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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
_X_ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934
For the Quarterly period ended September 30, 2002
------------------
or
___ Transition report pursuant to Section 13 or 15(d) of the Securities
and Exchange Act of 1934
For the transition period from ________________ to ___________________.
Commission File No. 1-9727
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Franklin Capital Corporation
----------------------------
(Exact name of registrant specified in its charter)
Delaware 13-3419202
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
450 Park Avenue, 10th Floor, New York, New York 10022
- ----------------------------------------------- ------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 486-2323
----------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Corporation was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_ No ___
The number of shares of common stock outstanding as of November 8, 2002 was
1,056,500.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION 3
Item 1. Financial Statements (Unaudited) 3
Balance Sheets 4
Statements of Operations 5
Statements of Cash Flows 6
Statements of Changes in Net Assets 7
Portfolio of Investments 8
Notes to Financial Statements 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 18
Critical Accounting Policies 18
Statement of Operations 18
Financial Condition 18
Termination of Merger with Change Technology Partners, Inc. 19
Investments 19
Results of Operations 22
Liquidity and Capital Resources 23
Risk Factors 23
Item 3. Quantitative and Qualitative Disclosures about Market Risk 25
Item 4. Controls and Procedures 26
PART II. OTHER INFORMATION 26
Item 1. Legal Proceedings 26
Item 2. Changes in Securities and Use of Proceeds 27
Item 3. Defaults Upon Senior Securities 27
Item 4. Submission of Matters to a Vote of Security Holders 27
Item 5. Other Information 27
Item 6. Exhibits and Reports on Form 8-K 27
SIGNATURE 27
CERTIFICATIONS 28
EXHIBIT INDEX xx
FORWARD LOOKING STATEMENTS
WHEN USED IN THIS QUARTERLY REPORT ON FORM 10-Q, THE WORDS "BELIEVES,"
"ANTICIPATES," "EXPECTS" AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY
FORWARD-LOOKING STATEMENTS. STATEMENTS LOOKING FORWARD IN TIME ARE INCLUDED IN
THIS QUARTERLY REPORT ON FORM 10-Q. SUCH STATEMENTS ARE SUBJECT TO CERTAIN RISKS
AND UNCERTAINTIES WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY,
INCLUDING, BUT NOT LIMITED TO, THOSE SET FORTH IN "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS." READERS ARE
CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH
SPEAK ONLY AS OF THE DATE HEREOF. THE CORPORATION UNDERTAKES NO OBLIGATION TO
PUBLICLY REVISE THESE FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR
CIRCUMSTANCES OCCURRING AFTER THE DATE HEREOF OR TO REFLECT THE OCCURRENCE OF
UNANTICIPATED EVENTS.
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The information furnished in the accompanying financial statements
reflects all adjustments consisting of normal recurring accruals that are, in
the opinion of management, necessary for a fair presentation of the results for
the interim period presented.
3
FRANKLIN CAPITAL CORPORATION
================================================================================
BALANCE SHEETS
- --------------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31,
2002 2001
(UNAUDITED)
- --------------------------------------------------------------------------------
ASSETS
Marketable investment securities, at market value
(cost: September 30, 2002 - $34,675;
December 31, 2001 - $34,675) (Note 2) $34,675 $34,675
Investments, at fair value
(cost: September 30, 2002 - $3,390,000;
December 31, 2001 - $3,876,430) (Note 2)
Excelsior Radio Networks, Inc. 4,365,000 2,325,000
Other investments 1,000,000 1,369,197
---------- ----------
5,365,000 3,694,197
---------- ----------
Cash and cash equivalents (Notes 1 & 2) 3,112 279,728
Other assets 88,967 90,266
---------- ----------
TOTAL ASSETS $5,491,754 $4,098,866
========== ==========
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Note payable $952,070 $1,000,000
Accounts payable and accrued liabilities 794,984 177,121
---------- ----------
TOTAL LIABILITIES 1,747,054 1,177,121
---------- ----------
Commitments and contingencies (Note 5)
STOCKHOLDERS' EQUITY
Convertible preferred stock, $1 par value,
cumulative 7% dividend:
5,000,000 shares authorized; 16,450 shares
issued and outstanding at September 30, 2002
and December 31, 2001 (Liquidation preference
$1,645,000) (Note 4) 16,450 16,450
Common stock, $1 par value: 5,000,000 shares
authorized; 1,505,888 shares issued: 1,064,500
shares outstanding at September 30, 2002 and
1,074,700 at December 31,2001 (Note 6) 1,505,888 1,505,888
Additional paid-in capital 10,571,610 10,271,610
Unrealized appreciation (depreciation) of
investments (Notes 2 and 3) 1,975,000 (182,233)
Accumulated deficit (7,767,570) (6,170,614)
---------- ----------
6,301,378 5,441,101
Deduct common stock held in treasury, at cost,
441,388 shares at September 30, 2002, and
431,188 shares at December 31, 2001 (Note 4) (2,556,678) (2,519,356)
---------- ----------
Net assets (See Note 9 for per share information) 3,744,700 2,921,745
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $5,491,754 $4,098,866
========== ==========
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
4
FRANKLIN CAPITAL CORPORATION
==================================================================================================
STATEMENTS OF OPERATIONS
(UNAUDITED)
- --------------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2002 2001 2002 2001
- --------------------------------------------------------------------------------------------------
INVESTMENT INCOME
Interest and dividend income $110 $11,735 $2,219 69,094
Management fees 120,000 30,000 330,000 30,000
----------- --------- ---------- -----------
120,110 41,735 332,219 99,094
----------- --------- ---------- -----------
EXPENSES
Salaries and employee benefits 195,957 215,216 589,848 692,487
Professional fees 35,325 41,325 106,575 123,975
Rent 15,768 29,784 79,164 89,351
Insurance 17,843 10,600 39,973 31,799
Directors' fees 501 501 1,502 19,502
Taxes other than income taxes 7,525 7,901 35,615 37,160
Newswire and promotion 1,001 1,000 3,000 3,000
Depreciation and amortization 4,242 4,998 12,727 14,995
Interest expense 8,850 -- 26,550 --
Expenses related to cancelled merger 265,782 -- 465,782 --
General and administrative 39,536 47,556 132,599 165,359
----------- --------- ---------- -----------
592,330 358,881 1,493,335 1,177,628
----------- --------- ---------- -----------
Net investment loss from operations (472,220) (317,146) (1,161,116) (1,078,534)
Net realized (loss) gain on portfolio
of investments:
Investment securities:
Affiliated -- 1,000 -- 138,757
Unaffiliated (16,431) 4,902 (349,147) 592,100
----------- --------- ---------- -----------
Net realized (loss) gain on portfolio
of investments (16,431) 5,902 (349,147) 730,857
Provision (benefit) for current
income taxes 331 -- 331 (1,676)
----------- --------- ---------- -----------
(16,762) 5,902 (349,478) 732,533
----------- --------- ---------- -----------
Net realized loss (488,982) (311,244) (1,510,594) (346,001)
----------- --------- ---------- -----------
(Decrease) increase in unrealized
appreciation of investments
Investment securities:
Affiliated (885,000) (140,974) 2,115,000 278,725
Unaffiliated 5,985 86,001 42,233 (1,866,419)
----------- --------- ---------- -----------
(Decrease) increase in unrealized
appreciation of investments (879,015) (54,973) 2,157,233 (1,587,694)
----------- --------- ---------- -----------
Net (decrease) increase in
net assets from operations (1,367,997) (366,217) 646,639 (1,933,695)
Preferred dividends 28,787 28,787 86,362 86,362
----------- --------- ---------- -----------
Net (decrease) increase in net assets
attributable to common stockholders ($1,396,784) ($395,004) $560,277 ($2,020,057)
=========== ========= ========== ===========
Basic and diluted net (decrease)
increase per share in net assets
attributable to common stockholders
(Note 8) ($1.31) ($0.37) $0.52 ($1.86)
=========== ========= ========== ===========
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
5
FRANKLIN CAPITAL CORPORATION
======================================================================================================
STATEMENTS OF CASH FLOWS
(UNAUDITED)
- ------------------------------------------------------------------------------------------------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 2001
- ------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net increase (decrease) in net assets from operations $646,639 ($1,933,695)
Adjustments to reconcile net increase (decrease) in net assets from
operations to net cash used in operating activities:
Depreciation and amortization 12,727 14,995
(Increase) decrease in unrealized appreciation of investments (2,157,233) 1,587,694
Net realized loss (gain) on portfolio of investments,
net of current income taxes 349,477 (732,533)
Changes in operating assets and liabilities:
(Increase) decrease in other assets (11,428) 6,595
Decrease (increase) in accounts payable and accrued liabilities,
excluding change in current income taxes payable 617,532 (53,727)
---------- -----------
Total adjustments (1,188,925) 823,024
---------- -----------
Net cash used in operating activities (542,286) (1,110,671)
---------- -----------
Cash flows from investing activities:
Proceeds from sale of affiliates -- 1,519,421
Proceeds from sale of other investments 78,715 1,044,782
