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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
Annual Report Pursuant to Section 13
or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended Commission File No. 1-9727
December 31, 1997 ------
The Franklin Holding Corporation (Delaware)
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(Exact name of registrant specified in its charter)
Delaware 13-3419202
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
450 Park Avenue, 10th Floor, New York, New York 10022
- ----------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 486-2323
--------------
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $1.00 par value
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 Company 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. [___]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of March 16, 1998 was $3,407,012 based on the last sale price as
quoted by The American Stock Exchange on such date (officers, directors and 5%
stockholders are considered affiliates for the purposes of this calculation).
The number of shares of common stock outstanding as of March 16, 1998 was
801,198.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Prospectus of the Registrant dated July 31,1992 (the
"Properties") are incorporated by reference in Part I, Part II and Part III
hereof.
TABLE OF CONTENTS
PART I
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for Company's Common Equity and Related Stockholder
Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 8. Financial Statements and Supplementary Data
Item 9. Disagreements with Accountants on Accounting and Financial Disclosure
PART III
Item 10. Directors and Executive Officers of the Company
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions
PART IV
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form
8-K
Signatures
Exhibit Index
CAUTIONARY STATEMENT FOR PURPOSES OF
THE "SAFE HARBOR" PROVISIONS OF
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
WHEN USED IN THIS ANNUAL REPORT ON FORM 10-K, THE WORDS "BELIEVES,"
"ANTICIPATES","EXPECTS" AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY
FORWARD-LOOKING STATEMENTS. STATEMENTS LOOKING FORWARD IN TIME ARE INCLUDED IN
THIS ANNUAL REPORT ON FORM 10-K PURSUANT TO THE "SAFE HARBOR" PROVISION OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. SUCH STATEMENTS ARE SUBJECT TO
CERTAIN RISKS AND UNCERTAINTIES WHICH COULD CAUSE ACTUAL RESULTS
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TO DIFFER MATERIALLY, INCLUDING, BUT NOT LIMITED TO, THOSE SET FORTH IN THE
COMPANY'S REGISTRATION STATEMENT ON FORM N-2 (FILE NO. 811-5103) AND IN
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS." READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE
FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE HEREOF. THE COMPANY
UNDERTAKES NO OBLIGATION TO PUBLICLY REVISE THESE FORWARD-LOOKING STATEMENTS TO
REFLECT EVENTS OR CIRCUMSTANCES OCCURRING AFTER THE DATE HEREOF OR TO REFLECT
THE OCCURRENCE OF UNANTICIPATED EVENTS.
PART I
Item 1. Business
Formation
The Franklin Holding Corporation (Delaware) (the "Registrant",
"Franklin," or the "Company") filed on April 7, 1987, with the Securities and
Exchange Commission (the "SEC" or the "Commission") a notification of
registration under Section 8(a) of the Investment Company Act of 1940 (the "1940
Act") and registered as a closed-end, non-diversified management investment
company. On July 10, 1987, the Company commenced operations as an investment
company. The Company's common stock, par value $1.00 per share, has been listed
on The American Stock Exchange since October 1, 1987. The Company operates as an
internally managed investment company whereby its officers and employees, under
the general supervision of its Board of Directors, conduct its operations.
From 1987 through 1991, the Company operated primarily as a passive
investor, both at the holding company level and through its wholly owned
subsidiary, Franklin SBIC.
In 1992, Franklin SBIC was dissolved and the Company formed Excelsior
Communications Corporation ("Excelsior"). Excelsior, through a partnership,
acquired a number of radio stations, and Franklin's management was active in the
operations of both Excelsior and its operating assets. At the end of 1995,
Excelsior sold the last of its radio properties. Excelsior continued to operate
through the first half of 1997.
The operating strategy of providing managerial assistance to companies
in which the Company invests has been pursued by Franklin since at least 1992.
This strategy is consistent with the legislative intent behind the statutory
framework governing business development companies under the 1940 Act. The
business development company ("BDC") is available for companies which are
engaged in the business of furnishing capital and managerial expertise to other
companies that might not otherwise have access to such capital. In light of this
operating strategy and the Company's long-term objectives, management and the
Board of Directors determined that it was in the best interest of the
shareholders to explore the feasibility of moving on election to be regulated as
a BDC.
On August 5, 1997, the Board of Directors determined that it would be
in the best interest of the Company and its stockholders to elect to become a
BDC under the 1940 Act. On September 9, 1997, at the Annual Meeting of
Stockholders, the stockholders of Franklin approved the proposal that the
Company be regulated as a BDC. On November 18, 1997, the Company filed a
notification of election to become a BDC with the Commission. The election
became effective upon the receipt of the filing by the Commission.
As a BDC, the Company's objective is to achieve capital appreciation
through long-term investments in businesses believed to have favorable growth
potential. The Company participates, or would participate, in start-
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up and early stage financing, expansion or growth financing, leveraged buy-out
financing and restructurings. The Company has also invested and will consider
investing in a broad range of industry segments.
Portfolio of Investments
As of December 31, 1997, the Company's portfolio of investments is a
composite of one controlled investment as defined under the 1940 Act,
investments in developing companies, limited partnerships and one marketable
security.
Illiquidity of Investments
Many 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 does not anticipate
that there will be any 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, as amended, 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 securities generally sell at a price lower than similar
securities not subject to restrictions on resale. Further, even if a portfolio
company or investee registers its securities and becomes a reporting company
under the Securities and 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 company's securities.
Managerial Assistance
The Company believes that providing managerial assistance to its
investees is critical to its business development activities. "Making available
significant managerial assistance" as defined in the 1940 Act with respect to a
business development company such as Franklin means (a) any arrangement whereby
a BDC, through its directors, officers, employees or general partners, offers to
provide, and if accepted, does so provide significant guidance and counsel
concerning the management, operations or business objectives and policies of a
portfolio company; or (b) the exercise of a controlling influence over the
management or policies of a portfolio company by a BDC acting individually or as
a part of a group acting together which controls such portfolio company. The
Company, as a BDC, is required by the 1940 Act to make significant managerial
assistance available at least with respect to investee companies that the
Company treats as qualifying assets for purposes of the 70 percent test (see
"Regulation"). The nature, timing and amount of managerial assistance provided
by the Company vary depending upon the particular requirements of each investee
company.
In connection with its managerial assistance, Franklin may be
represented by one or more of its officers or directors on the board of
directors of an investee. The Company's goal is to assist each investee company
in establishing its own independent and effective board of directors and
management.
Need for Follow-on Investments
Following its initial investments in investees, the Company has made
and anticipates that it will continue to make additional investments in such
investees as "follow-on" investments, in order to increase its investment in an
investee, and may exercise warrants, options or convertible securities that were
acquired in the original financing. Such follow-on investments may be made for a
variety of reasons including: 1) to increase the Company's exposure to an
investee, 2) to acquire securities issued as a result of exercising convertible
securities that were purchased in the original financing, 3) to preserve
Franklin's proportionate ownership in a subsequent financing, or 4) in an
attempt to preserve or enhance the value of the Company's investment. There can
be no assurance that the Company will make follow-on investments or have
sufficient funds to make such investments;
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the Company will have the discretion to make any follow-on investments as it
determines, subject to the availability of capital resources. The failure to
make such follow-on investments may, in certain circumstances, jeopardize the
continued validity of an investee and the Company's initial investment, or may
result in a missed opportunity for the Company to increase its participation in
a successful operation.
Competition
The Company competes for attractive investment opportunities with
venture capital partnerships and corporations, merchant banks, venture capital
affiliates of industrial and financial companies, Small Business Investment
Companies ("SBICs") other BDCs and wealthy individuals.
Employees
At December 31, 1997, the Company had six employees.
Regulation
The Small Business Investment Incentive Act of 1980 modified the
provisions of the 1940 Act that are applicable to a closed-end investment BDC.
After filling its election to be treated as a BDC, a company may not withdraw
its election without first obtaining the approval of holders of a majority of
its outstanding voting securities. The following is a brief description of the
1940 Act, as modified by the Small Business Investment Incentive Act of 1980,
and is qualified in its entirety by the reference to the full text of the 1940
Act and the rules thereunder by the SEC.
Generally, to be eligible to elect BDC status, a company must primarily
engage in the business of furnishing capital and managerial expertise to
companies which do not have ready access to capital through conventional
financial channels. Such portfolio companies are termed "eligible portfolio
companies." More specifically, in order to qualify as a BDC, a company must (i)
be a domestic company; (ii) have registered a class of its securities or have
filed a registration statement with the SEC pursuant to Section 12 of the
Exchange Act of 1934; (iii) operate for the purpose of investing in the
securities of certain types of portfolio companies, namely, immature or emerging
companies and businesses suffering or just recovering from financial distress
(see following paragraph); (iv) extend significant managerial assistance to such
portfolio companies; (v) have a majority of "disinterested" directors (as
defined in the 1940 Act) and (vi) file (or, under certain circumstances, intend
to file) a proper notice of election with the SEC.
