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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
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December 31, 1998
Franklin Capital Corporation
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(Exact name of registrant specified in its charter)
Delaware 13-3419202 .
- -------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
450 Park Avenue, 10th Floor, New York, New York 10022 .
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(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 Corporation 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. [ X ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of March 16, 1999 was $2,842,325 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, 1999 was
759,632.
1
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Prospectus of the Registrant dated July 31, 1992 (the
"Prospectus") 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 Corporation'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. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
PART III
Item 10. Directors and Executive Officers of the Corporation
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 TO DIFFER
MATERIALLY, INCLUDING, BUT NOT LIMITED TO, THOSE SET FORTH IN THE CORPORATION'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 UNDO RELIANCE ON THESE FORWARD-LOOKING
STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE HEREOF. THE CORPORATION UNDERTAKES
NO OBLIGATION TO PUBLICLY REVISE THESE FORWARD-LOOKING STATEMENTS TO REFLECT
EVENTS OR CIRCUMSTANCES OCCURRING AFTER THE DATE HEREOF OR TO REFLECT THE
OCCURRENCE OF UNANTICIPATED EVENTS.
2
PART I
Item 1. Business
Formation
The Franklin Capital Corporation1 (the "Registrant", "Franklin," or
the "Corporation") 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 Corporation Act of 1940 (the "1940 Act") and
registered as a closed-end, non-diversified management investment company. On
July 10, 1987, the Corporation commenced operations as an investment company.
The Corporation's common stock, par value $1.00 per share, has been listed on
The American Stock Exchange since October 1, 1987. The Corporation 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 Corporation 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 Corporation 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 Corporation 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 Corporation ("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 Corporation's long-term objectives,
management and the Board of Directors determined that it was in the best
interests 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 interests of the Corporation 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
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 the receipt of the filing by the Commission.
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1. On July 14, 1998, the Corporation filed a Certificate of Amendment
with the Secretary of State of the State of Delaware, changing its name from The
Franklin Holding Corporation (Delaware) to The Franklin Capital Corporation
(Delaware). The Corporation's shareholders had approved a proposal to change the
Corporation's name at the Annual Meeting of Stockholders held on June 16, 1998.
The Corporation had filed its original Articles of Incorporation with the
Secretary of State of the State of Delaware as The Franklin Holding Corporation
(Delaware) on March 31, 1987.
3
As a BDC, the Corporation's objective is to achieve capital
appreciation through long-term investments in businesses believed to have
favorable growth potential. The Corporation participates, or would participate,
in start-up and early stage financing, expansion or growth financing, leveraged
buy-out financing and restructurings. The Corporation has also invested and will
consider investing in a broad range of industry segments.
Portfolio of Investments
As of December 31, 1998, the Corporation's portfolio of investments
is a composite of investments in developing companies, investment limited
partnerships and one marketable security.
Illiquidity of Investments
Many of the Corporation'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 Corporation 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 Corporation 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 corporation or investee registers its securities and becomes a
reporting corporation under the Securities and Exchange Act of 1934, the
corporation may be considered an insider by virtue of its board representation
and would be restricted in sales of such corporation's securities.
Managerial Assistance
The Corporation 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
BDC 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 Corporation. The
Corporation, as a BDC, is required by the 1940 Act to make significant
managerial assistance available at least with respect to investee companies that
the Corporation treats as qualifying assets for purposes of the 70 percent test
(see "Regulation"). The nature, timing and amount of managerial assistance
provided by the Corporation vary depending upon the particular requirements of
each investee Corporation.
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 Corporation's goal is to assist each investee
company in establishing its own independent and effective board of directors and
management.
4
Need for Follow-on Investments
Following its initial investments in investees, the Corporation 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 Corporation'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 Corporation's
investment. There can be no assurance that the Corporation will make follow-on
investments or have sufficient funds to make such investments; the Corporation
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 Corporation's initial investment, or may result
in a missed opportunity for the Corporation to increase its participation in a
successful operation.
Competition
The Corporation competes for attractive investment opportunities with
venture capital partnerships and corporations, merchant banks, venture capital
affiliates of industrial and financial companies, SBICs, other BDCs and private
individual investors.
Employees
At December 31, 1998, the Corporation 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 filing its election to be treated as a BDC, a corporation 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 corporation 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 corporation must
(i) be a domestic corporation; (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.
5
An eligible portfolio company generally is a domestic corporation
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 where 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 Corporation'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, 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 Corporation 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 Corporation's assets, as defined, were to increase through the
issuance of additional capital stock or otherwise, the Corporation would be
permitted under the 1940 Act to issue senior securities.
The Corporation 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
Corporation 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 Corporation's outstanding voting securities" means the vote of
(i) 67 percent or more of the Corporation'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
Corporation's outstanding Common Stock, whichever is less.
Most of the transactions involving the Corporation 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 Corporation'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
Corporation, 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 Corporation's
6
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 Corporation's independent directors and, in some
situations, the prior approval of the Commission, before engaging in certain
transactions involving the Corporation or any company controlled by the
Corporation. The 1940 Act generally does not restrict transactions between the
Corporation 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 Corporation 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. As of December 31, 1998,
Franklin had sublet arrangements with two subtenants for a portion of Franklin's
office space.
Item 3. Legal Proceedings
The Corporation is a plaintiff in an action brought against National
Union Fire Insurance Corporation of Pittsburgh, PA ("National Union") in the
Supreme Court of the State of New York ("The Supreme Court"). The action was
filed on November 13, 1997 and seeks reimbursement of $1 million 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 was granted by The Supreme Court on November 24, 1998. Franklin
has filed an appeal of the dismissal with the New York State Supreme Court
Appellate Division. Both sides have submitted briefs to the Appellate Court. The
Corporation 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 Corporation did not submit any matters to a vote of its
stockholders during the fourth quarter of the 1998 fiscal year.
7
PART II
Item 5. Market for Corporation'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 Corporation's common stock. Certificates to be transferred should
be mailed directly to the transfer agent, preferably by registered mail.
Market Prices
The Corporation'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 Corporation's shares during each quarter of
the last two years, as reported by the American Stock Exchange.
1998 Quarter Ending Low High
March 31 $ 5.750 $ 7.000
June 30 $ 6.875 $ 8.250
September 30 $ 5.875 $ 8.250
December 31 $ 4.750 $ 5.750
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
* A special distribution of $3.25 per share was declared in July 1997.
Stockholders
As of March 16, 1999, there were 665 holders of record of the
Corporation's common stock. The Corporation has 2,000,000 shares authorized, of
which 1,003,986 are issued and 759,632 are outstanding at March 16, 1999.
