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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 MARCH 31, 2003
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, 20TH 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
--- ---
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes No X
------ ------
The number of shares of common stock outstanding as of May 13, 2003 was
1,040,100.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Balance Sheets
Statements of Operations
Statements of Cash Flows
Statements of Changes in Net Assets
Portfolio of Investments
Notes to Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Critical Accounting Policies
Statement of Operations
Financial Condition
Investments
Results of Operations
Taxes
Liquidity and Capital Resources
Risk Factors
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Item 4. Controls and Procedures
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURE
CERTIFICATIONS
EXHIBIT INDEX
FORWARD LOOKING STATEMENTS
WHEN USED IN THIS QUARTERLY REPORT ON FORM 10-Q, THE WORDS "BELIEVES,"
"ANTICIPATES," "EXPECTS" AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY
FORWARD-LOOKING STATEMENTS. STATEMENTS LOOKING FORWARD IN TIME ARE INCLUDED IN
THIS QUARTERLY REPORT ON FORM 10-Q. SUCH STATEMENTS ARE SUBJECT TO CERTAIN RISKS
AND UNCERTAINTIES WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY,
INCLUDING, BUT NOT LIMITED TO, THOSE SET FORTH IN "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS." READERS ARE
CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH
SPEAK ONLY AS OF THE DATE HEREOF. THE CORPORATION UNDERTAKES NO OBLIGATION TO
PUBLICLY REVISE THESE FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR
CIRCUMSTANCES OCCURRING AFTER THE DATE HEREOF OR TO REFLECT THE OCCURRENCE OF
UNANTICIPATED EVENTS.
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The information furnished in the accompanying financial statements
reflects all adjustments 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
- -----------------------------------------------------------------------------------------------------------
(UNAUDITED) (AUDITED)
MARCH 31, DECEMBER 31,
2003 2002
- -----------------------------------------------------------------------------------------------------------
ASSETS
Marketable investment securities, at market value (cost: March 31,
2003 and December 31, 2002 - $34,675) (Note 2) $34,675 $34,675
Investments, at fair value (cost: March 31, 2003 - $2,564,248;
December 31, 2002 - $2,476,804) (Note 2)
Excelsior Radio Networks, Inc. 3,092,863 2,957,875
Other investments 1,000,000 1,000,000
---------- ----------
4,092,863 3,957,875
---------- ----------
Cash and cash equivalents (Note 2) 95,398 562,191
Other assets 106,385 77,597
---------- ----------
TOTAL ASSETS $4,329,321 $4,632,338
========== ==========
- -----------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Notes payable (Note 6) $948,111 $951,817
Accounts payable and accrued liabilities 369,022 412,981
---------- ----------
TOTAL LIABILITIES 1,317,133 1,364,798
---------- ----------
Commitments and contingencies (Note 5)
STOCKHOLDERS' EQUITY
Convertible preferred stock, $1 par value, cumulative 7% dividend:
5,000,000 shares authorized; 10,950 issued and outstanding
at March 31, 2003 and December 31, 2002, respectively
(Liquidation preference $1,095,000) (Note 4) 10,950 10,950
Common stock, $1 par value: 5,000,000 shares authorized;
1,505,888 shares issued: 1,042,900 and 1,049,600 shares outstanding
at March 31, 2003 and December 31, 2002, respectively (Note 7) 1,505,888 1,505,888
Paid-in capital 10,439,610 10,439,610
Unrealized appreciation of investments,
net of deferred income taxes (Notes 2 and 3) 1,528,615 1,481,071
Accumulated deficit (7,871,699) (7,578,808)
---------- ----------
5,653,364 5,858,711
Deduct: 462,988 and 456,288 shares of common stock held in treasury,
at cost, at March 31, 2003 and December 31, 2002, respectively (Note 4) (2,601,176) (2,591,171)
---------- ----------
Net assets (Note 9 for per share information) 3,012,188 3,267,540
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $4,329,321 $4,632,338
========== ==========
- -----------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
4
FRANKLIN CAPITAL CORPORATION
================================================================================
STATEMENTS OF OPERATIONS
(UNAUDITED)
- -----------------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED MARCH 31, 2003 2002
- -----------------------------------------------------------------------------------------------
INVESTMENT INCOME
Interest income $678 $1,549
Management fees 45,000 90,000
--------- ---------
45,678 91,549
--------- ---------
EXPENSES
Salaries and employee benefits (Note 7) 175,565 181,776
Professional fees 30,000 35,925
Rent (Note 5) 9,172 35,154