An eligible portfolio company generally is a domestic company that is
not an investment company and that (i) does not have a class of securities
registered on an exchange or included in the Federal Reserve Board's
over-the-counter margin list; (ii) is actively controlled by a BDC and has an
affiliate of a BDC on its board of directors or (iii) meets such other criteria
as may be established by the SEC. Control under the 1940 Act is presumed to
exist when a BDC owns 25 percent of the outstanding securities of the investee.
The 1940 Act prohibits or restricts companies subject to the 1940 Act
from investing in certain types of companies, such as brokerage firms, insurance
companies, investment banking firms and investment companies. Moreover, the 1940
Act limits the type of certain assets necessary for its operations (such as
office furniture, equipment and facilities) if, at the time of acquisition, less
than 70 percent of the value of the Company's assets consist of qualifying
assets. Qualifying assets include: (i) securities of companies that were
eligible portfolio companies at the time such company acquired their securities;
(ii) securities of bankrupt or insolvent companies that were eligible at the
time of such company's initial investment in those companies; (iii) securities
received in exchange for or distributed in or with respect to any of the
foregoing and (iv) cash items, government securities and high quality short-term
debt. The 1940 Act also places restrictions on the nature of the transactions in
which,
5
and the persons for whom, securities can be purchased in order for the
securities to be considered qualifying assets. Such restrictions include
limiting purchases to transactions not involving a public offering and acquiring
securities from either the portfolio company or their officers, directors or
affiliates.
The Company is permitted by the 1940 Act, under specified conditions,
to issue multiple classes of senior debt and a single class of preferred stock
if its asset coverage, as defined in the 1940 Act, is at least 200 percent after
the issuance of the debt or the preferred stock (i.e., such senior securities
may not be in excess of 50 percent of its net assets). If the value of the
Company's assets, as defined, were to increase through the issuance of
additional capital stock or otherwise, the Company would be permitted under the
1940 Act to issue senior securities.
The Company may sell its securities at a price that is below the
prevailing net asset value per share only after a majority of its disinterested
directors has determined that such sale would be in the best interest of the
Company and its stockholders and upon the approval by the holders of a majority
of its outstanding voting securities, including a majority of the voting
securities held by non-affiliated persons. If the offering of the securities is
underwritten, a majority of the disinterested directors must determine in good
faith that the price of the securities being sold is not less than a price which
closely approximates market value of the securities, less any distribution
discount or commission. As defined by the 1940 Act, the term "majority of the
Company's outstanding voting securities" means the vote of (i) 67 percent or
more of the Company's Common Stock present at the meeting, if the holders of
more than 50 percent of the outstanding Common Stock are present or represented
by proxy or (ii) more than 50 percent of the Company's outstanding Common Stock,
whichever is less.
Most of the transactions involving the Company and its affiliates (as
well as affiliates of those affiliates) which were prohibited without the prior
approval of the Commission under the 1940 Act prior to its amendment by the
Small Business Investment Incentive Act are now permissible upon the prior
approval of a majority of the Company's independent directors and a majority of
the directors having no financial interest in the transactions. However, certain
transactions involving certain closely affiliated persons of the Company,
including its directors, officers, and employees, may still require the prior
approval of the Commission. In general, (i) any person who owns, controls or
holds power to vote more than 5 percent of the Company's outstanding Common
Stock; (ii) any director, executive officer or general partner of that person
and (iii) any person who directly controls, is controlled by, or is under common
control with that person, must obtain the prior approval of a majority of the
Company's independent directors and, in some situations, the prior approval of
the Commission, before engaging in certain transactions involving the Company or
any company controlled by the Company. The 1940 Act generally does not restrict
transactions between the Company and its portfolio companies. While a BDC may
change the nature of its business so as to cease being a BDC (and in connection
therewith withdraws its election to be treated as a BDC) only if authorized to
do so by a majority vote (as defined in the 1940 Act) of its outstanding voting
securities, stockholder approval of changes in other fundamental investment
policies of a BDC is not required (in contrast to the general 1940 Act
requirement, which requires stockholder approval for a change in any fundamental
investment policy). The Company is entitled to change its diversification status
without stockholder approval.
Item 2. Properties
Franklin maintains its offices at 450 Park Avenue, 10th Floor, New
York, New York 10022, where it leases approximately 3,600 square feet of office
space pursuant to a lease agreement expiring in 2003.
6
Item 3. Legal Proceedings
The Company is a plaintiff in an action brought against National Union
Fire Insurance Company of Pittsburgh, PA ("National Union") in the Supreme Court
of the State of New York. The action seeks reimbursement of $1,000,000 for fees
and expenses incurred in connection with certain shareholder litigation brought
against Franklin and its directors. National Union filed a motion to dismiss the
complaint which the Company opposed. The motion is pending before the Court. The
Company is unaware of any other material legal proceedings pending to which it
is a party or to which any of its property is subject.
Item 4. Submission of Matters to a Vote of Security Holders
The Company did not submit any matters to a vote of its stockholders
during the fourth quarter of the 1997 fiscal year.
7
PART II
Item 5. Market for Company's Common Equity and Related Stockholder Matters
Stock Transfer Agent
Chase Mellon Shareholder 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.
1997 Quarter Ending Low High
March 31 $ 9.375 $10.125
June 30 $ 8.875 $ 9.750
September 30* $ 7.000 $11.750
December 31 $ 6.250 $ 7.750
1996 Quarter Ending Low High
March 31 $ 9.250 $10.500
June 30 $10.000 $11.375
September 30 $10.625 $11.500
December 31** $ 9.000 $11.500
* A special distribution of $3.25 per share was declared in July 1997.
** A special distribution of $1.00 per share was declared in November 1996.
Stockholders
As of March 16, 1998, there were 706 holders of record of the Company's
common stock, which hold the Company's common stock for approximately 1,300
beneficial owners. The Company has 2,000,000 shares authorized, of which
1,003,986 are issued and 801,198 are outstanding at March 16, 1998.
8
Item 6. Selected Financial Data
The following tables should be read in conjunction with the Financial
Statements included in Item 8 of this form 10-K.
BALANCE SHEET DATA
Financial Position as of December 31:
1997 1996 1995 1994 1993
Total Assets $7,718,458 $11,798,044 $12,658,556 $14,155,454 $14,041,993
Total Liabilities $375,326 $1,921,475 $ 538,427 $ 810,849 $879,871
Net asset value $7,343,132 $9,876,569 $12,120,129 $13,344,605 $13,162,122
Net asset value per share $ 9.17 $ 12.33 $ 14.67 $ 15.40 $ 14.96
Shares outstanding 801,198 801,198 826,198 866,598 879,598
Operating Data for the year ended December 31:
1997 1996 1995 1994 1993
Investment Income $ 497,021 $ 852,211 $ 948,436 $ 709,068 $ 888,476
Net investment loss from operations (1,903,829) (1,553,891) (1,209,464) (1,441,669) (926,776)
Net realized gain on investments,
net of income taxes 3,313,498 95,085 999,029 1,800,301 347,483
(Decrease) increase in
unrealized appreciation
of investments, net of
deferred income taxes (1,339,212) 266,694 233,878 (58,124) 315,888
Net increase (decrease) in net
assets from operations 70,457 (1,192,112) 23,443 300,508 (263,405)
Net increase (decrease) in net
assets from operations
per weighted average number
of shares outstanding $ 0.09 $ (1.48) $ 0.03 $ 0.35 $ (0.30)
9
Item. 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations
Statement of Operations
The Company accounts for its operations under Generally Accepted
Accounting Principles for investment companies. On this basis, the principal
measure of its financial performance is captioned "Net increase (decrease) in
net assets from operations", which is composed of the following: "Net investment
loss from operations," which is the difference between the Company's income from
interest, dividends and fees and its operating expenses; "Net realized gain on
portfolio of investments," which is the difference between the proceeds received
from dispositions of portfolio securities and their stated cost; any applicable
income tax benefits (provisions); and "(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 increase (decrease) in deferred
income taxes that would become payable if the unrealized appreciation were
realized through the sale or other disposition of the investment portfolio.
