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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 1-9727
FRANKLIN CAPITAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-3419202
(STATE OF INCORPORATION) (I.R.S. EMPLOYER
IDENTIFICATION NUMBER)
100 WILSHIRE BOULEVARD, SUITE 1500
SANTA MONICA, CALIFORNIA 90401
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (310) 752-1416
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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Common Stock, par value The American Stock Exchange
$1.00 per share
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None
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 |_|.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2) Yes |_| No |X|.
The aggregate market value of common stock held by non-affiliates of the
Registrant on June 30, 2004, based on the closing price on that date of $4.00
on the American Stock Exchange, was $3,142,092. For the purposes of calculating
this amount only, all directors and executive officers of the Registrant have
been treated as affiliates. There were 1,758,776 shares of the Registrant's
common stock outstanding as of March 28, 2005.
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FRANKLIN CAPITAL CORPORATION
FORM 10-K FOR THE FISCAL YEAR
ENDED DECEMBER 31, 2004
TABLE OF CONTENTS
PAGE
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PART I
Item 1. BUSINESS............................................................................................. 1
Item 2. PROPERTIES........................................................................................... 38
Item 3. LEGAL PROCEEDINGS.................................................................................... 39
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................................................. 39
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES......................................................................................... 42
Item 6. SELECTED FINANCIAL DATA.............................................................................. 43
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS................ 44
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........................................... 52
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.......................................................... 54
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE................. 75
Item 9A. CONTROLS AND PROCEDURES.............................................................................. 75
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT................................................... 75
Item 11. EXECUTIVE COMPENSATION............................................................................... 78
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS................................................................................ 86
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....................................................... 89
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES............................................................... 89
PART IV
Item 15. EXHIBITS, FINANCIAL STATEMENT AND SCHEDULES.......................................................... 89
Signatures
PART I
ITEM 1. BUSINESS
GENERAL
Franklin Capital Corporation ("Franklin", or the "Company") is a
publicly traded, non-diversified internally managed, closed-end investment
company that elected to be treated as a business development company ("BDC")
under the Investment Company Act of 1940, as amended (the "1940 ACT") on
November 18, 1997. We were incorporated on March 31, 1987 as a Delaware
corporation and have been listed on the American Stock Exchange ("AMEX") since
October 1, 1987. We are currently involved in providing capital and managerial
assistance to early stage companies in the medical products, health care
solutions, financial services and real estate industries.
In the first half of 2004, we focused our investment strategy on the
achievement of capital appreciation through long-term equity investments in
start-up and early stage companies in the radio and telecommunications
industries. However, beginning in June 2004, we undertook a strategic
restructuring and recapitalization plan (the "RESTRUCTURING PLAN") which
ultimately culminated in a subsequent change in control in our management and a
shift in our business focus away from the radio and telecommunications
industries toward the medical products, health care solutions, financial
services and real estate industries. For more information SEE, "SUMMARY OF 2004
RESTRUCTURING PLAN AND CHANGE IN CONTROL."
OVERVIEW OF OUR BUSINESS PLAN AND RESTRUCTURING
The Restructuring Plan shifted our primary investment focus from the
radio and telecommunications industry to the medical products, health care
solutions, financial services and real estate industries. Accordingly, our
primary investment objective has also shifted and is now focused on maximizing
long-term capital growth through the appreciation of our investments in
health care and medical products related companies, and to a lesser extent
in the financial services and real estate industries. Franklin Capital
Properties, LLC, a real estate development and management company and Franklin
Medical Products, LLC, a healthcare consulting services company, both
wholly-owned subsidiaries of Franklin, were created to augment our investments
in these industries.
The Company and its operating subsidiaries are currently engaged in
the acquisition of controlling interests in companies and research and
development of products and services focused on the health care and medical
products field, particularly, the patient safety market, as well as the
financial services and real estate industries.
On February 25, 2005, in furtherance of the implementation of the
Company's Restructuring Plan the Company purchased SurgiCount, a privately held,
California-based developer of patient safety devices. SurgiCount is the
Company's first major acquisition in its plan to become a leader in what
it believes to be the multi-billion dollar patient safety field market and
management believes that the acquisition is a significant milestone in the
Company's plan to shift its focus from radio and telecommunications to products
and services targeting patient safety.
Given the changing nature of our business and investment focus from
investing, reinvesting, owning, holding, or trading in investment securities in
the radio and telecommunications industries toward that of an operating company
whose focus will be on acquisitions of controlling investments in operating
companies and assets in the healthcare and medical products industries, as well
as the financial services and real estate industries, we believe that the
regulatory regime governing BDC's is no longer appropriate and will hinder our
future growth. Accordingly, among other things, we are seeking shareholder
approval at the upcoming annual meeting to withdraw our election to be treated
as a BDC. For more information see, "WITHDRAWAL OF THE COMPANY'S ELECTION TO BE
TREATED AS A BDC."
Milton "Todd" Ault III and Louis Glazer, M.D., Ph. G. currently
serve as the principal executives in the management group responsible for the
operations and allocation of the resources of the Company and its subsidiaries.
Messrs. Ault and Glazer oversee and coordinate the activities of the Company's
health care, medical products, financial services and real estate companies.
1
Our capital is generally used to finance research and development of
products in the health care and patient safety markets, organic growth,
acquisitions, recapitalizations and working capital. Our investment decisions
are based on extensive analysis of potential portfolio companies' business
operations supported by an in-depth understanding of the quality of their
revenues and cash flow potential, variability of costs and the inherent value of
their assets, including proprietary intangible assets and intellectual property.
Our current target industries are heavily regulated. In the U.S.,
the principal authority regulating the operations of our medical companies is
the Food and Drug Administration ("FDA"). The FDA regulates the safety and
efficacy of the products we offer, our research quality, our manufacturing
processes and our promotion and advertising. In addition, we are also currently
subject to the requirements of the 1940 Act applicable to BDC's. For more
information see "BDC AND HEALTHCARE REGULATION" below.
WITHDRAWAL OF THE COMPANY'S ELECTION TO BE TREATED AS A BDC
General
On December 30, 2004, the Board unanimously approved a proposal to
authorize the Board to withdraw the Company's election to be treated as a BDC as
soon as practicable so that it may begin conducting business as an operating
company rather than an investment company subject to the 1940 Act. Such proposal
is scheduled to be voted upon by stockholders at the company's 2004 Annual
Meeting.
The Board believes that given the changing nature of the Company's
business and investment focus from investing, reinvesting, owning, holding, or
trading in investment securities in the radio and telecommunications industries
toward that of an operating company whose focus will be on acquisitions of
controlling investments in operating companies and assets in our current target
industries, that the regulatory regime governing BDC's is no longer appropriate
and will hinder the Company's future growth. In addition, the Board believes
that the Company will not be required to be regulated under the 1940 Act under
these circumstances.
Over the years, since the Company commenced operating as a BDC, the
business, regulatory and financial climates have shifted gradually but greatly,
making operations as a BDC more challenging and difficult. Given the investment
focus, asset mix, business and operations of the Company that will result from
the implementation of the Restructuring Plan, the Board believes that it is
prudent for the Company to withdraw its election as a BDC as soon as practicable
to eliminate many of the regulatory, financial reporting and other requirements
and restrictions imposed by the 1940 Act discussed below. For example:
o BUSINESS FOCUS. As a result of the Restructuring Plan, the nature of
the Company's business is changing from a business that has
historically been in the business of investing, reinvesting, owning,
holding, or trading in investment securities in the radio and
telecommunications industry toward that of an operating company
whose primary focus is on acquiring controlling interests in
companies in the medical products and health care industries, and to
a lesser extent in the financial services and real estate
industries. The Board believes that BDC regulation would be
inappropriate for such activities.
o ISSUANCE OF COMMON STOCK. By virtue of its BDC election, the Company
may not issue new shares of Common Stock at a per share price less
than the then net asset value per share of outstanding Common Stock
without prior stockholder approval. Historically, the market prices
for BDC stocks that invest primarily in equity securities have been
lower than net asset value, making it much more difficult for such
BDC's to raise equity capital. While this restriction provides
stockholders of an investment company with
2
appropriate and meaningful protection against dilution of their
indirect investment interest in portfolio securities, the Board
believes that this would essentially be irrelevant to the interests
of investors in an operating company, who look to its consolidated
earnings stream and cash flow from operations for investment value.
o ISSUANCE OF SECURITIES OTHER THAN COMMON STOCK. BDC's are limited or
restricted as to the type of securities other than common stock they
issue. The issuance of convertible securities and rights to acquire
shares of common stock (e.g., warrants and options) is restricted
primarily because of the statutory interest in facilitating
computation of the Company's net asset value per share. In addition,
issuances of senior debt and senior equity securities require that
certain "asset coverage" tests and other criteria be satisfied on a
continuing basis. This significantly affects the use of these types
of securities because asset coverage continuously changes by
variations in market prices of the Company's investment securities.
Operating companies, including holding companies operating through
subsidiaries, benefit from having maximum flexibility to raise
capital through various financing structures and means.
o RELATED PARTY TRANSACTIONS. The 1940 Act significantly restricts,
among other things, (a) transactions involving transfers of property
between the Company and certain affiliated persons of the Company
(or the affiliated persons of such affiliated persons), and (b)
transactions in which the Company and such affiliated persons (or
the affiliated persons of such affiliated persons) participate
jointly vis-a-vis third parties on the other. To overcome these
investment company restrictions, approval of the United States
Securities and Exchange Commission ("SEC") is required, which is
often a time-consuming and expensive procedure, regardless of the
intrinsic fairness of such transactions or the approval thereof by
the independent directors of the Company. The Board also believes
that situations may arise in which a company's best interests are
served by such transactions. The Board believes that even with the
protections afforded under the 1940 Act, stockholders are adequately
protected by the fiduciary obligations imposed on directors under
state corporate law, which generally requires that the independent
directors determine fairness to the Company of an interested-party
transaction (provided full disclosure of all material facts
regarding the transaction and the interested party's relationship
with the Company is made), and SEC disclosure rules, which require
the Company to include specified disclosure regarding transactions
with related parties in its SEC filings.
o COMPENSATION OF EXECUTIVES. The 1940 Act limits the extent to which,
and the circumstances under which executives of a BDC may be paid
compensation other than in the form of salary payable in cash. For
example, the issuance of equity compensation in the form of
restricted stock is generally prohibited. However, the Board
believes that by achieving greater flexibility in the structuring of
employee compensation packages, the Company will be able to attract
and retain additional talented and qualified personnel and to more
fairly reward and more effectively motivate its personnel in
accordance with industry practice.
o ELIGIBLE INVESTMENTS. As a BDC, the Company may not acquire any
asset other than "Qualifying Assets" unless, at the time the
acquisition is made, Qualifying Assets represent at least 70% of the
value of the total assets (the "70% TEST"). Because of the
limitations on the type of investments the Company may make, as well
as the Company's total asset composition, the Company may be
foreclosed from participating in prudent investment opportunities.
Moreover, the Company incurs significant costs in order to comply
with the regulations imposed by the 1940 Act. Management devotes considerable
time to issues relating to compliance with the 1940 Act and the Company incurs
substantial legal and accounting fees with respect to such matters. While these
protections are for the benefit of the Company's stockholders, the costs of this
regulation are none
3
the less borne by the stockholders of the Company. The Board believes that
resources now being expended on 1940 Act compliance matters could be utilized
more productively if devoted to the operation of the Company's business. The
Board has determined that the costs of compliance with the 1940 Act are
substantial, especially when compared to the Company's relative size and net
income, and that it would therefore be in the financial interests of the
stockholders for the Company to cease to be regulated under the 1940 Act
altogether.
The Board believes that the above reasons, among others, confirm
that the restrictions of the 1940 Act would have the effect of hindering the
Company's financial growth in the future. The Board has determined that the most
efficacious way to reduce these costs, improve profitability, and eliminate the
competitive disadvantages the Company experiences due to compliance with the
many requirements and restrictions associated with operating under the 1940 Act
would be to withdraw the Company's election to be treated as a BDC.
Effect of Election to Withdrawal as a BDC
In the event that the Board withdraws the Company's election to be
treated as a BDC and the Company becomes an operating company, the fundamental
nature of the Company's business will change from that of investing in a
portfolio of securities, with the goal of achieving gains on appreciation and
dividend income, to that of being actively engaged in the ownership and
management of operating businesses, with the goal of generating income from the
operations of those businesses.
The election to withdraw the Company as a BDC under the 1940 Act
will result in a significant change in the Company's method of accounting. BDC
financial statement presentation and accounting utilizes the value method of
accounting used by investment companies, which allows BDC's to recognize income
and value their investments at fair value as opposed to historical cost. As an
operating company, the required financial statement presentation and accounting
for securities held will be either fair value or historical cost methods of
accounting, depending on the classification of the investment and the Company's
intent with respect to the period of time it intends to hold the investment.
Change in the Company's method of accounting could reduce the market value of
its investments in privately held companies by eliminating the Company's ability
to report an increase in value of its holdings as they occur. Also, as an
operating company, the Company would have to consolidate its financial
statements with subsidiaries, thus eliminating the portfolio company reporting
benefits available to BDC's.
The pro forma unaudited balance sheet presented below gives effect
to the withdrawal of the Company's election to be regulated as a business
development company. The pro forma unaudited balance sheet assumes the
withdrawal had occurred as of January 1, 2003. The pro forma unaudited balance
sheet includes the historical amounts of the Company adjusted to reflect the
effects of the Company's withdrawal of its election to be regulated as a
business development company. The pro forma information should be read in
conjunction with the historical financial statements of the Company.
4
FRANKLIN CAPITAL CORPORATION AND SUBSIDIARIES PRO FORMA
UNAUDITED PRO FORMA BALANCE SHEET
DECEMBER 31, 2004 2003
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ASSETS
Cash and cash equivalents $ 846,404 $ 224,225
Trading assets 4,020,154 1,955,169
Other current assets 255,510 58,432
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TOTAL CURRENT ASSETS 5,122,068 2,237,826
Property, plant and equipment, net 23,657 20,206
Other long-term investments 1,788,518 1,000,000
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TOTAL ASSETS $ 6,934,243 $ 3,258,032
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 892,530 $ 915,754
Accounts payable and accrued liabilities 939,568 318,140
Trading assets sold short 1,075,100
Due to broker 460,776
TOTAL CURRENT LIABILITIES 3,367,974 1,233,894
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STOCKHOLDERS' EQUITY
Convertible preferred stock, $1 par value, cumulative 7% dividend:
10,000,000 shares authorized; 10,950 issued and outstanding
at December 31, 2004 and 2003
(Liquidation preference $1,095,000) 10,950 10,950
Common stock, $1 par value: 50,000,000 shares authorized;
2,042,689 and 1,505,888 shares issued: 1,556,901 and 1,020,100 shares
outstanding at December 31, 2004 and 2003, respectively 2,042,689 1,505,888
Paid-in capital 13,925,253 10,439,610
Accumulated deficit (9,795,791) (7,315,478)
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6,183,101 4,640,970
Deduct: 485,788 shares of common stock held in treasury
at cost, at December 31, 2004 and 2003, respectively (2,616,832) (2,616,832)
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Total stockholders' equity 3,566,269 2,024,138
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,934,243 $ 3,258,032
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The Company does not believe that the withdrawal of its election to
be treated as a BDC will have any impact on its federal income tax status, since
it has never elected to be treated as a regulated investment company under
Subchapter M of the Internal Revenue Code. (Electing for treatment as a
regulated investment company under Subchapter M generally allows a qualified
investment company to avoid paying corporate level federal income tax on income
it distributes to its stockholders.) Instead, the Company has always been
subject to corporate level federal income tax on its income (without regard to
any distributions it makes to its stockholders) as a "regular" corporation under
Subchapter C of the Code. There will be no change in its federal income tax
status as a result of it becoming an operating company.
In addition, withdrawal of the Company's election to be treated as a
BDC will not affect the Company's registration under Section 12(b) of the
Exchange Act. Under the Exchange Act, the Company is required to file periodic
reports on Form 10-K, Form 10-Q, Form 8-K, proxy statements and other reports
required under the Exchange Act. Withdrawal of the Company's election to be
treated as a BDC is not expected to have any affect on the Company's listing
status on the AMEX.
Steps Toward Withdrawal
The Company is using maximum efforts to qualify for this change of
status and has undertaken several steps to meet the requirements for withdrawal
of its election to be treated as a BDC, including: (i) preparing a detailed plan
of operations in contemplation of such a change to the status for the Company
5
and (ii) consulting with outside counsel as to the requirements for withdrawing
its election as a BDC and exemption or exclusion from being deemed an
"investment company" under the 1940 Act. As of the date hereof, the Company
believes that the Company meets the requirements for filing an application to
withdraw its election to be treated as a BDC. However, we may not change the
nature of our business so as to cease to be, or withdraw our election as, a BDC
unless authorized by vote of a "majority of the outstanding voting securities,"
as defined in the 1940 Act. A majority of the outstanding voting securities of a
company is defined under the 1940 Act as the lesser of: (i) 67% or more of such
company's shares present at a meeting if more than 50% of the outstanding shares
of such company are present and represented by proxy or (ii) more than 50% of
the outstanding shares of such company.
On June 24, 2004, we received a letter from AMEX inquiring as to the
Company's ability to remain listed on AMEX. Specifically, AMEX indicated that
the Company's common stock was subject to delisting under sections 1003(a)(i)
and 1003(a)(ii) of AMEX Company Guide because the Company's stockholders' equity
was below the level required by AMEX's continued listing standards. Accordingly,
AMEX requested information relating to the Company's plan to retain its listing.
On September 13, 2004, the Company presented the final components of
its proposed plan to AMEX to comply with AMEX's continued listing standards and
on September 15, 2004, AMEX notified the Company that it had accepted the
Company's plan and had granted the Company an extension until December 26, 2005
to be in compliance with the AMEX contained listing standards, during which time
AMEX will continue the Company's listing subject to certain conditions. The
Company cooperated, and has continue to cooperate, with AMEX regarding these
issues and intends to make every effort to remain listed on AMEX. AMEX has
notified the Company, however, that failure to make progress consistent with the
plan of compliance or to be in compliance with the continued listing standards
could result in the Company's common stock being delisted from AMEX, and no
assurances can be made that the Company will be able to maintain its AMEX
listing. A delisting from AMEX would have a material adverse effect on the price
and liquidity of Franklin's common stock.
On November 11, 2004, our Board adopted and approved certain
corporate governance-related documents, including a code of business conduct and
ethics, and revised audit and compensation committee charters, in order to
comply with certain of AMEX's corporate governance listing standards.
The Company believes that it is currently in compliance with the
AMEX requirements.
If the stockholders approve this proposal to permit the Company to
withdraw its BDC election, the withdrawal will become effective upon receipt by
the SEC of the Company's application for withdrawal. The Company does not
anticipate filing the application of withdrawal until it can be reasonably
certain that the Company will not be deemed to be an investment company without
the protection of its BDC election. After the Company's application for
withdrawal of its BDC election is filed with the SEC, the Company will no longer
be subject to the regulatory provisions of the 1940 Act applicable to BDC's
generally, including regulations related to insurance, custody, composition of
its Board, affiliated transactions and any compensation arrangements.
INITIATION OF THE RESTRUCTURING PLAN AND CHANGE IN CONTROL
On May 11, 2004, Ault Glazer & Company Investment Management, LLC
("AULT GLAZER"), a private investment management firm headquartered in Santa
Monica, California that manages approximately $20 million in individual client
accounts and private investment funds and is owned by Milton "Todd" Ault III,
Lynne Silverstein, and Louis and Melanie Glazer began acquiring shares of our
common stock, par value $1.00 (the "COMMON STOCK") through open-market
purchases.
By May 12, 2004, Ault Glazer indirectly beneficially owned or
controlled approximately 11% of the outstanding shares of Common Stock. On May
18, 2004, in its original filing with the SEC on Schedule 13D, Ault Glazer
disclosed its concerns regarding the ability and willingness of Franklin's
then-current management to maximize stockholder value and stated its intention
to recommend that Franklin's management coordinate with Ault Glazer to effect
certain fundamental changes within Franklin. Both prior to and following the
filing of the Schedule 13D, Ault had several conversations with Stephen L.
Brown, Franklin's then Chairman and Chief Executive Officer ("Brown"), and other
members of the Board regarding Ault Glazer's ideas with respect to changing
Franklin's leadership and business.
On May 19, 2004, by which time Ault Glazer indirectly beneficially
owned or controlled over 30% of the outstanding shares of Common Stock, the
Board met to discuss Ault Glazer's acquisitions of Common Stock and the Board's
responsibilities and obligations to Franklin's stockholders in connection with
these acquisitions, as well as an appropriate response. At the meeting, Ault
confirmed to the Board that Ault Glazer, in an effort to maximize long-term
stockholder value, intended to effect a change of control and a restructuring of
Franklin involving, among other things, the introduction of a new management
team to replace the existing directors and officers of Franklin, the liquidation
of Franklin's current investment portfolio, the recapitalization of Franklin
with new outside financing, and the relocation of Franklin's headquarters to
Santa Monica, California. During the meeting, Franklin and Ault Glazer also
entered into a confidentiality and "standstill" agreement, pursuant to which
Ault Glazer agreed, among other things, not to acquire any additional securities
of Franklin until May 30, 2004. On June 1, 2004, Ault Glazer and Ault also
amended their existing filing on Schedule 13D to confirm their intention to
effect a change of control of Franklin.
6
In response to the Board's request, Ault Glazer, through private
discussions with the Board between June 3, 2004 and June 9, 2004, presented the
basic terms of the Restructuring Plan. On June 9, 2004, the Board met to discuss
the Restructuring Plan. Following the discussion, the Board concluded that the
Restructuring Plan was in the best interests of Franklin and its stockholders.
As a result, the Board authorized and directed Franklin's management to hold
further discussions and negotiations with Ault Glazer with respect to the
Restructuring Plan.
IMPLEMENTING THE RESTRUCTURING PLAN
On June 23, 2004, the Company entered into a Letter of Understanding
(the "LOU") with Ault Glazer. This LOU set forth the understandings and
agreements of the Company and Ault Glazer with respect to the Restructuring
Plan. The Restructuring Plan was intended to maximize stockholder value through,
among other things, (i) a shift in the Company's investment strategy away from
the radio and telecommunications industry toward a primary focus on the health
care and medical products related companies, and to a lesser extent in the
financial services and real estate industries, (ii) the liquidation of the
Company's investments (including Excelsior Radio Networks, Inc. ("EXCELSIOR")),
(iii) the raising of new capital to fund new investments, and (iv) the election
of new directors and officers with experience and expertise in the medical
products, health care solutions, financial services and real estate industries.
In connection with the Restructuring Plan, Franklin also entered
into a Termination Agreement and Release (the "TERMINATION AND RELEASE
AGREEMENT") with Brown that contains the terms of Brown's prospective
resignation from Franklin. Franklin and Brown amended the Termination Agreement
on September 30, 2004. See "TERMINATION AGREEMENT AND RELEASE" BELOW.
On October 22, 2004, the Company held a special meeting of
stockholders to approve certain proposals relating to the Restructuring Plan
(the "SPECIAL MEETING"). At the Special Meeting, the Company's stockholders
approved proposals relating to: (1) the election of Louis Glazer, M.D., Ph.G.,
Herbert Langsam, Alice Campbell and Brigadier General (Ret.) Lytle Brown III to
serve on the Company's Board of Directors; (2) the amendment and restatement of
the Company's certificate of incorporation to increase the authorized number of
shares of the Company's common stock from 5,000,000 shares to 50,000,000 shares;
(3) the amendment and restatement of the Company's certificate of incorporation
to increase the authorized number of shares of the Company's preferred stock
from 5,000,000 shares to 10,000,000 shares; (4) the amendment and restatement of
the Company's certificate of incorporation to provide for the exculpation of
director liability to the fullest extent permitted by law; (5) the amendment and
restatement of the Company's certificate of incorporation to provide for the
classification of the Board into three classes of directors; (6) the sale by the
Company to Quince Associates, LP of all of the shares of, and warrants to
purchase shares of, common stock of Excelsior Radio Networks, Inc. beneficially
owned by the Company; and (7) the prospective sale by the Company of up to
5,000,000 shares of common stock and warrants to purchase up to an additional
1,500,000 shares of common stock. The proposal relating to the prospective sale
by the Company of Common Stock and warrants to purchase Common Stock to certain
"interested stockholders" under Delaware law was not approved by the requisite
stockholder vote.
On October 22, 2004, Stephen L. Brown, resigned from his positions
as the Company's Chairman and Chief Executive Officer, Hiram M. Lazar resigned
from his positions as the Company's Chief Financial Officer and Secretary. To
fill the vacancies created by these resignations, the newly elected Board
(consisting of Louis Glazer, Alice Campbell, Herbert Langsam, and Lytle Brown
III) appointed Ault to serve as the Company's Chairman and Chief Executive
Officer and Silverstein to serve as the Company's President and Secretary.
7
TERMINATION AGREEMENT AND RELEASE
In connection with the Restructuring Plan, the Company entered into
a Termination Agreement and Release (the "TERMINATION AGREEMENT") with Mr. Brown
that contained the terms of his resignation from the Company. Pursuant to the
terms of the Termination Agreement, we paid Mr. Brown a severance payment of
$250,000. In addition, we also agreed to: (i) pay Mr. Brown an aggregate amount
of $200,000 payable over eight months for consulting services to the Company on
historical matters concerning the Company's operations and stock portfolio as
may be reasonably requested from time to time by a designee of the Board, and
(ii) continue to provide coverage to Mr. Brown and his wife under our medical,
dental and vision plans for a period of three years following the date of
termination. The Company recorded a charge to operations of approximately
$483,000 in 2004 under the Termination Agreement.
A copy of the Termination Agreement was included as an exhibit to
the Company's report on Form 8-K filed with the SEC on June 24, 2004 and a copy
of Amendment No. 1 to the Termination Agreement was included as an exhibit to
the Company's current report on Form 8-K filed with the SEC on September 30,
2004.
All of the foregoing events are discussed in more detail in the
definitive proxy materials filed with the SEC on September 30, 2004, and March
3, 2005.
OUR CURRENT BUSINESS PLAN
THE MEDICAL PRODUCTS AND HEALTHCARE SOLUTIONS INDUSTRY
The Company believes that the healthcare delivery system is under
tremendous pressure to identify and commercialize simple medical solutions
quickly to lower costs, control infections, reduce liability and eliminate
preventable errors. Increased litigation and a renewed focus on patient safety
by regulators is spurring demand for new innovative medical devices. With the
convergence of scientific, electronic and digital technologies, new
breakthroughs in medical devices will play a critical role in solving the
problems in healthcare and enhancing patient safety in the future.
Surgeries are increasing in both number and complexity, creating a
need for newer, more efficient and safer medical devices. The urgency to reduce
the high level of preventable medical errors, reduce liability issues, control
infection and offer new health care services, will focus command attention and
resources as never before.
The medical community recognizes the importance of improving patient
safety, not only to enhance the quality of care, but also to help manage
skyrocketing medical costs and related litigation costs. We are confident the
medical profession and healthcare professionals will rise to the occasion and
help develop the medical solutions to revolutionize health care.
Franklin is dedicated to leading this effort through the development
and introduction of ground-breaking patient safety products such as its lead
product, the patented Safety-Sponge(TM) System, which management believes will
allow the Company to capture a significant portion of what we believe, based on
industry sources, to be approximately $650 million in annual U.S., European and
Japanese surgical sponge sales. In addition, the Company believes that its
innovative Safety-Sponge(TM) System could save up to an estimated $1.5 billion
annually in retained sponge litigation, based upon information from industry
sources.
To augment the Company's focus in the medical products industry the
Company formed Franklin Medical Products, LLC, a wholly-owned healthcare
consulting services company. Effective February 23, 2005, Franklin Medical
Products, LLC changed its name to Patient Safety Consulting Group, LLC.
8
("PSCG"). Initially, efforts at PSCG will be directed at products and services
that promote usage of our lead product.
CUSTOMERS
The Company intends to target hospitals, physicians, nurses and
clinics as its initial source of customers. In addition, the Company also plans
to develop strategic alliances with universities, medical facilities and notable
medical researchers around the United States, that will provide research,
development and promotional support for the Company's products and services.
9
GEOGRAPHIC AREAS
The Company intends to market and sell its patient safety products
and services in the United States and in Europe. However, the principal markets,
products and methods of distribution will vary by country based on a number of
factors, including, healthcare regulations, insurance coverage and customer
demographics. Investments and activities in some countries outside the United
States are subject to higher risks than comparable U.S. activities because the
investment and commercial climate is influenced by restrictive economic policies
and political uncertainties.
PRODUCT DEVELOPMENT
The Company's current patient safety products such as the
Safety-Sponge(TM) System are presently in the optimization and commercialization
phase. The Safety-Sponge(TM) System allows for faster and more accurate counting
of surgical sponges. SurgiCount has obtained FDA 510k exempt status for the
Safety-Sponge(TM) line. The Safety-Sponge(TM) line of sponges has passed
required FDA biocompatibility tests including ISO sensitization, cytotoxicity
and skin irritation tests. SurgiCount is now a wholly-owned subsidiary of the
Company. It is anticipated in the future that distribution of the Company's
medical products to health care professional markets will be done both directly
and through surgical supply and other dealers.
The Company intends to do further research and development to
advance its products as is normal for any other company. However, we intend to
outsource much of the R&D functions and focus our direct efforts on optimizing
this product and establishing distribution channels with strategic alliances
with hospitals to deploy the products. We also seek qualified input from
professionals in the healthcare profession as well as individuals at University
hospitals such as Harvard and the University of California, San Francisco. These
independent physicians and researchers maintain medical practices primarily at
University hospitals and are involved in various research and clinical
development programs. We meet on an as needed basis to discuss medical,
technology and development issues.
MANUFACTURING AND RAW MATERIALS
The Company has not begun commercial manufacturing of its
Safety-Sponge(TM) System. Upon such initiative, the Company intends to enter
into agreements or relationships with several vendors to commercially produce
our products. We believe that the materials used in our products are readily
available and can be purchased and/or produced by several different vendors and,
therefore, we do not anticipate being dependent on any one vendor.
RESEARCH AND DEVELOPMENT
Research and development activities are important to the Company's
business. However, at this time the Company does not have a research facility
but rather focuses its efforts on acquisitions of companies operating within our
target industries that have demonstrated product viability through their own
research and development activities. We intend to outsource much of the research
and development activities relating to improving our existing products or
expanding our intellectual property to similar products or products that have
similar characteristics in our target industries. The Company did not incur any
costs in 2004 relating to the development of new products, the improvement of
existing products, technical support of products and compliance with
governmental regulations for the protection of the consumer. In the future,
these costs will be charged directly to income in the year in which they are
incurred.
PATENTS AND TRADEMARKS
The Company intends to make a practice of obtaining patent
protection on its products and processes where possible. The Company's patents
and trademarks are protected by registration in the United States and other
countries where its products are marketed.
10
The Company currently owns patents issued in the United States and
Europe related to the Safety-Sponge(TM) System. Sales of the Safety-Sponge(TM)
System in the future will be expected to play a significant part of the
Company's total revenues. The Company considers these patents and trademarks in
the aggregate to be of material importance in the operation of its business. The
loss or expiration of any product patent or trademark could result in a loss of
market exclusivity and can result in a significant reduction in sales.
COMPETITION
The medical products and healthcare solutions industry is highly
competitive. We expect that if our investment model proves to be successful, our
current competitors in the medical products and healthcare solutions market may
duplicate our strategy and new competitors may enter the market. We compete
against other medical products and healthcare solutions companies, some of which
are much larger and have significantly greater financial resources than we do.
In addition, these companies will be competing with our portfolio companies to
acquire technologies from universities and research laboratories. We also
compete against large companies that seek to license medical products and
healthcare solutions technologies for themselves. We cannot assure you that we
will be able to successfully compete against these competitors in the
acquisition, development, or commercialization of any medical products and
healthcare solutions, funding of medical products and healthcare solutions
companies or marketing of our products and solutions.
Competition in research, involving the development of new products
and processes and the improvement of existing products and processes, is
particularly significant and results from time to time in product and process
obsolescence. The development of new and improved products is important to the
Company's success in all areas of its business. This competitive environment
requires substantial investments in continuing research, multiple sales forces
and strategic alliances. In addition, the winning and retention of customer
acceptance of the Company's patient safety products involves heavy expenditures
for health care regulatory compliance, advertising, promotion and selling.
COMPETITIVE ADVANTAGES
We believe that we are well positioned to provide financing and
research and development resources to medical products and health care-related
companies for the following reasons:
o Focus on innovative technologies, products and services;
o Network of well respected industry affiliations and medical
expertise;
o Expertise in originating, structuring and monitoring investments;
11
o Flexible investment approach; and
o Established deal sourcing network.
FINANCIAL SERVICES INDUSTRY
In recent years there has been substantial convergence among
companies in the financial services industry. A large number of corporate
entities, including, commercial banks, insurance companies and other broad-based
financial services companies have established or acquired broker-dealers and
asset management firms to compliment their existing lines of business. In
general, there are two types of institutions that will be the initial focus of
the Company's entry into the financial services industry -- broker-dealers and
investment management firms. Other types of entities in which the Company may
acquire or invest in the future, include, but are not necessarily limited to:
finance companies (including real-estate and mortgage related finance
companies), mutual fund companies, collection companies, technology companies
related to the financial services industry and companies engaged in financing
activities.
The Company intends to enter the financial services business through
the establishment of a broker-dealer or asset management subsidiary or through a
majority or minority acquisition or joint venture interest in a company engaged
in the provision of brokerage, asset management and/or similarly related
services. The Company also intends to provide financial advice on mergers,
acquisitions, restructurings and similar corporate finance matters in
furtherance of its financial services business line.