Insurance 17,413 11,148
Directors' fees 2,001 500
Taxes other than income taxes 15,969 18,896
Newswire and promotion -- 1,000
Depreciation and amortization 4,244 4,243
Interest expense 8,850 8,850
General and administrative 56,191 48,498
--------- ---------
319,405 345,990
--------- ---------
Net investment loss from operations (273,727) (254,441)
Net realized loss on portfolio of investments:
Investment securities:
Affiliated -- --
Unaffiliated -- (23,507)
--------- ---------
Total investment securities -- (23,507)
Net realized loss on portfolio of investments -- (23,507)
--------- ---------
Provision for current income taxes -- --
--------- ---------
Net realized loss (273,727) (277,948)
Increase in unrealized appreciation of investments:
Investment securities:
Affiliated 47,544 --
Unaffiliated -- 37,833
--------- ---------
Total investment securities 47,544 37,833
--------- ---------
Increase in unrealized appreciation of investments 47,544 37,833
--------- ---------
Net decrease in net assets from operations (226,183) (240,115)
--------- ---------
Preferred dividends 19,164 28,788
--------- ---------
Net decrease in net assets attributable to
common stockholders ($245,347) ($268,903)
========= =========
Basic and diluted net decrease in net assets per common share (Note 8) $0.23 ($0.25)
========= =========
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
5
FRANKLIN CAPITAL CORPORATION
================================================================================
Statements of Cash Flows
(unaudited)
- ------------------------------------------------------------------------------------------------
For the Three Months Ended March 31, 2003 2002
- ------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net decrease in net assets from operations ($226,183) ($240,115)
Adjustments to reconcile net decrease in net assets to net
cash used in operating activities:
Depreciation and amortization 4,244 4,243
Increase in unrealized appreciation of investments (47,544) (37,833)
Net realized loss on portfolio of investments,
net of current income taxes -- 23,507
Changes in operating assets and liabilities:
Increase in other assets (33,032) (13,914)
(Decrease) increase in accounts payable and accrued liabilities (43,959) 57,801
--------- ---------
Total adjustments (120,291) 33,804
--------- ---------
Net cash used in operating activities (346,474) (206,311)
--------- ---------
Cash flows from investing activities:
Proceeds from sale of other investments -- 20,093
Loan payments from majority-owned affiliate -- 75,000
Purchases of majority-owned affiliate (87,444) --
Purchases of marketable investment securities -- (22,985)
--------- ---------
Net cash provided by investing activities (87,444) 72,108
--------- ---------
Cash flows from financing activities:
Payment of preferred dividends (19,164) (28,788)
Decrease in note payable (3,706) --
Purchases of treasury stock (10,005) --
--------- ---------
Net cash used in by financing activities (32,875) (28,788)
--------- ---------
Net decrease in cash and cash equivalents (466,793) (162,991)
Cash and cash equivalents at beginning of period 562,191 279,728
--------- ---------
Cash and cash equivalents at end of period $95,398 $116,737
========= =========
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
6
FRANKLIN CAPITAL CORPORATION
================================================================================
STATEMENTS OF CHANGES IN NET ASSETS
(UNAUDITED)
- -----------------------------------------------------------------------------------------------
For the Three Months Ended March 31, 2003 2002
- -----------------------------------------------------------------------------------------------
Decrease in net assets from operations:
Net investment loss ($273,727) ($254,441)
Net realized loss on portfolio of investments,
net of current income taxes -- (23,507)
Increase (decrease) in unrealized appreciation of investments, 47,544 37,833
----------- -----------
Net decrease in net assets from operations (226,183) (240,115)
Capital stock transactions:
Payment of dividends on preferred stock (19,164) (28,788)
Purchase of treasury stock (10,005) --
----------- -----------
Total decrease in net assets (255,352) (268,903)
Net assets at beginning of period 3,267,540 2,921,745
----------- -----------
Net assets at end of period $3,012,188 $2,652,842
=========== ===========
- ----------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
7
FRANKLIN CAPITAL CORPORATION
================================================================================
PORTFOLIO OF INVESTMENTS
- --------------------------------------------------------------------------------
MARKETABLE INVESTMENT SECURITIES
- --------------------------------------------------------------------------------
NUMBER OF
SHARES OR MARKET
PRINCIPAL VALUE