Proceeds from sale of marketable investment securities 6,554 462,989
Loan payments from majority-owned affiliate 75,000 --
Purchase of investment in majority-owned affilitiate -- (1,650,000)
Purchases of other investments -- (49,095)
Purchases of marketable investment securities (22,985) (542,146)
---------- -----------
Net cash provided by investing activities 137,284 785,951
---------- -----------
Cash flows from financing activities:
Payment of preferred dividends (86,362) (86,362)
Decrease in note payable (47,930) --
Proceeds for conversion right 300,000 --
Purchases of treasury stock (37,322) (123,873)
---------- -----------
Net cash provided by (used in) financing activities 128,386 (210,235)
---------- -----------
Net decrease in cash and cash equivalents (276,616) (534,955)
Cash and cash equivalents at beginning of period 279,728 647,565
---------- -----------
Cash and cash equivalents at end of period $3,112 $112,610
========== ===========
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
6
FRANKLIN CAPITAL CORPORATION
=============================================================================================================================
STATEMENTS OF CHANGES IN NET ASSETS
(UNAUDITED)
- -----------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2002 2001 2002 2001
- -----------------------------------------------------------------------------------------------------------------------------
(Decrease) increase in net assets from operations:
Net investment loss ($472,220) ($317,146) ($1,161,116) ($1,078,534)
Net realized (loss) gain on portfolio of investments,
net of current income taxes (16,762) 5,902 (349,478) 732,533
(Decrease) increase in unrealized appreciation of investments (879,015) (54,973) 2,157,233 (1,587,694)
---------- ---------- ----------- -----------
Net (decrease) increase in net assets from operations (1,367,997) (366,217) 646,639 (1,933,695)
Capital stock transactions:
Payment of dividends on preferred stock (28,787) (28,787) (86,362) (86,362)
Proceeds for conversion right -- -- 300,000 --
Purchase of treasury stock (2,076) (8,514) (37,322) (123,873)
---------- ---------- ----------- -----------
Total (decrease) increase in net assets (1,398,860) (403,518) 822,955 (2,143,930)
---------- ---------- ----------- -----------
Net assets at beginning of period 5,143,560 3,838,668 2,921,745 5,579,080
---------- ---------- ----------- -----------
Net assets at end of period $3,744,700 $3,435,150 $3,744,700 $3,435,150
========== ========== =========== ===========
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
7
FRANKLIN CAPITAL CORPORATION
================================================================================
PORTFOLIO OF INVESTMENTS
- --------------------------------------------------------------------------------
MARKETABLE INVESTMENT SECURITIES
- --------------------------------------------------------------------------------
NUMBER OF
SHARES OR MARKET
PRINCIPAL VALUE
SEPTEMBER 30, 2002 (2) AMOUNT ($) COST(1) (NOTE 2)
- ------------------------------------------------------------------------------------------------------------------------------------
Certificate of Deposit - 1.3%, due 10/04/2002 34,675 34,675
---------- ----------
Total Marketable Investment Securities
(0.6% of total investments and 0.9% of net assets) $34,675 $34,675
========== =========
- ------------------------------------------------------------------------------------------------------------------------------------
INVESTMENTS, AT FAIR VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
Number of
Shares or Directors'
Equity Principal Valuation
September 30, 2002 (2) Investment Interest Amount ($) Cost(1) (Note 2)
- ------------------------------------------------------------------------------------------------------------------------------------
MAJORITY OWNED AFFILIATE
Common stock
Excelsior Radio Networks, Inc. and warrants 90.00% 2,262,879 $2,250,000 $4,365,000
Total Excelsior Radio Networks, Inc.
(80.8% of total investments and 116.6% of net assets) 50.81%
(Radio production and advertising sales) (fully diluted)
AFFILIATES
Excom Ventures, LLC (0.0% of total investments
and 0.0% of net assets) Units 18.64% 140,000 140,000 --
(Purchase evaluation software)
OTHER INVESTMENTS
Alacra Corporation (18.5% of total investments Convertible
and 26.7% of net assets) Preferred Stock 1.68% 321,543 1,000,000 1,000,000
---------- ----------
(Internet-based information provider)
Investments, at Fair Value 3,390,000 5,365,000
========== =========
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Book cost equals tax cost for all investments
(2) Total investments refers to investments and marketable investment
securities.
The accompanying notes are an integral part of these financial statements.
8
FRANKLIN CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
1. DESCRIPTION OF BUSINESS
Franklin Capital Corporation ("Franklin", or the "Corporation") is a Delaware
corporation operating as a Business Development Company ("BDC") under the
Investment Company Act of 1940 (the "Act"). A BDC is a specialized type of
investment company under the Act. A BDC must be primarily engaged in the
business of furnishing capital and making available managerial expertise to
companies that do not have ready access to capital through conventional
financial channels. Such companies are termed "eligible portfolio companies".
The Corporation, as a BDC, generally may invest in other securities; however,
such investments may not exceed 30% of the Corporation's total asset value at
the time of any such investment.
The accompanying financial statements have been prepared assuming that the
Corporation will continue as a going concern. For the nine months ended
September 30, 2002 and for the years ended December 31, 2001, and 2000, the
Corporation has incurred a net investment loss from operations of approximately
$1.2 million, $1.4 million, and $2.3 million, respectively, and has a working
capital deficiency of approximately $1.7 million at September 30, 2002. (Working
capital is defined as total liabilities less liquid assets.) These conditions
raise substantial doubt about the Corporation's ability to continue as a going
concern. In order to alleviate the substantial doubt about the Corporation's
ability to continue as a going concern, the Corporation will seek to sell assets
or find an alternative financing source. There can be no assurance that the
Corporation would be able to obtain financing. The financial statements do not
include any adjustments to reflect the possible future effects on the
recoverability of assets or the amounts of liabilities that may result from the
outcome of this uncertainty.
On October 3, 2002, Franklin sold to Sunshine Wireless, LLC ("Sunshine") 773,196
shares of the common stock of Excelsior at $1.94 per share for an aggregate
purchase price of $1,500,000, realizing a gain of $726,804 (See Note 12). This
asset sale reduced Franklin's working capital deficiency to approximately
$200,000. Franklin continues to have a working capital deficiency primarily due
to a note payable of $952,070 to Winstar Communications, Inc. ("Winstar") in
connection with the acquisition of assets from Winstar (see Note 6). This note
is taken into account in calculating the working capital deficit as it is
assumed to be payable within the next year. Due to an action in which Franklin
is a named party (see Note 5), the due date of this note has been extended
indefinitely and it is uncertain as to when this note will come due. Franklin
continues to seek adequate alternative financing rather than additional asset
sales in order to alleviate the going concern issue.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
9
FRANKLIN CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CASH FLOWS
For purposes of the Statements of Cash Flows, Franklin considers only highly
liquid investments such as money market funds and commercial paper with
maturities of 90 days or less at the date of their acquisition to be cash
equivalents.
The Corporation paid no interest or income taxes during the nine months ended
September 30, 2002 and 2001.
At September 30, 2002 and 2001, the Corporation held cash and cash equivalents
primarily in money market funds at two commercial banking institutions, and one
broker/dealer.
VALUATION OF INVESTMENTS
Security investments which are publicly traded on a national exchange or Nasdaq
Stock Market are stated at the last reported sales price on the day of
valuation, or if no sale was reported on that date, then the securities are
stated at the last quoted bid price. The Board of Directors of Franklin (the
"Board of Directors") may determine, if appropriate, to discount the value where
there is an impediment to the marketability of the securities held.
Investments for which there is no ready market are initially valued at cost and,
thereafter, at fair value based upon the financial condition and operating
results of the issuer and other pertinent factors as determined in good faith by
the Board of Directors. The financial condition and operating results have been
derived utilizing both audited and unaudited data. In the absence of a ready
market for an investment, numerous assumptions are inherent in the valuation
process. Some or all of these assumptions may not materialize. Unanticipated
events and circumstances may occur subsequent to the date of the valuation and
values may change due to future events. Therefore, the actual amounts eventually
realized from each investment may vary from the valuations shown and the
differences may be material. Franklin reports the unrealized gain or loss
resulting from such valuation in the Statements of Operations.