"Net realized gain (loss) on portfolio of investments" and (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
The Company's total assets and net assets were, respectively,
$7,718,458 and $7,343,132 at December 31,1997, versus $11,798,044 and $9,876,569
at December 31,1996. Net asset value per share was $9.17 at December 31, 1997,
versus $12.33 at December 31, 1996.
Franklin paid a $3.25 per share special distribution on August 4, 1997
to its stockholders of record as of July 28,1997 totaling $2,603,894. Based on
the calculation of current and cumulative earnings and profits at December 31,
1997, it was determined that this entire distribution was a return of capital to
the stockholders. The Company also paid a $1.00 per share special distribution
on December 4, 1996 to its stockholders of record as of November 25,1996
totaling $801,198, which entire distribution was also determined to be a return
of capital to the stockholders. Franklin additionally paid a $1.00 per share
special distribution on December 15, 1995 to its stockholders of record as of
December 8, 1995 totaling $826,698. It was determined that this entire
distribution was a dividend to stockholders.
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, 1997 December 31, 1996
Investments, at cost $ 4,209,672 $ 6,019,894
Unrealized appreciation, net of
deferred taxes 2,665,168 4,004,380
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Investments, at fair value $ 6,874,840 $ 10,024,274
============ =============
The Company has an investment in Avery Communications Inc. ("Avery"), valued at
$5,511,000 at December 31, 1997, which represents 71.4% of the Company's total
assets and 75.0% of it net assets. Avery is a holding corporation operating in
the telecommunications industry. Its common stock is quoted on the OTC
Electronic Bulletin Board under the symbol "ATEX". Hold Billing Services,
Avery's sole current operating subsidiary, provides billing and
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collection services for inter-exchange carriers and long-distance resellers.
Avery's other principal operating subsidiary was sold in early 1998.
Franklin's original investment in Avery of $350,000 was made in August
1995, and an additional investment of $2,500,000 million was made in May 1997.
On a primary share basis, Franklin owns more than 25 percent of Avery's
outstanding voting stock. Additionally, three officers of Franklin have been
appointed to Avery's six member Board of Directors; and Mr. Stephen Brown,
Franklin's Chairman and CEO, has been appointed as the Vice Chairman of Avery's
Board of Directors.
During 1997, the Company dissolved its wholly-owned subsidiary,
Excelsior. Excelsior was formed in 1992 to invest in broadcasting properties,
primarily radio stations. Excelsior's last broadcast assets were sold effective
December 31, 1995, at which point, and through the time of its dissolution, its
assets consisted principally of cash, receivables from customers of the radio
station and marketable securities. All remaining assets of Excelsior were
distributed to Franklin during 1997. The Company realized a net gain of
$3,166,842 in 1997 from this dissolution. At December 31, 1996, Excelsior had a
market value of $7,678,158, which represented 65.1% of the Company's total
assets and 77.7% of its net assets. At December 31, 1995, Excelsior had a market
value of $8,005,393, which represented 63.2% of the Company's total assets and
66.1% of its net assets.
At December 31, 1997, the Company had an investment in Seneca Capital,
L.P. ("Seneca"), an investment partnership whose primary investment objective is
to invest in securities which value will be meaningfully affected by an
anticipated event. Seneca invests primarily in publicly traded equity securities
of U.S. companies and, to control market risks, utilizes short positions, index
options and other hedging techniques. Franklin is a 0.90% limited partner. The
Company's original investment of $500,000 made in April 1996 is valued at
$806,849 at December 31, 1997. At December 31, 1997, Seneca represents 10.5% of
the Company's total assets and 11.0% of its net assets.
Results of Operations
Investment Income and Expenses:
The Company's principal objective is to achieve capital appreciation
through long-term investments in businesses believed to have favorable growth
potential. Therefore, a significant portion of the investment portfolio is
structured to maximize the potential for capital appreciation and provides
little or no current yield in the form of dividends or interest. The Company
earns interest income from loans, high yield 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.
The Company had interest income of $225,840 in 1997, $96,918 in 1996
and $198,436 in 1995. The increase in 1997 from 1996 was the result of an
increase in the amount of investments in high yield bonds in early 1997. Income
from controlled affiliates of $257,258 in 1997 represents dividend and interest
income from preferred stock and a note received in relation to the Company's
investment in Avery. The $750,000 income from controlled affiliates in 1996 and
1995 represents management fee income from Excelsior.
Operating expenses were $2,400,850 in 1997, $2,406,102 in 1996 and
$2,157,900 in 1995. Operating expenses included net professional fees,
settlement costs and other expenses related to litigation of $535,017 in 1997,
$754,631 in 1996 and $349,818 in 1995. Most of the Company's other operating
expenses are related to employee and director compensation, office and rent
expenses and professional fees (primarily general legal and audit fees).
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Net investment losses from operations were $1,903,829 in 1997,
$1,553,891 in 1996 and $1,209,464 in 1995.
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.
Net Realized Gains and Losses on Portfolio of Investments:
During the three years ended December 31, 1997, 1996 and 1995, the
Company realized net gains before taxes of $3,105,165, $246,518 and $1,242,937,
respectively, from the disposition of various investments.
During 1997, Franklin realized a net gain from the dissolution of its
wholly-owned subsidiary, Excelsior, of $3,166,842, as well as net gains of
$81,597 on the sales of various marketable securities, including stocks and high
yield bonds, and realized capital gains of $137,313 from the liquidation of
holdings in investment partnerships. These were offset by a loss of $59,733 on
the sale of a loan which had been originated when Franklin operated as a SBIC,
as well as the write-off of $220,854 of investments in limited partnerships and
securities in which there is no anticipated current or future value.
During 1996 and 1995, the Company realized net gains of $246,518 and
$1,242,937, respectively, on sales of marketable securities, primarily Market
Analysis and Information Database, Inc. ("M.A.I.D.") common stock. M.A.I.D. is a
leading online supplier of business intelligence services to business
professionals world-wide. Established in 1985, M.A.I.D. plc was floated on the
London Stock Exchange in 1994 and gained a NASDAQ listing in 1995.
Unrealized Appreciation of Investments:
Unrealized appreciation of investments, net of deferred taxes,
decreased by $1,339,212 during the year ended December 31, 1997, primarily due
to the realization of the gain from the dissolution of Excelsior and decreased
values for CIC Standby Ventures, L.P., Codman Research, Inc., Pixel Multimedia
Ltd. and Hefty Profits Ltd. These were partially offset by increased values for
Avery and Seneca.
Unrealized appreciation of investments, net of deferred taxes,
increased by $266,694 during the year ended December 31, 1996, primarily due to
increased values for Avery, FMA High Yield Capital Appreciation L.P. and CIC
Standby Ventures, L.P., offset by a decreased value for Excelsior.
Unrealized appreciation of investments, net of deferred taxes,
increased by $233,878 during the year ended December 31, 1995, primarily due to
increased values for Avery, FMA High Yield Income L.P. and CIC Standby Ventures,
L.P., offset by decreased values for Excelsior and M.A.I.D.
Liquidity and Capital Resources:
The Company's reported total cash and cash equivalents, accrued
interest and accounts receivable and marketable investment securities (the
primary measure of liquidity) at December 31, 1997 was $720,470, compared to
$442,805 at December 31, 1996 and $2,450,488 at December 31,1995. Management
believes that these assets, together with its investment in Seneca, provide the
Company with sufficient liquidity for its operations. Funds from Seneca may be
withdrawn upon 30 day notice to the general partner.
12
Risks
Pursuant to Section 64(b) (1) of the Investment Company Act of 1940, a
BDC is required to describe the risk factors involved in an investment in its
securities inherent in the nature of the company's investment portfolio. There
are significant risks inherent in the Company's venture capital business. The
Company has invested a substantial portion of its assets in small private
companies and a non-reporting company with limited management depth and thin
capitalization. Because of the speculative nature of 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. Others will appear likely to
become successful, but will never realize their potential. 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.
Risks Relating to the Year 2000 Issue
Many existing computer programs were designed and developed without
considering the impact of the upcoming change in the century. The problem exists
when a computer program uses only two digits to identify a year in the date
field. Extensive problems can result to a company's business, requiring
substantial resources to remedy. The Company believes that the "Year 2000"
problem may be material to Franklin's investments. Although the Company is
addressing the problem with respect to its own business operations, there can be
no assurance that the "Year 2000" problem will be properly or timely resolved,
which could have a material adverse effect on the Company's results of
operations and, in turn, cash available for distribution.
Item 8. Financial Statements and Supplementary Data
See Index to Financial Statements for a list of the Financial
Statements and Supplementary Data included in this Form 10-K.
Item 9. Disagreements with Accountants on Accounting and Financial Disclosure
None.
