to
Change 250,000 shares of its common stock in Excelsior. Franklin is obligated to
repurchase the 250,000 shares of Excelsior's common stock by August 29, 2002,
for $250,000 plus interest at an annual rate of 10% from December 4, 2001 to the
date of repurchase.
ALACRA CORPORATION
At June 30, 2002, the Corporation had an investment in Alacra
Corporation ("Alacra"), valued at $1,000,000, which represents 14.7% of the
Corporation's total assets and 19.4% 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.
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.
20
EXCOM VENTURES, LLC
At June 30, 2002, the Corporation had an investment in Excom Ventures,
LLC ("Excom") valued at $0. 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 December 31, 2001, the Board of Franklin had determined that this
investment had no value and had marked these securities down to reflect that
determination.
PRIMAL SOLUTIONS, INC.
The Corporation no longer has an investment in Primal Solutions, Inc.
("Primal"). 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 at an allocated cost
basis of $245,430. During the six months ended June 30, 2002, Franklin sold its
remaining position of 383,938 shares for total proceeds of $28,715, realizing a
loss of $32,715.
STRUCTURED WEB, INC.
At June 30, 2002, the Corporation had an investment in Structured Web,
Inc. ("Structured Web") valued at $0. 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. On May 30, 2002, the Corporation
sold its position in Structured Web for $50,000 realizing a loss of $300,000. As
part of the sale price, the Corporation maintained the right to receive 50% of
any proceeds received by the purchaser in excess of the $50,000 purchase price.
The Corporation has valued this right at $0, as it cannot be determined at this
time if the Corporation will receive any funds from this right.
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 investment income of $212,109 and $57,359 for the
six months ended June 30, 2002 and 2001, respectively. The increase in
investment income for the six months ended June 30, 2002 when compared to June
30, 2001, was primarily the result of the receipt of a management fee from
Excelsior. The Corporation had investment income of $120,560 and $14,802 for the
three months ended June 30, 2002 and 2001, respectively. The increase in
investment income for the three months ended June 30, 2002 when compared to June
30, 2001, was primarily the result of a management fee from Excelsior.
21
Operating expenses were $901,005 and $818,747 for the six months ended
and $555,015 and $386,093 for the three months ended June 30, 2002 and 2001,
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 Corporation accrued $200,000 in expenses
related to the terminated merger with Change. The Corporation was reimbursed
approximately $60,000 for salary and benefit expense for its chief financial
officer under the terms of the management agreement with Excelsior. This
reimbursement has been recorded as a reduction in operating expenses.
Net investment losses from operations were $688,896 and $761,388 for
the six months ended and $434,455 and $371,291 for the three months ended June
30, 2002 and 2001, respectively. The decrease resulted primarily from the
decrease in expenses noted above.
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.
NET REALIZED GAINS AND LOSSES ON PORTFOLIO OF INVESTMENTS:
During the six months ended June 30, 2002 and 2001, the Corporation
realized net (losses) gains before taxes of ($332,716) and $724,955
respectively, from the disposition of various investments.
UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENTS:
Unrealized appreciation of investments, increased by $3,036,248 during
the six months ended June 30, 2002, primarily from unrealized gains on the value
of Excelsior.
Unrealized appreciation of investments, decreased by $1,532,721 during
the six months ended June 30, 2001, primarily from unrealized losses due to the
decrease in value of Franklin's investment in Go America as well as the sale of
a significant portion of Franklin's holdings in Go America. This decrease was
partially offset by the sale of Franklin's investment in Avery Communications.