GAINS (LOSSES) ON PORTFOLIO OF INVESTMENTS
Amounts reported as realized gains (losses) are measured by the difference
between the proceeds of sale or exchange and the cost basis of the investment
without regard to unrealized gains (losses) reported in the prior periods. Gains
(losses) are considered realized when sales or dissolution of investments are
consummated.
INCOME TAXES
Franklin does not qualify for pass through tax treatment as a Regulated
Investment Company under Subchapter M of the Internal Revenue Code for income
tax purposes. Therefore, the Corporation is taxed under Regulation C.
Franklin accounts for income taxes in accordance with the provision of Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109"). The significant components of deferred tax assets and liabilities are
principally related to the Corporation's net operating loss carryforward and its
unrealized appreciation of investments.
10
FRANKLIN CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DEPRECIATION AND AMORTIZATION
Depreciation is recorded using the straight-line method at rates based upon
estimated useful lives for the respective assets. Leasehold Improvements are
included in other assets and are amortized over their useful lives or the
remaining life of the lease, whichever is shorter.
NET (DECREASE) INCREASE IN NET ASSETS PER SHARE ATTRIBUTABLE TO COMMON
STOCKHOLDERS
Net (decrease) increase in net assets per share attributable to common
stockholders is calculated in accordance with the provisions of Statement of
Financial Accounting Standards No. 128, "Earnings per Share".
RECLASSIFICATION
Certain amounts in prior years have been reclassified to conform with the
current year presentation.
3. INCOME TAXES
For the nine months ended September 30, 2002 and 2001, Franklin's tax
(provision) benefit was based on the following:
2002 2001
----------- -----------
Net investment loss from operations ................ $(1,161,116) $(1,078,534)
Net realized (loss) gain on portfolio
of investments ................................... (349,147) 730,857
Increase (decrease) in unrealized appreciation ..... 2,157,233 (1,587,694)
----------- -----------
Pre-tax book income (loss) ....................... $ 646,970 $(1,935,371)
=========== ===========
2002 2001
----------- -----------
Tax (provision) benefit at 34% on $646,970 and
$(1,935,371), respectively ....................... $ (220,000) $ 658,000
State and local, net of Federal benefit ............ -- 49,000
Other .............................................. (155,000) (8,000)
Change in valuation allowance ...................... 375,000 (697,000)
----------- -----------
$ -- $ 2,000
=========== ===========
The components of the tax provision are as follows:
2002 2001
----------- -----------
Current state and local tax provision .............. $ -- $ 2,000
Deferred tax expense ............................... -- --
----------- -----------
Provision for income taxes ......................... $ -- $ 2,000
=========== ===========
Deferred income tax provision reflects the impact of "temporary differences"
between amounts of assets and liabilities for financial reporting purposes and
such amounts as measured by tax laws.
At September 30, 2002 and December 31, 2001, significant deferred tax assets and
liabilities consist of:
11
FRANKLIN CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Asset (Liability)
---------------------------
September 30, December 31,
2002 2001
----------- -----------
Deferred Federal and state benefit from
net operating loss carryforward ................... $ 2,438,000 $ 1,905,000
Deferred Federal and state provision on unrealized
(appreciation) depreciation of investments ........ (842,000) 66,000
Valuation allowance ................................. (1,596,000) (1,971,000)
----------- -----------
Deferred taxes ...................................... $ -- $ --
=========== ===========
At December 31, 2001, Franklin had net operating loss carryforwards for income
tax purposes of approximately $5,291,000 that will begin to expire in 2011. At a
36% effective tax rate the after-tax net benefit from this loss would be
approximately $1,905,000.
4. STOCKHOLDERS' EQUITY
The accumulated deficit at September 30, 2002, consists of accumulated net
realized gains of $4,612,000 and accumulated investment losses of $12,379,000.
The Board of Directors has authorized Franklin to repurchase up to an aggregate
of 525,000 shares of its common stock in open market purchases on the American
Stock Exchange when such purchases are deemed to be in the best interest of the
Corporation and its stockholders. During the nine months ended September 30,
2002, Franklin purchased 10,200 shares of its common stock for an aggregate
price of $37,322. As of September 30, 2002, the Corporation has repurchased
492,550 shares of its common stock of which 441,388 shares remain in treasury at
September 30, 2002.
5. COMMITMENTS AND CONTINGENCIES
On October 15, 2001, Jeffrey A. Leve and Jeffrey Leve Family Partnership, L.P.
filed a lawsuit against Franklin, Sunshine and four other defendants affiliated
with Winstar in the Superior Court of the State of California for the County of
Los Angeles. The lawsuit, which has subsequently been removed to the United
States District Court for the Central District of California, alleges that the
Winstar defendants conspired to commit fraud and breached their fiduciary duty
to the plaintiffs in connection with the acquisition of the plaintiffs' radio
production and distribution business. The complaint further alleges that
Franklin and Sunshine joined the alleged conspiracy. The business was initially
acquired by certain entities affiliated with Winstar and, subsequently, the
assets of such business were sold to Franklin and Sunshine (see Note 6).
Concurrently with such purchase, Franklin transferred such assets to Excelsior.
The plaintiffs seek recovery of damages in excess of $10,000,000, costs and
attorneys' fees. On January 7, 2002, Franklin filed a motion to dismiss the
lawsuit or, in the alternative, to transfer venue to the United States District
Court of the Southern District of New York. The plaintiffs filed a motion
opposing Franklin's request on January 28, 2002. Franklin's motion for dismissal
was granted on February 25, 2002, due to improper venue. On June 7, 2002, the
plaintiffs filed their complaint to the United States District Court of the
Southern District of New York. On July 12, 2002, Franklin filed a motion to
dismiss the complaint. Franklin believes that plaintiffs' claims are without
merit and intends to defend this lawsuit vigorously, though the outcome cannot
be predicted at this time. An unfavorable outcome in this lawsuit may have a
material adverse effect on Franklin's business, financial condition and results
of operations.
12
FRANKLIN CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. TRANSACTIONS WITH AFFILIATES
On February 1, 2001, Franklin sold to Avery Communications, Inc. ("Avery")
1,183,938 shares of common stock and 350,000 shares of preferred stock of Avery
representing Franklin's entire holding in Avery, for $1,557,617 plus accrued
dividends on the preferred stock for a realized gain net of expenses of
$137,759. As part of the sale Franklin retained the right to receive 1,533,938
shares of Primal Solutions, Inc. ("Primal") a then wholly-owned subsidiary of
Avery. On February 13, 2001, Primal announced that Avery had completed a
spin-off of Primal and Franklin received 1,533,938 fully registered and
marketable shares of Primal. During the year ended December 31, 2001, Franklin
sold 1,150,000 shares of Primal for total proceeds of $53,861, realizing a loss
of $130,139. During the nine months ended September 30, 2002, Franklin sold its
remaining position of 383,938 shares for total proceeds of $28,715, realizing a
loss of $32,715.
On August 28, 2001, Franklin along with Sunshine Wireless LLC ("Sunshine")
purchased the assets of Winstar Radio Networks, Global Media and Winstar Radio
Productions (collectively "WRN") for a total purchase price of $6.25 million.
Change Technology Partners, Inc. ("Change"), a public company, provided $2.25
million of senior financing for the deal. The acquisition was consummated
through eCom Capital Inc., subsequently renamed Excelsior Radio Networks, Inc.
("Excelsior"), a then wholly-owned subsidiary of Franklin. Franklin's total
investment was $2.5 million consisting of $1.5 million in cash and a $1 million
note payable to WRN. The note was due February 28, 2002 with interest at 3.54%
and has a right of set-off against certain representations and warranties made
by WRN. In October 2001, a legal proceeding was filed against WRN, which also
named Franklin as a defendant, in which the representations and warranties made
by WRN have been challenged. Until the time that this action is settled the due
date of the note is extended indefinitely (see Note 5). Additionally, Franklin
provided a $150,000 note receivable to Excelsior. The note bore interest at 10%
per annum and was issued for a ninety-day rolling period. In connection with
this note, Franklin was granted warrants to acquire 12,879 shares of Excelsior
common stock at an exercise price of $1.125 per share. As of September 30, 2002,
this note has been repaid. In contemplation of a proposed merger agreement
between Franklin and Change (see Note 11), Franklin sold to Change 250,000
shares of common stock in Excelsior for $250,000.
At the closing, Franklin entered into a services agreement with Excelsior
whereby Franklin will provide Excelsior with certain services. In consideration
for the services provided, for a period of nine months Franklin would receive
$30,000 per month and be reimbursed for all direct expenses. Subsequently,
Franklin's monthly fee will be determined by a majority of the non-Franklin
directors; however, said management fee will be no less than $15,000 per month.