13
PART III
Item 10. Directors and Executive Officers of the Company
Officers
Stephen L. Brown, Chairman and Chief Executive Officer. For additional
information about Mr. Brown, please see the Directors' biographical information
section below.
Spencer L. Brown, age 32, has been Senior Vice President of the Company
since November 1995, Secretary of the Company since October 1994 and was Vice
President from August 1994 to November 1995. From September 1993 to July 1994,
Mr. Brown was an attorney with the firm of Wilson, Elser, Moskowitz, Edelman &
Dicker, and from September 1991 to September 1993, he was an attorney with the
firm of Weil, Gotshal & Manges LLP. Mr. Brown is also a director of Avery. Mr.
Brown is the son of Stephen L. Brown, the Chairman and Chief Executive Officer
of the Company.
John Greenbaum, Chief Financial Officer and Treasurer of the Company.
For additional information about Mr. Greenbaum, please see the Directors'
biographical information section below.
Stephen J. Mayer, age 45, has been Vice President and Controller of the
Company since December 1994. From April 1994 to October 1994, he was Chief
Financial Officer of Biltmore Mortgage Corp. From 1992 to April 1994, Mr. Mayer
was Vice President and Controller of Midcoast Mortgage Corp.
Directors
Stephen L. Brown, age 59, was elected to the Company's Board of
Directors and appointed Chairman of its Board of Directors in October 1986. He
has been Chief Executive Officer since October 1986. Since June 1984, Mr. Brown
has been Chairman of S.L. Brown & Company, Inc. ("SLB & Co., Inc."), a private
investment firm. Mr. Brown is a director of Copley Financial Services
Corporation (advisor to Copley Fund, Inc., a mutual fund) and Avery.
Miles L. Berger, age 67, joined the Board as a director in 1996. Mr.
Berger has been Vice Chairman of Heitman Financial Ltd., a real estate service
company, for more than the past five years. Mr. Berger is also Chairman of the
Board of Mid Town Bank, Chicago, and a director of Innkeepers USA Trust, a
Maryland real estate investment trust.
Carl D. Glickman, age 71, has been a director of the Company since
1986. He is the President of The Glickman Organization, a real estate investment
firm, for more than the past five years. Mr. Glickman is a director of The Bear
Stearns Companies Inc., Alliance Tyre & Rubber Co., Andal Corp., Continental
Health Affiliates, Inc., Infu Tech, Inc., Jerusalem Economics Corp., LTD,
Lexington Growth Properties and Office Max, Inc.
14
John Greenbaum, age 47, joined the Board as a director in 1992. Since
March 1996, he has been Chief Financial Officer and Treasurer of the Company.
Mr. Greenbaum acted as principal of Digital Media Group, a venture capital firm,
from October 1994 through March 1996. From March 1988 to September 1994, he was
Vice President of the Company, and from May 1992 to September 1994 acted as
Secretary of the Company. Mr. Greenbaum is also a director of Avery.
Irving Levine, age 76, became a director of the Company in 1990. He has
been Chairman of the Board and President of Copley Fund, Inc., a mutual fund,
since 1978, and Chairman and Treasurer of Stuffco International, Inc., a ladies
handbag processor and chain-store operator, since 1978. Mr. Levine is also
President and a director of Copley Financial Services Corporation (advisor to
Copley Fund, Inc.), and a director of Rexnord Holdings, Inc.
Jonathan A. Marshall, age 59, has been a director since 1987. Mr.
Marshall is a Senior Partner in the law firm of Pennie & Edmonds, and has been a
member of that firm since 1974. He is a member of the Bar of the State of New
York and is admitted to practice before the United States Supreme Court and the
United States Patent and Trademark Office.
Jeffrey J. Steiner, age 60, joined the Board as a director in 1986. He
has been Chairman and Chief Executive Officer of The Fairchild Corporation, an
aviation services company, since October 1985. Mr. Steiner is also Chairman,
Chief Executive Officer and a director of Banner Aerospace, Inc., a Vice
Chairman and director of Shared Technology Fairchild, Inc., and a director of
Copley Financial Service Corporation.
15
Item 11. Executive Compensation
Summary Compensation Table
The following table sets forth a summary for each of the last three
years of the cash and non-cash compensation awarded to, earned by, or paid to
the Chief Executive Officer of the Company and the other executive officers of
the Company, whose individual remuneration exceeded $100,000 for the year ended
December 31, 1997.
Name & Additional Other Annual 401K
Principal Position Year Salary Compensation Compensation Contribution
($) ($) ($) ($)
Stephen L. Brown 1997 390,000 - - 9,500
Chairman & President 1996 390,000 32,500 - 9,500
(1) 1995 390,000 32,500 - 9,240
Spencer L. Brown 1997 120,000 - - 8,050
Senior Vice President 1996 120,000 10,000 - 7,200
& Secretary 1995 90,000 7,500 - 5,850
John Greenbaum 1997 120,000 - - 6,900
Chief Financial Officer 1996 92,308 10,000 4,500 1,000
& Treasurer (2) 1995 - - 18,000 -
(1) Mr. Brown is employed under a contract with the Company at a base
salary of $390,000 per annum. The initial term of such employment contract
expired on December 31, 1995, and is automatically extended from year to
year thereafter unless the Company elects not to extend the term. In
compliance with the terms of the Settlement (as described in footnote 5 to
the financial statements), Mr. Brown's base salary was reduced to $350,000
effective January 1, 1998.
(2) Mr. Greenbaum joined the Company as Chief Financial Officer & Treasurer in
March 1996 at an annual base salary of $120,000. During 1995 and through
March 1996, Mr. Greenbaum served as an outside director of the Company for
which he received compensation of $18,000 and $4,500, respectively.
16
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets 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 March 16, 1998 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 Company is not aware of any arrangement which may, at a subsequent
date, result in a change of control of the Company.
Number of
Shares and
Nature of
Name and Address Beneficial Percent
of Beneficial Owner Ownership of Class
Stephen L. Brown 249,238 (1) 31.1%
c/o The Franklin Holding
Corporation (Delaware)
450 Park Avenue
New York, New York 10022
Jeffrey J. Steiner 31,481 (2) 3.9%
Carl D. Glickman 30,981 (3) 3.9%
Miles L. Berger 10,000 1.2%
Jonathan A. Marshall 5,900 *
John Greenbaum 4,600 (4) *
Spencer L. Brown 5,526 *
Irving Levine 3,000 (5) *
Stephen J. Mayer - *
All officers and directors
as a group (8 persons) 286,932 (6) 35.8%
-----------------------
* Less than 1.0%
17
(1) Includes the 25,000 shares of Common Stock owned by SLB & Co., Inc. Mr.
Brown has, subject to certain limitations, voting and investment power
over the voting securities owned by SLB & Co. Inc. Mr. Brown is Chairman
of SLB & Co., Inc. Includes 117,936 shares of Common Stock owned by
certain stockholders of SLB & Co., Inc. for which Mr. Brown has an
irrevocable proxy through no later than July 1, 1998. Does not include
1,250 shares owned by Mr. Brown's children. Mr. Brown disclaims
beneficial ownership of such shares.
(2) Includes 30,981 shares owned by Primrose Associates, Inc., a corporation
controlled by Mr. Steiner. 26,228 of these shares are subject to an
irrevocable proxy given to Stephen L. Brown through no later than July 1,
1998. Does not include 25,000 shares of Common Stock owned by SLB & Co.,
Inc. Mr. Steiner is an indirect stockholder of SLB & Co., Inc. Mr.
Steiner disclaims beneficial ownership of the shares of Common Stock
owned by SLB & Co., Inc.
(3) Includes 26,228 shares owned by Mr. Glickman that are subject to an
irrevocable proxy given to Stephen L. Brown through no later than July 1,
1998. Does not include 25,000 shares of Common Stock owned by SLB & Co.,
Inc. Mr. Glickman is a direct stockholder of SLB & Co., Inc. Mr. Glickman
disclaims Beneficial ownership of the shares of Common Stock owned by SLB
& Co., Inc.
(4) Ownership is through Greenbaum Brothers Partnership, in which Mr.
Greenbaum has a 33% general Partnership interest.
(5) Includes 1,338 shares owned by Spencer L. Brown that are subject to an
irrevocable proxy given to Stephen L. Brown through no later than July 1,
1998. Does not include 25,000 shares of Common Stock owned by SLB & Co.,
Inc. Spencer Brown is a direct stockholder of SLB & Co., Inc. Spencer
Brown disclaims Beneficial ownership of the shares of Common Stock owned
by SLB & Co., Inc.
