SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
Annual Report Pursuant to Section 13
or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended Commission File No. 1-9727
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December 31, 2002
Franklin Capital Corporation
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(Exact name of registrant specified in its charter)
Delaware 13-3419202 .
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
450 Park Avenue, 20th Floor, New York, New York 10022 .
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 486-2323 .
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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Common Stock, $1.00 par value The American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Corporation was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_ No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this form 10-K or any amendment to this
Form 10-K. ____
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes ___ No _X_
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of March 10, 2003 was $1,117,458 based on the last sale price as
quoted by The American Stock Exchange on such date (officers, directors and 5%
stockholders are considered affiliates for the purposes of this calculation).
The number of shares of common stock outstanding as of March 10, 2003 was
1,042,900.
TABLE OF CONTENTS
PART I
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item7a. Quantitative and Qualitative Disclosures
about Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure
PART III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions
Item 14. Controls and Procedures
PART IV
Item 15. Exhibits, Financial Statements, Schedules
and Reports on Form 8-K
SIGNATURES
CERTIFICATIONS
EXHIBIT INDEX
FORWARD LOOKING STATEMENTS
WHEN USED IN THIS ANNUAL REPORT ON FORM 10-K, THE WORDS "BELIEVES,"
"ANTICIPATES,""EXPECTS" AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY
FORWARD-LOOKING STATEMENTS. STATEMENTS LOOKING FORWARD IN TIME ARE INCLUDED IN
THIS ANNUAL REPORT ON FORM 10-K. 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.
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PART I
ITEM 1. BUSINESS
Franklin Capital Corporation (the "Registrant", "Franklin," or the
"Corporation") was incorporated on March 31, 1987, under the laws of the state
of Delaware and operates as a business development company ("BDC") under the
Investment Company Act of 1940 (the "1940 Act"). The Corporation's common stock,
par value $1.00 per share, has been listed on The American Stock Exchange since
October 1, 1987.
As a BDC, the Corporation's objective is to achieve capital
appreciation through long-term investments in businesses believed to have
favorable growth potential. In the past the Corporation participated in start-up
and early stage financing, expansion or growth financing, leveraged buy-out
financing and restructurings in a variety of industries. At December 31, 2002,
Franklin had $4,632,338 in assets.
EXCELSIOR RADIO NETWORKS, INC.
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. 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 Item 3 Legal Proceedings) Additionally, Franklin
provided a $150,000 note receivable to Excelsior. 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 bears interest at 10% per
annum and is issued for a ninety-day rolling period. As of December 31, 2002,
this note has been repaid. 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 for Excelsior.
At the closing, Franklin entered into a services agreement with
Excelsior whereby Franklin provides Excelsior with certain management services.
In consideration for the services provided, for a period of six months from the
closing of the transaction, Franklin received $30,000 per month and was
reimbursed for all direct expenses. Since then, Franklin's monthly fee is
determined by a majority of the non-Franklin directors on Excelsior's board;
however, the management fee will be no less than $15,000 per month and Franklin
will continue to be reimbursed for all direct expenses through December 31,
2003. Finally, Franklin's chief financial officer serves as Excelsior's chief
financial officer, and his salary and benefits are allocated between Excelsior
and Franklin 80% and 20%, respectively. During the year ended December 31, 2002,
Franklin earned $450,000 in management fees and was reimbursed $120,936 for
salary and benefits for Franklin's chief financial officer, which was recorded
as a reduction of expenses of Franklin.
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
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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
stock that may be issued pursuant to the terms of the Purchase Agreement or the
promissory notes issued in consideration of the Dial Acquisition.
Sunshine along with Change Technology Partners, Inc. ("Change") 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.
PROPOSED 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.
CURRENT PORTFOLIO OF INVESTMENTS
The Corporation invests primarily in equity securities, for example
common stock, preferred stock, convertible preferred stock or other equity
derivatives such as options, warrants or rights to acquire stock. As of December
31, 2002, the Corporation's portfolio of investments is a composite of illiquid
investments in developing companies.
The Corporation has invested a substantial portion of its assets in
private companies. The current portfolio, other than Excelsior is invested in
securities issued by a company involved in Internet software and information
services.
EXCELSIOR
Franklin's most significant investment is in Excelsior. As of December
31, 2002, Franklin owned 59.1% of Excelsior (29.3% on a fully diluted basis).
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Excelsior is a subsidiary 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, Excelsior purchased Dial Communications, whose
assets 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 forty 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 over 20 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.
Franklin's goal is to work with management in order to enhance the
value of Excelsior's current network. In order to do this, Excelsior will
increase its marketing efforts to radio stations across the United States. The
marketing efforts will focus primarily on the top 50 media markets. By
increasing its network presence in the top 50 media markets, Excelsior will be
able to charge a higher spot rate for its advertising time. The spot rate is the
price a national advertiser pays per commercial aired on Excelsior's network.
Excelsior currently has a network of over 2,000 radio affiliates, and with over
10,000 radio stations in the United States, Excelsior anticipates significantly
expanding its network. However, there can be no assurance that Excelsior will be
able to expand its operations.
Excelsior intends to focus its programming growth with both short-form
and long-form programs. For example during 2002, Excelsior announced the
launching of two new shows: "Daily Dose" and the "Ross Brittain Morning Prep
Show." Daily Dose is a morning prep show that is a joint venture between
Excelsior and The Source Magazine, "Ross Brittain Morning Prep Show" is a
morning prep show written by Mr. Brittain, a nationally recognized morning disc
jockey. Excelsior believes that it has developed a niche in short-form
programming specifically in the prep services that it provides to radio
stations. Moreover, Excelsior believes that it has a strong presence in urban
programming. Developing more programming that complements its existing programs
will provide Excelsior with more broadcast commercial inventory to sell on its
network. A typical short form program will have 2 to 4 commercials available for
sale while a typical long form program has 8 to 48 commercials available for
sale. Excelsior intends to offer additional programming in the future through
internal development, joint ventures, and the acquisition of businesses or
assets that complement Excelsior's operations.
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The creation of a radio network allows Excelsior to sell the acquired
commercial broadcast inventory to advertisers desiring national coverage. Rates
for the sale of network advertising are established on the basis of audience
delivery or ratings and the demographic composition of the listening audience.
Thus, if Excelsior expands its network, as previously discussed, it will be able
to charge more for broadcast commercial time on the network. In addition to
being able to charge more for its advertising time, by expanding its
programming, there will also be more commercial broadcast inventory available
for sale by Excelsior.
Excelsior sells commercial broadcast time by guaranteeing certain
ratings and demographics. There can be no assurance that the guarantee will be
achieved. If the radio network on which the commercial broadcast time is sold
does not achieve the guarantee, Excelsior may be obligated to offer the
advertiser additional advertising time on the same radio network or on an
alternate radio network. These "make goods" or "bonus spots" are the predominant
means whereby Excelsior satisfies such obligations to advertisers.
Alternatively, Excelsior could be obligated to refund or credit a portion of the
advertising revenue derived from such sales. Historically, Excelsior has not had
to refund any cash received as revenues.
According to the National Association of Broadcasters ("NAB"), there
are approximately 10,000 commercial radio stations in the United States.
Excelsior currently has broadcast commercial time on over 2,000 of these radio
stations. Radio is one of the most cost effective forms of advertising given its
wide reach and low cost in comparison to print and television media. Radio
advertising is attractive to advertisers for a variety of reasons:
o short lead time between commercial production and broadcast time;
o low cost of commercial production; and
o the fact that most radio listening occurs away from home, closer to
the point of purchase.
Radio stations attempt to develop formats, such as news/talk, music or
other types of entertainment programming, in order to appeal to a target
listening audience that will attract local, regional, and national advertisers
to their station. Most radio stations do not have the creative and financial
resources to produce nationally accepted programming. As a result, radio
stations look to syndicators, such as Excelsior, to enhance their existing local
programming. As a national network, Excelsior licenses radio stations to air its
programs in exchange for commercial broadcast time on the station. Excelsior
then resells the advertising time to advertisers requiring national coverage.
The commercial broadcast time may vary from market to market within a specified
time period depending on the requirements of the particular radio station. The
advertising rates are based upon audience ratings for the specific demographic
the advertiser is trying to reach. These ratings are determined by Arbitron
Research Company, which periodically measures the percentage of the radio
audience in a market area listening to a specific radio station during a
specific time period.
COMPETITION
Competition for radio advertising is very intense. The industry is
made up of a variety of competitive forces, including: (1) ownership groups,
which own blocks of radio stations across the industry; (2) syndicators, like
Excelsior, that offer programming and marketing services to radio stations; and
(3) independent producers and distributors that offer programs or services to
radio stations. Several of Excelsior's syndicating competitors also are
associated with major radio station group owners. In addition, many of these
competitors have recognized brand names and will pay compensation to radio
stations to broadcast their network commercials.
6
Excelsior's largest competitors that are associated with an ownership
group are Westwood One, Premier Radio Networks, and ABC Radio Networks.
Excelsior estimates that these competitors account for about 80% of the network
advertising revenues. Excelsior is a leader of the syndication companies not
associated with an ownership group. The principal competitive factors in the
radio industry are the quality and creativity of programming and the ability to
provide advertisers with a cost-effective method of reaching the target
demographic. In this respect, Excelsior has positioned itself by adding top
producers like Walt "Baby" Love, Mike Harvey, John Tesh, Talk Radio Network
featuring Michael Savage, WOR Radio featuring Joan Rivers and Jim Cramer.
Excelsior's principal operating strategy is to continue to provide high quality
programming in the most popular formats. Excelsior has developed and expanded
its network through internal operations and will look to continue this in the
future as well as acquire assets and businesses that compliment Excelsior's
operations.
GOVERNMENT REGULATIONS
Radio broadcasting and station ownership are regulated by the Federal
Communication Commission ("FCC"). Excelsior, as a producer and distributor of
radio programs, is generally not subject to regulation by the FCC. The FCC
regulates the radio stations that air Excelsior's programs. The radio station
affiliates are ultimately responsible for what material is broadcast on their
airwaves.
EMPLOYEES
As of February 1, 2003, Excelsior had 64 full time employees. In
addition, Excelsior maintains continuing relationships with over 40 independent
hosts, writers, and producers. Excelsior is not party to any collective
bargaining agreements. Excelsior believes its relationship with its employees
and independent contractors is good.
OTHER INVESTMENTS
See "Management's Discussion and Analysis of Financial Condition."
PRESENTATION OF FINANCIAL INFORMATION
Franklin presents its financial statements in accordance with
Securities and Exchange Commission ("SEC") regulations in the format applicable
to investment companies and with accounting principles generally accepted in the
United States. Generally, investments are reported at fair market value rather
than cost, including investments in wholly-owned subsidiaries. Because of such
reporting requirements, the operating results of Excelsior are not included in
the consolidated operating results of Franklin, and instead, Franklin reports
only the fair value of its investment in such companies.
ILLIQUIDITY OF INVESTMENTS
A majority of the Corporation's investments consist of securities
acquired directly from the issuer in private transactions. They may be subject
to restrictions on resale or otherwise be illiquid. Franklin anticipates that
there may not be an established trading market for such securities.
Additionally, many of the securities that the Corporation may invest in will not
be eligible for sale to the public without registration under the Securities Act
of 1933, which could prevent or delay any sale by the Corporation of such
investments or reduce the amount of proceeds that might otherwise be realized
therefrom. Restricted securities generally sell at a price lower than similar
securities not subject to restrictions on resale. Further, even if a portfolio
company registers its securities and becomes a reporting corporation under the
Securities Exchange Act of 1934, the Corporation may be considered an insider by
virtue of its board representation and would be restricted in sales of such
corporation's securities.
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MANAGERIAL ASSISTANCE
The Corporation, as a BDC, is required by the 1940 Act to make
significant managerial assistance available to its portfolio companies. "Making
available significant managerial assistance" as defined in the 1940 Act with
respect to a BDC such as Franklin means (a) any arrangement whereby a BDC,
through its directors, officers, employees or general partners, offers to
provide, and if accepted, does so provide significant guidance and counsel
concerning the management, operations or business objectives and policies of a
portfolio company; or (b) the exercise of a controlling influence over the
management or policies of a portfolio company by a BDC acting individually or as
a part of a group acting together which controls such portfolio company. The
nature, timing and amount of managerial assistance provided by the Corporation
vary depending upon the particular requirements of each portfolio company.
