<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
Annual Report Pursuant to Section 13
or 15(d) of the Securities Exchange Act of 1934
(Mark One)
/X/ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934
For the Quarterly period ended September 30, 1999
or
/ / Transition report pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934
For the transition period from ________________ to ___________________.
Commission File No. 1-9727
------
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.
----------------------------
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $1.00 par value
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Corporation was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No / /
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of October 29, 1999 was $2,882,842 based on the last sale price as
quoted by The American Stock Exchange on such date (officers, directors and 5%
stockholders are considered affiliates for the purposes of this calculation).
The number of shares of common stock outstanding as of October 29, 1999 was
730,588.
1
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Prospectus of the Registrant dated July 31, 1992 (the
"Prospectus") are incorporated by reference in Part I, and Part II hereof.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets
Statements of Operations
Statements of Cash Flows
Statements of Changes in Net Assets
Portfolio of Investments
Notes to Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Statement of Operations
Financial Condition
Investments
Results of Operations
Liquidity and Capital Resources
Risks
Item 3. Quantitative and Qualitative Disclosures about Market Risk
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signature
Exhibit Index
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
CORPORATION'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
CORPORATION UNDERTAKES NO OBLIGATION TO PUBLICLY REVISE THESE FORWARD-LOOKING
STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES OCCURRING AFTER THE DATE HEREOF OR
TO REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS.
2
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
The information furnished in the accompanying financial statements
reflects all adjustments that are, in the opinion of management, necessary for a
fair presentation of the results for the interim period presented.
3
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FRANKLIN CAPITAL CORPORATION
================================================================================
Balance Sheets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
(unaudited)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Marketable investment securities, at market value (cost: September 30,
1999 - $148,767; December 31, 1998 - $412,048) (Note 2) $ 355,954 $ 699,704
Investments, at fair value (cost: September 30,1999 - $3,285,247;
December 31, 1998 - $3,063,181) (Note 2)
eMattress.com (Note 6) 311,748 --
Other investments (Note 9) 4,722,949 4,425,602
----------- -----------
5,034,697 4,425,602
----------- -----------
Cash and cash equivalents 439,357 1,100,373
Accrued interest and accounts receivable 118,277 179,179
Other assets 146,141 143,838
----------- -----------
TOTAL ASSETS $ 6,094,426 $ 6,548,696
=========== ===========
- -------------------------------------------------------------------------------------------------------------
LIABILITIES AND NET ASSETS
LIABILITIES
Accounts payable and accrued liabilities $ 158,711 $ 233,143
----------- -----------
TOTAL LIABILITIES 158,711 233,143
----------- -----------
Commitments and contingencies (Note 5)
NET ASSETS
Common stock, $1 par value: 2,000,000 shares authorized;
1,003,986 shares issued: 730,588 and 750,686 shares outstanding
at September 30,1999 and December 31, 1998, respectively (Note 7) 1,003,986 1,003,986
Paid-in capital 8,998,051 8,997,877
Unrealized appreciation of investments,
net of deferred income taxes (Notes 2 and 3) 1,956,638 1,650,077
Accumulated deficit (3,754,638) (3,169,229)
----------- -----------
8,204,037 8,482,711
Deduct: 273,398 and 253,300 shares of common stock held in treasury,
at cost, at September 30, 1999 and December 31, 1998, respectively (Note 4) (2,268,322) (2,167,158)
----------- -----------
Net assets, equivalent to $8.12 per share at September 30, 1999
and $8.41 per share at December 31, 1998 5,935,715 6,315,553
----------- -----------
TOTAL LIABILITIES AND NET ASSETS $ 6,094,426 $ 6,548,696
=========== ===========
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements
4
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FRANKLIN CAPITAL CORPORATION
================================================================================
Statements of Operations
(unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
1999 1998 1999 1998
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
Income from controlled affiliates (Note 6) $ 0 $ 11,871 $ 0 $ 217,265
Dividend income 10,500 -- 31,500 76,915
Interest income 4,148 20,184 21,670 25,035