The Company has not invested in the financial services industry in
the past and therefore has not compiled a track record regarding the financial
performance to be expected in connection with the operation of this line of
business. However, the Company intends to utilize and rely on its relationship
with Ault Glazer, a private investment management firm owned and managed by
Milton "Todd" Ault III and other principals of the Company as well as other
third parties, to facilitate its acquisitions and/or joint investments the
forgoing types of financial services companies.
COMPETITION
The financial services industry is a highly competitive environment
where there are no long-term contracted sources of revenue. Each engagement is
separately awarded and negotiated. Our competitors are other investment banking
firms, merchant banks, broker dealers and investment management firms. We
compete with our competitors primarily on a regional, product or niche basis. We
compete on the basis of a number of factors, including our range of products and
services, innovation, and reputation.
As we expand our financial services business, we face competition to
acquire investments in attractive portfolio companies. The activity of
identifying, completing and realizing attractive private equity investments of
the types we expect to make is competitive and involves a high degree of
uncertainty. We may be competing with other investors and corporate buyers for
the investments that we make.
Competition is also intense for the attraction and retention of
qualified employees. Our ability to compete effectively in financial services
industry will depend upon our ability to attract new employees and retain and
motivate our existing employees.
THE REAL ESTATE INDUSTRY
The Company's real estate operations will eventually include a
mixture of commercial properties, residential land development projects and
other unimproved land, all in various stages of development and all available
for sale. Therefore, performance of the real estate operations will largely be
dependent upon the performance of the operating properties, the current status
of the Company's development projects and non-recurring gains or losses
recognized when and if real estate assets are sold. As a result, the results of
operations for the Company's real estate operations are likely to be
unpredictable and may experience significant year-over-year fluctuations.
The Company had several real estate investments at December 31,
2004. These investments consisted of eight vacant single family buildings and
two multi-unit buildings in Baltimore, Maryland, approximately 8.5 acres of
undeveloped land in Heber Springs, Arkansas, and various loans secured by real
estate in Heber Springs, Arkansas. The Company's real estate investments are
held in Franklin Properties. Franklin Properties primary focus is on the
acquisition and management of income producing real estate holdings.
COMPETITION
The Company's real estate operations are in competitive
environments. The Company has concentrations of investments in Baltimore,
Maryland and Heber Springs, Arkansas. The Company competes with a large number
of real estate property owners and developers. Principal factors of competition
are rent charged, attractiveness of location, the quality of the property and
breadth and quality of services provided. The success of the Company's real
estate operations depends upon, among other factors, trends of the national and
local economies, financial condition and operating results of prospective
tenants and customers, availability and cost of capital, construction and
renovation costs, taxes, governmental regulations, legislation and population
trends.
RECENT DEVELOPMENTS
On February 25, 2005, in furtherance of the implementation of the
Company's Restructuring Plan the Company purchased SurgiCount, a privately held,
California-based developer of patient safety devices. SurgiCount is the
Company's first major acquisition in its plan to become a leader in the
multi-billion dollar patient safety field market and management believes that
the acquisition is a significant milestone in the Company's plan to shift its
focus from radio and telecommunications to products and services targeting
patient safety.
On March 2, 2005, the Company made an investment in the common stock
of Administration for International Credit & Investments, Inc. ("AICI"), valued
at $450,000. As part of its investment, the Company received 225,000 warrants to
purchase common stock at $1.50 per share and 225,000 warrants to purchase common
stock at $2.00 per share. The warrants are exercisable for a period of five
years and are callable by AICI in certain instances. AICI operates an electronic
market for collecting, detecting, converting, enhancing and routing
telecommunication traffic and digital content. Members of the exchange
anonymously exchange information based on route quality and price through a
centralized, web accessible database and then route traffic. AICI's
fully-automatic, highly scalable Voice over Internet Protocol routing platform
updates routes based on availability, quality and price and executes the
capacity request of the orders using proprietary software and delivers them
through AICI's system. AICI invoices and processes payments for its members'
transactions and offsets credit risk through its credit management programs with
third parties. AICI's name changed to Ipex, Inc and began trading on the OTC
Bulletin Board on March 29, 2005.
On March 16, 2005, Ault Glazer filed a Schedule 13D with the SEC
relating to its holdings in Tuxis Corporation ("Tuxis"). Tuxis, a Maryland
corporation, currently is registered under the 1940 Act, as a closed-end
management investment company. Tuxis previously received Board of Directors and
shareholder approval to change the nature of its business so as to cease to be
an investment company and on May 3, 2004, filed an application with the SEC to
de-register. At March 16, 2005, the Company directly held 36,000 shares and
indirectly, by virtue of its relationship with Ault Glazer, held 98,000 shares
of Tuxis common stock, which represented approximately 3.66% and 9.96%,
respectively, of the total outstanding shares. At December 31, 2004, Tuxis had
reportable net assets of approximately $9.1 million.
INVESTMENT PROCESS
The Company identifies investment opportunities in our target
industries through an extensive network of contacts in the medical products and
health care solutions industries, relationships with venture capital firms and
other associations with individuals at University hospitals such as those
operated by Harvard and the University of California, San Francisco. Upon
identification of an investment opportunity the Company relies upon the
executive management team to conduct a thorough evaluation of the company and
its technology. As required, the executive management team may consult with
individuals that have specialized expertise in the target industry. In the case
of an investment where Franklin is the sole or lead investor and the executive
management team is satisfied with its evaluation, the basic terms of an
investment are negotiated directly by the executive management team and,
depending on the amount of the transaction, presented to the Board for approval.
Upon mutual acceptance of the basic terms, outside counsel would prepare the
transaction investment documents.
12
On March 2, 2005, the Company filed definitive proxy materials with
the Securities and Exchange Commission in connection with its 2004 Annual
Meeting of the Stockholders (the "ANNUAL MEETING"). The Annual Meeting is being
held on March 30, 2005 in order to vote on the following proposals: (i) the
election of Lytle Brown III as a Class I Director to hold office for a
three-year term expiring in 2007, or until his successor has been duly elected
and qualified or until his earlier death, resignation or removal, in accordance
with the Company's bylaws, as amended; (ii) the ratification of the appointment
by the Board of Directors of the Company (the "BOARD") of Rothstein, Kass &
Company, P.C. ("ROTHSTEIN KASS") to serve as independent auditors for the fiscal
year ended December 31, 2004; (iii) the authorization and approval of the stock
option component of the stock option and restricted stock plan for the Company
(the "NEW PLAN"); (iv) the authorization and approval of the restricted stock
component of the New Plan; (v) the authorization and approval of the payment of
cash and equity compensation to Milton "Todd" Ault III ("AULT"), Lynne
Silverstein ("SILVERSTEIN"), and Louis Glazer and Melanie Glazer (the
"GLAZERS"), each of whom may be deemed to be an "interested stockholder" (as
defined in Section 203 of the Delaware General Corporate Law ("DGCL")) of the
Company; (vi) the authorization and approval of the sale of common stock par
value $1.00 of the Company ("COMMON STOCK"), warrants to purchase Common Stock
("WARRANTS") and other securities representing indebtedness convertible into
Common Stock to Ault, Silverstein and the Glazers, each of whom may be deemed to
be an "interested stockholder" (as defined in Section 203 of the DGCL), on terms
that are approved by the Board consistent with its fiduciary duties and market
terms existing at the time of such offering, including those relating to price
per share, interest rate, warrant coverage and registration rights for such
issuances and the requirements of applicable law, including the 1940 Act, as
described in this proxy statement; (vii) the authorization and approval of the
certificate of amendment to the Amended and Restated Certificate of
Incorporation of the Company (the "CERTIFICATE OF AMENDMENT") to reduce the par
value of the Common Stock from $1.00 per share to $0.33 per share and effect a
three-for-one split of the Common Stock (the "STOCK SPLIT"); (viii) the
authorization and approval of the prospective issuance of bonds, notes or other
evidences of indebtedness that are convertible into Common Stock ("CONVERTIBLE
BONDS," "CONVERTIBLE NOTES" or "OTHER CONVERTIBLE INDEBTEDNESS") in accordance
with the requirements of the 1940 Act; (ix) the authorization and approval of
the Board to withdraw the Company's election to be treated as a BDC pursuant to
Section 54(c) under the 1940 Act; (x) the authorization and approval of the
Certificate of Amendment to change the name of the Company to "Patient Safety
Technologies, Inc."; and (xi) the authorization and approval of the Certificate
of Amendment to decrease the authorized number of shares of Common Stock from
50,000,000 shares to 25,000,000 shares and decrease the authorized number of
shares of Preferred Stock from 10,000,000 shares to 1,000,000 shares.
Please refer to our definitive proxy statement filed with the SEC on
March 2, 2005 and September 30, 2004, our quarterly reports on Form 10-Q filed
with the SEC for the quarters ended March 31, 2004, June 30, 2004 and September
30, 2004, and our Form 8-K's filed with the SEC on October 27, 2004, November 3,
2004, November 9, 2004, November 19, 2004, December 8, 2004, December 27, 2004,
January 4, 2005, February 9, 2005, February 9, 2005, and March 3, 2005 for
additional descriptions of, and information relating to, the Restructuring Plan,
the proposals voted on by the Company's stockholders at the Special Meeting of
Stockholders held on October 28, 2004, press releases related to the
announcement of the Company's future plans, and the proposals to be voted at the
Company's upcoming Annual Meeting.
PORTFOLIO OF INVESTMENTS
The Company has historically invested in long-term equity securities
of start-up and early stage companies in the radio and telecommunications
industry. However, as a result of the Restructuring Plan, the Company has
shifted its investment focus toward that of investments in companies in the
medical products/health care solutions and financial services and real estate
industries. These private businesses may be thinly
13
capitalized, unproven, small companies that lack management depth, are dependent
on new, commercially unproven technologies and have little or no history of
operations.
The following is a discussion of our most significant investments at
February 25, 2005. Pursuant to the Restructuring Plan, the Company shifted its
primary investment focus from the radio and telecommunications industry to the
medical products and health care solutions industries, and to a lesser extent in
the financial services and real estate industries. In conjunction with this
shift, on October 22, 2004, we sold our remaining equity interests in Excelsior
Radio Networks, Inc.("EXCELSIOR") to Quince Associates, LP ("QUINCE") for
$1,489,210. For a more detailed discussion of this transaction, see
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" - "OVERVIEW" and "INVESTMENTS - EXCELSIOR RADIO NETWORKS, INC."
SurgiCount
On February 25, 2005, the Company purchased SurgiCount Medical Inc.
("SURGICOUNT"), a privately held, California-based developer of patient safety
devices. Under the terms of the agreement, the Company paid to Brian Stewart and
Dr. William Stewart, the holders of 100% of the outstanding capital stock of
SurgiCount (the "Shareholders"), consideration in the amount of $340,000 in cash
and 200,000 shares of Common Stock, of which 10,000 shares of Common Stock will
be held in escrow until August 2005. In addition, if certain milestones are
satisfied, the Company will issue up to an additional 33,334 shares of Common
Stock to the Shareholders.
SurgiCount is the Company's first major acquisition in its plan to
become a leader in the multi-billion dollar patient safety field market.
Management believes that the acquisition is a significant milestone in the
Company's plan to shift its focus from radio and telecommunications to products
and services targeting health care and patient safety. SurgiCount owns patents
issued in the United States and Europe related to patient safety, among them,
the Safety-Sponge(TM) System, an innovation which management believes will allow
the Company to capture a significant portion of what we believe, based on
industry sources, to be approximately $650 million in annual U.S., European and
Japanese surgical sponge sales.
The Safety-Sponge(TM) System allows for faster and more accurate
counting of surgical sponges. SurgiCount has obtained FDA 510k exempt status for
the Safety-Sponge(TM) line. The Safety-Sponge(TM) line of sponges has passed
required FDA biocompatibility tests including ISO sensitization, cytotoxicity
and skin irritation tests. SurgiCount is now a wholly-owned subsidiary of the
Company.
China Nurse
On November 23, 2004, the Company entered into a strategic
relationship with China Nurse LLC ("China Nurse"), an international
nurse-recruiting firm based in New York that focuses on recruiting and training
qualified nurses from China and Taiwan for job placement with hospitals and
other health care facilities in the United States. In connection with this
strategic relationship, the Company has agreed to provide referrals and other
assistance and has also made a small capital investment in that company.
Digicorp
On December 29, 2004, the Company entered into a Common Stock
Purchase Agreement with certain shareholders of DigiCorp (the "Agreement"), to
purchase an aggregate of 3,453,527 shares of DigiCorp common stock. Of such
shares, 2,229,527 shares were purchased for $.135 per share on December 29,
2004, 100,787 shares were purchased for $.145 on December 29, 2004. Franklin
agreed to
14
purchase an additional 1,224,000 shares of DigiCorp common stock from the
selling shareholders at such time as the shares are registered for resale with
the SEC. The purchase price for such shares is $.135 or $.145 per share,
depending on when the closing occurs. Digicorp's common stock is traded on the
OTC Bulletin Board. In connection with the Agreement, Franklin is entitled to
designate two members to the Board of Directors of Digicorp. Franklin's first
designee, Melanie Glazer, was appointed on December 29, 2004. The Company is
currently evaluating several strategic alternatives for the use of the DigiCorp
entity, however, no definitive plan has been decided upon at this time.
Alacra Corporation
At December 31, 2004, the Company had an investment in shares of
Series F convertible preferred stock of Alacra Corporation, valued at
$1,000,000, which represented 14.4% of the corporation's total assets and 28.0%
of its net assets. Franklin has the right to have the Series F convertible
preferred stock redeemed by Alacra for face value plus accrued dividends on
December 31, 2006. Alacra, based in New York, is a global provider of business
and financial information. Alacra provides a diverse portfolio of fast,
sophisticated online services that allow users to quickly find, analyze, package
and present mission-critical business information. Alacra's customers include
more than 750 financial institutions, management consulting, law and accounting
firms and other corporations throughout the world.
Real Estate Investments
At December 31, 2004, the Company held a portfolio of real estate
investments through Franklin Capital Properties, LLC ("Franklin Properties"), a
Delaware limited liability company and a wholly owned subsidiary. As of December
31, 2004 Franklin Properties was valued at $738,518, which represents 10.7% of
the Company's total assets and 20.7% of its net assets. Franklin Properties
primary focus is on the acquisition and management of income producing real
estate holdings. Franklin Properties real estate holdings consist of eight
vacant single family buildings and two multi-unit buildings in Baltimore,
Maryland, approximately 8.5 acres of undeveloped land in Heber Springs,
Arkansas, and various loans secured by real estate in Heber Springs, Arkansas.
Franklin Properties intends to renovate the single family buildings and engage
in an active rental program.
For more information about the Company's other investments,
including its real estate holdings, see Item 7 "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION."
Excelsior Radio Networks, Inc.
At December 31, 2003, the Company had an investment in Excelsior
Radio Networks, Inc., formerly known as eCom Capital, Inc., valued at $1,921,270
which represented 59.0% of the Company's total assets and 94.9% of its net
assets. Excelsior produces and syndicates programs and services heard on more
than 2,000 radio stations nationwide across most major formats.
Franklin along with Sunshine initially purchased Excelsior on August
28, 2001. On October 3, 2002, Franklin sold 773,196 common shares for $1.94 per
share for $1,500,000 realizing a gain of $726,804. On January 31, 2003, Franklin
purchased and subsequently on May 29, 2003, Franklin cancelled the purchase,
33,750 common shares for $1.625 per share and 65,199 warrants to acquire shares
of Excelsior common stock at an exercise price of $1.125 per share for $0.50 per
warrant. On August 12, 2003, Franklin sold 193,000 common shares for $1.30 per
share for $250,900 realizing a gain of $57,900. Franklin has stock appreciation
rights on these common shares as follows, a) in the event that Excelsior is sold
on or before August 8, 2004 for gross proceeds of no less than $40,000,000, then
Franklin shall be
15
entitled to receive fifty percent (50%) of any net value above $1.30 per share
not to exceed total proceeds to Franklin of $1.94 per share, and b) in the event
that Excelsior is sold on or before August 8, 2005 for gross proceeds of no less
than $40,000,000, then Franklin shall be entitled to receive fifty percent (50%)
of any net value above $1.30 per share not to exceed proceeds to Franklin of
$1.625 per share. On October 8, 2003, Franklin sold to Sunshine 375,000 shares
of the common stock of Excelsior for an aggregate purchase price of $750,000,
realizing a gain of $375,000, pursuant to a stock purchase agreement between
Sunshine and Franklin. On March 19, 2004 Franklin sold an additional 58,804
shares of the common stock of Excelsior to Sunshine for an aggregate purchase
price of $117,608, $2.00 per common share. Franklin has stock appreciation
rights on the common shares sold to Sunshine on October 8, 2003 and March 19,
2004, such that if Excelsior is sold and the purchaser of the common shares from
Franklin receives more than $3.50 per share, Franklin is entitled to receive 80%
of the value greater than $3.50 per share.
On June 30, 2004, Franklin sold 200,000 common shares of Excelsior
to Quince Associates, LP ("Quince") for an aggregate purchase price of $500,000,
$2.50 per common share. On July 5, 2004, Franklin entered into an agreement with
Quince to sell Franklin's remaining interest in Excelsior. The transactions
contemplated by this agreement were subject to shareholder approval. On October
22, 2004, Franklin's shareholders approved the sale and Franklin agreed to sell
its remaining 550,000 shares of Excelsior common stock at $2.50 per share and
warrants exercisable for 74,232 shares of Excelsior common stock at an exercise
price of $1.20 per share at $1.30 per warrant and warrants exercisable for
12,879 shares of Excelsior common stock at an exercise price of $1.125 per share
at $1.375 per warrant. On September 24, 2004, 100,000 shares of common stock of
Excelsior were sold for an aggregate purchase price of $250,000 as an advance to
the final sale. On October 22, 2004, Franklin sold its remaining interest in
Excelsior to Quince for an aggregate purchase price of $1,489,210. Cumulative
realized gains on the sale of Excelsior common stock and warrants to purchase
Excelsior common stock to Quince amounted to $1,389,210.
The purchase price in connection with the June 30, 2004, September
24, 2004 and October 22, 2004 sales of our equity interests in Excelsior to
Quince is subject to a potential adjustment whereby, in the event that the per
share net proceeds from any liquidation of Excelsior exceeds $3.00 (or an amount
equal to $3.00 plus $.050 multiplied by the number of years, up to five, elapsed
since the closing date of the sale), Franklin will be entitled to receive 80% of
the value greater than $3.00 (or such other applicable amount) per share. The
purchase price adjustment for the sale will expire as of a date 5 years
following the closing of each sale transaction.
Other Investments
In 2001, Franklin maintained group life and dental insurance with
Principal Financial Group ("PFG"). Upon the demutualization of PFG in October
2001, Franklin received 4,338 common shares of PFG. However, Franklin did not
receive notification for the receipt of such shares. In 2004, Franklin became
aware of its ownership of PFG common shares, and recorded the fair value of such
shares within marketable investments. On April 23, 2004, Franklin sold the
common shares of PFG for $151,400, which was recorded as other realized gains in
the accompanying statement of operations.
16
EMPLOYEES
As of December 31, 2004, we had 7 employees in our offices, all
based in our Santa Monica office. We believe our relations with our employees
are good.
MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS
For federal and state income tax purposes, we are taxed at regular
corporate rates on ordinary income and recognize gains on distributions of
appreciated property. We are not entitled to the special tax treatment available
to BDCs that elect to be treated as regulated investment companies under the
Internal Revenue Code because, among other reasons, we do not distribute at
least 90% of "investment company taxable income" as required by the Internal
Revenue Code for such treatment. As of December 31, 2004, we had a net operating
loss carryforward of approximately $8.6 million to offset future taxable income
for federal income tax purposes. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--RESULTS OF OPERATIONS--TAXES."
Distributions in excess of current or accumulated earnings and profits will be
treated first as a return of capital to the extent of the holder's tax basis and
then as gain from the sale or exchange of property.
In the event that the company withdraws its election to be treated
as a BDC, the Company does not believe that the withdrawal of its election to be
treated as a BDC will have any impact on its federal income tax status, since it
has never elected to be treated as a regulated investment company under
Subchapter M of the Internal Revenue Code. (Electing for treatment as a
regulated investment company under Subchapter M generally allows a qualified
investment company to avoid paying corporate level federal income tax on income
it distributes to its stockholders.) Instead, the Company has always been
subject to corporate level federal income tax on its income (without regard to
any distributions it makes to its stockholders) as a "regular" corporation under
Subchapter C of the Code. There will be no change in its federal income tax
status as a result of it becoming an operating company.
For more information about the Company's plans to withdraw its
election as a BDC, see "WITHDRAWAL OF THE COMPANY'S ELECTION TO BE TREATED AS A
BDC MAY INCREASE THE RISKS TO OUR SHAREHOLDERS SINCE THE COMPANY WOULD NOT BE
SUBJECT TO MANY OF THE REGULATORY RESTRICTIONS IMPOSED BY, OR RECEIVE THE
FINANCIAL REPORTING BENEFITS, OF THE 1940 ACT" below.
REGULATION OF THE MEDICAL PRODUCTS AND HEALTHCARE INDUSTRY
The healthcare industry is affected by extensive government
regulation at the Federal and state levels. In addition, the Company's business
may also be subject to varying degrees of governmental
17
regulation in the countries in which operations are conducted, and the general
trend is toward regulation of increasing stringency. In the United States, the
drug, device, diagnostics and cosmetic industries have long been subject to
regulation by various federal, state and local agencies, primarily as to product
safety, efficacy, advertising and labeling. The exercise of broad regulatory
powers by the FDA continues to result in increases in the amounts of testing and
documentation required for FDA clearance of new drugs and devices and a
corresponding increase in the expense of product introduction. Similar trends
toward product and process regulation are also evident in a number of major
countries outside of the United States, especially in the European Economic
Community where efforts are continuing to harmonize the internal regulatory
systems.
The costs of human health care have been and continue to be a
subject of study, investigation and regulation by governmental agencies and
legislative bodies in the United States and other countries. In the United
States, attention has been focused on drug prices and profits and programs that
encourage doctors to write prescriptions for particular drugs or recommend
particular medical devices. Managed care has become a more potent force in the
market place and it is likely that increased attention will be paid to drug and
medical device pricing, appropriate drug and medical device utilization and the
quality of health care.
The regulatory agencies under whose purview the Company operates
have administrative powers that may subject the Company to such actions as
product recalls, seizure of products and other civil and criminal sanctions. In
some cases the Company may deem it advisable to initiate product recalls
voluntarily. We are also subject to the Safe Medical Devices Act of 1990, which
imposes certain reporting requirements on distributors in the event of an
incident involving serious illness, injury or death caused by a medical device.
In addition, sales and marketing practices in the health care
industry have come under increased scrutiny by government agencies and state
attorney generals and resulting investigations and prosecutions carry the risk
of significant civil and criminal penalties.
Changes in regulations and healthcare policy occur frequently and
may impact our results, growth potential and the profitability of products we
sell. There can be no assurance that changes to governmental reimbursement
programs will not have a material adverse effect on the Company.
REGULATION AS A BUSINESS DEVELOPMENT COMPANY
GENERAL
A BDC is regulated by the 1940 Act. A BDC must be organized in the
United States for the purpose of investing in or lending to primarily private
companies and making managerial assistance available to them. A BDC may use
capital provided by public stockholders and from other sources to invest in
long-term, private investments in businesses.
We may not change the nature of our business so as to cease to be,
or withdraw our election as, a BDC unless authorized by vote of a majority of
the outstanding voting securities, as required by the 1940 Act. A majority of
the outstanding voting securities of a company is defined under the 1940 Act as
the lesser of: (i) 67% or more of such company's voting securities present at a
meeting if more than 50% of the outstanding voting securities of such company
are present or represented by proxy, or (ii) more than 50% of the outstanding
voting securities of such company. We do not anticipate any substantial change
in the nature of our business.
As with other companies regulated by the 1940 Act, a BDC must adhere
to certain substantive regulatory requirements. A majority of our directors must
be persons who are not interested persons, as that term is defined in the 1940
Act. Additionally, we are required to provide and maintain a bond issued by a
reputable fidelity insurance company to protect the BDC. Furthermore, as a BDC,
we are prohibited from protecting any director or officer against any liability
to the company or our stockholders arising from willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in the conduct of
such person's office.
As a BDC, we are required to meet a coverage ratio of the value of
total assets to total senior securities, which include all of our borrowings and
any preferred stock we may issue in the future, of at least 200%. We may also be
prohibited under the 1940 Act from knowingly participating in certain
transactions with our affiliates without the prior approval of our directors who
are not interested persons and, in some cases, prior approval by the SEC.
We are not generally able to issue and sell our common stock at a
price below net asset value per share. See "RISK FACTORS--RISKS RELATING TO OUR
BUSINESS AND STRUCTURE--REGULATIONS GOVERNING OUR OPERATION AS A BDC AFFECT OUR
ABILITY TO, AND THE WAY IN WHICH WE RAISE ADDITIONAL CAPITAL." We may, however,
sell our common stock, or warrants, options or rights to acquire our common
stock, at a price below the then-current net asset value of our common stock if
our Board of Directors determines that such sale is in our best interests and
the best interests of our stockholders, and our stockholders approve such sale.
In addition, we may generally issue new shares of our common stock at a price
below net asset value in rights offerings to existing stockholders, in payment
of dividends and in certain other limited circumstances.
We will be periodically examined by the SEC for compliance with the
1940 Act.
As a BDC, we are subject to certain risks and uncertainties. See
"RISK FACTORS--RISKS RELATING TO OUR BUSINESS AND STRUCTURE."
In addition, the Company currently has plans, subject to shareholder
approval at the Annual Meeting, to withdraw the Company's election to be treated
as a BDC regulated under the 1940 Act. See "WITHDRAWAL OF THE COMPANY'S ELECTION
TO BE TREATED AS A BDC MAY INCREASE THE RISKS TO OUR SHAREHOLDERS SINCE THE
COMPANY WOULD NOT BE SUBJECT TO MANY OF THE REGULATORY RESTRICTIONS IMPOSED BY,
OR RECEIVE THE FINANCIAL REPORTING BENEFITS, OF THE 1940 ACT" below.
REGULATION OF THE FINANCIAL SERVICES INDUSTRY
FINANCIAL SERVICES INDUSTRY REGULATION
The growth and earnings performance of a financial institution are
affected not only by management decisions (such as the development of a business
plan and lending decisions) and general economic conditions (such as interest
rates, housing demand and business cycles), but also by the various governmental
regulations and authorities, including, but not limited to, regulation by the
Board of Governors of the Federal Reserve System ("FRB"), the Federal Deposit
Insurance Corporation ("FDIC"), the Office of the Comptroller of the Currency
("OCC"), the Office of Thrift Supervision ("OTS"), the Internal Revenue Service
("IRS"), and other federal and state authorities.
In addition, the Company will also be subject to extensive
regulation by self-regulatory bodies, including the New York Stock Exchange
(NYSE) and various other stock exchanges, the Securities and Exchange Commission
(SEC), the National Association of Securities Dealers Regulation, Inc. (NASDR)
and foreign regulatory bodies.
Federal and state laws and regulations generally applicable to
financial institutions regulate, among other things, the scope of business,
investment activities, capital levels, reserves against deposits, collateral
requirements, transactions with insiders and certain affiliates, the
establishment of branches, mergers, acquisitions, consolidations, the issuance
of equity and debt, and the payment of dividends.
Broker-dealers and investment advisers are subject to regulation
covering virtually all aspects of their businesses. These regulatory authorities
have adopted rules that govern the securities industry and, as a normal part of
their procedures, conduct periodic examinations of the Company's securities
brokerage and asset management operations. Additional legislation, changes in
rules promulgated by the SEC, foreign regulatory agencies, or any
self-regulatory organization, or changes in the interpretation or enforcement of
existing laws and rules, may directly affect the mode of operation and
profitability of the Company. In the United States, brokerage firms and certain
investment advisers also are subject to regulation by state securities
commissions in the states in which they conduct business. These regulatory
authorities, including state securities commissions, may conduct administrative
proceedings which can result in censure, fine, suspension or expulsion of a
broker-dealer or investment adviser, its officers or employees.
REGULATION OF THE REAL ESTATE INDUSTRY
The real estate development industry is subject to substantial
environmental, building, construction, zoning and real estate regulations that
are imposed by various federal, state and local authorities. In order to develop
its properties, the Company must obtain the approval of numerous
18
governmental agencies regarding such matters as permitted land uses, density,
the installation of utility services (such as water, sewer, gas, electric,
telephone and cable television) and the dedication of acreage for various
community purposes. Furthermore, changes in prevailing local circumstances or
applicable laws may require additional approvals or modifications of approvals
previously obtained. Delays in obtaining required approvals and authorizations
could adversely affect the profitability of the Company's projects.
19
QUALIFYING ASSETS
As a BDC, we may not acquire any asset other than "qualifying
assets" unless, at the time we make the acquisition, the value of our qualifying
assets represent at least 70% of the value of our total assets. The principal
categories of qualifying assets relevant to our business are:
o Securities of an eligible portfolio company that are purchased in
transactions not involving any public offering. An eligible
portfolio company is defined under the 1940 Act to include any
issuer that:
o is organized and has its principal place of business in the
U.S.;
o is not an investment company or a company operating pursuant
to certain exemptions under the 1940 Act, other than a small
business investment company wholly owned by a BDC; and
o does not have any class of publicly traded securities with
respect to which a broker may extend margin credit (i.e., a
"marginable security").
o Securities received in exchange for or distributed with respect to
securities described in the bullet above or pursuant to the exercise
of options, warrants, or rights relating to those securities; and
o Cash, cash items, government securities, or high quality debt
securities (as defined in the 1940 Act), maturing in one year or
less from the time of investment.
Amendments promulgated in 1998 by the Federal Reserve expanded the
definition of a marginable security under the Federal Reserve's margin rules to
include any non-equity security. Thus, any debt securities issued by any entity
are marginable securities under the Federal Reserve's current margin rules. As a
result, the staff of the SEC has raised the question to the BDC industry as to
whether a private company that has outstanding debt securities would qualify as
an "eligible portfolio company" under the 1940 Act.
The SEC has recently issued proposed rules to correct the unintended
consequence of the Federal Reserve's 1998 margin rule amendments of apparently
limiting the investment opportunities of business development companies. In
general, the SEC's proposed rules would define an eligible portfolio company as
any company that does not have securities listed on a national securities
exchange or association. We are currently in the process of reviewing the SEC's
proposed rules and assessing their impact, to the extent such proposed rules are
subsequently approved by the SEC, on our investment activities. We do not
believe that these proposed rules will have a material adverse effect on our
operations.
Until the SEC or its staff has taken a final public position with
respect to the issue discussed above, we will continue to monitor this issue
closely, and may be required to adjust our investment focus to comply with
and/or take advantage of any future administrative position, judicial decision
or legislative action.
20
In addition, a BDC must have been organized and have its principal
place of business in the United States and must be operated for the purpose of
making investments in eligible portfolio companies, or in other securities that
are consistent with its purpose as a BDC.
SIGNIFICANT MANAGERIAL ASSISTANCE
To include certain securities described above as qualifying assets
for the purpose of the 70% test, a BDC must offer to make available to the
issuer of those securities significant managerial assistance such as providing
guidance and counsel concerning the management, operations, or business
objectives and policies of a portfolio company. We offer to provide managerial
assistance to our portfolio companies.
INVESTMENT CONCENTRATION
Our investment objective is to maximize our portfolio's total
return, principally by investing in the debt and/or equity securities of
companies in the medical products, healthcare solutions, financial services and
real estate industries. In this respect, we concentrate in these sectors and
invest, under normal circumstances, at least 80% of the value of our net assets
(including the amount of any borrowings for investment purposes) in the medical
products, healthcare solutions, financial services and real estate industries.
This 80% policy is not a fundamental policy and therefore may be changed without
the approval of our stockholders. However, we may not change or modify this
policy unless we provide our stockholders with at least 60 days prior notice,
pursuant to Rule 35d-1 of the 1940 Act. See "RISK FACTORS--RISKS RELATED TO OUR
INVESTMENTS--OUR PORTFOLIO MAY BE CONCENTRATED IN A LIMITED NUMBER OF PORTFOLIO
COMPANIES."
1940 ACT CODE OF ETHICS
As required by the 1940 Act, we maintain a code of ethics that
establishes procedures for personal investments and restricts certain
transactions by our personnel. See "Risk factors--Risks relating to our business
and structure--There are significant potentiaL conflicts of interest." Our code
of ethics generally does not permit investments by our employees in securities
that may be purchased or held by us. A copy of the code of ethics may be
obtained, without charge, upon a written request mailed to: Franklin Capital
Corporation c/o Corporate Secretary, 100 Wilshire Boulevard, Suite 1500, Santa
Monica, California 90401.
CODE OF BUSINESS CONDUCT AND ETHICS
Each executive officer and director as well as every employee of the
Company is subject to the Company's Code of Business Conduct and Ethics which
was adopted by the Board on November 11, 2004 and filed as Appendix D to the
definitive proxy materials filed with the SEC on March 2, 2005. The code of
ethics applies to all the directors, officers and certain employees of the
Company, including the principal executive officer, principal financial officer,
principal accounting officer or controller, or persons performing similar
functions. A copy of the Code of Business Conduct and Ethics may be obtained,
without charge, upon a written request mailed to: Franklin Capital Corporation
c/o Corporate Secretary, 100 Wilshire Boulevard, Suite 1500, Santa Monica,
California 90401.
COMPLIANCE POLICIES AND PROCEDURES
We have adopted and implemented written policies and procedures
reasonably designed to prevent violation of the federal securities laws, and are
required to review these compliance policies and procedures annually for their
adequacy and the effectiveness of their implementation, and to designate a
21
Chief Compliance Officer to be responsible for administering the policies and
procedures. Lynne Silverstein serves as Chief Compliance Officer for the
Company.