In connection with its managerial assistance, the Corporation may be
represented by one or more of its officers or directors on the board of
directors of a portfolio company. The Corporation's goal has been to assist each
portfolio company in establishing its own independent and effective board of
directors and management.
NEED FOR FOLLOW-ON INVESTMENTS
Following its initial investments in portfolio companies, the
Corporation has made additional investments in such portfolio companies as
"follow-on" investments, in order to increase its investment in a portfolio
company, and exercised warrants, options or convertible securities that were
acquired in the original financing. Such follow-on investments may be made for a
variety of reasons including: 1) to increase the Corporation's exposure to a
portfolio company, 2) to acquire securities issued as a result of exercising
convertible securities that were purchased in a prior financing, 3) to preserve
or reduce dilution of Franklin's proportionate ownership in a subsequent
financing, or 4) in an attempt to preserve or enhance the value of the
Corporation's investment. There can be no assurance that the Corporation will
make follow-on investments or have sufficient funds to make such investments;
the Corporation will have the discretion to make any follow-on investments as it
determines, subject to the availability of capital resources. The failure to
make such follow-on investments may, in certain circumstances, jeopardize the
continued viability of a portfolio company and the Corporation's initial
investment, or may result in a missed opportunity for the Corporation to
increase its participation in a successful operation. Even if the Corporation
has sufficient capital to make a desired follow-on investment, the Company may,
under certain circumstances be prohibited from doing so if such an investment
would result in non-compliance with BDC regulations.
COMPETITION
Numerous companies and individuals are engaged in the venture capital
business and such business is extremely competitive. The Corporation competes
for attractive investment opportunities with venture capital partnerships and
corporations, merchant banks, venture capital affiliates of industrial and
financial companies, Small Business Investment Companies, other investment
companies, pension plans, other BDCs and private individual investors. Many of
these competitors have significantly greater resources and managerial
capabilities than the Corporation to obtain access to venture capital
investments. There can be no assurance that the Corporation will be able to
compete against those competitors for attractive investments.
DETERMINATION OF NET ASSET VALUE
Security investments that 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
8
the securities are stated at the last quoted bid price. The Board of Directors
of the Corporation may determine, if appropriate, to discount the value where
there is an impediment to the marketability of the securities held.
Investments for which there is no ready market are initially valued at
cost and, thereafter, at fair value based upon the financial condition and
operating results of the issuer and other pertinent factors as determined by the
Board of Directors. The financial condition and operating results have been
derived utilizing both audited and unaudited data. In the absence of a ready
market for an investment, numerous assumptions are inherent in the valuation
process. Some or all of these assumptions may not materialize. Unanticipated
events and circumstances may occur subsequent to the date of the valuation and
values may change due to future events. Therefore, the actual amounts eventually
realized from each investment may vary from the valuations shown and the
differences may be material. Franklin reports the unrealized gain or loss
resulting from such valuation in the Statements of Operations.
EMPLOYEES
At December 31, 2002, the Corporation had four employees.
GOVERNMENT REGULATIONS IMPACTING FRANKLIN
Franklin operates in a highly regulated environment as a BDC. The
following discussion generally summarizes certain regulations.
A BDC is defined and regulated by the 1940 Act. It is an investment
company that primarily focuses on investing in or lending to small private
companies and making managerial assistance available to them. A BDC may use
capital provided by public stockholders and from other sources to invest in
long-term, private investments in growing small businesses. A BDC provides
stockholders the ability to retain the liquidity of a publicly traded stock,
while sharing in the possible benefits, if any, of investing in privately-owned
growth companies.
As a BDC, Franklin may not acquire any asset other than "Qualifying
Assets" unless, at the time the acquisition is made, Qualifying Assets represent
at least 70% of the value of the total assets (the "70% test"). The principal
categories of Qualifying Assets relevant to Franklin's business are:
(1) securities purchased in transactions not involving any public
offering, the issuer of which is an eligible portfolio company.
An eligible portfolio company is defined to include any issuer
that (a) is organized and has its principal place of business in
the United States, (b) is not an investment company other than an
SBIC wholly-owned by a business development company, and (c) does
not have any class of publicly traded securities with respect to
which a broker may extend margin credit;
(2) securities received in exchange for or distributed with respect
to securities described in (1) above or pursuant to the exercise
of options, warrants, or rights relating to such securities; and
(3) cash, cash items, government securities and high quality debt
securities (within the meaning of the 1940 Act), maturing in one
year or less from the time of the investment.
To include certain securities described above as Qualifying Assets for
the purpose of the 70% test, a BDC must make available to the issuer of those
securities significant managerial assistance such as
9
providing significant guidance and counsel concerning the management,
operations, or business objectives and policies of a portfolio company, or
making loans to a portfolio company.
As a BDC, Franklin is entitled to issue senior securities in the form
of stock or senior securities representing indebtedness, including debt
securities and preferred stock, as long as each class of senior security has an
asset coverage of at least 200% immediately after each such issuance.
Franklin has adopted a Code of Ethics that establishes procedures for
personal investments and restricts certain transactions by its personnel.
The Corporation is permitted to adopt either a profit-sharing plan
pursuant to which management (including disinterested directors) could receive
up to 20% of the net after-tax profits of the Corporation or an option plan
covering up to 20% of the stock of the Corporation. Presently the Corporation
has incentive plans in effect covering 46,875 shares (4.3% on a diluted basis).
See "Item 11 Executive Compensation - Compensation Plans - Stock Option Plans."
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. 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
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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 financial
statements. Franklin is seeking alternative sources of financing to continue
operating through the current fiscal year. If funds are not raised, Franklin may
not be able to continue its operations.
ITEM 2. PROPERTIES
Franklin maintains its offices at 450 Park Avenue, New York, New York
10022, where it leases approximately 3,600 square feet of office space pursuant
to a lease agreement expiring December 31, 2003. As of December 31, 2002,
Franklin had a sublet arrangement with one subtenant for a portion of Franklin's
office space.
11
ITEM 3. LEGAL PROCEEDINGS
On October 15, 2001, Jeffrey A. Leve and Jeffrey Leve Family
Partnership, L.P. filed a lawsuit against Franklin, Sunshine Wireless, LLC
("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 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On November 12, 2002, the Corporation held an annual meeting of its
common and preferred stockholders. Stephen L. Brown, Irving Levine, Michael P.
Rolnick, Laurence I. Foster and David T. Lender were elected to serve as
directors of the Corporation for a term of one year or until their successors
are duly elected and qualified. The number of common and preferred shares,
voting together as a single class, voted for and against each director is as
follows:
---------------------------- ------------------------- -------------------------
FOR WITHHELD
---------------------------- ------------------------- -------------------------
Stephen L. Brown 982,581 10,989
---------------------------- ------------------------- -------------------------
David Lender 990,418 3,152
---------------------------- ------------------------- -------------------------
Laurence I. Foster 990,418 3,152
---------------------------- ------------------------- -------------------------
Michael P. Rolnick 990,418 3,152
---------------------------- ------------------------- -------------------------
Irving Levine* 11,350 0
---------------------------- ------------------------- -------------------------
Peter D. Gottlieb* 11,350 0
---------------------------- ------------------------- -------------------------
* - Only preferred stockholders voted for these directors.
In addition, stockholders were asked to ratify the selection of Ernst
& Young LLP as the Corporation's independent auditors for the fiscal year ended
December 31, 2002. 991,396 shares voted for, 1,570 shares voted against and 604
shares abstained from ratifying Ernst & Young LLP as the Corporation's
independent auditors.
12
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
STOCK TRANSFER AGENT
Mellon Investor Services, 85 Challenger Road, Overpack Center,
Ridgefield Park, NJ 07660 (Telephone (800) 851-9677) serves as transfer agent
for the Corporation's common stock. Certificates to be transferred should be
mailed directly to the transfer agent, preferably by registered mail.
MARKET PRICES
The Corporation's common stock is traded on The American Stock
Exchange under the symbol "FKL." The following table sets forth the range of the
high and low selling price of the Corporation's shares during each quarter of
the last two years, as reported by the American Stock Exchange.
2002 QUARTER ENDING LOW HIGH
March 31 $ 3.76 $ 4.24
June 30 $ 3.46 $ 4.02
September 30 $ 2.90 $ 3.72
December 31 $ 1.45 $ 2.97
2001 QUARTER ENDING LOW HIGH
March 31 $ 5.875 $ 8.125
June 30 $ 4.875 $ 5.75
September 30 $ 4.65 $ 5.05
December 31 $ 4.09 $ 4.87
DIVIDENDS
The Corporation paid $115,152, $115,150 and $98,633 in dividends to
preferred stockholders during 2002, 2001 and 2000, respectively, and has not
paid any dividends to common stockholders during the past two years.
STOCKHOLDERS
As of March 10, 2003, there were 568 registered shareholders of record
of the Corporation's common stock. The Corporation has 5,000,000 shares of
common stock authorized, of which 1,505,888 are issued and 1,042,900 shares are
outstanding at March 10, 2003. The Corporation has 5,000,000 shares of
convertible preferred stock authorized, of which 16,450 were issued on February
22, 2000 and 10,950 shares are outstanding at March 10, 2003. (See Item 7
Management's Discussion and Analysis of Financial Condition - Liquidity and
Capital Resources.)
13
ITEM 6. SELECTED FINANCIAL DATA
The following tables should be read in conjunction with the Financial
Statements included in Item 8 of this Form 10-K.
BALANCE SHEET DATA
FINANCIAL POSITION AS OF DECEMBER 31:
2002 2001 2000 1999 1998
----------- ----------- ----------- ----------- -----------
Total assets $4,632,338 $4,098,866 $5,766,712 $8,995,965 $6,548,696
Liabilities $1,364,798 $1,177,121 $187,632 $555,583 $233,143
Net asset value $3,267,540 $2,921,745 $5,579,080 $8,440,382 $6,315,553
Net asset value per share attributable
to common stockholders $2.07 $1.19 $3.58 $7.70 $5.61
Net asset value per share, as if converted basis $2.89 $2.44 $4.57 $7.70 $5.61
Shares outstanding 1,049,600 1,074,700 1,098,200 1,095,882 1,126,029
OPERATING DATA FOR THE YEAR ENDED DECEMBER 31:
2002 2001 2000* 1999 1998
----------- ----------- ----------- ----------- -----------
Investment income $455,081 $192,697 $115,015 $72,382 $263,323
Expenses $1,985,450 $1,579,382 $2,372,797 $1,621,780 $1,620,408
Net investment loss from operations $(1,530,369) $(1,386,685) $(2,257,782) $(1,549,398) $(1,357,085)
Net realized gain on portfolio of
investments, net of current income taxes $237,326 $522,131 $1,195,875 $688,259 $1,628,004
Net increase (decrease) in
unrealized appreciation of investments,
net of deferred income taxes $1,663,304 $(1,553,756) $(3,365,513) $3,086,958 $(1,015,091)
Net increase (decrease) in net Assets
attributable to common stockholders $255,110 $(2,533,460) $(4,526,053) $2,225,819 $(744,172)
Basic and diluted net increase (decrease)
in net assets from operations per weighted
average number of shares outstanding $0.24 $(2.34) $(4.14) $1.98 $(0.63)
* Expenses in the year ended December 31, 2000 include non-cash compensation
of $349,644 due to the exercise of employee incentive stock options.
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE INFORMATION CONTAINED IN THIS SECTION SHOULD BE READ IN CONJUNCTION WITH THE
CORPORATION'S 2002 FINANCIAL STATEMENTS AND NOTES THERETO IN ITEM 8.
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:
o "Net investment loss from operations," which is the difference between
the Corporation's income from interest, dividends and fees and its
operating expenses;
o "Net realized gain on portfolio of investments," which is the
difference between the proceeds received from dispositions of
portfolio securities and their stated cost;
o any applicable income tax provisions (benefits); and
o "Net 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,
$4,632,338 and $3,267,540 at December 31, 2002 versus $4,098,866 and $2,921,745
at December 31, 2001. Net asset value per share attributable to common
stockholders and on an as if converted basis was $2.07 and $2.89 at December 31,
2002, respectively, versus $1.19 and $2.44, respectively, at December 31, 2001.