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:
1998 1997* 1996 1995 1994
Total Assets $6,548,696 $7,718,458 $11,798,044 $12,658,556 $14,155,454
Liabilities $233,143 $ 375,326 $1,921,475 $ 538,427 $ 810,849
Net asset value $6,315,553 $7,343,132 $9,876,569 $12,120,129 $13,344,605
Net asset value per share $8.41 $ 9.17 $ 12.33 $ 14.67 $ 15.40
Shares outstanding 750,686 801,198 801,198 826,198 866,598
Operating Data for the year
ended December 31:
1998 1997 1996 1995 1994
Investment Income $263,323 $ 497,021 $ 852,211 $ 948,436 $ 709,068
Net investment loss from operations $(1,357,085) $(1,903,829) $(1,553,891) $(1,209,464) $(1,441,669)
Net realized gain on investments,
net of income taxes $1,628,004 $ 3,313,498 $ 95,085 $ 999,029 $ 1,800,301
Net (decrease) increase in
unrealized appreciation
of investments, net of
deferred income taxes $(1,015,091) $(1,339,212) $ 266,694 $ 233,878 $ (58,124)
Net increase (decrease) in net
assets from operations $(744,172) $ 70,457 $(1,192,112) $23,443 $ 300,508
Net increase (decrease) in net
assets from operations
per weighted average number
of shares outstanding $(0.94) $ 0.09 $ (1.48) $ 0.03 $ 0.35
* A special distribution of $3.25 per share was declared in July 1997.
9
Item. 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations
Statement of Operations
The Corporation accounts for its operations under Generally Accepted
Accounting Principles for investment companies. On this basis, the principal
measure of its financial performance is captioned "Net increase (decrease) in
net assets from operations", which is composed of the following: "Net investment
loss from operations," which is the difference between the Corporation's income
from interest, dividends and fees and its operating expenses; "Net realized gain
on portfolio of investments," which is the difference between the proceeds
received from dispositions of portfolio securities and their stated cost; any
applicable income tax provisions (benefits); and "Net increase (decrease) in
unrealized appreciation of investments," which is the net change in the fair
value of the Corporation's investment portfolio, net of any increase (decrease)
in deferred income taxes that would become payable if the unrealized
appreciation were realized through the sale or other disposition of the
investment portfolio.
"Net realized gain (loss) on portfolio of investments" and "Net
increases (decrease) in unrealized appreciation of investments" are directly
related. When a security is sold to realize a gain, the net unrealized
appreciation decreases and the net realized gain increases. When a security is
sold to realize a loss, the net unrealized appreciation increases and the net
realized gain decreases.
Financial Condition
The Corporation's total assets and net assets were, respectively,
$6,548,696 and $6,315,553 at December 31,1998 versus $7,718,458 and $7,343,132
at December 31,1997. Net asset value per share was $8.41 at December 31, 1998
versus $9.17 at December 31, 1997.
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 Corporation 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.
The Corporation's financial condition is dependent on the success of
its investments. A summary of the Corporation's investment portfolio is as
follows:
December 31, 1998 December 31, 1997
----------------- -----------------
Investments, at cost $ 3,475,229 $ 4,209,672
Unrealized appreciation, net of
deferred taxes 1,650,077 2,665,168
------------ --------------
Investments, at fair value $ 5,125,306 $ 6,874,840
=========== ============
10
Investments
The Corporation has an investment in Avery Communication Corporation
("Avery") valued at $3,380,013 at December 31, 1998, which represents 51.6% of
the Corporation's total assets and 53.5% of its 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". At December
31, 1998, Hold Billing Services ("HBS"), was Avery's sole current operating
subsidiary. HBS provides billing and collection services for inter-exchange
carriers and long-distance resellers. HBS'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 $2.5 million was made in May 1997.
On July 6, 1998, Franklin sold certain securities to the Thurston Group, Inc.
for $2.5 million. On a primary share basis, Franklin owns more than 17.5% of
Avery's outstanding voting stock. Additionally, two officers of Franklin serve
on Avery's eight member Board of Directors.
At December 31, 1998, the Corporation had an investment in
Communications Intelligence Corporation ("CIC") common stock valued at $656,250
and an investment in CIC Standby Ventures, L.P. ("CIC Ventures") valued at
$107,847. In 1995, the Corporation made an original investment in CIC Ventures
of $67,000. The managing partner of CIC Ventures is the Chairman of the Board of
CIC. In November 1998, the Corporation added to its existing holdings by
investing $375,000 in CIC. CIC develops, markets, and licenses software products
based on proprietary handwriting recognition technologies. CIC's core
technologies include multilingual handwriting recognition and dynamic signature
verification software. CIC's products are designed to increase the ease of use,
functionality, and security of electronic devices ranging from PC peripherals to
smart cellular phones. At December 31, 1998, the total investment in CIC and CIC
Ventures represents 11.7% of the Corporation's total assets and 12.1% of its net
assets.
At December 31, 1998, the Corporation had an investment in the 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 Corporation's original investment of $500,000 made in April
1996 is valued at $530,019 at December 31, 1998. The year-end value is net of a
profit distribution of $350,000 received by Franklin during the year ended
December 31, 1998. At December 31, 1998, Seneca represents 8.1% of the
Corporation's total assets and 8.4% of its net assets.
During 1997, the Corporation 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 Corporation realized a net gain of
$3,166,842 in 1997 from this dissolution.
11
Results of Operations
Investment Income and Expenses:
The Corporation's principal objective is to achieve capital
appreciation through long-term investments in businesses believed to have
favorable growth potential. Therefore, a significant portion of the investment
portfolio is structured to maximize the potential for capital appreciation and
provides little or no current yield in the form of dividends or interest. The
Corporation earns interest income from loans, preferred stocks, corporate bonds
and other fixed income securities. The amount of interest income varies based
upon the average balance of the Corporation's fixed income portfolio and the
average yield on this portfolio.
The Corporation had interest income of $34,128 in 1998, $225,840 in
1997, and $96,918 in 1996. The decrease in 1998 from 1997 was the result of a
decrease in the amount of investments in high yield bonds in early 1997 as
compared to 1998. Income from controlled affiliates of $229,195 in 1998 and
$257,258 in 1997 represents dividend and interest income from preferred stock
and a note received in connection with the Corporation's investment in Avery.
The $750,000 income from controlled affiliates in 1996 represents management fee
income from Excelsior.
Operating expenses were $1,620,408 in 1998, $2,400,850 in 1997, and
$2,406,102 in 1996. Operating expenses included net professional fees,
settlement costs and other expenses related to litigation of $535,017 in 1997,
$754,631 in 1996. Most of the Corporation's other operating expenses are related
to employee and director compensation, office and rent expenses and professional
fees (primarily general legal and audit fees).
Net investment losses from operations were $1,357,085 in 1998,
$1,903,829 in 1997, and $1,553,891 in 1996.
The Corporation has relied and continues to rely to a large extent
upon proceeds from sales of investments rather than investment income to defray
a significant portion of its operating expenses. Because such sales cannot be
predicted with certainty, the Corporation attempts to maintain adequate working
capital to provide for fiscal periods when there are no such sales.
Net Realized Gains and Losses on Portfolio of Investments:
During the three years ended December 31, 1998, 1997 and 1996, the
Corporation realized net gains before taxes of $1,628,004, $3,105,165, and
$246,518, respectively, from the disposition of various investments.