(6) Includes 53,794 shares owned by other officers and directors that are
subject to an irrevocable proxy given to Stephen L. Brown through no
later than July 1, 1998.
Item 13. Certain Relationships and Related Transactions
See Items 10 through 12 and Footnote 6 to the Financial Statements for
discussion of related transactions.
18
PART IV
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K
(a) (1) Financial Statements
(2) Exhibits
(3) (i) Articles of Incorporation*
(3) (ii) By-laws*
(23) Consent of Independent Auditors
(23) Financial Data Schedule (for EDGAR purposes only)
(b) Reports on Form 8-K. The Company did not file any reports on
Form 8-K during the last quarter of 1997.
- ---------------
*Incorporated by reference to the Company's Form N-2, as amended, filed July 31,
1992.
19
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.
THE FRANKLIN HOLDING CORPORATION (DELAWARE)
Date: March 24, 1998 By: /s/Stephen L. Brown
-------------------------------
Stephen L. Brown
Chairman & President
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/Stephen L. Brown Chairman & March 24, 1998
- ------------------- President
Stephen L. Brown
/s/Spencer L. Brown Senior Vice President & March 24, 1998
- ------------------- Secretary
Spencer L. Brown
/s/John Greenbaum Chief Financial Officer & March 24, 1998
- ------------------ Treasurer
John Greenbaum
/s/Stephen J. Mayer Vice President & March 24, 1998
- ------------------- Controller
Stephen J. Mayer
/s/Miles L. Berger Director March 24, 1998
- --------------------
Miles L. Berger
/s/Carl D. Glickman Director March 24, 1998
- --------------------
Carl D. Glickman
/s/Irving Levine Director March 24, 1998
- --------------------
Irving Levine
/s/Jonathan A. Marshall Director March 24, 1998
- ------------------------
Jonathan A. Marshall
/s/Jefrrey J. Steiner Director March 24, 1998
- ----------------------
Jeffrey J. Steiner
20
THE FRANKLIN HOLDING CORPORATION (DELAWARE)
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
The following reports and financial schedules of The Franklin Holding
Corporation (Delaware) are filed herewith and included in response to Item
14(a).
Documents Page
- -------- ----
Report of Independent Public Accountants...............................22
Financial Statements
- --------------------
Balance Sheets as of
December 31, 1997 and 1996....................................23
Statements of Operations for the years
ended December 31, 1997, 1996 and 1995........................24
Statements of Cash Flows for the years
ended December 31, 1997, 1996 and 1995........................25
Statements of Changes in Net Assets for the years
ended December 31, 1997, 1996 and 1995........................26
Financial Highlights for the years ended December 31,
1997, 1996, 1995, 1994 and 1993.............................. 27
Portfolio of Investments as of
December 31, 1997.............................................28
Notes to Financial Statements..........................................30-38
21
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To the Stockholders and Board of Directors of
The Franklin Holding Corporation (Delaware):
We have audited the accompanying balance sheets of The Franklin Holding
Corporation (Delaware) (a Delaware corporation) as of December 31, 1997 and
1996, including the portfolio of investments as of December 31, 1997, and the
related statements of operations, cash flows and changes in net assets for the
three years ended December 31,1997, and the financial highlights for the five
years ended December 31, 1997. 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 generally accepted auditing
standards. 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. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included the physical inspection of securities on
hand at December 31, 1997 and 1996, and the confirmation of marketable
investment securities owned as of December 31, 1997 and 1996, by correspondence
with brokers. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As explained in Note 2, the financial statements include investments valued at
$6,833,318 (93% of net assets) as of December 31, 1997 whose fair values have
been estimated by the Board of Directors in the absence of readily ascertainable
market values. Because of the inherent uncertainty of valuation, those estimated
values may differ significantly from the values that would have been used had a
ready market for the securities existed, and the differences could be material.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of The
Franklin Holding Corporation (Delaware) as of December 31, 1997 and 1996, the
results of its operations, cash flows and changes in net assets for the three
years ended December 31, 1997, and the financial highlights for the five years
ended December 31, 1997 in conformity with generally accepted accounting
principles.
/s/Arthur Andersen LLP
- ------------------------
Arthur Andersen LLP
New York, New York
March 24, 1998
22
THE FRANKLIN HOLDING CORPORATION (DELAWARE)
=========================================================================================================
Balance Sheets
- ---------------------------------------------------------------------------------------------------------
December 31, 1997 1996
- ---------------------------------------------------------------------------------------------------------
ASSETS
Marketable investment securities, at market value (cost: December 31,
1997 - $41,522; December 31, 1996 - $39,695) (Note 2) $41,522 $39,695
Investments, at fair value (cost: December 31,1997 - $4,168,150;
December 31, 1996 - $5,980,199) (Note 2)
Avery Communications Inc. (Note 6) 5,511,000 816,969
Excelsior Communications Corporation - 7,678,158
Other investments 1,322,318 1,489,452
---------- ---------
6,833,318 9,984,579
---------- ---------
Cash and cash equivalents 348,900 318,848
Accrued interest and accounts receivable (Note 6) 330,048 84,262
Other assets 164,670 1,370,660
-------- ---------
$7,718,458 $11,798,044
TOTAL ASSETS
- ---------------------------------------------------------------------------------------------------------
LIABILITIES AND NET ASSETS
LIABILITIES
Accounts payable and accrued liabilities $375,326 $1,921,475
TOTAL LIABILITIES 375,326 1,921,475
-------- ---------
Commitments and contingencies (Note 5)
NET ASSETS
Common stock, $1 par value: 2,000,000 shares authorized;
1,003,986 shares issued and 801,198 shares outstanding
at December 31,1997 and 1996; 1,003,986 1,003,986
Paid-in capital 8,997,877 8,997,877
Unrealized appreciation of investments,
net of deferred income taxes (Notes 2 and 3) 2,665,168 4,004,380
Accumulated deficit (3,440,148) (2,245,923)
----------- -----------
9,226,883 11,760,320
Deduct: 202,788 shares at December 31, 1997 and 1996
of common stock held in treasury, at cost (Note 4) (1,883,751) (1,883,751)
----------- -----------
Net assets, equivalent to $9.17 per share at December 31, 1997
and $12.33 per share at December 31, 1996 7,343,132 9,876,569
---------- ---------
TOTAL LIABILITIES AND NET ASSETS $7,718,458 $11,798,044
=========== ===========
- ---------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
23
THE FRANKLIN HOLDING CORPORATION (DELAWARE)
=========================================================================================================================
Statements of Operations
- -------------------------------------------------------------------------------------------------------------------------
For the Year Ended December 31, 1997 1996 1995
---------------------------------------------------
INVESTMENT INCOME
Income from controlled affiliates (Note 6) $257,258 $750,000 $750,000
Interest on short-term investments and money market accounts 49,112 17,940 138,822
Interest on loans and debt securities 176,728 78,978 59,614
Dividend income 1,996 5,293 -
Other Income 11,927 - -
----------- --------- ---------
497,021 852,211 948,436
-------- -------- -------
EXPENSES
Salaries and employee benefits (Note 7) 923,080 941,164 879,302
Professional fees 169,928 117,994 231,325
Appraisal fees 25,000 - -
Investment banking fee 13,997 - 60,715
Rent (Note 5) 97,607 108,857 135,008
Insurance 43,748 48,462 51,193
Directors' fees 121,809 131,906 127,090
Taxes other than income taxes 43,259 51,212 53,308
Advertising and promotion 7,826 9,116 6,500
Depreciation and amortization 38,301 36,660 35,030
Professional fees related to conversion to
Business Development Corporation 114,991 - -
Professional fees related to Stearns & Foster litigation (Note 5) 35,380 122,000 327,437
Recovery from insurance company of professional fees related
to Stearns & Foster litigation (Note 5) - - (397,657)
Net settlement of Stearns & Foster litigation ( Note 5) - 375,000 -
Expenses related to Stockholders' litigation & proxy contest (Note 5) 499,637 257,631 420,038
General and administrative 266,287 206,100 228,611
-------- -------- -------
2,400,850 2,406,102 2,157,900
---------- ---------- ---------
Net investment loss from operations (1,903,829) (1,553,891) (1,209,464)
Net realized gain on portfolio of investments 3,105,165 246,518 1,242,937
Benefit (provision) for current income taxes (Note 3) 208,333 (151,433) (243,908)
----------- --------- ---------
Net realized income (loss) 1,409,669 (1,458,806) (210,435)
(Decrease) increase in unrealized appreciation of investments, net
of deferred income tax benefit of $0; $100,636; and
$274,364, respectively (Note 3) (1,339,212) 266,694 233,878
----------- --------- ---------
Net increase (decrease) in net assets from operations $70,457 ($1,192,112) $23,443
======== ============ =======