MARCH 31, 2003 (2) AMOUNT ($) COST(1) (NOTE 2)
- ----------------------------------------------------------------------------------------------------------------
Certificate of Deposit - 1.15%, due 04/04/2003 34,675 34,675
Total Marketable Investment Securities (0.8% of total
investments and 1.1% of net assets) $34,675 $34,675
======= =======
- --------------------------------------------------------------------------------
INVESTMENTS, AT FAIR VALUE
- --------------------------------------------------------------------------------
NUMBER OF
SHARES OR DIRECTORS'
EQUITY PRINCIPAL VALUATION
MARCH 31, 2003 (2) INVESTMENT INTEREST AMOUNT ($) COST(1) (NOTE 2)
- --------------------------------------------------------------------------------------------------------------------------------
MAJORITY OWNED AFFILIATE
Excelsior Radio Networks, Inc. Common stock 60.42% 1,510,554 $1,531,648 $2,930,475
Excelsior Radio Networks, Inc. Warrants -- 152,310 32,600 162,388
---------- ----------
Total Excelsior Radio Networks, Inc. (74.9% of total
investments and 101.3% of net assets) 31.11% 1,564,248 3,092,863
(Radio production and advertising sales) (fully diluted)
OTHER INVESTMENTS
Alacra Corporation (24.2% of total investments Convertible Preferred 1.68% 321,543 1,000,000 1,000,000
and 32.8% of net assets) (Internet-based Stock
information provider)
Total Other Investments 1,000,000 1,000,000
---------- ---------
Investments, at Fair Value 2,564,248 4,092,863
========== =========
- --------------------------------------------------------------------------------
(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
MARCH 31, 2003
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. The Corporation has a working
capital deficiency of approximately $1,100,000 at March 31, 2003. (Working
capital is defined as total liabilities less liquid assets.) This condition
raises substantial doubt about the Corporation's ability to continue as a going
concern. The Corporation is currently seeking financing. There can be no
assurance that the Corporation would be able to obtain alternative financing.
The financial statements do not include any adjustments to reflect the possible
future effects on the recoverability of assets or the amounts of liabilities
that may result from the outcome of this uncertainty.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
STATEMENTS OF CASH FLOWS
For purposes of the Statements of Cash Flows, Franklin considers only highly
liquid investments such as money market funds and commercial paper with
maturities of 90 days or less at the date of their acquisition to be cash
equivalents.
The Corporation paid no interest or income taxes during the three months ended
March 31, 2003 and 2002.
At March 31, 2003 and 2002, the Corporation held cash and cash equivalents
primarily in money market funds at one commercial banking institution.
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
9
FRANKLIN CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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.
STOCK-BASED COMPENSATION
The Corporation has elected to follow APB Opinion 25, "Accounting for Stock
Issued to Employees," to account for its Non-Qualified Stock Option Plan under
which no compensation cost is recognized because the option exercise price is
equal to at least the market price of the underlying stock on the date of grant.
Had compensation cost for these plans been determined at the grant dates for
awards under the alternative accounting method provided for in SFAS No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure - an
Amendment of FASB Statement No. 123," net income and earnings per share, on a
pro forma basis, would have been:
MARCH 31, 2003 MARCH 31, 2002
-------------- --------------
Net decrease in net assets
attributable to common stockholders:
As reported $(245,347) $(268,903)
Deduct:
Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax effect -- 1,184
--------- ---------
Pro forma $(245,347) $(270,087)
========= =========
Basic and diluted net decrease in net assets
attributable to common stockholders:
As reported ($0.23) $(0.25)
Pro forma ($0.23) $(0.25)
DEPRECIATION AND AMORTIZATION
Property and equipment are stated at cost. Depreciation is recorded using the
straight-line method at rates based upon estimated useful lives for the
respective assets. Leasehold Improvements are included in other assets and are
amortized over their useful lives or the remaining life of the lease, whichever
is shorter.
10
FRANKLIN CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NET INCREASE (DECREASE) IN NET ASSETS PER COMMON SHARE
Net increase (decrease) in net assets attributable to common stockholders per
common share is calculated in accordance with the provisions of Statement of
Financial Accounting Standards No. 128, "Earnings per Share".