SARBANES-OXLEY ACT OF 2002
On July 30, 2002, President Bush signed into law the Sarbanes-Oxley
Act of 2002. The Sarbanes-Oxley Act, as well as the rules and regulations
promulgated thereunder, imposed a wide variety of new regulatory requirements on
publicly-held companies and their insiders. Many of these requirements affect
us. For example:
o Pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as
amended (the "1934 Act"), our Chief Executive Officer and Chief
Financial Officer must certify the accuracy of the financial
statements contained in our periodic reports;
o Pursuant to Item 307 of Regulation S-K, our periodic reports must
disclose our conclusions about the effectiveness of our disclosure
controls and procedures;
o Pursuant to Rule 13a-15 of the 1934 Act, our management must prepare
a report regarding its assessment of our internal control over
financial reporting, which must be audited by our independent
registered public accounting firm; and
o Pursuant to Item 308 of Regulation S-K and Rule 13a-15 of the 1934
Act, our periodic reports must disclose whether there were
significant changes in our internal controls or in other factors
that could significantly affect these controls subsequent to the
date of their evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
The Sarbanes-Oxley Act requires us to review our current policies
and procedures to determine whether we comply with the Sarbanes-Oxley Act and
the regulations promulgated thereunder. We will continue to monitor our
compliance with all regulations that are adopted under the Sarbanes-Oxley Act
and will take actions necessary to ensure that we are in compliance therewith.
22
AVAILABLE INFORMATION
Copies of the Company quarterly reports on Form 10-Q, annual reports
on Form 10-K and current reports on Form 8-K, and any amendments to the
foregoing, will be provided without charge to any shareholder submitting a
written request to the Corporate Secretary, Franklin Capital Corporation, 100
Wilshire Boulevard, Suite 1500, Santa Monica, CA 90401 or by calling (310)
752-1416. You may also obtain the documents filed by Franklin Capital with the
Securities and Exchange Commission for free at the Internet website maintained
by the Securities and Exchange Commission at www.sec.gov. The Company does not
currently make these documents available on its website.
RISK FACTORS
AN INVESTMENT IN OUR SECURITIES INVOLVES A HIGH DEGREE OF RISK
RELATING TO OUR BUSINESS, STRATEGY, STRUCTURE AND INVESTMENT OBJECTIVES. THE
RISKS SET OUT BELOW ARE NOT THE ONLY RISKS WE FACE, AND WE FACE OTHER RISKS
WHICH ARE NOT YET PREDICTABLE OR IDENTIFIABLE. IF ANY EVENTS UNDERLYING OR
RELATING TO THE FOLLOWING RISKS OCCUR, OUR BUSINESS, FINANCIAL CONDITION AND
RESULTS OF OPERATIONS COULD BE MATERIALLY ADVERSELY AFFECTED. IN SUCH CASE, OUR
NET ASSET VALUE AND THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE, AND YOU
MAY LOSE ALL OR PART OF YOUR INVESTMENT. IN ADDITION TO THE RISK FACTORS
DESCRIBED BELOW, OTHER FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY GENERALLY INCLUDE:
o CHANGES IN OR CONDITIONS AFFECTING THE ECONOMY;
o RISK ASSOCIATED WITH POSSIBLE DISRUPTION IN THE COMPANY'S OPERATIONS DUE
TO TERRORISM;
o FUTURE REGULATORY ACTIONS AND CONDITIONS IN THE COMPANY'S OPERATING AREAS
OR TARGET INDUSTRIES FOR INVESTMENTS; AND
o OTHER RISKS AND UNCERTAINTIES AS MAY BE DETAILED FROM TIME TO TIME IN THE
COMPANY'S PUBLIC ANNOUNCEMENTS AND SEC FILINGS.
23
RISKS RELATING TO OUR BUSINESS AND STRUCTURE
WE RECENTLY RESTRUCTURED OUR INVESTMENT STRATEGY AND OBJECTIVE AND HAVE LIMITED
OPERATING HISTORY UNDER OUR NEW STRUCTURE.
Upon the change of control that occurred in October 2004, we
restructured our investment strategy and objective to focus on the medical
products, healthcare solutions, financial services and real estate industries
instead of the radio and telecommunications industries. We have a limited
operating history under this new structure. We are subject to all of the
business risks and uncertainties associated with any new investment strategy or
objective, including the risk that we will not achieve our investment objective
and that the value of your investment in us could decline substantially.
THE COMPANY MAY NOT SUCCESSFULLY IMPLEMENT ITS RESTRUCTURING PLAN
The Restructuring Plan has shifted Franklin's investment strategy
away from the radio and telecommunications industry and refocused it on the
medical products, healthcare solutions, financial services and real estate
industries. Franklin has not typically invested in these industries in the past
and therefore has not compiled a track record regarding the financial
performance to be expected in connection with these new investments. There can
be no assurance regarding the return on, or the recovery of, Franklin's
investments in businesses in these industries, and whether such investments will
be profitable.
Moreover, there are a number of inherent risks for entities doing
business in the medical products, healthcare solutions, financial services and
real estate industries, including a complex array of regulatory requirements.
These risks could have a material adverse effect on the profitability of the
businesses in which Franklin invests, which in turn could have a material
adverse effect on the return on, or the recovery of, Franklin's investment in
such businesses.
WITHDRAWAL OF THE COMPANY'S ELECTION TO BE TREATED AS A BDC MAY INCREASE THE
RISKS TO OUR SHAREHOLDERS SINCE THE COMPANY WOULD NOT BE SUBJECT TO MANY OF THE
REGULATORY RESTRICTIONS IMPOSED BY, OR RECEIVE THE FINANCIAL REPORTING BENEFITS,
OF THE 1940 ACT
If the Company withdraws its election to be treated as a BDC, the
Company would no longer be subject to regulation under the 1940 Act, which is
designed to protect the interests of investors in investment companies. As a
non-BDC, the Company will not be subject to many of the regulatory, financial
reporting and other requirements and restrictions imposed by the 1940 Act
including, but not necessarily limited to, limitations on the amounts, types and
prices at which securities which may be issued, participation in related party
transactions, the payment of compensation to executives, and the scope of
eligible investments.
In the event that the Company withdraws its election to be treated
as a BDC and becomes an operating company, the fundamental nature of the
Company's business will change from that of investing in a portfolio of
securities in the radio and telecommunications industries, with the goal of
achieving gains on appreciation and dividend income, to that of being actively
engaged in the ownership and management of operating businesses in the medical
products, health care solutions, financial services and real estate industries,
with the goal of generating income from the operations of those businesses. No
assurance can be given that our business strategy or investment objectives will
be achieved by withdrawing our election to be treated as a BDC.
Further, the election to withdraw the Company as a BDC under the
1940 Act will result in a significant change in the Company's method of
accounting. BDC financial statement presentation and accounting utilizes the
value method of accounting used by investment companies, which allows BDCs to
recognize income and value their investments at market value as opposed to
historical cost. As an operating company, the required financial statement
presentation and accounting for securities held will be either fair value or
historical cost methods of accounting, depending on the classification of the
investment and the Company's intent with respect to the period of time it
intends to hold the investment.
24
A change in the Company's method of accounting could reduce the market value of
its investments in privately held companies by eliminating the Company's ability
to report an increase in the value of its holdings as they occur. Also, as an
operating company, the Company would have to consolidate its financial
statements with subsidiaries, thus eliminating the portfolio company reporting
benefits available to BDCs.
WE ARE DEPENDENT UPON OUR KEY MANAGEMENT PERSONNEL FOR OUR FUTURE SUCCESS,
PARTICULARLY MILTON "TODD" AULT III.
The Company is dependent on the diligence and skill of its senior
management and other key personnel for the selection, structuring, closing and
monitoring of its investments. The future success of the Company depends to a
significant extent on the continued service and coordination of its senior
management team, principally our Chief Executive Officer and Chairman, Milton
"Todd" Ault III. Mr. Ault is not currently subject to an employment contract
with us. The departure of any key management personnel, or Mr. Ault in
particular, could have a material adverse effect on the Company's ability to
implement its business strategy or achieve its investment objective.
As a result of the implementation of the Restructuring Plan and
pursuant to the Termination Agreement, on October 22, 2004, Stephen Brown
resigned as the Chairman and Chief Executive Officer of the Company. In
addition, certain other members of senior management and the board of directors
either resigned or were replaced with new directors and/or officers. These new
directors and/or officers have not previously been involved with the Company.
Profitability of the Company would be dependent on this new management, as
opposed to former management. As a result, there can be no assurance that the
new senior management would operate the Company in a profitable manner.
OUR MANAGEMENT HAS LIMITED EXPERIENCE IN MANAGING AND OPERATING AS A PUBLIC
COMPANY UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES EXCHANGE
ACT OF 1934, AS AMENDED, OR A BDC UNDER THE 1940 ACT, AS AMENDED.
Prior to the change in control that occurred in October 2004, our
senior management were primarily engaged in operating a private investment
management firm. In this capacity they developed a general understanding of the
administrative and regulatory environment in which public companies operate.
However, our senior management lacks practical experience operating a public
company and relies in many instances on the professional experience and advice
of third parties including its consultants, attorneys and accountants.
Additionally, utilization of professionals is expensive and in the event we fail
to reach profitability and/or raise additional capital there can be no assurance
that these resources will be available to the Company in the future.
Failure to comply or adequately comply with any laws, rules, or
regulations applicable to our business or us may result in fines or regulatory
actions, which may materially adversely affect our business, results of
operation, or financial condition.
OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS WILL DEPEND ON OUR ABILITY TO
MANAGE OUR FUTURE GROWTH EFFECTIVELY.
As part of the Restructuring Plan, we changed our investment
strategy and objective and are currently recapitalizing our business. As such,
our success in achieving our investment objective will depend on our ability to
grow effectively and efficiently, including our ability to identify, analyze,
and invest in and finance companies in a timely manner. Accomplishing this
result will also require us to raise capital on a cost-effective and timely
basis. As we grow, we will need to hire, train, supervise and manage new
employees. Our failure to manage our future growth effectively could have a
material adverse effect on our business, financial condition and results of
operations.
25
OUR BUSINESS MODEL DEPENDS UPON THE DEVELOPMENT OF STRONG REFERRAL RELATIONSHIPS
WITH PRIVATE EQUITY AND VENTURE CAPITAL FUNDS AND INVESTMENT BANKING FIRMS.
If we fail to maintain our relationships with key firms, or if we
fail to establish strong referral relationships with other firms or other
sources of investment opportunities, we will not be able to grow our portfolio
of private companies and achieve our investment objective. In addition, persons
with whom we have informal relationships are not obligated to provide us with
investment opportunities, and therefore there is no assurance that such
relationships will lead to the origination of debt or other investments.
WE MAY EXPERIENCE FLUCTUATIONS IN OUR QUARTERLY RESULTS.
We may experience fluctuations in our quarterly operating results
due to a number of factors, including the rate at which we identify and make new
investments, the success rate of our new investments, the level of our expenses,
variations in and the timing of the recognition of realized and unrealized gains
or losses, the degree to which we encounter competition in our markets and
general economic conditions. As a result of these factors, results for any
period should not be relied upon as being indicative of performance in future
periods.
ECONOMIC RECESSIONS OR DOWNTURNS COULD IMPAIR OUR INVESTMENTS AND HARM OUR
OPERATING RESULTS.
Many of the companies in which we have made or will make investments
may be susceptible to economic slowdowns or recessions. An economic slowdown may
affect the ability of a company to engage in a liquidity event such as a sale,
recapitalization, or initial public offering. Our nonperforming assets are
likely to increase and the value of our portfolio is likely to decrease during
these periods. These conditions could lead to financial losses in our portfolio
and a decrease in our revenues, net income, and assets.
Our business of making private equity investments and positioning
them for liquidity events also may be affected by current and future market
conditions. The absence of an active senior lending environment may slow the
amount of private equity investment activity generally. As a result, the pace of
26
our investment activity may slow. In addition, significant changes in the
capital markets could have an effect on the valuations of private companies and
on the potential for liquidity events involving such companies. This could
affect the amount and timing of gains realized on our investments.
THE INABILITY OF THE COMPANIES IN WHICH WE INVEST TO SUCCESSFULLY MARKET THEIR
PRODUCTS WOULD HAVE A NEGATIVE IMPACT ON OUR INVESTMENT RETURNS
Even if the companies in which we invest 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 our portfolio companies may not be successful.
WE MAY NEED TO UNDERTAKE ADDITIONAL FINANCINGS TO MEET OUR GROWTH, OPERATING
AND/OR CAPITAL NEEDS.
We anticipate that monetizable revenue from our operations for the
foreseeable future may not be sufficient to meet our growth, operating and/or
capital requirements. We believe that we currently have the financial resources
to meet our operating requirements for the next twelve months. We may however
undertake additional equity financings to better enable the Company to meet its
future growth, operating and/or capital requirements. We have no commitments for
any financings, and there can be no assurance that any such commitments can be
obtained on terms acceptable to us, if at all. Any equity financing may be
dilutive to our stockholders, and debt financing, if available, may involve
restrictive covenants or other adverse terms with respect to raising future
capital and other financial and operational matters. If we are unable to obtain
financing as needed, we may be required to reduce the scope of our expansion and
growth plans, as well as operations, which could have a material adverse effect
on us.
THERE ARE SIGNIFICANT POTENTIAL CONFLICTS OF INTEREST, WHICH COULD IMPACT OUR
INVESTMENT RETURNS.
Our executive officers and directors serve or may serve as officers
and directors of entities who operate in the same or related line of business as
we do. Accordingly, they may have obligations to investors in those entities,
the fulfillment of which might not be in the best interests of us or our
stockholders. For example, certain of the Company's officers, directors and/or
their family members have existing responsibilities and, in the future, may have
additional responsibilities, to act and/or provide services as executive
officers, directors, owners and/or managers of Ault Glazer. Accordingly, certain
conflicts of interest between the Company and Ault Glazer will occur from time
to time. The Company will attempt to resolve any such conflicts of interest in
its favor. Because of these possible conflicts of interest, such individuals may
direct potential business and investment opportunities to other entities rather
than to us.
The Board does not believe that the Company has any conflicts of
interest with the business of Ault Glazer, other than certain of the Company's
officers responsibility to provide certain management and administrative
services to Ault Glazer and its clients from time-to-time. However, subject to
applicable law, the Company may engage in transactions with Ault Glazer and
related parties in the future. These related party transactions may raise
conflicts of interest and, although the Company does not have a formal policy to
address such conflicts of interest, the Audit Committee intends to evaluate
relationships and transactions involving conflicts of interest on a case by case
basis and the approval of the Audit Committee shall be required for all such
transactions. The Audit Committee intends that any related party transactions
will be on terms and conditions no less favorable to the Company than those
terms and conditions reasonably obtainable from third parties and in accordance
with applicable law.
In order to minimize the potential conflicts of interest that might
arise, we have adopted a Code of Ethics in accordance with the requirements of
Investment Company Act that applies to all the directors,
27
officers and certain employees of the Company. A copy of the Code of Ethics may
be obtained, without charge, upon a written request mailed to the Company.
ANY TRANSACTIONS WE ENGAGE IN WITH AFFILIATES WILL INVOLVE CONFLICTS OF
INTEREST.
Affiliated transactions between us and any of our affiliates,
including our officers, directors or employees and principal stockholders are
subject to inherent conflicts of interest. In many cases, the 1940 Act, as well
as Federal and State securities laws and applicable State corporate regulations,
prohibit transactions between such persons and ourselves unless we first apply
for and obtain an exemptive order from the SEC. Delays and costs in obtaining
necessary approvals may decrease or even eliminate any profitability of such
transactions or make it impracticable or impossible to consummate such
transactions. These affiliations could cause circumstances that would require
the SEC's approval in advance of proposed transactions by us in portfolio
companies. Further, depending upon the extent of our management's influence and
control with respect to such portfolio companies, the selection of the
affiliates of management to perform such services may not be a disinterested
decision, and the terms and conditions for the performance of such services and
the amount and terms of such compensation may not be determined at arm's-length
negotiations.
THE SALE OR ISSUANCE OF SECURITIES TO INTERESTED STOCKHOLDERS MAY BE DILUTIVE TO
OUR EXISTING SHAREHOLDERS
In the event that the Company is no longer a BDC, and subject to
approval of the stockholders at the Annual Meeting of the sale of securities to
"interested stockholders" (as defined in Section 203 of the Delaware General
Corporate Law), the Company may from time to time issue common stock, warrants
to purchase common stock, or other securities representing indebtedness to
Milton "Todd" Ault III, Lynne Silverstein, Louis Glazer or Melanie Glazer. Any
sale of equity securities may be dilutive to the Company's stockholders, and
debt financing, if available, may involve restrictive covenants with respect to
raising future capital and other financial and operational matters. The
securities which may be issued to Milton "Todd" Ault III, Lynne Silverstein,
Louis Glazer or Melanie Glazer may have a material adverse effect on the market
price of the Common Stock as a result of the potential for dilution created by
the issuance of additional common stock, warrants to purchase common stock, or
other securities representing indebtedness. In addition, resales by Milton
"Todd" Ault III, Lynne Silverstein or Louis and Melanie Glazer may be made at
times that are adverse to the interests of other stockholders. Such sales could
further consolidate voting control in Milton "Todd" Ault III, Lynne Silverstein
or Louis and Melanie Glazer.
ONE OF OUR CURRENT STOCKHOLDERS HAS SIGNIFICANT INFLUENCE OVER OUR MANAGEMENT
AND AFFAIRS.
Milton "Todd" Ault III, our Chief Executive Officer and Chairman,
beneficially owns approximately 27.1% of our common stock as of February 28,
2005. Therefore Mr. Ault may be able to exert influence over our management and
policies. Mr. Ault may acquire additional equity in the future. The
concentration of ownership may also have the effect of delaying, preventing or
deterring a change of control of us, could deprive our shareholders of an
opportunity to receive a premium for their common stock as part of the sale of
us and might ultimately affect the market price of our common stock.
REGULATIONS GOVERNING OUR OPERATION AS A BDC AFFECT OUR ABILITY TO, AND THE WAY
IN WHICH WE RAISE ADDITIONAL CAPITAL, WHICH MAY EXPOSE US TO RISKS, INCLUDING
THE TYPICAL RISKS ASSOCIATED WITH LEVERAGE.
Our business will require a substantial amount of capital, which we
may acquire from the following sources:
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SENIOR SECURITIES AND OTHER INDEBTEDNESS
We may issue debt securities or preferred stock and/or borrow money
from banks or other financial institutions, which we refer to collectively as
"senior securities," up to the maximum amount permitted by the 1940 Act. Under
the provisions of the 1940 Act, we are permitted, as a BDC, to issue senior
securities in amounts such that our asset coverage ratio, as defined in the 1940
Act, equals at least 200% of gross assets, less all liabilities and indebtedness
not represented by senior securities, after each issuance of senior securities.
If we issue senior securities, including preferred stock and debt securities, we
will be exposed to typical risks associated with leverage, including an
increased risk of loss. If we incur leverage to make investments, a decrease in
the value of our investments would have a greater negative impact on the value
of our common stock. If we issue debt securities or preferred stock, it is
likely that such securities will be governed by an indenture or other instrument
containing covenants restricting our operating flexibility. In addition, such
securities may be rated by rating agencies, and in obtaining a rating for such
securities, we may be required to abide by operating and investment guidelines
that could further restrict our operating flexibility.
Our ability to pay dividends or issue additional senior securities
would be restricted if our asset coverage ratio was not at least 200%. If the
value of our assets declines, we may be unable to satisfy this test. If that
happens, we may be required to sell a portion of our investments and, depending
on the nature of our leverage, repay a portion of our indebtedness at a time
when such sales may be disadvantageous. Furthermore, any amounts that we use to
service our indebtedness would not be available for distributions to our common
stockholders.
In the event that the Company is no longer a BDC, the Company will
not be subject to the prohibitions and limitations listed above which are
currently imposed by 1940 Act. The Company does not currently have a
self-imposed lower threshold limit with respect to its asset coverage ratio, and
does not anticipate that such a limit would apply if it withdraws its election
to be treated as a BDC.
COMMON STOCK
We are not generally able to issue and sell our common stock at a
price below net asset value per share. We may, however, sell our common stock,
or warrants, options or rights to acquire our common stock, at a price below the
then-current net asset value of our common stock if our Board of Directors
determines that such sale is in the best interests of the Company and its
stockholders, and our stockholders approve such sale. In certain limited
circumstances, pursuant to an SEC staff interpretation, we may also issue shares
at a price below net asset value in connection with a transferable rights
offering so long as: (1) the offer does not discriminate among shareholders; (2)
we use our best efforts to ensure an adequate trading market exists for the
rights; and (3) the ratio of the offering does not exceed one new share for each
three rights held. If we raise additional funds by issuing more common stock or
senior securities convertible into, or exchangeable for, our common stock, the
percentage ownership of our stockholders at that time would decrease and they
may experience dilution. Moreover, we can offer no assurance that we will be
able to issue and sell additional equity securities in the future, on favorable
terms or at all.
In the event that the Company is no longer a BDC, the Company will
not be subject to the prohibitions and limitations listed above which are
currently imposed by 1940 Act.
ANY CHANGE IN REGULATION OF OUR BUSINESS COULD NEGATIVELY AFFECT THE
PROFITABILITY OF OUR OPERATIONS.
We are currently subject to government regulations because of our
status as a BDC. As a BDC, the 1940 Act imposes numerous restrictions on our
activities,
29
including restrictions on the nature of our investments and transactions with
affiliates. Any change in the law or regulations that govern our business could
have a material impact on us or our operations. Laws and regulations may be
changed from time to time, and the interpretations of the relevant laws and
regulations also are subject to change. In the event that the Company is no
longer a BDC, many of the regulatory, financial reporting and other requirements
and restrictions imposed by the 1940 Act will be removed. This could
significantly impact the way the Company operates its business from a financial
reporting, tax, legal, and accounting structure.
Additionally, changes in the laws, regulations or interpretations of
the laws and regulations that govern our portfolio companies, regulated
investment companies or non-depository commercial lenders could significantly
affect our operations and our cost of doing business. We are subject to federal,
state and local laws and regulations and are subject to judicial and
administrative decisions that affect our operations. If these laws, regulations
or decisions change, or if we expand our business into jurisdictions that have
adopted more stringent requirements than those in which we currently conduct
business, we may have to incur significant expenses in order to comply or we
might have to restrict our operations.
PROVISIONS OF THE DELAWARE GENERAL CORPORATION LAW AND OF OUR CHARTER AND BYLAWS
COULD DETER TAKEOVER ATTEMPTS AND HAVE AN ADVERSE IMPACT ON THE PRICE OF OUR
COMMON STOCK.
Our charter and bylaws, as well as certain statutory and regulatory
requirements, contain certain provisions that may have the effect of
discouraging a third party from making an acquisition proposal for us. These
anti-takeover provisions may inhibit a change of control in circumstances that
could give the holders of our common stock the opportunity to realize a premium
over the market price for our common stock.
RISKS RELATED TO OUR INVESTMENTS
INVESTING IN PRIVATE COMPANIES INVOLVES A HIGH DEGREE OF RISK.
The Company'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. 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 Company has
invested a substantial portion of its assets in private small private companies
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. There is
generally no publicly available information about the companies in which we
invest, and we rely significantly on the diligence of our employees and agents
to obtain information in connection with our investment decisions. In addition,
some smaller businesses have narrower product lines and market shares than their
competition and may be more vulnerable to customer preferences, market
conditions, loss of key personnel, or economic downturns, which may adversely
affect the return on, or the recovery of, our investment in such businesses.
The Company expects that some of its 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 Company has been risk seeking
rather than risk averse in its approach to its investments. Neither the
Company's investments nor an investment in the Company is intended to constitute
a balanced investment program. The Company 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.
30
OUR INVESTMENTS IN OUR PORTFOLIO COMPANIES MAY BE CONCENTRATED IN ONE OR MORE
INDUSTRIES AND IF THESE INDUSTRIES SHOULD DECLINE OR FAIL TO DEVELOP AS EXPECTED
OUR INVESTMENTS WILL BE LOST.
Our investments in our portfolio companies may be concentrated in
one or more industries. This concentration will mean that our investments will
be particularly dependent on the development and performance of those
industries. Accordingly, our investments may not benefit from any advantages,
which might be obtained with greater diversification of the industries in which
our portfolio companies operate. If those industries should decline or fail to
develop as expected, our investments in our portfolio companies in those
industries will be subject to loss.
THE MEDICAL PRODUCTS AND HEALTHCARE-RELATED SECTOR IS SUBJECT TO MANY RISKS,
INCLUDING VOLATILITY, INTENSE COMPETITION, DECREASING LIFE CYCLES AND PERIODIC
DOWNTURNS.
We invest in companies in the medical products and
healthcare-related sector, some of which may have relatively short operating
histories. The revenues, income (or losses) and valuations of medical products
and healthcare-related companies can and often do fluctuate suddenly and
dramatically. Also, the medical products and healthcare-related market is
generally characterized by abrupt business cycles and intense competition. In
addition, because of rapid technological change, the average selling prices of
products and some services provided by the medical products and
healthcare-related sector have historically decreased over their productive
lives. As a result, the average selling prices of products and services offered
by our portfolio companies may decrease over time, which could adversely affect
their operating results and their ability to meet their financial obligations,
as well as the value of any equity securities, that we may hold. This could, in
turn, materially adversely affect our business, financial condition and results
of operations.
OUR INVESTMENTS IN THE MEDICAL PRODUCTS AND HEALTHCARE-RELATED COMPANIES THAT WE
ARE TARGETING MAY BE EXTREMELY RISKY AND WE COULD LOSE ALL OR PART OF OUR
INVESTMENTS.
Although a prospective portfolio company's assets are one component
of our analysis when determining whether to provide equity or debt capital, we
generally do not base an investment decision primarily on the liquidation value
of a company's balance sheet assets. Instead, given the nature of the companies
that we invests in, we also review the company's historical and projected cash
flows, equity capital and "soft" assets, including intellectual property
(patented and non-patented), databases, business relationships (both contractual
and non-contractual) and the like. Accordingly, considerably higher levels of
overall risk will likely be associated with our portfolio.
Specifically, investment in the medical products and
healthcare-related companies that we are targeting involves a number of
significant risks, including:
o these companies may have limited financial resources and may be
unable to meet their current or future financial obligations, which
may result in the deterioration in the value of any collateral and a
reduction in the likelihood of us realizing any value from the
liquidation of such collateral;
o they typically have limited operating histories, narrower product
lines and smaller market shares than larger businesses, which tend
to render them more vulnerable to competitors' actions and market
conditions, as well as general economic downturns;
o because they tend to be privately owned, there is generally little
publicly available information about these businesses; therefore,
although the Company will perform "due diligence"
31
investigations on these portfolio companies, their operations and
their prospects, we may not learn all of the material information we
need to know regarding these businesses;
o they are more likely to depend on the management talents and efforts
of a small group of persons; therefore, the death, disability,
resignation or termination of one or more of these persons could
have a material adverse impact on our portfolio company and, in
turn, on us; and
o they generally have less predictable operating results, may from
time to time be parties to litigation, may be engaged in rapidly
changing businesses with products subject to a substantial risk of
obsolescence, and may require substantial additional capital to
support their operations, finance expansion or maintain their
competitive position.
WE FACE STRONG COMPETITION FROM FAR LARGER FIRMS IN THE FINANCIAL SERVICES
INDUSTRY
The financial services industry is intensely competitive and we
expect it to remain so. We compete on the basis of a number of factors,
including the quality of our advice and service, innovation, and reputation.
Most of our competitors in the financial services industry have a far greater
range of products and services, greater financial and marketing resources,
larger customer bases, greater name recognition, greater global reach and more
established relationships with potential customers than we have. These larger
and better capitalized competitors may be better able to respond to changes in
the financial services industry, to compete for skilled professionals, to
finance investment and acquisition opportunities, to fund internal growth and to
compete for market share generally.
DIFFICULT MARKET CONDITIONS COULD ADVERSELY AFFECT OUR FINANCIAL SERVICES
BUSINESS
Adverse market or economic conditions would likely affect the number
and size of transactions on which we provide mergers and acquisitions advice and
therefore adversely affect the amount of capital we commit to these strategic
relationships.
Adverse market or economic conditions as well as a slowdown of
activity in the sectors in which the portfolio companies of our merchant banking
funds operate could have an adverse effect on the earnings of those portfolio
companies, and therefore, our earnings, especially in the future as we seek to
increase our merchant banking fund management revenues.
REAL ESTATE INVESTMENTS' VALUE AND INCOME FLUCTUATE DUE TO VARIOUS FACTORS.
THE VALUE OF REAL ESTATE FLUCTUATES DEPENDING ON CONDITIONS IN THE
GENERAL ECONOMY AND THE REAL ESTATE BUSINESS. THESE CONDITIONS MAY ALSO LIMIT
OUR REVENUES AND AVAILABLE CASH.
The factors that may affect the value of the our real estate
include, among other things, national, regional and local economic conditions;
consequences of any armed conflict involving, or terrorist attack against, the
United States; our ability to secure adequate insurance; local conditions such
as an oversupply of space or a reduction in demand for real estate in the area;
competition from other available space; whether tenants consider a property
attractive; the financial condition of tenants, including the extent of tenant
bankruptcies or defaults; whether we are able to pass some or all of any
increased operating costs through to tenants; how well we manage our properties;
fluctuations in interest rates; changes in real estate taxes and other expenses;
changes in market rental rates; the timing and costs associated with property
improvements and rentals; changes in taxation or zoning laws; government
regulation; availability of financing on acceptable terms or at all; potential
liability under environmental or other laws or regulations; and general
competitive factors.
The rents we expect to receive and the occupancy levels at our
properties may not materialize as a result of adverse changes in any of these
factors. If our rental revenues fail to materialize, we generally would expect
to have less cash available to pay our operating costs. In addition, some
expenses, including mortgage payments, real estate taxes and maintenance costs,
generally do not decline when the related rents decline.
WE ANTICIPATE ON LEASING SPACE TO TENANTS ON ECONOMICALLY FAVORABLE
TERMS AND COLLECTING RENT FROM OUR TENANTS, WHO MAY NOT BE ABLE TO PAY.
Our financial results depend on leasing space in our properties to
tenants on economically favorable terms. If a tenant does not pay its rent, we
might not be able to enforce our rights as landlord without delays and might
incur substantial legal costs to enforce those rights.
BANKRUPTCY OR INSOLVENCY OF TENANTS MAY DECREASE OUR EXPECTED
REVENUES AND AVAILABLE CASH.
A number of companies have declared bankruptcy in recent years. If a
major tenant were to declare bankruptcy or become insolvent, the rental property
where it leases space may have lower revenues and operational difficulties. As a
result, the bankruptcy or insolvency of a major tenant could result in a lower
level of funds from operations available to pay our operating cost.
REAL ESTATE IS A COMPETITIVE BUSINESS.
For a discussion of risks related to competition in the real estate
business, see "THE REAL ESTATE INDUSTRY - COMPETITION."
OUR REAL ESTATE INVESTMENTS ARE CONCENTRATED IN BALTIMORE, MARYLAND AND HEBER
SPRINGS, ARKANSAS. CIRCUMSTANCES AFFECTING THESE AREAS GENERALLY COULD ADVERSELY
AFFECT OUR BUSINESS.
A significant proportion of our real estate investments are in
Baltimore, Maryland and Heber Springs, Arkansas and are affected by the economic
cycles and risks inherent to those regions. Like other real estate markets, the
real estate markets in these areas have experienced economic downturns in the
past, and we cannot predict how the current economic conditions will impact
these markets in both the short and long term. Further declines in the economy
or a decline in the real estate markets in these areas could hurt our financial
performance and the value of our properties. The factors affecting economic
conditions in these regions include: business layoffs or downsizing; industry
slowdowns; relocations of businesses; changing demographics; and any oversupply
of or reduced demand for real estate.
AS A BDC, OUR ABILITY TO INVEST IN PRIVATE COMPANIES MAY BE LIMITED IN CERTAIN
CIRCUMSTANCES.
If we maintain our status as a BDC, we must not acquire any assets
other than "qualifying assets" unless, at the time of and after giving effect to
such acquisition, at least 70% of our total assets are qualifying assets. If we
acquire debt or equity securities from an issuer that has outstanding marginable
securities at the time we make an investment, these acquired assets cannot be
treated as qualifying assets. This result is dictated by the definition of
"eligible portfolio company" under the 1940 Act, which in part looks to whether
a company has outstanding marginable securities. For a more detailed discussion
of the definition of an "eligible portfolio company" and the marginable
securities requirement, see the section entitled "REGULATION AS A BUSINESS
DEVELOPMENT COMPANY."
Amendments promulgated in 1998 by the Federal Reserve expanded the
definition of a marginable security under the Federal Reserve's margin rules to
include any non-equity security. Thus, any debt securities issued by any entity
are marginable securities under the Federal Reserve's current margin rules. As a
result, the staff of the SEC has raised the question to the BDC industry as to
whether a private company that has outstanding debt securities would qualify as
an "eligible portfolio company" under the 1940 Act.
The SEC has recently issued proposed rules to correct the unintended
consequence of the Federal Reserve's 1998 margin rule amendments of apparently
limiting the investment opportunities of business development companies. In
general, the SEC's proposed rules would define an eligible portfolio company as
any company that does not have securities listed on a national securities
exchange or association. We are currently in the process of reviewing the SEC's
proposed rules and assessing their impact, to the extent such proposed rules are
subsequently approved by the SEC, on our investment activities. We do not
believe that these proposed rules will have a material adverse effect on our
operations.
Until the SEC or its staff has taken a final public position with
respect to the issue discussed above, we will continue to monitor this issue
closely, and may be required to adjust our investment focus to comply with
and/or take advantage of any future administrative position, judicial decision
or legislative action.
