SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
<TABLE>
(Mark One)
<S> <C> <C>
X Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 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
The Franklin Holding Corporation (Delaware)
----------------------------------------------------
(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
---------------------------
</TABLE>
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 May 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 May 1, 1998 was 801,198.
1
715134.1
<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................................ 20
Financial Condition ............................................. 20
Results of Operations .......................................... 21
Liquidity and Capital Resources ................................. 23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings .............................................. 24
Item 2. Changes in Securities and Use of Proceeds....................... 24
Item 3. Defaults Upon Senior Securities ................................ 24
Item 4. Submission of Matters to a Vote of Security Holders ............ 24
Item 5. Other Information .............................................. 24
Item 6. Exhibits and Reports on Form 8-K................................ 24
Signature................................................................. 24
2
715134.1
<PAGE>
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 REPOSRT 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
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.
3
715134.1
<PAGE>
<TABLE>
<CAPTION>
THE FRANKLIN HOLDING CORPORATION (DELAWARE)
===========================================================================================================
Balance Sheets
- -----------------------------------------------------------------------------------------------------------
March 31, December 31,
1998 1997
March 31, (unaudited) (audited)
- -----------------------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C>
Marketable investment securities, at market value (cost: March 31,
1998 - $61,994; December 31, 1997 - $41,522) (Note 2) $57,899 $41,522
Investments, at fair value (cost: March 31,1998 - $4,216,884;
December 31, 1997 - $4,168,150) (Note 2)
Avery Communications Inc. (Note 6) 5,511,000 5,511,000
Other investments 1,058,309 1,322,318
---------- ---------
6,569,309 6,833,318
---------- ---------
Cash and cash equivalents 356,479 348,900
Accrued interest and accounts receivable (Note 6) 345,551 330,048
Other assets 181,722 164,670
-------- -------
$7,510,960 $7,718,458
TOTAL ASSETS
- -----------------------------------------------------------------------------------------------------------
LIABILITIES AND NET ASSETS
LIABILITIES
Accounts payable and accrued liabilities $382,766 $375,326
TOTAL LIABILITIES 382,766 375,326
-------- -------
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 March 31,1998 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) 2,348,330 2,665,168
Accumulated deficit (3,338,248) (3,440,148)
----------- -----------
9,011,945 9,226,883
Deduct: 202,788 shares at March 31, 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 $8.90 per share at March 31, 1998
and $9.17 per share at December 31, 1997 7,128,194 7,343,132
---------- ---------
TOTAL LIABILITIES AND NET ASSETS $7,510,960 $7,718,458
=========== ==========
- -----------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements
4
715194.1
<PAGE>
<TABLE>
<CAPTION>
THE FRANKLIN HOLDING CORPORATION (DELAWARE)
===============================================================================================================
Statements of Operations
(unaudited)
- ---------------------------------------------------------------------------------------------------------------
For the Three Months Ended March 31, 1998 1997
- ---------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME
<S> <C> <C>
Income from controlled affiliates (Note 6) $102,758 $10,500
Dividend income 76,915 762
Interest income 1,162 123,433
Other Income - 7,986
-------- -------
180,835 142,681
-------- -------
EXPENSES
Salaries and employee benefits (Note 7) 214,729 253,609
Professional fees 20,824 76,106
Investment banking fee - 6,954
Rent (Note 5) 28,473 26,589
Insurance 10,731 11,150
Directors' fees 11,250 36,185
Taxes other than income taxes 18,333 16,157
Newswire and promotion 2,975 195
Depreciation and amortization 9,575 9,575
General and administrative 50,208 79,578
Professional fees related to conversion to
Business Development Corporation - 8,429
Professional fees related to Stearns & Foster litigation (Note 5) - 5,300
Expenses related to Stockholders' litigation & proxy contest (Note 5) - 209,700
-------- -------
367,098 739,527
-------- -------
Net investment loss from operations (186,263) (596,846)
Net realized gain on portfolio of investments 290,563 217,083
(Provision) benefit for current income taxes (Note 3) (2,400) 106,500
--------- -------
Net realized income (loss) 101,900 (273,263)
Decrease in unrealized appreciation of investments, net
of deferred income taxes (316,838) (117,786)
--------- -------
Net decrease in net assets from operations ($214,938) ($391,049)
========= =========
Net decrease in net assets per common share ($0.27) ($0.49)
========= =========
Weighted average number of common shares outstanding 801,198 801,198
========= =========
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
715194.1
<PAGE>
<TABLE>
<CAPTION>
THE FRANKLIN HOLDING CORPORATION (DELAWARE)
===============================================================================================================
Statements of Cash Flows
(unaudited)
- ---------------------------------------------------------------------------------------------------------------
For the Three Months Ended March 31, 1998 1997
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net decrease in net assets from operations ($214,938) ($391,049)