The change in total assets and net assets is primarily attributable to a
increase in the fair market value of the Corporation's investments.
The Corporation's financial condition is dependent on the success of
its investments. A summary of the Corporation's investment portfolio is as
follows:
15
DECEMBER 31, 2002 DECEMBER 31, 2001
----------------- -----------------
Investments, at cost $2,511,479 $3,911,105
Unrealized appreciation (depreciation),
net of deferred taxes 1,471,071 (182,233)
---------- ----------
Investments, at fair value $3,992,550 $3,728,872
========== ==========
INVESTMENTS
The Corporation's financial condition is dependent on the success of
its investments. The Corporation has invested a substantial portion of its
assets in thinly capitalized companies including one development stage company
that may lack management depth.
ALACRA CORPORATION
At December 31, 2002, the Corporation had an investment in Alacra
Corporation ("Alacra"), valued at $1,000,000, which represents 21.6% of the
Corporation's total assets and 30.6% 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 privatesuite(TM), a fast, easy, cost-effective way to
identify and retrieve profiles of privately held companies around the world;
compbook(TM), 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 on Alacra board of directors meetings.
EXCELSIOR RADIO NETWORKS
At December 31, 2002, the Corporation had an investment in Excelsior
Radio Networks, Inc. ("Excelsior"), formerly known as eCom Capital, Inc., valued
at $2,957,875, which represents 63.9% of the Corporation's total assets and
90.5% of its net assets. Excelsior produces and syndicates programs and services
heard on more than 2,000 radio stations nationwide across most major formats.
Through its Dial Communications Global Media sales subsidiary, Excelsior sells
the advertising inventory radio stations provide in exchange for the Excelsior
content. The programming and content includes prep services as well as long form
and short form programming. Additionally, Dial Communications Global Media has a
number of independent producer clients, which range from talk and music programs
to news and traffic services. See Item 1 Business - Current Portfolio
Investments - Excelsior.
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. As of December
31, 2002, the secured note was paid back 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 the proposed merger with Change. 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.
16
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 stock, corporate bonds
and other fixed income securities. The amount of interest income varies based
upon the average balance of the Corporation's fixed income portfolio and the
average yield on this portfolio.
The Corporation had interest and dividend income of $5,081 in 2002,
$72,697 in 2001, and $93,015 in 2000. The decrease in 2002 from 2001 was the
result of the sale of the Avery preferred stock on February 1, 2001. The
Corporation earned management fees of $450,000 in 2002, and $120,000 in 2001 in
from its majority-owned affiliate, Excelsior. The Corporation had $22,000 in
other income during 2000 representing a patent infringement settlement.
Operating expenses were $1,985,450 in 2002, $1,579,382 in 2001, and
$2,372,797 in 2000. A majority of the Corporation's operating expenses consist
of employee compensation (which for 2000 included a non-cash charge of $349,644
due to the cashless exercise of incentive options), 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, consulting fees and investment related legal fees. During 2002, the
Corporation incurred professional fees related to the terminated merger with
Change of $490,782.
Net investment losses from operations were $1,530,369 in 2002,
$1,386,685 in 2001, and $2,257,782 in 2000.
The Corporation has relied and continues to rely to a large extent
upon proceeds from sales of investments rather than investment income to defray
a significant portion of its operating expenses. Because such sales cannot be
predicted with certainty, the Corporation attempts to maintain adequate working
capital to provide for fiscal periods when there are no such sales.
NET REALIZED GAINS AND LOSSES ON PORTFOLIO OF INVESTMENTS
During the three years ended December 31, 2002, 2001, and 2000, the
Corporation realized net gains before taxes of $237,658, $520,455, and
$1,215,875, respectively, from the disposition of various investments.
During 2002, Franklin realized a gain of $726,804 from the sale of
773,196 shares of Excelsior Radio Networks, Inc. common stock. This gain was
offset by a loss of $300,000 from the sale of 188,425 shares of Structured Web
common stock, a previous portfolio holding of the Corporation, a loss of
$140,000 from the write down of Excom Ventures, a previous portfolio holding of
the Corporation which was determined to be a worthless security, a loss of
$32,715 from the sale of 363,938 shares of Primal common stock as well as a
realized net loss of $16,430 from sale of marketable securities.
During 2001, Franklin realized a gain of $598,617 from the sale of
434,024 shares of Go America, Inc. ("Go America") common stock, an investment
Franklin has held since 1995, a gain of $87,013 from the sale of 1,183,938
shares of Avery common stock, and a gain of $50,750 from the sale of 350,000
shares of Avery preferred stock. These gains were offset by a loss of $130,139
from the sale of
17
1,150,000 shares of Primal common stock as well as a realized net loss of
$85,786 from the sale of various marketable securities.
During 2000, Franklin realized a gain of $956,576 from the sale of
241,131 shares of Communication Intelligence Corporation ("CIC") common stock,
an investment Franklin has held since 1996, a gain of $161,531 from the sale of
202,000 shares of Avery common stock, and a gain of $843,663 from the sale of
105,760 shares of Go America common stock. Additionally, gains of $3,819 were
realized on tail payments from partnerships liquidated during 1999. These gains
were offset by a loss of $440,057 from the write-off of the Corporation's
investment in eMattress.com and a loss of $300,626 from the write-off of the
Corporation's investment in TradingNews, Inc as well as a realized net loss of
$9,031 from the sale of various marketable securities.
UNREALIZED APPRECIATION OF INVESTMENTS
Unrealized appreciation of investments, net of deferred taxes,
increased by $1,663,304 during the year ended December 31, 2002, due primarily
to the increased valuation of Excelsior.
Unrealized appreciation of investments, net of deferred taxes,
decreased by $1,553,756 during the year ended December 31, 2001, primarily from
the sale of Franklin's position in Go America common stock and the sale of
Franklin's position in Avery Communications. The changes in the value of the
investments occurred during a period of extreme volatility of publicly traded,
small capitalization, high technology stocks. The volatility of the overall
market will continue to impact on the performance of the Corporation's
investments. The value of the Corporation's investments will vary on a quarterly
basis.
Unrealized appreciation of investments, net of deferred taxes,
decreased by $3,365,513 during the year ended December 31, 2000, primarily from
the decreased value of Avery Communications and the sale of Franklin's position
in CIC common stock and CIC Standby Ventures, L.P. ("CIC Ventures").
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 $800,000 at December 31, 2002. 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 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 increased by $282,463 to $562,191 for the
year ended December 31, 2003, compared to an decrease of $367,837 for the year
ended December 31, 2001.
Operating activities used $1,282,171 of cash for the year ended
December 31, 2002, compared to providing $1,365,563 for the year ended December
31, 2001.
18
Operating activities for the year ended December 31, 2002, exclusive
of changes in operating assets and liabilities, used $1,513,400 of cash, as the
Corporation's net increase in net assets from operations of $370,262 included
non-cash charges for depreciation and amortization of $16,969, realized gains of
$237,327 and unrealized gains of $1,663,304. For the year ended December 31,
2001, operating activities, exclusive of changes in operating assets and
liabilities, used $1,366,691 of cash, as the Corporation's net loss of
$2,418,310 included non-cash charges of depreciation and amortization of
$19,994, realized gains of $522,131 and unrealized losses of $1,553,756.
Changes in operating assets and liabilities increased cash $231,229
for the year ended December 31, 2002, principally due an increase in the level
of accounts payable and accrued expenses. For the year ended December 31, 2001,
changes in operating assets and liabilities produced $1,128 of cash.
The principal factor in the $1,637,284 of cash provided by investing
activities in the year ended December 31, 2002 was the sale of a portion of the
Corporation's holding in Excelsior for $1,500,000. In the year ended December
31, 2001, the principal factor in the $1,236,750 cash provided by investing
activities was proceeds from the sale of Avery Communications of $1,564,282 and
Go America of $1,044,782, partially offset by an investment in Excelsior of
$1,500,000.
Cash used in financing activities for the year ended December 31, 2002
of $72,650 resulted from payment of preferred dividends of $115,152, the
redemption of preferred stock of $137,500 and the purchase of treasury stock of
$71,815 offset by the issuance of certain rights to convert promissory notes
issued from Excelsior to Dial into Franklin stock of $300,000. Financing
activities used $239,024 in the prior year's comparable period for the payment
of preferred dividends of $115,150 and the purchase of treasury stock of
$123,874.
Franklin is obligated under an operating lease, which provides for
annual minimum rental payments through December 31, 2003 of $149,600.
On February 22, 2000, the Corporation issued $1,645,000 of convertible
preferred stock. The stock was issued at a price of $100 per share and has a 7%
quarterly dividend. The stock is convertible into Franklin common stock at a
conversion price of $13.33 per common share. On December 31, 2002 the
Corporation redeemed from certain preferred stockholders 5,500 shares of
convertible preferred stock for $25.00 per share.
ITEM 7A. 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 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
19
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."
20
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FRANKLIN CAPITAL CORPORATION
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
Page
Report of Ernst & Young LLP ......................................... 22
Balance Sheets as of
December 31, 2002 and 2001 .................................... 23
Statements of Operations for the years
ended December 31, 2002, 2001 and 2000 ........................ 24
Statements of Cash Flows for the years
ended December 31, 2002, 2001 and 2000 ........................ 25
Statements of Changes in Net Assets for the years
ended December 31, 2002, 2001 and 2000 ........................ 26
Financial Highlights for the years ended December 31,
2002, 2001, 2000, 1999 and 1998 ............................... 27
Portfolio of Investments as of
December 31, 2002 ............................................. 28
Notes to Financial Statements ....................................... 29-37
The schedules for which provision is made in the applicable regulation of the
Securities and Exchange Commission are not required under the related
instruction or are inapplicable and, therefore, have been omitted
21
REPORT OF INDEPENDENT AUDITORS
To the Stockholders and Board of Directors
Franklin Capital Corporation
We have audited the accompanying balance sheets of Franklin Capital
Corporation as of December 31, 2002 and 2001, including the portfolio of
investments as of December 31, 2002, and the related statements of operations,
cash flows and changes in net assets for each of the three years in the period
ended December 31, 2002, and the financial highlights for each of the five years
in the period ended December 31, 2002. These financial statements and financial
highlights are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
and financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements and financial highlights. Our procedures included the
confirmation of securities owned as of December 31, 2002 by correspondence with
the custodian. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
Franklin Capital Corporation at December 31, 2002 and 2001, the results of its
operations, cash flows and changes in net assets for each of the three years in
the period ended December 31, 2002, and the financial highlights for each of the
five years in the period ended December 31, 2002, in conformity with accounting
principles generally accepted in the United States.
The accompanying financial statements have been prepared assuming that
Franklin Capital Corporation will continue as a going concern. The Corporation
has incurred recurring operating losses and as more fully described in Note 1,
has a working capital deficiency. These conditions raise substantial doubt about
the Corporation's ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 1. 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.
