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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
Annual Report Pursuant to Section 13
or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended Commission File No. 1-9727
December 31, 1999
Franklin Capital Corporation
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(Exact name of registrant specified in its charter)
Delaware 13-3419202
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
450 Park Avenue, 10th Floor, New York, New York 10022
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 486-2323
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Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $1.00 par value
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Corporation was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this form 10-K or any amendment to this
Form 10-K. [ X ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of March 9, 2000 was $19,814,480 based on the last sale price as
quoted by The American Stock Exchange on such date (officers, directors and 5%
stockholders are considered affiliates for the purposes of this calculation).
The number of shares of common stock outstanding as of March 9, 2000 was
730,588.
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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, Part II and Part III
hereof.
TABLE OF CONTENTS
PART I
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for Corporation's Common Equity and Related Stockholder
Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
PART III
Item 10. Directors and Executive Officers of the Corporation
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions
PART IV
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form
8-K
Signatures
Exhibit Index
CAUTIONARY STATEMENT FOR PURPOSES OF
THE "SAFE HARBOR" PROVISIONS OF
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
WHEN USED IN THIS ANNUAL REPORT ON FORM 10-K, THE WORDS "BELIEVES,"
"ANTICIPATES,"EXPECTS" AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY
FORWARD-LOOKING STATEMENTS. STATEMENTS LOOKING FORWARD IN TIME ARE INCLUDED IN
THIS ANNUAL REPOSRT ON FORM 10-K 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. 814-159) AND IN "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING
STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE HEREOF. THE CORPORATION UNDERTAKES
NO OBLIGATION TO PUBLICLY REVISE THESE FORWARD-LOOKING STATEMENTS TO REFLECT
EVENTS OR CIRCUMSTANCES OCCURRING AFTER THE DATE HEREOF OR TO REFLECT THE
OCCURRENCE OF UNANTICIPATED EVENTS.
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PART I
Item 1. Business
Formation
Franklin Capital Corporation(1) (the "Registrant", "Franklin," or the
"Corporation") filed on April 7, 1987, with the Securities and Exchange
Commission (the "SEC" or the "Commission") a notification of registration under
Section 8(a) of the Investment Corporation Act of 1940 (the "1940 Act") and
registered as a closed-end, non-diversified management investment company. On
July 10, 1987, the Corporation commenced operations as an investment company.
The Corporation's common stock, par value $1.00 per share, has been listed on
The American Stock Exchange since October 1, 1987.
From 1987 through 1991, the Corporation operated primarily as a passive
investor, both at the holding company level and through its wholly owned
subsidiary, Franklin SBIC.
In 1992, Franklin SBIC was dissolved and the Corporation formed Excelsior
Communications Corporation ("Excelsior"). Excelsior, through a partnership,
acquired a number of radio stations, and Franklin's management was active in the
operations of both Excelsior and its operating assets. At the end of 1995,
Excelsior sold the last of its radio properties. Excelsior continued to operate
through the first half of 1997.
The operating strategy of providing managerial assistance to companies in
which the Corporation invests has been pursued by Franklin since 1992. This
strategy is consistent with the legislative intent behind the statutory
framework governing business development companies under the 1940 Act. The
Business Development Corporation ("BDC") is available for companies which are
engaged in the business of furnishing capital and managerial expertise to other
companies that might not otherwise have access to such capital. In light of this
operating strategy and the Corporation's long-term objectives, management and
the Board of Directors determined that it was in the best interests of the
shareholders to explore the feasibility of moving on election to be regulated as
a BDC.
On August 5, 1997, the Board of Directors determined that it would be in the
best interests of the Corporation 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 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 the receipt of the filing by the Commission. The Corporation operates as an
internally managed BDC whereby its officers and employees, under the general
supervision of its Board of Directors, conduct its operations.
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(1) On July 14, 1998, the Corporation filed a Certificate of Amendment
with the Secretary of State of the State of Delaware, changing its name from The
Franklin Holding Corporation (Delaware) to Franklin Capital Corporation. The
Corporation's shareholders had approved a proposal to change the Corporation's
name at the Annual Meeting of Stockholders held on June 16, 1998. The
Corporation had filed its original Articles of Incorporation with the Secretary
of State of the State of Delaware as The Franklin Holding Corporation (Delaware)
on March 31, 1987.
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As a BDC, the Corporation's objective is to achieve capital appreciation
through long-term investments in businesses believed to have favorable growth
potential. The Corporation participates, or would participate, in start-up and
early stage financing, expansion or growth financing, leveraged buy-out
financing and restructurings. The Corporation has also invested and will
consider investing in a broad range of industry segments.
Portfolio of Investments
As of December 31, 1999, the Corporation's portfolio of investments is a
composite of investments in developing companies, investment limited
partnerships and marketable securities.
Illiquidity of Investments
A majority of the Corporation's investments consist of securities acquired
directly from the issuer in private transactions. They may be subject to
restrictions on resale or otherwise be illiquid. Franklin anticipates that there
may not be an established trading market for such securities. Additionally, many
of the securities that the Corporation may invest in will not be eligible for
sale to the public without registration under the Securities Act of 1933, as
amended, which could prevent or delay any sale by the Corporation of such
investments or reduce the amount of proceeds that might otherwise be realized
therefrom. Restricted securities generally sell at a price lower than similar
securities not subject to restrictions on resale. Further, even if a portfolio
corporation or investee registers its securities and becomes a reporting
corporation under the Securities and Exchange Act of 1934, the corporation may
be considered an insider by virtue of its board representation and would be
restricted in sales of such corporation's securities.
