SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
X
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended June 30, 1998
or
__ Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from ________________ to _______________.
Commission File Number 1-9727
Franklin Capital Corporation
----------------------------------------------------------------
(Exact name of registrant specified in its charter)
Delaware 13-3419202 .
- -------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
450 Park Avenue, 10th Floor, New York, New York 10022 .
- ----------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 486-2323 .
---------------------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Company was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
-- --
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of August 1, 1998 was $4,114,128 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, par value $.01 per share, outstanding as
of August 1, 1998 was 801,198.
1
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Prospectus of the Registrant dated July 31, 1992 (the
"Prospectus") are incorporated by reference in Part I, Part II and Part III
hereof.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements .................................................3
Balance Sheets........................................................4
Statements of Operations .............................................5
Statements of Cash Flows .............................................6
Statements of Changes in Net Assets ..................................7
Portfolio of Investments .............................................8
Notes to Financial Statements.........................................9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 18
Financial Condition .................................................18
Results of Operations ..............................................19
Liquidity and Capital Resources .....................................21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ..................................................22
Item 2. Changes in Securities and Use of Proceeds...........................22
Item 3. Defaults Upon Senior Securities ....................................22
Item 4. Submission of Matters to a Vote of Security Holders ................22
Item 5. Other Information ..................................................22
Item 6. Exhibits and Reports on Form 8-K....................................22
Signature.....................................................................22
2
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CAUTIONARY STATEMENT FOR PURPOSES OF
THE "SAFE HARBOR" PROVISIONS OF
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
WHEN USED IN THIS QUARTERLY REPORT ON FORM 10-Q, THE WORDS "BELIEVES,"
"ANTICIPATES," "EXPECTS" AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY
FORWARD-LOOKING STATEMENTS. STATEMENTS LOOKING FORWARD IN TIME ARE INCLUDED IN
THIS QUARTERLY REPORT ON FORM 10-Q PURSUANT TO THE "SAFE HARBOR" PROVISION OF
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. SUCH STATEMENTS ARE
SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES WHICH COULD CAUSE ACTUAL RESULTS TO
DIFFER MATERIALLY, INCLUDING, BUT NOT LIMITED TO, THOSE SET FORTH IN THE
COMPANY'S REGISTRATION STATEMENT ON FORM N-2 (FILE NO.811-5103) AND IN
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS." READERS ARE CAUTIONED NOT TO PLACE UNDO RELIANCE ON THESE
FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE HEREOF. THE COMPANY
UNDERTAKES NO OBLIGATION TO PUBLICLY REVISE THESE FORWARD-LOOKING STATEMENTS TO
REFLECT EVENTS OR CIRCUMSTANCES OCCURRING AFTER THE DATE HEREOF OR TO REFLECT
THE OCCURRENCE OF UNANTICIPATED EVENTS.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
The information furnished in the accompanying financial statements
reflects all adjustments that are, in the opinion of management, necessary for a
fair presentation of the results for the interim period presented.
On August 5, 1997, the Board of Directors determined that it would be
in the best interests of the Company and its stockholders to elect to become a
Business Development Company ("BDC') under the 1940 Act. On September 9, 1997,
at the Annual Meeting of Stockholders, the stockholders of Franklin approved the
proposal that the Company be regulated as a BDC. On November 18, 1997, the
Company filed a notification of election to become a BDC with the Commission.
The election became effective upon the receipt of the filing by the Commission.
Certain information and disclosures normally included in the financial
statements in accordance with Generally Accepted Accounting Principles have been
condensed or omitted as permitted by Regulation S-X and Regulation S-K. It is
suggested that the accompanying financial statements be read in conjunction with
the audited financial statements and notes thereto for the year ended December
31, 1997 contained in the Company's 1997 Annual Report on Form 10-K.