----------- ----------- ----------- -----------
14,648 32,055 53,170 319,215
----------- ----------- ----------- -----------
EXPENSES
Salaries and employee benefits (Note 7) 194,316 206,617 584,696 628,101
Professional fees 53,525 54,097 152,714 149,834
Appraisal fees 10,616 -- 20,616 3,087
Employment fees -- -- -- 12,500
Rent (Note 5) 25,172 26,531 64,920 78,346
Insurance 10,473 10,232 30,826 31,363
Directors' fees 12,000 13,750 36,000 39,789
Taxes other than income taxes 3,681 10,438 26,961 45,202
Newswire and promotion 2,499 8,086 7,497 12,488
Depreciation and amortization 5,601 9,576 16,802 28,727
General and administrative 34,663 48,576 116,717 153,728
----------- ----------- ----------- -----------
352,546 387,903 1,057,749 1,183,165
----------- ----------- ----------- -----------
Net investment loss from operations (337,898) (355,848) (1,004,579) (863,950)
Net realized gain on portfolio of investments 112,301 1,323,562 418,228 1,646,520
(Provision) benefit for current income taxes (Note 3) 8,730 (1,600) 942 (6,400)
----------- ----------- ----------- -----------
Net realized (loss) gain (216,867) 966,114 (585,409) 776,170
Increase (decrease) in unrealized appreciation of investments,
net of deferred income taxes (192,108) (1,426,854) 306,561 (1,522,994)
----------- ----------- ----------- -----------
Net increase (decrease) in net assets from operations ($ 408,975) ($ 460,740) ($ 278,848) ($ 746,824)
=========== =========== =========== ===========
Net increase (decrease) in net assets per common share ($0.55) ($0.58) ($0.37) ($0.93)
=========== =========== =========== ===========
Weighted average number of common shares outstanding 749,425 798,737 756,287 800,369
=========== =========== =========== ===========
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
5
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FRANKLIN CAPITAL CORPORATION
================================================================================
Statements of Cash Flows
(unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Nine Months Ended September 30, 1999 1998
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net increase (decrease) in net assets from operations ($ 278,848) ($ 746,824)
Adjustments to reconcile net increase (decrease) in net assets to net
cash used in operating activities:
Depreciation and amortization 16,802 28,727
(Increase) decrease in unrealized appreciation of investments (306,561) 1,522,994
Amortization of discount on note receivable from Avery -- (101,176)
Net realized gain on portfolio of investments (418,228) (1,646,520)
Changes in operating assets and liabilities:
Decrease in accrued interest and accounts receivable 60,902 191,427
(Increase) in other assets (19,105) (21,071)
(Decrease) in accounts payable and accrued liabilities (74,432) (170,393)
----------- -----------
Total adjustments (740,622) (196,012)
----------- -----------
Net cash used in operating activities (1,019,470) (942,836)
----------- -----------
Cash flows from investing activities:
Return of capital from investments 36,622 355,284
Investment in controlled affiliate (303,000) --
Proceeds from sale of controlled affiliate -- 3,080,001
Additional investment in portfolio securities (124,999) (1,605,001)
Loan payments received from investments 66,667 33,333
Proceeds from sale of marketable investment securities, net of expenses 1,773,624 132,407
Purchases of marketable investment securities (980,723) (239,298)
----------- -----------
Net provided by investing activities 468,191 1,756,726
----------- -----------
Cash flows from financing activities:
Purchase of treasury stock (109,737) (175,835)
----------- -----------
Net cash used in financing activities (109,737) (175,835)
----------- -----------
Net (decrease) in cash and cash equivalents (661,016) 638,055
Cash and cash equivalents at beginning of period 1,100,373 348,900
----------- -----------
Cash and cash equivalents at end of period $ 439,357 $ 986,955
=========== ===========
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
FRANKLIN CAPITAL CORPORATION
================================================================================
Statements of Changes in Net Assets
(unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
For the Nine Months Ended September 30, 1999 1998 1999 1998
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Increase (decrease) in net assets from operations:
Net investment loss ($ 337,898) ($ 355,848) ($1,004,579) ($ 863,950)
Net realized gain on portfolio of investments,
net of income taxes 121,031 1,321,962 419,170 1,640,120
Increase (decrease) in unrealized appreciation of investments,
net of deferred income taxes (192,108) (1,426,854) 306,561 (1,522,994)
----------- ----------- ----------- -----------
Net increase (decrease) in net assets from operations (408,975) (460,740) (278,848) (746,824)
----------- ----------- ----------- -----------
Capital stock transactions:
Issuance of stock from treasury, net (162,935) -- 8,573 --
Additional paid in capital due to issuance of stock from treasury (3,319) -- 174 --