THE LACK OF LIQUIDITY IN OUR INVESTMENTS MAY ADVERSELY AFFECT OUR BUSINESS.
A majority of the Company's investments consist of securities
acquired directly from the issuer in private transactions. They may be subject
to restrictions on resale or otherwise be illiquid. Franklin anticipates that
there may not be an established trading market for such securities.
Additionally, many of the securities that the Company may invest in will not be
eligible for sale to the public without registration under the Securities Act of
1933, which could prevent or delay any sale by the Company of such investments
or reduce the amount of proceeds that might otherwise be realized therefrom.
Restricted
32
securities generally sell at a price lower than similar securities not subject
to restrictions on resale. Further, even if a portfolio company registers its
securities and becomes a reporting corporation under the Securities Exchange Act
of 1934, the Company may be considered an insider by virtue of its board
representation and would be restricted in sales of such corporation's
securities.
We typically exit our investments when the portfolio company has a
liquidity event such as a sale, recapitalization, or initial public offering of
the company. The illiquidity of our investments may adversely affect our ability
to dispose of debt and equity securities at times when it may be otherwise
advantageous for us to liquidate such investments. In addition, if we were
forced to immediately liquidate some or all of the investments in the portfolio,
the proceeds of such liquidation would be significantly less than the value at
which we acquired those investments.
WE MAY NOT REALIZE GAINS FROM OUR EQUITY INVESTMENTS.
We intend to invest, from time to time, in the equity securities of
other companies. However, these equity interests may not appreciate in value
and, in fact, may decline in value. Accordingly, we may not be able to realize
gains from our equity interests, and any gains that we do realize on the
disposition of any equity interests may not be sufficient to offset any other
losses we experience.
BECAUSE MOST OF OUR INVESTMENTS ARE NOT IN PUBLICLY TRADED SECURITIES, THERE IS
UNCERTAINTY REGARDING THE VALUE OF OUR INVESTMENTS, WHICH COULD ADVERSELY AFFECT
THE DETERMINATION OF OUR NET ASSET VALUE.
Our portfolio investments are not generally in publicly traded
securities. As a result, the fair value of these securities is not readily
determinable. We value these securities at fair value as determined in good
faith by our Board of Directors. The types of factors that the Valuation
Committee takes into account in providing its fair value
33
recommendation to the Board of Directors includes, as relevant, the nature and
value of any collateral, the portfolio company's ability to make payments and
its earnings, the markets in which the portfolio company does business,
comparison to valuations of publicly traded companies, comparisons to recent
sales of comparable companies, the discounted value of the cash flows of the
portfolio company and other relevant factors. Because such valuations are
inherently uncertain and may be based on estimates, our determinations of fair
value may differ materially from the values that would be assessed if a ready
market for these securities existed.
OUR INVESTMENTS ARE RECORDED AT FAIR VALUE AS DETERMINED BY THE
BOARD OF DIRECTORS IN THE ABSENCE OF READILY ASCERTAINABLE PUBLIC MARKET VALUES.
Pursuant to the requirements of the 1940 Act, the Company's board of
directors is required to value each investment quarterly, and we are required to
carry such investments 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 we invest, our board of directors estimates
the fair value of these loans and equity securities on a quarterly basis. There
is no single standard for determining fair value in good faith. As a result,
determining fair value requires that judgment be applied to the specific facts
and circumstances of each investment. If we were required to sell any of such
investments, there is no assurance that the fair value, as determined by the
Board of Directors, would be obtained. If we were unable to obtain fair value
for such investments, there would be an adverse effect on our net asset value
and on the price of our common stock. Unlike banks, we are not permitted to
provide a general reserve for anticipated loan losses; instead, we are required
by the 1940 Act to specifically value each individual investment and record an
unrealized loss for an asset that we believes has become impaired. Without a
readily ascertainable market value, the estimated value of our investments may
differ significantly from the values that would be placed such investments if
there existed a ready market for those investments. Any changes in estimated
values are recorded in the Company's statement of operations as "Net unrealized
gains (losses)."
OUR FINANCIAL RESULTS COULD BE NEGATIVELY AFFECTED IF A SIGNIFICANT INVESTMENT
FAILS TO PERFORM AS EXPECTED.
We intend to purchase controlling equity stakes in companies and our
total debt and equity investment in controlled companies may be significant
individually or in the aggregate. Investments in controlled portfolio companies
are generally larger and in fewer companies than our investments in companies
that we do not control. As a result, if a significant investment in one or more
controlled companies fails to perform as expected, our financial results could
be more negatively affected and the magnitude of the loss could be more
significant than if we had made smaller investments in more companies.
In the case of SurgiCount, acquired subsequent to December 31, 2004,
we own patents issued in the United States and Europe related to patient safety,
among them, the Safety-Sponge(TM) System. These patents are a key element to the
success of SurgiCount aNd our Company as a whole could be materially impacted if
the patent is compromised. Our ability to enforce our patents is subject to
general litigation risks as well as uncertainty as to the enforceability in
various countries We believe that the duration of the applicable patents are
adequate relative to the expected life of the product. Because of the fast pace
of innovation and product development our product may be obsolete before the
patents related to it expire.
34
WE BORROW MONEY, WHICH MAGNIFIES THE POTENTIAL FOR GAIN OR LOSS ON AMOUNTS
INVESTED AND MAY INCREASE THE RISK OF INVESTING IN US.
Borrowings, also known as leverage, magnify the potential for gain
or loss on amounts invested and, therefore, increase the risks associated with
investing in our securities. We borrow from and issue senior debt securities to
banks, insurance companies, and other lenders. Lenders of these senior
securities have fixed dollar claims on our consolidated assets that are superior
to the claims of our common shareholders. If the value of our consolidated
assets increases, then leveraging would cause the net asset value attributable
to our common stock to increase more sharply than it would have had we not
leveraged. Conversely, if the value of our consolidated assets decreases,
leveraging would cause net asset value to decline more sharply than it otherwise
would have had we not leveraged. Similarly, any increase in our consolidated
income in excess of consolidated interest payable on the borrowed funds would
cause our net income to increase more than it would without the leverage, while
any decrease in our consolidated income would cause net income to decline more
sharply than it would have had we not borrowed. Leverage is generally considered
a speculative investment technique.
CHANGES IN INTEREST RATES MAY AFFECT OUR COST OF CAPITAL AND NET INVESTMENT
INCOME.
Because we may borrow money to make investments, our net investment
income is dependent upon the difference between the rate at which we borrow
funds and the rate at which we invest these funds. As a result, there can be no
assurance that a significant change in market interest rates will not have a
material adverse effect on our net investment income. In periods of rising
interest rates, our cost of funds would increase, which would reduce our net
investment income. We may use a combination of long-term and short-term
borrowings and equity capital to finance our investing activities. We utilize
our revolving line of credit as a means to bridge to long-term financing. Our
long-term fixed-rate investments are financed primarily with long-term
fixed-rate debt and equity. We may use interest rate risk management techniques
in an effort to limit our exposure to interest rate fluctuations. Such
techniques may include various interest rate hedging activities to the extent
permitted by the 1940 Act. Accordingly, no assurances can be given that such
changes will not have a material adverse effect on the return on, or the
recovery of, Franklin's investments.
RISKS RELATED TO AN INVESTMENT IN OUR COMMON STOCK
OUR COMMON STOCK PRICE MAY BE VOLATILE.
The trading price of our common stock may fluctuate substantially.
The price of the common stock that will prevail in the market after this
offering may be higher or lower than the price you pay, depending on many
factors, some of which are beyond our control and may not be directly related to
our operating performance. These factors include, but are not limited to, the
following:
o price and volume fluctuations in the overall stock market from time
to time;
o significant volatility in the market price and trading volume of
securities of regulated investment companies, business development
companies or other financial services companies;
o changes in regulatory policies or tax guidelines with respect to
regulated investment companies or business development companies;
o actual or anticipated changes in our earnings or fluctuations in our
operating results or changes in the expectations of securities
analysts;
35
o general economic conditions and trends;
o loss of a major funding source; or
o departures of key personnel.
In the past, following periods of volatility in the market price of
a company's securities, securities class action litigation has often been
brought against that company. Due to the potential volatility of our stock
price, we may therefore be the target of securities litigation in the future.
Securities litigation could result in substantial costs and divert management's
attention and resources from our business.
OUR SHARES MAY TRADE AT DISCOUNTS FROM NET ASSET VALUE OR AT PREMIUMS THAT ARE
UNSUSTAINABLE OVER THE LONG TERM.
Shares of business development companies may trade at a market price
that is less than the net asset value that is attributable to those shares. The
possibility that our shares of common stock will trade at a discount from net
asset value or at premiums that are unsustainable over the long term are
separate and distinct from the risk that our net asset value will decrease.
During the second and third quarters of 2004, our shares of common stock traded
at a discount to the net asset value attributable to those shares. It is not
possible to predict whether our shares will trade at, above, or below net asset
value.
THERE IS A RISK THAT YOU MAY NOT RECEIVE DIVIDENDS OR THAT OUR DIVIDENDS MAY NOT
GROW OVER TIME.
We cannot assure you that we will achieve investment results that
will allow any specified level of cash distributions or year-to-year increases
in cash distributions. Historically, the only dividends the Company has paid
have been those required by our Preferred Stock, currently 7% a year. We
currently have no intention of paying dividends on our Common Stock.
IF THE COMPANY'S STOCKHOLDERS APPROVE A THREE-FOR-ONE STOCK SPLIT THERE IS AN
INCREASED RISK THAT THE COMPANY'S SHARES OF COMMON STOCK MAY SELL AT A LOW PRICE
PER SHARE AND INCREASE THE RISK OF A DELISTING ON THE AMEX.
The Company is requesting stockholder approval of the Board's
proposal to amend the Company's Amended and Restated Certificate of
Incorporation (the "CURRENT CERTIFICATE") to reduce the par value of each share
of Common Stock, from $1.00 per share to $0.33 per share and effect a
three-for-one stock split of the Common Stock of the Company (the "STOCK
SPLIT").
As of February 28, 2005, there were 1,758,776 shares of Common Stock
issued and outstanding and 10,950 shares of Preferred Stock issued and
outstanding. Additionally, as of December 31, 2004, there were 1,875 options to
purchase Common Stock outstanding and 18,750 options available for future
issuance under the 1997 Non-Statutory Stock Option Plan. If this Proposal is
approved by the stockholders, there would be an additional 3,517,552 shares of
Common Stock issued to existing stockholders of record as of the effective date
of the Stock Split. This means that on a post-split basis, the Company would
have approximately 5,276,328 shares of Common Stock outstanding. In addition,
each share of Preferred Stock which is currently convertible into 7.5 shares of
Common Stock would become convertible into 22.5 shares of Common Stock after the
Stock Split.
The Company's Common Stock is listed for trading on the AMEX under
the symbol "FKL." The new shares of Common Stock to be issued as a result of the
Stock Split would be included in our listing on the AMEX. The AMEX may delist a
security when it sells for a substantial period of time at a low
36
price per share ("the low selling price"). As a result of the proposed
significant increase in the outstanding shares of our Common Stock it is highly
probable that the per share price would experience an immediate decrease.
Further, in the event any other factors outside the control of the Company were
to put downward pressure on the Company's stock price the actual price could
fall and remain within the low selling price.
IF THE COMPANY FAILS TO COMPLY WITH THE REQUIREMENTS OF THE FORUM IN WHICH THEIR
SECURITIES ARE QUOTED OR THE TRADING MARKET ON WHICH THEIR SECURITIES ARE
LISTED, THE LIQUIDITY AND PRICES OF YOUR INVESTMENT IN THE COMPANY WOULD BE
MATERIALLY ADVERSELY AFFECTED.
On June 24, 2004, Franklin received a letter from AMEX inquiring as
to Franklin's ability to remain listed on AMEX. Specifically, AMEX indicated
that the Common Stock was subject to delisting under sections 1003(a)(i) and
1003(a)(ii) of AMEX's Company Guide because Franklin's stockholders' equity was
below the level required by AMEX's continued listing standards. Accordingly,
AMEX requested information relating to Franklin's plan to retain its listing. On
September 13, 2004, Franklin presented the final components of its proposed plan
to AMEX to comply with AMEX's continued listing standards and on September 15,
2004, AMEX notified Franklin that it had accepted Franklin's plan and had
granted Franklin an extension until December 26, 2005 to regain compliance,
during which time AMEX will continue Franklin's listing subject to certain
conditions. Franklin has cooperated, and will continue to cooperate, with AMEX
regarding these issues and intends to make every effort to remain listed on AMEX
irrespective of the outcome of the Special Meeting. AMEX has notified Franklin,
however, that failure to make progress consistent with the plan of compliance or
to regain compliance with the continued listing standards by December 26, 2005
could result in the Common Stock being delisted from AMEX, and no assurances can
be made that Franklin will be able to maintain its listing. A delisting from
AMEX could have a material adverse effect on the price and liquidity of the
Common Stock.
At September 30, 2004, Franklin securities were quoted on the AMEX
under the ticker "FKL". In order for our securities to be eligible for continued
quotation on the AMEX, the Company must remain in compliance with certain
listing standards. Among other things, these standards require that the Company
remain current in their filings with the SEC and comply with certain of the
provisions of the Sarbanes-Oxley Act of 2002. If the Company is no longer in
compliance with these requirements, there would be no forum or market for the
quotation or listing of the securities of our portfolio companies. Without such
a forum or market, the liquidity and prices of your investments in the Company's
securities would be materially adversely affected. We cannot give any assurance
that the Company will remain in compliance with the requirements to be quoted on
the AMEX.
TECHNOLOGIES OR PRODUCTS ACQUIRED OR DEVELOPED BY US, OR THE COMPANIES IN WHICH
WE MAY INVEST, MAY BECOME OBSOLETE.
Neither we, nor the companies in which we may invest, have any
control over the pace of technology or product development. There is a
significant risk that we, or the companies in which we invest, could develop or
acquire the rights to a technology that is currently or is subsequently made
obsolete by other technological developments. We cannot assure you that either
we, or the companies in which we may invest, will successfully acquire, develop,
transfer or sell any new technology or products.
FORWARD-LOOKING STATEMENTS
This annual report contains forward-looking statements that involve
substantial risks and uncertainties. These forward-looking statements are not
historical facts, but rather are based on current expectations, estimates and
projections about our industry, our beliefs, and our assumptions. Words such as
"anticipates," "expects," "intends," "plans," "believes," "seeks," and
"estimates" and variations
37
of these words and similar expressions are intended to identify forward-looking
statements. These statements are not guarantees of future performance and are
subject to risks, uncertainties, and other factors, some of which are beyond our
control and difficult to predict and could cause actual results to differ
materially from those expressed or forecasted in the forward-looking statements.
Forward-looking statements include, among others, the following statements
related to:
o OUR STRATEGY FOR GROWING OUR OPERATIONS IN THE TARGET INDUSTRIES;
o OUR ABILITY TO OPERATE SUCCESSFULLY IN HIGHLY REGULATED
ENVIRONMENTS;
o AN ECONOMIC DOWNTURN COULD DISPROPORTIONATELY IMPACT THE TARGET
INDUSTRIES IN WHICH WE CONCENTRATE CAUSING US TO SUFFER LOSSES IN
OUR PORTFOLIO AND EXPERIENCE DIMINISHED DEMAND FOR CAPITAL IN THESE
INDUSTRY SECTORS;
o A CONTRACTION OF AVAILABLE CREDIT AND/OR AN INABILITY TO ACCESS THE
EQUITY MARKETS COULD IMPAIR OUR INVESTMENT ACTIVITIES;
o INTEREST RATE VOLATILITY COULD ADVERSELY AFFECT OUR RESULTS; AND
o THE RISKS, UNCERTAINTIES AND OTHER FACTORS WE IDENTIFY IN "RISK
FACTORS" AND ELSEWHERE IN THIS FORM 10-K AND IN OUR FILINGS WITH THE
SEC.
Although we believe that the assumptions on which these forward-looking
statements are based are reasonable, any of those assumptions could prove to be
inaccurate, and as a result, the forward-looking statements based on those
assumptions also could be inaccurate. Important assumptions include our ability
to originate new loans and investments, certain margins and levels of
profitability and the availability of additional capital. In light of these and
other uncertainties, the inclusion of a projection or forward-looking statement
in this annual report should not be regarded as a representation by us that our
plans and objectives will be achieved. These risks and uncertainties include
those described or identified in "Risk Factors" and elsewhere in this annual
report. You should not place undue reliance on these forward-looking statements,
which apply only as of the date of this annual report.
ITEM 2. PROPERTIES
We do not own any real estate or other physical properties
materially important to our operation. Our headquarters are located at 100
Wilshire Boulevard, Suite 1500, Santa Monica, California 90401, where we occupy
our office space with Ault Glazer at no cost to the Company. Our office space is
currently approximately 2,000 square feet. The Company anticipates leasing
office space in 2005.
In addition, we also have several real estate investments in our
wholly-owned subsidiary Franklin Capital Properties LLC. These investments range
in fair value, as carried in our financial statements, from $75,000 to $300,000
and are comprised of eight vacant single family buildings and two multi-unit
buildings in Baltimore, Maryland, approximately 8.5 acres of undeveloped land in
Heber Springs, Arkansas, and various loans secured by real estate in Heber
Springs, Arkansas. Based upon the number of real estate investments, and related
fair values, management does not currently believe that the Company's real
estate holdings represent a material risk to the Company.
38
ITEM 3. LEGAL PROCEEDINGS
On October 15, 2001, Jeffrey A. Leve and Jeffrey Leve Family
Partnership, L.P. filed a lawsuit against Franklin, Sunshine Wireless, LLC, and
four other defendants affiliated with Winstar Communications, Inc. On February
25, 2003, the case against Franklin and Sunshine was dismissed. However, on
October 19, 2004, the plaintiffs exercised their right to appeal. The initial
lawsuit alleged 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 alleged that Franklin and Sunshine joined the alleged
conspiracy. The plaintiffs seek recovery of damages in excess of $10,000,000,
costs and attorneys' fees. An unfavorable outcome in an appeal, together with an
unfavorable outcome in the lawsuit may have a material adverse effect on
Franklin's business, financial condition and results of operations. The Company
believes the lawsuit is without merit and intends to vigorously defend itself.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following proposals were submitted to shareholders at our
Special Meeting of Stockholders held October 28, 2004. The following proposals
were approved by a majority of the shares present at the meeting.
1. To elect four directors to hold office until the next annual
meeting of stockholders or until their successors have been duly elected and
qualified (two of whom are to be elected by the holders of Franklin's Common
Stock and Franklin's Preferred Stock, par value $1.00 per share (the "PREFERRED
STOCK"), voting together as a single class, and two of whom are to be elected by
the holders of Preferred Stock, voting as a separate class). This proposal was
approved. Results of the voting were as follows:
NO. OF SHARES
------------------------------------------------ ----------------- ----------------- ----------------
NOMINEES SHARES FOR SHARES WITHHELD BROKER NON-VOTES
------------------------------------------------ ----------------- ----------------- ----------------
COMMON AND PREFERRED STOCK NOMINEES
Lytle Brown III 976,510 3,693 N/A
Alice Campbell 976,510 3,693 N/A
PREFERRED STOCK NOMINEES
Louis Glazer 9,750 None N/A
Herbert Langsam 9,750 None N/A
2. To approve the amendment and restatement of Franklin's
certificate of incorporation to increase the authorized number of shares of
Common Stock from 5,000,000 shares to 50,000,000 shares. This proposal was
approved. Results of the voting were as follows:
NO. OF SHARES
---------------- ----------------- ----------------- ---------------- ------------------
SHARES FOR AGAINST ABSTAIN BROKER NON-VOTES
---------------- ----------------- ----------------- ---------------- ------------------
Common Stock 914,280 55,006 1,167 0
Preferred Stock 9,750 0 0 0
----------------
Common Stock and 924,030 55,006 1,167 0
Preferred Stock
39
3. To approve the amendment and restatement of Franklin's
certificate of incorporation to increase the authorized number of shares of
Preferred Stock from 5,000,000 shares to 10,000,000 shares. This proposal was
approved. Results of the voting were as follows:
NO. OF SHARES
---------------- ----------------- ----------------- ---------------- ------------------
SHARES FOR AGAINST ABSTAIN BROKER NON-VOTES
---------------- ----------------- ----------------- ---------------- ------------------
Common Stock 713,793 53,521 2,667 200,472
Preferred Stock 9,750 0 0 0
----------------
Common Stock and 723,543 53,521 2,267 200,472
Preferred Stock
4. To approve the amendment and restatement of Franklin's
certificate of incorporation to provide for the exculpation of director
liability to the fullest extent permitted by law. This proposal was approved.
Results of the voting were as follows:
NO. OF SHARES
---------------- ----------------- ----------------- ---------------- ------------------
SHARES FOR AGAINST ABSTAIN BROKER NON-VOTES
---------------- ----------------- ----------------- ---------------- ------------------
Common Stock and 924,860 55,119 224 0
Preferred Stock
5. To approve the amendment and restatement of Franklin's
certificate of incorporation to provide for the classification of Franklin's
board of directors (the "Board") into three classes of directors. This proposal
was approved. Results of the voting were as follows:
NO. OF SHARES
---------------- ----------------- ----------------- ---------------- ------------------
SHARES FOR AGAINST ABSTAIN BROKER NON-VOTES
---------------- ----------------- ----------------- ---------------- ------------------
Common Stock and 723,552 8,409 47,800 200,472
Preferred Stock
6. To approve the sale by Franklin to Quince Associates, LP, a
Maryland limited partnership ("Quince"), of all of the shares of common stock,
and warrants to purchase shares of common stock, of Excelsior Radio Networks,
Inc. ("Excelsior") beneficially owned by Franklin, upon the terms and subject to
the conditions described in this proxy statement. This proposal was approved.
Results of the voting were as follows:
NO. OF SHARES
---------------- ----------------- ----------------- ---------------- ------------------
SHARES FOR AGAINST ABSTAIN BROKER NON-VOTES
---------------- ----------------- ----------------- ---------------- ------------------
Common Stock and 773,540 5,779 412 200,472
Preferred Stock
40
7. To approve the issuance of an aggregate of up to 5,000,000 shares
of Common Stock, and warrants to purchase an aggregate of up to 1,500,000
additional shares of Common Stock upon terms that are approved by a majority of
the Board consistent with its fiduciary duties and consistent with prevailing
market terms relating to price per share, warrant coverage and registration
rights for such issuances at the time of such issuances, as described in this
proxy statement. This proposal was approved. Results of the voting were as
follows:
NO. OF SHARES
---------------- ----------------- ----------------- ---------------- ------------------
SHARES FOR AGAINST ABSTAIN BROKER NON-VOTES
---------------- ----------------- ----------------- ---------------- ------------------
Common Stock and 723,058 55,586 1,087 200,472
Preferred Stock
NO. OF SHARES (AFTER SUBTRACTION)
---------------- ----------------- ----------------- ---------------- ------------------
SHARES FOR AGAINST ABSTAIN BROKER NON-VOTES
---------------- ----------------- ----------------- ---------------- ------------------
Common Stock and 158,474 55,586 1,087 200,472
Preferred Stock
8. To approve the sale of Common Stock and warrants to purchase
Common Stock to certain "interested stockholders" (as such term is defined in
Section 203 of the Delaware General Corporation Law (the "DGCL")) on terms that
are approved by a majority of the Board consistent with its fiduciary duties and
consistent with prevailing market terms relating to price per share, warrant
coverage and registration rights for such issuances at the time of such
issuances. This proposal was not approved. Results of the voting were as
follows:
NO. OF SHARES
---------------- ----------------- ----------------- ---------------- ------------------
SHARES FOR AGAINST ABSTAIN BROKER NON-VOTES
---------------- ----------------- ----------------- ---------------- ------------------
Common Stock and 771,633 7,386 712 200,472
Preferred Stock
NO. OF SHARES (AFTER SUBTRACTION)
---------------- ----------------- ----------------- ---------------- ------------------
SHARES FOR AGAINST ABSTAIN BROKER NON-VOTES
---------------- ----------------- ----------------- ---------------- ------------------
Common Stock and 259,199 7,386 712 200,472
Preferred Stock
No other matters were submitted to a vote of security holders during
the fourth quarter of the fiscal year ended December 31, 2004. However, on March
2, 2005, Company filed definitive proxy materials with the Securities and
Exchange Commission in connection with its 2004 Annual Meeting of the
Stockholders (the "ANNUAL MEETING"). The Annual Meeting is being held on March
30, 2005 in order to vote on the following proposals: (i) the election of Lytle
Brown III as a Class I Director to hold office for a three-year term expiring in
2007, or until his successor has been duly elected and qualified or until his
earlier death, resignation or removal, in accordance with the Company's bylaws,
as amended; (ii)
41
the ratification of the appointment by the Board of Directors of the Company
(the "BOARD") of Rothstein, Kass & Company, P.C. ("ROTHSTEIN KASS") to serve as
independent auditors for the fiscal year ended December 31, 2004; (iii) the
authorization and approval of the stock option component of the stock option and
restricted stock plan for the Company (the "NEW PLAN"); (iv) the authorization
and approval of the restricted stock component of the New Plan; (v) the
authorization and approval of the payment of cash and equity compensation to
Milton "Todd" Ault III ("AULT"), Lynne Silverstein ("SILVERSTEIN"), and Louis
Glazer and Melanie Glazer (the "GLAZERS"), each of whom may be deemed to be an
"interested stockholder" (as defined in Section 203 of the Delaware General
Corporate Law ("DGCL")) of the Company; (vi) the authorization and approval of
the sale of common stock par value $1.00 of the Company ("COMMON STOCK"),
warrants to purchase Common Stock ("WARRANTS") and other securities representing
indebtedness convertible into Common Stock to Ault, Silverstein and the Glazers,
each of whom may be deemed to be an "interested stockholder" (as defined in
Section 203 of the DGCL), on terms that are approved by the Board consistent
with its fiduciary duties and market terms existing at the time of such
offering, including those relating to price per share, interest rate, warrant
coverage and registration rights for such issuances and the requirements of
applicable law, including the 1940 Act, as described in this proxy statement;
(vii) the authorization and approval of the certificate of amendment to the
Amended and Restated Certificate of Incorporation of the Company (the
"CERTIFICATE OF AMENDMENT") to reduce the par value of the Common Stock from
$1.00 per share to $0.33 per share and effect a three-for-one split of the
Common Stock (the "STOCK SPLIT"); (viii) the authorization and approval of the
prospective issuance of bonds, notes or other evidences of indebtedness that are
convertible into Common Stock ("CONVERTIBLE BONDS," "CONVERTIBLE NOTES" or
"OTHER CONVERTIBLE INDEBTEDNESS") in accordance with the requirements of the
1940 Act; (ix) the authorization and approval of the Board to withdraw the
Company's election to be treated as a BDC pursuant to Section 54(c) under the
1940 Act; (x) the authorization and approval of the Certificate of Amendment to
change the name of the Company to "Patient Safety Technologies, Inc."; and (xi)
the authorization and approval of the Certificate of Amendment to decrease the
authorized number of shares of Common Stock from 50,000,000 shares to 25,000,000
shares and decrease the authorized number of shares of Preferred Stock from
10,000,000 shares to 1,000,000 shares.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
STOCK TRANSFER AGENT
Mellon Investor Services, 85 Challenger Road, Overpack Center,
Ridgefield Park, NJ 07660 (Telephone (800) 851-9677) serves as transfer agent
for the Company's common stock. Certificates to be transferred should be mailed
directly to the transfer agent, preferably by registered mail.
MARKET PRICES
The Company's common stock is traded on The American Stock Exchange
under the symbol "FKL." The following table sets forth the range of the high and
low selling price of the Company's shares during each quarter of the last two
years, as reported by the American Stock Exchange.
42
2004 QUARTER ENDING LOW HIGH
------------------- --- ----
December 31 $ 9.20 $ 12.75
September 30 $ 3.20 $ 14.75
June 30 $ 0.90 $ 8.90
March 31 $ 1.05 $ 1.52
2003 QUARTER ENDING LOW HIGH
------------------- --- ----
December 31 $ 0.50 $ 1.55
September 30 $ 0.75 $ 1.05
June 30 $ 0.77 $ 1.26
March 31 $ 1.10 $ 1.62
DIVIDENDS
The Company paid $76,650, and $76,652 and $115,152 in dividends to
preferred stockholders during 2004, 2003 and 2002, respectively, and has not
paid any dividends to common stockholders during the past three years. Dividends
to our preferred stockholders are cumulative and paid at the rate of 7% a year.
We currently have no intention of paying dividends on our common stock.
STOCKHOLDERS
As of February 28, 2005, there were 615 registered shareholders of
record of the Company's common stock. The Company has 50,000,000 shares of
common stock authorized, of which 2,242,689 are issued and 1,758,776 shares are
outstanding at March 7, 2005. The Company has 10,000,000 shares of convertible
preferred stock authorized, of which 16,450 were issued on February 22, 2000 and
10,950 shares are outstanding at March 7, 2005. See Item 7 "FINANCIAL CONDITION,
LIQUIDITY AND CAPITAL RESOURCES."
We are seeking shareholder approval at Annual Meeting to, among
other items, reduce the par value of our Common Stock from $1.00 per share to
$0.33 per share and effect a Stock Split; to decrease the authorized number of
shares of Common Stock from 50,000,000 shares to 25,000,000 shares and decrease
the authorized number of shares of Preferred Stock from 10,000,000 shares to
1,000,000 shares.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data for the fiscal year ended
December 31, 2004 and for the periods ended December 31, 2003, December 31,
2002, December 31, 2001 and December 31, 2000 are derived from our financial
statements which have been audited by Ernst & Young, LLP (December 31, 2000
through December 31, 2003) and Rothstein Kass (December 31, 2004), our
independent registered public accounting firms. The data should be read in
conjunction with our financial statements and the related notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this report.
43
BALANCE SHEET DATA
FINANCIAL POSITION AS OF DECEMBER 31:
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
Total assets $ 6,934,243 $ 3,258,032 $ 4,632,338 $ 4,098,866 $ 5,766,712
Liabilities $ 3,367,974 $ 1,233,894 $ 187,632
$ 1,364,798 $ 1,177,121
Net assets $ 3,566,269 $ 2,024,138 $ 3,267,540 $ 2,921,745 $ 5,579,080
Net asset value per share attributable to common
stockholders $ 1.59 $ 0.91 $ 2.07 $ 1.19 $ 3.58
Net asset value per share, as if converted basis $ 2.18 $ 1.84 $ 2.89 $ 2.44 $ 4.57
Shares outstanding 1,556,901 1,020,100 1,049,600 1,074,700 1,098,200
OPERATING DATA FOR THE YEAR ENDED DECEMBER 31:
2004 2003 2002 2001 2000*
---- ---- ---- ---- -----
Investment income $ 11,056 $ 183,159 $ 455,081 $ 192,697 $ 115,015
Expenses $ 2,951,173 $ 1,279,526 $ 1,985,450 $ 1,579,382 $ 2,372,797
Net investment loss from operations $(2,940,117) $(1,096,367) $(1,530,369) $(1,386,685) $(2,257,782)
Net realized gain on portfolio of investments $ 430,883 $ 237,327 $ 522,131 $ 1,195,875
$ 1,591,156
Net (decrease) increase in
unrealized appreciation of investments $(1,054,702) $ (475,605) $ 1,663,304 $(1,553,756) $(3,365,513)
Net (decrease) increase in net
assets attributable to common stockholders $(2,480,313) $(1,217,741) $ 255,110 $(2,533,460) $(4,526,053)
Basic and diluted net (decrease) increase in net
assets from operations per weighted
average number of shares outstanding $ (2.25) $ (1.17) $ 0.24 $ (2.34) $ (4.14)
* Expenses in the year ended December 31, 2000 include non-cash compensation
of $349,644 due to the exercise of employee incentive stock options.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING ANALYSIS OF OUR FINANCIAL CONDITION AND RESULTS OF
OPERATIONS SHOULD BE READ IN CONJUNCTION WITH OUR FINANCIAL STATEMENTS AND THE
RELATED NOTES THERETO CONTAINED ELSEWHERE IN THIS FORM 10-K.
THE FOLLOWING "OVERVIEW" SECTION IS A BRIEF SUMMARY OF THE
SIGNIFICANT ISSUES ADDRESSED IN MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS ("MD&A"). INVESTORS SHOULD READ
THE RELEVANT SECTIONS OF THE MD&A FOR A COMPLETE DISCUSSION OF THE ISSUES
SUMMARIZED BELOW. THE ENTIRE MD&A SHOULD BE READ IN CONJUNCTION WITH ITEM 6.
SELECTED FINANCIAL DATA AND ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
APPEARING ELSEWHERE IN THIS FORM 10K.
OVERVIEW
Franklin Capital Corporation is a publicly traded, non-diversified
internally managed, closed-end investment company that elected to be treated as
a BDC under the 1940 Act. We are currently involved in providing capital and
managerial assistance to early stage companies primarily in the medical products
and health care solutions industries, and to a lesser extent in the financial
services and real estate industries. Franklin Capital Properties, LLC, a real
estate development and management company and
44
Franklin Medical Products, LLC, a healthcare consulting services company, both
wholly-owned subsidiaries of Franklin, were created to augment our investments
in these industries. Effective February 23, 2005, Franklin Medical Products, LLC
changed its name to Patient Safety Consulting Group, LLC.
In the first half of 2004, we focused our investment strategy on the
achievement of capital appreciation through long-term equity investments in
start-up and early stage companies in the radio and telecommunications
industries. However, beginning in June 2004, we undertook a Restructuring Plan
which ultimately culminated in a subsequent change in control in our management
and a shift in our business focus away from the radio and telecommunications
industries toward a primary focus on the medical products and health care
solutions industries, particularly, the patient safety market as well as the
financial services and real estate industries.