Managerial Assistance
The Corporation believes that providing managerial assistance to its
investees is critical to its business development activities. "Making available
significant managerial assistance" as defined in the 1940 Act with respect to a
BDC such as Franklin means (a) any arrangement whereby a BDC, through its
directors, officers, employees or general partners, offers to provide, and if
accepted, does so provide significant guidance and counsel concerning the
management, operations or business objectives and policies of a portfolio
company; or (b) the exercise of a controlling influence over the management or
policies of a portfolio company by a BDC acting individually or as a part of a
group acting together which controls such portfolio Corporation. The
Corporation, as a BDC, is required by the 1940 Act to make significant
managerial assistance available at least with respect to investee companies that
the Corporation treats as qualifying assets for purposes of the 70 percent test
(see "Regulation"). The nature, timing and amount of managerial assistance
provided by the Corporation vary depending upon the particular requirements of
each investee company.
In connection with its managerial assistance, Franklin may be represented
by one or more of its officers or directors on the board of directors of an
investee company. The Corporation's goal is to assist each investee company in
establishing its own independent and effective board of directors and
management.
Need for Follow-on Investments
Following its initial investments in investees, the Corporation has made
and anticipates that it will continue to make additional investments in such
investees as "follow-on" investments,
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in order to increase its investment in an investee, and may exercise warrants,
options or convertible securities that were acquired in the original financing.
Such follow-on investments may be made for a variety of reasons including: 1) to
increase the Corporation's exposure to an investee, 2) to acquire securities
issued as a result of exercising convertible securities that were purchased in a
prior financing, 3) to preserve or reduce dilution of Franklin's proportionate
ownership in a subsequent financing, or 4) in an attempt to preserve or enhance
the value of the Corporation's investment. There can be no assurance that the
Corporation will make follow-on investments or have sufficient funds to make
such investments; the Corporation will have the discretion to make any follow-on
investments as it determines, subject to the availability of capital resources.
The failure to make such follow-on investments may, in certain circumstances,
jeopardize the continued viability of an investee and the Corporation's initial
investment, or may result in a missed opportunity for the Corporation to
increase its participation in a successful operation.
Competition
The Corporation competes for attractive investment opportunities with
venture capital partnerships and corporations, merchant banks, venture capital
affiliates of industrial and financial companies, SBICs, investment companies,
pension plans, other BDCs and private individual investors.
Employees
At December 31, 1999, the Corporation had five employees.
Regulation
The Corporation is not an investment company and is not registered as an
investment company. However, as a BDC it is subject to regulation under the 1940
Act, including several of the same provisions as apply to registered investment
companies. The following is a brief description of the provisions of the 1940
Act applicable to the Corporation.
Generally, to be eligible to elect BDC status, a corporation must
primarily engage in the business of furnishing capital and managerial expertise
to companies that do not have ready access to capital through conventional
financial channels. Such portfolio companies are termed "eligible portfolio
companies." More specifically, in order to qualify as a BDC, a corporation must
(i) be a domestic corporation; (ii) have registered a class of its securities or
have filed a registration statement with the SEC pursuant to Section 12 of the
Exchange Act of 1934; (iii) operate for the purpose of investing in the
securities of certain types of portfolio companies, namely, immature or emerging
companies and businesses suffering or just recovering from financial distress
(see following paragraph); (iv) extend significant managerial assistance to such
portfolio companies; (v) have a majority of "disinterested" directors (as
defined in the 1940 Act) and (vi) file (or, under certain circumstances, intend
to file) a proper notice of election with the SEC.
An eligible portfolio company generally is a domestic corporation that is
not an investment company and that (i) does not have a class of securities
registered on an exchange or included in the Federal Reserve Board's
over-the-counter margin list; (ii) is actively controlled by a BDC and has an
affiliate of a BDC on its board of directors or (iii) meets such other criteria
as may be established by the SEC. Control under the 1940 Act is presumed to
exist where a BDC owns 25 percent of the outstanding voting securities of the
investee.
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The 1940 Act restricts BDC investments in certain types of companies, such
as brokerage firms, insurance companies, investment banking firms and investment
companies. Moreover, the 1940 Act limits the type of certain assets necessary
for its operations (such as office furniture, equipment and facilities) if, at
the time of acquisition, less than 70 percent of the value of the Corporation's
assets consist of qualifying assets. Qualifying assets include: (i) securities
of companies that were eligible portfolio companies at the time such company
acquired their securities; (ii) securities of bankrupt or insolvent companies
that were eligible at the time of such company's initial investment in those
companies; (iii) securities received in exchange for or distributed in or with
respect to any of the foregoing and (iv) cash items, government securities and
high quality short-term debt. The 1940 Act also places restrictions on the
nature of the transactions in which, and the persons for whom, securities can be
purchased in order for the securities to be considered qualifying assets. Such
restrictions include limiting purchases to transactions not involving a public
offering and acquiring securities from either the portfolio company or their
officers, directors or affiliates.
The Corporation is permitted by the 1940 Act, under specified conditions,
to issue multiple classes of senior debt and a single class of preferred stock
if its asset coverage, as defined in the 1940 Act, is at least 200 percent after
the issuance of the debt or the preferred stock (i.e., such senior securities
may not be in excess of 50 percent of its net assets). If the value of the
Corporation's assets, as defined, were to increase through the issuance of
additional capital stock or otherwise, the Corporation would be permitted under
the 1940 Act to issue senior securities. These securities may be convertible
into common stock subject to various statutory limitations. On February 22,
2000, the Corporation issued $1,645,000 worth of preferred stock with a 7%
coupon convertible into the Corporation's common stock at $20 per share. The
Corporation at the time of the issuance and as of the date of this filing
complied with the 1940 Act provisions relating to the issuance of convertible
preferred stock.