Franklin will continue to be reimbursed for all direct expenses. Finally,
Franklin's chief financial officer will serve in that capacity for Excelsior and
his salary and benefits will be allocated between Excelsior and Franklin on an
80/20 basis. During the nine months ended September 30, 2002, Franklin earned
$330,000 in management fees and was reimbursed $90,702 for salary and benefits
for Franklin's chief financial officer, which was recorded as a reduction of
expenses on Franklin.
On April 3, 2002, Dial Communications Global Media, Inc. ("DCGM"), a newly
formed wholly-owned subsidiary of Excelsior, a majority-owned affiliate of
Franklin, completed the acquisition of substantially all of the assets of Dial
Communications Group, Inc. ("DCGI"), and Dial Communications Group, LLC ("DCGL"
and together with DCGI, the "Dial Entities") used in connection with the Dial
Entities' business of selling advertising relating to radio programming (the
"Dial Acquisition"). The Dial Acquisition was
13
FRANKLIN CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
completed pursuant to the Asset Purchase Agreement (the "Purchase Agreement"),
dated as of April 1, 2002, by and among the Dial Entities, Franklin and
Excelsior. Immediately prior to the closing of the transactions contemplated by
the Purchase Agreement, Excelsior assigned all of its rights and obligations
under the Purchase Agreement, as well as certain other assets and liabilities
relating to the portion of Excelsior's business dedicated to the sale of
advertising relating to radio programming, to DCGM.
The total purchase price for the Dial Acquisition will be an amount between
$8,880,000 and $13,557,500. The initial consideration for the Dial Acquisition
consisted of $6,500,000 in cash and a three year promissory note bearing
interest at 4.5% issued by DCGM in favor of DCGL in the aggregate principal
amount of $460,000. In addition, the Purchase Agreement provides for the minimum
payment of $1,920,000 of additional consideration, which is subject to increase
to a maximum amount of $6,597,500 based upon the attainment of certain revenue
and earnings objectives in 2002 and 2003. The additional consideration will be
comprised of both cash and two additional promissory notes issued by DCGM in
favor of DCGL, each with an initial aggregate principal amount of $460,000
bearing interest at 4.5% that is subject to increase upon the attainment of such
revenue and earnings objectives. Each of the promissory notes issued in
consideration of the Dial Acquisition is convertible into shares of Franklin's
common stock at a premium ranging from 115% to 120% of the average closing
prices of Franklin's common stock during a specified pre and post closing
measurement period. Excelsior has paid to Franklin an amount equal to $300,000
in consideration of Franklin's obligations in connection with any Franklin
common stock that may be issued pursuant to the terms of the Purchase Agreement
or the promissory notes issued in consideration of the Dial Acquisition. For
each share of common stock Franklin is required to issue under the Purchase
Agreement or the promissory notes, Franklin will receive 0.86 shares of common
stock in Excelsior.
Change and Sunshine, both existing stockholders of Excelsior, loaned Excelsior
an aggregate amount of $7,000,000 to finance the initial consideration of the
Dial Acquisition. The obligations under the loans are secured by certain of
Excelsior's assets.
7. STOCK OPTION PLANS
On September 9, 1997, Franklin's stockholders approved two Stock Option Plans: a
Stock Incentive Plan ("SIP") to be offered to the Corporation's consultants,
officers and employees (including any officer or employee who is also a director
of the Corporation) and a Non-Statutory Stock Option Plan ("SOP") to be offered
to the Corporation's "outside" directors, (i.e., those directors who are not
also officers or employees of Franklin). 112,500 shares of the Corporation's
Common Stock have been reserved for issuance under these plans, of which 67,500
shares have been reserved for the SIP and 45,000 shares have been reserved for
the SOP. Shares subject to options that terminate or expire prior to exercise
will be available for future grants under the Plans. Because the issuance of
options to "outside" directors is not permitted under the Act without an
exemptive order by the Securities and Exchange Commission, the issuance of
options under the SOP was conditioned upon the granting of such order. The order
was granted by the Commission on January 18, 2000.
Franklin accounts for the options issued to employees under APB Opinion No. 25,
under which no compensation cost has been recognized. Pro forma information
determined consistent with the fair value method required by FASB Statement No.
123, is as follows for the years ended:
14
FRANKLIN CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 2002 September 30, 2001
------------------ ------------------
Net increase (decrease) in net assets
attributable to common stockholders:
As reported $560,277 ($2,020,057)
Pro forma $553,965 ($2,048,546)
Basic net increase (decrease) in
net assets per share attributable
to common stockholders:
As reported $0.52 ($1.86)
Pro forma $0.52 ($1.89)
No options were granted during the nine months ended September 30, 2002 and
2001.
The following is a summary of the status of the Stock Option Plans during the
nine months ended:
September 30, 2002 September 30, 2001
------------------ ------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------ -------- ------ --------
Outstanding at beginning of period 39,375 $11.27 39,375 $11.27
Granted -- -- -- --
Exercised -- -- -- --
Forfeited 18,750 $11.13 -- --
Expired -- -- -- --
------ ------
Outstanding at end of period 20,625 $11.39 39,375 $11.27
====== ======
Exercisable at end of period 20,625 $11.39 26,875 $10.73
====== ======
The options issued under the SIP have a remaining contractual life of 6.2 years.
The options issued under the SOP have a remaining contractual life of 7.3 years.
8. NET (DECREASE) INCREASE IN NET ASSETS ATTRIBUTABLE TO COMMON STOCKHOLDERS
PER SHARE
The following table sets forth the computation of basic and diluted change in
net assets attributable to common stockholders per share:
Three Months ended Nine months ended
September 30, September 30,
-----------------------------------------------
2002 2001 2002 2001
----------- --------- --------- -----------
Numerator:
Net (decrease) increase in
net assets from operations ($1,367,997) ($366,217) $646,639 ($1,933,695)
Preferred stock dividends (28,787) (28,787) (86,362) (86,362)
----------- --------- --------- -----------
Numerator for basic and
diluted earnings per
share - net (decrease)
increase in net assets
attributable to common
stockholders ($1,396,784) ($395,004) $560,277 ($2,020,057)
=========== ========= ========= ===========
15
FRANKLIN CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Denominator:
Denominator for basic
and diluted (decrease)
increase in net assets from
operations - weighted -
average shares 1,064,593 1,076,012 1,068,155 1,083,408
Basic and diluted net
(decrease) increase in
net assets from
operations per share ($1.31) ($0.37) $0.52 ($1.86)
=========== ========= ========= ===========
The following securities have been excluded from the dilutive per share
computation as they are antidilutive:
Preferred stock convertible into 123,375 shares of common stock was antidilutive
for the three and nine months ended September 30, 2002 and 2001. Stock options
were antidilutive for the three and nine months ended September 30, 2002 and
2001.
For additional information on the above securities, see Note 7.
9. NET ASSET VALUE PER SHARE
The following table sets forth the computation of net asset value per common
share attributable to common stockholders:
September 30, December 31,
---------------------------
2002 2001
---------------------------
Numerator:
Numerator for net asset value per
common share, as if converted basis $3,744,700 $2,921,745
Liquidation value of convertible
preferred stock (1,645,000) (1,645,000)
---------- ----------
Numerator for net asset value per share
attributable to common stockholders $2,099,700 $1,276,745
========== ==========
Denominator:
Number of common shares outstanding,
denominator for net asset value per share
attributable to common stockholders 1,064,500 1,074,700
Number of shares of common stock to be
issued upon conversion of preferred stock 123,375 123,375
---------- ----------
Denominator for net asset value per common
share as if converted basis 1,187,875 1,198,075
========== ==========
Net asset value per share attributable
to common stockholders $1.97 $1.19
========== ==========
Net asset value per common share,
as if converted basis $3.15 $2.44
========== ==========
16
FRANKLIN CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. PURCHASES AND SALES OF INVESTMENT SECURITIES
The cost of purchases and proceeds from sales of investment securities excluding
short-term investments, aggregated $22,985 and $85,269 respectively, for the
nine months ended September 30, 2002, and $3,091,241 and $3,026,363
respectively, for the nine months ended September 30, 2001.
11. MERGER WITH CHANGE TECHNOLOGY PARTNERS, INC.
On July 1, 2002, Franklin executed its right to terminate the merger agreement
that had been entered into on December 4, 2001, between Change Technology
Partners, Inc. ("Change") and Franklin pursuant to which Change would have been
merged with and into Franklin. Had the merger gone through, Change shareholders
would have owned approximately 80% of Franklin with the balance held by
Franklin's current stockholders.