Adjustments to reconcile net decrease in net assets to net cash
used in operating activities:
Depreciation and amortization 9,575 9,575
Decrease in unrealized appreciation of investments 316,838 117,786
Amortization of discount on note receivable from Avery (54,755) -
Net realized gain on portfolio of investments (290,563) (217,083)
Changes in operating assets and liabilities:
(Increase) in accrued interest and accounts receivable (15,503) (285,340)
(Increase) decrease in other assets (26,628) 1,124,198
Increase (decrease) in accounts payable and accrued liabilities 7,440 (1,438,610)
------ -----------
Total adjustments (53,596) (689,474)
-------- ---------
Net cash used in operating activities (268,534) (1,080,523)
--------- -----------
Cash flows from investing activities:
Cash consolidated from Excelsior Communications Corporation - 1,710,702
Return of capital from investments 293,556 -
Acquisitions of investments - (46,336)
Proceeds from sale of marketable investment securities, net of expenses 28,511 2,650,774
Purchases of marketable investment securities (45,954) (2,230,696)
Purchases of fixed assets - (4,681)
-- -------
Net cash provided by investing activities 276,113 2,079,763
-------- ---------
Net increase in cash and cash equivalents 7,579 999,240
Cash and cash equivalents at beginning of period 348,900 318,848
-------- -------
Cash and cash equivalents at end of period $356,479 $1,318,088
========= ==========
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
715194.1
<PAGE>
<TABLE>
<CAPTION>
THE FRANKLIN HOLDING CORPORATION (DELAWARE)
==========================================================================================================
Statements of Changes in Net Assets
(unaudited)
- ----------------------------------------------------------------------------------------------------------
For the Three Months Ended March 31, 1998 1997
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
(Decrease) increase in net assets from operations:
Net investment loss ($186,263) ($596,846)
Net realized gain on portfolio of investments,
net of current income taxes 288,163 323,583
Decrease in unrealized appreciation of investments,
net of deferred income taxes (316,838) (117,786)
--------- ---------
Net decrease in net assets from operations (214,938) (391,049)
--------- ---------
Total decrease in net assets (214,938) (391,049)
--------- ---------
Net assets at beginning of period 7,343,132 9,876,569
---------- ---------
Net assets at end of period $7,128,194 $9,485,520
=========== ==========
- ----------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
715194.1
<PAGE>
<TABLE>
<CAPTION>
THE FRANKLIN HOLDING CORPORATION (DELAWARE)
============================================================================================================================
Portfolio of Investments
(unaudited)
- ----------------------------------------------------------------------------------------------------------------------------
Marketable Investment Securities
- ----------------------------------------------------------------------------------------------------------------------------
Number of
Shares or Market
Principal Value
March 31, 1998 Amount ($) Cost (Note 2)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Communication Intelligence Corp. - common stock................................ 14,557 $ 20,472 $ 16,377
Certificate of Deposit - 4.65%, due 05/04/98................................... $41,522 41,522 41,522
Total Marketable Investment Securities (0.9% of total investments)......... $ 61,994 $ 57,899
- ----------------------------------------------------------------------------------------------------------------------------
Investments, at Fair Value
- ----------------------------------------------------------------------------------------------------------------------------
Directors'
Equity Valuation
March 31, 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) 725,463
(Telecommunications) less unamortized discount;
10.0% interest rate
Due 5/31/2000
Avery Communications Inc........................ Warrants 357,051
----------
(Telecommunications)
Total Avery Communications (83.2% of total investments) 22.14% 2,976,853 $ 5,511,000
(fully diluted basis) ---------- -----------
Other Investments
Seneca Limited Partnership...................... Limited partnership 0.85% 500,000 535,007
(Investment limited partnership) interest
Codman Research Inc............................ Common stock 2.75% 400,031 254,488
(Heathcare information systems)
CIC Standby Ventures, L.P. ..................... Limited partnership 1.80% 66,986 153,397
(Computer handwriting systems) interest
FMA High Yield Income Limited Partnership ...... Limited partnership 2.82% - 90,417
(Schroders high yield bond interest
limited partnership)
GoAmerica Corp.................................. Common stock 0.50% 25,000 25,000
(Internet software)
Other investments............................... 248,014 -
-------- -
Total Other Investments (15.9% of total investments) 1,240,031 1,058,309
---------- ---------
Total Investments, at Fair Value................................................. $4,216,884 $6,569,309
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
8
715194.1
<PAGE>
Notes to Financial Statements
1. ORGANIZATION
The Franklin Holding Corporation (Delaware) ("Franklin Holding" 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 Holding's wholly owned subsidiary, Excelsior
Communications Corporation ("Excelsior"), was dissolved. For financial reporting
purposes as of and for the three months ended March 31, 1998, the assets and
operations of Excelsior have been consolidated with Franklin Holding. 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 Holding 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 three months ended March 31, 1998
and 1997, and paid $0 and $20,313 for income taxes during the three months ended
March 31, 1998 and 1997, respectively.