ERNST & YOUNG LLP
New York, New York
March 7, 2003
22
FRANKLIN CAPITAL CORPORATION
================================================================================
Balance Sheets
--------------------------------------------------------------------------------
December 31, 2002 2001
--------------------------------------------------------------------------------
ASSETS
Marketable investment securities, at market
value (cost: December 31, 2002 and 2001 -
$34,675) (Note 2) $34,675 $34,675
Investments, at fair value
(cost: December 31, 2002 - $2,476,804;
December 31, 2001 - $3,876,430) (Note 2)
Excelsior Radio Networks, Inc. 2,957,875 2,325,000
Other investments 1,000,000 1,369,197
---------- ----------
3,957,875 3,694,197
---------- ----------
Cash and cash equivalents (Note 2) 562,191 279,728
Other assets 77,597 90,266
---------- ----------
TOTAL ASSETS $4,632,338 $4,098,866
========== ==========
--------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Notes payable (Note 6) $951,817 $1,000,000
Accounts payable and accrued liabilities 412,981 177,121
---------- ----------
TOTAL LIABILITIES 1,364,798 1,177,121
---------- ----------
Commitments and contingencies (Note 5)
STOCKHOLDERS' EQUITY
Convertible preferred stock, $1 par value,
cumulative 7% dividend: 5,000,000 shares
authorized; 10,950 and 16,450 issued and
outstanding at December 31, 2002 and 2001,
respectively
(Liquidation preference $1,095,000 and
$1,645,000) (Note 4) 10,950 16,450
Common stock, $1 par value: 5,000,000 shares
authorized; 1,505,888 shares issued: 1,049,600 and
1,074,700 shares outstanding at December 31, 2002
and 2001, respectively (Note 7) 1,505,888 1,505,888
Paid-in capital 10,439,610 10,271,610
Unrealized appreciation (depreciation) of
investments, net of deferred income taxes
(Notes 2 and 3) 1,481,071 (182,233)
Accumulated deficit (7,578,808) (6,170,614)
---------- ----------
5,858,711 5,441,101
Deduct: 456,288 and 431,188 shares of common stock
held in treasury, at cost, at December 31, 2002
and 2001, respectively (Note 4) (2,591,171) (2,519,356)
---------- ----------
Net assets (Note 9 for per share information) 3,267,540 2,921,745
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $4,632,338 $4,098,866
========== ==========
--------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
23
FRANKLIN CAPITAL CORPORATION
=============================================================================================================
Statements of Operations
-------------------------------------------------------------------------------------------------------------
For the Year Ended December 31, 2002 2001 2000
-------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME
Interest on short term investments and money market accounts $5,081 $45,953 $51,015
Dividend income -- 26,744 42,000
Income from majority-owned affiliates (Note 6) 450,000 120,000 --
Other income -- -- 22,000
----------- ----------- -----------
455,081 192,697 115,015
----------- ----------- -----------
EXPENSES
Salaries and employee benefits (Note 7) 862,970 933,081 1,419,941
Professional fees 191,900 168,618 367,629
Rent (Note 5) 98,982 126,134 104,332
Insurance 58,036 41,955 42,314
Directors' fees 2,003 18,802 67,981
Taxes other than income taxes 39,709 40,394 45,306
Newswire and promotion 1,181 5,707 6,823
Depreciation and amortization 16,969 19,994 21,468
Interest expense 35,401 11,988 --
Expenses related to terminated merger 490,782 -- --
General and administrative 187,517 212,709 297,003
----------- ----------- -----------
1,985,450 1,579,382 2,372,797
----------- ----------- -----------
Net investment loss from operations (1,530,369) (1,386,685) (2,257,782)
Net realized gain on portfolio of investments:
Investment securities:
Affiliated 254,088 7,613 (278,526)
Unaffiliated (16,430) 512,842 1,490,582
----------- ----------- -----------
Total investment securities 237,658 520,455 1,212,056
Other than investment securities -- -- 3,819
----------- ----------- -----------
Net realized gain on portfolio of investments 237,658 520,455 1,215,875
Provision (benefit) for current income taxes 331 (1,676) 20,000
----------- ----------- -----------
Net realized loss (1,293,042) (864,554) (1,061,907)
Increase (decrease) in unrealized appreciation of investments,
net of deferred income taxes:
Investment securities:
Affiliated 1,663,304 279,699 (1,771,744)
Unaffiliated -- (1,833,455) (992,907)
----------- ----------- -----------
Total investment securities 1,663,304 (1,553,756) (2,764,651)
Other than investment securities -- -- (951,862)
Deferred income tax benefit -- -- 351,000
----------- ----------- -----------
Increase (decrease) in unrealized appreciation of investments,
net of deferred income taxes 1,663,304 (1,553,756) (3,365,513)
----------- ----------- -----------
Net increase (decrease) in net assets from operations 370,262 (2,418,310) (4,427,420)
Preferred dividends 115,152 115,150 98,633
----------- ----------- -----------
Net increase (decrease) in net assets attributable
to common stockholders $255,110 ($2,533,460) ($4,526,053)
=========== =========== ===========
Basic and diluted net increase (decrease) in net assets
per share attributable to common stockholders (Note 8) $0.24 ($2.34) ($4.14)
=========== =========== ===========
-------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
24
FRANKLIN CAPITAL CORPORATION
====================================================================================================================================
Statements of Cash Flows
------------------------------------------------------------------------------------------------------------------------------------
For the Year Ended December 31, 2002 2001 2000
------------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net increase (decrease) in net assets from operations $370,262 ($2,418,310) ($4,427,420)
Adjustments to reconcile net increase (decrease) in net assets from operations
to net cash used in operating activities:
Depreciation and amortization 16,969 19,994 21,468
Non-cash compensation expense from cashless exercise of officer options -- -- 349,644
(Increase) decrease in unrealized appreciation of investments,
net of deferred taxes (1,663,304) 1,553,756 3,365,513
Net realized gain on portfolio of investments, net of current income taxes (237,327) (522,131) (1,195,875)
Changes in operating assets and liabilities:
Decrease in receivable from disposal of investments -- -- 231,308
(Increase) decrease in other assets (4,300) 9,963 (7,763)
Increase (decrease) in accounts payable and accrued liabilities 235,529 (8,835) (36,951)
----------- ----------- -----------
Total adjustments (1,652,433) 1,052,747 2,727,344
----------- ----------- -----------
Net cash used in operating activities (1,282,171) (1,365,563) (1,700,076)
----------- ----------- -----------
Cash flows from investing activities:
Proceeds from sale of majority-owned affiliate 1,500,000 250,000 --
Proceeds from sale of affiliate 78,715 1,564,282 379,527
Proceeds from sale of other investments -- 1,044,782 950,151
Proceeds from sale of marketable investment securities 6,554 543,927 1,259,323
Loan payments received from majority-owned affiliate 75,000 75,000 --
Loan to majority owned affiliate -- (150,000) --
Purchases of investment in majority-owned affiliate -- (1,500,000) (56,311)
Purchase of investment in affiliate -- -- (140,000)
Purchases of other investments -- (49,095) (1,575,625)
Purchases of marketable investment securities (22,985) (542,146) (257,239)
----------- ----------- -----------
Net cash provided by investing activities 1,637,284 1,236,750 559,826
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from issuance of preferred stock -- -- 1,645,000
Payments of preferred dividends (115,152) (115,150) (98,633)
Cash paid to common stockholders in lieu of fractional shares due to
stock split of common shares -- -- (1,448)
Decrease in note payable (48,183) -- --
Proceeds from conversion right 300,000 -- --
Redemption of preferred stock (137,500) -- --
Purchases of treasury stock (71,815) (123,874) (328,445)
----------- ----------- -----------
Net cash (used in) provided by financing activities (72,650) (239,024) 1,216,474
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 282,463 (367,837) 76,224
Cash and cash equivalents at beginning of year 279,728 647,565 571,341
----------- ----------- -----------
Cash and cash equivalents at end of year $562,191 $279,728 $647,565
=========== =========== ===========
------------------------------------------------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
Non-cash liability issued in connection with purchase of majority owned affiliate -- $1,000,000 --
------------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
25
FRANKLIN CAPITAL CORPORATION
================================================================================================================
STATEMENTS OF CHANGES IN NET ASSETS
----------------------------------------------------------------------------------------------------------------
For the Year Ended December 31, 2002 2001 2000
----------------------------------------------------------------------------------------------------------------
Increase (decrease) in net assets from operations:
Net investment loss ($1,530,369) ($1,386,685) ($2,257,782)
Net realized gain on portfolio of investments,
net of current income taxes 237,327 522,131 1,195,875
Increase (decrease) in unrealized appreciation of investments,
net of deferred income taxes 1,663,304 (1,553,756) (3,365,513)
----------- ----------- -----------
Net increase (decrease) in net assets from operations 370,262 (2,418,310) (4,427,420)
Capital stock transactions:
Issuance of preferred stock -- -- 1,645,000
Payment of dividends on preferred stock (115,152) (115,150) (98,633)
Issuance of stock from treasury for exercise of officer options -- -- 349,644
Cash paid to common shareholders in lieu of fractional shares -- -- (1,448)
Proceeds for conversion right 300,000 -- --
Redemption of preferred stock (137,500) -- --
Purchase of treasury stock (71,815) (123,874) (328,445)
----------- ----------- -----------
Total increase (decrease) in net assets 345,795 (2,657,335) (2,861,302)
----------- ----------- -----------
Net assets at beginning of year 2,921,745 5,579,080 8,440,382
----------- ----------- -----------
Net assets at end of year $3,267,540 $2,921,745 $5,579,080
=========== =========== ===========
----------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
26
FRANKLIN CAPITAL CORPORATION
===========================================================================================================
FINANCIAL HIGHLIGHTS
-----------------------------------------------------------------------------------------------------------
For the Year Ended December 31, 2002(1) 2001(1) 2000(1) 1999 1998
-----------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE (2):
Net asset value attributable to common stockholders,
beginning of year $1.19 $3.58 $7.70 $5.61 $6.11
------ ------ ------ ------ ------
Net investment loss (1.44) (1.28) (2.07) (1.38) (1.14)
Net gain (loss) on portfolio of investments
(realized and unrealized) after taxes 1.78 (0.95) (1.98) 3.35 0.51
------ ------ ------ ------ ------
Total from investment operations 0.34 (2.23) (4.05) 1.97 (0.63)
------ ------ ------ ------ ------
Less dividends and distributions:
Distributions from accumulated
deficit and earnings 0.00 0.00 0.00 0.00 0.00
------ ------ ------ ------ ------
Total dividends and distributions 0.00 0.00 0.00 0.00 0.00
------ ------ ------ ------ ------
Capital stock transactions 0.54 (0.16) (0.07) 0.12 0.12
------ ------ ------ ------ ------
Net asset value attributable to common stockholders,
end of year $2.07 $1.19 $3.58 $7.70 $5.61
====== ====== ====== ====== ======
Market value per share, end of year $1.62 $4.18 $8.00 $6.83 $3.50
====== ====== ====== ====== ======
TOTAL INVESTMENT RETURN:
Based on market value per share (%) (58.85) (47.75) 17.13 95.24 (19.23)
RATIOS TO AVERAGE NET ASSETS:
Expenses (%) 56.61 37.67 25.99 24.97 23.73
Net investment loss from operations (%) (43.64) (33.08) (24.73) (23.86) (19.88)
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of period (000 omitted) $3,268 $2,922 $5,579 $8,440 $6,316
Portfolio turnover rate (%) 37 89 24 36 39
-----------------------------------------------------------------------------------------------------------
(1) - Includes liquidation preference of preferred stockholders.
(2) - Calculated based on weighted average number of shares outstanding during
the period.
The accompanying notes are an integral part of these financial highlights.
27
FRANKLIN CAPITAL CORPORATION
====================================================================================================================================
PORTFOLIO OF INVESTMENTS
------------------------------------------------------------------------------------------------------------------------------------
MARKETABLE INVESTMENT SECURITIES
------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF
SHARES OR MARKET
PRINCIPAL VALUE
DECEMBER 31, 2002 (2) AMOUNT ($) COST(1) (NOTE 2)
------------------------------------------------------------------------------------------------------------------------------------
Certificate of Deposit - 1.15%, due 01/04/2003 $34,675 $34,675
---------- ----------
Total Marketable Investment Securities (0.9% of total investments and 1.1% of net assets) $34,675 $34,675
---------- ----------
------------------------------------------------------------------------------------------------------------------------------------
INVESTMENTS, AT FAIR VALUE
------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF
SHARES OR DIRECTORS'
EQUITY PRINCIPAL VALUATION
DECEMBER 31, 2002 (2) INVESTMENT INTEREST AMOUNT ($) COST(1) (NOTE 2)
------------------------------------------------------------------------------------------------------------------------------------
MAJORITY OWNED AFFILIATE
Excelsior Radio Networks, Inc. Common stock 59.07% 1,476,804 $1,476,804 $2,865,000
Excelsior Radio Networks, Inc. Warrants -- 87,111 -- 92,875
---------- ----------
Total Excelsior Radio Networks, Inc.
(74.1% of total investments and 90.5% of net assets) 29.26% 1,476,804 2,957,875
(Radio production and advertising sales) (fully diluted)
OTHER INVESTMENT
Alacra Corporation (25.0% of total investments and Convertible
30.6% of net assets) Preferred Stock 1.68% 321,543 1,000,000 1,000,000
---------- ----------
(Internet-based information provider)
Investments, at Fair Value 2,476,804 3,957,875
------------------------------------------------------------------------------------------------------------------------------------
(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.