3. INCOME TAXES
For the three months ended March 31, 2003, and 2002, Franklin's tax (provision)
benefit was based on the following:
2003 2002
--------- ---------
Net investment loss from operations $(273,727) $(254,441)
Net realized gain on portfolio of investments -- (23,507)
Increase in unrealized appreciation 47,544 37,833
--------- ---------
Pre-tax book loss $(226,183) $(240,115)
========= =========
2003 2002
--------- ---------
Federal tax benefit at 34% on $(226,183) and
$(240,115), respectively .................... $ 77,000 $ 82,000
Other ......................................... 7,000 (3,000)
Change in valuation allowance ................. (84,000) (79,000)
--------- ---------
$ -- $ --
========= =========
Deferred income tax benefit 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 March 31, 2003 and 2002, significant deferred tax assets and liabilities
consist of:
Asset (Liability)
--------------------------
March 31, December 31,
2003 2002
----------- -----------
Deferred Federal and state benefit from net operating
loss carryforward ......................................... $ 2,457,000 $ 2,356,000
Deferred Federal and state (provision) benefit on unrealized
(appreciation) depreciation of investments ................ (550,000) (533,000)
Valuation allowance ......................................... (1,907,000) (1,823,000)
----------- -----------
Deferred taxes ............................................ $ -- $ --
=========== ===========
At December 31, 2002, Franklin had net operating loss carryforwards for income
tax purposes of approximately $6,544,000 that will begin to expire in 2011. At a
36% effective tax rate the after-tax net benefit from this loss would be
approximately $2,356,000.
4. STOCKHOLDERS' EQUITY
The accumulated deficit at March 31, 2003, consists of accumulated net realized
gains of $5,150,000 and accumulated investment losses of $13,022,000.
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. As of December 31, 2002, the Corporation had
purchased 507,450 shares of its common stock of which 456,288 remained in
treasury. During the three months ended March 31, 2003, the Corporation
purchased 6,700 shares of its common stock at a total cost of $10,005. To date,
Franklin has repurchased 514,150 shares of its common stock of which 462,988
shares remain in treasury at March 31, 2003.
11
FRANKLIN CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
PREFERRED STOCK -
The preferred stock has a cumulative 7% quarterly dividend and is convertible
into the number of shares of common stock by dividing the purchase price for the
convertible preferred stock by conversion price in effect (which is currently
$13.33). The convertible preferred stock has antidilution provisions, which can
change the conversion price in certain circumstances if the Corporation issues
additional shares of common stock. The holder has the right to convert the
shares of convertible preferred stock at any time until February 22, 2010 into
common stock. Upon liquidation, dissolution or winding up of the Corporation,
the stockholders of the convertible preferred stock are entitled to receive $100
per share plus any accrued and unpaid dividends before distributions to any
holder of the Corporation's common stock. On December 31, 2002, the Corporation
redeemed from certain preferred stockholders 5,500 shares of convertible
preferred stock for $25.00 per share.
5. COMMITMENTS AND CONTINGENCIES
Franklin is obligated under an operating lease, which provides for annual
minimum rental payments through December 31, 2004 of $149,600.
Rent expense for the three months ended March 31, 2003 and 2002, was
approximately $9,000 and $35,000, respectively. For the three months ended March
31, 2003, and 2002, the Corporation collected rents of $9,000 and $8,000,
respectively, from subtenants under month-to-month leases, for a portion of its
existing office space that is reflected as a reduction in rent expense for that
period.
On October 15, 2001, Jeffrey A. Leve and Jeffrey Leve Family Partnership, L.P.
filed a lawsuit against Franklin, Sunshine Wireless, LLC ("Sunshine") and four
other defendants affiliated with Winstar Communications, Inc. 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. Concurrently with such purchase,
Franklin transferred such assets to Excelsior Radio Networks, Inc.
("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 of the
Southern District of New York. On July 12, 2002, Franklin filed a motion to
dismiss the complaint. On February 25, 2003, the case against Franklin and
Sunshine was dismissed; however, the plaintiffs may file an appeal. An
unfavorable outcome in this lawsuit may have a material adverse effect on
Franklin's business, financial condition and results of operations.
6. TRANSACTIONS WITH AFFILIATES
Franklin issued a $1,000,000 note as part of the purchase price of Excelsior.
This note was due February 28, 2002 with interest at 3.54% but has a right of
set-off against certain representations and warranties made by WRN. (See Note 5)
On October 1, 2002, Franklin received 74,232 warrants to acquire shares of
Excelsior common stock at an exercise price of $1.20 per share for arranging a
refinancing of Excelsior debt. On October 3, 2002, Franklin sold 773,196 shares
of common stock in Excelsior for $1.94 per share for total proceeds of
$1,500,000 realizing a gain of $726,804.
12
FRANKLIN CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Franklin entered into a services agreement with Excelsior whereby Franklin
provides Excelsior with certain services. Franklin receives a management fee of
not less than $15,000 per month as determined by Excelsior's board.
Additionally, Franklin's chief financial officer serves in that capacity for
Excelsior and his salary and benefits are allocated between Excelsior and
Franklin on an 80/20 basis. During the three months ended March 31, 2003, and
2002, Franklin earned $45,000 and $90,000, respectively, in management fees and
was reimbursed $36,000 and $30,234, respectively, for salary and benefits for
Franklin's chief financial officer, which was recorded as a reduction of
expenses on Franklin.