9
<PAGE>
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 Holding (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 Holding 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 Holding does not qualify as a Regulated Investment Company for income
tax purposes. Therefore, the Corporation is taxed as a regular corporation.
Franklin Holding 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 Holding
amortizes its leasehold improvements over its useful life or the remaining life
of the lease, whichever is shorter.
10
715129.1
<PAGE>
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 Holding 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 three months ended March 31, 1998 and 1997, Franklin Holding's tax
(provision) benefit was based on the following:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Net investment loss from operations............................. $ ( 186,263) $ ( 596,846)
Net realized gain on portfolio of investments................... 290,563 217,083
Decrease in unrealized appreciation............................. ( 316,838) ( 117,786)
------------- ------------
Pre-tax book (loss)........................................ $ ( 212,538) $ ( 497,549)
============= ============
1998 1997
---------- ----------
Tax at 34% on $(212,538) and $(497,549)
respectively.................................................. $ 72,263 $ 169,167
State and local, net of Federal benefit......................... ( 2,400) ( 4,500)
Book losses for which no benefit is provided.................... ( 72,263) (169,167)
Adjustment to deferred taxes
provided in prior periods.............................. - 111,000
------------- -----------
$ ( 2,400) $ 106,500
============= ===========
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
The components of the tax (provision) benefit are as follows:
1998 1997
---------- ----------
<S> <C> <C>
Current state and local tax
Provision..................................................... $ ( 2,400) $ (4,500)
Adjustment to Federal, state and local taxes
provided in prior periods.................................... -
---------- 111,000
(Provision) benefit for income taxes............................ $ ( 2,400) $ 106,500
============= ===========
</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 March 31, 1998 and December 31, 1997, deferred tax attributes consist of:
<TABLE>
<CAPTION>
Asset (Liability)
---------------------------------------
<S> <C> <C>
March 31, December 31,
1998 1997
--------- -----------
Deferred Federal and state benefit from net operating
loss carryforward............................................. $ 1,330,603 $ 1,370,552
Deferred Federal and state provision on unrealized
appreciation of investments................................... (1,033,265) (1,172,673)
Valuation allowance............................................. (297,338) (197,879)
------------- ---------------
Deferred taxes................................................ $ - $ -
============= ===============
</TABLE>
At March 31, 1998, the realization of deferred tax assets is dependent upon
future appreciation of the Corporation's investments.
12
715129.1
<PAGE>
4. TREASURY STOCK
The Board of Directors has authorized Franklin Holding 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 Holding has
repurchased 212,788 shares of its common stock of which 202,788 shares remain in
treasury at March 31, 1998.