Net increase (decrease) in net assets per common share $0.09 ($1.48) $0.03
====== ======= =====
Weighted average number of common shares outstanding 801,198 803,097 844,172
======== ======== =======
- -------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
24
THE FRANKLIN HOLDING CORPORATION (DELAWARE)
============================================================================================================================
Statements of Cash Flows
- ----------------------------------------------------------------------------------------------------------------------------
For the Year Ended December 31, 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net increase (decrease) in net assets from operations $70,457 ($1,192,112) $23,443
Adjustments to reconcile net increase (decrease) in net assets to net cash
used in operating activities:
Depreciation and amortization 38,301 36,660 35,030
Decrease (increase) in unrealized appreciation of investments 1,339,212 (166,058) 40,486
Deferred income tax benefit - (100,636) (274,364)
Amortization of discount on note receivable from Avery (127,760) - -
Net realized gain on portfolio of investments (3,105,165) (246,518) (1,242,937)
Changes in operating assets and liabilities:
(Increase) decrease in accrued interest and accounts receivable (161,101) 315,312 (121,051)
Decrease (increase) in other assets 1,173,580 (1,126,211) (41,076)
(Decrease) increase in accounts payable and accrued liabilities (1,592,196) 1,483,684 1,942
----------- ---------- -----
Total adjustments (2,435,129) 196,233 (1,601,970)
----------- -------- -----------
Net cash used in operating activities (2,364,672) (995,879) (1,578,527)
----------- --------- -----------
Cash flows from investing activities:
Proceeds from sale of investments, net of expenses 309,000 300,001 4,052
Cash consolidated from Excelsior Communications Corporation 1,710,702 - -
Return of capital from investments 887,313 677,716 26,993
Acquisitions of investments (2,448,963) (887,521) (1,266,528)
Proceeds from sale of marketable investment securities, net of expenses 7,296,186 2,099,051 3,323,571
Purchases of marketable investment securities (2,749,730) (1,694) (3,579,556)
Sales of fixed assets - - 86,937
Purchases of fixed assets (5,890) (21,791) (2,977)
------- -------- -------
Net cash provided by (used in) investing activities 4,998,618 2,165,762 (1,407,508)
---------- ---------- -----------
Cash flows from financing activities:
Distribution to stockholders charged to accumulated deficit (2,603,894) (801,198) (826,698)
Purchase of treasury stock - (250,250) (421,221)
-- --------- ---------
Net cash used in financing activities (2,603,894) (1,051,448) (1,247,919)
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 30,052 118,435 (4,233,954)
Cash and cash equivalents at beginning of year 318,848 200,413 4,434,367
-------- -------- ---------
Cash and cash equivalents at end of year $348,900 $318,848 $200,413
========= ========= ========
- ----------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
25
THE FRANKLIN HOLDING CORPORATION (DELAWARE)
===========================================================================================================================
Statements of Changes in Net Assets
- ---------------------------------------------------------------------------------------------------------------------------
For the Year Ended December 31, 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets from operations:
Net investment loss ($1,903,829) ($1,553,891) ($1,209,464)
Net realized gain on portfolio of investments, 3,313,498 95,085 999,029
net of current income taxes
(Decrease) increase in unrealized appreciation of investments,
net of deferred income taxes (1,339,212) 266,694 233,878
----------- -------- -------
Net increase (decrease) in net assets from operations 70,457 (1,192,112) 23,443
Distributions to stockholders charged to
accumulated deficit and earnings (2,603,894) (801,198) (826,698)
Capital stock transactions:
Purchase of treasury stock - (250,250) (421,221)
----------- -------- -------
Total decrease in net assets (2,533,437) (2,243,560) (1,224,476)
----------- ----------- -----------
Net assets at beginning of year 9,876,569 12,120,129 13,344,605
---------- ----------- ----------
Net assets at end of year $7,343,132 $9,876,569 $12,120,129
=========== =========== ===========
- ---------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
26
THE FRANKLIN HOLDING CORPORATION (DELAWARE)
===========================================================================================================================
Financial Highlights
- ---------------------------------------------------------------------------------------------------------------------------
For the Year Ended December 31, 1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE (1):
Net asset value, beginning of period $12.33 $14.67 $15.40 $14.96 $15.17
------- ------- ------- ------- ------
Net investment loss (2.37) (1.93) (1.43) (1.66) (1.01)
Net gain on portfolio of .
investments (realized and unrealized) after taxes 2.46 0.45 1.46 2.01 0.71
----- ----- ----- ----- ----
Total from investment operations 0.09 (1.48) 0.03 0.35 (0.30)
----- ------ ----- ----- ------
Less dividends and distributions:
Distributions from accumulated
deficit and earnings (3.25) (1.00) (1.00) 0.00 0.00
------ ------ ------ ----- ----
Total dividends and distributions (3.25) (1.00) (1.00) 0.00 0.00
------ ------ ------ ----- ----
Treasury stock transactions 0.00 0.14 0.24 0.09 0.09
----- ----- ----- ----- ----
Net asset value, end of period $9.17 $12.33 $14.67 $15.40 $14.96
====== ======= ======= ======= ======
Market value per share, end of period $6.50 $10.13 $10.13 $8.13 $8.88
====== ======= ======= ====== =====
TOTAL INVESTMENT RETURN:
Based on market value per share (%) (16.62) 9.64 35.45 (8.45) 0.00
RATIOS TO AVERAGE NET ASSETS:
Expenses (%) 28.97 20.58 16.59 16.04 13.50
Net investment loss (%) (22.97) (13.29) (11.17) (10.76) (7.00)
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of period (000 omitted) $7,343 $9,877 $12,120 $13,345 $13,162
Portfolio turnover rate (%) 77 8 32 63 79
- ---------------------------------------------------------------------------------------------------------------------------
(1) Calculated based on weighted average number of shares outstanding during the period.
The accompanying notes are an integral part of these financial highlights.
27
THE FRANKLIN HOLDING CORPORATION (DELAWARE)
=========================================================================================================================
Portfolio of Investments
- -------------------------------------------------------------------------------------------------------------------------
Marketable Investment Securities
- -------------------------------------------------------------------------------------------------------------------------
Market
Principal Value
December 31, 1997 Amount ($) Cost (Note 2)
- -------------------------------------------------------------------------------------------------------------------------
Certificate of Deposit - 4.65%, due 05/04/98.....................................$41,522 41,522 41,522
------- -------
Total Marketable Investment Securities (0.6% of total investments).......... $41,522 $41,522
======= =======
- -------------------------------------------------------------------------------------------------------------------------
Investments, at Fair Value
- -------------------------------------------------------------------------------------------------------------------------
Directors'
Equity Valuation
December 31, 1997 Investment Interest Cost (Note 2)
- -------------------------------------------------------------------------------------------------------------------------
Controlled Affiliates
Avery Communications Inc...............................Common stock $901,482
(Telecommunications)
Avery Communications Inc...........................Convertible preferred 642,858
(Telecommunications) stock - Series D;
10.0% dividend rate
Avery Communications Inc...........................Convertible preferred 350,000
(Telecommunications) stock - Series E;
12.0% dividend rate
Avery Communications Inc..............................Note (face value $1,000,000) 670,707
(Telecommunications) less unamortized discount;
10.0% interest rate
Due 5/31/2000
Avery Communications Inc.................................Warrants 357,051
----------
(Telecommunications)
Total Avery Communications Inc. (80.2% of total investments) 22.62% 2,922,098 $ 5,511,000
(fully diluted basis) ---------- -----------
Other Investments
Seneca Limited Partnership..........................Limited partnership 0.85% 500,000 806,849
(Investment limited partnership) interest
Codman Research Inc...................................Common stock 3.00% 400,031 254,488
(Heathcare information systems)
CIC Standby Ventures, L.P. .........................Limited partnership 1.80% 73,007 192,007
(Computer handwriting systems) interest
FMA High Yield Income Limited Partnership ..........Limited partnership 2.80% - 43,974
(Schroders high yield bond interest
limited partnership)
GoAmerica Corp.........................................Common stock 0.50% 25,000 25,000
(Internet software)
Other investments...................................... 248,014 -
---------- -----------
Total Other Investments (19.2% of total investments)
1,246,052 1,322,318
---------- -----------
Total Investments, at Fair Value.........................................................$4,168,150 $6,833,318
- -------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of this schedule.