Purchase of treasury stock -- (175,835) (109,737) (175,835)
----------- ----------- ----------- -----------
Total increase (decrease) in net assets (575,229) (636,575) (379,838) (922,659)
----------- ----------- ----------- -----------
Net assets at beginning of period 6,510,944 7,057,048 6,315,553 7,343,132
----------- ----------- ----------- -----------
Net assets at end of period $ 5,935,715 $ 6,420,473 $ 5,935,715 $ 6,420,473
=========== =========== =========== ===========
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
FRANKLIN CAPITAL CORPORATION
================================================================================
Portfolio of Investments
(unaudited)
- --------------------------------------------------------------------------------
Marketable Investment Securities
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number of
Shares or Market
Principal Value
September 30, 1999 Amount ($) Cost (Note 2)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Communication Intelligence Corp. - common stock...................... 250,000 $105,313 $312,500
Certificate of Deposit - 4.65%, due 11/04/99......................... 43,454 43,454
-------- --------
Total Marketable Investment Securities (6.6% of
total investments and 6.0% of net assets)....................... $148,767 $355,954
======== ========
- ------------------------------------------------------------------------------------------------------------------------------------
Investments, at Fair Value
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Directors'
Equity Valuation
September 30, 1999 Investment Interest Cost (Note 2)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Controlled Affiliates
eMattress.com (5.8% of total investments and 5.3%
of net assets)......................................... Common stock 82.50% $311,748 $311,748
Other Investments
Avery Communications Inc............................... Common stock $1,481,482
(Telecommunications)
Avery Communications Inc............................... Convertible preferred
(Telecommunications) stock - Series E;
12.0% dividend rate 350,000
----------
Total Avery Communications 12.90% 1,831,482 3,380,013
(fully diluted basis)
Seneca Limited Partnership............................. Limited partnership 0.80% 500,000 601,361
(Investment limited partnership) interest
Codman Research Inc.................................... Common stock 1.38% 400,031 254,488
(Healthcare information systems)
CIC Standby Ventures, L.P. ............................ Limited partnership 1.80% 66,987 176,172
(Computer handwriting systems) interest
GoAmerica Corp......................................... Common stock 0.50% 124,999 260,915
(Internet software)
Trading News, Inc...................................... Convertible Preferred Stock 1.85% 50,000 50,000
(Investment information provider) ---------- ----------
Total Other Investments (87.6% of total investments and
79.6% of net assets)................................................................................. 2,973,499 4,722,949
---------- ----------
Total Investments............................................................................... $3,285,247 $5,034,697
========== ==========
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
8
<PAGE>
Franklin Capital Corporation
Notes to Financial Statements
September 30, 1999
1. ORGANIZATION
Franklin Capital Corporation ("Franklin", 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
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 nine months ended September 30,
1999, and 1998 and paid no income taxes during the nine months ended September
30, 1999, and 1998, respectively.
On January 25, 1999 the Corporation issued 20,046 shares of treasury stock
valued at $175,000, the Net Asset Value ("NAV") on the date of the transaction,
as part of an investment in a controlled affiliate. On September 30, 1999,
19,044 of these shares were canceled and placed back into treasury. (See Note 6
- - Transactions with Controlled Affiliates.)
At September 30, 1999 the Corporation held cash and cash equivalents primarily
in money market funds at two commercial banking institutions.
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
9
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Franklin Capital Corporation
Notes to Financial Statements (continued)
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 for the respective assets. Leasehold Improvements are
included in other assets and are amortized over their useful lives or the
remaining life of the lease, whichever is shorter.
Net Increase (Decrease) in Net Assets Per Common Share
Net increase (decrease) in net assets 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.
3. INCOME TAXES
At December 31, 1998, Franklin had a net operating loss carryforward for income
tax purposes of approximately $3,315,000 that will begin to expire in 2011. At a
43% effective tax rate the after-tax net benefit from this loss would be
approximately $1,425,000.