28
FRANKLIN CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 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. The Corporation has a working
capital deficiency of approximately $800,000 at December 31, 2002. (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 years ended December
31, 2002, 2001 and 2000.
At December 31, 2002 and 2001, the Corporation held cash and cash equivalents
primarily in money market funds at two commercial banking institutions, and two
broker/dealers.
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
29
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:
December 31, December 31, December 31,
2002 2001 2000
------------ ------------ ------------
Net increase (decrease) in net assets
attributable to common stockholders:
As reported $255,110 $(2,533,460) $(4,526,053)
Add:
Stock-based employee compensation
expense included in reported net
increase (decrease) in net assets
attributable to common stockholders -- -- 223,772
Deduct:
Total stock-based employee compensation
expense determined under fair value
based method for all awards, net of
related tax effect 4,734 37,985 140,585
-------- ----------- -----------
Pro forma $250,376 $(2,571,445) $(4,442,866)
Basic and diluted net increase
(decrease) in net assets attributable
to common stockholders:
As reported $0.24 $(2.34) $(4.14)
Pro forma $0.23 $(2.37) $(4.06)
30
FRANKLIN CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DEPRECIATION AND AMORTIZATION
Property and equipment are stated at cost. Depreciation is recorded using the
straight-line method at rates based upon estimated useful lives for the
respective assets. Leasehold Improvements are included in other assets and are
amortized over their useful lives or the remaining life of the lease, whichever
is shorter.
NET INCREASE (DECREASE) IN NET ASSETS PER COMMON SHARE
Net increase (decrease) in net assets attributable to common stockholders per
common share is calculated in accordance with the provisions of 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 years ended December 31, 2002, 2001 and 2000, Franklin's tax (provision)
benefit was based on the following:
2002 2001 2000
----------- ----------- -----------
Net investment loss from operations $(1,530,369) $(1,386,685) $(2,257,782)
Net realized gain on portfolio of investments 237,657 520,455 1,215,875
Increase (decrease) in unrealized appreciation 1,663,304 (1,553,756) (3,716,513)
----------- ----------- -----------
Pre-tax book income (loss) $ 370,592 $(2,419,986) $(4,758,420)
=========== =========== ===========
2002 2001 2000
----------- ----------- -----------
Federal tax (provision) benefit at 34% on $370,592,
$(2,419,986), and $(4,758,420), respectively $ (126,000) $ 823,000 $ 1,618,000
State and local, net of Federal benefit -- 1,000 (13,000)
Other (22,000) 5,000 (130,000)
Change in valuation allowance 148,000 (827,000) (1,144,000)
----------- ----------- -----------
$ -- $ 2,000 $ 331,000
=========== =========== ===========
The components of the tax benefit are as follows:
2002 2001 2000
----------- ----------- -----------
Current state and local tax benefit (expense) $ -- $ 2,000 $ (20,000)
Deferred tax benefit -- -- 351,000
----------- ----------- -----------
Benefit for income taxes $ -- $ 2,000 $ 331,000
=========== =========== ===========
Deferred income tax benefit (provision) reflects the impact of "temporary
differences" between amounts of assets and liabilities for financial reporting
purposes and such amounts as measured by tax laws.
At December 31, 2002 and 2001, significant deferred tax assets and liabilities
consist of:
Asset (Liability)
----------------------------
December 31, December 31,
2002 2001
----------- -----------
Deferred Federal and state benefit from
net operating loss carryforward $ 2,356,000 $ 1,905,000
Deferred Federal and state (provision)
benefit on unrealized (appreciation)
depreciation of investments (533,000) 66,000
Valuation allowance (1,823,000) (1,971,000)
----------- -----------
Deferred taxes $ -- $ --
=========== ===========
31
FRANKLIN CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 December 31, 2002, consists of accumulated net
realized gains of $5,170,000 and accumulated investment losses of $12,749,000.
On February 22, 2000, the Corporation issued 16,450 shares of convertible
preferred stock with a par value of $100 for $1,645,000. The 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), resulting in 123,375
shares of common stock. 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.
On April 26, 2000, the Corporation declared a three-for-two stock split of the
Corporation's Common Stock in the form of a stock dividend to shareholders of
record on May 15, 2000, and payable June 7, 2000. The stock split has been
reflected in the accompanying financial statements and all applicable references
as to the number of common shares and per share information have been restated.
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, 2001, the Corporation had
purchased 482,350 shares of its common stock of which 431,188 remained in
treasury. During the year ended December 31, 2002, the Corporation purchased
25,100 shares of its common stock at a total cost of $71,815. To date, Franklin
has repurchased 507,450 shares of its common stock of which 456,288 shares
remain in treasury at December 31, 2002.
5. COMMITMENTS AND CONTINGENCIES
Franklin is obligated under an operating lease, which provides for annual
minimum rental payments through December 31, 2003 of $149,600.
Rent expense for the years ended December 31, 2002, 2001 and 2000, was
approximately $99,000, $126,000, and $104,000, respectively. For the years ended
December 31, 2002, 2001 and 2000, the Corporation collected rents of $59,000,
$24,000, and $40,000, 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. Of the amount collected from subtenants during the
year ended December 31, 2000, $30,000, was received from a corporation included
in Franklin's investment portfolio.
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
32
FRANKLIN CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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
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
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 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 year ended December 31, 2002, Franklin sold its remaining position in Primal
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 is 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 bears interest at 10%
per annum and is 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 December 31, 2002, this
note has been repaid. In contemplation of the 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. 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.
At the closing, Franklin entered into a services agreement with Excelsior
whereby Franklin provides Excelsior with certain services. In consideration for
the services provided, for a period of six months Franklin received $30,000 per
month and was reimbursed for all direct expenses. Since then, Franklin's monthly
fee is determined by a majority of the non-Franklin directors; however, said
management fee will be no less than $15,000 per month and Franklin will continue
to be reimbursed for all direct expenses through December 31, 2003. Finally,
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 years ended December 31, 2002, and 2001, Franklin earned
$450,000 and $120,000,
33
FRANKLIN CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
respectively, in management fees and was reimbursed $120,936 and $40,156,
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.
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.
During the year ended December 31, 2000, the Corporation invested $140,000 in
Excom Ventures, LLC. ("Excom"). Excom was formed as a holding company for the
purpose of investing in Expert Commerce, Inc., a Business-to-Business purchase
evaluation engine that simulates the way people make decisions. At December 31,
2001, the Board of Franklin determined that this investment had not value and
recorded an unrealized loss. At December 31, 2002, Excom was dissolved and
Franklin realized a loss of $140,000.
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
34
FRANKLIN CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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.
Forfeited options of 1,875 were issued on March 1, 2000, to one eligible officer
of the Corporation at a strike price of $14.00 per share, which represented the
closing price of Franklin's Common Stock as reported by the American Stock
Exchange on that date. These options will expire as originally issued on January
28, 2008. One-half of the reissued options vested immediately, and one-half
vested on March 1, 2001.
On February 14, 2000, 30,000 options were granted under the SOP to four eligible
"outside" directors. The strike price of the options was $11.50 per share, which
represented the closing price of Franklin's Common Stock as reported by the
American Stock Exchange on that date. One-third of the options granted vested
immediately; another one-third vest one year from the date of issuance; and the
final one-third vest two years after the date of issuance. The options expire
after ten years. On June 7, 2000, 7,500 options were granted under the SOP to
four eligible "outside" directors. The strike price of the options was $9.67 per
share, which represented the closing price of Franklin's Common Stock as
reported by the American Stock Exchange on that date. One-third of the options
granted vested immediately; another one-third vest one year from the date of
issuance; and the final one-third vest two years after the date of issuance. The
options expire after ten years.
On May 9, 2000, one of Franklin's officers made a cashless exercise of 29,062
options resulting in a non-cash charge to compensation expense of $197,188. On
September 11, 2000, one of Franklin's officers made a cashless exercise of
29,062 options resulting in a non-cash charge to compensation expense of
$129,317. On December 21, 2000, three of Franklin's officers made cashless
exercises of 7,501 options resulting in a non-cash charge to compensation
expense of $23,139.
The following is a summary of the status of the Stock Option Plans during the
years ended:
December 31, 2002 December 31, 2001 December 31, 2000
-------------------- -------------------- --------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ------ ------ ------ ------ ------
Outstanding at beginning of year 39,375 $11.27 39,375 $11.27 65,625 $ 4.59
Granted -- -- -- -- 39,375 $11.27
Exercised -- -- -- -- 65,625 $ 4.42
Forfeited 18,750 $11.13 -- -- -- --
Expired -- -- -- -- -- --
------ ------ ------
Outstanding at end of year 20,625 $11.39 39,375 $11.27 39,375 $11.27
====== ====== ======
Exercisable at end of year 20,625 $11.39 26,875 $11.33 13,438 $11.33
====== ====== ======
Weighted average fair value
of options granted -- -- $ 2.40
The fair value of the options granted was estimated on the date of the grant
using the Black-Scholes option pricing model with the following assumptions:
December 31, 2000
Stock volatility 41.3%
Risk-free interest rate 5.5%
Option term in years 4
Stock dividend yield --
35
FRANKLIN CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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:
December 31,
-------------------------------------------
2002 2001 2000
-------------------------------------------
Numerator:
Net increase (decrease) in net
assets from operations $ 370,262 ($2,418,310) ($4,427,420)
Preferred stock dividends (115,152) (115,150) (98,633)
----------- ----------- -----------
Numerator for basic and diluted
earnings per share - net increase
(decrease) in net assets attributable
to common stockholders $ 255,110 ($2,533,460) ( $4,526,053)
=========== =========== ===========
Denominator:
Denominator for basic and diluted
increase (decrease) in net assets
from operations - weighted -
average shares 1,066,195 1,083,408 1,094,373
=========== =========== ===========
Basic and diluted net increase (decrease) in
net assets from operations per share $ 0.24 $ (2.34) $ (4.14)
=========== =========== ===========
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 December 31,
-----------------------------
2002 2001 2000
-----------------------------
Preferred stock convertible into common stock 123,375 123,375 123,375
Stock options 20,625 39,375 25,625
9. NET ASSET VALUE PER SHARE
The following table sets forth the computation of net asset value per common
share attributable to common stockholders:
December 31, December 31,
2002 2001
---------- ----------
Numerator:
Numerator for net asset value per
common share, as if converted basis $3,267,540 $2,921,745
Liquidation value of convertible preferred
stock (1,095,000) (1,645,000)
---------- ----------
Numerator for net asset value per share
attributable to common stockholders $2,172,540 $1,276,745
========== ==========
36
FRANKLIN CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Denominator:
Number of common shares outstanding,
denominator for net asset value per share
attributable to common stockholders 1,049,600 1,074,700
Number of shares of common stock to be
issued upon conversion of preferred stock 82,125 123,375
---------- ----------
Denominator for net asset value per common
share as if converted basis 1,131,725 1,198,075
========== ==========
Net asset value per share attributable
to common stockholders $ 2.07 $ 1.19
========== ==========
Net asset value per common share, as if
converted basis $ 2.89 $ 2.44
========== ==========
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 $1,660,269,
respectively, for the year ended December 31, 2002; $3,241,241 and $3,477,991,
respectively, for the year ended December 31, 2001; and $1,944,500 and
$2,543,819, respectively, for the year ended December 31, 2000.
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. SELECTED QUARTERLY DATA (UNAUDITED)
2002
---------------------------------------------------------
Quarter 1 Quarter 2 Quarter 3 Quarter 4
----------- ----------- ----------- ---------
Total investment income $ 91,549 $ 120,560 $ 120,110 $ 122,862
Net investment loss from operations (254,441) (434,455) (472,220) (369,253)
Net (decrease) increase in net assets
attributable to common stockholders (268,903) 2,225,964 (1,396,784) (305,167)
Basic and diluted earnings per common share (0.25) 2.08 (1.31) (0.29)
2001
---------------------------------------------------------
Quarter 1 Quarter 2 Quarter 3 Quarter 4
----------- ----------- ----------- ---------
Total investment income $ 42,557 $ 14,802 $ 41,735 $ 93,603
Net investment loss from operations (390,097) (371,291) (317,146) (308,151)
Net decrease in net assets
attributable to common stockholders (1,181,953) (443,100) (395,004) (398,253)
Basic and diluted earnings per common share (1.08) (0.41) (0.37) (0.48)
37
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
All of the Corporation's directors are independent with the exception
of Stephen L. Brown.