12. SUBSEQUENT EVENT
On October 3, 2002, Franklin sold to Sunshine 773,196 shares of the common stock
of Excelsior for an aggregate purchase price of $1,500,000, realizing a gain of
$726,804, pursuant to a stock purchase agreement between Sunshine and Franklin.
After giving effect to the purchase of the common stock, Sunshine owns
approximately 30.9% and the Company owns 59.1% of the issued and outstanding
common stock, and voting power, of Excelsior. On a fully diluted basis, after
giving effect to the exercise of the outstanding warrants and the conversion of
Sunshine's outstanding preferred stock of Excelsior into common stock, Sunshine
and the Corporation own a total of approximately 57.0% and 29.3%, respectively,
of the common stock of Excelsior. The remaining common stock of Excelsior is
owned by Change. In addition, on or before the earlier of November 30, 2002 and
the next annual meeting of Excelsior, the Corporation and Sunshine have agreed
to vote their shares of common stock of Excelsior to cause the election to the
board of directors of Excelsior of two designees of Franklin and five designees
of Sunshine.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CRITICAL ACCOUNTING POLICIES
Franklin's discussion and analysis of its financial condition and
results of operations are based upon the Corporation's financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these financial statements
requires the Corporation to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses and related
disclosure of contingent assets and liabilities. On an ongoing basis, the
Corporation evaluates its estimates, the most critical of which are those
related to the fair value of the portfolio of investments.
STATEMENT OF OPERATIONS
The Corporation accounts for its operations under generally accepted
accounting principles for investment companies. On this basis, the principal
measure of its financial performance is captioned "Net increase (decrease) in
net assets from operations", which is composed of the following: "Net investment
loss from operations," which is the difference between the Corporation's income
from interest, dividends and fees and its operating expenses; "Net realized gain
on portfolio of investments," which is the difference between the proceeds
received from dispositions of portfolio securities and their stated cost; any
applicable income tax provisions (benefits); and "Net increase (decrease) in
unrealized appreciation of investments," which is the net change in the fair
value of the Corporation's investment portfolio, net of any increase (decrease)
in deferred income taxes that would become payable if the unrealized
appreciation were realized through the sale or other disposition of the
investment portfolio.
"Net realized gain (loss) on portfolio of investments" and "Net
increase (decrease) in unrealized appreciation of investments" are directly
related. When a security is sold to realize a gain, the net unrealized
appreciation decreases and the net realized gain increases. When a security is
sold to realize a loss, the net unrealized appreciation increases and the net
realized gain decreases.
FINANCIAL CONDITION
The Corporation's total assets and net assets were, respectively,
$5,491,754 and $3,744,700 at September 30, 2002, versus $4,098,866 and
$2,921,745 at December 31, 2001. Net asset value per share attributable common
stockholders and on an as if converted basis was $1.97 and $3.15, respectively
at September 30, 2002, versus $1.19 and $2.44 at December 31, 2001.
The Corporation's financial condition is dependent on the success of
its investments. A summary of the Corporation's investment portfolio is as
follows:
SEPTEMBER 30, 2002 DECEMBER 31, 2001
------------------ -----------------
Investments, at cost $3,424,675 $3,911,105
Unrealized appreciation (depreciation) 1,975,000 (182,233)
---------- ----------
Investments, at fair value $5,399,675 $3,728,872
========== ==========
The accompanying financial statements have been prepared assuming that
the Corporation will continue as a going concern. For the nine months ended
September 30, 2002 and for the years ended December 31, 2001, and 2000, the
Corporation has incurred a net investment loss from operations of approximately
$1.2 million, $1.4 million, and $2.3 million, respectively, and has a working
capital deficiency of approximately $1.7 million at September 30, 2002. (Working
capital is defined as total liabilities less liquid assets.) These conditions
raise substantial doubt about the Corporation's ability to continue as a going
concern. In order to alleviate the substantial doubt about the Corporation's
ability to continue as a going concern, the Corporation is seeking a financing
source. (See Note 12 to the financial statements). There can be no assurance
that the Corporation would be able to obtain financing. The
18
financial statements do not include any adjustments to reflect the possible
future effects on the recoverability of assets or the amounts of liabilities
that may result from the outcome of this uncertainty.
On October 3, 2002, Franklin sold to Sunshine Wireless, LLC
("Sunshine") 773,196 shares of the common stock of Excelsior at $1.94 per share
for an aggregate purchase price of $1,500,000, realizing a gain of $726,804 (See
Note 12 to the financial statements). This asset sale reduced Franklin's working
capital deficiency to approximately $200,000. Franklin continues to have a
working capital deficiency primarily due to a note payable of $952,070 to
Winstar Communications, Inc. ("Winstar") in connection with the acquisition of
assets from Winstar (see Note 6 to the financial statements). This note is taken
into account in calculating the working capital deficit as it is assumed to be
payable within the next year. Due to an action in which Franklin is a named
party (see Note 5 to the financial statements), the due date of this note has
been extended indefinitely and it is uncertain as to when this note will come
due. Franklin continues to seek adequate alternative financing rather than
additional asset sales in order to alleviate the going concern issue. See
further discussion in Liquidity and Capital Resources section.
TERMINATION OF MERGER WITH CHANGE TECHNOLOGY PARTNERS, INC.
On July 1, 2002, Franklin executed its right to terminate the merger
agreement that had been entered into on December 4, 2001, between Change
Technology Partners, Inc. ("Change") and Franklin pursuant to which Change would
have been merged with and into Franklin. Had the merger gone through Change
shareholders would have owned approximately 80% of Franklin with the balance
held by Franklin's current stockholders.
INVESTMENTS
Franklin's primary investment is in Excelsior. A description of
Franklin's other investments follows the description of Excelsior.
EXCELSIOR
At September 30, 2002, the Corporation had an investment in Excelsior,
formerly known as eCom Capital, Inc., valued at $4,365,000, which represents
79.5% of the Corporation's total assets and 116.6% of its net assets.
Excelsior is a majority-owned affiliate of Franklin and was
incorporated in 1999 under the laws of the State of Delaware. Excelsior had no
operations until August 2001 when a group led by Franklin invested in Excelsior
for the purpose of acquiring certain assets from Winstar Radio Networks, LLC,
Winstar Global Media, Inc. and Winstar Radio Productions, LLC. Excelsior's
principal executive offices are located at 450 Park Avenue, 10th Floor, New
York, NY 10022.
On April 3, 2002, Dial Communications Global Media, Inc. ("DCGM"), a
newly formed wholly-owned subsidiary of Excelsior Radio Networks, Inc.
("Excelsior"), completed the acquisition of substantially all of the assets of
Dial Communications Group, Inc. ("DCGI"), and Dial Communications Group, LLC
("DCGL" and together with DCGI, the "Dial Entities") used in connection with the
Dial Entities' business of selling advertising relating to radio programming
(the "Dial Acquisition"). The Dial Acquisition was completed pursuant to the
Asset Purchase Agreement (the "Purchase Agreement"), dated as of April 1, 2002,
by and among the Dial Entities, Franklin and Excelsior. Immediately prior to the
closing of the transactions contemplated by the Purchase Agreement, Excelsior
assigned all of its rights and obligations under the Purchase Agreement, as well
as certain other assets and liabilities relating to the portion of Excelsior's
business dedicated to the sale of advertising relating to radio programming, to
DCGM.
The total purchase price for the Dial Acquisition will be an amount
between $8,880,000 and $13,557,500. The initial consideration for the Dial
Acquisition consisted of $6,500,000 in cash and a three year promissory note
bearing interest at 4.5% issued by DCGM in favor of DCGL in the aggregate
principal amount of $460,000. In addition, the Purchase Agreement provides for
the minimum payment of
19
$1,920,000 of additional consideration, which is subject to increase to a
maximum amount of $6,597,500 based upon the attainment of certain revenue and
earnings objectives in 2002 and 2003. The additional consideration will be
comprised of both cash and two additional promissory notes bearing interest at
4.5% issued by DCGM in favor of DCGL, each with an initial aggregate principal
amount of $460,000 that is subject to increase upon the attainment of such
revenue and earnings objectives. Each of the promissory notes issued in
consideration of the Dial Acquisition is convertible into shares of Franklin's
common stock at a premium of ranging from 115% to 120% of the average closing
prices of Franklin's common stock during a specified pre and post closing
measurement period. The promissory notes are not convertible for at least a
one-year period. Excelsior has paid to Franklin an amount equal to $300,000 in
consideration of Franklin's obligations in connection with any Franklin common
stock that may be issued pursuant to the terms of the Purchase Agreement or the
promissory notes issued in consideration of the Dial Acquisition.