In addition to shifting a significant amount of our available
capital to investments in the above-referenced industries our primary investment
objective has also shifted and is now focused on maximizing long-term capital
growth through the appreciation of controlling interests in operating companies
and assets in such target industries. As such, it is management's belief that
the regulatory regime governing BDC's is no longer appropriate and will hinder
the Company's future growth. Accordingly, among other things, we are seeking
shareholder approval at the upcoming annual meeting to withdraw its election to
be treated as a BDC.
Since the Restructuring Plan became effective at the end of 2004,
and the reporting period for this Form 10-K is as of December 31, 2004, the
operating results discussed in this MD&A primarily relate to the investment
focus that existed for the majority of the year and the liquidation of those
investments. During 2004, the Company realized approximately $1,448,014 in gains
on its sale of Excelsior common stock. The Company continues to rely on the
increase in the value of its investments and the ability to sell them in order
to fund its ongoing operations. Operating expenses increased by approximately
$1,672,000 due to the severance payment to Stephen L. Brown, our former Chairman
and Chief Executive Officer and professional fees related to the negotiation of
the LOU with Ault Glazer and the filing of proxy statements in connection with
the Special Meeting of the Stockholders of the Company held on October 22, 2004,
and the 2004 Annual Shareholder Meeting of the Company to be held on March 30,
2005.
CRITICAL ACCOUNTING POLICIES
Franklin's discussion and analysis of its financial condition and
results of operations are based upon the Company'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
management to make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenues and expenses and related disclosure of contingent
assets and liabilities. On an ongoing basis, management evaluates its estimates,
the most critical of which are those that are both important to the presentation
of our financial condition and results of operations and require management's
most difficult, complex, or subjective judgments. Our most critical accounting
policy relates to the valuation of our investments.
As a business development company, we invest primarily in illiquid
equity securities of private companies. Our investments are generally subject to
restrictions on resale and generally have no established trading market. Because
of the type of investments that we make and the nature of our business, our
valuation process requires an analysis of various factors.
Pursuant to the requirements of the 1940 Act, our Board of Directors
(the "Board") is responsible for determining in good faith the fair value of our
investments for which market quotations are not readily available. At December
31, 2004, approximately 26% of our total assets represented investments recorded
at fair value. Value, as defined in Section 2(a)(41) of the 1940 Act, is (i) the
market price for those
45
securities for which a market quotation is readily available and (ii) for all
other securities and assets, fair value is as determined in good faith by the
board of directors. Since there is typically no readily available market value
for the investments in our portfolio, we value substantially all of our
investments at fair value as determined in good faith by our Board pursuant to a
valuation policy and a consistent valuation process. Because of the inherent
uncertainty of determining the fair value of investments that do not have a
readily available market value, the fair value of our investments determined in
good faith by our Board may differ significantly from the values that would have
been used had a ready market existed for the investments, and the differences
could be material. For the years ended December 31, 2004, 2003 and 2002, as
reported in our 2004 STATEMENTS OF OPERATIONS, variances between the estimates
utilized to determine the fair market value of our investments have been
consistent with the amounts actually received upon liquidation of those
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 are stated at the last quoted bid price. Our Board 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 valued 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 line item entitled "(Decrease) increase in unrealized
appreciation of investments" in the Statements of Operations.
ACCOUNTING DEVELOPMENTS
In December 2004, Statement of Financial Accounting Standards
("SFAS") No. 123(R), "SHARE-BASED PAYMENT," which addresses the accounting for
employee stock options, was issued. SFAS 123(R) revises the disclosure
provisions of SFAS 123, "ACCOUNTING FOR STOCK BASED COMPENSATION" and supersedes
Accounting Principles Board ("APB") Opinion No. 25, "ACCOUNTING FOR STOCK ISSUED
TO Employees." SFAS 123(R) requires that the cost of all employee stock options,
as well as other equity-based compensation arrangements, be reflected in the
financial statements based on the estimated fair value of the awards. This
statement is effective for the Company as of the beginning of the first interim
or annual reporting period that begins after June 15, 2005. We adopted Statement
123(R) as of January 1, 2005, and it did not have a material effect on the
Company's accounting for employee stock options.
STATEMENT OF OPERATIONS
The Company accounts for its operations under accounting principles
generally accepted in the United States for investment companies. On this basis,
the principal measure of its financial performance is captioned "Net (decrease)
increase in net assets from operations," which is composed of the following:
o "Net investment loss from operations," which is the difference
between the Company's income from interest, dividends and fees and
its operating expenses;
46
o "Net realized gain on portfolio of investments," which is the
difference between the proceeds received from dispositions of
portfolio securities and their stated cost;
o any applicable income tax provisions (benefits); and
o "Net (decrease) increase in unrealized appreciation of investments,"
which is the net change in the fair value of the Company's
investment portfolio, net of any (decrease) increase 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
(decrease) increase 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, LIQUIDITY AND CAPITAL RESOURCES
The Company's total assets and net assets were, respectively,
$6,934,243 and $3,566,269 at December 31, 2004 versus $3,258,032 and $2,024,138
at December 31, 2003. Net asset value per share attributable to common
stockholders and on an as if converted basis was $1.59 and $2.18 at December 31,
2004, respectively, versus $0.91 and $1.84, respectively, at December 31, 2003.
The change in total assets and net assets is primarily attributable to the
Company's operating losses and financing activities.
At December 31, 2004 and December 31, 2003, we had $846,404 and
$224,225 in cash and cash equivalents. Our Board has given our Chairman and
Chief Executive Officer, Milton "Todd" Ault III, the authority to invest our
cash balances in the public equity and debt markets as appropriate to maximize
the short-term return on such assets. The making of such investments entails
risks related to the loss of investment and price volatility.
During 2004, the Company raised net proceeds of approximately $3.925
million in a private placement transaction. Management believes that existing
cash resources, together with anticipated revenues from its operations, should
be adequate to fund its operations for the twelve months subsequent to December
31, 2004. However, long-term liquidity is dependent on the Company's ability to
attain future profitable operations. Management may undertake additional debt or
equity financings to better enable the Company to grow and meet its future
operating and capital requirements.
As of December 31, 2004, we had no outstanding commitments other
than these reflected on our balance sheet. Management was, however, in
discussions with various companies regarding acquisition transactions, of which
SurgiCount was one. As in our acquisition of SurgiCount, we intend to use a
combination of common stock and warrants to purchase common stock as the primary
means to acquire companies. Accordingly, the Company's need to raise significant
amounts of cash can be minimized, provided the companies we acquire are willing
to accept non-cash forms of consideration.
Cash and cash equivalents increased by $622,179 to $846,404 for the
year ended December 31, 2004, compared to a decrease of $337,966 for the year
ended December 31, 2003.
Operating activities used $2,684,458 of cash for the year ended
December 31, 2004, compared to using $1,192,248 for the year ended December 31,
2003.
47
Operating activities for the year ended December 31, 2004, exclusive
of changes in operating assets and liabilities, used $2,939,254 of cash, as the
Company's net decrease in net assets from operations of $2,403,663 included
non-cash charges for depreciation and amortization of $863, realized gains of
$1,591,156 and unrealized losses of $1,054,702. For the year ended December 31,
2003, operating activities, exclusive of changes in operating assets and
liabilities, used $1,079,395 of cash, as the Company's net decrease in net
assets from operations of $1,141,089 included non-cash charges for depreciation
and amortization of $16,972, realized gains of $430,883 and unrealized losses of
$475,605.
Changes in operating assets and liabilities produced cash of
$254,796 for the year ended December 31, 2004, principally due an increase in
the level of accounts payable and accrued expenses. For the year ended December
31, 2003, changes in operating assets and liabilities decreased cash by
$112,853.
The principal factor in the $560,121 of cash used in investing
activities in the year ended December 31, 2004 was the sale of the remaining
interest of the Company's holding in Excelsior for $2,356,818, the increase in
the amount due to the Company's broker of $460,776, offset by net purchases of
marketable investment securities of $2,589,197, and investments in Franklin
Properties of $738,518. The principal factor in the $992,658 of cash provided by
investing activities in the year ended December 31, 2003 was the sale of a
portion of the Company's holdings in Excelsior for $1,000,900.
Cash provided by financing activities for the year ended December
31, 2004, of $3,866,758 resulted primarily from the net proceeds from issuance
of common stock of $3,924,786 and payment of preferred dividends of $76,650.
Cash used in financing activities for the year ended December 31, 2003, of
$138,376 resulted primarily from the payment of preferred dividends of $76,652
and the purchase of treasury stock of $25,661. Additionally, during the years
ended December 31, 2004 and 2003 the note payable was offset by certain payments
made allowed for in the note payable.
At December 31, 2004, the Company had 10,950 shares of convertible
preferred stock outstanding. The stock was issued at a price of $100 per share
and has a 7% quarterly dividend. The stock is convertible into Franklin common
stock at a conversion price of $13.33 per common share.
On November 3, 2004, the Company entered into a Subscription
Agreement and sold an aggregate of 405,625 shares of its Common Stock and
warrants to purchase an aggregate of up to 202,810 shares of its Common Stock in
a private placement transaction to certain accredited investors. Pursuant to the
terms of the Subscription Agreement, the Company held additional closings of the
private placement on November 15, 2004, December 2, 2004, and on December 27,
2004, and sold an aggregate of 100,275 additional shares of its Common Stock and
warrants to purchase an aggregate of up to 50,137 shares of its Common Stock.
The Company received aggregate net proceeds from all the closings of $3,924,786.
The Company is required to file a registration statement with the SEC on or
before May 2, 2005, which is 180 days after closing of the first sale
transaction, registering the resale of the shares of our Common Stock (including
the shares of common stock issuable upon exercise of the warrants) sold in the
private placement transactions on a continuous or delayed basis under the
Securities Act of 1933. We are required to use our reasonable best efforts to
cause the registration statement to become effective within 90 days after the
date we file such registration statement with the SEC. If the registration
statement has not been filed on or prior to the 180th day after the closing of
the sale transaction, we will pay liquidated damages to the purchasers of the
505,900 shares of our Common Stock and the warrants to purchase 252,950 shares
of our Common Stock equal to 1.0% per month of the aggregate gross proceeds of
$4,047,200. We intend to use the net proceeds from the private placement
transaction primarily for general corporate purposes and in buying controlling
equity stakes in companies and/or assets in the medical products, health care
solutions, financial services and real estate industries.
48
The Company's financial condition is dependent on the success of its
investments. A summary of the Company's investment portfolio is as follows:
DECEMBER 31, 2004 DECEMBER 31, 2003
----------------- -----------------
Investments, at cost $ 4,782,808 $ 1,949,703
Unrealized (depreciation) appreciation (49,236) 1,005,466
----------- -----------
Investments, at fair value $ 4,733,572 $ 2,955,169
=========== ===========
INVESTMENTS
The Company's financial condition is dependent on the success of its
investments. The Company has invested a substantial portion of its assets in
thinly capitalized companies including one development stage company that may
lack management depth.
REAL ESTATE INVESTMENTS
At December 31, 2004, the Company had several real estate
investments, valued at $738,518, which represents 10.7% of the Company's total
assets and 20.7% of its net assets. The Company holds its real estate through an
investment in Franklin Capital Properties, LLC ("Franklin Properties"), a
Delaware limited liability company and a wholly owned subsidiary. Franklin
Properties' primary focus is on the acquisition and management of income
producing real estate holdings. Franklin Properties' real estate holdings
consist of eight vacant single family buildings and two multi-unit buildings in
Baltimore, Maryland, approximately 8.5 acres of undeveloped land in Heber
Springs, Arkansas, and various loans secured by real estate in Heber Springs,
Arkansas. Franklin Properties intends to renovate the single family and
multi-unit buildings and engage in an active rental program.
ALACRA CORPORATION
At December 31, 2004, the Company had an investment in Alacra
Corporation ("Alacra"), valued at $1,000,000, which represents 14.4% of the
Company's total assets and 28.0% of its net assets. Alacra, based in New York,
is a leading global provider of business and financial information. Alacra
provides a diverse portfolio of fast, sophisticated online services that allow
users to quickly find, analyze, package and present mission-critical business
information. Alacra's customers include more than 750 leading financial
institutions, management consulting, law and accounting firms and other
corporations throughout the world.
On April 20, 2000, the Company purchased $1,000,000 worth of Alacra
Series F Convertible Preferred Stock. Franklin has the right to have the
preferred stock redeemed by Alacra for face value plus accrued dividends on
December 31, 2006. In connection with this investment, Franklin was granted
observer rights on Alacra board of directors meetings.
EXCELSIOR RADIO NETWORKS, INC.
During the year ended December 31, 2004, the Company liquidated its
investment in Excelsior Radio Networks, Inc. ("Excelsior"). Excelsior produces
and syndicates programs and services heard on more than 2,000 radio stations
nationwide across most major formats. Through its Dial Communications Global
Media sales subsidiary, Excelsior sells the advertising inventory radio stations
provide in exchange for the Excelsior content. The programming and content
includes prep services as well as long
49
form and short form programming. Additionally, Dial Communications Global Media
has a number of independent producer clients, which range from talk and music
programs to news and traffic services.
Franklin has stock appreciation rights on various sales transactions
of Excelsior common stock to Sunshine Wireless, LLC ("SUNSHINE") and Quince
Associates, LP ("QUINCE"). In the event that Excelsior is sold Franklin may be
entitled to additional proceeds from these stock appreciation rights. Franklin
has stock appreciation rights on 193,000 common shares sold to Sunshine on
August 12, 2003 such that in the event that Excelsior is sold on or before
August 8, 2005 for gross proceeds of no less than $40,000,000, then Franklin
shall be entitled to receive fifty percent (50%) of any net value above $1.30
per share not to exceed proceeds to Franklin of $1.625 per share. Franklin has
stock appreciation rights on 433,804 shares of common stock sold to Sunshine on
October 8, 2003, and on March 19, 2004, such that if Excelsior is sold and the
purchaser of the common shares from Franklin receives more than $3.50 per share,
Franklin is entitled to receive 80% of the value greater than $3.50 per share.
Franklin has stock appreciation rights on the 200,000 shares of common stock
sold on June 30, 2004, on the 100,000 shares of common stock sold on September
24, 2004, and on the 550,000 shares of common stock sold on October 22, 2004, to
Quince. In the event that the per share net proceeds from any liquidation of
Excelsior exceeds $3.00 (or an amount equal to $3.00 plus $.050 multiplied by
the number of years, up to five, elapsed since the closing date of the sale),
Franklin will be entitled to receive 80% of the value greater than $3.00 (or
such other applicable amount) per share. The purchase price adjustment for the
sale will expire as of a date 5 years following the closing of each sale
transaction.
SURGICOUNT
On February 25, 2005, the Company purchased SurgiCount Medical Inc.
("SURGICOUNT"), a privately held, California-based developer of patient safety
devices. Under the terms of the agreement, the Company paid to Brian Stewart and
Dr. William Stewart, the holders of 100% of the outstanding capital stock of
SurgiCount (the "Shareholders"), consideration in the amount of $340,000 in cash
and 200,000 shares of Common Stock, of which 10,000 shares of Common Stock will
be held in escrow until August 2005. In addition, if certain milestones are
satisfied, the Company will issue up to an additional 33,334 shares of Common
Stock to the Shareholders.
SurgiCount is the Company's first major acquisition in its plan to
become a leader in the multi-billion dollar patient safety field market.
Management believes that the acquisition is a significant milestone in the
Company's plan to shift its focus from radio and telecommunications to products
and services targeting health care and patient safety. SurgiCount owns patents
issued in the United States and Europe related to patient safety, among them,
the Safety-Sponge(TM) System, an innovation which management believes will allow
the Company to capture a significant portion of what we believe, based on
industry sources, to be approximately $650 million in annual U.S., European and
Japanese surgical sponge sales.
The Safety-Sponge(TM) System allows for faster and more accurate
counting of surgical sponges. SurgiCount has obtained FDA 510k exempt status for
the Safety-Sponge(TM) line. The Safety-Sponge(TM) line of sponges has passed
required FDA biocompatibility tests including ISO sensitization, cytotoxicity
and skin irritation tests. SurgiCount is now a wholly-owned subsidiary of the
Company.
CHINA NURSE
On November 23, 2004, the Company entered into a strategic
relationship with China Nurse LLC ("China Nurse"), an international
nurse-recruiting firm based in New York that focuses on recruiting and training
qualified nurses from China and Taiwan for job placement with hospitals and
other health care facilities in the United States. In connection with this
strategic relationship, the Company has agreed to provide referrals and other
assistance and has also made a small capital investment in that company.
DIGICORP
On December 29, 2004, the Company entered into a Common Stock
Purchase Agreement with certain shareholders of DigiCorp (the "Agreement"), to
purchase an aggregate of 3,453,527 shares of DigiCorp common stock. Of such
shares, 2,229,527 shares were purchased for $.135 per share on December 29,
2004, 100,787 shares were purchased for $.145 on December 29, 2004. Franklin
agreed to purchase an additional 1,224,000 shares of DigiCorp common stock from
the selling shareholders at such time as the shares are registered for resale
with the SEC. The purchase price for such shares is $.135 or $.145 per share,
depending on when the closing occurs. Digicorp's common stock is traded on the
OTC Bulletin Board. In connection with the Agreement, Franklin is entitled to
designate two members to the Board of Directors of Digicorp. Franklin's first
designee, Melanie Glazer, was appointed on December 29, 2004. The Company is
currently evaluating several strategic alternatives for the use of the DigiCorp
entity, however, no definitive plan has been decided upon at this time.
OTHER INVESTMENTS
On March 2, 2005, the Company made an investment in the common stock
of Administration for International Credit & Investments, Inc. ("AICI"), valued
at $450,000. As part of its investment, the Company received 225,000 warrants to
purchase common stock at $1.50 per share and 225,000 warrants to purchase common
stock at $2.00 per share. The warrants are exercisable for a period of five
years and are callable by AICI in certain instances. AICI operates an electronic
market for collecting, detecting, converting, enhancing and routing
telecommunication traffic and digital content. Members of the exchange
anonymously exchange information based on route quality and price through a
centralized, web accessible database and then route traffic. AICI's
fully-automatic, highly scalable Voice over Internet Protocol routing platform
updates routes based on availability, quality and price and executes the
capacity request of the orders using proprietary software and delivers them
through AICI's system. AICI invoices and processes payments for its members'
transactions and offsets credit risk through its credit management programs with
third parties. AICI's name changed to Ipex, Inc and began trading on the OTC
Bulletin Board on March 29, 2005.
On March 16, 2005, Ault Glazer filed a Schedule 13D with the SEC
relating to its holdings in Tuxis Corporation ("Tuxis"). Tuxis, a Maryland
corporation, currently is registered under the 1940 Act, as a closed-end
management investment company. Tuxis previously received Board of Directors and
shareholder approval to change the nature of its business so as to cease to be
an investment company and on May 3, 2004, filed an application with the SEC to
de-register. At March 16, 2005, the Company directly held 36,000 shares and
indirectly, by virtue of its relationship with Ault Glazer, held 98,000 shares
of Tuxis common stock, which represented approximately 3.66% and 9.96%,
respectively, of the total outstanding shares. At December 31, 2004, Tuxis had
reportable net assets of approximately $9.1 million.
RESULTS OF OPERATIONS
The principal measure of our financial performance is the "Net
increase (decrease) in net assets from operations" which is the sum of three
elements. The first element is "Net investment income (loss) from operations,"
which is the difference between the Company's income from interest, dividends,
fees and other income (such as management fees), and its operating expenses, net
of applicable income tax provision. The second element is "Net realized gain
(loss) on portfolio of investments," which is the difference between the
proceeds received from dispositions of portfolio securities and their stated
cost, net of applicable income tax provision. The third element, "Increase
(decrease) in unrealized appreciation on investments," is the net change in the
fair value of the Company'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.
The Company generally 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 Company's fixed
income portfolio and the average yield on this portfolio.
INVESTMENT INCOME
The Company had interest and dividend income of $11,056 in 2004,
$3,159 in 2003, and $5,081 in 2002. The Company earned no management fees in
2004 as opposed to management fees of $180,000 in 2003, and $450,000 in 2002.
The decrease in investment income was primarily the result of no
management fees being received by us from Excelsior, an affiliate, because our
management agreement with Excelsior expired on December 31, 2003.
The Company 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.
50
Because such sales cannot be predicted with certainty, the Company attempts to
maintain adequate working capital to provide for fiscal periods when there are
no such sales.
EXPENSES
Operating expenses were $2,951,173 in 2004, $1,279,526 in 2003, and
$1,985,450 in 2002. A majority of the Company's operating expenses consist of
employee compensation, office and rent expense, other expenses related to
identifying and reviewing investment opportunities and professional fees as well
as the accrual of an expense related to the severance package of Mr. Brown, our
former Chairman and Chief Executive Officer. During 2004, the Company accrued a
severance expense of $483,000 of which $160,142 was reflected as a current
liability at December 31, 2004. Included in compensation was a $40,000 bonus
paid to Stephen L. Brown. Professional fees were $1,252,979 higher in 2004 due
to legal and other costs incurred in connection with the negotiation of the LOU
with Ault Glazer and the filing of proxy statements in connection with the
Special Meeting of the Stockholders of the Company held on October 22, 2004, and
the 2004 Annual Shareholder Meeting of the Company to be held on March 30, 2005.
The Company was reimbursed approximately $108,000 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 LOSS FROM OPERATIONS
Net investment losses from operations were $2,940,117 in 2004,
$1,096,367 in 2003, and $1,530,369 in 2002. The change in such amounts reflects
the increase in operating expenses versus the decrease in investment income
during such periods.
NET REALIZED GAIN ON PORTFOLIO OF INVESTMENTS
During the three years ended December 31, 2004, 2003, and 2002, the
Company realized net gains before taxes of $1,591,156, $430,883, and $237,658,
respectively, from the disposition of various investments.
During 2004, the Company realized a gain of $1,448,014 from the sale
of 908,804 shares and warrants to purchase 87,111 shares of Excelsior common
stock. Additionally, the Company realized a net gain of $143,142 from the sale
of marketable securities.
During 2003, Franklin realized a gain of $432,900 from the sale of
568,000 shares of Excelsior Radio Networks, Inc. common stock. This gain was
offset by a loss of $2,017 from the sale of marketable securities.
During 2002, Franklin realized a gain of $726,804 from the sale of
773,196 shares of Excelsior Radio Networks, Inc. common stock. This gain was
offset by a loss of $300,000 from the sale of 188,425 shares of Structured Web
common stock, a previous portfolio holding of the Company, a loss of $140,000
from the write down of Excom Ventures, a previous portfolio holding of the
Company which was determined to be a worthless security, a loss of $32,715 from
the sale of 363,938 shares of Primal common stock a previous portfolio holding
of the Company as well as a realized net loss of $16,430 from the sale of
marketable securities.
The Company 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 Company attempts to maintain adequate working
capital to provide for fiscal periods when there are no such sales.
51
UNREALIZED APPRECIATION OF INVESTMENTS
Unrealized appreciation of investments decreased by $1,054,702
during the year ended December 31, 2004, primarily due to the sale of 908,804
shares and warrants to purchase 87,111 shares of Excelsior common stock. When we
exit an investment and realize a gain, we make an accounting entry to reverse
any unrealized appreciation we had previously recorded to reflect the
appreciated value of the investment.
Unrealized appreciation of investments, net of deferred taxes,
decreased by $475,605 during the year ended December 31, 2003, primarily due to
the sale of a portion of the Company's holdings of Excelsior offset by the
increased valuation of Excelsior.
Unrealized appreciation of investments, net of deferred taxes,
increased by $1,663,304 during the year ended December 31, 2002, primarily due
to the increased valuation of Excelsior.
TAXES
Franklin does not qualify for pass through tax treatment as a
Regulated Investment Company under Subchapter M of the Internal Revenue Code
(the "CODE") for income tax purposes. The Company is taxed under Subchapter C of
the Code and, therefore, it is subject to federal income tax on the portion of
its taxable income and net capital as well as such distribution to its
stockholders.
We have a net operating loss carryforward of approximately $8.6
million to offset future taxable income for federal income tax purposes. The
utilization of the loss carryforward to reduce any such future income taxes will
depend on our ability to generate sufficient taxable income prior to the
expiration of the net operating loss carryforwards. The carryforward expires
beginning on 2011.
A change in the ownership of a majority of the fair market value of
the Company's common stock can delay or limit the utilization of existing net
operating loss carryforwards pursuant to the Internal Revenue Code Section 382.
The Company believes that such a change occurred during the year ended December
31, 2004. Based upon a detail analysis of purchase transactions of our equity
securities, the Company believes that its net operating loss carryforward
utilization is limited to approximately $755,000 per year.
CONTRACTUAL OBLIGATIONS
The following table sets forth information relating to our contractual
obligations as of December 31, 2004:
---------------------------------------------------------------------------------------------------
CONTRACTUAL OBLIGATIONS PAYMENTS DUE BY PERIOD
---------------------------------------------------------------------------------------------------
TOTAL LESS THAN 1 YEAR
---------------------------------------------------------------------------------------------------
Accrued purchase price of investment in DigiCorp $165,240 $165,240
---------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------
TOTAL $165,240 $165,240
---------------------------------------------------------------------------------------------------
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's business activities contain elements of risk. The
Company considers a principal type of market risk to be valuation risk.
Investments are stated at "fair value" as defined in the 1940 Act
52
and in the applicable regulations of the Securities and Exchange Commission. All
assets are valued at fair value as determined in good faith by the Board of
Directors.
Neither the Company's investments nor an investment in the Company
is intended to constitute a balanced investment program. The Company has
exposure to public-market price fluctuations to the extent of its publicly
traded portfolio.
The Company 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 Company 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 Company invests, the valuation of the equity
interests in the Company's portfolio is subject to the estimate of the Company'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 Company'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 Company's consolidated statements of operations as "Net increase
(decrease) in unrealized appreciation on investments."
53
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FRANKLIN CAPITAL CORPORATION
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
PAGE
----
Report of Rothstein, Kass & Company, P.C.............................. 55
Report of Ernst & Young LLP........................................... 56
Balance Sheets as of
December 31, 2004 and 2003................................... 57
Statements of Operations for the years
ended December 31, 2004, 2003 and 2002....................... 58
Statements of Cash Flows for the years
ended December 31, 2004, 2003 and 2002....................... 59
Statements of Changes in Net Assets for the years
ended December 31, 2004, 2003 and 2002....................... 60
Financial Highlights for the years ended December 31,
2004, 2003, 2002, 2001 and 2000.............................. 61
Portfolio of Investments as of
December 31, 2004............................................ 62
Notes to Financial Statements......................................... 63-74
The schedules for which provision is made in the applicable regulation of the
Securities and Exchange Commission are not required under the related
instruction or are inapplicable and, therefore, have been omitted
54
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors of
Franklin Capital Corporation
We have audited the accompanying consolidated balance sheet of Franklin Capital
Corporation and Subsidiaries (the "Company") as of December 31, 2004, including
the consolidated portfolio of investments as of December 31, 2004, and the
related consolidated statements of operations, cash flows and changes in net
assets for the year ended December 31, 2004, and the financial highlights for
the year ended December 31, 2004. These consolidated financial statements and
financial highlights are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial highlights based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements and financial highlights, assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. Our procedures
included confirmation of securities owned as of December 31, 2004, by
correspondence with the custodian and brokers or by physical counts of
securities. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Company as of December 31, 2004, and the results of its operations, its cash
flows and changes in its net assets for the year ended December 31, 2004, and
the financial highlights for the year ended December 31, 2004, in conformity
with accounting principles generally accepted in the United States of America.
/s/ Rothstein, Kass & Company, P.C.
Roseland, New Jersey
March 18, 2005
55
REPORT OF ERNST & YOUNG LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors
Franklin Capital Corporation
We have audited the accompanying balance sheet of Franklin Capital Corporation
as of December 31, 2003, including the portfolio of investments as of December
31, 2003, and the related statements of operations, cash flows and changes in
net assets for the two years in the period ended December 31, 2003, and the
financial highlights for each of the four years in the period ended December 31,
2003. These financial statements and financial highlights are the responsibility
of the Corporation's management. Our responsibility is to express an opinion on
these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. We were
not engaged to perform an audit of the Company's internal control over financial
reporting. Our audit included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Company's internal control over financial reporting.
Accordingly we express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights, the confirmation of securities owned as of
December 31, 2003 by correspondence with the custodian, assessing the accounting
principles used and significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Franklin Capital Corporation at December 31, 2003, the results of its
operations, cash flows and changes in net assets for the two years in the period
ended December 31, 2003, and the financial highlights for each of the four years
in the period ended December 31, 2003, in conformity with accounting principles
generally accepted in the United States.