<PAGE>
<TABLE>
<CAPTION>
FRANKLIN CAPITAL CORPORATION
<S> <C> <C>
===========================================================================================================
Balance Sheets
- -----------------------------------------------------------------------------------------------------------
June 30, December 31,
1998 1997
June 30, (unaudited) (audited)
- -----------------------------------------------------------------------------------------------------------
ASSETS
Marketable investment securities, at market value (cost: June 30,
1998 - $42,490; December 31, 1997 - $41,522) (Note 2) $42,490 $41,522
Investments, at fair value (cost: June 30,1998 - $4,263,305;
December 31, 1997 - $4,168,150) (Note 2)
Avery Communications Inc. (Note 6) 5,880,013 5,511,000
Other investments 952,320 1,322,318
-------- ---------
6,832,333 6,833,318
---------- ---------
Cash and cash equivalents 58,409 348,900
Accrued interest and accounts receivable (Note 6) 178,448 330,048
Other assets 180,206 164,670
-------- -------
$7,291,886 $7,718,458
TOTAL ASSETS
- -----------------------------------------------------------------------------------------------------------
LIABILITIES AND NET ASSETS
LIABILITIES
Accounts payable and accrued liabilities $234,838 $375,326
TOTAL LIABILITIES 234,838 375,326
-------- -------
Commitments and contingencies (Note 5)
NET ASSETS
Common stock, $1 par value: 2,000,000 shares authorized;
1,003,986 shares issued and 801,198 shares outstanding
at June 30,1998 and December 31, 1997 (Note 7) 1,003,986 1,003,986
Paid-in capital 8,997,877 8,997,877
Unrealized appreciation of investments,
net of deferred income taxes (Notes 2 and 3) 2,569,028 2,665,168
Accumulated deficit (3,630,092) (3,440,148)
----------- -----------
8,940,799 9,226,883
Deduct: 202,788 shares at June 30, 1998 and December 31, 1997
of common stock held in treasury, at cost (Note 4) (1,883,751) (1,883,751)
----------- -----------
Net assets, equivalent to $8.81 per share at June 30, 1998
and $9.17 per share at December 31, 1997 7,057,048 7,343,132
---------- ---------
TOTAL LIABILITIES AND NET ASSETS $7,291,886 $7,718,458
=========== ==========
- -----------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements
4
<PAGE>
<TABLE>
<CAPTION>
FRANKLIN CAPITAL CORPORATION
<S> <C> <C>
========================================================================================================================
Statements of Operations
(unaudited)
- ------------------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30 June 30
1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME
Income from controlled affiliates (Note 6) $102,636 $31,333 $205,394 $41,833
Dividend income - 278 76,915 1,040
Interest income 3,689 52,977 4,851 176,410
Other Income - - - 7,986
---------- ---------- ---------- ---------
106,325 84,588 287,160 227,269
------- ------ ------- -------
EXPENSES
Salaries and employee benefits (Note 7) 206,755 215,969 421,484 469,578
Professional fees 74,913 (24,534) 95,737 51,572
Appraisal fees 3,087 - 3,087 -
Employment fees 12,500 - 12,500
Investment banking fee - 7,044 - 13,998
Rent (Note 5) 23,342 30,144 51,815 56,733
Insurance 10,400 11,286 21,131 22,436
Directors' fees 14,789 28,821 26,039 65,006
Taxes other than income taxes 16,431 11,887 34,764 28,044
Newswire and promotion 1,427 1,490 4,402 1,685
Depreciation and amortization 9,576 9,700 19,151 19,275
General and administrative 54,944 43,824 105,152 123,402
Professional fees related to conversion to
Business Development Corporation - 10,049 - 18,478
Professional fees related to Stearns & Foster litigation (Note 5) - 23,160 - 28,460
Expenses related to Stockholders' litigation & proxy contest (Note 5) - 211,000 - 420,700
------- ------ ------- -------
428,164 579,840 795,262 1,319,367
-------- ------- -------- ---------
Net investment loss from operations (321,839) (495,252) (508,102) (1,092,098)
Net realized gain on portfolio of investments 32,395 132,019 322,958 349,102
(Provision) benefit for current income taxes (Note 3) (2,400) (1,000) (4,800) 105,500
------- ------- ------- -------
Net realized loss (291,844) (364,233) (189,944) (637,496)
Increase (decrease) in unrealized appreciation of investments,
net of deferred income taxes 220,698 (324,836) (96,140) (442,622)
-------- --------- -------- ---------
Net decrease in net assets from operations ($71,146) ($689,069) ($286,084)($1,080,118)
========= ========== ========== ===========
Net decrease in net assets per common share ($0.09) ($0.86) ($0.36) ($1.35)
======= ======= ======= =======
Weighted average number of common shares outstanding 801,198 801,198 801,198 801,198
======== ======== ======== =======
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
<TABLE>
<CAPTION>
FRANKLIN CAPITAL CORPORATION
<S> <C> <C>
===============================================================================================================
Statements of Cash Flows
(unaudited)
- ---------------------------------------------------------------------------------------------------------------
For the Six Months Ended June 30, 1998 1997
- ---------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net decrease in net assets from operations ($286,084) ($1,080,118)
Adjustments to reconcile net decrease in net assets to net cash
used in operating activities:
Depreciation and amortization 19,151 19,275
Decrease in unrealized appreciation of investments 96,140 442,622
Amortization of discount on note receivable from Avery (101,176) (8,333)
Net realized gain on portfolio of investments (322,958) (349,102)
Changes in operating assets and liabilities:
Accrued interest and accounts receivable 151,600 (355,446)
Other assets (34,687) 1,172,377
Accounts payable and accrued liabilities (140,488) (1,626,342)
--------- -----------
Total adjustments (332,418) (704,949)
--------- ---------
Net cash used in operating activities (618,502) (1,785,067)
--------- -----------
Cash flows from investing activities:
Cash consolidated from Excelsior Communications Corporation - 1,710,702
Return of capital from investments 336,180 -
Acquisitions of investments - (2,456,335)
Proceeds from sale of marketable investment securities, net of expenses 71,159 6,674,565
Purchases of marketable investment securities (79,328) (2,661,418)
-------- -----------
Net cash provided by investing activities 328,011 3,267,514
-------- ---------
Net (decrease) increase in cash and cash equivalents (290,491) 1,482,447