10
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Franklin Capital Corporation
Notes to Financial Statements (continued)
For the nine months ended September 30, 1999, and 1998, Franklin's tax
(provision) benefit was based on the following:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Net investment loss from operations ......................... $(1,004,579) $ (863,950)
Net realized gain on portfolio of investments ............... 418,228 1,646,520
Increase (decrease) in unrealized appreciation .............. 306,561 (1,522,994)
----------- -----------
Pre-tax book income (loss) ............................. $ (279,790) $ (740,424)
=========== ===========
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Tax benefit at 34% on $(279,790) and
$(740,424) respectively ................................... $ 95,000 $ 251,744
State and local, net of Federal benefit ..................... (11,000) (6,400)
Prior year under accrual of Federal taxes ................... (584) --
Prior year over accrual of state and local taxes ............ 12,526 --
Book losses for which no benefit is provided ................ (95,000) (251,744)
----------- -----------
Adjustment to deferred taxes provided in prior periods ...... $ 942 $ (6,400)
=========== ===========
The components of the tax benefit (provision) are as follows:
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Current state and local tax
provision ................................................. $ 942 $ (6,400)
----------- -----------
(Provision) benefit for income taxes ........................ $ 942 $ (6,400)
=========== ===========
</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 September 30, 1999 and December 31, 1998, significant deferred tax assets and
liabilities consist of:
<TABLE>
<CAPTION>
Asset (Liability)
---------------------------
September 30, December 31,
1999 1998
----------- -----------
<S> <C> <C>
Deferred Federal and state benefit from net operating
loss carryforward ..................................... $ 1,546,000 $ 1,425,000
Deferred Federal and state provision on unrealized
appreciation of investments ........................... (841,000) (710,000)
Valuation allowance ..................................... (705,000) (715,000)
----------- -----------
Deferred taxes ........................................ $ -- $ --
=========== ===========
</TABLE>
At September 30, 1999, the realization of deferred tax assets is dependent upon
future appreciation of the Corporation's investments.
4. STOCKHOLDERS' EQUITY
The Accumulated Deficit at September 30, 1999 consists of accumulated net
realized gains of $3,273,000 and accumulated investment losses of $7,028,000.
11
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Franklin Capital Corporation
Notes to Financial Statements (continued)
The Board of Directors has authorized Franklin to repurchase up to an aggregate
of 350,000 shares of its common stock in open market purchases on the American
Stock Exchange when such purchases are deemed to be in the best interest of the
Corporation and its stockholders. As of December 31, 1998 the Corporation had
purchased 263,300 shares of its common stock of which 253,300 remained in
treasury. During the nine months ended September 30, 1999, the Corporation
purchased 21,100 shares of its common stock at a total cost of $109,737. The
Corporation issued 20,046 shares of stock from treasury pursuant to an
investment made by Franklin on January 25, 1999. On September 30, 1999, 19,044
of these shares were canceled and place back into Treasury. (See Note 6
Transactions with Controlled Affiliates) To date, Franklin has repurchased
284,400 shares of its common stock of which 273,398 shares remain in treasury at
September 30, 1999.
5. COMMITMENTS AND CONTINGENCIES
Franklin is obligated under an operating lease, which provides for annual
minimum rental payments as follows:
December 31,
1999.............................................................. $ 149,600
2000.............................................................. 149,600
2001.............................................................. 149,600
2002.............................................................. 149,600
2003.............................................................. 149,600
----------
$ 748,000
===========
Rent expense for the nine months ended September 30, 1999, and 1998 was $64,920
and $78,346, respectively. For the nine months ended September 30, 1999 and
1998, the Corporation collected rents of $41,532 and $31,792, respectively, from
subtenants for a portion of its existing office space which is reflected as a
reduction in rent expense for that period. Of the amount collected from
subtenants during the nine months ended September 30, 1999, $10,812 was received
from a partnership in which two officers of Franklin have a non-controlling
interest.
6. TRANSACTIONS WITH CONTROLLED AFFILIATES
In January 1999, Franklin formed eCom Capital Corporation ("eCom"), a wholly
owned subsidiary of Franklin, for the purposes of investing in internet related
ventures. On January 25, 1999, eCom invested a total of $387,500 into
eMattress.com Inc. ("eMattress"), consisting of $175,000 worth of Franklin
common stock (20,046 shares from treasury stock valued at the Net Asset Value on
the date of the transaction) and $212,500 in cash for 320,000 shares of
Preferred Stock which is convertible into a 50% equity interest in eMattress.
eMattress is a retail internet mattress company that can be found on the World
Wide Web at the domain address www.emattress.com. eMattress became operational
and its website went online in March 1999. Two officers of Franklin were elected
to serve on the member eMattress Board of Directors.