On April 3, 2002, Dial Communications Global Media, Inc. ("DCGM"), a newly
formed wholly-owned subsidiary of Excelsior, a majority-owned affiliate of
Franklin, completed the acquisition of substantially all of the assets of Dial
Communications Group, Inc. ("DCGI"), and Dial Communications Group, LLC ("DCGL"
and together with DCGI, the "Dial Entities") used in connection with the Dial
Entities' business of selling advertising relating to radio programming (the
"Dial Acquisition"). The Dial Acquisition was completed pursuant to the Asset
Purchase Agreement (the "Purchase Agreement"), dated as of April 1, 2002, by and
among the Dial Entities, Franklin and Excelsior. Immediately prior to the
closing of the transactions contemplated by the Purchase Agreement, Excelsior
assigned all of its rights and obligations under the Purchase Agreement, as well
as certain other assets and liabilities relating to the portion of Excelsior's
business dedicated to the sale of advertising relating to radio programming, to
DCGM.
The total purchase price for the Dial Acquisition will be an amount between
$8,880,000 and $13,557,500. The initial consideration for the Dial Acquisition
consisted of $6,500,000 in cash and a three-year promissory note bearing
interest at 4.5% issued by DCGM in favor of DCGL in the aggregate principal
amount of $460,000. In addition, the Purchase Agreement provides for the minimum
payment of $1,920,000 of additional consideration, which is subject to increase
to a maximum amount of $6,597,500 based upon the attainment of certain revenue
and earnings objectives in 2002 and 2003. The additional consideration will be
comprised of both cash and two additional promissory notes issued by DCGM in
favor of DCGL, each with an initial aggregate principal amount of $460,000
bearing interest at 4.5% that is subject to increase upon the 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.
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.
The following is a summary of the status of the Stock Option Plans during the
three months ended:
13
FRANKLIN CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
March 31, 2003 March 31, 2002
-------------- ---------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------ ----- ------ ------
Outstanding at beginning of year 20,625 $11.39 39,375 $11.27
Granted - - - -
Exercised - - - -
Forfeited - - - -
Expired - - - -
---------- ----------
Outstanding at end of year 20,625 $11.39 39,375 $11.27
====== ======
Exercisable at end of year 20,625 $11.39 36,875 $11.27
====== ======
Weighted average fair value of
options granted - -
The options issued under the SIP have a remaining contractual life of 5.1 years.
The options issued under the SOP have a remaining contractual life of 7.1 years.
8. NET INCREASE (DECREASE) IN NET ASSETS PER COMMON SHARE
The following table sets forth the computation of basic and diluted change in
net assets per common share:
March 31,
--------------------------
2003 2002
----------- -----------
Numerator:
Net decrease in net
assets from operations ($226,183) ($240,115)
Preferred stock dividends (19,164) (28,788)
----------- -----------
Numerator for basic and diluted
earnings per share - net increase in net
assets attributable to common stockholders ($245,347) ($268,903)
=========== ===========
Denominator:
Denominator for basic and diluted
decrease in net assets from operations -
weighted - average shares 1,045,187 1,074,700
=========== ===========
Basic and diluted net increase in net assets
from operations per share $(0.23) $(0.25)
=========== ===========
Common shares which would be issued upon conversion of the Corporation's
preferred stock or exercise of options have been excluded from the dilutive per
share computation as they are antidilutive (see Notes 4 and 7):
PERIOD ENDED MARCH 31,
----------------------
2003 2002
----------------------
Preferred stock convertible into common stock 82,125 123,375
Stock options 20,625 39,375
14
FRANKLIN CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. NET ASSET VALUE PER SHARE
The following table sets forth the computation of net asset value per common
share attributable to common stockholders:
MARCH 31, DECEMBER 31,
--------------------------
2003 2002
--------------------------
Numerator:
Numerator for net asset value per
common share, as if converted basis $3,012,188 $3,267,540
Liquidation value of convertible preferred stock (1,095,000) (1,095,000)
----------- ----------
Numerator for net asset value per share
attributable to common stockholders $1,917,188 $2,172,540
========== ==========
Denominator:
Number of common shares outstanding,
denominator for net asset value per share
attributable to common stockholders 1,042,900 1,049,600
Number of shares of common stock to be
issued upon conversion of preferred stock 82,125 82,125
---------- ----------
Denominator for net asset value per common
share as if converted basis 1,125,025 1,131,725
========== ==========
Net asset value per share attributable to common stockholders $1.84 $2.07
========== ==========
Net asset value per common share, as if converted basis $2.68 $2.89
========== ==========
10. PURCHASES AND SALES OF INVESTMENT SECURITIES
The cost of purchases and proceeds from sales of investment securities,
excluding short-term investments, aggregated $87,446 and $0, respectively, for
the three months ended March 31, 2003; $22,985 and $95,093, respectively, for
the three months ended March 31, 2002.