The Corporation may sell its securities at a price that is below the
prevailing net asset value per share only after a majority of its disinterested
directors has determined that such sale would be in the best interest of the
Corporation and its stockholders and upon the approval by the holders of a
majority of its outstanding voting securities, including a majority of the
voting securities held by non-affiliated persons. If the offering of the
securities is underwritten, a majority of the disinterested directors must
determine in good faith that the price of the securities being sold is not less
than a price which closely approximates market value of the securities, less any
distribution discount or commission. As defined by the 1940 Act, the term
"majority of the Corporation's outstanding voting securities" means the vote of
(i) 67 percent or more of the Corporation's Common Stock present at the meeting,
if the holders of more than 50 percent of the outstanding Common Stock are
present or represented by proxy or (ii) more than 50 percent of the
Corporation's outstanding Common Stock, whichever is less.
Most of the transactions involving the Corporation and its affiliates (as
well as affiliates of those affiliates) which were prohibited without the prior
approval of the Commission under the 1940 Act prior to its amendment by the
Small Business Investment Incentive Act are now permissible upon the prior
approval of a majority of the Corporation's disinterested directors and a
majority of the directors having no financial interest in the transactions.
However, certain transactions involving certain closely affiliated persons of
the Corporation, including its directors, officers, and employees, may still
require the prior approval of the Commission. In general, (i) any person who
owns, controls or holds power to vote more than 5 percent of the Corporation's
outstanding voting securities; (ii) any director, executive officer or general
partner of that person and (iii) any person who directly controls, is controlled
by, or is under common control with that person, must obtain the prior approval
of a majority of the Corporation's independent directors
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and, in some situations, the prior approval of the Commission, before engaging
in certain transactions involving the Corporation or any company controlled by
the Corporation. The 1940 Act generally does not restrict transactions between
the Corporation and its portfolio companies. While a BDC may change the nature
of its business so as to cease being a BDC (and in connection therewith
withdraws its election to be treated as a BDC) only if authorized to do so by a
majority vote (as defined in the 1940 Act) of its outstanding voting securities,
stockholder approval of changes in other fundamental investment policies of a
BDC is not required (in contrast to the general 1940 Act requirement, which
requires stockholder approval for a change in any fundamental investment
policy). The Corporation is entitled to change its diversification status
without stockholder approval.
The Corporation is permitted to adopt either a profit-sharing plan
pursuant to which management (including disinterested directors) could receive
up to 20% of the net after-tax profits of the Corporation or an option plan
covering up to 20% of the stock of the Corporation. Presently the Corporation
has an option plan in effect covering 75,000 shares (8.4% on a fully diluted
basis).
Item 2. Properties
Franklin maintains its offices at 450 Park Avenue, 10th Floor, New York,
New York 10022, where it leases approximately 3,600 square feet of office space
pursuant to a lease agreement expiring in 2003. As of December 31, 1999,
Franklin had a sublet arrangement with one subtenant for a portion of Franklin's
office space.
Item 3. Legal Proceedings
None.
Item 4. Submission of Matters to a Vote of Security Holders
The Corporation did not submit any matters to a vote of its stockholders
during the fourth quarter of the 1999 fiscal year.
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PART II
Item 5. Market for Corporation's Common Equity and Related Stockholder
Matters
Stock Transfer Agent
Chase Mellon Shareholder Services, 85 Challenger Road, Overpack Center,
Ridgefield Park, NJ 07660 (Telephone (800) 851-9677) serves as transfer agent
for the Corporation's common stock. Certificates to be transferred should be
mailed directly to the transfer agent, preferably by registered mail.
Market Prices
The Corporation's common stock is traded on The American Stock Exchange
under the symbol "FKL". The following table sets forth the range of the high and
low selling price of the Corporation's shares during each quarter of the last
two years, as reported by the American Stock Exchange.
1999 Quarter Ending Low High
March 31 $ 4.625 $ 6.250
June 30 $ 5.000 $ 7.500
September 30 $ 5.000 $ 5.875
December 31 $ 5.125 $ 11.125
1998 Quarter Ending Low High
March 31 $ 5.750 $ 7.000
June 30 $ 6.875 $ 8.250
September 30 $ 5.875 $ 8.250
December 31 $ 4.750 $ 5.750
Stockholders
As of March 9, 2000, there were 625 holders of record of the Corporation's
common stock. The Corporation has 5,000,000 shares of common stock authorized,
of which 1,003,986 are issued and 730,588 are outstanding at March 9, 2000. The
Corporation has 5,000,000 shares of convertible preferred stock authorized, of
which 16,450 were issued on February 22, 2000 and are outstanding at March 9,
2000. (See section on Liquidity and Capital Resources for details of preferred
stock.)
Item 6. Selected Financial Data
The following tables should be read in conjunction with the Financial
Statements included in Item 8 of this form 10-K.