5. COMMITMENTS AND CONTINGENCIES
Franklin Holding is obligated under an operating lease which provides for annual
minimum rental payments as follows:
<TABLE>
<S> <C>
December 31,
1998.......................................................... $ 139,000
1999.......................................................... 149,000
2000.......................................................... 149,000
2001.......................................................... 149,000
2002.......................................................... 149,000
2003 ......................................................... 151,000
----------
$ 886,000
==========
</TABLE>
Rent expense for the three months ended March 31, 1998 and 1997 was $28,473 and
$25,589, respectively. For the three months ended March 31, 1998 and 1997, the
Corporation collected rents of $10,250 and $9,000, 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 Holding 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 Holding 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
Holding and its related entities with prejudice; (ii) release Franklin Holding
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
Holding 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 Holding (who, in
1990, was not renominated for election to the Board of Directors) against the
Corporation, its chairman, certain of its directors and an affiliated company
13
715129.1
<PAGE>
("Action No. 1"). Action No. 1 was purportedly brought both on behalf of a class
of minority stockholders of Franklin Holding and derivatively on behalf of the
Corporation. Action No. 1, in substance, alleged that the Corporation's Board
did not comply with the "interested persons" provisions of the Act; that there
had not been full disclosure about various matters, including with respect to
the Corporation's application to deregister as an investment company and about
the business relationships between defendants in proxy statements from 1989
through 1994; and that management's and directors' compensation and benefits
were excessive in relation to the financial performance of the Corporation. The
complaint asserted claims under the Act and SEC Rules promulgated thereunder and
under common law. In May 1995, an amended complaint was filed containing in
substance, the same claims as the original complaint, but purporting to assert
additional derivative and class action claims under Sections 10(b) and 20(a) of
the Securities Exchange Act of 1934. The amended complaint alleged that Franklin
Holding and its Board failed to disclose facts in various documents, including
the Corporation's 1994 Annual Report and 1993 and 1994 Proxy Statements, with
respect to, among other things, Franklin Holding's investment through Excelsior
in various radio stations and the current status of the Corporation's
operations.
After the filing of Action No.1, Mr. Jay B. Langner and a group of other
individuals filed a Schedule 13D, pursuant to the 1934 Act and related
regulatory requirements, announcing their intention to conduct a proxy campaign
to gain control of the Corporation, with a view towards removing existing board
members and bringing about the Corporation's dissolution and liquidation. In
July 1995, the Corporation filed suit against Mr. Langner, and his group,
claiming violations of the federal securities laws, in connection with the
Schedule 13D filing and the group's subsequent proxy materials ("Action No.2").
In June 1995, the Corporation and the other defendants moved to dismiss the
amended complaint in Action No.1 for failure to make the required demand upon
the Board of Directors (as to purported derivative claims), for lack of standing
to assert the purported derivative claims, for failure to state a claim upon
which the requested relief can be granted and for failure to plead the claims
for fraud with the required specificity. Plaintiff filed a second amended
complaint in August 1995 containing in substance the same claims as the amended
complaint, but including additional factual allegations. The second amended
complaint sought unspecified monetary relief from the individual defendants and
equitable and declaratory relief with respect to Franklin Holding, including
setting aside the election of directors held at the Corporation's annual meeting
in August 1994 and 1995 and Board action since August 1994, declaring the
chairman's employment contract void, an accounting by defendants, and an
injunction directing the liquidation of Franklin Holding and the appointment of
a special fiscal agent, receiver or conservator to oversee same. The plaintiff
and the defendants submitted supplemental briefings concerning the issue of
whether the second amended complaint should be dismissed.
In January 1996, the Court issued an opinion partially granting and partially
denying defendants' motion to dismiss. The Court dismissed plaintiff's
derivative claims for failure to make the required demand upon the Board of
Directors and abstained from entertaining plaintiff's claim that the Corporation
be dissolved and that a special fiscal agent, receiver or conservator be
appointed. The Court denied defendants' motion to dismiss with respect to the
remainder of plaintiff's claims.
14
715129.1
<PAGE>
On December 10, 1996, the Court ruled that Action No. 1 could proceed as a class
action and defined the class (the "Class") as the Corporation's stockholders
excluding S. L. Brown & Company, Inc., the Corporation's directors, and their
controlling stockholders, the members of their immediate families, their
partners and other legal representatives.
On July 14, 1997, the parties in Action No.1 and Action No. 2 entered into a
Stipulation of Settlement (the "Settlement"). 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 dividend to stockholders of record of the Corporation's
Common Stock as of July 28, 1997. The special dividend payable to the
Corporation's stockholders who are members of the Class in Action No. 1 was
placed in a settlement fund for the benefit of the Class on August 7, 1997. The
settlement fund, which was reduced by an amount totaling $740,748 for attorneys'
fees and expenses awarded by the District Court to plaintiff's counsel in Action
No. 1, was distributed to class members on October 20, 1997. The Corporation's
stockholders who were recordholders on July 28, 1997, but were not members of
the Class (and also including by terms of the Settlement, Miles L. Berger and
members of his immediate family) received the special dividend on August 4,
1997.