15
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 accounting principles
generally accepted in the United States 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,
$4,329,321 and $3,012,188 at March 31, 2003, versus $4,632,338 and $3,267,540 at
December 31, 2002. Net asset value per share attributable to common shareholders
and on an as if converted basis was $1.84 and $2.68, respectively at March 31,
2003, versus $2.07 and $2.89 at December 31, 2002.
The Corporation's financial condition is dependent on the success of
its investments. A summary of the Corporation's investment portfolio is as
follows:
MARCH 31, 2003 DECEMBER 31, 2002
-------------- -----------------
Investments, at cost $2,564,248 $2,511,479
Unrealized appreciation 1,528,615 1,481,071
---------- ----------
Investments, at fair value $4,092,863 $3,992,550
========== ==========
The accompanying financial statements have been prepared assuming that
the Corporation will continue as a going concern. The Corporation has a working
capital deficiency
16
of approximately $1,100,000 at March 31, 2003. This condition raises substantial
doubt about the Corporation's ability to continue as a going concern. There can
be no assurance that the Corporation would be able to find a suitable merger
partner or be able to obtain alternative financing. The financial statements do
not include any adjustments to reflect the possible future effects on the
recoverability of assets or the amounts of liabilities that may result from the
outcome of this uncertainty.
INVESTMENTS
Franklin's primary investment is in Excelsior. A description of
Franklin's other investment follows the description of Excelsior.
EXCELSIOR
At March 31, 2003, the Corporation has an investment in Excelsior,
formerly known as eCom Capital, Inc., valued at $3,092,863, which represents
70.8% of the Corporation's total assets and 101.3% 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.
On April 3, 2002, Dial Communications Global Media, Inc. ("Newco"), a
newly formed wholly-owned subsidiary of 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 Newco.
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 Newco 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
bearing interest at 4.5% issued by Newco in favor of DCGL, each with an initial
aggregate principal amount of $460,000 that is subject to increase upon the
attainment of such revenue and earnings objectives. Each of the promissory notes
issued in consideration of the Dial Acquisition is convertible into shares of
Franklin's common stock at a premium of 115% to 120% of the average closing
prices of Franklin's common stock during a specified pre and post closing
measurement period. The promissory notes are not convertible for at least a
one-year period. Excelsior has paid to Franklin an amount equal to $300,000 in
consideration of Franklin's obligations in connection with any Franklin common
17
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 2002 advertising sales revenues of almost $50
million and a client roster of over 40 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 100 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, which has
subsequently been repaid. 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. The note has been repaid to Franklin. Franklin sold 250,000
common shares for $1.00 per share on December 4, 2001 for no gain or loss in
connection with a proposed merger with Change Technology Partners, Inc. On
October 1, 2002, Franklin received 74,232 warrants to acquire shares of
Excelsior common stock at an exercise price of $1.20 per share for arranging a
financing of Excelsior. On October 3, 2002, Franklin sold 773,196 common shares
for $1.94 per share for total proceeds of $1,500,000 realizing a gain of
$726,804. On January 31, 2003, Franklin purchased 33,750 common shares for
$1.625 per share and 65,199 warrants to acquire shares of Excelsior common stock
at an exercise price of $1.125 per share for $0.50 per warrant.
ALACRA CORPORATION
At March 31, 2003, the Corporation has an investment in Alacra
Corporation ("Alacra"), valued at $1,000,000, which represents 25.7% of the
Corporation's total assets and 37.7% 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.
18
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.
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 $45,678 and $91,549 for the
three months ended March 31, 2003 and 2002, respectively. The decrease in
investment income for the three months ended March 31, 2003 when compared to
March 31, 2002, was primarily the result of the reduction of the management fee
from Excelsior.
Operating expenses were $319,405 and $345,990 for the three months
ended March 31, 2003 and 2002, 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. Included in compensation is a $40,000 bonus paid to an
officer of the Corporation during 2003. Professional fees consist of general
legal fees, audit and tax fees and investment related legal fees. The
Corporation was reimbursed approximately $36,000 and $30,000 for salary and
benefit expense for its chief financial officer under the terms of the
management agreement with Excelsior for the three months ended March 31, 2003
and 2002, respectively. This reimbursement has been recorded as a reduction in
operating expenses.