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BALANCE SHEET DATA
Financial Position as of December 31:
<TABLE>
<CAPTION>
1999 1998 1997* 1996 1995
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<S> <C> <C> <C> <C> <C>
Total assets $ 8,995,965 $ 6,548,696 $ 7,718,458 $ 11,798,044 $ 12,658,556
Liabilities $ 555,583 $ 233,143 $ 375,326 $ 1,921,475 $ 538,427
Net asset value $ 8,440,382 $ 6,315,553 $ 7,343,132 $ 9,876,569 $ 12,120,129
Basic net asset value per share $ 11.55 $ 8.41 $ 9.17 $ 12.33 $ 14.67
Diluted net asset value per share $ 11.33 $ 8.41 $ 9.17 $ 12.33 $ 14.67
Shares outstanding 730,588 750,686 801,198 801,198 826,198
Operating Data for the year ended December 31:
1999 1998 1997* 1996 1995
---- ---- ----- ---- ----
Investment income $ 72,382 $ 263,323 $ 497,021 $ 852,211 $ 948,436
Net investment loss from operations $ (1,549,398) $ (1,357,085) $ (1,903,829) $ (1,553,891) $ (1,209,464)
Net realized gain on investments,
net of income taxes $ 688,259 $ 1,628,004 $ 3,105,165 $ 95,085 $ 999,029
Net increase (decrease) in
unrealized appreciation
of investments, net of
deferred income taxes $ 3,086,958 $ (1,015,091) $ (1,130,879) $ 266,694 $ 233,878
Net increase (decrease) in net
assets from operations $ 2,225,819 $ (744,172) $ 70,457 $ (1,192,112) $ 23,443
Basic net increase (decrease) in net
assets from operations per
weighted average number of
shares outstanding $ 2.97 $ (0.94) $ 0.09 $ (1.48) $ 0.03
Diluted net increase (decrease) in
net assets from operations per
weighted average number of
shares outstanding $ 2.96 $ (0.94) $ 0.09 $ (1.48) $ 0.03
</TABLE>
* A special distribution of $3.25 per share was declared in July 1997.
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Item. 7 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 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 Corporation's total assets and net assets were, respectively,
$8,995,965 and $8,440,382 at December 31, 1999 versus $6,548,696 and $6,315,553
at December 31,1998. Net asset value per share was $11.55 at December 31, 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:
December 31, 1999 December 31, 1998
----------------- -----------------
Investments, at cost $ 2,971,347 $ 3,475,229
Unrealized appreciation, net
of deferred taxes 4,737,035 1,650,077
----------- ---------
Investments, at fair value $ 7,708,382 $ 5,125,306
=========== ===========
Investments
The Corporation has an investment in Avery Communications Corporation
("Avery Communications") valued at $3,471,880 at December 31, 1999, which
represents 38.6% of the Corporation's total assets and 41.1% of its net assets.
Its common stock is quoted on the OTC Electronic Bulletin Board under the symbol
"ATEX". Avery Communications is the public parent of two companies, Primal
Solutions, Inc. ("Primal") and HBS Billing Service, Ltd ("HBS"), both of which
operate in the telecommunications industry. Primal, based in Irvine, California,
is a leading provider of customer relationship management and intelligence
solutions to the communications industries worldwide, including web-enabled
customer acquisition and retention, billing, switch mediation and decision
support. Its Outfront(TM), Customer Relationship Management software utilizes
some of the newest Java-based technology to provide
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telecommunications and Internet providers with powerful business intelligence
for customer retention, valuation and executive decision making. HBS, based in
San Antonio, Texas provides local exchange carrier (LEC) clearinghouse billing
services to domestic long-distance telephone companies and other third party
billers who desire their charges to appear on the local telephone bill.
Franklin made an initial investment in Avery Communications of $350,000 in
August 1995. It made an additional investment of $2.5 million in May 1997. On
July 6, 1998, Franklin sold certain Avery Communications securities to the
Thurston Group, Inc. for $2.5 million, which resulted in a gain of $935,297.
Franklin's remaining shares represent 16.1% of Avery Communications outstanding
voting stock on a primary share basis. Additionally, Stephen L. Brown and
Spencer L. Brown, officers of Franklin, serve on Avery Communications eight
member Board of Directors.
At December 31, 1999, the Corporation held 100,000 shares of
Communications Intelligence Corporation ("CIC") common stock, quoted on NASDAQ
under the symbol "CICI", valued at $825,000 and had an investment in CIC Standby
Ventures, L.P. ("CIC Ventures") valued at $1,018,849. The total investment in
CIC and CIC Ventures represents 20.5% of the Corporation's total assets and
21.8% of its net assets. CIC Ventures is a partnership that as of December 31,
1999 owned 9,000,000 shares of CIC common stock. The managing partner of CIC
Ventures is the Chairman of the Board of CIC. At year-end through this
partnership the Corporation owns approximately 123,000 shares of CIC common
stock. CIC is a leading supplier of pen-based software solutions. CIC's core
software technologies include multilingual handwriting recognition, dynamic
signature verification, ink compression, and operating system extensions that
enable pen input. CIC's products are designed to increase the ease of use,
functionality, and security of mobile electronic devices ranging from handheld
companions to cellular phones. Key licensees of CIC's technologies include
Ericsson, Fujitsu, Hitachi, Microsoft, Mitsubishi, National Semiconductor and
Nortel. CIC is headquartered in Redwood Shores, California and has a joint
venture, CICC, in Nanjing, China.
In 1995, the Corporation made an original investment in CIC Ventures of
$66,987. 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. During the year ended December 31, 1999 the Corporation sold
775,000 shares of common stock realizing a gain of $922,118.
At December 31, 1999, the Corporation had an investment in eMattress.com
("eMattress") valued at $100,000, which represents 1.1% of total assets and 1.2%
of its net assets. eMattress is a development stage company that sells
mattresses and related bedding products over the Internet.