The terms of the Settlement provided that the Corporation's directors would use
their reasonable best efforts to formulate and adopt, and to cause the
Corporation to call a meeting of its stockholders to vote upon a plan to
designate the Corporation as a Business Development Company pursuant to the Act.
On September 9, 1997, the stockholders approved a proposal that the Corporation
be regulated as a BDC. On November 18, 1997, the Corporation filed a
notification of election to become a BDC with the Commission. The election
became effective upon receipt of the filing by the Commission.
Under the terms of the Settlement, upon the Corporation becoming a BDC, for
three years thereafter: (a) each director's annual fees for all meetings of the
Board or Directors and its committees actually attended, including consulting
fees, shall not exceed in the aggregate a total of $12,000 per year, but such
directors may receive incentive compensation, as determined in and subject to
the absolute discretion of the Board of Directors and provided that such
incentive compensation is permissible under the Act; and (b) the base salary for
Stephen Brown shall not exceed $350,000 per year, but, during those three years,
Mr. Brown also may receive such additional incentive compensation, as determined
by and subject to the absolute discretion of the Board of Directors, as is
permissible under the Act.
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 Corporations opposed. The motion is pending before the
court.
15
715129.1
<PAGE>
6. TRANSACTIONS WITH CONTROLLED AFFILIATES
On May 30, 1997, Franklin Holding 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 Holding owning in excess of 25% of Avery's outstanding
voting stock on a primary basis. Additionally, three officers of Franklin
Holding 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 three months ended March 31, 1998 and 1997, Franklin Holding's income
from controlled affiliates consists of $48,000 and $10,500, respectively, in
dividends from Avery, and $54,758 and $0, respectively, of interest amortized on
the note. At March 31, 1998 and 1997, $202,330 and $10,500, respectively, are
included in "Accrued interest and accounts receivable" on the accompanying
balance sheets for amounts due from Avery for dividends and reimbursable
expenses.
7. EMPLOYEE BENEFIT PLANS
On September 9, 1997 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 Holding. 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 of 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
16
715129.1
<PAGE>
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 Holding'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 Holding 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 income for the
three months ended March 31, 1998 and the net asset value per share at March 31,
1998 would have been reduced to the following pro forma amounts.
Net realized income:
As reported $ 101,900
Pro forma $ 64,275
Net decrease in net assets per share:
As reported ($ 0.27)
Pro forma ($ 0.31)
Net Asset Value per share:
As reported $ 8.90
Pro forma $ 8.85
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 at March 31, 1998:
Stock volatility 27%
Risk-free interest rate 5.5%
Option term in years 4
Stock dividend yield -
17
715129.1
<PAGE>
A summary of the status of the Stock Option Plans at March 31, 1998 and changes
during the three 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
The exercise price for all options outstanding as of March 31, 1998 is $7.00
with a remaining life of 3.8 years.
Prior to the Stock Option Plans, Franklin Holding had a contributory retirement
plan (the "Plan") covering all employees. Contributions to the Plan were
invested in Franklin Holding's common stock and/or a selected group of mutual
funds. Contributions for the three months ended March 31, 1997 were $9,165 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 $45,954 and $322,067, respectively,
for the three months ended March 31, 1998 and $2,277,032 and $2,650,774,
respectively, for the three months ended March 31, 1997.
18
715129.1
<PAGE>
9. STOCKHOLDERS' DISTRIBUTION
Franklin Holding 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.
19
715129.1
<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,
$7,510,960 and $7,128,194 at March 31,1998, versus $7,718,458 and $7,343,132 at
December 31,1997. Net asset value per share was $8.90 at March 31, 1998, versus
$9.17 at December 31, 1997.
Franklin paid a $3.25 per share special distribution on August 4, 1997
to its stockholders of record as of July 28,1997 totaling $2,603,894. Based on
the calculation of current and cumulative earnings and profits at December 31,
1997, it was determined that this entire distribution was a return of capital to
the stockholders.
The Company's financial condition is dependent on the success of its
investments. A summary of the Company's investment portfolio is as follows:
<TABLE>
March 31, 1998 December 31, 1997
<S> <C> <C>
Investments, at cost $ 4,278,878 $ 4,209,672
Unrealized appreciation, net of
deferred taxes 2,348,330 2,665,168
------------ -------------
Investments, at fair value $ 6,627,208 $ 6,874,840
=========== =============
</TABLE>
20
715112.1
<PAGE>
The Company has an investment in Avery valued at $5,511,000 at both
March 31, 1998 and December 31, 1997. This investment represents 73.4% of the
Company's total assets and 77.3% of it net assets at March 31, 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. Avery's other principal operating subsidiary was sold
in early 1998.