/s/ ERNST & YOUNG LLP
New York, New York
March 5, 2004
56
FRANKLIN CAPITAL CORPORATION AND SUBSIDIARIES
--------------------------------------------------------------------------------
BALANCE SHEETS
-----------------------------------------------------------------------------------------------------------
December 31, 2004 2003
-----------------------------------------------------------------------------------------------------------
ASSETS
Marketable investment securities, at market value (cost: December 31,
2004 - $4,058,383; December 31, 2003 - $40,899) $ 4,020,154 $ 33,899
Investments, at fair value (cost: December 31, 2004 - $1,788,518;
December 31, 2003 - $1,908,804)
Excelsior Radio Networks, Inc. 1,921,270
Other investments 1,788,518 1,000,000
------------ ------------
1,788,518 2,921,270
------------ ------------
Cash and cash equivalents 846,404 224,225
Other assets 279,167 78,638
------------ ------------
TOTAL ASSETS $ 6,934,243 $ 3,258,032
============ ============
-----------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Notes payable $ 892,530 $ 915,754
Accounts payable and accrued liabilities 939,568 318,140
Marketable investments sold short, at market value (proceeds: December 31,
2004 - $1,064,093; December 31, 2003 - $0) 1,075,100
Due to broker 460,776
------------ ------------
TOTAL LIABILITIES 3,367,974 1,233,894
============ ============
STOCKHOLDERS' EQUITY
Convertible preferred stock, $1 par value, cumulative 7% dividend:
10,000,000 shares authorized; 10,950 issued and outstanding
at December 31, 2004 and 2003
(Liquidation preference $1,095,000) 10,950 10,950
Common stock, $1 par value: 50,000,000 shares authorized;
2,042,689 and 1,505,888 shares issued: 1,556,901 and 1,020,100 shares
outstanding at December 31, 2004 and 2003, respectively 2,042,689 1,505,888
Paid-in capital 13,925,253 10,439,610
Unrealized (depreciation) appreciation of investments (49,236) 1,005,466
Accumulated deficit (9,746,555) (8,320,944)
------------ ------------
6,183,101 4,640,970
Deduct: 485,788 shares of common stock held in treasury,
at cost, at December 31, 2004 and 2003, respectively (2,616,832) (2,616,832)
------------ ------------
Net assets 3,566,269 2,024,138
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,934,243 $ 3,258,032
============ ============
-----------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
57
FRANKLIN CAPITAL CORPORATION AND SUBSIDIARIES
--------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS
----------------------------------------------------------------------------------------------------------------
For the Year Ended December 31, 2004 2003 2002
----------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME
Interest on short term investments and money market accounts $ 11,056 $ 3,159 $ 5,081
Income from affiliates -- 180,000 450,000
----------- ----------- -----------
11,056 183,159 455,081
----------- ----------- -----------
EXPENSES
Salaries and employee benefits, net of reimbursements 494,167 548,269 862,970
Officer's severance 483,000 -- --
Professional fees 1,484,143 231,164 191,900
Rent 76,276 71,942 98,982
Insurance 64,083 67,728 58,036
Directors' fees 10,550 9,158 2,003
Taxes other than income taxes 50,697 29,708 39,709
Newswire and promotion 8,360 -- 1,181
Depreciation and amortization 863 16,972 16,969
Interest expense 32,284 42,903 35,401
Expenses related to terminated merger -- 73,500 490,782
General and administrative 246,750 188,182 187,517
----------- ----------- -----------
2,951,173 1,279,526 1,985,450
----------- ----------- -----------
Net investment loss from operations (2,940,117) (1,096,367) (1,530,369)
Net realized gain on portfolio of investments:
Investment securities:
Affiliated 1,448,014 432,900 254,088
Unaffiliated 143,142 (2,017) (16,430)
----------- ----------- -----------
Net realized gain on portfolio of investments 1,591,156 430,883 237,658
Provision (benefit) for current income taxes -- -- 331
----------- ----------- -----------
Net realized loss (1,348,961) (665,484) (1,293,042)
(Decrease) increase in unrealized appreciation of investments
Investment securities:
Affiliated (1,012,466) (479,392) 1,663,304
Unaffiliated (42,236) 3,787 --
----------- ----------- -----------
(Decrease) increase in unrealized appreciation of investments,
net of deferred income taxes (1,054,702) (475,605) 1,663,304
----------- ----------- -----------
Net (decrease) increase in net assets from operations (2,403,663) (1,141,089) 370,262
Preferred dividends 76,650 76,652 115,152
----------- ----------- -----------
Net (decrease) increase in net assets attributable
to common stockholders ($2,480,313) ($1,217,741) $ 255,110
=========== =========== ===========
Basic and diluted net (decrease) increase in net assets per share
attributable to common stockholders ($ 2.25) ($ 1.17) $ 0.24
=========== =========== ===========
Weighted average number of common shares outstanding 1,100,324 1,037,443 1,066,195
=========== =========== ===========
----------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
58
FRANKLIN CAPITAL CORPORATION AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
----------------------------------------------------------------------------------------------------------------------------------
For the Year Ended December 31, 2004 2003 2002
----------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net (decrease) increase in net assets from operations ($ 2,403,663) ($ 1,141,089) $ 370,262
Adjustments to reconcile net (decrease) increase in net assets from operations
to net cash used in operating activities:
Depreciation and amortization 863 16,972 16,969
Decrease (increase) in unrealized appreciation of investments 1,054,702 475,605 (1,663,304)
Net realized gain on portfolio of investments (1,591,156) (430,883) (237,327)
Changes in operating assets and liabilities:
(Increase) in other assets (201,392) (18,013) (4,300)
Increase (Decrease) in accounts payable and accrued liabilities 456,188 (94,840) 235,529
------------ ------------ ------------
Total adjustments (280,795) (51,159) (1,652,433)
------------ ------------ ------------
Net cash used in operating activities (2,684,458) (1,192,248) (1,282,171)
------------ ------------ ------------
Cash flows from investing activities:
Proceeds from sale of majority-owned affiliate -- -- 1,500,000
Increase in due to broker 460,776
Proceeds from sale of affiliate 2,356,818 1,000,900 78,715
Proceeds from sale of marketable investment securities 57,805,768 28,924 6,554
Loan payments received from majority-owned affiliate -- -- 75,000
Purchases of other investments (788,518) -- --
Purchases of marketable investment securities (60,394,965) (37,166) (22,985)
------------ ------------ ------------
Net cash (used in) provided by investing activities (560,121) 992,658 1,637,284
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from issuance of common stock, net of offering costs 3,924,786 -- --
Proceeds from exercise of stock options 39,375 -- --
Payments of preferred dividends (76,650) (76,652) (115,152)
Decrease in note payable (23,224) (36,063) (48,183)
Proceeds from conversion right -- -- 300,000
Redemption of preferred stock -- -- (137,500)
Proceeds related to 16B filing 2,471 -- --
Purchases of treasury stock -- (25,661) (71,815)
------------ ------------ ------------
Net cash provided by (used in) financing activities 3,866,758 (138,376) (72,650)
------------ ------------ ------------
Net (decrease) increase in cash and cash equivalents 622,179 (337,966) 282,463
Cash and cash equivalents at beginning of year 224,225 562,191 279,728
------------ ------------ ------------
Cash and cash equivalents at end of year $ 846,404 $ 224,225 $ 562,191
============ ============ ============
Supplemental disclosures of cash flow information:
Cash paid during the year for interest $ 2,452
Issuance of common stock for purchase of investment $ 55,812
Accrued purchase price of investment $ 165,240
----------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
59
FRANKLIN CAPITAL CORPORATION AND SUBSIDIARIES
--------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
For the Year Ended December 31, 2004 2003 2002
---------------------------------------------------------------------------------------------------------------
Decrease in net assets from operations:
Net investment loss ($2,940,117) ($1,096,367) ($1,530,369)
Net realized gain on portfolio of investments 1,591,156 430,883 237,327
(Decrease) increase in unrealized appreciation of investments (1,054,702) (475,605) 1,663,304
----------- ----------- -----------
Net (decrease) increase in net assets from operations (2,403,663) (1,141,089) 370,262
Capital stock transactions:
Dividends on preferred stock (76,650) (76,652) (115,152)
Cash proceeds from issuance of common stock, net 3,924,786 -- --
Cash proceeds from exercise of stock options 39,375 -- --
Cash proceeds related to 16B filing 2,471 -- --
Issuance of common stock for purchase of investments 55,812 -- --
Proceeds for conversion right -- -- 300,000
Redemption of preferred stock -- -- (137,500)
Purchase of treasury stock -- (25,661) (71,815)
----------- ----------- -----------
Total (decrease) increase in net assets 1,542,131 (1,243,402) 345,795
----------- ----------- -----------
Net assets at beginning of year 2,024,138 3,267,540 2,921,745
----------- ----------- -----------
Net assets at end of year $ 3,566,269 $ 2,024,138 $ 3,267,540
=========== =========== ===========
---------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
60
FRANKLIN CAPITAL CORPORATION AND SUBSIDIARIES
--------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
----------------------------------------------------------------------------------------------------------------------------------
For the Year Ended December 31, 2004(1) 2003(1) 2002(1) 2001(1) 2000(1)
----------------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE (2):
Net asset value attributable to common stockholders,
beginning of year $0.91 $2.07 $1.19 $3.58 $7.70
----- ----- ----- ----- -----
Net investment loss (2.67) (1.06) (1.44) (1.28) (2.07)
Net (loss) gain on portfolio of
investments (realized and unrealized) after taxes 0.49 (0.04) 1.78 (0.95) (1.98)
----- ----- ----- ----- -----
Total from investment operations (2.18) (1.10) 0.34 (2.23) (4.05)
----- ----- ----- ----- -----
Capital stock transactions 2.87 (0.06) 0.54 (0.16) (0.07)
----- ----- ----- ----- -----
Net asset value attributable to common stockholders,
end of year $1.59 $0.91 $2.07 $1.19 $3.58
===== ===== ===== ===== =====
Market value per share, end of year $12.73 $1.06 $1.62 $4.18 $8.00
====== ===== ===== ===== =====
TOTAL INVESTMENT RETURN:
Based on market value per share (%) 1,100.94 (38.37) (58.85) (47.75) 17.13
RATIOS TO AVERAGE NET ASSETS:
Expenses (%) 105.58 48.36 56.61 37.67 25.99
Net investment loss from operations (%) (105.18) (41.44) (43.64) (33.08) (24.73)
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of period (000 omitted) $3,566 $2,024 $3,268 $2,922 $5,579
Portfolio turnover rate (%) 2,179 26 37 89 24
----------------------------------------------------------------------------------------------------------------------------------
(1) - Includes liquidation preference of preferred stockholders.
(2) - Calculated based on weighted average number of shares outstanding during
the period.
The accompanying notes are an integral part of these financial highlights.
61
FRANKLIN CAPITAL CORPORATION AND SUBSIDIARIES
PORTFOLIO OF INVESTMENTS
MARKETABLE INVESTMENT SECURITIES
NUMBER OF
SHARES OR MARKET
PRINCIPAL VALUE
DECEMBER 31, 2004 (2) AMOUNT ($) COST(1) (NOTE 2)
-----------------------------------------------------------------------------------------------------------------------------------
DigiCorp 3,846,027 $ 532,435 $ 532,435
Dreamworks Animation SKG, Inc. 5,000 197,950 187,550
Google, Inc. 2,500 495,404 481,975
Law Enforcements Associates Corp. 22,000 124,650 113,300
NASDAQ 100 Trust Series I Put, Exp. 1/21/2005, Strike $38.00 200 8,400 2,500
Palmone, Inc. 8,000 254,878 252,400
Thermogenesis Corp. 5,000 32,266 31,700
Tuxis Corp. 35,000 248,232 257,250
US Treasury - 2.875%, due 11/30/06 500,000 498,672 498,516
US Treasury - 3.000%, due 11/15/07 1,000,000 996,875 994,063
US Treasury - 3.500%, due 12/15/09 500,000 497,734 497,578
Federal Home Loan Mtg. Corp., due 01/19/2035 1,000,000 144,638 144,638
Certificate of Deposit - 0.7%, due 01/31/2005 26,249 26,249
========== ==========
4,058,383 4,020,154
Diamonds Trust Series 1, sold short (10,000) (1,064,093) (1,075,100)
---------- ----------
Total Marketable Investment Securities (62.2% of total investments and
82.6% of net assets) $2,994,290 $2,945,054
========== ==========
INVESTMENTS, AT FAIR VALUE
-----------------------------------------------------------------------------------------------------------------------------------
NUMBER OF
SHARES OR DIRECTORS'
EQUITY PRINCIPAL VALUATION
DECEMBER 31, 2004 (2) INVESTMENT INTEREST AMOUNT ($) COST(1) (NOTE 2)
-----------------------------------------------------------------------------------------------------------------------------------
OTHER INVESTMENTS
Alacra Corporation (21.1% of total investments and 28.0%
of net assets) (Internet-based information provider) Convertible Preferred Stock 1.58% 321,543 1,000,000 1,000,000
China Nurse, LLC (1.1% of total investments and 1.4% of
net assets) (Healthcare Services) LLC Interest 5.00% 50,000 50,000 50,000
Real Estate (7.7% of total investments and 10.2% of net
assets) (Real estate development) Owned 100.00% 363,053 363,053
Real Estate (7.9% of total investments and 10.5% of net
assets) (Real estate development) Loan 375,465 375,465 375,465
---------- ----------
Investments, at Fair Value (37.8% of total
investments and 50.1% of net assets) $1,788,518 $1,788,518
========== ==========
-----------------------------------------------------------------------------------------------------------------------------------
(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.
62
FRANKLIN CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
1. DESCRIPTION OF BUSINESS
Franklin Capital Corporation ("Franklin", or the "Company") is a Delaware
corporation that elected to be a Business Development Company ("BDC") under the
Investment Company Act of 1940 (the "1940 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 Company, as a BDC, generally may invest in other securities; however, such
investments may not exceed 30% of the Company's total asset value at the time of
any such investment.
On June 23, 2004, the Company entered into a Letter of Understanding (the "LOU")
with Ault Glazer & Company Investment Management LLC ("Ault Glazer"). This LOU
sets forth the understandings and agreements of the Company and Ault Glazer with
respect to the initial steps in the execution of a strategic restructuring and
recapitalization plan for the Company (the "Restructuring Plan"), as described
more fully in Item 7 (Management's discussion and Analysis of Financial
Condition and Results of Operations) of this Annual Report on Form 10-K. The
Restructuring Plan was intended to maximize stockholder value through, among
other things, (i) a shift in Franklin's investment strategy away from the radio
and telecommunications industry toward a focus on the medical products/health
care solutions and the financial services industries, (ii) the liquidation of
Franklin's investments (including Excelsior Radio Networks, Inc.), (iii) the
raising of new capital to fund new investments and (iv) the election of new
directors and officers with experience and expertise in the medical
products/health care solutions and the financial services industries.
2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements for 2004 include the accounts
of Franklin and its wholly-owned subsidiary, Franklin Capital Properties, LLC.
While these financial statements have been consolidated, the financial position,
results of operations, and cash flows do not represent those of a single legal
entity. All significant intercompany transactions have been eliminated in
consolidation.
USE OF ESTIMATES
The financial statements have been prepared in accordance with accounting
principles generally accepted in the United States ("GAAP"). The preparation of
financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. These estimates are based on knowledge of
current events and anticipated future events and accordingly, actual results may
differ from those estimates.
CASH AND CASH EQUIVALENTS
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 as cash and cash equivalents.
At December 31, 2004 and 2003, the Company held cash and cash equivalents
primarily in money market funds at two commercial banking institutions, and two
broker/dealers.
63
FRANKLIN CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In the normal course of business, all of the Company's marketable securities
transactions, money balances and security positions are transacted with a
broker. The Company is subject to credit risk to the extent any broker with
which it conducts business is unable to fulfill contractual obligations on its
behalf. Management monitors the financial condition of such brokers and does not
anticipate any losses from these counterparties.
OFF-BALANCE SHEET RISK
The Company is subject to certain inherent risks arising from its investing
activities of selling securities short. The ultimate cost to the Company to
acquire these securities may exceed the liability reflected in these financial
statements.
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 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 (the "Code")
for income tax purposes. Therefore, the Company is taxed under Subchapter C of
the Code.
Franklin accounts for income taxes in accordance with the provision of Statement
of Financial Accounting Standards ("SFAS") No. 109, "ACCOUNTING FOR INCOME
TAXES". The significant components of deferred tax assets and liabilities are
principally related to the Company's net operating loss carryforward and its
unrealized appreciation of investments.
STOCK-BASED COMPENSATION
The Company has elected to follow the recognition and measurement principles
(the intrinsic-value method) prescribed in Accounting Principles Board ("APB")
Opinion No. 25, "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES," to account for its
Non-Qualified Stock Option Plan under which no compensation cost is recognized
because the option exercise price is equal to at least the market price of the
underlying stock on the date of grant.
64
FRANKLIN CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In December 2002, Statement of Financial Accounting Standards (SFAS) No. 148,
"ACCOUNTING FOR STOCK-BASED COMPENSATION--TRANSITION AND DISCLOSURE" was issued.
SFAS No. 148 provides alternative methods of transition to the fair value method
of accounting for equity-based employee compensation. It also amends and expands
the disclosure provisions of SFAS No. 123 and APB Opinion No. 28, "INTERIM
FINANCIAL REPORTING," to require disclosure in the summary of significant
accounting policies of the effects on an entity's accounting policy with respect
to equity-based employee compensation on reported net income and earnings per
share in annual and interim financial statements. While SFAS No. 148 does not
require companies to account for employee equity options using the fair-value
method, the disclosure provisions of SFAS No. 148 are applicable to all
companies with equity-based employee compensation, regardless of whether they
account for that compensation using the fair-value method of SFAS No. 123 or the
intrinsic-value method of APB Opinion No. 25. The Company has adopted the
disclosure requirements of SFAS No. 148.
In December 2004, SFAS No. 123(R), "SHARE-BASED PAYMENT," which addresses the
accounting for employee stock options, was issued. SFAS 123(R) revises the
disclosure provisions of SFAS 123, "ACCOUNTING FOR STOCK BASED COMPENSATION" and
supercedes APB Opinion No. 25, "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES." SFAS
123(R) requires that the cost of all employee stock options, as well as other
equity-based compensation arrangements, be reflected in the financial statements
based on the estimated fair value of the awards. This statement is effective for
the Company as of the beginning of the first interim or annual reporting period
that begins after June 15, 2005. The Company has not elected to early implement
SFAS 123(R) for the year ended December 31, 2004.
The following table illustrates the effect on net income and net income
attributable to common shareholders if the fair value based method had been
applied to all awards.
DECEMBER 31, 2004 DECEMBER 31, 2003 DECEMBER 31, 2002
----------------- ----------------- -----------------
Net (decrease) increase in net assets
attributable to common stockholders:
As reported $(2,480,313) $ (1,217,741) $ 255,110
Deduct:
Total stock-based employee compensation
expense determined under fair value
based method for all awards, net of related
tax effect 5,094 -- 4,734
----------- ------------- -----------
Pro forma $(2,485,407) $ (1,217,741) $ 250,376
Basic and diluted net (decrease) increase
in net assets attributable to common
stockholders:
As reported $ (2.25) $ (1.17) $ 0.24
Pro forma $ (2.26) $ (1.17) $ 0.23
DEPRECIATION AND AMORTIZATION
Property and equipment are stated at cost. 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 COMMON SHARE
Net increase (decrease) in net assets attributable to common stockholders per
common share is calculated in accordance with the provisions of SFAS No. 128,
"Earnings per Share".
65
FRANKLIN CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. INCOME TAXES
For the years ended December 31, 2004, 2003 and 2002, Franklin's tax (provision)
benefit was based on the following:
2004 2003 2002
----------- ----------- -----------
Net investment loss from operations $(2,940,117) $(1,096,367) $(1,530,369)
Net realized gain on portfolio of investments 1,591,156 430,883 237,657
(Decrease) increase in unrealized appreciation (1,054,702) (475,605) 1,663,304
----------- ----------- -----------
Pre-tax book (loss) income $(2,403,663) $(1,141,089) $ 370,592
=========== =========== ===========
2004 2003 2002
----------- ----------- -----------
Federal tax benefit (provision) at 34% on $(2,403,663),
$(1,141,089), and $370,592, respectively $ 817,000 $ 388,000 $ (126,000)
State and local, net of Federal benefit 48,000 22,500 --
Other 6,000 (5,500) (22,000)
Change in valuation allowance (871,000) (405,000) 148,000
----------- ----------- -----------
$ -- $ -- $ --
============ =========== ===========
The components of the tax benefit are as follows:
2004 2003 2002
----------- ----------- -----------
Current state and local tax benefit $ -- $ -- $ --
=========== =========== ===========
Deferred income tax benefit (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.
A change in the ownership of a majority of the fair market value of the
Company's common stock can delay or limit the utilization of existing net
operating loss carryforwards pursuant to the Internal Revenue Code Section 382.
The Company believes that such a change occurred during the year ended December
31, 2004. Based upon a detail analysis of purchase transactions of our equity
securities, the Company believes that its net operating loss carryforward
utilization is limited to approximately $755,000 per year.
At December 31, 2004 and 2003, significant deferred tax assets and liabilities
consist of:
ASSET (LIABILITY)
----------------------------
December 31, December 31,
2004 2003
------------ ------------
Deferred Federal and state benefit from net operating
loss carryforward ........................................ $ 3,081,000 $ 2,605,000
Deferred Federal and state (provision) benefit on unrealized
(appreciation) depreciation of investments ............... 18,000 (377,000)
Valuation allowance ........................................ (3,099,000) (2,228,000)
----------- -----------
Deferred taxes ........................................... $ -- $ --
=========== ===========
At December 31, 2004, Franklin had net operating loss carryforwards for income
tax purposes of approximately $8,559,000 that will begin to expire in 2011. At a
36% effective tax rate the after-tax net benefit from this loss would be
approximately $3,081,000.
66
FRANKLIN CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. STOCKHOLDERS' EQUITY
The accumulated deficit at December 31, 2004, consists of accumulated net
realized gains of $7,115,000 and accumulated investment losses of $16,862,000.
The convertible preferred 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,
currently $13.33. The convertible preferred stock has antidilution provisions,
which can change the conversion price in certain circumstances. In the event the
Company subdivides its outstanding shares of common stock into a greater number
of shares of common stock the conversion price in effect would be reduced,
thereby increasing the total number of shares of common stock that the
convertible preferred stock is convertible into. The holder has the right to
convert the shares of convertible preferred stock at any time until February 22,
2010 into common stock. Upon liquidation, dissolution or winding up of the
Company, 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 Company's common stock.
On December 31, 2002, the Company redeemed from certain preferred stockholders
5,500 shares of convertible preferred stock for $25.00 per share.
The Board of Directors has authorized Franklin to repurchase up to an aggregate
of 575,000 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
Company and its stockholders. As of December 31, 2003, the Company had
repurchased 536,950 shares of its common stock of which 485,788 remained in
treasury. No shares were purchased during the year ended December 31, 2004.
On November 3, 2004, Franklin entered into a Subscription Agreement with several
accredited investors (the "Investors"), relating to the issuance and sale by
Franklin of shares of its common stock (the "Shares") and five-year warrants
(the "Warrants") to purchase additional shares of its common stock (the "Warrant
Shares") in one or more closings of a private placement (the "Private
Placement"). Pursuant to the Subscription Agreement, Franklin may issue and sell
to accredited investors an aggregate of up to 625,000 Shares at a price per
Share of $8.00. Each investor that purchases Shares pursuant to the Subscription
Agreement will also receive a Warrant to purchase that number of Warrant Shares
equal to 50% of the number of Shares purchased by that investor at an exercise
price per Warrant Share equal to 110% of the closing price of Franklin's common
stock on the date of the issuance and sale of the Shares to such investor. Each
Warrant further specifies that Franklin may require the holder thereof to
exercise the Warrant in accordance with its terms in the event that the average
closing price of Franklin's common stock during any period of five consecutive
trading days exceeds 200% of the Warrant's exercise price per share. Pursuant to
the Subscription Agreement, Franklin has agreed to register for resale all of
the Shares and Warrant Shares issuable upon exercise of the Warrants issued and
sold to investors in connection with the Private Placement. Securities issued
under the terms of the Subscription Agreement were made in reliance upon the
exemption provided in Section 4(2) of the Securities Act and the safe harbor of
Rule 506 under Regulation D promulgated under the Securities Act of 1933, as
amended (the "Securities Act").
During the period November 3, 2004, through December 21, 2004, Franklin held a
series of four closings of the Private Placement. In conjunction with the
closings Franklin issued and sold to the Investors an aggregate of 505,900
Shares and Warrants to purchase an aggregate of up to 252,950 Warrant Shares
pursuant to the terms of the Subscription Agreement. At December 31, 2004, the
Warrants weighted average exercise price was $11.58 with a weighted average life
of 4.8 years. These issuances resulted in aggregate net proceeds to Franklin of
$3,924,786. The Company is required to file a registration statement with the
SEC on or before May 2, 2005, which is 180 days after initial closing of the
sale transaction, registering the resale of the shares of our common stock
(including the shares of common stock issuable upon exercise of the warrants) on
a continuous or delayed basis under the Securities Act of 1933. The Company is
required to use its reasonable best efforts to cause the registration statement
to become effective within 90 days after the date we file such registration
statement with the SEC. If the registration statement
67
FRANKLIN CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
does not become effective when required, the Company will pay liquidated damages
to the purchasers equal to 1.0% of the purchase price.
5. COMMITMENTS AND CONTINGENCIES
Rent expense for the years ended December 31, 2004, 2003 and 2002, was
approximately $76,000, $72,000, and $99,000, respectively. For the years ended
December 31, 2004, 2003 and 2002, the Company collected rents of $30,000,
$37,500, and $59,000, respectively, from subtenants under month-to-month leases,
for a portion of its existing office space that is reflected as a reduction in
rent expense for that period.
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. On February 25,
2003, the case against Franklin and Sunshine was dismissed, however, on October
19, 2004, Jeffrey A. Leve and Jeffrey Leve Family Partnership, L.P. exercised
their right to appeal. The initial lawsuit alleged that the Winstar defendants
conspired to commit fraud and breached their fiduciary duty to the plaintiffs in
connection with the acquisition of the plaintiff's radio production and
distribution business. The complaint further alleges that Franklin and Sunshine
joined the alleged conspiracy. The plaintiffs seek recovery of damages in excess
of $10,000,000, costs and attorneys' fees. An unfavorable outcome in an appeal,
together with an unfavorable outcome in the lawsuit may have a material adverse
effect on Franklin's business, financial condition and results of operations.
The Company believes the lawsuit is without merit and intends to vigorously
defend itself. These financial statements do not include any adjustments for the
possible outcome of this uncertainty.
6. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
On May 17, 2004, as a result of the acquisition by Ault Glazer of more than 30%
of the outstanding shares of the common stock of Franklin without the prior
approval of the Board, Mr. Stephen Brown, Chairman and Chief Executive Officer
of Franklin became entitled, if his employment with Franklin were to terminate
within one year thereafter, to receive certain severance payments under the
terms of his employment agreement and severance compensation agreement with
Franklin. In connection with the Restructuring Plan Franklin entered into a
Termination Agreement (the "Termination Agreement") which replaces Mr. Brown's
employment agreement and severance compensation agreement and provides, as
amended, Mr. Brown with a severance payment of $250,000. Franklin also agreed to
continue to provide coverage to Mr. Brown and his wife under its medical, dental
and vision plans for a period of three years following the date of termination.
The total cost of the medical coverage for Mr. Brown and his wife is estimated
to be approximately $11,000 per year. Mr. Brown also entered into a consulting
agreement with Franklin, whereby, Franklin would pay Mr. Brown an aggregate
amount of $200,000 payable over eight months. During the quarter ended September
30, 2004, the Company recorded the charge to operations of approximately
$483,000 under the Termination Agreement.
Accounts payable and accrued liabilities at December 31, 2004 and 2003 is
comprised of the following:
December 31, December 31,
2004 2003
------------ ------------
Professional Fees - legal $351,867 $ 92,470
Accrued purchase price on investment 165,240 --
Officer's severance 160,142 --
Accrued interest 112,432 82,650
Professional fees - other 52,950 102,000
Accrued - other 96,937 41,020
-------- --------
$939,568 $318,140
======== ========
68
FRANKLIN CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. INVESTMENTS
ALACRA CORPORATION
At December 31, 2004, the Company had an investment in shares of Series F
convertible preferred stock of Alacra Corporation, valued at $1,000,000, which
represented 14.4% of the Company's total assets and 28.0% of its net assets.
Franklin has the right to have the Series F convertible preferred stock redeemed
by Alacra for face value plus accrued dividends on December 31, 2006. Alacra,
based in New York, is a global provider of business and financial information.
Alacra provides a diverse portfolio of fast, sophisticated online services that
allow users to quickly find, analyze, package and present mission-critical
business information. Alacra's customers include more than 750 financial
institutions, management consulting, law and accounting firms and other
corporations throughout the world.
DIGICORP.
At December 31, 2004, the Company held 3,846,027 shares of common stock of
DigiCorp valued at cost, or approximately $0.14 per share. Digicorp's common
stock is traded on the OTC Bulletin Board, which reported a closing price, at
December 31, 2004, of $0.35. Based upon the illiquid nature of the investment
and the short period of time the investment has been held, the Company has
elected to value the investment at its cost basis of approximately $0.14 per
share. This represents a 60% discount to the December 31, 2004 closing price of
$0.35.
EXCELSIOR RADIO NETWORKS, INC.
During the year ended December 31, 2004, the Company liquidated its investment
in Excelsior Radio Networks, Inc. ("Excelsior"). Excelsior produces and
syndicates programs and services heard on more than 2,000 radio stations
nationwide across most major formats. Through its Dial Communications Global
Media sales subsidiary, Excelsior sells the advertising inventory radio stations
provide in exchange for the Excelsior content. The programming and content
includes prep services as well as long form and short form programming.
Additionally, Dial Communications Global Media has a number of independent
producer clients, which range from talk and music programs to news and traffic
services.
Franklin along with Sunshine initially purchased Excelsior on August 28, 2001.
As part of the purchase price Franklin issued a $1,000,000 note. This note was
due February 28, 2002 with interest at 3.54% but has a right of set-off against
certain representations and warranties made by Winstar Radio Networks, Inc. The
due date of the note has been extended indefinitely until the action described
in Note 5 is settled.
On October 3, 2002, Franklin sold 773,196 common shares for $1.94 per share for
$1,500,000 realizing a gain of $726,804. On January 31, 2003, Franklin purchased
and subsequently on May 29, 2003, Franklin cancelled the purchase of 33,750
common shares for $1.625 per share and 65,199 warrants to acquire shares of
Excelsior common stock at an exercise price of $1.125 per share for $0.50 per
warrant. On August 12, 2003, Franklin sold 193,000 common shares for $1.30 per
share for $250,900 realizing a gain of $57,900. Franklin has stock appreciation
rights on these common shares such that in the event Excelsior is sold on or
before August 8, 2005 for gross proceeds of no less than $40,000,000, then
Franklin shall be entitled to receive fifty percent (50%) of any net value above
$1.30 per share not to exceed proceeds to Franklin of $1.625 per share. On
October 8, 2003, Franklin sold to Sunshine 375,000 shares of the common stock of
Excelsior for an aggregate purchase price of $750,000, realizing a gain of
$375,000, pursuant to a stock purchase agreement between Sunshine and Franklin.
On March 19, 2004 Franklin sold an additional 58,804 shares of the common stock
of Excelsior to Sunshine for an aggregate purchase price of $117,608, $2.00 per
common share. Franklin has stock appreciation rights on the common shares sold
to Sunshine on October 8, 2003 and March 19, 2004, such that if Excelsior is
sold and the purchaser of the common shares from Franklin receives more than
$3.50 per share, Franklin is entitled to receive 80% of the value greater than
$3.50 per share.
On June 30, 2004, Franklin sold 200,000 common shares of Excelsior to Quince
Associates, LP ("Quince") for an aggregate purchase price of $500,000, or $2.50
per common share. On July 5, 2004, Franklin entered into an
69
FRANKLIN CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
agreement with Quince to sell Franklin's remaining interest in Excelsior. The
transactions contemplated by this agreement were subject to shareholder
approval. On October 22, 2004, Franklin's shareholders approved the sale and
Franklin agreed to sell its remaining 550,000 shares of Excelsior common stock
at $2.50 per share and warrants exercisable for 74,232 shares of Excelsior
common stock at an exercise price of $1.20 per share for $1.30 per warrant and
warrants exercisable for 12,879 shares of Excelsior common stock at an exercise
price of $1.125 per share for $1.375 per warrant. On September 24, 2004, 100,000
shares of common stock of Excelsior were sold for an aggregate purchase price of
$250,000 as an advance to the final sale. On October 22, 2004, Franklin sold its
remaining interest in Excelsior to Quince for an aggregate purchase price of
$1,489,210. Cumulative realized gains on the sale of Excelsior common stock and
warrants to purchase Excelsior common stock to Quince amounted to $1,389,210.
The purchase price in connection with the June 30, 2004, September 24, 2004 and
October 22, 2004 sales of the Company's equity interests in Excelsior to Quince
is subject to a potential adjustment whereby, in the event that the per share
net proceeds from any liquidation of Excelsior exceeds $3.00 (or an amount equal
to $3.00 plus $.050 multiplied by the number of years, up to five, elapsed since
the closing date of the sale), Franklin will be entitled to receive 80% of the
value greater than $3.00 (or such other applicable amount) per share. The
purchase price adjustment for the sale will expire as of a date 5 years
following the closing of each sale transaction.
INVESTMENTS IN REAL ESTATE
At December 31, 2004, the Company had several real estate investments, valued at
$738,518, which represents 10.0% of the Company's total assets and 18.3% of its
net assets. These investments are reflected in the Portfolio of Investments -
Investments, at Fair Value. The Company holds its real estate investments in
Franklin Capital Properties, LLC ("Franklin Properties"), a Delaware limited
liability company and a wholly-owned subsidiary. Franklin Properties primary
focus is on the acquisition and management of income producing real estate
holdings. Franklin Properties' real estate holdings consist of eight vacant
single family buildings and two multi-unit buildings in Baltimore, Maryland,
approximately 8.5 acres of undeveloped land in Heber Springs, Arkansas, and
various loans secured by real estate in Heber Springs, Arkansas. Franklin
Properties intends to renovate the single family and multi-unit buildings and
engage in an active rental program.
8. 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 Company's consultants,
officers and employees (including any officer or employee who is also a director
of the Company) and a Non-Statutory Stock Option Plan ("SOP") to be offered to
the Company's "outside" directors, (i.e., those directors who are not also
officers or employees of Franklin). 112,500 shares of the Company'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.
The following is a summary of the status of the Stock Option Plans during the
years ended:
DECEMBER 31, 2004 DECEMBER 31, 2003 DECEMBER 31, 2002
----------------- ----------------- -----------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------ ------- ------ ------- ------ -------
Outstanding at beginning of year 20,625 $ 11.39 20,625 $ 11.39 39,375 $ 11.27
Granted 26,250 $ 1.50 -- -- -- --
Exercised 26,250 $ 1.50 -- -- -- --
Forfeited 18,750 $ 11.13 -- -- 18,750 $ 11.13
Expired -- -- -- -- -- --
------ ------ ------
Outstanding at end of year 1,875 $ 14.00 20,625 $ 11.39 20,625 $ 11.39
====== ====== ======
Exercisable at end of year 1,875 $ 14.00 20,625 $ 11.39 20,625 $ 11.39
====== ====== ======
70
FRANKLIN CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The options issued under the SIP have a remaining contractual life of 0.1 years.
9. NET (DECREASE) INCREASE IN NET ASSETS PER COMMON SHARE
The following table sets forth the computation of basic and diluted change in
net assets per common share:
DECEMBER 31,
-----------------------------------------------
2004 2003 2002
----------- ----------- -----------
Numerator:
Net (decrease) increase in net
assets from operations $(2,403,663) $(1,141,089) $ 370,262
Preferred stock dividends (76,650) (76,652) (115,152)
----------- ----------- -----------
Numerator for basic and diluted
earnings per share - net (decrease)
increase in net assets attributable
to common stockholders $(2,480,313) $(1,217,741) $ 255,110
=========== =========== ===========
Denominator:
Denominator for basic and diluted
(decrease) increase in net assets
from operations - weighted -
average shares 1,100,324 1,037,443 1,066,195
=========== =========== ===========
Basic and diluted net (decrease) increase in
net assets from operations per share $ (2.25) $ (1.17) $ 0.24
=========== =========== ===========
Common shares which would be issued upon exercise of warrants have been included
in the dilutive per share computation. Common shares which would be issued upon
conversion of the Company's preferred stock or exercise of options have been
excluded from the dilutive per share computation as they are antidilutive (see
Notes 4 and 8):
YEAR ENDED DECEMBER 31,
----------------------------
2004 2003 2002
----------------------------
Preferred stock convertible into common stock 82,125 82,125 123,375
Stock options 1,875 20,625 20,625
10. NET ASSET VALUE PER SHARE
The following table sets forth the computation of net asset value per common
share attributable to common stockholders:
71
FRANKLIN CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, DECEMBER 31,
------------------------------
2004 2003
------------------------------
Numerator:
Numerator for net asset value per
common share, as if converted basis $ 3,566,269 $ 2,024,138
Liquidation value of convertible preferred
stock (1,095,000) (1,095,000)
----------- -----------
Numerator for net asset value per share
attributable to common stockholders $ 2,471,269 $ 929,138
=========== ===========
Denominator:
Number of common shares outstanding,
denominator for net asset value per share
attributable to common stockholders 1,556,901 1,020,100
Number of shares of common stock to be
issued upon conversion of preferred stock 82,125 82,125
----------- -----------
Denominator for net asset value per common
share as if converted basis 1,639,026 1,102,225
=========== ===========
Net asset value per share attributable to common stockholders $ 1.59 $ 0.91
=========== ===========
Net asset value per common share, as if converted basis $ 2.18 $ 1.84
=========== ===========
11. PURCHASES AND SALES OF INVESTMENT SECURITIES
The cost of purchases and proceeds from sales of investment securities,
excluding short-term investments, aggregated $61,404,535 and $60,162,586,
respectively, for the year ended December 31, 2004; $37,166 and $1,021,398,
respectively, for the year ended December 31, 2003; and $22,985 and $1,660,269,
respectively, for the year ended December 31, 2002.