Cash and cash equivalents at beginning of period 348,900 318,848
-------- -------
Cash and cash equivalents at end of period $58,409 $1,801,295
======== ==========
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
<TABLE>
<CAPTION>
FRANKLIN CAPITAL CORPORATION
<S> <C> <C>
===============================================================================================================
Statements of Changes in Net Assets
(unaudited)
- ---------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30 June 30
1998 1997 1998 1997
- ---------------------------------------------------------------------------------------------------------------
Decrease in net assets from operations:
Net investment loss ($321,839) ($495,252) ($508,102) ($1,092,098)
Net realized gain on portfolio of investments,
net of current income taxes 29,995 131,019 318,158 454,602
Increase (decrease) in unrealized appreciation of
investments, net of deferred income taxes 220,698 (324,836) (96,140) (442,622)
-------- --------- -------- ---------
Net decrease in net assets from operations (71,146) (689,069) (286,084) (1,080,118)
-------- --------- --------- -----------
Total decrease in net assets (71,146) (689,069) (286,084) (1,080,118)
-------- --------- --------- -----------
Net assets at beginning of period 7,128,194 9,485,520 7,343,132 9,876,569
---------- ---------- ---------- ---------
Net assets at end of period $7,057,048 $8,796,451 $7,057,048 $8,796,451
=========== =========== =========== ==========
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
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<TABLE>
<CAPTION>
FRANKLIN CAPITAL CORPORATION
<S> <C> <C>
================================================================================================================
Portfolio of Investments
(unaudited)
- ----------------------------------------------------------------------------------------------------------------
Marketable Investment Securities
- ----------------------------------------------------------------------------------------------------------------
Number of
Shares or Market
Principal Value
June 30, 1998 Amount ($) Cost (Note 2)
- ----------------------------------------------------------------------------------------------------------------
Certificate of Deposit - 4.45%, due 11/04/98........................ $42,490 42,490 42,490
Total Marketable Investment Securities......................... $ 42,490 $ 42,490
(0.6% of total investments) ----------- -----------
- ----------------------------------------------------------------------------------------------------------------
Investments, at Fair Value
- ----------------------------------------------------------------------------------------------------------------
Directors'
Equity Valuation
June 30, 1998 Investment Interest Cost (Note 2)
- ----------------------------------------------------------------------------------------------------------------
Controlled Affiliates
Avery Communications Inc.................. Common stock $901,481
(Telecommunications)
Avery Communications Inc.................. Convertible preferred 642,858
(Telecommunications) stock - Series D;
10.0% dividend rate
Avery Communications Inc.................. Convertible.preferred 350,000
(Telecommunications) stock - Series E;
12.0% dividend rate
Avery Communications Inc................... Note (face value $1,000,000) 1,884
(Telecommunications) less unamortized discount;
10.0% interest rate
Due 5/31/2000
Avery Communications Inc................... Warrants 357,051
-------
(Telecommunications)
Total Avery Communications (85.5% of total investments) 20.6% 3,023,274 $ 5,880,013
---------- -----------
(fully diluted basis)
Other Investments
Seneca Limited Partnership.................. Limited partnership 0.9% 500,000 493,062
(Investment limited partnership) interest
Codman Research Inc........................ Common stock 2.8% 400,031 254,488
(Healthcare information systems)
CIC Standby Ventures, L.P. ................. Limited partnership 1.8% 66,986 142,010
(Computer handwriting systems) interest
FMA High Yield Income Limited Partnership Limited partnership 2.8% - 37,760
(Schroders high yield bond interest
limited partnership)
GoAmerica Corp.............................. Common stock 0.5% 25,000 25,000
(Internet software)
Other investments........................... 248,014 -
-------- -------
Total Other Investments (13.9% of total investments) 1,240,031 952,320
---------- -------
Total Investments, at Fair Value.......... $4,263,305 $6,832,333
========== ==========
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
8
<PAGE>
Notes to Financial Statements
1. ORGANIZATION
Franklin Capital Corporation (formerly The Franklin Holding Corporation
(Delaware)) ("Franklin", the "Company" or the "Corporation") is a Delaware
corporation registered as a Business Development Company ("BDC") under the
Investment Company Act of 1940 (the "Act"). A BDC is a specialized type of
investment company under the Act. A BDC must be primarily engaged in the
business of furnishing capital and managerial expertise to companies that do not
have ready access to capital through conventional financial channels. Such
companies are termed "eligible portfolio companies". The Corporation, as a BDC,
may invest in the securities of public companies and other investments that are
not qualifying assets of eligible portfolio companies, however such investments
may not exceed 30% of the Corporation's total asset value at the time of any
such investment.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
Effective July 2, 1997, Franklin's wholly owned subsidiary, Excelsior
Communications Corporation ("Excelsior"), was dissolved. For financial reporting
purposes, the assets and operations of Excelsior have been consolidated with
Franklin effective January 1, 1997. The Corporation, as a closed-end investment
company registered under the Act, does not consolidate its non-investment
company subsidiaries.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Statements of Cash Flows
For purposes of the Statements of Cash Flows, Franklin considers only highly
liquid investments with maturities of 90 days or less at the date of their
acquisition to be cash equivalents.
The Corporation paid no interest during the six months ended June 30, 1998 and
1997, and paid $1,628 and $20,313 for income taxes during the six months ended
June 30, 1998 and 1997, respectively.