Franklin's original investment in Avery of $350,000 was made in August
1995, and an additional investment of $2.5 million was made in May 1997. On a
primary share basis, Franklin owns more than 25 percent of Avery's outstanding
voting stock. Additionally, three officers of Franklin have been appointed to
Avery's six member Board of Directors; and Mr. Stephen Brown, Franklin's
Chairman and CEO, has been appointed as the Vice Chairman of Avery's Board of
Directors.
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 $15,984
for the three months ended March 31, 1997 and $3,166,842 for the year ended
December 31, 1977 from this dissolution.
At March 31, 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 0.85%
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 $535,007 at March 31, 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 three months ended
March 31, 1998. The remaining $273,085 is included in Net realized gain on
portfolio of investments. At March 31, 1998, Seneca represents 7.1% of the
Company's total assets and 7.5% 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.
21
715112.1
<PAGE>
The Company had income from controlled affiliates of $102,758 and
$10,500 for the three months ended March 31, 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 $1,162 and
$123,433 for the three months ended March 31, 1998 and 1997, respectively. The
decrease from 1997 to 1998 was the result of the sale of investments in high
yield bonds in early 1997, the proceeds of which were used to make the
additional investment in Avery. Dividend income of $76,915 for the three months
ended March 31, 1998 represents the current period earnings from Seneca which
were distributed in March, 1998.
Operating expenses were $367,098 and $739,527 for the three months
ended March 31, 1998 and 1997, respectively. Operating expenses in 1997 included
net professional fees, settlement costs and other expenses related to litigation
of $215,000. 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 $186,263 and $596,846 for
the three months ended March 31, 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 three months ended March 31, 1998 and 1997, the Company
realized net gains before taxes of $290,563 and $217,083, respectively, from the
disposition of various investments.
During the three months ended March 31, 1998, Franklin realized a gain
of $273,085 from the distribution from its investment in Seneca and a gain of
$14,450 from a stock distribution from its investment in CIC Standby Ventures,
L.P., as well as net gains of $3,028 on the sales of various marketable
securities.
During the three months ended March 31, 1997, Franklin realized a net
gain from the dissolution of its wholly-owned subsidiary, Excelsior, of $15,984,
as well as net gains of $201,099 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 $316,838 during the three months ended March 31, 1998, primarily
due to the realization of the gains from the distributions from Seneca and CIC
Standby Ventures, L.P. and income realized from the amortization of the note
discount from Avery. These were partially offset by an increased value for the
FMA High Yield Income L.P.
Unrealized appreciation of investments, net of deferred taxes,
decreased by $117,786 during the three months ended March 31, 1997, primarily
due to decreased values and gains on the sales of various marketable securities
and a decrease in the value of CIC Standby Ventures, L.P. These were offset by
increased values for Avery, Seneca and the TCW Global Fund. L.P.
22
715112.1
<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 March 31, 1998 was $759,929, compared to
$720,470 at December 31, 1997. 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.
23
715112.1
<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
None
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 quarter 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.
THE FRANKLIN HOLDING
CORPORATION (DELAWARE)
Date: May 14, 1998 By: /s/ John Greenbaum
---------------------------------------
John Greembaum
Chief Financial Officer
24
715112.1
<PAGE>
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 MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000812301
<NAME> UST PRIVATE EQUITY INVESTORS FUND, INC.
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-1-1998
<PERIOD-END> MAR-31-1998
<INVESTMENTS-AT-COST> 4,217
<INVESTMENTS-AT-VALUE> 6,569
<RECEIVABLES> 346
<ASSETS-OTHER> 596
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 7,511
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 383
<TOTAL-LIABILITIES> 383
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 8,118
<SHARES-COMMON-STOCK> 801
<SHARES-COMMON-PRIOR> 801
<ACCUMULATED-NII-CURRENT> (3,338)
<OVERDISTRIBUTION-NII> 0
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<NET-ASSETS> 7,128
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<REALIZED-GAINS-CURRENT> 288
<APPREC-INCREASE-CURRENT> (317)
<NET-CHANGE-FROM-OPS> (215)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
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<PER-SHARE-GAIN-APPREC> (0.04)
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