In August 1999, Franklin invested an additional $87,500 into eCom. As part of
this transaction, eCom was merged into eMattress and eMattress was
reincorporated into eMattress.com, Delaware and Franklin received 19,044 shares
of Franklin common stock that had been issued out of treasury as part of the
original investment. As a result of this transaction Franklin's ownership
increased to 91% or eMattress.com,
12
<PAGE>
Franklin Capital Corporation
Notes to Financial Statements (continued)
Delaware. Resulting from certain subsequent transactions within eMattress, on
September 30, 1999, Franklin owned 82.5% of eMattress.
In August 1995, Franklin made an initial investment of $350,000 in Avery
Communications Inc. ("Avery"), a holding company in the telecommunications
industry. This investment consisted of a one year 12% note with warrants and a
conversion option. Subsequently, Franklin exercised its warrants to purchase
158,333 shares of Avery common stock at $0.10 per share and the note was
converted to 350,000 shares of Series B preferred stock which earn dividends of
12% per annum payable quarterly and are convertible to 350,000 shares of common
stock. An additional 28,506 shares of common stock at a price of $1.00 per share
were issued to Franklin at that time in lieu of accrued interest on the note.
On May 30, 1997, Franklin made an additional investment of $2,500,000 in Avery.
This 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
expired 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 were convertible to 100,000 shares of common stock. The shares of
preferred Series D stock earned a dividend of 10.0% per annum payable quarterly.
The Series B preferred shares previously owned by Franklin were converted to
Series E preferred stock with the same terms. 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.
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 the current chairman of Avery. Franklin
realized a net gain of $935,297 as a result of this sale. In conjunction with
this transaction, Franklin's representation on Avery's Board of Directors was
reduced from three directors to two. On July 13, 1998, Franklin entered into a
cashless exercise of its remaining warrants to purchase 386,667 shares of Avery
common stock at $1.50 per share realizing a net gain of $372,911 and a decrease
in unrealized appreciation of a like amount. In return, Franklin received
196,503 shares of Avery common stock.
As a result of the July 6 transaction, Avery is no longer a controlled affiliate
of Franklin. At September 30, 1999, Franklin owned 12.9% of Avery on a fully
diluted basis, and more than 17.5% of Avery on a primary basis.
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
13
<PAGE>
Franklin Capital Corporation
Notes to Financial Statements (continued)
of Franklin. 75,000 shares of the Corporation's 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 Corporation's Board of Directors. The Board 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 also administered by the 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 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 ten years. On December 31, 1998, one of the eligible
officers resigned from the Corporation and forfeited 10,000 options. These
10,000 options were reissued on March 18, 1999 to three eligible officers of the
Corporation at a strike price of $5.75 per share, which represented the closing
price of Franklin's Common Stock as reported by the American Stock Exchange on
that date. These options will expire as originally issued. One-half of the
reissued options vested immediately, and one-half will vest on January 27, 2000.
Franklin accounts for the options issued to employees under APB Opinion No. 25,
under which no compensation cost has been recognized. Proforma information
determined consistent with the fair value method required by FASB Statement No.
123 ("FASB 123"), is as follows:
Net realized loss:
As reported $(585,409)
Pro forma $(610,684)
Net decrease in net assets per common share:
As reported $(0.37)
Pro forma $(0.40)
Net Asset Value per share:
As reported $8.12
Pro forma $8.09
Pro forma - fully diluted $8.09
14
<PAGE>
Franklin Capital Corporation
Notes to Financial Statements (continued)
The fair value of the options granted was estimated on the date of the grant
using the Black-Scholes option pricing model with the following weighted average
assumptions:
Stock volatility 30.0%
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 September 30, 1999 and
changes during the nine months then ended follows:
Weighted
Average
Exercise
Shares Price
------ --------
Outstanding at beginning of
period 35,000 $7.000
Granted 10,000 $5.750
Exercised -- --
Forfeited -- --
Expired -- --
------
Outstanding at end of period 45,000 $6.722
======
Exercisable at end of period 30,000 $6.792
======
Weighted average fair value
of options granted $2.31
The exercise price for the options issued on January 27, 1998 is $7.00 with a
remaining contractual life of 8.25 years. The exercise price for the options
issued on March 18, 1999 is $5.75 with a remaining contractual life of 8.25
years.
8. PURCHASES AND SALES OF INVESTMENT SECURITIES
The cost of purchases and proceeds from sales of investment securities,
including the issuance of treasury stock as discussed in Note 6 and excluding
short term investments, aggregated $1,518,459 and $1,876,913 respectively, for
the nine months ended September 30, 1999; $1,844,299 and $3,601,025
respectively, for the nine months ended September 30, 1998.