9
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Valuation of Investments
Security investments which are publicly traded on a national exchange or NASDAQ
are stated at the last reported sales price on the day of valuation, or if no
sale was reported on that date, then the securities are stated at the last
quoted bid price. The Board of Directors of Franklin (the "Board of Directors")
may determine, if appropriate, to discount the value where there is an
impediment to the marketability of the securities held.
Investments for which there is no ready market are initially valued at cost and,
thereafter, at fair value based upon the financial condition and operating
results of the issuer and other pertinent factors as determined by the Board of
Directors. The financial condition and operating results have been derived
utilizing both audited and unaudited data. In the absence of a ready market for
an investment, numerous assumptions are inherent in the valuation process. Some
or all of these assumptions may not materialize. Unanticipated events and
circumstances may occur subsequent to the date of the valuation and values may
change due to future events. Therefore, the actual amounts eventually realized
from each investment may vary from the valuations shown and the differences may
be material. Franklin reports the unrealized gain or loss resulting from such
valuation in the Statements of Operations.
Gains on Portfolio of Investments
Amounts reported as realized gains are measured by the difference between the
proceeds of sale or exchange and the cost basis of the investment without regard
to unrealized gains reported in the prior periods. Gains are considered realized
when sales or dissolution of investments are consummated.
Income Taxes
Franklin does not qualify as a Regulated Investment Company for income tax
purposes. Therefore, the Corporation is taxed as a regular corporation.
Franklin has adopted Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("SFAS 109"). The significant components of
deferred tax assets and liabilities are principally related to the Corporation's
net operating loss carryforward and its unrealized appreciation of investments.
Depreciation and Amortization
Depreciation is recorded using the straight-line method at rates based upon
estimated useful lives of five years for the respective assets. Franklin
amortizes its leasehold improvements over its useful life or the remaining life
of the lease, whichever is shorter.
10
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Net Increase (Decrease) in Net Assets Per Common Share
Net increase (decrease) in net assets per common share is based upon the
weighted average number of shares of common stock outstanding. See Note 7 for
discussion of Stock Option Plans.
Reclassification
Certain reclassifications have been made to prior period financial statements to
conform with current period presentation.
3. INCOME TAXES
At December 31, 1997, Franklin had a net operating loss carryforward for Federal
income tax purposes of approximately $3,093,000 that will begin to expire in
2011. At a 34% Federal income tax rate the benefit from this loss would be
approximately $1,052,000.
For the six months ended June 30, 1998 and 1997, Franklin's tax (provision)
benefit was based on the following:
<TABLE>
<S> <C> <C>
1998 1997
--------- ---------
Net investment loss from operations.............................. $ ( 508,102) $( 1,092,098)
Net realized gain on portfolio of investments.................... 322,958 349,102
Decrease in unrealized appreciation.............................. ( 96,140) ( 442,622)
--------------- -------------
Pre-tax book (loss)......................................... $ ( 281,284) $ (1,185,618)
=============== =============
1998 1997
---------- ---------
Tax at 34% on $(281,284) and $(1,185,618)
respectively.................................................... $ 95,637 $ 403,110
State and local, net of Federal benefit........................... ( 4,800) ( 5,500)
Book losses for which no benefit is provided...................... ( 95,637) (403,110)
Adjustment to deferred taxes
provided in prior periods................................ - 111,000
-------------- ------------
$ ( 4,800) $ 105,500
============== ============
</TABLE>
11
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The components of the tax (provision) benefit are as follows:
<TABLE>
<S> <C> <C>
1998 1997
-------- -------
Current state and local tax
Provision...................................................... $ ( 4,800) $ (5,500)
5,500)
Adjustment to Federal, state and local taxes - 111,000
provided in prior periods..................................... ----------- ----------
(Provision) benefit for income taxes............................. $ ( 4,800) $ 105,500
=========== ===========
</TABLE>
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 June 30, 1998 and December 31, 1997, significant deferred tax assets and
liabilities consist of:
<TABLE>
Asset (Liability)
--------------------------------
<S> <C> <C>
June 30, December 31,
1998 1997
---------- ----------
Deferred Federal and state benefit from net operating
loss carryforward............................................ $ 1,443,472 $ 1,370,552
Deferred Federal and state provision on unrealized
appreciation of investments................................... (1,130,372) (1,172,673)
Valuation allowance............................................. (313,100) (197,879)
Deferred taxes................................................ $ - $ -
============ ==============
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
At June 30, 1998, the realization of deferred tax assets is dependent upon
future appreciation of the Corporation's investments.
12
<PAGE>
4. TREASURY STOCK
The Board of Directors has authorized Franklin to repurchase up to an aggregate
of 250,000 shares of its common stock in open market purchases on the American
Stock Exchange when such purchases are deemed to be in the best interest of the
Corporation and its stockholders. To date, Franklin has repurchased 212,788
shares of its common stock of which 202,788 shares remain in treasury at June
30, 1998.