COMMON STOCK DIRECTORS
STEPHEN L. BROWN,(1) age 64, was elected to the Corporation's Board of
Directors and appointed Chairman of its Board of Directors in October 1986. He
has been Chairman and Chief Executive Officer since October 1986. Prior to
joining Franklin, Mr. Brown was Chairman of S.L. Brown & Company, Inc. ("SLB &
Co., Inc."), a private investment firm. Mr. Brown is a director of Copley
Financial Services Corporation, advisor to Copley Fund, Inc., a mutual fund. Mr.
Brown is an "interested person" of the Corporation as defined in the 1940 Act
because he serves as both an officer and director of the Corporation. He is the
father of Spencer L. Brown, Senior Vice President and Secretary of the
Corporation.
DAVID T. LENDER,(3) age 50, joined the Board as a director in 2000.
Mr. Lender is a Managing Director at Banc of America Securities, LLC where he
specializes in mergers and acquisitions. Prior to joining Banc of America
Securities, LLC, Mr. Lender was a Managing Director in the Mergers and
Acquisitions Group of Rothschild, Inc.
MICHAEL P. ROLNICK,(2) age 37, joined the Board as a director in 1998.
Mr. Rolnick is a General Partner at ComVentures, a venture capital firm that
invests in early stage Internet and communications companies. Mr. Rolnick is
responsible for private equity investments and managing portfolio companies.
Prior to joining ComVentures in 1999, Mr. Rolnick had been Vice President for
New Ventures at E* Trade Group Inc. since 1997.
PREFERRED STOCK DIRECTORS
IRVING LEVINE, (1),(2),(3) age 81, joined the Board as a director in
1990. He has been Chairman of the Board and President of Copley Fund, Inc., a
mutual fund, since 1978, and Chairman and Treasurer of Stuffco International,
Inc., a ladies handbag processor and chain-store operator, since 1978. Mr.
Levine is President and a director of Copley Financial Services Corporation
(advisor to Copley Fund, Inc.) as well as a director of U.S. Energy Systems,
Inc. an independent producer of clean efficient energy for growing energy
markets.
LAURENCE I. FOSTER,(2),(3) age 61, joined the Board as a director in
2002. He was a partner at KPMG until his retirement in May 2000 when he joined
Richard E. Eisner & Company LLP's New York City office as a partner in the
personal financial planning practice. In June 2002 Mr. Foster became an
independent consultant. Mr. Foster holds the American Institute of Certified
Public Accountants "Personal Financial Specialist" (PFS) designation. Mr. Foster
is a member of the American Institute of Certified Public Accountants where he
is the Chairman on the PFS Credential Committee. Mr. Foster is also a member of
the New York State Society of Certified Public Accountants and the former
chairman of their Estate Planning Committee.
1 - Member of Executive Committee, 2 - Member of Compensation Committee,
3 - Member of Audit Committee
38
EXECUTIVE OFFICERS
STEPHEN L. BROWN, Chairman and Chief Executive Officer. For additional
information about Mr. Brown, please see the Directors' biographical information
section above.
SPENCER L. BROWN, age 37, had been Senior Vice President of the
Corporation since November 1995, Secretary of the Corporation since October 1994
and was Vice President from August 1994 to November 1995. Mr. Brown is the son
of Stephen L. Brown, the Chairman and Chief Executive of the Corporation. Mr.
Brown resigned his positions with Franklin on January 1, 2003 in order to become
the Chief Executive Officer of Excelsior Radio Networks, Inc., Franklin's
largest investment.
HIRAM M. LAZAR, age 38, joined the Corporation as Chief Financial
Officer in January 1999. From June 1992 to January 1999, Mr. Lazar was the
Vice-President of Finance and Corporate Controller for Lebenthal & Co., Inc., a
regional full-service broker/dealer.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Corporation's officers and directors, and persons who own more than
10 percent of the Corporation's common stock to file reports (including a
year-end report) of ownership and changes in ownership with the Securities and
Exchange Commission (the "SEC") and to furnish the Company with copies of all
reports filed.
Based solely on a review of the forms furnished to the Corporation, or
written representations from certain reporting persons, the Corporation believes
that all persons who were subject to Section 16(a) in 2002 complied with the
filing requirements.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth a summary for each of the last three
years of the cash and non-cash compensation awarded to, earned by, or paid to
the Chief Executive Officer of the Corporation and the other executive officers
of the Corporation, whose individual remuneration exceeded $100,000 for the year
ended December 31, 2002.
SECURITIES
OTHER UNDERLYING
NAME & ANNUAL OPTIONS OTHER
PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) COMPENSATION($)(1) AWARDED (#) COMPENSATION($)
---------------------- ---- ----------- --------- ------------------ ------------ ----------------
Stephen L. Brown (2) 2002 $420,000 $30,000 -- -- --
CHAIRMAN & 2001 420,000 -- -- -- --
PRESIDENT 2000 350,000 125,000 -- -- --
Spencer L. Brown(3) 2002 225,000 41,667 -- -- --
SENIOR VICE PRESIDENT 2001 225,000 -- -- -- --
& SECRETARY 2000 200,000 40,000 -- -- --
Hiram M. Lazar 2002 130,000 3,750 -- -- --
CHIEF FINANCIAL 2001 130,000 -- -- -- --
OFFICER 2000 120,000 15,000 -- 1,875 --
39
(1) There were no perquisites paid by the Corporation in excess of the lesser
of $50,000 or 10% of the compensated person's total salary and bonus for
the year.
(2) Mr. Brown is an "interested person" of the Corporation, as defined under
the 1940 Act, because he serves as both a director and executive officer of
the Corporation.
(3) Mr. Brown resigned January 1, 2003 to become the Chief Executive Officer of
Excelsior, Franklin's largest investment.
COMPENSATION OF DIRECTORS
Each director of the Corporation, other than Mr. Stephen L. Brown, is
eligible to receive a fee of $500 plus reimbursement of expenses incurred in
attending each board meeting.
PENSION OR
RETIREMENT ESTIMATED
BENEFITS ANNUAL TOTAL
ACCRUED AS PART BENEFITS COMPENSATION
AGGREGATE OF CORPORATION'S UPON PAID TO
NAME OF DIRECTOR COMPENSATION EXPENSES RETIREMENT DIRECTORS
---------------- ------------ ---------------- ---------- ------------
Stephen L. Brown $ -- -- -- --
David T. Lender $500 -- -- $500
Michael P. Rolnick $500 -- -- $500
Lawrence J. Foster $500 -- -- $500
Irving Levine $500 -- -- $500
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Irving Levine, Laurence Foster, and Michael Rolnick served on the
Compensation Committee during 2002. There were no Compensation Committee
interlocks or insider (employee) participation during 2002.
OPTION GRANTS
No options were granted during the year ended December 31, 2002, to
the Chief Executive Officer of the Corporation or the other executive officers
of the Corporation.
OPTION EXERCISES
No options were exercised during the year ended December 31, 2002, by
the Chief Executive Officer of the Corporation or the other executive officers
of the Corporation.
EMPLOYMENT AGREEMENTS
On July 26, 2002, the Board authorized an amendment to Stephen L.
Brown's Employment Agreement with the Corporation (as amended, the "Stephen
Brown Employment Agreement"). The Stephen Brown Employment Agreement will now
expire on December 31, 2004 ("the Term"). The Term will automatically renew from
year to year thereafter, unless the Corporation notifies Mr. Brown not less than
120 days prior to the end of any Term in writing that the Corporation will not
be renewing the Stephen Brown Employment Agreement.
40
The Stephen Brown Employment Agreement provides that Mr. Stephen L.
Brown will serve as the Chairman and Chief Executive Officer of the Corporation
and be responsible for the general management of the affairs of the Corporation,
reporting directly to the Board. It also provides that he will serve as a member
of the Board for the period of which he is and shall from time to time be
elected or reelected.
Mr. Stephen L. Brown receives compensation under the Stephen Brown
Employment Agreement in the form of base salary of $420,000. In addition, the
Board may increase such salary at its discretion from time to time. Mr. Brown is
also entitled to be paid bonuses as the Board determines in its sole discretion.
Under the Stephen Brown Employment Agreement, the Corporation furnishes Mr.
Brown with an automobile and reimburses him for certain expenses related to such
automobile. In addition, Mr. Brown is reimbursed for expenses related to
membership in a club to be used primarily for business purposes. Mr. Brown is
entitled under the Stephen Brown Employment Agreement to participate in any
employee benefit plans or programs and to receive all benefits, perquisites and
emoluments for which salaried employees are eligible. Mr. Brown is also entitled
to severance pay in the event of termination without cause or by constructive
discharge equal to the remaining base salary payable under the Stephen Brown
Employment Agreement and provides for death benefits payable to his surviving
spouse equal to Mr. Brown's base salary for a period of one year.
In addition, on July 26, 2002 the Board authorized an amendment to
Stephen L. Brown's Severance Agreement (as amended, the "Stephen Brown Severance
Agreement"). Under the terms of the Stephen Brown Severance Agreement, Mr. Brown
is entitled to receive severance if following a change in control (as defined in
the Stephen Brown Severance Agreement) his employment is terminated by the
Corporation without cause or by the executive within one year of such change in
control. The amendment has increased the amount of the severance payment Mr.
Brown is entitled to receive upon the occurrence of such event from 1.5 to 2.5
times his average compensation over the past five years.
Mr. Spencer L. Brown was covered under an employment agreement that
was terminated effective January 1, 2003, upon Mr. Brown's resignation from the
Corporation to become the Chief Executive Officer of Excelsior Radio Networks,
Inc.
On January 1, 2003, Mr. Hiram Lazar entered into an employment
agreement with the Corporation, the "Hiram Lazar Employment Agreement". The
Hiram Lazar Employment Agreement will expire on December 31, 2003 ("the Term").
The Term will automatically renew from year to year thereafter, unless the
Corporation notifies Mr. Lazar not less than 90 days prior to the end of any
Term in writing that the Corporation will not be renewing the Hiram Lazar
Employment Agreement.
The Hiram Lazar Employment Agreement provides that Mr. Lazar will
serve as the Chief Financial Officer of the Corporation and be responsible for
the financial affairs of the Corporation, reporting directly to the Chief
Executive Officer.
Mr. Lazar receives compensation under the Hiram Lazar Employment
Agreement in the form of base salary of $160,000. In addition, the Board may
increase such salary at its discretion from time to time. Mr. Lazar is also
entitled to be paid bonuses up to 20% of base salary as the Board determines in
its sole discretion. Mr. Lazar is entitled under the Hiram Lazar Employment
Agreement to participate in any employee benefit plans or programs and to
receive all benefits, perquisites and emoluments for which salaried employees
are eligible. Mr. Lazar is also entitled to severance pay in the event of
termination without cause or by constructive discharge equal to the remaining
base salary payable under the Hiram Lazar Employment Agreement and provides for
death benefits payable to his surviving spouse equal to Mr. Lazar's base salary
for a period of six months. Excelsior reimburses the Corporation for 80% of Mr.
Lazar's total compensation.
41
COMPENSATION PLANS
On September 9, 1997, Franklin Capital's stockholders approved two
Stock Option Plans: a Stock Incentive Plan ("SIP") to be offered to Franklin
Capital's consultants, officers and employees (including any officer or employee
who is also a director of Franklin Capital) and a Non-Statutory Stock Option
Plan ("SOP") to be offered to Franklin Capital's "outside" directors, I.E.,
those directors who are not also officers or employees of Franklin. 112,500
shares of Franklin Capital's common stock have been reserved for issuance under
these plans, of which 67,500 shares have been reserved for the SIP and 45,000
shares have been reserved for the SOP.
Shares subject to options that terminate or expire prior to exercise
will be available for future grants under the plans. Because the issuance of
options to "outside" directors is not permitted under the Investment Company Act
without an exemptive order by the Securities and Exchange Commission, the
issuance of options under the SOP was conditioned upon the granting of such
order. The order was granted by the Commission on January 18, 2000.