9. SUBSEQUENT EVENT
On November 3, 1999, Franklin liquidated ninety percent of its holding in the
Seneca Limited Partnership for substantially the value as reflected on the
Portfolio of Investments at September 30, 1999.
15
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Statement of Operations
The Corporation accounts for its operations under Generally Accepted
Accounting Principles for investment companies. On this basis, the principal
measure of its financial performance is captioned "Net increase (decrease) in
net assets from operations", which is composed of the following: "Net investment
loss from operations," which is the difference between the Corporation's income
from interest, dividends and fees and its operating expenses; "Net realized gain
on portfolio of investments," which is the difference between the proceeds
received from dispositions of portfolio securities and their stated cost; any
applicable income tax provisions (benefits); and "Net increase (decrease) in
unrealized appreciation of investments," which is the net change in the fair
value of the Corporation's investment portfolio, net of any increase (decrease)
in deferred income taxes that would become payable if the unrealized
appreciation were realized through the sale or other disposition of the
investment portfolio.
"Net realized gain (loss) on portfolio of investments" and "Net increase
(decrease) in unrealized appreciation of investments" are directly related. When
a security is sold to realize a gain, the net unrealized appreciation decreases
and the net realized gain increases. When a security is sold to realize a loss,
the net unrealized appreciation increases and the net realized gain decreases.
Financial Condition
The Corporation's total assets and net assets were, respectively,
$6,094,426 and $5,935,715 at September 30, 1999 versus $6,548,696 and $6,315,553
at December 31,1998. Net asset value per share was $8.12 at September 30, 1999
versus $8.41 at December 31, 1998.
The Corporation's financial condition is dependent on the success of its
investments. A summary of the Corporation's investment portfolio is as follows:
September 30, 1999 December 31, 1998
------------------ -----------------
Investments, at cost $3,434,013 $3,475,229
Unrealized appreciation, net of
deferred taxes 1,956,638 1,650,077
---------- ----------
Investments, at fair value $5,390,651 $5,125,306
========== ==========
Investments
At September 30, 1999, the Corporation had an investment in eMattress.com
("eMattress") valued at $311,748, which represents 5.1% of total assets and 5.3%
of its net assets. Two directors and the officers of eMattress are officers of
Franklin. On January 25, 1999, eCom Capital Corporation ("eCom"), a wholly-owned
subsidiary of Franklin, invested a total of $387,500 into eMattress consisting
of $175,000 worth of Franklin common stock (20,046 shares from treasury stock
valued at the Net Asset Value on the date of the transaction) and $212,500 in
cash for 320,000 shares of Preferred Stock which was convertible into a 50%
equity interest in eMattress. In August 1999, Franklin invested an additional
$87,500 into eCom. As part of this transaction, eCom was merged into eMattress
and eMattress was reincorporated into eMattress.com, Delaware and Franklin
received 19,044 shares of Franklin common stock that had been issued out of
treasury as part of the original investment. As a result of this transaction and
subsequent transactions within eMattress, on September 30, 1999, Franklin owned
82.5% of eMattress.
16
<PAGE>
eMattress is a retail internet company that commenced operations in March
1999. eMattress sells mattresses, futons, bed frames, mattress pads and pillows,
and can be found on the World Wide Web at the domain address www.emattress.com.
The Corporation has an investment in Avery Communication Corporation
("Avery") valued at $3,380,013 at September 30, 1999, which represents 55.5% of
the Corporation's total assets and 56.9% of its net assets. 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". Avery has
two operating subsidiaries, one is Hold Billing Services ("HBS"). HBS provides
billing and collection services for inter-exchange carriers and long-distance
resellers. HBS is one of the largest independent companies in this business.
Avery's other operating subsidiary is Primal Systems, Inc. ("Primal"). Primal
has developed a suite of Decision Support applications, known as Outfront(TM),
that can assist telecom carriers in reducing customer churn, decreasing
marketing costs, and guarding against subscription fraud. Primal also has
expertise in Internet applications, including Electronic Bill Presentment and
Payment.
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 July
6, 1998, Franklin sold certain Avery securities to the Thurston Group, Inc. for
$2.5 million, which resulted in a gain of $935,297. Franklin's remaining shares
represent more than 17.5% of Avery's outstanding voting stock on a primary share
basis. Additionally, two officers of Franklin serve on Avery's eight member
Board of Directors.