During 1999 the Corporation formed a wholly owned subsidiary, eCom Capital
Corporation ("eCom") which in turn 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. eCom received preferred stock convertible into a 50% equity
interest in eMattress. In conjunction with this transaction, Stephen L. Brown
and Spencer L. Brown were appointed to the eMattress five member Board of
Directors. In August 1999, Franklin invested an additional $87,500 into eCom.
Pursuant to this transaction eMattress was merged into eCom and 19,044 shares of
Franklin common stock were returned to Franklin's treasury. The surviving
entity, eMattress.com is a Delaware corporation.
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In November 1999, Franklin invested an additional $75,000 into eMattress and as
a result of this transaction on December 31, 1999, Franklin owned 87.2% of
eMattress.
At December 31, 1999 the Corporation had an investment in Go America, Inc.
("Go America"), a wireless internet service provider valued at $2,502,191, which
represents 27.8% of the Corporation's total assets and 29.6% of its net assets.
Go America is a leading provider of nationwide wireless Internet services. Go
America enables business and individual subscribers to access remotely the
Internet, email and corporate intranets in real time through a wide variety of
mobile computing and communications devices. Go America's Wireless Internet
Connectivity Center offers subscribers comprehensive and flexible mobile data
solutions for wireless Internet access by providing wireless network services,
mobile devices, software and subscriber service and support.
The Corporation made an initial purchase of $25,000 worth of Go America
common stock in 1996. The Corporation made additional purchases of common stock
of $25,000 and $324,740 in 1998 and in November 1999, respectively.
Additionally, in November 1999, the Corporation purchased $125,000 of
convertible preferred stock. At December 31, 1999, Franklin owned 1.39% of Go
America after taking into account the dilution post a strategic investment round
occurring in January 2000.
At December 31, 1999 the Corporation had an investment in TradingNews,
Inc. ("TradingNews") valued at $75,000 which represents 0.8% of the
Corporation's total assets and 0.9% of its net assets. TradingNews is a provider
of financial market intelligence for retail investors based on price and volume
movement. TradingNews scans every trade on major stock exchanges for important
technical signals. These signals, published instantly on the World Wide Web as
easy to understand news headlines, help investors identify key market entry and
exit points, spot market trends, and grasp the feel of the market.
During 1999, the Corporation purchased $75,000 worth of TradingNews
convertible preferred stock. In connection with this investment, Stephen L.
Brown was appointed to the TradingNews six member Board of Directors.
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 income of $30,382 in 1999, $34,128 in 1998,
and $225,840 in 1997. The decrease in 1999 from 1998 was the result of a
decrease in the amount of cash on hand in 1999 as compared to 1998. Income from
controlled affiliates was $0 in 1999, $229,195 in 1998 and $257,258 in 1997,
representing dividend and interest income from preferred stock and a note
received in connection with the Corporation's investment in Avery
Communications. Avery Communications ceased being a controlled investment of
Franklin during 1998. (See footnote 6 to the Financial Statements.)
12
<PAGE>
Operating expenses were $1,621,780 in 1999, $1,620,408 in 1998, and
$2,400,850 in 1997. A majority of the Corporation's operating expenses consist
of employee compensation, office and rent expense, other expenses related to
identifying and reviewing investment opportunities and professional fees.
Professional fees consist of general legal fees, audit and tax fees and
investment related legal fees. During 1997, operating expenses included
litigation related expenses of $535,017.
Net investment losses from operations were $1,549,398 in 1999, $1,357,085
in 1998, and $1,903,829 in 1997.
The Corporation has relied and continues to rely to a large extent upon
proceeds from sales of investments rather than investment income to defray a
significant portion of its operating expenses. Because such sales cannot be
predicted with certainty, the Corporation attempts to maintain adequate working
capital to provide for fiscal periods when there are no such sales.
Net Realized Gains and Losses on Portfolio of Investments:
During the three years ended December 31, 1999, 1998 and 1997, the
Corporation realized net gains before taxes of $688,259, $1,628,004, and
$3,105,165, respectively, from the disposition of various investments.
During 1999, Franklin realized a gain of $922,118 from the sale of 775,000
shares of CIC common stock as well as a gain of $92,300 from the liquidation of
Seneca and $36,622 from the liquidation of the investment in the FMA High Yield
Income Limited Partnership. Additionally, the Corporation realized $73,797 in
gains from the sale of various marketable securities. These gains were offset by
a loss of $226,023 from the liquidation of the Corporation's investment in
Codman Research Inc., and $148,014 from the write off of the Corporation's
investment in Pacific Healthcare Group. Additionally, the Corporation realized
losses of $62,541 from the sale of various marketable securities.
During 1998, Franklin realized a net gain from the sale of a portion of
its investment in and subsequent exercise of warrants in Avery Communications of
$1,308,208, as well as $350,000 in gains from Seneca, and $96,370 in gains from
other investment partnerships, the sale of various marketable securities and
loans. These gains were offset by a loss of $126,574 on the sales of various
marketable securities, loans, and investment partnerships.
During 1997, Franklin realized a net gain from the dissolution of its
wholly-owned subsidiary, Excelsior, of $3,166,842, as well as net gains of
$81,597 on the sales of various marketable securities, including stocks and high
yield bonds, and realized capital gains of $137,313 from the liquidation of
holdings in investment partnerships. These were offset by a loss of $59,733 on
the sale of a loan that had been originated when Franklin operated as a SBIC, as
well as the write-off of $220,854 of investments in limited partnerships and
securities in which there is no anticipated current or future value.