During 1998, Franklin realized a net gain from the sale of a portion
of its investment in and subsequent exercise of warrants in Avery of $1,308,208,
as well as $350,000 in gains from Seneca, and $96,370 in gains from other
investment partnerships, the sale of various marketable securities and loans.
These gains were offset by a loss of $126,574 on the sales of various marketable
securities, loans, and investment partnerships.
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
12
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 the Corporation realized net gains of $246,518 on sales
of marketable securities, primarily Market Analysis and Information Database,
Inc. ("M.A.I.D.") common stock.
Unrealized Appreciation of Investments:
Unrealized appreciation of investments, net of deferred taxes,
decreased by $1,015,091 during the year ended December 31, 1998, primarily from
realized gains due to the sale of a portion of Franklin's investment in Avery.
This was offset by increased values for CIC and CIC Ventures.
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.
Liquidity and Capital Resources:
The Corporation's reported total cash and cash equivalents, accrued
interest and accounts receivable and marketable investment securities (the
primary measure of liquidity) at December 31, 1998 was $1,979,256 compared to
$720,470 at December 31, 1997 and $442,805 at December 31, 1996. Management
believes that these assets, together with its investment in Seneca, provide the
Corporation with sufficient liquidity for its operations. Funds from Seneca may
be withdrawn upon 30 days written notice to the general partner.
Risks
Pursuant to Section 64(b) (1) of the Investment Corporation 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 Corporation's investment
portfolio. There are significant risks inherent in the Corporation's venture
capital business. The Corporation has invested a substantial portion of its
assets in small private companies and a non-reporting public corporation.
Because of the speculative nature of these investments, there is significantly
greater risk of loss than is the case with traditional investment securities.
The Corporation expects that from time to time its venture capital investments
may result in a complete loss of the Corporation's invested capital or may be
unprofitable. Other investments may appear likely to become successful, but may
never realize their potential. Neither the Corporation's investments nor an
investment in the Corporation is intended to constitute a balanced investment
program. The Corporation has in the past relied and continues to rely to a large
extent upon proceeds from sales of investments rather than investment income to
defray a significant portion of its operating expenses.
13
Risks Relating to the Year 2000 Issue
The Corporation's internal computer information is Year 2000
compliant. The Corporation uses individual PC's that rely on third party
software. All such software has been upgraded to versions that are Year 2000
compliant.
The Corporation's Year 2000 issues and any potential business
interruptions, costs, damages, or losses related thereto are primarily dependent
upon the Year 2000 compliance of third parties. The Corporation's suppliers that
provide mission-critical services are primarily large companies, such as local
and long distance telephone service providers, banks, and utility companies. The
Corporation has no reason to believe that these suppliers will not be Year 2000
compliant. However, the Corporation is in the process of reviewing its third
party relationships in order to assess and address Year 2000 issues with respect
to these third parties.
The Corporation believes that the "Year 2000" problem may be material
to its investments. The Corporation has received assurances from the companies
that it invests in that they are addressing the Year 2000 issue and do not
expect any material events to affect their 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
Corporation's results of operations. The Corporation intends to develop a
contingency plan to be able to react to any Year 2000 problems should they
arise.
The costs associated with Year 2000 compliance have been nominal and
the Corporation believes that the remaining costs will be minimal and will not
have a material adverse effect on its financial condition or results of
operations.
Item 7a. Quantitative and Qualitative Disclosures about Market Risk
A portion of the Corporation's portfolio of investments is in
marketable securities traded on the over-the-counter market. In order to realize
the full market value of a security the market must trade in an orderly fashion.
Should an economic event occur that would not allow the markets to trade in an
orderly fashion, the Corporation may not be able to receive fair value for those
investments.
All investments owned by the Corporation are marked at fair value at
December 31, 1998. For those investments that do not have a ready market, the
Corporation has received valuation information from either an independent third
party or the investee corporation itself. The Corporation has no off-balance
sheet investments or hedging instruments.
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.
14
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
The Corporation terminated its auditing relationship with Arthur
Andersen & Co. and began a relationship with Ernst & Young LLP on June 16, 1998,
to provide auditing, accounting and managerial services. The change was approved
by the Board of Directors of the Corporation and subsequently the shareholders
at a shareholder meeting held on June 16, 1998. There were no disagreements with
Arthur Andersen & Co. or with Ernst & Young LLP on accounting or financial
disclosure.
15
PART III
Item 10. Directors and Executive Officers of the Corporation
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 33, has been Senior Vice President of the
Corporation since November 1995, Secretary of the Corporation 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 of the Corporation.
Hiram M. Lazar, age 34, joined the Corporation as Chief Financial
Officer in January 1999. From June 1992 to January 1999, Mr. Lazar was the
Vice-President of Finance and Corporate Controller for Lebenthal & Co., Inc., a
regional full-service broker/dealer. From July 1985 to June 1992, Mr. Lazar
worked as a Certified Public Accountant with various regional and national
Certified Public Accounting firms.
John Greenbaum, age 48 had been Chief Financial Officer and Treasurer
of the Corporation since 1996. Mr. Greenbaum resigned from the Corporation
effective December 31, 1998.
Stephen J. Mayer, age 46, had been Vice President and Controller of
the Corporation since 1994. Mr. Mayer's employment ceased with the Corporation
effective December 31, 1998.
Directors
- ---------
Stephen L. Brown, age 60, was elected to the Corporation's Board of
Directors and appointed Chairman of its Board of Directors in October 1986. He
has been Chief Executive Officer since October 1986. From June 1984 through June
1997, Mr. Brown was 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 68, joined the Board as a director in 1996. Mr.
Berger has been Vice Chairman of Heitman Financial Ltd., a real estate service
Corporation, for more than the past six years. Mr. Berger is also Chairman of
the Board of Mid Town Bank, Chicago, and Berger Management Services LLC.
Additionally Mr. Berger serves as a board member of Innkeepers USA Trust, and
Universal Health Realty Income Trust.
Irving Levine, age 77, became a director of the Corporation 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.).
16
Jonathan A. Marshall, age 60, 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.
Michael P. Rolnick, age 33, is currently Vice President for New
Ventures at E*Trade Group, Inc. In this capacity he is responsible for the
company's corporate development activities including mergers and acquisitions,
private equity investments, and Corporate Strategy. Prior to working at E*Trade,
Mr. Rolnick was an Associate at Montgomery Securities.
Carl Glickman, age 72, resigned from the Board on July 29, 1998.
Jeffrey Steiner, age 61, did not submit his name for reelection to
the Board at the Annual Meeting of Stockholders held on June 16, 1998.
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 Corporation and the other executive officers
of the Corporation, whose individual remuneration exceeded $100,000 for the year
ended December 31, 1998.