Net investment losses from operations were $273,727 and $254,441 for
the three months ended March 31, 2003 and 2002, respectively.
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 months ended March 31, 2003 and 2002, the Corporation
realized net losses before taxes of $0 and $23,507 respectively, from the
disposition of various investments.
UNREALIZED APPRECIATION OF INVESTMENTS:
Unrealized appreciation of investments, increased by $47,544 during the
three months ended March 31, 2003, primarily from unrealized gains in Excelsior.
19
Unrealized appreciation of investments, increased by $37,833 during the
three months ended March 31, 2002, primarily from unrealized gains due to the
sale of Primal.
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. The Corporation is taxed under Regulation C of the Code and,
therefore, it is subject to federal income tax on the portion of its taxable
income and net capital as well as such distribution to its stockholders.
LIQUIDITY AND CAPITAL RESOURCES
The accompanying financial statements have been prepared assuming that
the Corporation will continue as a going concern. The Corporation has a working
capital deficiency of approximately $1,100,000 at March 31, 2003. This condition
raises substantial doubt about the Corporation's ability to continue as a going
concern. The Corporation is seeking alternative financing. There can be no
assurance that the Corporation would be able to obtain alternative financing.
The financial statements do not include any adjustments to reflect the possible
future effects on the recoverability of assets or the amounts of liabilities
that may result from the outcome of this uncertainty.
Cash and cash equivalents decreased by $466,793 to $95,398 for the
three months ended March 31, 2003, compared to a decrease of $162,991 for the
three months ended March 31, 2002.
Operating activities used $346,474 of cash for the three months ended
March 31, 2003, compared to using $206,311 for the three months ended March 31,
2002.
Operating activities for the three months ended March 31, 2003,
exclusive of changes in operating assets and liabilities, used $269,483 of cash,
as the Corporation's net decrease in net assets from operations of $226,183
included non-cash charges for depreciation and amortization of $4,244 and
unrealized gains of $47,544. For the three months ended March 31, 2002,
operating activities, exclusive of changes in operating assets and liabilities,
used $250,198 of cash, as the Corporation's net decrease in net assets from
operations of $240,115 included non-cash charges of depreciation and
amortization of $4,243, realized losses of $23,507 and unrealized gains of
$37,833.
Changes in operating assets and liabilities decreased cash $116,991 for
the three months ended March 31, 2003, principally due to a decrease in the
level of accounts payable and accrued expenses and an increase in other assets.
For the three months ended March 31, 2002, changes in operating assets and
liabilities produced $43,887 of cash.
The factor in the $87,444 of cash used in investing activities for
the three months ended March 31, 2003 was the purchase of additional common
shares and warrants of Excelsior. For the three months ended March 31, 2002, the
principal factor in the $72,108 cash provided by investing activities was
payment of a loan from Excelsior offset by the net purchase and sale of
marketable investment securities.
Cash used in financing activities for the three months ended March 31,
2003 of $32,875 resulted from payment of preferred dividends of $19,164 and the
purchase of treasury stock of
20
$10,005. Financing activities used $28,788 in the prior year's comparable period
for the payment of preferred dividends.
RISK FACTORS
There are significant risks inherent in the Corporation's venture
capital business. The Corporation has invested a substantial portion of its
assets in small private companies and one bulletin board listed public
corporation. Because of the speculative nature of these investments, there is
significantly greater risk of loss than is the case with traditional investment
securities. The Corporation expects that from time to time its venture capital
investments may result in a complete loss of the Corporation's invested capital
or may be unprofitable. Other investments may appear likely to become
successful, but may never realize their potential. Neither the Corporation's
investments nor an investment in the Corporation is intended to constitute a
balanced investment program. The Corporation has in the past relied and
continues to rely to a large extent upon proceeds from sales of investments
rather than investment income to defray a significant portion of its operating
expenses.
INVESTING IN PRIVATE COMPANIES INVOLVES A HIGH DEGREE OF RISK. The
Corporation's portfolio consists primarily of investments in private companies.
Investments in private businesses involve a high degree of business and
financial risk, which can result in substantial losses and accordingly should be
considered speculative. There is generally no publicly available information
about the companies in which Franklin invests, and Franklin relies significantly
on the diligence of its employees and agents to obtain information in connection
with the Corporation's investment decisions. In addition, some smaller
businesses have narrower product lines and market shares than their competitors,
and may be more vulnerable to customer preferences, market conditions or
economic downturns, which may adversely affect the return on, or the recovery
of, the Corporation's investment in such businesses.