12. SELECTED QUARTERLY DATA (UNAUDITED)
2004
----
QUARTER 1 QUARTER 2 QUARTER 3 QUARTER 4
---------------------------------------------------------------
Total investment income $ 165 $ 50 $ 155 $ 10,686
Net investment loss from operations (292,683) (396,647) (1,296,010) (954,777)
Net (decrease) increase in net assets
attributable to common stockholders (159,610) 15,577 (1,315,172) (1,021,108)
Basic and diluted earnings per common share (0.16) 0.02 (1.26) (0.85)
2003
----
QUARTER 1 QUARTER 2 QUARTER 3 QUARTER 4
---------------------------------------------------------------
Total investment income $ 45,678 $ 45,080 $ 45,090 $ 47,311
Net investment loss from operations (273,727) (277,926) (271,683) (273,031)
Net (decrease) increase in net assets
attributable to common stockholders (245,347) (821,688) 145,013 (295,719)
Basic and diluted earnings per common share (0.23) (0.79) 0.14 (0.29)
13. RELATED PARTY TRANSACTIONS
In conjunction with the Restructuring Plan, the Company's headquarters were
relocated from New York, New York to Santa Monica, California. Office facilities
are currently being provided to the Company at no cost by Ault Glazer. Ault
Glazer is a private investment management firm that manages an estimated $20
million in individual client accounts and private investment funds. Ault Glazer
has been given discretionary authority to buy, sell, and vote
72
FRANKLIN CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
securities on behalf of each of those client accounts and funds. Together,
Milton "Todd" Ault III ("Ault"), Chairman and Chief Executive Officer of the
Company, and Louis Glazer, Chief Health and Science Officer of Franklin Medical
Products, LLC (a wholly-owned subsidiary of Franklin) and Class I Director of
the Company, and Melanie Glazer, Manager of Franklin Properties, (together, the
"Glazers") own approximately 99% of the outstanding membership interests in Ault
Glazer. As of December 31, 2004, Ault Glazer, Ault and the Glazers indirectly
beneficially own or control approximately 25.5% of the outstanding common stock
of the Company and beneficially own approximately 98.2% of the outstanding
preferred stock of the Company.
At December 31, 2004, the Company had an amount due from Strome Securities of
$65,735 recorded in other assets. Until December 31, 2004, Ault was a registered
representative of Strome Securities.
14. SUBSEQUENT EVENTS
On February 25, 2005, the Company acquired all of the outstanding securities of
Surgicount Medical, Inc. in exchange for approximately $340,000 in cash payments
and 200,000 shares of Franklin common stock valued at approximately $3,695,600
and incurred approximately $60,000 of direct costs associated with the
transaction. The value assigned to the stock portion of the purchase price is
$18.48 per share based on the average closing price of Franklin's common stock
for the five days beginning two days prior to and ending two days after February
4, 2005, the date of the Agreement and Plan of Merger and Reorganization (the
"Merger"). In addition, in the event that prior to the fifth anniversary of the
closing of the Merger the cumulative gross revenues of SurgiCount exceed
$500,000 the Company is obligated to issue an additional 16,667 shares of
Franklin common stock to certain SurgiCount shareholders. Should the cumulative
gross revenues exceed $1,000,000 during the five-year period the additional
shares would be increased by 16,667, for a total of 33,334 additional shares.
Such amount is not included in the aggregate purchase price and will be recorded
when and if issued.
On March 2, 2005, the Company filed a proxy statement with the Securities and
Exchange Commission (the "SEC") relating to its 2004 annual stockholder meeting
to be held on March 30, 2005. One of the proposals included in the proxy
statement, which was unanimously approved by the Company's Board of Directors,
seeks stockholder approval to withdraw the Company's election to be regulated as
a business development company under the 1940 Act. If approved the Company shall
be required to present its financial statements in accordance with the
provisions of the Securities Exchange Act of 1934, as amended. The pro forma
unaudited balance sheet presented below gives effect to the withdrawal of the
Company's election to be regulated as a business development company. The pro
forma unaudited balance sheet assumes the withdrawal had occurred as of January
1, 2003. The pro forma unaudited balance sheet includes the historical amounts
of the Company adjusted to reflect the effects of the Company's withdrawal of
its election to be regulated as a business development company. The pro forma
information should be read in conjunction with the historical financial
statements of the Company.
73
FRANKLIN CAPITAL CORPORATION AND SUBSIDIARIES PRO FORMA
UNAUDITED PRO FORMA BALANCE SHEET
DECEMBER 31, 2004 2003
----------------------------------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 846,404 $ 224,225
Trading assets 4,020,154 1,955,169
Other current assets 255,510 58,432
------------ ------------
TOTAL CURRENT ASSETS 5,122,068 2,237,826
Property, plant and equipment, net 23,657 20,206
Other long-term investments 1,788,518 1,000,000
------------ ------------
TOTAL ASSETS $ 6,934,243 $ 3,258,032
============ ============
----------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 892,530 $ 915,754
Accounts payable and accrued liabilities 939,568 318,140
Trading assets sold short 1,075,100 `
Due to broker 460,776 `
TOTAL CURRENT LIABILITIES 3,367,974 1,233,894
------------ ------------
STOCKHOLDERS' EQUITY
Convertible preferred stock, $1 par value, cumulative 7% dividend:
10,000,000 shares authorized; 10,950 issued and outstanding
at December 31, 2004 and 2003
(Liquidation preference $1,095,000) 10,950 10,950
Common stock, $1 par value: 50,000,000 shares authorized;
2,042,689 and 1,505,888 shares issued: 1,556,901 and 1,020,100 shares
outstanding at December 31, 2004 and 2003, respectively 2,042,689 1,505,888
Paid-in capital 13,925,253 10,439,610
Accumulated deficit (9,795,791) (7,315,478)
------------ ------------
6,183,101 4,640,970
Deduct: 485,788 shares of common stock held in treasury
at cost, at December 31, 2004 and 2003, respectively (2,616,832) (2,616,832)
------------ ------------
Total stockholders' equity 3,566,269 2,024,138
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,934,243 $ 3,258,032
============ ============
On March 2, 2005, the Company made an investment in the common stock of
Administration for International Credit & Investments, Inc. ("AICI"), valued at
$440,000, which represented 6.3% of the Company's total assets and 12.3% of its
net assets at December 31, 2004. Additionally, the Company received 225,000
warrants to purchase common stock at $1.50 per share and 225,000 warrants to
purchase common stock at $2.00 per share. The warrants are exercisable for a
period of five years and are callable by AICI in certain instances. AICI
operates an electronic market for collecting, detecting, converting, enhancing
and routing telecommunication traffic and digital content. Members of the
exchange anonymously exchange information based on route quality and price
through a centralized, web accessible database and then route traffic. AICI's
fully-automatic, highly scalable Voice over Internet Protocol routing platform
updates routes based on availability, quality and price and executes the
capacity request of the orders using proprietary software and delivers them
through AICI's system. AICI invoices and processes payments for its members'
transactions and offsets credit risk through its credit management programs with
third parties. AICI's name changed to Ipex, Inc. and began trading on the OTC
Bulletin Board on March 29, 2005.
On March 16, 2005, Ault Glazer filed a Schedule 13D with the SEC relating to its
holdings in Tuxis Corporation ("Tuxis"). Tuxis, a Maryland corporation,
currently is registered under the 1940 Act as a closed-end management investment
company. Tuxis previously received Board of Directors and shareholder approval
to change the nature of its business so as to cease to be an investment company
and on May 3, 2004, filed an application with the SEC to de-register. At March
16, 2005, the Company directly held 36,000 shares and indirectly, by virtue of
its relationship with Ault Glazer, held 98,000 shares of Tuxis common stock,
which represented approximately 3.66% and 9.96%, respectively, of the total
outstanding shares. At December 31, 2004, Tuxis had reportable net assets of
approximately $9.1 million.
74
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On July 6, 2004, Ernst & Young, LLP ("E&Y") indicated to the Company
that, due to economic reasons, E&Y would not stand for re-election as Franklin's
independent accountants for the year ended December 31, 2004 and that the client
auditor relationship between the Company and E&Y will cease upon the filing of
the Company's quarterly report on Form 10-Q for the quarterly period ended June
30, 2004. As such, there was a change in accountants. However, the decision to
change accountants was not presented to, recommended or approved by the Audit
Committee or the Board. Further, during Franklin's fiscal years ended December
31, 2002 and 2003, and the interim periods preceding the date hereof, there were
no disagreements with E&Y on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of E&Y, would have caused E&Y
to make reference to the subject matter of the disagreements in connection with
its report.
As a result of the resignation of E&Y, the Company, upon the
approval and recommendation of the Audit Committee (which consisted solely of
directors who are not "interested persons" of the Company), engaged Rothstein
Kass on October 28, 2004 to serve as the Company's independent accountants for
the fiscal year ending December 31, 2004. Prior to this engagement, Rothstein
Kass had not performed any services on behalf of the Company or been consulted
in respect of the Company during the Company's two most recent fiscal years or
any subsequent interim period. Rothstein Kass has advised the Company that
neither the firm nor any present member or associate of it has any material
financial interest, direct or indirect, in the Company or its subsidiaries.
ITEM 9A. CONTROLS AND PROCEDURES.
The Corporation's chief executive officer and the person performing
the functions as chief financial officer have evaluated the effectiveness of the
Company's disclosure controls and procedures (as defined in Rules 13a-14(c) and
15d-14(c) under the Securities Exchange Act of 1934 (the "Exchange Act")) as of
a date (the "Evaluation Date") within 90 days as of the end of the period
covered by this annual report (the "Evaluation Period"). Based on such
evaluation, they have concluded that, as of the Evaluation Date, the Company's
disclosure controls and procedures are effective in ensuring that the
information required to be disclosed by the Company in the reports that it files
or submits under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the rules and forms of the
Securities and Exchange Commission.
There were no changes in the Company's internal control over
financial reporting that have materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial reporting
during the period covered by this annual report.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Pursuant to the Company's Amended and Restated Certificate of
Incorporation and its ByLaws, the number of directors constituting the Board
shall be fixed from time to time by resolution passed by a majority of the
Board. The number of directors on the Board is currently fixed at five.
Directors are elected by class for a staggered term of three years for each
class, with the term of office of one class of directors expiring each year.
Directors serve until their successors are elected and qualified. No current
disagreement exists between the Company and any of the current members of the
Board regarding the operations, policies or practices of the Company.
The current directors of the company are as follows: Brigadier
General (Ret.) Lytle Brown III (Class I Director (Served since 2004) - nominated
for re-election to the Board for a three-year term expiring in 2007); Alice
Campbell (Class II Director (Served since 2004) - term expiring in 2005);
Herbert Langsam (Class II Director - (Served since 2004) - term expiring in
2005); Milton "Todd" Ault III (Class III Director (Served since 2004) - term
expiring in 2006); and Louis Glazer, M.D., Ph.G (Class III Director (Served
since 2004) - term expiring in 2006).
All of the Company's directors are independent with the exception of
Milton "Todd" Ault III and Louis Glazer, M.D., Ph.G.
COMMON STOCK DIRECTORS
MILTON "TODD" AULT III, age 35, is the Chairman and Chief Executive
Officer of the Company and has served as a director of the Company since June
23, 2004. He is the co-founder, in 1998, the controlling and managing member and
chief investment officer of Ault Glazer, a private investment management firm
headquartered in Santa Monica, California that manages approximately $20 million
in individual client accounts and private investment funds. Mr. Ault also serves
on the board of directors of Definitely for Kids, a philanthropic organization
devoted to assisting hearing-impaired children. Prior to founding Ault Glazer,
Mr. Ault served as a portfolio manager and regional institutional financial
advisor
75
for Prudential Securities. Mr. Ault has also previously served as an
institutional account executive for Dean Witter Reynolds. Until December 31,
2004, Mr. Ault was a registered representative of Strome.
ALICE M. CAMPBELL, (1), (2) age 55, has served as a Class II
Director of the Company since October 22, 2004. Ms. Campbell also currently
serves as an investigator and consultant, specializing in research and
litigation services, financial investigations and computer forensics, for major
companies and law firms throughout the United States. Ms. Campbell is a
certified fraud specialist, as well as a certified instructor for the Regional
Training Center of the United States Internal Revenue Service (the "IRS") and
for the National Business Institute. Previously, Ms. Campbell served as a
special agent for the United States Treasury Department where she conducted
criminal investigations and worked closely with the United States Attorney's
Office and with several federal agencies, including the IRS, Federal Bureau of
Investigation, Secret Service, Customs Service, State Department, Drug
Enforcement Agency, Bureau of Alcohol, Tobacco and Firearms and U.S. Postal
Service. Ms. Campbell received her B.A. from the University of North Carolina,
Chapel Hill and has attended various specialized schools dealing with financial
matters.
BRIGADIER GENERAL (RET.) LYTLE BROWN III, (1), (2) age 72, has
served as a Class I Director of the Company since October 22, 2004. Mr. Brown
also currently serves as a senior tax professional with H&R Block Inc., in
Nashville, Tennessee. Mr. Brown also owns and manages Marmatic Enterprises, a
private company in Nashville, Tennessee that manages and invests in residential
real estate principally in Tennessee and Florida. Mr. Brown is a former partner
and executive vice president of Hart Freeland Roberts, Inc., one of the largest
architectural engineering firms in Tennessee. Mr. Brown previously served as the
head of the United States Army Corps of Engineers from 1984 to 1988, during
which time he acted as commander of all engineering in Tennessee, as well as
engineering units in Louisiana and Mississippi. Mr. Brown received his B.S. in
engineering from Vanderbilt University and his J.D. from the Nashville School of
Law.
PREFERRED STOCK DIRECTORS
LOUIS GLAZER, M.D., PH.G., age 73, is the Chief Health and Science
Officer of Franklin Medical Products, LLC (a wholly-owned subsidiary of the
Company) and has served as a Class III Director of the Company since October 22,
2004. Dr. Glazer also currently serves as a member of Ault Glazer's advisory
board and as an independent biotechnology and medical consultant. Until 2002,
Dr. Glazer served as the chief anesthesiologist and medical director for the
Vitreo-Retinal Clinic in Memphis, Tennessee. Prior to that, Dr. Glazer taught
obstetrics anesthesia at the University of Tennessee, while practicing
anesthesiology at Baptist East Hospital, Methodist Hospital, St. Francis
Hospital and Baptist Memorial Hospital in Memphis, Tennessee. Dr. Glazer was
also responsible for establishing anesthesia programs at Baptist Memorial
Hospital and Methodist Hospital South in Memphis, Tennessee. Dr. Glazer received
his B.S. in pharmacy from the University of Oklahoma and his M.D. from the
University of Bologna School of Medicine in Italy.
HERBERT LANGSAM, (1), (2) age 73, has served as a Class II Director
of the Company since October 22, 2004. Mr. Langsam also currently serves as
president of Medicare Recoveries, Inc., a private company located in Oklahoma
City, Oklahoma focused on providing Medicare claims and recovery services. Mr.
Langsam serves as a member of the board of trustees for the Geriatric Research
Drug Therapy Institute and as an adjunct professor at the University of Oklahoma
Pharmacy School. Previously, Mr. Langsam was the founder, president and chief
executive officer of Langsam Health Services, a conglomerate of health care
companies that serviced 17,000 long-term care residents, that was acquired by
Omnicare, Inc. in 1991. Mr. Langsam also served as the vice president of
pharmacy services for Omnicare, Inc. following its acquisition of Langsam Health
Services. Mr. Langsam received his B.S. in pharmacy from the University of
Oklahoma.
1 - Member of Compensation Committee, 2 - Member of Audit Committee
76
EXECUTIVE OFFICERS AS OF FEBRUARY 28, 2005
The executive officers of the Company and its subsidiaries are as follows:
SERVED AS AN
OFFICER
NAME AND AGE OFFICE SINCE
---------------------------------------------------------------------------------------------------------------------------
Milton "Todd" Ault III (35) Chief Executive Officer 2004
Lynne Silverstein (34) President and Secretary 2004
Louis Glazer, M.D., Ph.G. (73) Chief Health and Science Officer of Franklin Medical Products, LLC 2005
Melanie Glazer (63) Manager of Franklin Capital Properties, LLC 2005
Certain family relationships exist among the directors and/or
executive officers of the Company. Specifically, Silverstein, the President and
Secretary of the Company, is the step-daughter of Louis Glazer. Louis Glazer is
the Chief Health and Science Officer of Franklin Medical Products, LLC (a
wholly-owned subsidiary of the Company) and a Class III Director of the Company.
EXECUTIVE OFFICERS
MILTON "TODD" AULT III, Chairman and Chief Executive Officer. For
additional information about Mr. Ault, please see the Directors' biographical
information section above.
LYNNE SILVERSTEIN, age 34, is the President and Secretary of the
Company. She has been Chief Executive Officer of Ault Glazer since October 2003.
Prior thereto, she was Director of Operations since January 2001, having joined
Ault Glazer in January 1999 as a Manager. From February 1996 to October 1998 she
was employed by STV Communications, a media content and preview kiosk company,
serving as Marketing Director since February 1998. Ms. Silverstein received her
B.S. in Communications from the University of Miami.
LOUIS GLAZER, M.D., PH.G., Chief Health and Science Officer of
Franklin Medical Products, LLC (a wholly-owned subsidiary of Franklin). For
additional information about Dr. Glazer, please see the Directors' biographical
information section above.
MELANIE GLAZER, age 63, is as the Manager of Franklin Capital
Properties, LLC (a wholly-owned subsidiary of Franklin). Mrs. Glazer co-founded
Ault Glazer in 1998 and serves as a Banking/ Special Situations Analyst. Mrs.
Glazer began her career in banking in 1976 as Officer of United American Bank,
responsible for business development, government relations and public relations.
From 1978 to 1985 she was Vice President of Investors Savings & Loan Association
in Nashville, Tennessee, where she managed a branch office and was responsible
for business development, advertising for all offices, public relations, and was
in charge of the savings incentive program. Mrs. Glazer joined Dobson & Johnson,
Inc. in 1986, where she was a Real Estate Broker. In 1989, Mrs. Glazer
established her own Realty company, Morris Glazer Realty, which she ran
successfully until 2003. Ms. Glazer received her B.A. in History in 1964 from
George Peabody College, part of Vanderbilt University.
CERTAIN SIGNIFICANT CONSULTANTS
On December 10, 2004, the Company entered into a consulting agreement
with William Horne (the "HORNE CONSULTING AGREEMENT"). The Horne Consulting
Agreement provides that Mr. Horne will serve as a consultant to the Company on
financial and accounting related matters of the Company. The term of the
agreement is month-to-month. Pursuant to the terms of the Horne Consulting
Agreement, Mr. Horne is entitled to receive a monthly consulting fee of
approximately $4,200, which the Board may increase at its discretion from time
to time. The Board may also award options to Mr. Horne in the future, subject to
applicable laws, including the provisions of the 1940 Act.
BUSINESS EXPERIENCE
Certain information, with respect to each of the executive officers and
directors as well as the nominee for election as Class I Director at the Annual
Meeting, is set forth below, including their names, ages, a brief description of
their recent business experience, including present occupations and employment,
certain directorships that each director or nominee holds, and the year in which
each nominee or person became a director or officer of the Company.
PRINCIPAL
TERM OF OFFICE OCCUPATION(S) OTHER DIRECTORSHIPS
POSITION(S) HELD AND LENGTH OF DURING PAST HELD BY DIRECTOR OR
NAME AND ADDRESS AGE WITH COMPANY TIME SERVED 5 YEARS NOMINEE FOR DIRECTOR
--------------------------------------- --- ---------------- ------------------ ---------------- --------------------
INTERESTED PERSONS
MILTON "TODD" AULT
III(2)(8)................................35 Chairman and Term of one year; Member and None
100 Wilshire Boulevard Chief Executive served as Chairman Investment
Santa Monica, California 90401 Officer Class and CEO since adviser of Ault
III Director October 22, Glazer(3)
2004 and as
director since
June 23, 2004
LOUIS GLAZER, M.D., PH.G(1)(8)...........73 Class III Director Served as director Member of Ault None
100 Wilshire Boulevard since October 22, Glazer (3);
Santa Monica, California 90401 2004 and Chief independent
Health and Science medical and
Officer of biotechnology
Franklin Medical consultant
Products LLC
since January 1,
2005
NON-INTERESTED PERSONS
BRIGADIER GENERAL (RET.)
LYTLE BROWN III(1)(6)....................72 Class.I Director Served since Owner and manager None
1601 Ardenwood Court October 22, 2004 of Marmatic
Nashville, Tennessee 37215 Enterprises (4);
senior tax
professional for
H&R Block Inc.
HERBERT LANGSAM(1)(7)....................73 Class.II Director Served since President of None
5300 Wisteria Drive October 22, 2004 Medicare
Oklahoma City, Oklahoma 73142 Recoveries,
Inc.(5)
ALICE CAMPBELL(1)(7).....................55 Class.II Director Served since Independent private None
1211 Ridgeway Road #130 October 22, 2004 investigator/
Memphis, Tennessee 38119 consultant
EXECUTIVE OFFICERS
LYNNE SILVERSTEIN(2).....................33 President and Served since CEO, Director of None
100 Wilshire Boulevard Secretary October 22, 2004 Operations and
Santa Monica, California 90401 Member of Ault
Glazer (3)
--------------------
(1) On October 22, 2004, Irving Levine, David T. Lender and Laurence Foster
were replaced as directors of the Company by Lytle Brown, Herbert Langsam,
Alice Campbell, and Louis Glazer.
(2) On October 22, 2004, Mr. Stephen L. Brown, resigned from his positions as
the Company's Chairman and Chief Executive Officer. Similarly, Hiram M.
Lazar also resigned from his positions as the Company's Chief Financial
Officer and Secretary. To fill the vacancies created by these resignations,
the newly elected Board (consisting of Louis Glazer, Alice Campbell,
Herbert Langsam, and Lytle Brown III) appointed Ault to serve as the
Company's Chairman and Chief Executive Officer and Silverstein to serve as
the Company's President and Secretary.
(3) Ault Glazer is a private investment management firm headquartered in Santa
Monica, California that manages individual client accounts and private
investment funds.
(4) Marmatic Enterprises is a private company located in Nashville, Tennessee
that holds, buys, sells, rents and repairs residential real estate.
(5) Medicare Recoveries, Inc. is a private company located in Oklahoma City,
Oklahoma which provides Medicare claims and recovery services.
(6) Class I Director -- nominee up for re-election -- Term Expiring 2007.
(7) Class II Director -- Term Expiring 2005.
(8) Class III Director -- Term Expiring 2006.
AUDIT COMMITTEE
The primary function of the Audit Committee is to oversee and
monitor the Company's accounting and reporting processes and the audits of the
Company's financial statements. The Audit Committee is presently composed of
three persons, including Messrs. Herbert Langsam and Lytle Brown III and Ms.
Alice Campbell, each of whom are considered independent under the rules
promulgated by the AMEX and under Rule 10A-3 under the Exchange Act, and each of
whom is financially literate as required by the rules of AMEX. Ms. Campbell
serves as the chairman of the Audit Committee. The Board
77
has determined that Ms. Campbell is an "audit committee financial expert" as
defined under Item 401 of Regulation S-K of the Exchange Act, and "financially
sophisticated" as defined by the rules of AMEX. Ms. Campbell meets the current
independence and experience requirements of Rule 10A-3 of the Exchange Act and,
in addition, is not an "interested person" of the Company as defined in Section
2(a)(19) of the Investment Company Act.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's officers and directors, and persons who own more than 10 percent
of the Company's common stock to file reports (including a year-end report) of
ownership and changes in ownership with the Securities and Exchange Commission
(the "SEC") and to furnish the Company with copies of all reports filed.
To the Company's knowledge, based solely on its review of the copies of
such forms received by it, or written representations from certain reporting
persons that no additional forms were required for those persons, the Company
believes that its executive officers, directors and greater than 10% beneficial
owners have complied with the Section 16(a) filing requirements applicable to
them for the fiscal year ended December 31, 2004, except that Brown did not
timely file two reports on Form 4 covering nine transactions, one transaction
and eight transactions respectively in 2004; Laurence Foster did not timely file
one report on Form 4 covering three transactions in 2004; Hiram Lazar did not
timely file one report on Form 4 covering twelve transactions in 2004; David
Lender did not timely file one report on Form 4 covering three transactions in
2004; Irving Levine did not timely file three reports on Form 4 covering six
transactions, three transactions, two transactions, and one transaction
respectively in 2004; Ault Glazer did not timely file two Form 4 reports
covering 22 transactions, one transaction and 21 transactions respectively in
2004; Louis Glazer did not timely file one report on Form 3 covering three
transactions in 2004; Lynne Silverstein did not timely file on report of Form 3
covering three transactions in 2004; Alice Campbell did not timely file one
report on Form 3 covering two transactions and one report on Form 4 covering two
transactions in 2004; Herbert Langsam did not timely file one report on Form 3
covering one transaction and one report on Form 4 covering two transactions in
2004; Lytle Brown did not timely file one report on Form 3 covering one
transaction and one report on Form 4 covering two transactions in 2004; and
Steven Bodnar and Bodnar Capital Management LLC each did not timely file one
report on Form 3 covering two transactions in 2004.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth information for the fiscal years ended
December 31, 2004, December 31, 2003 and December 31, 2002, with respect to all
cash remuneration paid or accrued by the Company for each of the Company's
directors for services as directors and for each of the Company's officers whose
aggregate compensation exceeded $60,000 for the fiscal years ended December 31,
2004, December 31, 2003 and December 31, 2002.
2004 SUMMARY COMPENSATION
------------------------------------------------------------------------------------------------------------------------------------
TOTAL
AGGREGATE PENSION OR RETIREMENT ESTIMATED COMPENSATION
COMPENSATION BENEFITS ACCRUED AS ANNUAL FROM THE
FROM THE PART OF THE COMPANY'S BENEFITS UPON COMPANY PAID
NAME OF PERSON POSITION COMPANY EXPENSES RETIREMENT TO DIRECTORS
---------------------------- ---------------------------- ------------- --------------------- ------------- -------------
INTERESTED PERSONS
Chairman and Chief Executive
Stephen L. Brown(1)......... Officer $ 607,500 $ 4,869 $ 0 $ 612,369
Hiram M. Lazar(2)........... Chief Financial Officer $ 38,750 $ 4 $ 0 $ 38,754
Milton "Todd" Ault III(3)... Chairman, Chief Executive
Officer, and Class III
Director $ 500 $ 0 $ 0 $ 500
Louis Glazer, M.D., Ph.G.(5. Class III Director $ 0 $ 0 $ 0 $ 0
NON-INTERESTED PERSONS
Irving Levine(4)............ Director $ 3,000 $ 0 $ 0 $ 3,000
David T. Lender(4))......... Director $ 3,000 $ 0 $ 0 $ 3,000
Laurence I. Foster(4)....... Director $ 3,000 $ 0 $ 0 $ 3,000
Brigadier General (Ret.).... Class I Director $ 0 $ 0 $ 0 $ 0
Lytle Brown III(5)..........
Herb Langsam(5)............. Class II Director $ 0 $ 0 $ 0 $ 0
Alice Campbell(5)........... Class II Director $ 0 $ 0 $ 0 $ 0
EXECUTIVE OFFICERS
Lynne Silverstein........... President $ 0 $ 0 $ 0 $ 0
2003 SUMMARY COMPENSATION
------------------------------------------------------------------------------------------------------------------------------------
TOTAL
AGGREGATE PENSION OR RETIREMENT ESTIMATED COMPENSATION
COMPENSATION BENEFITS ACCRUED AS ANNUAL FROM THE
FROM THE PART OF THE COMPANY'S BENEFITS UPON COMPANY PAID
NAME OF PERSON POSITION COMPANY EXPENSES RETIREMENT TO DIRECTORS
---------------------------- ---------------------------- ------------- --------------------- ------------- -------------
INTERESTED PERSONS
Chairman and Chief Executive
Stephen L. Brown(1)......... Officer $ 427,500 $0 $0 $ 0
Hiram M. Lazar(2)........... Chief Financial Officer $ 163,750 $0 $0 --
NON-INTERESTED PERSONS
Irving Levine(4)............ Director $ 3,000 $0 $0 $ 3,000
David T. Lender(4).......... Director $ 3,000 $0 $0 $ 3,000
Laurence I. Foster(4)....... Director $ 3,000 $0 $0 $ 3,000
2002 SUMMARY COMPENSATION
------------------------------------------------------------------------------------------------------------------------------------
TOTAL
AGGREGATE PENSION OR RETIREMENT ESTIMATED COMPENSATION
COMPENSATION BENEFITS ACCRUED AS ANNUAL FROM THE
FROM THE PART OF THE COMPANY'S BENEFITS UPON COMPANY PAID
NAME OF PERSON POSITION COMPANY EXPENSES RETIREMENT TO DIRECTORS
---------------------------- ---------------------------- ------------- --------------------- ------------- -------------
INTERESTED PERSONS
Chairman and Chief Executive
Stephen L. Brown(1)......... Officer $ 450,000 $0 $0 $ 0
Hiram M. Lazar(2)........... Chief Financial Officer $ 133,750 $0 $0 --
NON-INTERESTED PERSONS
Irving Levine(4)............ Director $ 500 $0 $0 $ 500
David T. Lender(4).......... Director $ 500 $0 $0 $ 500
Laurence I. Foster(4)....... Director $ 500 $0 $0 $ 500
------------------
(1) Mr. Brown resigned from his positions as Chairman and Chief Executive
Officer on October 22, 2004.
(2) Mr. Lazar resigned from his position as Chief Financial Officer on October
22, 2004.
(3) Mr. Ault was appointed as a director on June 23, 2004. Mr. Ault received
$500 in directors fees for his attendance at a Board meeting held in 2004.
Mr. Ault was hired as Chairman and Chief Executive Officer of the Company on
October 22, 2004.
(4) Irving Levine, David T. Lender and Laurence I. Foster were replaced as
directors at the Special Meeting of the stockholders held on October 22,
2004.
(5) Brigadier General (Ret.) Lytle Brown III (Class I Director), Herbert Langsam
(Class II Director) Alice Campbell (Class II Director) and Louis Glazer,
M.D., Ph.G (Class III- Director) were elected as directors at the Special
Meeting of stockholders held on October 22, 2004.
78
COMPENSATION OF DIRECTORS
As of December 31, 2004, each director of the Company is eligible to
receive a fee of $500 plus reimbursement of expenses incurred in attending each
board meeting.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee members currently are Messrs. Herbert
Langsam and Lytle Brown III and Ms. Alice Campbell, each of whom is not an
"interested person" as defined in Section 2(a)(19) of the Investment Company
Act, and is "independent" for purposes of the AMEX rules. Each member of the
Compensation Committee is a "non-employee director" for purposes of Rule 16b-3
under Section 16 of the Exchange Act and an "outside director" for purposes of
Section 162(m) of the Code. Mr. Langsam serves as the chairman of the
Compensation Committee. None of these individuals is a present or former officer
or employee of the Company. Messrs. Levine and Lender were replaced as members
of the Compensation Committee on October 22, 2004.
During the last fiscal year, no executive officer of the Company
served either as: (1) a member of the compensation committee (or other board
committee performing equivalent functions or, in the absence of any such
committee, the entire board of directors) of another entity, one of whose
executive officers served on the compensation committee (or other board
committee performing equivalent functions or, in the absence of any such
committee, the entire board of directors) of the Company; (2) a director of
another entity, one of whose executive officers served on the compensation
committee (or other board committee performing equivalent functions or, in the
absence of any such committee, the entire board of directors) of the Company; or
(3) a member of the compensation committee (or other board committee performing
equivalent functions or, in the absence of any such committee, the entire board
of directors) of another entity, one of whose executive officers served as a
director of the Company.
OPTION GRANTS
No options were granted during the year ended December 31, 2004, to
the Chief Executive Officer of the Company or the other executive officers of
the Company.
79
OPTION EXERCISES
No options were exercised during the year ended December 31, 2004,
by the Chief Executive Officer of the Company or the other executive officers of
the Company.
EMPLOYMENT AGREEMENTS
In connection with the Restructuring Plan, the Company entered into
a Termination Agreement and Release (the "TERMINATION AGREEMENT") with Stephen
L. Brown that contained the terms of his resignation from the Company. Mr. Brown
resigned from his positions as Chairman and Chief Executive Officer on October
22, 2004. Pursuant to the terms of the Termination Agreement, we paid Mr. Brown
a severance payment of $250,000. In addition, we also agreed to: (i) pay Mr.
Brown an aggregate amount of $200,000 payable over eight months for consulting
services to the Company on historical matters concerning the Company's
operations and stock portfolio as may be reasonably requested from time to time
by a designee of the Board, and (ii) continue to provide coverage to Mr. Brown
and his wife under our medical, dental and vision plans for a period of three
years following the date of termination. The Company recorded a charge to
operations of approximately $483,000 in 2004 under the Termination Agreement.
On July 26, 2002, the Board had authorized an amendment to Mr.
Brown's Employment Agreement with the Company (as amended, the "Stephen Brown
Employment Agreement"). The Stephen Brown Employment Agreement would have
expired on December 31, 2004 ("the Term").
The Stephen Brown Employment Agreement provided that Mr. Brown would
serve as the Chairman and Chief Executive Officer of the Company and be
responsible for the general management of the affairs of the Company, reporting
directly to the Board. It also provided that he would serve as a member of the
Board for the period of which he was elected or reelected.
Mr. Brown received compensation under the Stephen Brown Employment
Agreement in the form of base salary of $420,000. In addition, the Board had the
authority to increase such salary at its discretion from time to time. Mr. Brown
was also entitled to be paid bonuses as the Board determined in its sole
discretion. Under the Stephen Brown Employment Agreement, the Company furnished
Mr. Brown with an automobile and reimbursed him for certain expenses related to
such automobile. In addition, Mr. Brown was reimbursed for expenses related to
membership in a club to be used primarily for business purposes. Mr. Brown was
entitled under the Stephen Brown Employment Agreement to participate in any
employee benefit plans or programs and to receive all benefits, perquisites and
emoluments for which salaried employees are eligible. Mr. Brown was also
entitled to severance pay in the event of termination without cause or by
constructive discharge equal to the remaining base salary payable under the
Stephen Brown Employment Agreement and provided death benefits payable to his
surviving spouse equal to Mr. Brown's base salary for a period of one year.