Name & Additional Other Annual 401K
Principal Position Year Salary Compensation Compensation Contribution
($) ($) ($) ($)
Stephen L. Brown 1998 350,000 32,500 - -
Chairman & President 1997 390,000 - - 9,500
(1) 1996 390,000 32,500 - 9,500
Spencer L. Brown 1998 126,250 12,500 - -
Senior Vice President 1997 120,000 - - 8,050
& Secretary 1996 120,000 10,000 - 7,200
John Greenbaum 1998 102,500 - - -
Chief Financial Officer 1997 120,000 - - 6,900
& Treasurer (2) 1996 92,308 10,000 4,500 1,000
(1) Mr. Brown is employed under a contract with the Corporation 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 Corporation elects not to extend
the term. In compliance with the terms of the Settlement described in
Footnote 5 to the financial statements, Mr. Brown's base salary was
reduced to $350,000.
(2) Mr. Greenbaum joined the Corporation as Chief Financial Officer &
Treasurer in March 1996 at an annual base salary of $120,000. Through
March 1996, Mr. Greenbaum served as an outside director of the
Corporation for which he received compensation of $4,500. Mr. Greenbaum
resigned from Franklin effective December 31, 1998.
17
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 Corporation's common stock as of March 16, 1999 by 1)
each person who is known by the Corporation to be the beneficial owner of more
than five percent of the outstanding common stock, 2) each director of the
Corporation, 3) each current executive officer listed in the Summary
Compensation Table and 4) all directors and executive officers of the
Corporation as a group. Except as otherwise indicated, to the Corporation's
knowledge, all shares are beneficially owned and investment and voting power is
held as stated by the persons named as owners. The Corporation is not aware of
any arrangement which may, at a subsequent date, result in a change of control
of the Corporation. The address for all beneficial owners, unless stated
otherwise below is c/o The Franklin Capital Corporation 450 Park Avenue, Suite
1000, New York, NY 10022.
Amount and
Nature of
Name and Address Beneficial Percent
of Beneficial Owner Ownership of Class
------------------- ------------ ---------
Stephen L. Brown 110,960 (1) 14.4%
Kuby Gottlieb Special Value Fund 60,350 7.9%
500 West Madison Ave, 27th Floor
Chicago, IL 60661
Spencer L. Brown 15,975 (2) 2.1%
Miles L. Berger 10,000 1.3%
John Greenbaum 9,600 (3) 1.3%
Jonathan A. Marshall 5,900 *
Irving Levine 3,000 *
Hiram M. Lazar 2,000 *
Michael Rolnick 400 *
Stephen J. Mayer - *
All officers and directors
as a group (9 persons) 157,835 20.2%
---------------------------
* Less than 1.0%
(1) Does not include 4,075 shares owned by Mr. Brown's children not
including Spencer L. Brown, and does not include 15,975 owned by Spencer
L. Brown, including options for 10,000 shares. See (2) below. Mr. Brown
disclaims beneficial ownership of such shares. Includes options for
5,000 shares exercisable on January 27, 1998 and 5,000 shares
exercisable on January 27, 1999.
(2) Includes options for 5,000 shares exercisable on January 27, 1998 and
5,000 shares exercisable on January 27, 1999.
(3) Ownership is through Greenbaum Brothers Partnership, in which Mr.
Greenbaum has a 33% general Partnership interest. Includes options for
5,000 shares exercisable on January 27, 1998.
Item 13. Certain Relationships and Related Transactions
See Items 10 through 12 and Footnote 6 to the Financial Statements.
18
PART IV
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K
(a) (1) Financial Statements
Information required by subsection of item is
presented in index to Financial Statements on
page 21.
(2) Exhibits
(3) (i) Articles of Incorporation*
(3) (ii) By-Laws*
(23) Financial Data Schedule (for EDGAR purposes only)
(b) Reports on Form 8-K. The Corporation did not file any reports on
Form 8-K the last quarter of 1998.
- --------------------------------------------------------------------------------
*Incorporated by reference to the Corporation'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 Corporation has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
THE FRANKLIN CAPITAL CORPORATION
Date: March 24, 1999 By: /s/
----------------------------------------
Stephen L. Brown
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
Corporation in the capacities and on the dates indicated.
Signatures Title Date
- ---------- ----- ----
/s/______________________ Chairman & March 24, 1999
Stephen L. Brown Chief Executive Officer
/s/______________________ Senior Vice President & March 24, 1999
Spencer L. Brown Secretary
/s/______________________ Chief Financial Officer March 24, 1999
Hiram M. Lazar
/s/______________________ Director March 24, 1999
Miles L. Berger
/s/______________________ Director March 24, 1999
Irving Levine
/s/______________________ Director March 24, 1999
Jonathan A. Marshall
/s/______________________ Director March 24, 1999
Michael P. Rolnick
20
THE FRANKLIN CAPITAL CORPORATION
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
The following financial statements of The Franklin Capital Corporation are filed
herewith and included in response to Item 8.
Page
----
Report of Ernst & Young, LLP.......................................... 22
Report of Arthur Andersen, LLP........................................ 23
Balance Sheets as of
December 31, 1998 and 1997.................................. 24
Statements of Operations for the years
ended December 31, 1998, 1997 and 1996...................... 25
Statements of Cash Flows for the years
ended December 31, 1998, 1997 and 1996...................... 26
Statements of Changes in Net Assets for the years
ended December 31, 1998, 1997 and 1996...................... 27
Financial Highlights for the years ended December 31,
1998, 1997, 1996, 1995 and 1994............................. 28
Portfolio of Investments as of
December 31, 1998........................................... 29
Notes to Financial Statements......................................... 30-37
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.
21
To the Stockholders and Board of Directors of
Franklin Capital Corporation
We have audited the accompanying balance sheet of Franklin Capital Corporation
as of December 31, 1998, including the portfolio of investments as of December
31, 1998, and the related statements of operations, cash flows and changes in
net assets and the financial highlights for the year then ended. 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 audit.