28
Notes to Financial Statements
1. ORGANIZATION
The Franklin Holding Corporation (Delaware) ("Franklin Holding" or the
"Corporation") is a Delaware corporation registered as a business development
company ("BDC") under the Investment Company Act of 1940 (the "Act"). A BDC is a
specialized type of investment company under the Act. A BDC must be primarily
engaged in the business of furnishing capital and managerial expertise to
companies that do not have ready access to capital through conventional
financial channels. Such companies are termed "eligible portfolio companies".
The Corporation, as a BDC, may invest in the securities of public companies and
other investments that are not qualifying assets of eligible portfolio
companies, however such investments may not exceed 30% of the Corporation's
total asset value at the time of any such investment.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
Effective July 2, 1997, Franklin Holding's wholly owned subsidiary, Excelsior
Communications Corporation ("Excelsior"), was dissolved. For financial reporting
purposes as of and for the year ended December 31, 1997, the assets and
operations of Excelsior have been consolidated with Franklin Holding. The
Corporation, as a closed-end investment company registered under the Act, does
not consolidate its non-investment company subsidiaries.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principals requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Statements of Cash Flows
For purposes of the Statements of Cash Flows, Franklin Holding considers only
highly liquid investments with maturities of 90 days or less at the date of
their acquisition to be cash equivalents.
The Corporation paid no interest during the year ended December 31, 1997, 1996
and 1995, and paid $54,265 , $173,018 and $6,190 for income taxes during the
year ended December 31, 1997, 1996 and 1995, respectively.
29
Valuation of Investments
Security investments which are publicly traded on a national exchange or NASDAQ
are stated at the last reported sales price on the day of valuation, or if no
sale was reported on that date, then the securities are stated at the last
quoted bid price. The Board of Directors of Franklin Holding (the "Board of
Directors") may determine, if appropriate, to discount the value where there is
an impediment to the marketability of the securities held.
Investments for which there is no ready market are initially valued at cost and,
thereafter, at fair value based upon the financial condition and operating
results of the issuer and other pertinent factors as determined by the 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 Holding reports the unrealized gain or loss resulting from
such valuation in the Statements of Operations.
Gains on Portfolio of Investments
Amounts reported as realized gains are measured by the difference between the
proceeds of sale or exchange and the cost basis of the investment without regard
to unrealized gains reported in the prior periods. Gains are considered realized
when sales or dissolution of investments are consummated.
Income Taxes
Franklin Holding does not qualify as a Regulated Investment Company for income
tax purposes. Therefore, the Corporation is taxed as a regular corporation.
Franklin Holding has adopted Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes" ("SFAS 109"). The significant components of
deferred tax assets and liabilities are principally related to the Corporation's
net operating loss carryforward and its unrealized appreciation of investments.
Depreciation and Amortization
Depreciation is recorded using the straight-line method at rates based upon
estimated useful lives of five years for the respective assets. Franklin Holding
amortizes its leasehold improvements over its useful life or the remaining life
of the lease, whichever is shorter.
30
Net Increase (Decrease) in Net Assets Per Common Share
Net increase (decrease) in net assets per common share is based upon the
weighted average number of shares of common stock outstanding. Franklin Holding
has no common stock equivalents.
Reclassification
Certain reclassifications have been made to prior year finanical statements to
conform with current year presentation.
3. INCOME TAXES
At December 31, 1997, Franklin Holding had a net operating loss carryforward for
Federal income tax purposes of approximately $3,093,000 that will begin to
expire in 2011. At a 34% Federal income tax rate the benefit from this loss
would be approximately $1,052,000.
For the years ended December 31, 1997, 1996 and 1995, Franklin Holding's tax
benefit (provision) was based on the following:
===============================================================================
1997 1996 1995
---------- ---------- -------
Net investment loss from operations.......................... $ (1,903,829) $ (1,553,891) $ (1,209,464)
Net realized gain on portfolio of investments................ 3,105,165 246,518 1,242,937
Increase (decrease) in unrealized appreciation............... (1,339,212) 166,058 (40,486)
---------------- --------------- ----------------
Pre-tax book loss .................................... $ (137,876) $ (1,141,315) $ (7,013)
================ ================ ================
1997 1996 1995
---------- ---------- -------
Tax at 34% on $(137,876), $(1,141,315) and $(7,013),
respectively............................................. $ 46,878 $ 388,047 $ 2,384
State and local, net of Federal benefit...................... (14,100) (40,000) (243,908)
Book losses for which no benefit is provided................. (46,878) (361,319) -
Adjustment to deferred taxes provided in prior periods....... 222,433 (37,525) 271,980
--------------- ---------------- ---------------
$ 208,333 $ (50,797) $ 30,456
=============== ================ ===============
31
The components of the tax benefit (provision) are as follows:
1997 1996 1995
---------- ---------- -------
Current Federal tax (provision).............................. $ - $ (111,433) $ -
Net deferred Federal tax benefit (provision)................. - 67,339 (80,339)
Current state and local tax (provision)...................... (14,100) (40,000) (243,908)
Deferred state and local tax benefit......................... - 33,297 354,703
Adjustment to Federal, state and local taxes provided in
prior periods................................................ 222,433 - -
--------------- --------------- ---------------
Benefit (provision) for income taxes......................... $ 208,333 $ (50,797) $ 30,456
=============== ================ ===============
==================================================================================================================================
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.
At December 31, 1997 and 1996, deferred tax attributes consist of:
==================================================================================================================================
Asset (Liability)
1997 1996
---- ----
Deferred Federal and state benefit from net operatin gloss carryforward......... $ 1,370,552 $ 614,993
Deferred Federal and state benefit on reserves for litigation................... - 165,000
Deferred Federal and state provision on unrealized appreciation of investments.. (1,172,673) (418,674)
Valuation allowance............................................................. (197,879) (361,319)
------------------ ------------------
Deferred Taxes.................................................................. $ - $ -
================= ==================
==================================================================================================================================
At December 31, 1997, the realization of deferred tax assets is dependent upon
future appreciation of the Corporation's investments.
32
4. TREASURY STOCK
The Board of Directors has authorized Franklin Holding to repurchase up to an
aggregate of 250,000 shares of its common stock in open market purchases on the
American Stock Exchange when such purchases are deemed to be in the best
interest of the Corporation and its stockholders. To date, Franklin Holding has
repurchased 212,788 shares of its common stock of which 202,788 shares remain in
treasury at December 31, 1997 and 1996.
5. COMMITMENTS AND CONTINGENCIES
Franklin Holding is obligated under an operating lease which provides for annual
minimum rental payments as follows:
- --------------------------------------------------------------------------------
December 31,
1998.........................................................$ 139,000
1999......................................................... 149,000
2000......................................................... 149,000
2001......................................................... 149,000
2002......................................................... 149,000
2003 ........................................................ 151,000
----------
$ 886,000
==========
- --------------------------------------------------------------------------------
Rent expense for the year ended December 31, 1997, 1996 and 1995 was $97,607,
$108,857, and $135,008, respectively. For the years ended December 31, 1997 and
1996, the Corporation collected rents of $44,750 and $33,500, respectively, from
subtenants for a portion of its existing office space which is reflected in rent
expense for that year.
In March 1994, Stearns and Foster Bedding Company ("Stearns & Foster") commenced
a private cost recovery and contribution action against Franklin Holding and a
number of other defendants in the United States District Court for the District
of New Jersey (Newark). Stearns & Foster is the current owner of a site located
in South Brunswick, New Jersey (the "Site"), which is the subject of an
investigation and cleanup under the Industrial Site Recovery Act ("ISRA"). A
settlement agreement concerning this matter was executed by the parties on
February 28, 1997. Franklin Holding and its insurer respectively agreed therein
to pay Stearns and Foster $375,000 and $1,125,000. In consideration for these
payments, Stearns and Foster agreed to: (i) dismiss all claims against Franklin
Holding and its related entities with prejudice; (ii) release Franklin Holding
and its related entities from any past, present or future claims related to the
matters at issue in the litigation; and (iii) indemnify and hold Franklin
Holding and its related entities harmless as to any claims arising from or in
any way related to the matters at issue in the litigation. All payments due
under this settlement agreement were made in March, 1997.
In March 1995, a complaint was filed in the United States District Court for the
Southern District of New York by a former director of Franklin Holding (who, in
1990, was not renominated for election to the Board
33
of Directors) against the Corporation, its chairman, certain of its directors
and an affiliated company ("Action No. 1"). Action No. 1 was purportedly brought
both on behalf of a class of minority stockholders of Franklin Holding and
derivatively on behalf of the Corporation. Action No. 1, in substance, alleged
that the Corporation's Board did not comply with the "interested persons"
provisions of the Act; that there had not been full disclosure about various
matters, including with respect to the Corporation's application to deregister
as an investment company and about the business relationships between defendants
in proxy statements from 1989 through 1994; and that management's and directors'
compensation and benefits were excessive in relation to the financial
performance of the Corporation. The complaint asserted claims under the Act and
SEC Rules promulgated thereunder and under common law. In May 1995, an amended
complaint was filed containing in substance, the same claims as the original
complaint, but purporting to assert additional derivative and class action
claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934.