On December 31, 2002, there were 20,625 options to purchase common
stock outstanding and 26,250 remain available for future issuance.
The following is a description of each of the Stock Option Plans
followed by a description of the provisions applicable to both Stock Option
Plans.
STOCK INCENTIVE PLAN (SIP)
PURPOSE
The purpose of the SIP is to give the Corporation and its Affiliates a
competitive advantage in attracting, retaining and motivating officers,
employees and consultants of the Corporation and to provide the Corporation with
a stock plan that provides incentives linked to the financial results of the
Corporation and increase in stockholder value.
TYPE OF AWARDS
The SIP permits, at the discretion of the Committee, the granting to
SIP participants of options to purchase Common Stock (including incentive stock
options within the meaning of Section 422 of the Code ("ISOs") or "non-statutory
stock options" ("non-ISOs")), stock appreciation rights, restricted stock and
tax offset bonuses. A stock appreciation right entitles an optionee to an amount
equal to the excess of the fair market value of one share of common stock over
the per share exercise price multiplied by the number of shares in respect of
which the stock appreciation right is exercised. Stock appreciation rights may
only be granted in conjunction with all or part of an option grant.
Restricted stock may be awarded to any participant, for no cash
consideration and may be subject to such conditions, including vesting,
forfeiture and restrictions on transfer, as the Committee shall determine. Such
terms and conditions will be specified in an agreement evidencing the award.
Finally, the SIP permits the granting of a right to receive a cash
payment at such time or times as an award under the SIP results in compensation
income to the participant for the purpose of assisting the participant in paying
the resulting taxes.
Upon exercise of an ISO or non-ISO, the Committee may elect to cash
out all or any portion of the shares of common stock for which an option is
being exercised by paying the optionee the excess of
42
the fair market value of a share of common stock over the per share exercise
price for each such option share being cashed out. All options granted under the
SIP become automatically exercisable upon a "change of control" and remain
exercisable until expiration of their respective terms. A "change in control" is
defined in the Stock Option Plans as the acquisition by any person or group
(other than Stephen L. Brown and his Affiliates) of more than 25% of the voting
securities of the Corporation or a sale or other disposition of all or
substantially all of the assets of the Corporation to any person.
ADMINISTRATION
The SIP will be administered by a committee of the Board of Directors
composed of not fewer than two outside directors each of whom will qualify as a
"non-employee director" within the meaning of Rule 16b-3 of the 1934 Act and an
"outside Director" within the meaning of Section 162(m) of the Code with all
grants under the SIP approved pursuant to Section 57(o) of the 1940 Act. Section
57(o) of the 1940 Act requires that grants be approved by a majority of the
directors with no financial interest in the grant and a majority of
non-interested directors. The Committee will have the authority, among other
rights, to select the participants to whom awards may be granted, determine
whether to grant ISOs, non-ISOs, stock appreciation rights or restricted stock,
or any combination thereof and determine the vesting terms and other conditions
of an award to an SIP participant.
PARTICIPANTS
SIP participants will be the officers, employees (including such
officers and employees who are also directors) or consultants of the Corporation
and its Affiliates who are responsible for or contribute to the management,
growth and profitability of the business of the Corporation and its Affiliates.
Each grant of an award under the SIP will be evidenced by an agreement between
the participant and the Corporation, which shall include such terms and
provisions as the Committee may determine from time to time.
TRANSITION OF AWARDS
Under the SIP, generally, upon an SIP participant's death or when an
SIP participant's employment is terminated for any reason, all unvested stock
options will be forfeited. Upon the termination of employment of an optionee
other than as a result of the optionee's death, unless otherwise provided in
such optionee's option agreement, an optionee's right to exercise a vested
option will expire three months after termination of employment. If an
optionee's employment is terminated by reason of death, the period of exercise
for options vested at the optionee's death is 12 months. Options are not
transferable except on the death of the optionee, by will or the laws of decent
and distribution. Stock appreciation rights may be exercised and transferred to
the same extent that the options to which they relate may be exercised or
transferred.
The Board of Directors may terminate, suspend, amend or revise the SIP
at any time subject to limitations in the plan. The Board may not, without the
consent of the optionee, alter or impair rights under any award previously
granted except in order to comply with applicable law.
NON-STATUTORY STOCK OPTION PLAN (SOP)
PURPOSE
The purpose of the SOP is to further the interests of the Corporation,
its stockholders and its employees by providing the "outside" directors of the
Corporation (I.E., those who are not also officers and employees of the
Corporation) the opportunity to purchase the Common Stock of the Corporation as
an appropriate reward for the dedication and loyalty of the "outside" directors.
43
TYPE OF AWARDS
The SIP only permits the granting of options to purchase common stock.
Only non-ISOs can be granted under the SOP.
ADMINISTRATION
The SOP will be administered by the Board of Directors of the
Corporation with all grants approved pursuant to Section 57(o) of the 1940 Act.
Options granted under the SOP are intended to comply with the exemption afforded
by Rule 16b-3 of the 1934 Act. The Board, in its discretion, can impose any
vesting or other restrictions on options granted under the SOP.
PARTICIPANTS
SOP participants will be outside directors of the Corporation.
TERMINATION OF AWARDS
Under the SOP, options expire 30 days after the date of a SOP
participant's appointment with the Corporation is terminated except if such
termination is by reason of death or disability. In the event of termination by
reason of disability, options expire 12 months after such termination. In the
event of the participant's death while serving as director or within the 30-day
period following termination of the participant's appointment, options expire 12
months following the date of death.
PROVISIONS APPLICABLE TO BOTH STOCK OPTION PLANS
AVAILABLE SHARES
The aggregate number of shares of common stock reserved for issuance
under the Stock Option Plans will be 112,500, of which 67,500 shares have been
reserved for issuance under the SIP and 45,000 have been reserved for issuance
under the SOP. Shares subject to options that terminate or expire prior to
exercise will be available for future grants under the Stock Option Plan.
The number of shares of common stock reserved for issuance under the
Stock Option Plans, the number of shares issuable upon the exercise of options
or subject to stock appreciation rights, the exercise price of such awards and
the number of restricted stock awards granted under the Stock Option Plans may
be subject to "anti-dilution" adjustments, in the sole discretion of the
Committee, in the event of any merger, reorganization, consolidation,
separation, liquidation, stock dividend, stock split, share combination,
recapitalization or other change in corporate structure affecting the
outstanding common stock of the Corporation.
GRANT AND EXERCISE OF AWARDS
The exercise price for options under the Stock Option Plans will be
determined, in the case of the SIP, by the Committee, and in the case of the
SOP, by the Board of Directors, but will not be less than the "Fair Market
Value" of the Corporation's common stock at the date of grant (as defined in the
Stock Option Plans as the closing market price of the common stock on the
American Stock Exchange on the date of such grant).
Options granted under the Stock Option Plans are exercisable for a
period of 10 years from the date of grant (five years with respect to ISOs
granted to optionees who own more than 10% of the voting
44
power of the Corporation or any subsidiary) or such shorter period as the
administrator of such plan (either the Committee or the Board, as the case may
be) may establish as to any or all shares of common stock subject to any option.
Options will become exercisable in accordance with the vesting schedule
prescribed in such optionee's option agreement, and may be subject to
satisfaction of such other conditions as the administrator may determine. Stock
appreciation rights granted under the SIP are exercisable to the same extent as
the options to which they relate and upon exercise terminate the related option.
An employee, officer or director exercising a non-ISO pursuant to the
SIP may elect to have the Corporation withhold shares of the Corporation's
common stock to satisfy tax liabilities arising from the exercise of such
options. Initially, there will be three employees of the Corporation, two of
whom are also directors, who will be eligible to participate in the SIP. There
are five outside directors eligible to participate in the SOP.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF OPTIONS
The following discussion of certain relevant federal income tax
effects applicable to stock options granted under the Stock Option Plans is a
brief summary only, and reference is made to the Code and the regulations and
interpretations issued thereunder for a complete statement of all relevant
federal tax consequences.
INCENTIVE STOCK OPTIONS
No taxable income will be realized by an optionee upon the grant or
timely exercise of an ISO. If shares are issued to an optionee pursuant to the
timely exercise of an ISO and a disqualifying disposition of such shares is not
made by the optionee (I.E., no disposition is made within two years after the
date of grant or within one year after the receipt of shares by such optionee,
whichever is later), then (i) upon sale of the shares, any amount realized in
excess of the exercise price of the ISO will be taxed to the optionee as a
long-term capital gain and any loss sustained will be long-term capital loss,
and (ii) no deduction will be allowed to the Corporation. However, if shares
acquired upon the timely exercise of an ISO are disposed of prior to satisfying
the holding period described above, generally (a) the optionee will realize
ordinary income in the year of disposition in an amount equal to the excess (if
any) of the fair market value of the shares at the time of exercise (or, if
less, the amount realized on the disposition of the shares) over the exercise
price thereof, and (b) the Corporation will be entitled to deduct an amount
equal to such income. Any additional gain recognized by the optionee upon a
disposition of shares prior to satisfying the holding period described above
will be taxed as a short-term or long-term capital gain, as the case may be, and
will not result in any deduction for the Corporation.
If an ISO is not exercised on a timely basis, the option will be
treated as a nonqualified stock option. Subject to certain expectations, an ISO
generally will not be exercised on a timely basis if it is exercised more than
three months following termination of employment.
The amount that the fair market value of shares of common stock on the
exercise date of an ISO exceeds the exercise price generally will constitute an
item that increases the optionee's alternative minimum taxable income.
In general, the Corporation will not be required to withhold income or
payroll taxes on the timely exercise of an ISO.
45
NON-ISOS
In general, an optionee will not be subject to tax at the time a
non-ISO is granted. Upon exercise of a non-ISO where the exercise price is paid
in cash, the optionee generally must include in ordinary income at the time of
exercise an amount equal to the excess, if any, of the fair market value of the
shares of common stock at the time of exercise over the exercise price. The
optionee's tax basis in the shares acquired upon exercise will equal the
exercise price plus the amount taxable as ordinary income to the optionee. The
federal income tax consequences of an exercise of a non-ISO where the exercise
price is paid in previously owned shares of common stock are generally similar
to those where the exercise price is paid in cash. However, the optionee will
not be subject to tax on the surrender of such shares, and the tax basis of the
shares acquired on exercise that are equal in number to the shares surrendered
will be the same as the optionee's tax basis in such surrendered shares. Special
timing rules may apply to an optionee who is subject to reporting under Section
16(a) of the 1934 Act (generally an executive officer of the Corporation) and
would be subject to liability under Section 16(b) of the 1934 Act.
The Corporation generally will be entitled to a deduction in the
amount of an optionee's ordinary income at the time such income is recognized by
the optionee upon the exercise of a non-ISO. Income and payroll taxes are
required to be withheld for employees on the amount of ordinary income resulting
from the exercise of a non-ISO.
On February 14, 2000, 30,000 options were granted under the SOP to
four eligible "outside" directors. The strike price of the options was $11.50
per share, which represented the closing price of Franklin's common stock as
reported by the American Stock Exchange on that date. One-third of the options
granted vested immediately; another one-third vested one year from the date of
issuance; and the final one-third vest two years after the date of issuance. The
options expire after ten years. On June 7, 2000, 7,500 options were granted
under the SOP to four eligible "outside" directors. The strike price of the
options was $9.67 per share, which represented the closing price of Franklin's
common stock as reported by the American Stock Exchange on that date. One-third
of the options granted vested immediately; another one-third vest one year from
the date of issuance; and the final one-third vest two years after the date of
issuance. The options expire after ten years.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
The following tables set forth certain information with respect to
beneficial ownership (as that term is defined in the rules and regulations of
the Commission) of the Corporation's common stock as of March 10, 2003, by 1)
each person who is known by the Corporation to be the beneficial owner of more
than five percent of the outstanding common stock, 2) each director of the
Corporation, 3) each current executive officer listed in the Summary
Compensation Table and 4) all directors and executive officers of the
Corporation as a group. Except as otherwise indicated, to the Corporation's
knowledge, all shares are beneficially owned and investment and voting power is
held as stated by the persons named as owners. The address for all beneficial
owners, unless stated otherwise below, is c/o Franklin Capital Corporation 450
Park Avenue, Suite 1000, New York, NY 10022.