We conducted our audit 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 and
financial highlights. Our procedures included the physical inspection of
securities on hand at December 31, 1998 and the confirmation of marketable
investment securities owned as of December 31, 1998, by correspondence with the
custodian. 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 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
Franklin Capital Corporation at December 31, 1998, the results of its
operations, cash flows and changes in net assets and the financial highlights
for the year then ended in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
New York, New York
February 24, 1999
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of
The Franklin Capital Corporation:
We have audited the accompanying balance sheet of The Franklin Capital
Corporation (formerly, The Franklin Holding Corporation [Delaware]) (a Delaware
corporation) as of December 31, 1997, and the related statements of operations,
cash flows and changes in net assets for the two years ended December 31, 1997,
and the financial highlights for the four 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 the confirmation of marketable investment
securities owned as of December 31, 1997, 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, the results of
its operations, cash flows and changes in net assets for the two years ended
December 31, 1997, and the financial highlights for the four years ended
December 31, 1997 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
New York, New York
March 24, 1998
THE FRANKLIN CAPITAL CORPORATION
====================================================================================================================
Balance Sheets
- --------------------------------------------------------------------------------------------------------------------
December 31, 1998 1997
- --------------------------------------------------------------------------------------------------------------------
ASSETS
Marketable investment securities, at market value (cost: December 31,
1998 - $412,048; December 31, 1997 - $41,522) (Note 2) $ 699,704 $ 41,522
Investments, at fair value (cost: December 31,1998 - $3,063,181;
December 31, 1997 - $4,168,150) (Note 2)
Avery Communications Inc. (Note 6) 3,380,013 5,511,000
Other investments 1,045,589 1,322,318
--------- ---------
4,425,602 6,833,318
--------- ---------
Cash and cash equivalents (Note 2) 1,100,373 348,900
Accrued interest and accounts receivable (Note 6) 179,179 330,048
Other assets 143,838 164,670
------- -------
$ 6,548,696 $ 7,718,458
=========== ===========
TOTAL ASSETS
- --------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accounts payable and accrued liabilities $ 233,143 $ 375,326
TOTAL LIABILITIES 233,143 375,326
Commitments and contingencies (Note 5)
STOCKHOLDERS' EQUITY
Common stock, $1 par value: 2,000,000 shares authorized;
1,003,986 shares issued:750,686 and 801,198 shares outstanding
at December 31,1998 and 1997, respectively (Note 7) 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) 1,650,077 2,665,168
Accumulated deficit (3,169,229) (3,440,148)
---------- ----------
8,482,711 9,226,883
Deduct:253,300 and 202,788 shares of common stock held in treasury,
at cost, at December 31, 1998 and 1997, respectively (Note 4) (2,167,158) (1,883,751)
Net assets, equivalent to $8.41 per share at December 31, 1998
and $9.17 per share at December 31, 1997 6,315,553 7,343,132
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,548,696 $ 7,718,458
=========== ===========
- --------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
24
THE FRANKLIN CAPITAL CORPORATION
==================================================================================================================================
Statements of Operations
- ----------------------------------------------------------------------------------------------------------------------------------
For the Year Ended December 31, 1998 1997 1996
--------------------------------------------------------
INVESTMENT INCOME
Income from controlled affiliates (Note 6) $ 229,195 $ 257,258 $ 750,000
Interest on loans and debt securities - 176,728 78,978
Interest on short term investments and money market accounts 34,128 49,112 17,940
Dividend income - 1,996 5,293
Other Income - 11,927 -
----------- -------- --------
263,323 497,021 852,211
----------- -------- --------
EXPENSES
Salaries and employee benefits (Note 7) 882,168 923,080 941,164
Professional fees 223,106 169,928 117,994
Appraisal fees 3,087 25,000
Investment banking fee - 13,997 -
Rent (Note 5) 99,912 97,607 108,857
Insurance 43,201 43,748 48,462
Directors' fees 54,539 121,809 131,906
Taxes other than income taxes 49,919 43,259 51,212
Newswire and promotion 12,774 7,826 9,116
Depreciation and amortization 28,428 38,301 36,660
General and administrative 223,274 266,287 206,100
Professional fees related to conversion to
Business Development Corporation - 114,991 -
Professional fees related to Stearns & Foster litigation (Note 5) - 35,380 122,000
Expenses related to Stockholders' litigation & proxy contest (Note 5) - 499,637 257,631
Net settlement of Stearns & Foster litigation ( Note 5) - - 375,000
----------- -------- --------
1,620,408 2,400,850 2,406,102
----------- -------- --------
Net investment loss from operations (1,357,085) (1,903,829) (1,553,891)
Net realized gain on portfolio of investments 1,628,004 3,105,165 246,518
Benefit (provision) for income taxes (Note 3) - 208,333 (151,433)
----------- -------- --------
Net realized income (loss) 270,919 1,409,669 (1,458,806)
(Decrease) increase in unrealized appreciation of investments,
net of deferred income tax benefit of $0; $0; and $100,636,
respectively (Note 3) (1,015,091) (1,339,212) 266,694
----------- -------- --------
Net (decrease) increase in net assets from operations ($ 744,172) $ 70,457 ($1,192,112)
=========== =========== ===========
Net (decrease) increase in net assets from operations per common share ($ 0.94) $ 0.09 ($ 1.48)
=========== =========== ===========
Weighted average number of common shares outstanding 792,572 801,198 803,097
=========== =========== ===========
- -----------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
25
THE FRANKLIN CAPITAL CORPORATION
===================================================================================================================================
Statements of Cash Flows
- -----------------------------------------------------------------------------------------------------------------------------------
For the Year Ended December 31, 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net (decrease) increase in net assets from operations ($744,172) $70,457 ($1,192,112)
Adjustments to reconcile net (decrease) increase in net assets to net cash
used in operating activities:
Depreciation and amortization 28,428 38,301 36,660
(Increase) decrease in unrealized appreciation of investments 1,015,091 1,339,212 (166,058)
Deferred income tax benefit - - (100,636)
Amortization of discount on note receivable from Avery (101,176) (127,760) -
Net realized gain on portfolio of investments (1,628,004) (3,105,165) (246,518)
Changes in operating assets and liabilities:
(Increase) decrease in accrued interest and accounts receivable 150,869 (161,101) 315,312
(Increase) decrease in other assets (7,596) 1,173,580 (1,126,211)
Increase (decrease) in accounts payable and accrued liabilities (142,183) (1,592,196) 1,483,684
Total adjustments (684,571) (2,435,129) 196,233
Net cash used in operating activities (1,428,743) (2,364,672) (995,879)
Cash flows from investing activities:
Proceeds from sale of controlled affiliate 2,500,000 - -
Proceeds from sale of other investments, net of expenses 1,432,717 309,000 300,001
Proceeds from sale of marketable investment securities, net of expenses 217,481 7,296,186 2,099,051
Cash consolidated from Excelsior Communications Corporation - 1,710,702 -
Return of capital from investments - 887,313 677,716
Purchases of investments (1,025,000) (2,448,963) (887,521)
Purchases of marketable investment securities (661,575) (2,749,730) (1,694)
Purchases of fixed assets - (5,890) (21,791)
Net cash provided by investing activities 2,463,623 4,998,618 2,165,762
Cash flows from financing activities:
Distribution to stockholders charged to accumulated deficit - (2,603,894) (801,198)
Purchase of treasury stock (283,407) - (250,250)
Net cash used in financing activities (283,407) (2,603,894) (1,051,448)
Net increase in cash and cash equivalents 751,473 30,052 118,435
Cash and cash equivalents at beginning of year 348,900 318,848 200,413
Cash and cash equivalents at end of year $1,100,373 $348,900 $318,848
- -----------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