The assets purchased in the Dial Acquisition were combined with
Excelsior's Global Media division to create a national radio sales
representation company with 2001 advertising sales revenues of almost $50
million and a client roster of over fifty independent radio production
companies.
Excelsior creates, produces, distributes and is a sales representative
for national radio programs and offers other miscellaneous services to the radio
industry. Excelsior offers radio programs to the industry in exchange for
commercial broadcast time, which Excelsior sells to national advertisers.
Excelsior currently offers approximately 150 programs to over 2,000 radio
stations across the country. The group of radio stations who contract with
Excelsior to broadcast a particular program constitutes a radio network.
Excelsior derives its revenue from selling the commercial broadcast time on its
radio networks to advertisers desiring national coverage.
Excelsior currently produces 23 network programs targeting the most
popular radio formats, including adult contemporary, rock, urban oldies, album
oriented rock, comedy and country. Excelsior produces both short form and long
form programs. Short form features are two to three minute daily vignettes and
include such programs as "African Americans Making History." Long form programs,
such as "Walt `Baby' Love's The Countdown" and "Gospel Traxx," "Keeping The
Seventies Alive," "Behind the Hits" and "All Star Mix Party" are programs that
range from one to four hours in length. Excelsior offers these programs to radio
stations free of charge. The radio stations airing these programs become
networks for Excelsior to sell advertising time. Excelsior sells the commercial
broadcast time inside of these networks to advertisers desiring national
coverage.
On August 28, 2001, the Corporation purchased $2,500,000 worth of
Excelsior Common Stock and issued a secured note for $150,000. In connection
with this note, Franklin was granted warrants to acquire 12,879 shares of
Excelsior common stock at an exercise price of $1.125 per share. On November 28,
2001, $75,000 of the secured note was paid back to Franklin. On February 28,
2002, the remaining $75,000 of the secured note was paid back to Franklin.
On October 1, 2002, Excelsior refinanced $2.25 million of indebtedness
owing to Change pursuant to a note entered into by Excelsior in favor of Change.
The refinancing was funded by Sunshine, another shareholder of Excelsior,
pursuant to a Credit Agreement dated as of September 30, 2002 between Excelsior
and Sunshine. The obligations under the Credit Agreement are guaranteed by DCGM
and secured by all of the accounts receivable and proceeds of accounts
receivable of Excelsior and DCGM. In connection with the refinancing, Excelsior
issued to Sunshine a warrant for the purchase of 816,551 shares of Excelsior
common stock, $.01 par value, at a strike price of $1.20 per share. The warrant
expires September 30, 2012. In addition, Excelsior issued to the Corporation a
warrant for the purchase of 74,232 shares of Excelsior common stock, having the
same strike price and expiration date as the warrant referred to above. In
connection with the refinancing, Phoenix Enterprises LLC ("Phoenix") and
Sunshine also agreed to extend until October 31, 2002 the maturity of $750,000
in aggregate principal amount of indebtedness of Excelsior owing to Phoenix and
Sunshine.
In a related transaction, on October 3, 2002, Sunshine purchased from
the Corporation 773,196 shares of the common stock of Excelsior for an aggregate
purchase price of $1,500,000, pursuant to a stock purchase agreement between
Sunshine and the Corporation. After giving effect to the purchase of the
20
common stock, Sunshine owns approximately 30.9% and the Corporation owns 59.1%
of the issued and outstanding common stock, and voting power, of Excelsior. On a
fully diluted basis, after giving effect to the exercise of all of the
outstanding warrants, including the warrants referred to above, and the
conversion of Sunshine's outstanding preferred stock of Excelsior into common
stock, Sunshine and the Corporation own a total of approximately 57.0% and
29.3%, respectively, of the common stock of Excelsior. The remaining common
stock of Excelsior is owned by Change. In addition, on or before the earlier of
November 30, 2002 and the next annual meeting of Excelsior, the Corporation and
Sunshine have agreed, based on the current fully diluted stock ownership, to
vote their shares of common stock of Excelsior to cause the election to the
board of directors of Excelsior of two designees of the Corporation and five
designees of Sunshine.
ALACRA CORPORATION
At September 30, 2002, the Corporation had an investment in Alacra
Corporation ("Alacra"), valued at $1,000,000, which represents 18.2% of the
Corporation's total assets and 26.7% of its net assets. Alacra, headquartered in
New York and London, is a leading provider of Internet-based online information
services. Alacra provides a service called .xls, which aggregates and
cross-indexes over 70 premier business databases, delivering information
directly to Microsoft Excel, HTML, Microsoft Word or PDF formats at the desktop.
Other products include privatesuiteTM, a fast, easy, cost-effective way to
identify and retrieve profiles of privately held companies around the world;
compbookTM, a tool for company peer analysis; and Portal BTM, a fully integrated
business information portal.
On April 20, 2000, the Corporation purchased $1,000,000 worth of Alacra
Series F Convertible Preferred Stock. In connection with this investment,
Franklin was granted observer rights for Alacra Board of Directors meetings.
EXCOM VENTURES, LLC
At September 30, 2002, the Corporation had an investment in Excom
Ventures, LLC ("Excom") valued at $0. Excom was formed as a limited liability
holding company for the purpose of investing in Expert Commerce, Inc. ("Expert
Commerce"). Expert Commerce was a Business-to-Business purchase evaluation
engine that simulated the way people make decisions.
On June 26, 2000, the Corporation purchased $140,000 worth of Excom
Units. At December 31, 2001, the Board of Franklin had determined that this
investment had no value and had marked these securities down to reflect that
determination.
PRIMAL SOLUTIONS, INC.
The Corporation no longer has an investment in Primal Solutions, Inc.
("Primal"). On February 13, 2001, Primal was spun-off from Avery Communications,
Inc. ("Avery"). As a result of this spin-off Franklin received 1,533,938 fully
registered and marketable shares of common stock of Primal at an allocated cost
basis of $245,430. During the nine months ended September 30, 2002, Franklin
sold its remaining position of 383,938 shares for total proceeds of $28,715,
realizing a loss of $32,715.
STRUCTURED WEB, INC.
At September 30, 2002, the Corporation had an investment in Structured
Web, Inc. ("Structured Web") valued at $0. Structured Web develops web building
blocks to enable small businesses to create and manage their own digital nerve
system easily and at an affordable price. Structured Web's object-based
proprietary technology enables customers to choose from a growing selection of
"WebBlocks" including content, communication, commerce and services.
On August 8, 2000, the Corporation purchased $350,000 worth of
Structured Web convertible preferred stock. On May 30, 2002, the Corporation
sold its position in Structured Web for $50,000 realizing a loss of $300,000. As
part of the sale price, the Corporation maintained the right to receive 50%
21
of any proceeds received by the purchaser in excess of the $50,000 purchase
price. The Corporation has valued this right at $0, as it cannot be determined
at this time if the Corporation will receive any funds from this right.
RESULTS OF OPERATIONS
INVESTMENT INCOME AND EXPENSES:
The Corporation's principal objective is to achieve capital
appreciation through long-term investments in businesses believed to have
favorable growth potential. Therefore, a significant portion of the investment
portfolio is structured to maximize the potential for capital appreciation and
provides little or no current yield in the form of dividends or interest. The
Corporation earns interest income from loans, preferred stocks, corporate bonds
and other fixed income securities. The amount of interest income varies based
upon the average balance of the Corporation's fixed income portfolio and the
average yield on this portfolio.
The Corporation had investment income of $332,219 and $99,094 for the
nine months ended September 30, 2002 and 2001, respectively. The increase in
investment income for the nine months ended September 30, 2002 when compared to
September 30, 2001, was primarily the result of the receipt of a management fee
from Excelsior. The Corporation had investment income of $120,110 and $41,735
for the three months ended September 30, 2002 and 2001, respectively. The
increase in investment income for the three months ended September 30, 2002 when
compared to September 30, 2001, was primarily the result of a management fee
from Excelsior.
Operating expenses were $1,493,335 and $1,177,628 for the nine months
ended and $592,330 and $358,881 for the three months ended September 30, 2002
and 2001, respectively. A majority of the Corporation's operating expenses
consist of employee compensation, office and rent expense, other expenses
related to identifying and reviewing investment opportunities and professional
fees. Professional fees consist of general legal fees, audit and tax fees and
investment related legal fees. The Corporation incurred $465,782 in expenses
related to the terminated merger with Change. The Corporation was reimbursed
$90,702 for salary and benefit expense for its chief financial officer under the
terms of the management agreement with Excelsior. This reimbursement has been
recorded as a reduction in operating expenses.