At September 30, 1999, the Corporation held 250,000 shares of
Communications Intelligence Corporation ("CIC") common stock valued at $312,500
and had an investment in CIC Standby Ventures, L.P. ("CIC Ventures") valued at
$176,172. In 1995, the Corporation made an original investment in CIC Ventures
of $66,987. CIC Ventures is a partnership that currently owns 9,000,000 shares
of CIC. Through this partnership we own an equivalent of 150,000 shares of CIC.
The managing partner of CIC Ventures is the Chairman of the Board of CIC. CIC
develops, markets, and licenses software products based on proprietary
handwriting recognition technologies. CIC's core technologies include
multilingual handwriting recognition and dynamic signature verification
software. CIC's products are designed to increase the ease of use,
functionality, and security of electronic devices ranging from PC peripherals to
smart cellular phones. Its common stock is quoted on NASDAQ under the symbol
"CICI". In November 1998, the Corporation added to its existing holdings by
purchasing in an open market transaction 875,000 shares of CIC common stock at a
cost of $375,000. As of September 30, 1999 the Corporation has sold 625,000
shares realizing a gain of $547,126. At September 30, 1999, the total investment
in CIC and CIC Ventures represents 8.0% of the Corporation's total assets and
8.2% of its net assets.
At September 30, 1999, the Corporation had an investment in the Seneca
Capital, L.P. ("Seneca"), an investment partnership whose primary investment
objective is to invest in securities which 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 0.90%
limited partner. The Corporation's original investment of $500,000 made in April
1996 is valued at $601,361, which is net of a profit distribution of $350,000
received by Franklin during the year ended December 31, 1998. At September 30,
1999, Seneca represents 9.9% of the Corporation's total assets and 10.1% of its
net assets. On November 3, 1999, the Corporation liquidated ninety percent of
its investment in Seneca for substantially the market value as reported at
September 30,
17
<PAGE>
1999. Franklin liquidated this position in order to raise funds to invest
additional amount in Go America.
At September 30, 1999 the Corporation had an investment in Go America, a
wireless internet service provider. Go America has expanded its focus to
concentrate on wireless email and web-based solutions for corporations and
mobile professionals across multiple data networks using standard web browsers.
GoAmerica's goal is to provide seamless mobile access to email and corporate
data using Information Appliances such as, 2-way Messengers, PDAs and Handheld
computing devices. The Corporation made an original investment of $25,000 worth
of common stock in 1996. The Corporation made add on investments of common stock
of $25,000 in 1998 and $75,000 in 1999. Additionally, the Corporation has made a
commitment to invest another $125,000 in preferred stock. At September 30, 1999,
Go America represents 4.3% of the Corporation's total assets and 4.4% of its net
assets.
Results of Operations
Investment Income and Expenses:
The Corporation's principal objective is to achieve capital appreciation
through long-term investments in businesses believed to have favorable growth
potential. Therefore, a significant portion of the investment portfolio is
structured to maximize the potential for capital appreciation and provides
little or no current yield in the form of dividends or interest. The Corporation
earns interest income from loans, preferred stocks, corporate bonds and other
fixed income securities. The amount of interest income varies based upon the
average balance of the Corporation's fixed income portfolio and the average
yield on this portfolio.
The Corporation had interest and dividend income of $53,170 and $319,215
for the nine months ended September 30, 1999 and 1998, respectively. The
decrease in interest and dividend income for the nine months ended September 30,
1999 when compared to September 30, 1998, was primarily the result of the sale
in July 1998 of both Series D preferred stock and a $1,000,000 note that had
been received in connection with the Corporation's investment in Avery.
Operating expenses were $1,057,749 and $1,183,165 for the nine months
ended September 30, 1999 and 1998, respectively. Most of the Corporation's
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 $1,004,579 and $863,950 for the
nine months ended September 30, 1999 and 1998, respectively.
The Corporation has relied and continues to rely to a large extent upon
proceeds from sales of investments rather than investment income to defray a
significant portion of its operating expenses. Because such sales cannot be
predicted with certainty, the Corporation attempts to maintain adequate working
capital to provide for fiscal periods when there are no such sales.