26
THE FRANKLIN CAPITAL CORPORATION
=================================================================================================================================
Statements of Changes in Net Assets
- ---------------------------------------------------------------------------------------------------------------------------------
For the Year Ended December 31, 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------------
Decrease in net assets from operations:
Net investment loss ($1,357,085) ($1,903,829) ($1,553,891)
Net realized gain on portfolio of investments,
net of current income taxes 1,628,004 3,313,498 95,085
(Decrease) increase in unrealized appreciation of investments,
net of deferred income taxes (1,015,091) (1,339,212) 266,694
------------ ---------- ----------
Net (decrease) increase in net assets from operations (744,172) 70,457 (1,192,112)
Distributions to stockholders charged to
accumulated deficit and earnings - (2,603,894) (801,198)
Capital stock transactions:
Purchase of treasury stock (283,407) - (250,250)
------------ ---------- ----------
Total decrease in net assets (1,027,579) (2,533,437) (2,243,560)
------------ ---------- ----------
Net assets at beginning of year 7,343,132 9,876,569 12,120,129
------------ ---------- ----------
Net assets at end of year $6,315,553 $7,343,132 $9,876,569
============ ========== ==========
- ---------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
27
THE FRANKLIN CAPITAL CORPORATION
=================================================================================================================================
Financial Highlights
- ---------------------------------------------------------------------------------------------------------------------------------
For the Year Ended December 31, 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE (1):
Net asset value, beginning of period $9.17 $12.33 $14.67 $15.40 $14.96
----- ------ ------ ------ ------
Net investment loss (1.71) (2.37) (1.93) (1.43) (1.66)
Net gain on portfolio of
investments (realized and unrealized) after taxes 0.77 2.46 0.45 1.46 2.01
----- ------ ------ ------ ------
Total from investment operations (0.94) 0.09 (1.48) 0.03 0.35
----- ------ ------ ------ ------
Less dividends and distributions:
Distributions from accumulated
deficit and earnings 0.00 (3.25) (1.00) (1.00) 0.00
----- ------ ------ ------ ------
Total dividends and distributions 0.00 (3.25) (1.00) (1.00) 0.00
----- ------ ------ ------ ------
Treasury stock transactions 0.18 0.00 0.14 0.24 0.09
----- ------ ------ ------ ------
Net asset value, end of period $8.41 $9.17 $12.33 $14.67 $15.40
----- ------ ------ ------ ------
Market value per share, end of period $5.25 $6.50 $10.13 $10.13 $8.13
----- ------ ------ ------ ------
TOTAL INVESTMENT RETURN:
Based on market value per share (%) (19.23) (16.62) 9.64 35.45 (8.45)
RATIOS TO AVERAGE NET ASSETS:
Expenses (%) 23.73 28.97 20.58 16.59 16.04
Net investment loss (%) (19.88) (22.97) (13.29) (11.17) (10.76)
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of period (000 omitted) $6,316 $7,343 $9,877 $12,120 $13,345
Portfolio turnover rate (%) 39 77 8 32 63
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Calculated based on weighted average number of shares outstanding during the period.
The accompanying notes are an integral part of these financial highlights.
28
THE FRANKLIN CAPITAL CORPORATION
===================================================================================================================================
Portfolio of Investments
- --------------------------------------------------------------------------------------------------------------------------------
Marketable Investment Securities Number of
- --------------------------------------------------------------------------------- --------------------------------
Shares or Market
Principal Value
December 31, 1998 Amount ($) Cost(1) (Note 2)
- --------------------------------------------------------------------------------------------------------------------------------
Common Stock - Communication Intelligence Corp.......................... 875,000 $368,594 $656,250
Certificate of Deposit - 3.90%, due 05/04/99............................ 43,454 43,454 43,454
Total Marketable Investment Securities (13.7% of total investments
and 11.1% of net assets)...................................... $412,048 $699,704
- -----------------------------------------------------------------------------------------------------------------------------------
Investments, at Fair Value
- ----------------------------------------------------------------------------------------------------------------------------------
Directors'
Equity Valuation
December 31, 1998 Investment Interest Cost(1) (Note 2)
- ------------------------------------------------------------------------------------------------------------------------------
Avery Communications Inc.......................................Common stock $1,481,482
(Telecommunications)
Avery Communications Inc..................................Convertible preferred
(Telecommunications) stock - Series E; 350,000
12.0% dividend rate
Total Avery Communications (65.9% of total investments
and 53.5% of net assets) 12.90% $1,831,482 $3,380,013
(fully diluted basis)
Other Investments
Seneca Limited Partnership.................................Limited partnership 0.80% 500,000 530,019
(Investment limited partnership) interest
Codman Research Inc............................................Common stock 2.75% 400,031 254,488
(Healthcare information systems)
CIC Standby Ventures, L.P. ................................Limited partnership 1.80% 66,987 107,847
(Computer handwriting systems) interest
FMA High Yield Income Limited Partnership .....................Limited partnership 2.69% - 36,568
(Schroders high yield bond interest
limited partnership)
GoAmerica Corp.................................................Common stock 0.50% 50,000 50,000
(Internet software)
Pixel Multimedia Ltd..........................................Convertible Note 66,667 66,667
(Multimedia publishing) (Non Interest Bearing)
Other investments................................................... 148,014 -
Total Other Investments (20.4% of total investments
and 16.6% of net assets) 1,231,699 1,045,589
Total Investments ...............................................................................$3,063,181.....$4,425,602
- ----------------------------------------------------------------------------------------------------------------------------------
(1) Book cost equals tax cost for all investments.
The accompanying notes are an integral part of this Schedule.
29
Franklin Capital Corporation
Notes to Financial Statements
December 31, 1998
1. ORGANIZATION
Franklin Capital Corporation (formerly The Franklin Holding Corporation
(Delaware)) ("Franklin", or the "Corporation") is a Delaware corporation
registered as a Business Development Company ("BDC") under the Investment
Company Act of 1940 (the "Act"). A BDC is a specialized type of investment
company under the Act. A BDC must be primarily engaged in the business of
furnishing capital and managerial expertise to companies that do not have ready
access to capital through conventional financial channels. Such companies are
termed "eligible portfolio companies". The Corporation, as a BDC, 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's wholly owned subsidiary, Excelsior
Communications Corporation ("Excelsior"), was dissolved. For financial reporting
purposes, the assets and operations of Excelsior have been consolidated with
Franklin effective January 1, 1997. 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 principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Statements of Cash Flows
For purposes of the Statements of Cash Flows, Franklin considers only highly
liquid investments with maturities of 90 days or less at the date of their
acquisition to be cash equivalents.
The Corporation paid no interest during the years ended December 31, 1998, 1997
and 1996 and paid $0, $54,265 and $173,018 for income taxes during the years
ended December 31, 1998, 1997 and 1996, respectively.
At December 31, 1998 the Corporation held cash and cash equivalents primarily in
money market funds at two commercial banking institutions.
Valuation of Investments
Security investments which are publicly traded on a national exchange or NASDAQ
are stated at the last reported sales price on the day of valuation, or if no
sale was reported on that date, then the securities are stated at the last
quoted bid price. The Board of Directors of Franklin (the "Board of Directors")
may determine, if appropriate, to discount the value where there is an
impediment to the marketability of the securities held.