5. COMMITMENTS AND CONTINGENCIES
Franklin is obligated under an operating lease which provides for annual minimum
rental payments as follows:
- --------------------------------------------------------------------------------
December 31,
1998................................................................. $ 139,000
1999................................................................. 149,000
2000................................................................. 149,000
2001................................................................. 149,000
2002................................................................. 149,000
2003 ................................................................ 151,000
----------
$ 886,000
==========
- --------------------------------------------------------------------------------
Rent expense for the six months ended June 30, 1998 and 1997 was $51,815 and
$56,733, respectively. For the six months ended June 30, 1998 and 1997, the
Corporation collected rents of $20,292 and $20,500, respectively, from
subtenants for a portion of its existing office space which is reflected in rent
expense for that year.
In March 1994, Stearns and Foster Bedding Company ("Stearns & Foster") commenced
a private cost recovery and contribution action against Franklin and a number of
other defendants in the United States District Court for the District of New
Jersey (Newark). Stearns & Foster is the current owner of a site located in
South Brunswick, New Jersey (the "Site"), which is the subject of an
investigation and cleanup under the Industrial Site Recovery Act ("ISRA"). A
settlement agreement concerning this matter was executed by the parties on
February 28, 1997. Franklin and its insurer respectively agreed therein to pay
Stearns and Foster $375,000 and $1,125,000. In consideration for these payments,
Stearns and Foster agreed to: (i) dismiss all claims against Franklin and its
related entities with prejudice; (ii) release Franklin and its related entities
from any past, present or future claims related to the matters at issue in the
litigation; and (iii) indemnify and hold Franklin and its related entities
harmless as to any claims arising from or in any way related to the matters at
issue in the litigation. All payments due under this settlement agreement were
made in March, 1997.
In March 1995, a complaint was filed in the United States District Court for the
Southern District of New York by a former director of Franklin (as previously
discussed in the Form 10-K for December 31, 1997). The Settlement was approved
by the District Court on September 11, 1997. Pursuant to terms of the
Settlement, the Board of Directors declared on July 18, 1997 a $3.25 special
distribution to stockholders of
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record of the Corporation's Common Stock as of July 28, 1997. In addition, the
Corporation paid certain legal fee's to the plaintiff's counsel.
The Corporation is a plaintiff in an action brought against National
Union Fire Insurance Company of Pittsburgh, PA ("National Union") in the Supreme
Court of the State of New York. The action seeks reimbursement of $1,000,000 for
fees and expenses incurred in connection with certain shareholder litigation
brought against Franklin and its directors. National Union filed a motion to
dismiss the complaint, which the Corporation opposed. The motion is pending
before the court.
6. TRANSACTIONS WITH CONTROLLED AFFILIATES
On May 30, 1997, Franklin made an additional investment of $2,500,000 in Avery
Communications Inc. ("Avery"), a holding company in the telecommunications
industry. The investment partially consisted of a $1,000,000 note with a
maturity of three years that earns interest at the rate of 10.0% per annum. The
first year's interest payment of $100,000 was made at the time the loan was
made. As additional consideration for this note, the Corporation received
warrants to purchase 666,667 shares of Avery common stock at $1.50 per share.
These warrants expire in five years from the date of issuance. The remainder of
the investment, $1,500,000, purchased 7.5 equity units in Avery. Each unit
consists of 133,333 shares of common stock of Avery and 200,000 shares of
preferred Series D stock which are convertible to 100,000 shares of common
stock. The shares of preferred Series D stock earn a dividend of 10.0% per annum
payable quarterly. This transaction, in conjunction with the investment in
common and preferred stock of Avery that the Corporation held previously,
resulted in Franklin owning in excess of 25% of Avery's outstanding voting stock
on a primary basis. Additionally, three officers of Franklin were appointed to
Avery's six person Board of Directors and the Corporation's Chairman and Chief
Executive Officer was appointed as the Vice Chairman of Avery's Board of
Directors.
For the six months ended June 30, 1998 and 1997, Franklin's income from
controlled affiliates consists of $96,000 and $33,500, respectively, in
dividends from Avery, and $109,394 and $8,333, respectively, of interest on the
note. At June 30, 1998 and December 31, 1997, $105,103 and $170,403,
respectively, are included in "Accrued interest and accounts receivable" on the
accompanying balance sheets for amounts due from Avery for dividends and
reimbursable expenses.
On July 6, 1998, Franklin sold the 1,500,000 shares of Avery preferred Series D
stock and the $1,000,000 Avery note along with 280,000 warrants to purchase
Avery common stock for a total of $2,500,000 to the Thurston Group, Inc. The
president of the Thurston Group is also the president and chairman of Avery.
Franklin's valuation at June 30, 1998 of this portion of its Avery investment
was based on this sale and represented an increase of $10,567 in unrealized
appreciation over the valuation at March 31, 1998. Franklin realized a net gain
of $935,297 in July 1998 as a result of this sale. In conjunction with this
sale, Franklin's representation on Avery's Board of Directors was reduced from
three directors to two.
On July 13, 1998, Franklin exercised its remaining warrants to purchase 386,667
shares of Avery common stock at $1.50 per share. In return for this cashless
exercise, Franklin received 196,503 shares of Avery common stock. Franklin's
valuation at June 30, 1998 of this portion of its Avery investment was based on
14
<PAGE>
this exercise and represented an increase of $240,114 in unrealized appreciation
over the valuation at March 31, 1998.