Net Realized Gains and Losses on Portfolio of Investments:
During the nine months ended September 30, 1999 and 1998, the Corporation
realized net gains before taxes of $418,228 and $1,646,520, respectively, from
the disposition of various investments.
18
<PAGE>
Unrealized Appreciation of Investments:
Unrealized appreciation of investments, net of deferred taxes, increased
by $306,561 during the nine months ended September 30, 1999, primarily from
unrealized gains due to the increase in value of Franklin's investments in CIC
and Go America.
Unrealized appreciation of investments, net of deferred taxes, decreased
by $1,522,944 during the nine months ended September 30, 1998, primarily due to
the realization of the gains from the sale of a portion of the investment in
Avery, the exercise of Avery warrants and distributions from Seneca and CIC
Ventures. These were partially offset by an increased value for Avery.
Liquidity and Capital Resources
The Corporation's reported total cash and cash equivalents, accrued
interest and accounts receivable and marketable investment securities (the
primary measure of liquidity) at September 30, 1999 was $913,588 compared to
$1,979,256 at December 31, 1998. Management believes that these assets, together
with its investment in Seneca, provide the Corporation with sufficient liquidity
for its operations. The investment in Seneca was reduced by ninety percent on
November 3, 1999 at substantially the carrying value as of September 30, 1999.
Risks
Pursuant to Section 64(b) (1) of the Investment Corporation 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 Corporation's investment portfolio.
There are significant risks inherent in the Corporation's venture capital
business. The Corporation has invested a substantial portion of its assets in
small private companies and a non-reporting public corporation. Because of the
speculative nature of these investments, there is significantly greater risk of
loss than is the case with traditional investment securities. The Corporation
expects that from time to time its venture capital investments may result in a
complete loss of the Corporation's invested capital or may be unprofitable.
Other investments may appear likely to become successful, but may never realize
their potential. Neither the Corporation's investments nor an investment in the
Corporation is intended to constitute a balanced investment program. The
Corporation has in the past relied and continues to rely to a large extent upon
proceeds from sales of investments rather than investment income to defray a
significant portion of its operating expenses.
Risks Relating to the Year 2000 Issue:
The Corporation's internal computer information is Year 2000 compliant.
The Corporation uses individual PC's that rely on third party software. All such
software has been upgraded to versions that are Year 2000 compliant.
The Corporation's Year 2000 issues and any potential business
interruptions, costs, damages, or losses related thereto are primarily dependent
upon the Year 2000 compliance of third parties. The Corporation's suppliers that
provide mission-critical services are primarily large companies, such as local
and long distance telephone service providers, banks, and utility companies. The
Corporation has no reason to believe that these suppliers will not be Year 2000
compliant. However, the Corporation is in the process of reviewing its third
party relationships in order to assess and address Year 2000 issues with respect
to these third parties.
19
<PAGE>
The Corporation believes that the Year 2000 problem may be material to its
investments. The Corporation has received assurances from the companies that it
invests in that they are addressing the Year 2000 issue and do not expect any
material events to affect their 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 Corporation's
results of operations. The Corporation intends to develop a contingency plan to
be able to react to any Year 2000 problems should they arise.
The costs associated with Year 2000 compliance have been nominal and the
Corporation believes that the remaining costs will be minimal and will not have
a material adverse effect on its financial condition or results of operations.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
A portion of the Corporation's portfolio of investments is in marketable
securities traded on the over-the-counter market. In order to realize the full
market value of a security the market must trade in an orderly fashion. Should
an economic event occur that would not allow the markets to trade in an orderly
fashion, the Corporation may not be able to receive fair value for those
investments.
All investments owned by the Corporation are marked at fair value at
September 30, 1999. For those investments that do not have a ready market, the
Corporation has received valuation information from either an independent third
party or the investee corporation itself. The Corporation has no off-balance
sheet investments or hedging instruments.
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 Holders
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits. The exhibits which are filed with the Form 10-Q or
incorporated herein by reference are set for in the Exhibit Index on
page 21.
(b) Reports on Form 8-K. The Company did not file any reports on Form
8-K during the first nine months of 1999.
20
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Corporation has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
THE FRANKLIN CAPITAL CORPORATION
Date: November 9, 1999 By: /s/ Hiram M. Lazar
----------------------------------
Hiram M. Lazar
Chief Financial Officer
EXHIBIT INDEX
None.
21
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION FROM FORM 10-Q FOR THE PERIOD ENDED
JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS
</LEGEND>
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