LIQUIDITY AND CAPITAL RESOURCES
The accompanying financial statements have been prepared assuming that
the Corporation will continue as a going concern. For the six months ended June
30, 2002 and for the years ended December 31, 2001, and 2000, the Corporation
has incurred a net investment loss from operations of approximately $0.5
million, $1.4 million, and $2.3 million, respectively, and has a working capital
deficiency of approximately $1.4 million at June 30, 2002. (Working capital is
defined as total liabilities less liquid assets.) These conditions raise
substantial doubt about the Corporation's ability to continue as a going
concern. In order to alleviate the substantial doubt about the Corporation's
ability to continue as a going concern, the Corporation is seeking a merger
partner or an alternative financing source. There can be no assurance that the
Corporation would be able to find a suitable merger partner or be able to obtain
alternative financing. The financial statements do not include any adjustments
to reflect the possible future effects on the recoverability of assets or the
amounts of liabilities that may result from the outcome of this uncertainty.
Franklin is obligated to repurchase the 250,000 shares of Excelsior's common
stock by August 29, 2002 for $250,000 plus interest at an annual rate of 10%
from December 4, 2001 to the date of repurchase. As of June 30, 2002, the
$250,000 for the repurchase as well as $200,000 in estimated expenses related to
the merger have been accrued for by Franklin.
22
RISK FACTORS
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 one 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 PRIVATE COMPANIES INVOLVES A HIGH DEGREE OF RISK. The
Corporation's portfolio consists primarily of investments in private companies.
Investments in private businesses involve a high degree of business and
financial risk, which can result in substantial losses and accordingly should be
considered speculative. There is generally no publicly available information
about the companies in which Franklin invests, and Franklin relies significantly
on the diligence of its employees and agents to obtain information in connection
with the Corporation's investment decisions. In addition, some smaller
businesses have narrower product lines and market shares than their competitors,
and may be more vulnerable to customer preferences, market conditions or
economic downturns, which may adversely affect the return on, or the recovery
of, the Corporation's investment in such businesses.
THE PORTFOLIO OF INVESTMENTS IS ILLIQUID. Franklin acquires most of its
investments directly from private companies. The majority of the investments in
its portfolio will be subject to restrictions on resale or otherwise have no
established trading market. The illiquidity of most of the portfolio may
adversely affect Franklin's ability to dispose of loans and securities at times
when it may be advantageous to liquidate such investments.
FRANKLIN'S PORTFOLIO INVESTMENTS ARE RECORDED AT FAIR VALUE AS
DETERMINED BY THE BOARD OF DIRECTORS IN ABSENCE OF READILY ASCERTAINABLE PUBLIC
MARKET VALUES. Pursuant to the requirements of the 1940 Act, the Corporation's
board of directors is required to value each asset quarterly, and Franklin is
required to carry the portfolio at a fair market value as determined by the
board of directors. Since there is typically no public market for the loans and
equity securities of the companies in which Franklin makes investments, the
board of directors estimates the fair value of these loans and equity securities
pursuant to written valuation policy and a consistently applied valuation
process. Unlike banks, Franklin is not permitted to provide a general reserve
for anticipated loan losses; instead, Franklin is required by the 1940 Act to
specifically value each individual investment and record an unrealized loss for
an asset that it believes has become impaired. Without a readily ascertainable
market value, the estimated value of the portfolio of loans and equity
securities may differ significantly from the values that would be placed on the
portfolio if there existed a ready market for the loans and equity securities.
Franklin adjusts quarterly the valuation of the portfolio to reflect the board
of directors' estimate of the current realizable value of each investment in the
Corporation's portfolio. Any changes in estimated value are recorded in the
Corporation's statement of operations as "Net unrealized gains (losses)."
FRANKLIN OPERATES IN A COMPETITIVE MARKET FOR INVESTMENT OPPORTUNITIES.
Franklin competes for investments with many other companies and individuals,
some of whom have greater resources than does Franklin. Increased competition
would make it more difficult to purchase or originate investments at attractive
prices. As a result of this competition, sometimes Franklin may be precluded
from making otherwise attractive investments.