7. EMPLOYEE BENEFIT PLANS
On September 9, 1997, Franklin's stockholders approved two Stock Option Plans: a
Stock Incentive Plan ("SIP") to be offered to the Corporation's consultants,
officers and employees (including any officer or employee who is also a director
of the Corporation) and a Non-Statutory Stock Option Plan ("SOP") to be offered
to the Corporation's "outside " directors, i.e., those directors who are not
also officers or employees of Franklin. 75,000 shares of the Corporations Common
Stock have been reserved for issuance under these plans, of which 45,000 shares
have been reserved for the SIP and 30,000 shares have been reserved for the SOP.
Shares subject to options that terminate or expire prior to exercise will be
available for future grants under the Plans.
The SIP is administered by the Compensation Committee of the Board of Directors
(the "Committee") which is composed of three "outside" directors. The Committee
has the authority, among other rights, to select the participants to whom awards
may be granted, determine the types of awards to be granted, and determine the
vesting terms and other conditions of an award to an SIP participant. The SIP
permits the Committee to grant participants options to purchase Common Stock
(including incentive stock options within the meaning of Section 422 of the
Internal Revenue Code ("ISOs") or "non-statutory stock options" ("non-ISOs")),
stock appreciation rights, restricted stock and tax offset bonuses.
The SOP is administered by the full Board of Directors. Only non-ISOs can be
granted under the SOP. Because the issuance of options to "outside" directors is
not permitted under the Act without an exemptive order by the Commission, the
issuance of options under the SOP is conditioned upon the granting of such
order. The Corporation has applied for such relief and will not issue options to
"outside" directors until obtaining such exemptive relief. In the event such
relief is not granted, no "outside" directors will be issued options pursuant to
the SOP.
On January 27, 1998, 45,000 options were granted in total to three eligible
officers of the Corporation under the SIP. The strike price of the options was
$7.00 per share which represented the closing price of Franklin's 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 five years.
Franklin accounts for the Stock Option Plans under APB Opinion No. 25, under
which no compensation cost has been recognized. Had compensation cost for the
Plans been determined consistent with the fair value method required by FASB
Statement No. 123 ("FASB 123"), the Corporation's net realized loss for the six
months ended June 30, 1998 and the net asset value per share at June 30, 1998
would have been reduced to the following pro forma amounts.
15
<PAGE>
Net realized (loss):
As reported $ (189,944)
Pro forma $ (235,207)
Net decrease in net assets per share:
As reported ($ 0.36)
Pro forma ($ 0.41)
Net Asset Value per share:
As reported $ 8.81
Pro forma $ 8.75
Pro forma - fully diluted $ 8.74
The fair value of the option grant is estimated on the date of the grant using
the Black-Scholes option pricing model with the following weighted average
assumptions:
Stock volatility 27%
Risk-free interest rate 5.5%
Option term in years 4
Stock dividend yield -
A summary of the status of the Stock Option Plans at June 30, 1998 and changes
during the six months then ended is presented in the table and narrative below:
Weighted
Average
Exercise
Shares Price
----------- ---------
Outstanding at beginning of
period - -
Granted 45,000 $7.00
Exercised - -
Forfeited - -
Expired - -
Outstanding at end of period 45,000 $7.00
Exercisable at end of period 15,000 $7.00
Weighted average fair value of
options granted $2.13
16
<PAGE>
The exercise price for all options outstanding as of June 30, 1998 is $7.00 with
a remaining life of 3.5 years.
Prior to the Stock Option Plans, Franklin had a contributory retirement plan
(the "Plan") covering all employees. Contributions to the Plan were invested in
Franklin's common stock and/or a selected group of mutual funds. Contributions
for the six months ended June 30, 1997 were $16,750 and are included in salaries
and employee benefits in the accompanying Statements of Operations. The Plan was
terminated in January 1998 and all funds were distributed to the participating
employees.
8. PURCHASES AND SALES OF INVESTMENT SECURITIES
The cost of purchases and proceeds from sales of investment securities,
excluding short term investments, aggregated $79,328 and $407,339, respectively,
for the six months ended June 30, 1998 and $5,117,753 and $6,674,565,
respectively, for the six months ended June 30, 1997.
9. STOCKHOLDERS' DISTRIBUTION
Franklin paid a $3.25 per share special distribution on August 4, 1997 to its
stockholders of record as of July 28,1997 totaling $2,603,894. Based on the
calculation of current and cumulative earnings and profits at December 31, 1997,
it was determined that this entire distribution was a return of capital to the
stockholders.
17
<PAGE>
Item. 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations
Statement of Operations
The Company accounts for its operations under Generally Accepted
Accounting Principles for investment companies. On this basis, the principal
measure of its financial performance is captioned "Net increase (decrease) in
net assets from operations", which is composed of the following: "Net investment
loss from operations," which is the difference between the Company's income from
interest, dividends and fees and its operating expenses; "Net realized gain on
portfolio of investments," which is the difference between the proceeds received
from dispositions of portfolio securities and their stated cost; any applicable
income tax provisions (benefits); and "Net increase (decrease) in unrealized
appreciation of investments," which is the net change in the fair value of the
Company's investment portfolio, net of any increase (decrease) in deferred
income taxes that would become payable if the unrealized appreciation were
realized through the sale or other disposition of the investment portfolio.