Unrealized Appreciation of Investments:
Unrealized appreciation of investments, net of deferred taxes, increased
by $3,086,958 during the year ended December 31, 1999, primarily from the
increased value of CIC and CIC Ventures and the increased value of Go America.
13
<PAGE>
Unrealized appreciation of investments, net of deferred taxes, decreased
by $1,015,091 during the year ended December 31, 1998, primarily from realized
gains due to the sale of a portion of Franklin's investment in Avery
Communications. This was offset by increased values for CIC and CIC Ventures.
Unrealized appreciation of investments, net of deferred taxes,
decreased by $1,130,879 during the year ended December 31, 1997, primarily
due to the realization of the gain from the dissolution of Excelsior and
decreased values for CIC Standby Ventures, L.P., Codman Research, Inc., Pixel
Multimedia Ltd. and Hefty Profits Ltd. These were partially offset by
increased values for Avery and Seneca.
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 December 31, 1999 was $1,710,087 compared to
$1,979,256 at December 31, 1998 and $720,470 at December 31, 1997. Management
believes that these assets provide the Corporation with sufficient liquidity for
its operations.
On February 22, 2000, the Corporation issued $1,645,000 of convertible
preferred stock. The stock was issued at a price of $100 per share and has a 7%
quarterly dividend. The stock is convertible into Franklin common stock at a
conversion price of $20 per share. Franklin expects to use the funds raised from
this issuance for additional investments.
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 bulletin board listed public corporation. Because
of the speculative nature of these investments, there is significantly greater
risk of loss than is the case with traditional investment securities. The
Corporation expects that from time to time its venture capital investments may
result in a complete loss of the Corporation's invested capital or may be
unprofitable. Other investments may appear likely to become successful, but may
never realize their potential. Neither the Corporation's investments nor an
investment in the Corporation is intended to constitute a balanced investment
program. The Corporation has in the past relied and continues to rely to a large
extent upon proceeds from sales of investments rather than investment income to
defray a significant portion of its operating expenses.
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
14
<PAGE>
compliant. The Corporation has reviewed its third party relationships in order
to assess and address Year 2000 issues with respect to these third parties.
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 have addressed 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 has developed 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.
As of the date of this report, Franklin has not experienced any disruption
in its business or any additional costs due to "Year 2000" issues. The
Corporation does not believe that any material adverse effects will occur to
impair its financial condition or results of operations.
Item 7a. 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
December 31, 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.
Item 8. Financial Statements and Supplementary Data
See Index to Financial Statements for a list of the Financial Statements
and Supplementary Data included in this Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
The Corporation terminated its auditing relationship with Arthur Andersen
& Co. and began a relationship with Ernst & Young LLP on June 16, 1998, to
provide auditing services. The change was approved by the Board of Directors of
the Corporation and subsequently the shareholders at a shareholder meeting held
on June 16, 1998. There were no disagreements with Arthur Andersen & Co. or with
Ernst & Young LLP on accounting or financial disclosure.
15
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Corporation
Officers
Stephen L. Brown, Chairman and Chief Executive Officer. For additional
information about Mr. Brown, please see the Directors' biographical information
section below.
Spencer L. Brown, age 34, has been Senior Vice President of the
Corporation since November 1995, Secretary of the Corporation since October 1994
and was Vice President from August 1994 to November 1995. Mr. Brown is also a
director of Avery Communications and eMattress. Mr. Brown is the son of Stephen
L. Brown, the Chairman and Chief Executive of the Corporation.
Hiram M. Lazar, age 35, joined the Corporation as Chief Financial Officer
in January 1999. From June 1992 to January 1999, Mr. Lazar was the
Vice-President of Finance and Corporate Controller for Lebenthal & Co., Inc., a
regional full-service broker/dealer.
Directors
Stephen L. Brown, age 61, was elected to the Corporation's Board of
Directors and appointed Chairman of its Board of Directors in October 1986. He
has been Chairman and Chief Executive Officer since October 1986. Prior to
joining Franklin, Mr. Brown was Chairman of S.L. Brown & Company, Inc. ("SLB &
Co., Inc."), a private investment firm. Mr. Brown is a director of Copley
Financial Services Corporation, advisor to Copley Fund, Inc., a mutual fund,
Avery Communications, eMattress and TradingNews.
Miles L. Berger, age 69, joined the Board as a director in 1996. Mr.
Berger is Chairman of the Board of Mid Town Banc Corp, Chicago, and Berger
Management Services LLC. Additionally Mr. Berger serves as a board member of
Innkeepers USA Trust and Universal Health Realty Income Trust.
Irving Levine, age 78, joined the Board as a director in 1990. He has been
Chairman of the Board and President of Copley Fund, Inc., a mutual fund, since
1978, and Chairman and Treasurer of Stuffco International, Inc., a ladies
handbag processor and chain-store operator, since 1978. Mr. Levine is also
President and a director of Copley Financial Services Corporation (advisor to
Copley Fund, Inc.).
Jonathan A. Marshall, age 61, joined the Board as a director in 1987. Mr.
Marshall is a Senior Partner in the law firm of Pennie & Edmonds, and has been a
member of that firm since 1974. He is a member of the Bar of the State of New
York and is admitted to practice before the United States Supreme Court and the
United States Patent and Trademark Office.
Michael P. Rolnick, age 34, joined the Board as a director in 1998. Mr.
Rolnick is currently a General Partner at ComVentures, a venture capital firm
that invests in early stage Internet and communications companies. Mr. Rolnick
is responsible for private equity investments and managing portfolio companies.
Prior to joining ComVentures, Mr. Rolnick was Vice President for New Ventures at
E*Trade Group, Inc.