THE PORTFOLIO OF INVESTMENTS IS ILLIQUID. Franklin acquires most of its
investments directly from private companies. The majority of the investments in
its portfolio will be subject to restrictions on resale or otherwise have no
established trading market. The illiquidity of most of the portfolio may
adversely affect Franklin's ability to dispose of loans and securities at times
when it may be advantageous to liquidate such investments.
FRANKLIN'S PORTFOLIO INVESTMENTS ARE RECORDED AT FAIR VALUE AS
DETERMINED BY THE BOARD OF DIRECTORS IN ABSENCE OF READILY ASCERTAINABLE PUBLIC
MARKET VALUES. Pursuant to the requirements of the 1940 Act, the Corporation's
board of directors is required to value each asset quarterly, and Franklin is
required to carry the portfolio at a fair market value as determined by the
board of directors. Since there is typically no public market for the loans and
equity securities of the companies in which Franklin makes investments, the
board of directors estimates the fair value of these loans and equity securities
pursuant to written valuation policy and a consistently applied valuation
process. Unlike banks, Franklin is not permitted to provide a general reserve
for anticipated loan losses; instead, Franklin is required by the 1940 Act to
specifically value each individual investment and record an unrealized loss for
an asset that it believes has become impaired. Without a readily ascertainable
market value, the estimated value of the portfolio of loans and equity
securities may differ significantly from the values that would be placed on the
portfolio if there existed a ready market for the loans and equity securities.
Franklin adjusts quarterly the valuation of the portfolio to reflect the board
of directors' estimate of the current realizable value of each investment in the
Corporation's portfolio. Any changes in estimated value are recorded in the
Corporation's statement of operations as "Net unrealized gains (losses)."
21
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 annual financial
statements. Franklin is currently seeking alternative sources of financing to
continue operating through the current fiscal year. If funds were not raised,
Franklin may not be able to continue its operations.
INVESTMENT IN SMALL, PRIVATE COMPANIES
There are significant risks inherent in the Corporation's venture
capital business. The Corporation has invested a substantial portion of its
assets in private development stage or start-up companies. These private
businesses tend to be thinly capitalized, unproven, small companies with risky
technologies that lack management depth and have not attained profitability or
have no history of operations. Because of the speculative nature and the lack of
a public market for these investments, there is significantly greater risk of
loss than is the case with traditional investment securities. The Corporation
expects that some of its venture capital investments will be a complete loss or
will be unprofitable and that some will appear to be likely to become successful
but never realize their potential. The Corporation has been risk seeking rather
than risk averse in its approach to venture capital and other investments.
Neither the Corporation's investments nor an investment in the Corporation is
intended to constitute a balanced investment program. The Corporation has in the
past relied, and continues to rely to a large extent, upon proceeds from sales
of investments rather than investment income to defray a significant portion of
its operating expenses.
22
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.
VALUATION OF PORTFOLIO INVESTMENTS
There is typically no public market of equity securities of the small
private companies in which the Corporation invests. As a result, the valuation
of the equity securities in the Corporation's portfolio is subject to the good
faith determination of the Corporation's Board of Directors. In the absence of a
readily ascertainable market value, the estimated value of the Corporation's
portfolio of equity securities may differ significantly from the values that
would be placed on the portfolio if a ready market for the equity securities
existed. Any changes in estimated net asset value are recorded in the
Corporation's statement of operations as "Change in unrealized appreciation on
investments."
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 lack management depth
and have not attained profitability or have no
23
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
defendants conspired to commit fraud and breached their fiduciary duty to the
plaintiffs in connection with
24
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. 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 of the Southern District of New York. On July 12, 2002,
Franklin filed a motion to dismiss the complaint. On February 25, 2003, the case
against Franklin and Sunshine was dismissed, however the plaintiffs may file an
appeal. 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.
None
25
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: May 14, 2003 By: /s/ STEPHEN L. BROWN
--------------------
Stephen L. Brown
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
/s/ HIRAM M. LAZAR
--------------------------------
Hiram M. Lazar
CHIEF FINANCIAL OFFICER
26
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.
Dated: May 14, 2003
By: /s/ STEPHEN L. BROWN
--------------------
Name: Stephen L. Brown
Title: Chairman and Chief Executive Officer
27
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.
Dated: May 14, 2003
By: /s/ HIRAM M. LAZAR
------------------
Name: Hiram M. Lazar
Title: Chief Financial Officer
28