"Net realized gain (loss) on portfolio of investments" and "Net
increases (decrease) in unrealized appreciation of investments" are directly
related. When a security is sold to realize a gain, the net unrealized
appreciation decreases and the net realized gain increases. When a security is
sold to realize a loss, the net unrealized appreciation increases and the net
realized gain decreases.
Financial Condition
The Company's total assets and net assets were, respectively, $7,291,886 and
$7,057,048 at June 30, 1998, versus $7,718,458 and $7,343,132 at December
31,1997. Net asset value per share was $8.81 at June 30, 1998, versus $9.17 at
December 31, 1997.
Franklin paid a $3.25 per share special distribution on August 4, 1997
to its stockholders of record as of July 28,1997 totaling $2,603,894. Based on
the calculation of current and cumulative earnings and profits at December 31,
1997, it was determined that this entire distribution was a return of capital to
the stockholders.
The Company's financial condition is dependent on the success of its
investments. A summary of the Company's investment portfolio is as follows:
<TABLE>
<S> <C> <C>
June 30, 1998 December 31, 1997
Investments, at cost $ 4,305,795 $ 4,209,672
Unrealized appreciation, net of
deferred taxes 2,569,028 2,665,168
------------ -----------
Investments, at fair value $ 6,874,823 $ 6,874,840
============ ============
</TABLE>
18
<PAGE>
The Company has an investment in Avery valued at $5,880,013 at June 30, 1998 and
$5,511,000 at December 31, 1997. This investment represents 80.6% of the
Company's total assets and 83.3% of it net assets at June 30, 1998, and 71.4% of
the Company's total assets and 75.0% of it net assets at December 31, 1997.
Avery is a holding corporation operating in the telecommunications industry. Its
common stock is quoted on the OTC Electronic Bulletin Board under the symbol
"ATEX". Hold Billing Services, Avery's sole current operating subsidiary,
provides billing and collection services for inter-exchange carriers and
long-distance resellers.
During 1997, the Company dissolved its wholly-owned subsidiary,
Excelsior, which had been formed in 1992 to invest in broadcasting properties,
primarily radio stations. Excelsior's last broadcast assets were sold effective
December 31, 1995, at which point, and through the time of its dissolution, its
assets consisted principally of cash, receivables from customers of the radio
station and marketable securities. All remaining assets of Excelsior were
distributed to Franklin during 1997. The Company realized a net gain of $165,983
for the six months ended June 30, 1997 and $3,166,842 for the year ended
December 31, 1977 from this dissolution.
At June 30, 1998 and December 31, 1997, the Company had an investment
in the Seneca Capital, L.P. ("Seneca"), an investment partnership whose primary
investment objective is to invest in securities whose value will be meaningfully
affected by an anticipated event. Seneca invests primarily in publicly traded
equity securities of U.S. companies and, to control market risks, utilizes short
positions, index options and other hedging techniques. Franklin is a 0.9%
limited partner. The Company's original investment of $500,000 was made in April
1996 through Excelsior. The asset was valued at $806,849 at December 31, 1997,
and $493,062 at June 30, 1998 after Seneca distributed $350,000 to the Company
in March 1998. $76,915 of this distribution, which represents current period
earnings in Seneca, is included in Dividend income for the six months ended June
30, 1998. The remaining $273,085 is included in Net realized gain on portfolio
of investments. At June 30, 1998, Seneca represents 6.8% of the Company's total
assets and 7.0% of its net assets. At December 31, 1997, Seneca represents 10.5%
of the Company's total assets and 11.0% of its net assets.
Results of Operations
Investment Income and Expenses:
The Company's principal objective is to achieve capital appreciation
through long-term investments in businesses believed to have favorable growth
potential. Therefore, a significant portion of the investment portfolio is
structured to maximize the potential for capital appreciation and provides
little or no current yield in the form of dividends or interest. The Company
earns interest income from loans, high yield bonds and other fixed income
securities. The amount of interest income varies based upon the average balance
of the Company's fixed income portfolio and the average yield on this portfolio.
The Company had income from controlled affiliates of $205,394 and
$41,833 for the six months ended June 30, 1998 and 1997, respectively, which
represents dividend and interest income from preferred stock and a note received
in relation to the Company's investment in Avery. Interest income was $4,851 and
$184,396 for the six months ended June 30, 1998 and 1997, respectively. The
decrease from 1997 to 1998 was the result of the sale of investments in high
yield bonds during 1997, the proceeds of which were used to make the additional
investment in Avery. Dividend income of $76,915 for the six months ended June
30, 1998 represents the current period earnings from Seneca which were
distributed in March, 1998.
19
<PAGE>
Operating expenses were $795,262 and $1,319,367 for the six months
ended June 30, 1998 and 1997, respectively. Operating expenses in 1997 included
net professional fees, settlement costs and other expenses related to litigation
of $449,160. Most of the Company's other operating expenses are related to
employee and director compensation, office and rent expenses and professional
fees (primarily general legal and audit fees).