Net investment losses from operations were $1,161,116 and $1,078,534
for the nine months ended and $472,220 and $317,146 for the three months ended
September 30, 2002 and 2001, respectively. The increase resulted primarily from
the merger related expenses noted above.
The Corporation has relied and continues to rely to a large extent upon
proceeds from sales of investments rather than investment income to defray a
significant portion of its operating expenses. Because such sales cannot be
predicted with certainty, the Corporation attempts to maintain adequate working
capital to provide for fiscal periods when there are no such sales.
NET REALIZED GAINS AND LOSSES ON PORTFOLIO OF INVESTMENTS:
During the nine months ended September 30, 2002 and 2001, the
Corporation realized net (losses) gains before taxes of ($349,147) and $730,857
respectively, from the disposition of various investments.
UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENTS:
Unrealized appreciation of investments, increased by $2,157,233 during
the nine months ended September 30, 2002, primarily from unrealized gains on the
value of Excelsior.
Unrealized appreciation of investments, decreased by $1,587,694 during
the nine months ended September 30, 2001, primarily from unrealized losses due
to the decrease in value of Franklin's investment
22
in Go America as well as the sale of a significant portion of Franklin's
holdings in Go America. This decrease was partially offset by the sale of
Franklin's investment in Avery Communications.
LIQUIDITY AND CAPITAL RESOURCES
The accompanying financial statements have been prepared assuming that
the Corporation will continue as a going concern. For the nine months ended
September 30, 2002 and for the years ended December 31, 2001, and 2000, the
Corporation has incurred a net investment loss from operations of approximately
$1.2 million, $1.4 million, and $2.3 million, respectively, and has a working
capital deficiency of approximately $1.7 million at September 30, 2002. (Working
capital is defined as total liabilities less liquid assets.) These conditions
raise substantial doubt about the Corporation's ability to continue as a going
concern. In order to alleviate the substantial doubt about the Corporation's
ability to continue as a going concern, the Corporation is seeking a financing
source. (See Note 12 to the financial statements). There can be no assurance
that the Corporation would be able to obtain financing. The financial statements
do not include any adjustments to reflect the possible future effects on the
recoverability of assets or the amounts of liabilities that may result from the
outcome of this uncertainty.
On October 3, 2002, Franklin sold to Sunshine Wireless, LLC
("Sunshine") 773,196 shares of the common stock of Excelsior at $1.94 per share
for an aggregate purchase price of $1,500,000, realizing a gain of $726,804 (See
Note 12 to the financial statements). This asset sale reduced Franklin's working
capital deficiency to approximately $200,000. Franklin continues to have a
working capital deficiency primarily due to a note payable of $952,070 to
Winstar Communications, Inc. ("Winstar") in connection with the acquisition of
assets from Winstar (see Note 6 to the financial statements). This note is taken
into account in calculating the working capital deficit as it is assumed to be
payable within the next year. Due to an action in which Franklin is a named
party (see Note 5 to the financial statements), the due date of this note has
been extended indefinitely and it is uncertain as to when this note will come
due.
The sale of the Excelsior stock has provided Franklin with $1,500,000.
Management believes that this amount will allow Franklin to cover its
obligations for approximately the next twelve months assuming the note to
Winstar discussed above does not come due. Franklin continues to seek adequate
alternative financing rather than additional asset sales in order to alleviate
the going concern issue. Because of the uncertainty and other factors relating
to the repayment of the note it may cause the Company's results to differ
materially from what Management believes.
RISK FACTORS
There are significant risks inherent in the Corporation's venture
capital business. The Corporation has invested a substantial portion of its
assets in small private companies and one bulletin board listed public
corporation. Because of the speculative nature of these investments, there is
significantly greater risk of loss than is the case with traditional investment
securities. The Corporation expects that from time to time its venture capital
investments may result in a complete loss of the Corporation's invested capital
or may be unprofitable. Other investments may appear likely to become
successful, but may never realize their potential. Neither the Corporation's
investments nor an investment in the Corporation is intended to constitute a
balanced investment program. The Corporation has in the past relied and
continues to rely to a large extent upon proceeds from sales of investments
rather than investment income to defray a significant portion of its operating
expenses.
INVESTING IN PRIVATE COMPANIES INVOLVES A HIGH DEGREE OF RISK. The
Corporation's portfolio consists primarily of investments in private companies.
Investments in private businesses involve a high degree of business and
financial risk, which can result in substantial losses and accordingly should be
23
considered speculative. There is generally no publicly available information
about the companies in which Franklin invests, and Franklin relies significantly
on the diligence of its employees and agents to obtain information in connection
with the Corporation's investment decisions. In addition, some smaller
businesses have narrower product lines and market shares than their competitors,
and may be more vulnerable to customer preferences, market conditions or
economic downturns, which may adversely affect the return on, or the recovery
of, the Corporation's investment in such businesses.
THE PORTFOLIO OF INVESTMENTS IS ILLIQUID. Franklin acquires most of its
investments directly from private companies. The majority of the investments in
its portfolio will be subject to restrictions on resale or otherwise have no
established trading market. The illiquidity of most of the portfolio may
adversely affect Franklin's ability to dispose of loans and securities at times
when it may be advantageous to liquidate such investments.
FRANKLIN'S PORTFOLIO INVESTMENTS ARE RECORDED AT FAIR VALUE AS
DETERMINED BY THE BOARD OF DIRECTORS IN ABSENCE OF READILY ASCERTAINABLE PUBLIC
MARKET VALUES. Pursuant to the requirements of the 1940 Act, the Corporation's
board of directors is required to value each asset quarterly, and Franklin is
required to carry the portfolio at a fair market value as determined by the
board of directors. Since there is typically no public market for the loans and
equity securities of the companies in which Franklin makes investments, the
board of directors estimates the fair value of these loans and equity securities
pursuant to written valuation policy and a consistently applied valuation
process. Unlike banks, Franklin is not permitted to provide a general reserve
for anticipated loan losses; instead, Franklin is required by the 1940 Act to
specifically value each individual investment and record an unrealized loss for
an asset that it believes has become impaired. Without a readily ascertainable
market value, the estimated value of the portfolio of loans and equity
securities may differ significantly from the values that would be placed on the
portfolio if there existed a ready market for the loans and equity securities.
Franklin adjusts quarterly the valuation of the portfolio to reflect the board
of directors' estimate of the current realizable value of each investment in the
Corporation's portfolio. Any changes in estimated value are recorded in the
Corporation's statement of operations as "Net unrealized gains (losses)."
FRANKLIN OPERATES IN A COMPETITIVE MARKET FOR INVESTMENT OPPORTUNITIES.
Franklin competes for investments with many other companies and individuals,
some of whom have greater resources than does Franklin. Increased competition
would make it more difficult to purchase or originate investments at attractive
prices. As a result of this competition, sometimes Franklin may be precluded
from making otherwise attractive investments.
QUARTERLY RESULTS MAY FLUCTUATE AND MAY NOT BE INDICATIVE OF FUTURE
QUARTERLY PERFORMANCE. The Corporation's quarterly operating results could
fluctuate, and therefore, you should not rely on quarterly results to be
indicative of Franklin's performance in future quarters. Factors that could
cause quarterly operating results to fluctuate include, among others, variations
in the investment origination volume, variation in timing of prepayments,
variations in and the timing of the recognition of realized and unrealized gains
or losses, the degree to which Franklin encounters competition in its markets
and general economic conditions.
FRANKLIN IS DEPENDENT UPON KEY MANAGEMENT PERSONNEL FOR FUTURE SUCCESS.
Franklin is dependent for the selection, structuring, closing and monitoring of
its investments on the diligence and skill of its senior management members and
other management members. The future success of the Corporation depends to a
significant extent on the continued service and coordination of its senior
management team, particularly the Chairman and Chief Executive Officer. The
departure of any of the executive officers or key employees could materially
adversely affect the Corporation's ability to implement its business strategy.
Franklin does not maintain key man life insurance on any of its officers or
employees.
THERE IS SUBSTANTIAL DOUBT AS TO FRANKLIN'S ABILITY TO CONTINUE AS A
GOING CONCERN. Franklin has determined that it may not have sufficient cash and
cash equivalents to meet its working capital requirements over the next fiscal
year. Franklin's independent auditors have issued an opinion in which the
independent auditors have indicated that there is substantial doubt as to
Franklin's ability to continue as a going concern as noted in their explanatory
paragraph within their opinion, which is noted in Franklin's
24
year-end financial statements. Franklin is seeking financing alternatives to
continue operating through the current fiscal year. If funds were not raised,
Franklin may not be able to continue its operations. (See Note 12 to the
financial statements).