The amended complaint alleged that Franklin Holding and its Board failed to
disclose facts in various documents, including the Corporation's 1994 Annual
Report and 1993 and 1994 Proxy Statements, with respect to, among other things,
Franklin Holding's investment through Excelsior in various radio stations and
the current status of the Corporation's operations.
After the filing of Action No.1, Mr. Jay B. Langner and a group of other
individuals filed a Schedule 13D, pursuant to the 1934 Act and related
regulatory requirements, announcing their intention to conduct a proxy campaign
to gain control of the Corporation, with a view towards removing existing board
members and bringing about the Corporation's dissolution and liquidation. In
July 1995, the Corporation filed suit against Mr. Langner, and his group,
claiming violations of the federal securities laws, in connection with the
Schedule 13D filing and the group's subsequent proxy materials ("Action No.2").
In June 1995, the Corporation and the other defendants moved to dismiss the
amended complaint in Action No.1 for failure to make the required demand upon
the Board of Directors (as to purported derivative claims), for lack of standing
to assert the purported derivative claims, for failure to state a claim upon
which the requested relief can be granted and for failure to plead the claims
for fraud with the required specificity. Plaintiff filed a second amended
complaint in August 1995 containing in substance the same claims as the amended
complaint, but including additional factual allegations. The second amended
complaint sought unspecified monetary relief from the individual defendants and
equitable and declaratory relief with respect to Franklin Holding, including
setting aside the election of directors held at the Corporation's annual meeting
in August 1994 and 1995 and Board action since August 1994, declaring the
chairman's employment contract void, an accounting by defendants, and an
injunction directing the liquidation of Franklin Holding and the appointment of
a special fiscal agent, receiver or conservator to oversee same. The plaintiff
and the defendants submitted supplemental briefings concerning the issue of
whether the second amended complaint should be dismissed.
In January 1996, the Court issued an opinion partially granting and partially
denying defendants' motion to dismiss. The Court dismissed plaintiff's
derivative claims for failure to make the required demand upon the Board of
Directors and abstained from entertaining plaintiff's claim that the Corporation
be dissolved and that a special fiscal agent, receiver or conservator be
appointed. The Court denied defendants' motion to dismiss with respect to the
remainder of plaintiff's claims.
On December 10, 1996, the Court ruled that Action No. 1 could proceed as a class
action and defined the class (the "Class") as the Corporation's stockholders
excluding S. L. Brown & Company, Inc., the Corporation's
34
directors, and their controlling stockholders, the members of their immediate
families, their partners and other legal representatives.
On July 14, 1997, the parties in Action No.1 and Action No. 2 entered into a
Stipulation of Settlement (the "Settlement"). The Settlement was approved by the
District Court on September 11, 1997.
Pursuant to terms of the Settlement, the Board of Directors declared on July 18,
1997 a $3.25 special dividend to stockholders of record of the Corporation's
Common Stock as of July 28, 1997. The special dividend payable to the
Corporation's stockholders who are members of the Class in Action No. 1 was
placed in a settlement fund for the benefit of the Class on August 7, 1997. The
settlement fund, which was reduced by an amount totaling $740,748 for attorneys'
fees and expenses awarded by the District Court to plaintiff's counsel in Action
No. 1, was distributed to class members on October 20, 1997. The Corporation's
stockholders who were recordholders on July 28, 1997, but were not members of
the Class (and also including by terms of the Settlement, Miles L. Berger and
members of his immediate family) received the special dividend on August 4,
1997.
The terms of the Settlement provided that the Corporation's directors would use
their reasonable best efforts to formulate and adopt, and to cause the
Corporation to call a meeting of its stockholders to vote upon a plan to
designate the Corporation as a Business Development Company pursuant to the Act.
On September 9, 1997, the stockholders approved a proposal that the Corporation
be regulated as a BDC. On November 18, 1997, the Corporation filed a
notification of election to become a BDC with the Commission. The election
became effective upon receipt of the filing by the Commission.
Under the terms of the Settlement, upon the Corporation becoming a BDC, for
three years thereafter: (a) each director's annual fees for all meetings of the
Board or Directors and its committees actually attended, including consulting
fees, shall not exceed in the aggregate a total of $12,000 per year, but such
directors may receive incentive compensation, as determined in and subject to
the absolute discretion of the Board of Directors and provided that such
incentive compensation is permissible under the Act; and (b) the base salary for
Stephen Brown shall not exceed $350,000 per year, but, during those three years,
Mr. Brown also may receive such additional incentive compensation, as determined
by and subject to the absolute discretion of the Board of Directors, as is
permissible under the Act.
The Corporation is a plaintiff in an action brought against National
Union Fire Insurance Company of Pittsburgh, PA ("National Union") in the Supreme
Court of the State of New York. The action seeks reimbursement of $1,000,000
for fees and expenses incurred in connection with certain shareholder litigation
brought against Franklin and its directors. National Union filed a motion to
dismiss the complaint which the Corporation opposed. The motion is pending
before the court.
35
6. TRANSACTIONS WITH CONTROLLED AFFILIATES
On May 30, 1997, Franklin Holding made an additional investment of $2,500,000 in
Avery Communications Inc. ("Avery"), a holding company in the telecommunications
industry. The investment partially consisted of a $1,000,000 note with a
maturity of three years that earns interest at the rate of 10.0% per annum. The
first year's interest payment of $100,000 was made at the time the loan was
made. As additional consideration for this note, the Corporation received
warrants to purchase 666,667 shares of Avery common stock at $1.50 per share.
These warrants expire in five years from the date of issuance. The remainder of
the investment, $1,500,000, purchased 7.5 equity units in Avery. Each unit
consists of 133,333 shares of common stock of Avery and 200,000 shares of
preferred Series D stock which are convertible to 100,000 shares of common
stock. The shares of preferred Series D stock earn a dividend of 10.0% per annum
payable quarterly. This transaction, in conjunction with the investment in
common and preferred stock of Avery that the Corporation held previously,
resulted in Franklin Holding owning in excess of 25% of Avery's outstanding
voting stock on a primary basis. Additionally, three officers of Franklin
Holding were appointed to Avery's six person Board of Directors and the
Corporation's Chairman and Chief Executive Officer was appointed as the Vice
Chairman of Avery's Board of Directors.
For the year ended December 31, 1997, Franklin Holding's income from controlled
affiliates consists of $129,500 in dividends from Avery and $127,758 of interest
amortized on the note. At December 31, 1997, $170,403 is included in "Accrued
interest and accounts receivable" on the accompanying balance sheet for amounts
due from Avery for dividends and reimbursable expenses.
For the years ended December 31, 1996 and 1995, Franklin Holding's income from
controlled affiliates consists of a management fee from Excelsior of $750,000 .
7. EMPLOYEE STOCK SAVINGS PLAN
At December 31, 1997, Franklin Holding had a contributory retirement plan (the
"Plan") covering all employees. Contributions to the Plan were invested in
Franklin Holding's common stock and/or a selected group of mutual funds.
Contributions for the year ended December 31, 1997, 1996 and 1995 were $27,093,
$21,163, and $25,070, respectively, and are included in salaries and employee
benefits in the accompanying Statements of Operations. The Plan was terminated
in January 1998 and all funds were distributed to the participating employees.
8. PURCHASES AND SALES OF INVESTMENT SECURITIES
The cost of purchases and proceeds from sales of investment securities,
excluding short-term investments, aggregated $5,198,693 and $8,492,499,
respectively, for the year ended December 31, 1997 and $4,837,273 and
$3,350,826, respectively, for the year ended December 31, 1996.
36
9. STOCKHOLDERS' DISTRIBUTION
Franklin Holding paid a $3.25 per share special distribution on August 4, 1997
to its stockholders of record as of July 28,1997 totaling $2,603,894. Based on
the calculation of current and cumulative earnings and profits at December 31,
1997, it was determined that this entire distribution was a return of capital to
the stockholders. Franklin Holding also paid a $1.00 per share special
distribution on December 4, 1996 to its stockholders of record as of November
25,1996 totaling $801,198. Based on the calculation of current and cumulative
earnings and profits at that time, it was determined that this entire
distribution was also a return of capital to the stockholders.
37