The Franklin Capital Corporation
Notes to Financial Statements (continued)
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 reports the unrealized gain or loss resulting from such
valuation in the Statements of Operations.
Gains on Portfolio of Investments
Amounts reported as realized gains are measured by the difference between the
proceeds of sale or exchange and the cost basis of the investment without regard
to unrealized gains reported in the prior periods. Gains are considered realized
when sales or dissolution of investments are consummated.
Income Taxes
Franklin does not qualify as a Regulated Investment Company for income tax
purposes. Therefore, the Corporation is taxed as a regular corporation.
Franklin 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 for the respective assets. Leasehold Improvements are
included in other assets and are amortized over its useful life or the remaining
life of the lease, whichever is shorter.
Net (Decrease) Increase in Net Assets Per Common Share
Net (decrease) increase in net assets per common share is based upon the
weighted average number of shares of common stock outstanding. See Note 7 for
discussion of Stock Option Plans.
3. INCOME TAXES
At December 31, 1998, Franklin had a net operating loss carryforward for income
tax purposes of approximately $3,315,000 that will begin to expire in 2011. At a
43% effective tax rate the after-tax net benefit from this loss would be
approximately $1,425,000.
For the years ended December 31, 1998, 1997 and 1996, Franklin's tax (provision)
benefit was based on the following:
The Franklin Capital Corporation
Notes to Financial Statements (continued)
1998 1997 1996
------------- --------------- -----------------
Net investment loss from operations.................................$ (1,357,085) $ (1,903,829) $ (1,553,891)
Net realized gain on portfolio of investments....................... 1,628,004 3,105,165 246,518
Decrease in unrealized appreciation................................. (1,015,091) (1,339,212) 166,058
---------- ---------- -------
Pre-tax book loss .............................................$ ( 744,172) $ (137,876) $ (1,141,315)
============= ============= =============
1998 1997 1996
---------------- --------------- ----------------
Tax benefit at 34% on $(744,172), $(137,876) and
$(1,141,315) respectively.........................................$ 253,000 $ 46,878 $ 388,047
State and local, net of Federal benefit............................. - (14,100) (40,000)
Book losses for which no benefit is provided........................ (253,000) (46,878) (361,319)
Adjustment to deferred taxes provided in prior periods.............. - 222,433 (37,525)
----------- ------- -------
$ - $ 208,333 $ (50,797)
============= ============ ===========
The components of the tax benefit (provision) are as follows:
1998 1997 1996
------------- -------------- ----------------
Current Federal tax benefit (provision) $ - $ - $ (111,433)
Net deferred Federal tax benefit (provision) - - 67,339
Current state and local tax
provision...................................................... - (14,100) (40,000)
Deferred state and local tax benefit............................. - - 33,297
Adjustment to Federal, state and local taxes
provided in prior periods..................................... - 222,433 -
------------- ---------- ---------------
(Provision) benefit for income taxes............................. $ - $ 208,333 $ (50,797)
============= =========== ==========
- --------------------------------------------------------------------------------
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, 1998 and December 31, 1997, significant deferred tax assets and
liabilities consist of:
- --------------------------------------------------------------------------------
Asset (Liability)
-----------------
December 31, December 31,
1998 1997
---------------- -----------------
Deferred Federal and state benefit from net operating
loss carryforward..................................................... $ 1,425,000 $ 1,370,552
Deferred Federal and state provision on unrealized
appreciation of investments........................................... (710,000) (1,172,673)
Valuation allowance..................................................... (715,000) ( 197,879)
------------ ----------------
Deferred taxes........................................................ $ - $ -
============= ===============
The Franklin Capital Corporation
Notes to Financial Statements (continued)
At December 31, 1998, the realization of deferred tax assets is dependent upon
future appreciation of the Corporation's investments.
4. STOCKHOLDERS' EQUITY
The Accumulated Deficit at December 31, 1998 consists of accumulated net
realized gains of $2,855,000 and accumulated investment losses of $6,024,000.
Prior to 1998, the Board of Directors had authorized Franklin 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 were deemed to be in the best
interest of the Corporation and its stockholders. As of December 31, 1997 the
Corporation had purchased 212,788 shares of its common stock of which 202,788
remained in treasury. In December 1998 the Board authorized the repurchase of up
to an additional 100,000 shares of its common stock in open market purchases on
the American Stock Exchange when such purchases are deemed to be in the best
interest of the Corporation and its stockholders. During the year ended December
31, 1998, the Corporation purchased 50,512 shares of its common stock at a total
cost of $283,407. To date, Franklin has repurchased 263,300 shares of its common
stock of which 253,300 shares remain in treasury at December 31, 1998.
Subsequent to December 31, 1998, 20,046 shares of stock from treasury were
issued pursuant to an investment made by Franklin in January 1999. (See Note 10
- - Subsequent Events)
5. COMMITMENTS AND CONTINGENCIES
Franklin is obligated under an operating lease which provides for annual minimum
rental payments as follows:
- --------------------------------------------------------------------------------
December 31,
1999....................................$ 149,600
2000.................................... 149,600
2001.................................... 149,600
2002.................................... 149,600
2003.................................... 149,600
----------
$ 748,000
==========
- --------------------------------------------------------------------------------
Rent expense for the twelve months ended December 31, 1998, 1997 and 1996 was
$99,912, $97,607 and $108,857, respectively. For the twelve months ended
December 31, 1998 and 1997, the Corporation collected rents of $43,542 and
$44,750, respectively, from subtenants for a portion of its existing office
space which is reflected as a reduction in rent expense for that period.
In March 1994, Stearns and Foster Bedding Company ("Stearns & Foster") commenced
a private cost recovery and contribution action against Franklin 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
The Franklin Capital Corporation
Notes to Financial Statements (continued)
executed by the parties on February 28, 1997. Franklin 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 and its related entities with prejudice; (ii)
release Franklin 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 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.
A settlement related to a complaint filed by a former director of Franklin in
the United States District Court for the Southern District of New York 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
distribution to stockholders of record of the Corporation's Common Stock as of
July 28, 1997 and the Corporation paid legal fees of $75,000 to the plaintiff's
counsel.
The Corporation brought an action against National Union Fire Insurance Company
of Pittsburgh, PA ("National Union") in the Supreme Court of the State of New
York. The action sought reimbursement of $1 million 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 was granted by the Court on November 24, 1998. Franklin has
filed an appeal of the dismissal with the New York State Supreme Court Appellate
Division. Both sides have submitted briefs to the Court, and the case is
currently pending.
6. TRANSACTIONS WITH CONTROLLED AFFILIATES
In August 1995, Franklin made an initial investment of $350,000 in Avery
Communications Inc. ("Avery"), a holding company in the telecommunications
industry. This investment consisted of a one year 12% note with warrants and a
conversion option. On June 30, 1996, Franklin exercised its warrants to purchase
158,333 shares of Avery common stock at $0.10 per share. In November 1996, the
note was converted to 350,000 shares of Series B preferred stock which earn
dividends of 12% per annum payable quarterly and are convertible to 350,000
shares of common stock. An additional 28,506 shares of common stock at a price
of $1.00 per share were issued to Franklin at that time in lieu of accrued
interest on the note.