16
<PAGE>
Item 11. Executive Compensation
Summary Compensation Table
The following table sets forth a summary for each of the last three years
of the cash and non-cash compensation awarded to, earned by, or paid to the
Chief Executive Officer of the Corporation and the other executive officers of
the Corporation, whose individual remuneration exceeded $100,000 for the year
ended December 31, 1999.
Name &
Principal Options Other
Position Year Salary Bonus Awarded Compensation
($) ($) (#) ($)
Stephen L. Brown 1999 350,000 70,000 5,000 -
Chairman & President 1998 350,000 32,500 15,000 -
(1) 1997 390,000 - - -
Spencer L. Brown 1999 151,250 30,000 5,000 -
Senior Vice 1998 126,250 12,500 15,000 -
President
& Secretary 1997 120,000 - - -
Hiram M. Lazar 1999 112,917 5,000 3,750 -
Chief Financial
Officer
(1) Mr. Brown is employed under a contract with the Corporation at a base
salary of $390,000 per annum. The initial term of such employment contract
expired on December 31, 1995, and is automatically extended from year to
year thereafter unless the Corporation elects not to extend the term. In
compliance with the terms of the Settlement described in Footnote 5 to the
financial statements, Mr. Brown's base salary was reduced to $350,000.
Option Grants
The following table sets forth a summary of the options granted during the
year ended December 31, 1999 to the Chief Executive Officer of the Corporation
and the other executive officers of the Corporation.
<TABLE>
<CAPTION>
Number % Of Grant Date
Of Options Total Options Exercise Expiration Present
Granted Granted Price Date Value ($)(1)
<S> <C> <C> <C> <C> <C>
Stephen L. Brown 3,750 27.3% $5.75 January 27, 2008 $6,825
Stephen L. Brown 1,250 9.1% $9.00 January 27, 2008 $3,713
----- -------
Total 5,000 36.4%
Spencer L. Brown 3,750 27.3% $5.75 January 27, 2008 $6,825
Spencer L. Brown 1,250 9.1% $9.00 January 27, 2008 $3,713
----- -------
Total 5,000 36.4%
Hiram M. Lazar 2,500 18.2% $5.75 January 27, 2008 $4,550
Hiram M. Lazar 1,250 9.1% $9.00 January 27, 2008 $3,713
----- ------
Total 3,750 27.3%
</TABLE>
17
<PAGE>
(1) Black Scholes pricing model used to calculate. Assumptions used as
follows, expected volatility of 30.6%, risk free rate 5.5%, dividend yield
0%, time of exercise 4 years.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information with respect to
beneficial ownership (as that term is defined in the rules and regulations of
the Commission) of the Corporation's common stock as of March 9, 2000 by 1) each
person who is known by the Corporation to be the beneficial owner of more than
five percent of the outstanding common stock, 2) each director of the
Corporation, 3) each current executive officer listed in the Summary
Compensation Table and 4) all directors and executive officers of the
Corporation as a group. Except as otherwise indicated, to the Corporation's
knowledge, all shares are beneficially owned and investment and voting power is
held as stated by the persons named as owners. The Corporation is not aware of
any arrangement that may, at a subsequent date, result in a change of control of
the Corporation. The address for all beneficial owners, unless stated otherwise
below is c/o Franklin Capital Corporation 450 Park Avenue, Suite 1000, New York,
NY 10022.
Amount and
Nature of
Name and Address Beneficial Percent
of Beneficial Owner Ownership of Class
------------------- --------- --------
Stephen L. Brown 110,835 (1) 14.8%
Kuby Gottlieb Special Value Fund 61,850 (2) 8.2%
500 West Madison Ave, 27th Floor
Chicago, IL 60661
Spencer L. Brown 29,050 (3) 3.9%
Irving Levine 25,417 (4) 3.8%
Miles L. Berger 11,667 (5) 1.6%
Jonathan A. Marshall 10,967 (6) 1.5%
Hiram M. Lazar 6,775 (7) *
Michael Rolnick 2,067 (5) *
All officers and directors
as a group (10 persons) 261,628 31.6%
- -------------------------
* Less than 1.0%
(1) Does not include 5,023 shares owned by Mr. Brown's children and does
not include 28,425 owned by Spencer L. Brown. See (2) below. Mr. Brown
disclaims beneficial ownership of such shares. Includes options for
5,000 shares exercisable on January 27, 1998, options for 5,000 shares
exercisable on January 27, 1999, options for 1,875 shares exercisable
on March 18, 1999, options for 625 shares exercisable on December 9,
1999 and options for 6,785 shares exercisable on January 27, 2000.
(2) Includes preferred stock owned convertible into 20,000 shares of common
stock.
(3) Includes options for 5,000 shares exercisable on January 27, 1998,
options for 5,000 shares exercisable on January 27, 1999, options for
1,875 shares exercisable on March 18, 1999, options for 625 shares
exercisable on December 9, 1999 and options for 6,785 shares
exercisable on January 27, 2000. Also includes preferred stock owned
convertible into 1,250 shares of common stock.
(4) Includes options for 1,667 shares exercisable on February 14, 2000.
Also includes preferred stock convertible into 23,750 shares of common
stock owned by Copley Fund, Inc. ("Copley"). Mr. Levine is
18
<PAGE>
deemed to be a controlling person of Copley due to his position as
Chairman and Chief Executive Officer. Therefore, Mr. Levine may be
deemed to be a beneficial owner of all shares owned by Copley.
(5) Includes options for 1,667 shares exercisable on February 14, 2000.