COMMON STOCK
NAME AND ADDRESS OF AMOUNT AND NATURE OF PERCENT
BENEFICIAL OWNER BENEFICIAL OWNERSHIP OF CLASS
---------------------------- -------------------- --------
The Prudential Insurance
Company of America 187,438 18.0%
751 Broad Street
Newark, NJ 07102
46
NAME AND ADDRESS OF AMOUNT AND NATURE OF PERCENT
BENEFICIAL OWNER BENEFICIAL OWNERSHIP OF CLASS
---------------------------- -------------------- --------
Stephen L. Brown 144,791 (1) 13.9%
Irving Levine 46,375 (2) 4.3%
Hiram M. Lazar 9,085 (3) *
Michael P. Rolnick 7,250 (4) *
David T. Lender 300 *
Laurence I. Foster -- *
All officers and directors
as a group (5 persons) 207,801 19.0%
-----------------------
* Less than 1.0%
(1) Does not include 40,779 shares owned by Mr. Brown's children. Mr. Brown
disclaims beneficial ownership of such shares.
(2) Includes options for 2,500 shares exercisable on February 14, 2000, options
for 625 shares exercisable on June 7, 2000, options for 2,500 shares
exercisable on February 14, 2001 and options for 625 shares exercisable on
June 7, 2001. Also includes preferred stock which is convertible into
35,625 shares of common stock owned by Copley Fund, Inc. ("Copley"). Mr.
Levine may be deemed to be a controlling person of Copley due to his
position as Chairman and Chief Executive Officer. Therefore, Mr. Levine may
be deemed to be a beneficial owner of all shares owned by Copley.
(3) Includes options for 937 shares exercisable on March 1, 2000, and options
for 938 shares exercisable on March 1, 2001. Also includes preferred stock
held which is convertible into 750 shares of common stock.
(4) Includes options for 2,500 shares exercisable on February 14, 2000, options
for 625 shares exercisable on June 7, 2000, options for 2,500 shares
exercisable on February 14, 2001 and options for 625 shares exercisable on
June 7, 2001.
PREFERRED STOCK
NAME AND ADDRESS OF AMOUNT AND NATURE OF PERCENT
BENEFICIAL OWNER BENEFICIAL OWNERSHIP OF CLASS
---------------------------- -------------------- --------
Irving Levine 4,750 (1) 43.4%
Mark Rattner 2,000 18.3%
37 Radio Circle Drive
Mount Kisco, NY 10549
Gerry M. Ritterman 1,500 13.7%
47 Lawrence Farms Crossways
Chappaqua, NY 10514
Hiram M. Lazar 100 *
Stephen L. Brown -- *
David T. Lender -- *
Michael P. Rolnick -- *
Laurence I. Foster -- *
All officers and directors
As a group (6 persons) 4,850 44.3%
----------
* Less than 1.0%
(1) Preferred stock owned by Copley Fund, Inc. ("Copley"). Mr. Levine may be
deemed to be a controlling person of Copley due to his position as Chairman
and Chief Executive Officer. Therefore, Mr. Levine may be deemed to be a
beneficial owner of all shares owned by Copley.
47
Set forth below is the dollar range of equity securities beneficially owned by
each nominee and continuing director as of March 10, 2003:
DOLLAR RANGE OF EQUITY
NAME OF SECURITIES BENEFICIALLY
DIRECTOR OWNED(1)(2)(4)
-------- -----------------------
Stephen L. Brown(3) over $100,000
David T. Lender $1-$10,000
Michael P. Rolnick $1-$10,000
Lawrence J. Foster None
Irving Levine over $100,000
----------
(1) Beneficial ownership has been determined in accordance with Rule
16a-1(a)(2) of the Securities Exchange Act of 1934.
(2) The dollar ranges are: None, $1-$10,000, $10,001-$50,000, $50,001-100,000,
or over $100,000.
(3) Denotes an individual who is an "interested person" as defined in the
Investment Company Act of 1940.
(4) Franklin Capital has not provided information with respect to the
"Aggregate Dollar Range of Equity Securities in All Funds Overseen or to be
Overseen by Director or Nominee in Family of Investment Companies" because
it is not part of a family of investment companies.
EQUITY COMPENSATION PLAN INFORMATION
The following table summarizes information about the options, warrants
and rights and other equity compensation under the Corporation's equity plans as
of December 31, 2002.
NUMBER OF SECURITIES REMAINING
AVAILABLE FOR FUTURE ISSUANCE
NUMBER OF SECURITIES TO WEIGHTED-AVERAGE UNDER EQUITY COMPENSATION PLANS
BE ISSUED UPON EXERCISE EXERCISE PRICE OF (EXCLUDING SECURITIES REFLECTED
PLAN CATEGORY OF OUTSTANDING OPTIONS OUTSTANDING OPTIONS IN COLUMN (A))
Equity compensation plans
approved by security holders(1) 20,625 $11.39 26,250
(1) Includes options to purchase shares of Corporation common stock under the
following stockholder approved plans: Stock Incentive Plan and the
Non-Statutory Stock Option Plan both approved on September 9, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See Items 10 through 12 and Footnote 6 to the Financial Statements.
ITEM 14. CONTROLS AND PROCEDURES
The Corporation's chief executive officer and chief financial officer
have evaluated the effectiveness of the Corporation's disclosure controls and
procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities
Exchange Act of 1934 (the "Exchange Act")) as of a date (the "Evaluation Date")
within 90 days before the filing date of this annual report. Based on such
evaluation, they have concluded that, as of the Evaluation Date, the information
required to be disclosed by the Corporation in the reports that it files or
submits under the Exchange Act is recorded, processed, summarized and
48
reported, within the time periods specified in the rules and forms of the
Securities and Exchange Commission.
There were no significant changes in the Corporation's internal
controls or in other factors that could significantly affect these controls
during the period covered by this annual report.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
The following financial statements are set forth under Item 8.
(a) (1) Financial Statements
Report of Ernst & Young LLP
Balance Sheets as of December 31, 2002 and 2001
Statements of Operations for the years ended
December 31, 2002, 2001 and 2000
Statements of Cash Flows for the years ended
December 31, 2002, 2001 and 2000
Statements of Changes in Net Assets for the years ended
December 31, 2002, 2001 and 2000
Financial Highlights for the years ended
December 31, 2002, 2001, 2000, 1999 and 1998
Portfolio of Investments as of December 31, 2002
Notes to Financial Statements
The following exhibits are filed herewith or incorporated as set forth below:
(2) Exhibits
(2)(i) Agreement and Plan of Merger between Franklin
Capital Corporation and Change Technology
Partners, Inc. dated as of December 4, 2001(1)
(3)(i) Articles of Incorporation(2)
(3)(ii) By-Laws(2)
(3)(iii) Amendment to Articles of Incorporation(3)
(4)(i) Certificate of Designation(4)
(4)(ii) Registration Rights Agreement(5)
(4)(iii) Preferred Stock Purchase Agreement(6)
(10)(i) Employment Agreement - Stephen L. Brown(7)
(10)(ii) Employment Agreement - Spencer L. Brown(8)
(10)(iii) Severance Agreement - Stephen L. Brown(9)
(10)(iv) Severance Agreement - Spencer L. Brown(10)
(10)(v) Stock Incentive Plan(12)
(10)(vi) Stock Option Plan(13)
(10)(vii) Management Agreement with Excelsior Radio
Networks(14)
(10)(viii) Asset Purchase Agreement, dated as of April 1,
2002, by and among the Dial Entities, Franklin and
Excelsior (11)
(10)(ix) Convertible Promissory Note, dated April 3, 2002,
issued by Newco in favor of DCGL (11)
(10)(x) Convertible Promissory Note, dated April 3, 2002,
issued by Newco in favor of DCGL (11)
(10)(xi) Convertible Promissory Note, dated April 3, 2002,
issued by Newco in
49
favor of DCGL (11)
(10)(xii) Promissory Note, dated April 3, 2002, issued by
Excelsior in favor of Change (11)
(10)(xiii) Promissory Note, dated April 3, 2002, issued by
Excelsior in favor of Sunshine (11)
(10)(xiv) Security Agreement, dates as of April 3, 2002, by
and among Excelsior, Sunshine and Change (11)
(10)(xv) Amendment No. 1 to Agreement and Plan of Merger,
dated as of April 3, 2002, by and between Change
and Franklin (11)
(21) List of Subsidiaries(15)
(23) Consent of Ernst & Young LLP
(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
----------
(1) Incorporated by reference to the Current Report on Form 8-K filed December
5, 2001.
(2) Incorporated by reference to the Corporation's Form N-2, as amended, filed
July 31, 1992.
(3) Incorporated by reference to Exhibit 3 (iii) filed on the Company's Annual
Report filed on Form 10-K for the year ended December 31, 2000
(4) Incorporated by reference to Exhibit 4 (i) filed on the Company's Annual
Report filed on Form 10-K for the year ended December 31, 2000
(5) Incorporated by reference to Exhibit 4 (ii) filed on the Company's Annual
Report filed on Form 10-K for the year ended December 31, 2000
(6) Incorporated by reference to Exhibit 4 (iii) filed on the Company's Annual
Report filed on Form 10-K for the year ended December 31, 2000
(7) Incorporated by reference to Exhibit 10 (i) filed on the Company's Annual
Report filed on Form 10-K for the year ended December 31, 2000
(8) Incorporated by reference to Exhibit 10 (ii) filed on the Company's Annual
Report filed on Form 10-K for the year ended December 31, 2000
(9) Incorporated by reference to Exhibit 10 (iii) filed on the Company's Annual
Report filed on Form 10-K for the year ended December 31, 2000
(10) Incorporated by reference to Exhibit 10 (iv) filed on the Company's Annual
Report filed on Form 10-K for the year ended December 31, 2000
(11) Incorporated by reference to Current Report on form 8-K filed on April 3,
2002
(12) Incorporated by reference to Exhibit 10 (v) filed on the Company's Annual
Report filed on Form 10-K for the year ended December 31, 2001
(13) Incorporated by reference to Exhibit 10 (vi) filed on the Company's Annual
Report filed on Form 10-K for the year ended December 31, 2001
(14) Incorporated by reference to Exhibit 10 (vii) filed on the Company's Annual
Report filed on Form 10-K for the year ended December 31, 2001
(15) Incorporated by reference to Exhibit 21 filed on the Company's Annual
Report filed on Form 10-K for the year ended December 31, 2001
(b) Reports on Form 8-K.
None
50
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Corporation has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
FRANKLIN CAPITAL CORPORATION
Date: March 31, 2003 By: /s/ Stephen L. Brown
-------------------------------------
Stephen L. Brown
CHAIRMAN & CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the
Corporation in the capacities and on the dates indicated.
SIGNATURES TITLE
/s/ Stephen L. Brown Chairman &
----------------------- Chief Executive Officer
Stephen L. Brown
/s/ Hiram M. Lazar Chief Financial Officer
----------------------
Hiram M. Lazar
/s/ Laurence I. Foster Director
----------------------
Laurence I. Foster
/s/ David T. Lender Director
----------------------
David T. Lender
/s/ Irving Levine Director
----------------------
Irving Levine
/s/ Michael P. Rolnick Director
----------------------
Michael P. Rolnick
51
CERTIFICATIONS
I, Stephen L. Brown, certify that:
1. I have reviewed this annual report on Form 10-K of Franklin Capital
Corporation;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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
annual 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 annual report (the "Evaluation Date"); and
c. Presented in this annual 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
annual 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 March 31, 2003
By: /s/ Stephen L. Brown
-------------------------------
Name: Stephen L. Brown
Title: Chairman and Chief Executive Officer
52
CERTIFICATIONS
I, Hiram M. Lazar, certify that:
1. I have reviewed this annual report on Form 10-K of Franklin Capital
Corporation;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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
annual 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 annual report (the "Evaluation Date"); and
c. Presented in this annual 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
annual 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 March 31, 2003
By: /s/ Hiram M. Lazar
-----------------------------------
Name: Hiram M. Lazar
Title: Chief Financial Officer
53