On May 30, 1997, Franklin made an additional investment of $2,500,000 in Avery.
This 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. The Series
B preferred shares previously owned by Franklin were converted to Series E
preferred stock with the same terms. This transaction, in conjunction with the
investment in common and preferred stock of Avery that the Corporation held
previously, resulted in Franklin owning in excess of 25% of Avery's outstanding
voting stock on a primary basis. Additionally, three officers of Franklin 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.
The Franklin Capital Corporation
Notes to Financial Statements (continued)
On July 6, 1998, Franklin sold the 1,500,000 shares of Avery preferred Series D
stock and the $1,000,000 Avery note along with 280,000 warrants to purchase
Avery common stock for a total of $2,500,000 to the Thurston Group, Inc. The
president of the Thurston Group is the current chairman of Avery. Franklin
realized a net gain of $935,297 as a result of this sale. In conjunction with
this transaction, Franklin's representation on Avery's Board of Directors was
reduced from three directors to two.
On July 13, 1998, Franklin entered into a cashless exercise of its remaining
warrants to purchase 386,667 shares of Avery common stock at $1.50 per share
realizing a net gain of $372,911 and a decrease in unrealized appreciation of a
like amount. In return, Franklin received 196,503 shares of Avery common stock.
As a result of the July 6 transaction, Avery is no longer a controlled affiliate
of Franklin. At December 31, 1998, Franklin owns 12.9% of Avery on a fully
diluted basis.
For the years ended December 31, 1998 and 1997, Franklin's income from Avery
consists of $118,431 and $129,500, respectively, in dividends from Avery, and
$110,764 and $127,758, respectively, of interest on the note. At December 31,
1998 and December 31, 1997, $112,523 and $170,403, respectively, are included in
"Accrued interest and accounts receivable" on the accompanying balance sheets
for amounts due from Avery for dividends and reimbursable expenses.
7. EMPLOYEE BENEFIT PLANS
On September 9, 1997, Franklin's stockholders approved two Stock Option Plans: a
Stock Incentive Plan ("SIP") to be offered to the Corporation's consultants,
officers and employees (including any officer or employee who is also a director
of the Corporation) and a Non-Statutory Stock Option Plan ("SOP") to be offered
to the Corporation's "outside " directors, i.e., those directors who are not
also officers or employees of Franklin. 75,000 shares of the Corporations Common
Stock have been reserved for issuance under these plans, of which 45,000 shares
have been reserved for the SIP and 30,000 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.
The SIP is administered by the Corporation's Board of Directors. The Board has
the authority, among other rights, to select the participants to whom awards may
be granted, determine the types of awards to be granted, and determine the
vesting terms and other conditions of an award to an SIP participant. The SIP
permits the Committee to grant participants options to purchase Common Stock
(including incentive stock options within the meaning of Section 422 of the
Internal Revenue Code ("ISOs") or "non-statutory stock options" ("non-ISOs")),
stock appreciation rights, restricted stock and tax offset bonuses.
The SOP is also administered by the Board of Directors. Only non-ISOs can be
granted under the SOP. Because the issuance of options to "outside" directors is
not permitted under the Act without an exemptive order by the Commission, the
issuance of options under the SOP is conditioned upon the granting of such
order. The Corporation has applied for such relief and will not issue options to
"outside" directors until obtaining such exemptive relief. In the event such
relief is not granted, no "outside" directors will be issued options pursuant to
the SOP.
On January 27, 1998, 45,000 options were granted in total to three eligible
officers of the Corporation under the SIP. The strike price of the options was
$7.00 per share which represented the closing price of Franklin's
The Franklin Capital Corporation
Notes to Financial Statements (continued)
Common Stock as reported by the American Stock Exchange on that date. One-third
of the options granted vested immediately; another one-third vest one year from
the date of issuance; and the final one-third vest two years after the date of
issuance. The options expire after ten years.
Franklin accounts for the options issued to employees under APB Opinion No. 25,
under which no compensation cost has been recognized. Proforma information
determined consistent with the fair value method required by FASB Statement No.
123 ("FASB 123"), is as follows:
Net realized gain:
As reported $270,919
Pro forma $219,444
Net decrease in net assets per common share:
As reported ($0.94)
Pro forma ($1.00)
Net Asset Value per share:
As reported $8.41
Pro forma $8.34
Pro forma - fully diluted $8.34
The fair value of the options granted was estimated on the date of the grant
using the Black-Scholes option pricing model with the following weighted average
assumptions:
Stock volatility 27.0%
Risk-free interest rate 5.5%
Option term in years 4
Stock dividend yield -
A summary of the status of the Stock Option Plans at December 31, 1998 and
changes during the year then ended follows:
Weighted Average
Shares Exercise Price
---------------------------- -----------------------
Outstanding at beginning of
period - -
Granted 45,000 $7.00
Exercised - -
Forfeited 10,000 $7.00
Expired - -
Outstanding at end of period 35,000 $7.00
Exercisable at end of period 15,000 $7.00
Weighted average fair value
of options granted $2.13
The Franklin Capital Corporation
Notes to Financial Statements (continued)
One of the eligible officers of the corporation resigned on 12/31/98 resulting
in the forfeiture of 10,000 options. The exercise price for all options
outstanding as of December 31, 1998 is $7.00 with a remaining contractual life
of 9.1 years.
Prior to the Stock Option Plans, Franklin had a contributory retirement plan
(the "Plan") covering all employees. Contributions to the Plan were invested in
Franklin's common stock and/or a selected group of mutual funds. Contributions
for the year ended December 31, 1997 and 1996 were $27,093 and $21,163,
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,
including the cashless exercise of the Avery warrants of $580,000 as discussed
in Note 6, and excluding short term investments, aggregated $4,730,199 and
$2,365,820 respectively, for the year ended December 31, 1998; $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.
9. STOCKHOLDERS' DISTRIBUTION
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. Franklin 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.
10. SUBSEQUENT EVENTS
In January 1999, Franklin formed Ecom Capital Corporation ("Ecom"), a wholly
owned subsidiary of Franklin, for the purposes of investing in internet related
ventures. On January 25, 1999, Ecom invested a total of $387,500 into
E-Mattress.com Inc. ("E-Mattress"), consisting of $175,000 worth of Franklin
common stock (20,046 shares from treasury stock valued at the Net Asset Value on
the date of the transaction) and $212,500 in cash for 320,000 shares of
Preferred Stock which is convertible into a 50% equity interest in E-Mattress.
E-Mattress is a retail internet mattress company that was founded in 1998.
E-mattress can be found on the World Wide Web at the domain address
www.emattress.com. E-Mattress became operational and its website went online in
March 1999. Two officers of Franklin were elected to serve on the five member
E-Mattress Board of Directors.