QUARTERLY RESULTS MAY FLUCTUATE AND MAY NOT BE INDICATIVE OF FUTURE
QUARTERLY PERFORMANCE. The Corporation's quarterly operating results could
fluctuate, and therefore, you should not rely on quarterly results to be
indicative of Franklin's performance in future quarters. Factors that could
cause quarterly operating results to fluctuate include, among others, variations
in the investment origination
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volume, variation in timing of prepayments, variations in and the timing of the
recognition of realized and unrealized gains or losses, the degree to which
Franklin encounters competition in its markets and general economic conditions.
FRANKLIN IS DEPENDENT UPON KEY MANAGEMENT PERSONNEL FOR FUTURE SUCCESS.
Franklin is dependent for the selection, structuring, closing and monitoring of
its investments on the diligence and skill of its senior management members 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.
Franklin does not maintain key man life insurance on any of its officers or
employees.
THERE IS SUBSTANTIAL DOUBT AS TO FRANKLIN'S ABILITY TO CONTINUE AS A
GOING CONCERN. Franklin has determined that it may not have sufficient cash and
cash equivalents to meet its working capital requirements over the next fiscal
year. Franklin's independent auditors have issued an opinion in which the
independent auditors have indicated that there is substantial doubt as to
Franklin's ability to continue as a going concern as noted in their explanatory
paragraph within their opinion, which is noted in Franklin's year-end financial
statements. Franklin is seeking financing alternatives to continue operating
through the current fiscal year. If funds were not raised, Franklin may not be
able to continue its operations.
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.
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.
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
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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 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
portfolio company itself. 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
On October 15, 2001, Jeffrey A. Leve and Jeffrey Leve Family
Partnership, L.P. filed a lawsuit against Franklin, Sunshine Wireless,
LLC ("Sunshine") and four other defendants affiliated with Winstar
Communications, Inc. in the Superior Court of the State of California
for the County of Los Angeles. The lawsuit, which has subsequently been
removed to the United States District Court for the Central District of
California, alleges that the Winstar defendents conspired to commit
fraud and breached their fiduciary duty to the plaintiffs in connection
with the acquisition of the plaintiffs' radio production and
distribution business. The complaint further alleges that Franklin and
Sunshine joined the alleged conspiracy. The business was initially
acquired by certain entities affiliated with Winstar Communications
and, subsequently, the assets of such business were sold to Franklin
and Sunshine (see Note 6). Concurrently with such purchase, Franklin
transferred such assets to Excelsior. The plaintiffs seek recovery of
damages in excess of $10,000,000, costs and attorneys' fees. On January
7, 2002, Franklin filed a motion to dismiss the lawsuit or, in the
alternative, to transfer venue to the United States District Court of
the Southern District of New York. The plaintiffs filed a motion
opposing Franklin's request on January 28, 2002. Franklin's motion for
dismissal was granted on February 25, 2002, due to improper venue. On
June 7, 2002, the plaintiffs filed their complaint to the United States
District Court of the Southern District of New York. On July 12, 2002,
Franklin filed a motion to dismiss the complaint. Franklin believes
that plaintiffs' claims are without merit and intends to defend this
lawsuit vigorously, though the outcome cannot be predicted at this
time. An unfavorable
25
outcome in this lawsuit may have a material adverse effect on
Franklin's business, financial condition and results of operations.
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable
Item 3. DEFAULTS UPON SENIOR SECURITIES HOLDERS
Not applicable
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
Item 5. OTHER INFORMATION
Not applicable
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 99.1 Certification Pursuant To 18 U.S.C. Section 1350,
As Adopted By Section 906 Of The Sarbanes-Oxley
Act Of 2002
(b) Reports on Form 8-K. The Corporation filed a report on Form 8-K on
April 3, 2002 announcing the acquisition of the Dial Entities and
filed a report on Form 8-K on July 1, 2002 announcing the
termination of the merger with Change Technology Partners, 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: August 14, 2002 By: /s/
------------------------------------
Stephen L. Brown
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
/s/
-------------------------------------
Hiram M. Lazar
CHIEF FINANCIAL OFFICER
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