Net investment losses from operations were $508,102 and $1,092,098 for
the six months ended June 30, 1998 and 1997, respectively.
The Company has relied and continues to rely to a large extent upon
proceeds from sales of investments rather than investment income to defray a
significant portion of its operating expenses. Because such sales cannot be
predicted with certainty, the Company attempts to maintain adequate working
capital to provide for fiscal periods when there are no such sales.
Net Realized Gains on Portfolio of Investments:
During the six months ended June 30, 1998 and 1997, the Company
realized net gains before taxes of $322,958 and $349,102, respectively, from the
disposition of various investments.
During the six months ended June 30, 1998, Franklin realized a gain of
$273,085 from the distribution from its investment in Seneca, a gain of $42,625
from a distribution from its investment in the FMA High Yield Income L.P. and a
gain of $14,450 from a stock distribution from its investment in CIC Standby
Ventures, L.P., partially offset by net losses of $7,202 on the sales of various
marketable securities.
During the six months ended June 30, 1997, Franklin realized a net
gain from the dissolution of its wholly-owned subsidiary, Excelsior, of
$165,983, as well as net gains of $183,119 on the sales of various marketable
securities, including stocks and high yield bonds.
Unrealized Appreciation of Investments:
Unrealized appreciation of investments, net of deferred taxes,
decreased by $96,140 during the six months ended June 30, 1998, primarily due to
the realization of the gains from the distributions from Seneca and CIC Standby
Ventures, L.P. These were partially offset by an increased value for Avery.
Unrealized appreciation of investments, net of deferred taxes,
decreased by $442,622 during the six months ended June 30, 1997, primarily due
to realized gains from Excelsior Communications and decreased values and
realized gains on the sales of various marketable securities. There were also
decreases in the values of Avery, CIC Standby Ventures, L.P., Codman Research
Inc. and BP Restaurants, L.P. These were offset by increased values for Seneca,
the FMA High Yield Capital Appreciation L.P. and the TCW Global Fund. L.P.
20
<PAGE>
Liquidity and Capital Resources:
The Company's reported total cash and cash equivalents, accrued
interest and accounts receivable and marketable investment securities (the
primary measure of liquidity) at June 30, 1998 was $279,347, compared to
$720,470 at December 31, 1997. On July 6, 1998, Franklin sold the 1,500,000
shares of Avery preferred Series D stock and the $1,000,000 Avery note along
with 280,000 warrants to purchase Avery common stock for a total of $2,500,000
in cash. Management believes that these assets, together with its investment in
Seneca, provide the Company with sufficient liquidity for its operations. Funds
from Seneca may be withdrawn upon 30 day notice to the general partner.
Risks
Pursuant to Section 64(b) (1) of the Investment Company Act of 1940, a
BDC is required to describe the risk factors involved in an investment in its
securities inherent in the nature of the company's investment portfolio. There
are significant risks inherent in the Company's venture capital business. The
Company has invested a substantial portion of its assets in small private
companies and a non-reporting company with limited management depth and thin
capitalization. Because of the speculative nature of these investments, there is
significantly greater risk of loss than is the case with traditional investment
securities. The Company expects that some of its venture capital investments
will be a complete loss or will be unprofitable. Others will appear likely to
become successful, but will never realize their potential. Neither the Company's
investments nor an investment in the Company is intended to constitute a
balanced investment program. The Company has in the past relied and continues to
rely to a large extent upon proceeds from sales of investments rather than
investment income to defray a significant portion of its operating expenses.
Risks Relating to the Year 2000 Issue
Many existing computer programs were designed and developed without
considering the impact of the upcoming change in the century. The problem exists
when a computer program uses only two digits to identify a year in the date
field. Extensive problems can result to a company's business, requiring
substantial resources to remedy. The Company believes that the "Year 2000"
problem may be material to Franklin's investments. Although the Company is
addressing the problem with respect to its own business operations, there can be
no assurance that the "Year 2000" problem will be properly or timely resolved,
which could have a material adverse effect on the Company's results of
operations and, in turn, cash available for distribution.
21
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security
None
Item 5. Other Information
On July 14, 1998, The Franklin Holding Corporation (Delaware) filed a
certificate of amendment with the Secretary of State of the State of Delaware
changing its name to Franklin Capital Corporation. The name change became
effective July 23, 1998. Franklin's stockholders had approved a proposal to
change the name of the Company at the Annual Meeting of Stockholders held on
June 16, 1998.
On July 29 1998, Carl Glickman submitted his resignation as a Director
of Franklin.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits. The exhibits which are filed with this Form 10-Q or
incorporated herein by reference are set for in the Exhibit
Index on page 26.
(b) Reports on Form 8-K. The Company did not file any reports on Form
8-K during the first six months of 1998.
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FRANKLIN CAPITAL CORPORATION
Date: August 14, 1998 By: /s/JOHN GREENBAUM
-----------------------------------
John Greenbaum
Chief Financial Officer
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION FROM UST
PRIVATE EQUITY INVESTORS FUND, INC.'S FORM 10-Q FOR THE PERIOD
ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000812301
<NAME> FRANKLIN CAPITAL CORPORATION
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