INVESTMENT IN SMALL, PRIVATE COMPANIES
There are significant risks inherent in the Corporation's venture
capital business. The Corporation has invested a substantial portion of its
assets in private development stage or start-up companies. These private
businesses tend to be thinly capitalized, unproven, small companies with risky
technologies that lack management depth and have not attained profitability or
have no history of operations. Because of the speculative nature and the lack of
a public market for these investments, there is significantly greater risk of
loss than is the case with traditional investment securities. The Corporation
expects that some of its venture capital investments will be a complete loss or
will be unprofitable and that some will appear to be likely to become successful
but never realize their potential. The Corporation has been risk seeking rather
than risk averse in its approach to venture capital and other investments.
Neither the Corporation's investments nor an investment in the Corporation is
intended to constitute a balanced investment program. The Corporation has in the
past relied, and continues to rely to a large extent, upon proceeds from sales
of investments rather than investment income to defray a significant portion of
its operating expenses.
ILLIQUIDITY OF PORTFOLIO INVESTMENTS
Most of the investments of the Corporation are or will be equity
securities acquired directly from small companies. The Corporation's portfolio
of equity securities is and will usually be subject to restrictions on resale or
otherwise have no established trading market. The illiquidity of most of the
Corporation's portfolio of equity securities may adversely affect the ability of
the Corporation to dispose of such securities at times when it may be
advantageous for the Corporation to liquidate such investments.
THE INABILITY OF THE CORPORATION'S PORTFOLIO COMPANIES TO SUCCESSFULLY
MARKET THEIR PRODUCTS WOULD HAVE A NEGATIVE IMPACT ON ITS INVESTMENT
RETURNS
Even if the Corporation's portfolio companies are able to develop
commercially viable products, the market for new products and services is highly
competitive and rapidly changing. Commercial success is difficult to predict and
the marketing efforts of the Corporation's portfolio companies may not be
successful.
FLUCTUATIONS OF QUARTERLY RESULTS
The Corporation's quarterly operating results could fluctuate as a
result of a number of factors. These include, among others, variations in and
the timing of the recognition of realized and unrealized gains or losses, the
degree to which the Corporation encounters competition in its markets and
general economic conditions. As a result of these factors, results for any one
quarter should not be relied upon as being indicative of performance in future
quarters.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Corporation's business activities contain elements of risk. The
Corporation considers a principal type of market risk to be valuation risk.
Investments are stated at "fair value" as defined in the 1940 Act and in the
applicable regulations of the Securities and Exchange Commission. All assets are
valued at fair value as determined in good faith by, or under the direction of,
the Board of Directors.
Neither the Corporation's investments nor an investment in the
Corporation is intended to constitute a balanced investment program. The
Corporation has exposure to public-market price fluctuations to the extent of
its publicly traded portfolio.
The Corporation has invested a substantial portion of its assets in
private development stage or start-up companies. These private businesses tend
to be thinly capitalized, unproven, small companies that
25
lack management depth and have not attained profitability or have no history of
operations. Because of the speculative nature and the lack of public market for
these investments, there is significantly greater risk of loss than is the case
with traditional investment securities. The Corporation expects that some of its
venture capital investments will be a complete loss or will be unprofitable and
that some will appear to be likely to become successful but never realize their
potential.
Because there is typically no public market for the equity interests of
the small companies in which the Corporation invests, the valuation of the
equity interests in the Corporation's portfolio is subject to the estimate of
the Corporation's Board of Directors. In making its determination, the Board may
consider valuation information provided by an independent third party or the
portfolio company itself. In the absence of a readily ascertainable market
value, the estimated value of the Corporation's portfolio of equity interests
may differ significantly from the values that would be placed on the portfolio
if a ready market for the equity interests existed. Any changes in valuation are
recorded in the Corporation's consolidated statements of operations as "Net
increase (decrease) in unrealized appreciation on investments."
ITEM 4. CONTROLS AND PROCEDURES
(a) The Company maintains disclosure controls and procedures that are
designed to ensure that information required to be disclosed in the Company's
filings under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the periods specified in the rules and forms of
the Securities and Exchange Commission. Such information is accumulated and
communicated to the Company's management, including its principal executive
officer and principal financial officer, as appropriate, to allow timely
decisions regarding required disclosure. The Company's management, including the
principal executive officer and the principal financial officer, recognizes that
any set of controls and procedures, no matter how well designed and operated,
can provide only reasonable assurance of achieving the desired control
objectives.
Within 90 days prior to the filing date of this quarterly report on
Form 10-Q, the Company has carried out an evaluation, under the supervision and
with the participation of the Company's management, including the Company's
principal executive officer and the Company's principal financial officer, of
the effectiveness of the design and operation of the Company's disclosure
controls and procedures. Based on such evaluation, the Company's principal
executive officer and principal financial officer concluded that the Company's
disclosure controls and procedures are effective.
(b) There have been no significant changes in the Company's internal
controls or in other factors that could significantly affect the internal
controls subsequent to the date of their evaluation in connection with the
preparation of this quarterly report on Form 10-Q.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On October 15, 2001, Jeffrey A. Leve and Jeffrey Leve Family
Partnership, L.P. filed a lawsuit against Franklin, Sunshine Wireless,
LLC ("Sunshine") and four other defendants affiliated with Winstar
Communications, Inc. in the Superior Court of the State of California
for the County of Los Angeles. The lawsuit, which has subsequently been
removed to the United States District Court for the Central District of
California, alleges that the Winstar defendents conspired to commit
fraud and breached their fiduciary duty to the plaintiffs in connection
with the acquisition of the plaintiffs' radio production and
distribution business. The complaint further alleges that Franklin and
Sunshine joined the alleged conspiracy. The business was initially
acquired by certain entities affiliated with Winstar Communications
and, subsequently, the assets of such business were sold to Franklin
and Sunshine (see Note 6). Concurrently with such purchase, Franklin
transferred such assets to Excelsior. The plaintiffs seek recovery of
damages in excess of $10,000,000, costs and attorneys' fees. On January
7, 2002, Franklin filed a motion to dismiss the lawsuit or, in the
alternative, to transfer venue to the United States District Court of
the
26
Southern District of New York. The plaintiffs filed a motion opposing
Franklin's request on January 28, 2002. Franklin's motion for dismissal
was granted on February 25, 2002, due to improper venue. On June 7,
2002, the plaintiffs filed their complaint to the United States
District Court of the Southern District of New York. On July 12, 2002,
Franklin filed a motion to dismiss the complaint. Franklin believes
that plaintiffs' claims are without merit and intends to defend this
lawsuit vigorously, though the outcome cannot be predicted at this
time. An unfavorable outcome in this lawsuit may have a material
adverse effect on Franklin's business, financial condition and results
of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES HOLDERS
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 99.1 Certification Pursuant To 18 U.S.C. Section 1350,
As Adopted By Section 906 Of The Sarbanes-Oxley
Act Of 2002
Exhibit 99.2 Certification Pursuant To 18 U.S.C. Section 1350,
As Adopted By Section 906 Of The Sarbanes-Oxley
Act Of 2002
(b) Reports on Form 8-K. The Corporation filed a report on Form 8-K on
July 1, 2002 announcing the termination of the merger with Change
Technology Partners, Inc. and filed a report on Form 8-K on
October 8, 2002 announcing the sale of a portion of the
Corporation's holdings in Excelsior.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FRANKLIN CAPITAL CORPORATION
Date: November 14, 2002 By: /s/ Stephen L. Brown
------------------------------------
Stephen L. Brown
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
/s/ Hiram M. Lazar
------------------------------------
Hiram M. Lazar
CHIEF FINANCIAL OFFICER
27
CERTIFICATIONS
I, Stephen L. Brown, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Franklin Capital
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c. Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date November 14, 2002
By: /s/ Stephen L. Brown
-----------------------------------
Name: Stephen L. Brown
Title: Chairman and Chief Executive Officer
28
CERTIFICATIONS
I, Hiram M. Lazar, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Franklin Capital
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c. Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date November 14, 2002
By: /s/ Hiram M. Lazar
--------------------------------
Name: Hiram M. Lazar
Title: Chief Financial Officer
29
EXHIBIT INDEX
Exhibit Description
- ------- ----------------------------------------------------------------------
99.1 Certification Pursuant To 18 U.S.C. Section 1350, As Adopted By
Section 906 Of The Sarbanes-Oxley Act Of 2002
99.2 Certification Pursuant To 18 U.S.C. Section 1350, As Adopted By
Section 906 Of The Sarbanes-Oxley Act Of 2002