In addition, on July 26, 2002 the Board authorized an amendment to
Stephen L. Brown's Severance Agreement (as amended, the "Stephen Brown Severance
Agreement"). Under the terms of the Stephen Brown Severance Agreement, Mr. Brown
was entitled to receive severance if following a change in control (as defined
in the Stephen Brown Severance Agreement) his employment is terminated by the
Company without cause or by the executive within one year of such change in
control. The amendment increased the amount of the severance payment Mr. Brown
was entitled to receive upon the occurrence of such event from 1.5 to 2.5 times
his average compensation over the past five years.
A copy of the Termination Agreement was included as an exhibit to
the Company's report on Form 8-K filed with the SEC on June 24, 2004 and a copy
of Amendment No. 1 to the Termination Agreement was included as an exhibit to
the Company's current report on Form 8-K filed with the SEC on September 30,
2004.
80
All of the foregoing events are discussed in more detail in the
definitive proxy materials filed with the SEC on September 30, 2004, and March
3, 2005.
Mr. Lazar resigned from his positions as Chief Financial Officer and
Secretary on October 22, 2004. On January 1, 2003, Mr. Hiram Lazar had entered
into an employment agreement with the Company, the "Hiram Lazar Employment
Agreement". The Hiram Lazar Employment Agreement expired on December 31, 2003
("the Term"). The Term automatically renewed from year to year thereafter,
unless the Company notified Mr. Lazar not less than 90 days prior to the end of
any Term in writing that the Company will not be renewing the Hiram Lazar
Employment Agreement.
The Hiram Lazar Employment Agreement provided that Mr. Lazar would
serve as the Chief Financial Officer of the Company and be responsible for the
financial affairs of the Company, reporting directly to the Chief Executive
Officer.
Mr. Lazar received compensation under the Hiram Lazar Employment
Agreement in the form of base salary of $160,000. In addition, the Board had the
authority to increase such salary at its discretion from time to time. Mr. Lazar
was also entitled to be paid bonuses up to 20% of base salary as the Board
determined in its sole discretion. Mr. Lazar was entitled under the Hiram Lazar
Employment Agreement to participate in any employee benefit plans or programs
and to receive all benefits, perquisites and emoluments for which salaried
employees are eligible. Mr. Lazar was also entitled to severance pay in the
event of termination without cause or by constructive discharge equal to the
remaining base salary payable under the Hiram Lazar Employment Agreement and
provided for death benefits payable to his surviving spouse equal to Mr. Lazar's
base salary for a period of six months. Excelsior reimbursed the Company for 80%
of Mr. Lazar's total compensation.
CONSULTING AGREEMENT
On December 10, 2004, the Company entered into a consulting
agreement with William Horne (the "HORNE CONSULTING AGREEMENT"). The Horne
Consulting Agreement provides that Mr. Horne will serve as a consultant to the
Company on financial and accounting related matters of the Company. The term of
the agreement is month-to-month. Pursuant to the terms of the Horne Consulting
Agreement, Mr. Horne is entitled to receive a monthly consulting fee of
approximately $4,200, which the Board may increase at its discretion from time
to time. The Board may also award options to Mr. Horne in the future, subject to
applicable laws, including the provisions of the 1940 Act.
COMPENSATION PLANS
On September 9, 1997, Franklin Capital's stockholders approved two
Stock Option Plans: a Stock Incentive Plan ("SIP") to be offered to Franklin
Capital's consultants, officers and employees (including any officer or employee
who is also a director of Franklin Capital) and a Non-Statutory Stock Option
Plan ("SOP") to be offered to Franklin Capital's "outside" directors, I.E.,
those directors who are not also officers or employees of Franklin. 112,500
shares of Franklin Capital'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 Investment Company 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.
On December 31, 2004, there were 1,875 options to purchase common
stock outstanding and 18,750 remain available for future issuance.
The following is a description of each of the Stock Option Plans
followed by a description of the provisions applicable to both Stock Option
Plans.
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STOCK INCENTIVE PLAN (SIP)
PURPOSE
The purpose of the SIP is to give the Company and its Affiliates a
competitive advantage in attracting, retaining and motivating officers,
employees and consultants of the Company and to provide the Company with a stock
plan that provides incentives linked to the financial results of the Company and
increase in stockholder value.
TYPE OF AWARDS
The SIP permits, at the discretion of the Committee, the granting to
SIP participants of options to purchase Common Stock (including incentive stock
options within the meaning of Section 422 of the Code ("ISOs") or "non-statutory
stock options" ("non-ISOs")), stock appreciation rights, restricted stock and
tax offset bonuses. A stock appreciation right entitles an optionee to an amount
equal to the excess of the fair market value of one share of common stock over
the per share exercise price multiplied by the number of shares in respect of
which the stock appreciation right is exercised. Stock appreciation rights may
only be granted in conjunction with all or part of an option grant.
Restricted stock may be awarded to any participant, for no cash
consideration and may be subject to such conditions, including vesting,
forfeiture and restrictions on transfer, as the Committee shall determine. Such
terms and conditions will be specified in an agreement evidencing the award.
Finally, the SIP permits the granting of a right to receive a cash
payment at such time or times as an award under the SIP results in compensation
income to the participant for the purpose of assisting the participant in paying
the resulting taxes.
Upon exercise of an ISO or non-ISO, the Committee may elect to cash
out all or any portion of the shares of common stock for which an option is
being exercised by paying the optionee the excess of the fair market value of a
share of common stock over the per share exercise price for each such option
share being cashed out. All options granted under the SIP become automatically
exercisable upon a "change of control" and remain exercisable until expiration
of their respective terms. A "change in control" is defined in the Stock Option
Plans as the acquisition by any person or group (other than Stephen L. Brown and
his Affiliates) of more than 25% of the voting securities of the Company or a
sale or other disposition of all or substantially all of the assets of the
Company to any person.
ADMINISTRATION
The SIP will be administered by a committee of the Board of
Directors composed of not fewer than two outside directors each of whom will
qualify as a "non-employee director" within the meaning of Rule 16b-3 of the
1934 Act and an "outside Director" within the meaning of Section 162(m) of the
Code with all grants under the SIP approved pursuant to Section 57(o) of the
1940 Act. Section 57(o) of the 1940 Act requires that grants be approved by a
majority of the directors with no financial interest in the grant and a majority
of non-interested directors. The Committee will have the authority, among other
rights, to select the participants to whom awards may be granted, determine
whether to grant ISOs, non-ISOs, stock appreciation rights or restricted stock,
or any combination thereof and determine the vesting terms and other conditions
of an award to an SIP participant.
PARTICIPANTS
SIP participants will be the officers, employees (including such
officers and employees who are also directors) or consultants of the Company and
its Affiliates who are responsible for or contribute to the management, growth
and profitability of the business of the Company and its Affiliates. Each grant
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of an award under the SIP will be evidenced by an agreement between the
participant and the Company, which shall include such terms and provisions as
the Committee may determine from time to time.
TRANSITION OF AWARDS
Under the SIP, generally, upon an SIP participant's death or when an
SIP participant's employment is terminated for any reason, all unvested stock
options will be forfeited. Upon the termination of employment of an optionee
other than as a result of the optionee's death, unless otherwise provided in
such optionee's option agreement, an optionee's right to exercise a vested
option will expire three months after termination of employment. If an
optionee's employment is terminated by reason of death, the period of exercise
for options vested at the optionee's death is 12 months. Options are not
transferable except on the death of the optionee, by will or the laws of decent
and distribution. Stock appreciation rights may be exercised and transferred to
the same extent that the options to which they relate may be exercised or
transferred.
The Board of Directors may terminate, suspend, amend or revise the
SIP at any time subject to limitations in the plan. The Board may not, without
the consent of the optionee, alter or impair rights under any award previously
granted except in order to comply with applicable law.
NON-STATUTORY STOCK OPTION PLAN (SOP)
PURPOSE
The purpose of the SOP is to further the interests of the Company,
its stockholders and its employees by providing the "outside" directors of the
Company (I.E., those who are not also officers and employees of the Company) the
opportunity to purchase the Common Stock of the Company as an appropriate reward
for the dedication and loyalty of the "outside" directors.
TYPE OF AWARDS
The SIP only permits the granting of options to purchase common
stock. Only non-ISOs can be granted under the SOP.
ADMINISTRATION
The SOP will be administered by the Board of Directors of the
Company with all grants approved pursuant to Section 57(o) of the 1940 Act.
Options granted under the SOP are intended to comply with the exemption afforded
by Rule 16b-3 of the 1934 Act. The Board, in its discretion, can impose any
vesting or other restrictions on options granted under the SOP.
PARTICIPANTS
SOP participants will be outside directors of the Company.
TERMINATION OF AWARDS
Under the SOP, options expire 30 days after the date of a SOP
participant's appointment with the Company is terminated except if such
termination is by reason of death or disability. In the event of termination by
reason of disability, options expire 12 months after such termination. In the
event of the
83
participant's death while serving as director or within the 30-day period
following termination of the participant's appointment, options expire 12 months
following the date of death.
PROVISIONS APPLICABLE TO BOTH STOCK OPTION PLANS
AVAILABLE SHARES
The aggregate number of shares of common stock reserved for issuance
under the Stock Option Plans will be 112,500, of which 67,500 shares have been
reserved for issuance under the SIP and 45,000 have been reserved for issuance
under the SOP. Shares subject to options that terminate or expire prior to
exercise will be available for future grants under the Stock Option Plan.
The number of shares of common stock reserved for issuance under the
Stock Option Plans, the number of shares issuable upon the exercise of options
or subject to stock appreciation rights, the exercise price of such awards and
the number of restricted stock awards granted under the Stock Option Plans may
be subject to "anti-dilution" adjustments, in the sole discretion of the
Committee, in the event of any merger, reorganization, consolidation,
separation, liquidation, stock dividend, stock split, share combination,
recapitalization or other change in corporate structure affecting the
outstanding common stock of the Company.
GRANT AND EXERCISE OF AWARDS
The exercise price for options under the Stock Option Plans will be
determined, in the case of the SIP, by the Committee, and in the case of the
SOP, by the Board of Directors, but will not be less than the "Fair Market
Value" of the Company's common stock at the date of grant (as defined in the
Stock Option Plans as the closing market price of the common stock on the
American Stock Exchange on the date of such grant).
Options granted under the Stock Option Plans are exercisable for a
period of 10 years from the date of grant (five years with respect to ISOs
granted to optionees who own more than 10% of the voting power of the Company or
any subsidiary) or such shorter period as the administrator of such plan (either
the Committee or the Board, as the case may be) may establish as to any or all
shares of common stock subject to any option. Options will become exercisable in
accordance with the vesting schedule prescribed in such optionee's option
agreement, and may be subject to satisfaction of such other conditions as the
administrator may determine. Stock appreciation rights granted under the SIP are
exercisable to the same extent as the options to which they relate and upon
exercise terminate the related option.
An employee, officer or director exercising a non-ISO pursuant to
the SIP may elect to have the Company withhold shares of the Company's common
stock to satisfy tax liabilities arising from the exercise of such options.
Initially, there will be three employees of the Company, two of whom are also
directors, who will be eligible to participate in the SIP. There are five
outside directors eligible to participate in the SOP.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF OPTIONS
The following discussion of certain relevant federal income tax
effects applicable to stock options granted under the Stock Option Plans is a
brief summary only, and reference is made to the Code and the regulations and
interpretations issued thereunder for a complete statement of all relevant
federal tax consequences.
84
INCENTIVE STOCK OPTIONS
No taxable income will be realized by an optionee upon the grant or
timely exercise of an ISO. If shares are issued to an optionee pursuant to the
timely exercise of an ISO and a disqualifying disposition of such shares is not
made by the optionee (I.E., no disposition is made within two years after the
date of grant or within one year after the receipt of shares by such optionee,
whichever is later), then (i) upon sale of the shares, any amount realized in
excess of the exercise price of the ISO will be taxed to the optionee as a
long-term capital gain and any loss sustained will be long-term capital loss,
and (ii) no deduction will be allowed to the Company. However, if shares
acquired upon the timely exercise of an ISO are disposed of prior to satisfying
the holding period described above, generally (a) the optionee will realize
ordinary income in the year of disposition in an amount equal to the excess (if
any) of the fair market value of the shares at the time of exercise (or, if
less, the amount realized on the disposition of the shares) over the exercise
price thereof, and (b) the Company will be entitled to deduct an amount equal to
such income. Any additional gain recognized by the optionee upon a disposition
of shares prior to satisfying the holding period described above will be taxed
as a short-term or long-term capital gain, as the case may be, and will not
result in any deduction for the Company.
If an ISO is not exercised on a timely basis, the option will be
treated as a nonqualified stock option. Subject to certain expectations, an ISO
generally will not be exercised on a timely basis if it is exercised more than
three months following termination of employment.
The amount that the fair market value of shares of common stock on
the exercise date of an ISO exceeds the exercise price generally will constitute
an item that increases the optionee's alternative minimum taxable income.
In general, the Company will not be required to withhold income or
payroll taxes on the timely exercise of an ISO.
NON-ISOS
In general, an optionee will not be subject to tax at the time a
non-ISO is granted. Upon exercise of a non-ISO where the exercise price is paid
in cash, the optionee generally must include in ordinary income at the time of
exercise an amount equal to the excess, if any, of the fair market value of the
shares of common stock at the time of exercise over the exercise price. The
optionee's tax basis in the shares acquired upon exercise will equal the
exercise price plus the amount taxable as ordinary income to the optionee. The
federal income tax consequences of an exercise of a non-ISO where the exercise
price is paid in previously owned shares of common stock are generally similar
to those where the exercise price is paid in cash. However, the optionee will
not be subject to tax on the surrender of such shares, and the tax basis of the
shares acquired on exercise that are equal in number to the shares surrendered
will be the same as the optionee's tax basis in such surrendered shares. Special
timing rules may apply to an optionee who is subject to reporting under Section
16(a) of the 1934 Act (generally an executive officer of the Company) and would
be subject to liability under Section 16(b) of the 1934 Act.
The Company generally will be entitled to a deduction in the amount
of an optionee's ordinary income at the time such income is recognized by the
optionee upon the exercise of a non-ISO. Income and payroll taxes are required
to be withheld for employees on the amount of ordinary income resulting from the
exercise of a non-ISO.
On May 11, 2004, 26,250 options were granted under the SOP to three
eligible "outside" directors. The strike price of the options was $1.50 per
share, which represented the closing price of
85
Franklin's common stock as reported by the American Stock Exchange on that date.
The options granted vested immediately and were exercised in June 2004.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following tables set forth certain information with respect to
beneficial ownership (as that term is defined in the rules and regulations of
the Commission) of the Company's common stock as of February 28, 2005, by 1)
each person who is known by the Company to be the beneficial owner of more than
five percent of the outstanding common stock, 2) each director of the Company,
3) each current executive officer listed in the Summary Compensation Table and
4) all directors and executive officers of the Company as a group. Except as
otherwise indicated, to the Company's knowledge, all shares are beneficially
owned and investment and voting power is held as stated by the persons named as
owners. The address for all beneficial owners, unless stated otherwise below, is
c/o Franklin Capital Corporation 450 Park Avenue, Suite 2002, New York, NY
10022.
COMMON STOCK
NAME AND ADDRESS OF AMOUNT AND NATURE OF PERCENT
BENEFICIAL OWNER BENEFICIAL OWNERSHIP OF CLASS
---------------- -------------------- --------
Ault Glazer & Company Investment
Management LLC
100 Wilshire Boulevard
Santa Monica, CA 90401 476,900 (1) 27.1%
Melanie Glazer
100 Wilshire Boulevard
Santa Monica, CA 90401 476,900 (1) 27.1%
Steven Bodnar & Bodnar Capital
Management LLC
680 Old Academy Road
Fairfield, CT 06824 281,250 (2) 16.0%
Brian Stewart
222 Seventh Street, No. 105
Santa Monica, CA 90402 95,000 (3) 5.4%
Dr. William Stewart
222 Seventh Street, No. 105
Santa Monica, CA 90402 95,000 (3) 5.4%
Milton "Todd" Ault III
100 Wilshire Boulevard
Santa Monica, CA 90401 476,900 (1) 27.1%
Louis Glazer, M.D., Ph.G
100 Wilshire Boulevard
Santa Monica, CA 90401 476,900 (1) 27.1%
Brigadier General (Ret.)
Lytle Brown III
1601 Ardenwood Court
Nashville, TN 37215 3,000 *
Herbert Langsam
5300 Wisteria Drive
Oklahoma City, Oklahoma, 73142 7,000 *
Alice Campbell
1211 Ridgeway Road #130
Memphis, TN 38119 5,850 (4) *
86
NAME AND ADDRESS OF AMOUNT AND NATURE OF PERCENT
BENEFICIAL OWNER BENEFICIAL OWNERSHIP OF CLASS
---------------- -------------------- --------
Lynne Silverstein
100 Wilshire Boulevard
Santa Monica, CA 90401 476,900 (1) 27.1%
All current officers and directors
as a group (6 persons) 476,900 (1) 27.1%
----------
* Represents less than 1.0%
(1) Pursuant to Amendment No. 10 to the Schedule 13D jointly filed by Ault,
Silverstein, Ault Glazer and the Glazers on January 21, 2005 (the "AULT GLAZER
13D") pursuant to which Ault Glazer, Ault, Silverstein, and the Glazers have all
reported beneficial ownership of these shares of Common Stock. The 476,900
reported above include 80,625 shares of Common Stock issuable upon conversion of
the 10,750 shares of Preferred Stock reported below. According to the Ault
Glazer 13D: (i) Ault Glazer's beneficial ownership of these shares of Common
Stock is direct as a result of Ault Glazer's discretionary authority to buy,
sell and vote such shares of Common Stock for its investment fund clients; (ii)
Ault's beneficial ownership of these shares of Common Stock is indirect as a
result of Ault's control of Ault Glazer; (iii) Silverstein's beneficial
ownership of these shares of Common Stock is indirect as a result of
Silverstein's control of Ault Glazer; and (iv) the Glazers have reported
beneficial ownership of these shares of Common Stock because, as a result of
certain relationships they may be deemed to be members, together with Ault
Glazer, Ault and Silverstein, of a group that beneficially owns such shares of
Common Stock. Also includes 44,146 shares of Common Stock held by Zeal
Aggressive Partners, L.P., 70,466 shares beneficially owned by Zealous Partners,
L.L.C., and 252,756 shares beneficially owned by Zodiak Investments, L.P.
(2) Pursuant to the Schedule 13D filed by Steven Bodnar on December 17, 2004,
Bodnar Capital Management LLC ("BCM") owns 187,500 shares of Common Stock and
warrants exercisable to purchase 93,750 shares of Common Stock. Mr. Bodnar has
the power to vote and direct the disposition of all shares of Common Stock owned
by BCM.
(3) The shares listed above are being reported by the Company in connection with
its acquisition of SurgiCount. On February 25, 2005, the Company closed this
acquisition and issued 200,000 shares of Common Stock, of which 10,000 shares of
Common Stock will be held in escrow until August 2005. In addition, if certain
milestones are satisfied, the Company will issue up to an additional 33,334
shares of Common Stock.
(4) Includes 1,100 shares that Ms. Campbell beneficially owns by virtue of her
minority ownership interest in Zeal Aggressive Partners, L.P., a private
investment fund managed by Ault Glazer.
PREFERRED STOCK
NAME AND ADDRESS OF AMOUNT AND NATURE OF PERCENT
BENEFICIAL OWNER BENEFICIAL OWNERSHIP OF CLASS
---------------- -------------------- --------
Ault Glazer & Company Investment
Management LLC
100 Wilshire Boulevard
Santa Monica, CA 90401 10,750 (1) 98.2%
Melanie Glazer
100 Wilshire Boulevard
Santa Monica, CA 90401 10,750 (1) 98.2%
Milton "Todd" Ault III
100 Wilshire Boulevard
Santa Monica, CA 90401 10,750 (1) 98.2%
Louis Glazer, M.D., Ph.G
100 Wilshire Boulevard
Santa Monica, CA 90401 10,750 (1) 98.2%
Lynne Silverstein
100 Wilshire Boulevard
Santa Monica, CA 90401 10,750 (1) 98.2%
87
NAME AND ADDRESS OF AMOUNT AND NATURE OF PERCENT
BENEFICIAL OWNER BENEFICIAL OWNERSHIP OF CLASS
---------------- -------------------- --------
All officers and directors
As a group (6 persons) 10,750 (1) 98.2%
----------
* Represents less than 1.0%
(1) Consists of: (i) 1,500 shares beneficially owned by Zodiak Investment
Partners, L.P.; (ii) 2,600 shares beneficially owned by Zealous Partners,
L.L.C.; and (iii) an aggregate of 6,650 shares beneficially owned by six
separate trust accounts for which Melanie Glazer acts as trustee. Pursuant to
the Ault Glazer 13D, Ault Glazer, Ault, Silverstein, and the Glazers have
reported beneficial ownership of these shares of Preferred Stock because, as a
result of certain relationships they may be deemed to be members, of a group
that beneficially owns such shares of Preferred Stock.
The following table sets forth the dollar range of Common Stock
beneficially owned by each of our current directors and nominees as of December
31, 2004:
DOLLAR RANGE OF
EQUITY SECURITIES
NAME OF DIRECTOR OR NOMINEE OF THE COMPANY(1)(2)
--------------------------- --------------------
INTERESTED PERSONS
Milton "Todd" Ault III(3)................................... $10,001-$50,000
Louis Glazer, M.D., Ph.G.(3)................................ over $100,000
NON-INTERESTED PERSONS
Brigadier General (Ret.) Lytle Brown III(3)................. $10,001-$50,000
Herb Langsam(3)............................................. $10,001-$50,000
Alice Campbell(3)........................................... $10,001-$50,000
----------
(1) Pursuant to Instruction 2 of Item 22(b)(5) of Schedule 14A, beneficial
ownership has been determined in accordance with Rule 16a-1(a)(2) of the
Exchange Act.
(2) The Company has not provided information with respect to the aggregate
dollar range of equity securities in all funds overseen by each director
or nominee for director named above because the Company is not part of any
family of investment companies.
(3) Ault became a director on June 23, 2004. Louis Glazer, Gen. Lytle Brown,
Herbert Langsam, and Alice Campbell became directors on October 22, 2004.
EQUITY COMPENSATION PLAN INFORMATION
The following table summarizes information about the options,
warrants and rights and other equity compensation under the Company's equity
plans as of December 31, 2004.
NUMBER OF SECURITIES REMAINING
AVAILABLE FOR FUTURE ISSUANCE
NUMBER OF SECURITIES TO WEIGHTED-AVERAGE UNDER EQUITY COMPENSATION PLANS
BE ISSUED UPON EXERCISE EXERCISE PRICE OF (EXCLUDING SECURITIES REFLECTED
PLAN CATEGORY OF OUTSTANDING OPTIONS OUTSTANDING OPTIONS IN COLUMN (A))
Equity compensation plans
approved by security holders (1) 1,875 $14.00 18,750
(1) Includes options to purchase shares of Company common stock under the
following stockholder approved plans: Stock Incentive Plan and the Non-Statutory
Stock Option Plan both approved on September 9, 1997.
88
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain of the Company's officers, directors and/or their family
members have existing responsibilities and, in the future, may have additional
responsibilities, to act and/ or provide services as executive officers,
directors, owners and/ or managers of Ault Glazer. Accordingly, certain
conflicts of interest between the Company and Ault Glazer may occur from time to
time. The Company will attempt to resolve any such conflicts of interest in its
favor. The officers and directors of the Company are accountable to the Company
and to its stockholders as fiduciaries, which requires that the officers and
directors exercise good faith and integrity in handling the Company's affairs.
The Board does not believe that the Company has any conflicts of
interest with the business of Ault Glazer, other than Ault's, Silverstein's, and
the Glazers' responsibility to provide certain management and administrative
services to Ault Glazer and its clients from time-to-time. However, subject to
applicable law, the Company may engage in transactions with Ault Glazer and
related parties in the future, including but not limited to acquisitions and/or
joint investments in the target industries. These related party transactions may
raise conflicts of interest and, although the Company does not have a formal
policy to address such conflicts of interest, the Audit Committee intends to
evaluate relationships and transactions involving conflicts of interest on a
case by case basis.
The Audit Committee will conduct a review of all related party
transactions for potential conflict of interest situations on an ongoing basis,
and the approval of the Audit Committee will be required for all such
transactions. The Audit Committee intends that any related party transactions
will be on terms and conditions no less favorable to the Company than those
terms and conditions reasonably obtainable from third parties and in accordance
with applicable law.
Ault Glazer provides the Company with office space, telephone,
computer, and internet service, office supplies, and administrative and
secretarial support, all without charge. The Company has no obligation to
reimburse Ault Glazer for any of these goods and services in the future. In the
event that the Company pays for such services in the future, it will do so on
market terms approved by the Audit Committee.
In addition, Strome Securities, L.P. ("STROME") a broker dealer
registered with the National Association of Securities Dealers, Inc. ("NASD")
provides the Company with brokerage and execution services. Strome provides such
services to the Company on market terms which have been approved by the Board.
Until December 31, 2004 Ault was a registered representative of Strome.
For addition information see Items 10 through 12 and Footnote 6 to
the Financial Statements.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
AUDIT FEES. The aggregate fees billed for professional services
rendered by Ernst & Young LLP and Rothstein, Kass & Company, P.C for 2004 for
the audit of the Corporation's annual financial statements for 2004 and for the
review of the financial statements included in the Corporation's Forms 10-Q for
2004 were $101,550. The amounts paid or attributable to Ernst & Young LLP were
approximately $28,600 and the amounts paid or attributable to Rothstein, Kass &
Company, P.C were approximately $72,950.
AUDIT-RELATED FEES. Audit-related fees consist of fees billed for
assurance and related services that are reasonably related to the performance of
the audit or review of our consolidated financial statements and are not
reported under "AUDIT FEES." These services include attest services that are not
required by statute or regulation and consultations concerning financial
accounting and reporting standards. The Company incurred audit-related fees of
approximately $17,000 for 2004.
TAX FEES. Tax fees consist of fees billed for professional services
for tax compliance. These services include assistance regarding federal, state
and local tax compliance. The Company incurred tax fees of approximately $10,000
for 2004.
ALL OTHER FEES. All other fees would include fees for products and
services other than the services reported above. The Company did not incur other
fees for 2004.
AUDIT COMMITTEE'S PRE-APPROVAL POLICIES AND PROCEDURES
In accordance with its Amended and Restated Charter of the Audit
Committee, the Audit Committee's policy is to expressly pre-approve all audit
and permissible non-audit services provided by the Company's independent public
accountants before the independent public accountants are engaged by the Company
to provide any such services. These services may include audit services, audit
related services, tax services and other related services. Pre-approval is
generally provided for up to one year and any pre-approval is detailed as to the
particular service or category of service and is subject to a specific budget.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES
The following financial statements are set forth under Item 8.
(a) (1) Financial Statements
Report of Rothstein, Kass & Company, P.C
Report of Ernst & Young LLP
Balance Sheets as of December 31, 2004 and 2003
Statements of Operations for the years ended December
31, 2004, 2003 and 2002
Statements of Cash Flows for the years ended December
31, 2004, 2003 and 2002
Statements of Changes in Net Assets for the years ended
December 31, 2004, 2003 and 2002
Financial Highlights for the years ended December 31,
2004, 2003, 2002, 2001 and 2000
Portfolio of Investments as of December 31, 2004
Notes to Financial Statements
89
The following exhibits are filed herewith or incorporated as set forth below:
(2) Exhibits
(2.1) Stock Purchase Agreement, dated as of June 30,
2004, between Franklin and Quince Associates,
LP(1)
(2.2) Stock Purchase Agreement, dated as of July 5,
2004, between Franklin and Quince Associates,
LP(1)
(2.3) Agreement and Plan of Merger and
Reorganization, dated as of February 3, 2005,
by and among Franklin, SurgiCount Acquisition
Corp., SurgiCount Medical, Inc., Brian Stewart
and Dr. William Stewart(2)
(3.1) Articles of Incorporation(3)
(3.2) By-Laws(3)
(3.3) Amended and Restated Certificate of
Incorporation
(4.1) Certificate of Designation(4)
(4.2) Registration Rights Agreement(5)
(4.3) Preferred Stock Purchase Agreement(6)
(10.1) Employment Agreement - Stephen L. Brown(7)
(10.2) Employment Agreement - Spencer L. Brown(8)
(10.3) Severance Agreement - Stephen L. Brown(9)
(10.4) Severance Agreement - Spencer L. Brown(10)
(10.5) Stock Incentive Plan(11)
(10.6) Stock Option Plan(12)
(10.7) Management Agreement with Excelsior Radio
Networks(13)
(10.8) Registration Rights Agreement, dated as of
February 3, 2005, by and among Franklin, Brian
Stewart and Dr. William Stewart(2)
(10.9) Common Stock Purchase Agreement, dated as of
December 29, 2004, between Franklin and certain
selling stockholders(14)
(10.10) Subscription Agreement, dated November 3, 2004,
by and among Franklin and accredited investors
(10.11) Amendment to Subscription Agreement, dated
March 2, 2005, by and among Franklin and
accredited investors
(10.12) Letter of Understanding, dated as of June 23,
2004, between Franklin and Ault Glazer(15)
(10.13) Amendment to Letter of Understanding, dated as
of August 26, 2004, between Franklin and Ault
Glazer(16)
(10.14) Amendment No. 2 to Letter of Understanding,
dated September 30, 2004, by and between
Franklin and Ault Glazer(17)
(10.15) Termination Agreement and Release, dated as of
June 23, 2004, between Franklin and Ault
Glazer(15)
(10.16) First Amendment to Termination Agreement and
Release, dated as of September 30, 2004,
between Franklin and Ault Glazer(17)
(14.1) Code of Business Conduct and Ethics(18)
(16.1) Letter from Ernst & Young LLP to the SEC, dated
July 9, 2004(19)
(21) List of Subsidiaries
(23.1) Consent of Rothstein, Kass & Company, P.C.
(23.2) Consent of Ernst & Young LLP
90
(31.1) Certification of the Chief Executive Officer
and the person performing the functions of the
Chief Financial Officer pursuant to Rule 13a-14
of Securities Exchange Act of 1934, as amended
(32.1) Certification Pursuant To 18 U.S.C. Section
1350, As Adopted By Section 906 of The
Sarbanes-Oxley Act of 2002
FINANCIAL STATEMENT SCHEDULES
No financial statement schedules are filed herewith because (1) such schedules
are not required or (2) the information has been presented in the aforementioned
financial statements.
----------
(1) Incorporated by reference to the Current Report on Form 8-K filed July 23,
2004
(2) Incorporated by reference to the Current Report on Form 8-K filed February
9, 2005
(3) Incorporated by reference to the Company's Form N-2, as amended, filed
July 31, 1992
(4) Incorporated by reference to Exhibit 4.1 filed on the Company's Annual
Report filed on Form 10-K for the year ended December 31, 2000
(5) Incorporated by reference to Exhibit 4.2 filed on the Company's Annual
Report filed on Form 10-K for the year ended December 31, 2000
(6) Incorporated by reference to Exhibit 4.3 filed on the Company's Annual
Report filed on Form 10-K for the year ended December 31, 2000
(7) Incorporated by reference to Exhibit 10.1 filed on the Company's Annual
Report filed on Form 10-K for the year ended December 31, 2000
(8) Incorporated by reference to Exhibit 10.2 filed on the Company's Annual
Report filed on Form 10-K for the year ended December 31, 2000
(9) Incorporated by reference to Exhibit 10.3 filed on the Company's Annual
Report filed on Form 10-K for the year ended December 31, 2000
(10) Incorporated by reference to Exhibit 10.4 filed on the Company's Annual
Report filed on Form 10-K for the year ended December 31, 2000
(11) Incorporated by reference to Exhibit 10.5 filed on the Company's Annual
Report filed on Form 10-K for the year ended December 31, 2001
(12) Incorporated by reference to Exhibit 10.6 filed on the Company's Annual
Report filed on Form 10-K for the year ended December 31, 2001
(13) Incorporated by reference to Exhibit 10.7 filed on the Company's Annual
Report filed on Form 10-K for the year ended December 31, 2001
(14) Incorporated by reference to the Current Report on Form 8-K filed January
4, 2005
(15) Incorporated by reference to the Current Report on Form 8-K filed June 24,
2004
(16) Incorporated by reference to the Current Report on Form 8-K filed August
27, 2004
(17) Incorporated by reference to the Current Report on Form 8-K filed
September 30, 2004
(18) Incorporated by reference to Appendix D of the Company's Definitive Proxy
Materials filed on March 2, 2005
(19) Incorporated by reference to the Current Report on Form 8-K filed July 9,
2004
91
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Company has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
FRANKLIN CAPITAL CORPORATION
Date: March 30, 2005 By: /s/ Milton "Todd" Ault III
----------------------------------
Milton "Todd" Ault III
CHAIRMAN & CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the Company in
the capacities and on the dates indicated.
SIGNATURES TITLE DATE
---------- ----- ----
/s/ Milton "Todd" Ault III Chairman &
---------------------------- Chief Executive Officer March 30, 2005
Milton "Todd" Ault III
/s/ Lytle Brown III
----------------------------
Brigadier General (Ret.)
Lytle Brown III Director March 30, 2005
/s/ Alice Campbell
----------------------------
Alice Campbell Director March 30, 2005
/s/ Louis Glazer
----------------------------
Louis Glazer, M.D., Ph.G Director March 30, 2005
/s/ Herbert Langsam Director March 30, 2005
----------------------------
Herbert Langsam
92