(6) Includes options for 1,667 shares exercisable on February 14, 2000 also
includes preferred stock owned convertible into 2,500 shares of common
stock.
(7) Includes options for 1,250 shares exercisable on March 18, 1999,
options for 625 shares exercisable on December 9, 1999, options for
1,250 shares exercisable on January 27, 2000, and options for 625
shares exercisable March 1, 2000. Also includes preferred stock owned
convertible into 500 shares of common stock.
Item 13. Certain Relationships and Related Transactions
See Items 10 through 12 and Footnote 6 to the Financial Statements.
19
<PAGE>
PART IV
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K
(a) (1) Financial Statements
Information required by subsection of item is presented in
index to Financial Statements on page 22.
(2) Exhibits
(3) (i) Articles of Incorporation*
(3) (ii) By-Laws*
(23) (i) Financial Data Schedule (for EDGAR purposes only)
(23) (ii) Consent of Ernst & Young, LLP
(b) Reports on Form 8-K. The Corporation did not file any reports on Form
8-K during the last quarter of 1999.
- ------------------------------------------------------------------------------
* Incorporated by reference to the Corporation's Form N-2, as amended,
filed July 31, 1992.
20
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Corporation has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
FRANKLIN CAPITAL CORPORATION
Date: March 20, 2000 By: /s/
-----------------------------
Stephen L. Brown
Chairman & Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Corporation in
the capacities and on the dates indicated.
Signatures Title Date
- ---------- ----- ----
/s/ Chairman & March 20, 2000
- -------------------------- Chief Executive Officer
Stephen L. Brown
/s/ Senior Vice President & March 20, 2000
- -------------------------- Secretary
Spencer L. Brown
/s/ Chief Financial Officer March 20, 2000
- --------------------------
Hiram M. Lazar
/s/ Director March 20, 2000
- --------------------------
Miles L. Berger
/s/ Director March 20, 2000
- --------------------------
Irving Levine
/s/ Director March 20, 2000
- --------------------------
Jonathan A. Marshall
/s/ Director March 20, 2000
- --------------------------
Michael P. Rolnick
21
<PAGE>
FRANKLIN CAPITAL CORPORATION
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
The following financial statements of Franklin Capital Corporation are filed
herewith and included in response to Item 8.
Page
Report of Ernst & Young, LLP.......................................... 23
Report of Arthur Andersen, LLP........................................ 24
Balance Sheets as of
December 31, 1999 and 1998...................................... 25
Statements of Operations for the years
ended December 31, 1999, 1998 and 1997........................... 26
Statements of Cash Flows for the years
ended December 31, 1999, 1998 and 1997........................... 27
Statements of Changes in Net Assets for the years
ended December 31, 1999, 1998 and 1997........................... 28
Financial Highlights for the years ended December 31,
1999, 1998, 1997, 1996 and 1995.................................. 29
Portfolio of Investments as of
December 31, 1999................................................ 30
Notes to Financial Statements..........................................31-39
The schedules for which provision is made in the applicable regulation of the
Securities and Exchange Commission are not required under the related
instruction or are inapplicable and, therefore, have been omitted.
22
<PAGE>
Report of Independent Auditors
To the Stockholders and Board of Directors of
Franklin Capital Corporation
We have audited the accompanying balance sheets of Franklin Capital Corporation
as of December 31, 1999 and 1998, including the portfolio of investments as of
December 31, 1999 and the related statements of operations, cash flows and
changes in net assets and the financial highlights for the years ended. These
financial statements and financial highlights are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statement and financial highlights. Our procedures included the
confirmation of securities with the custodian. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Franklin Capital Corporation at December 31, 1999 and 1998, the results of its
operations, cash flows and changes in net assets and the financial highlights
for the years then ended in conformity with accounting principles generally
accepted in the United States.
ERNST & YOUNG LLP
New York, New York
February 17, 2000
23
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of
The Franklin Capital Corporation:
We have audited the accompanying statements of operations, cash flows and
changes in net assets of The Franklin Capital Corporation (formerly, The
Franklin Holding Corporation [Delaware]) (a Delaware corporation) for the year
ended December 31, 1997, and the financial highlights for the three years ended
December 31, 1997. These financial statements and financial highlights are the
responsibility of the Corporation's management. Our responsibility is to express
an opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the results of its operations,
cash flows and changes in net assets of The Franklin Holding Corporation
(Delaware) for the year ended December 31, 1997, and the financial highlights
for the three years ended December 31, 1997 in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
New York, New York
March 24, 1998
24
<PAGE>
<TABLE>
<CAPTION>
FRANKLIN CAPITAL CORPORATION
==================================================================================================================
Balance Sheets
- ------------------------------------------------------------------------------------------------------------------
December 31, 1999 1998
- ------------------------------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C>
Marketable investment securities, at market value (cost: December 31,
1999 - $109,784; December 31, 1998 - $412,048) (Note 2) $891,462 $699,704
Investments, at fair value (cost: December 31,1999 - $2,861,563;
December 31, 1998 - $3,063,181) (Note 2)
eMattress.com 100,000 -
Avery Communications, Inc. 3,471,880 3,380,013
Other investments 3,596,040 1,045,589
---------- ----------
7,167,920 4,425,602
Cash and cash equivalents (Note 2) 571,341 1,100,373
Receivable from disposal of investments 231,308 -
Accrued interest and accounts receivable (Note 6) 15,976 179,179
Other assets 117,958 143,838
-------- -------
TOTAL ASSETS $8,995,965 $6,548,696
========== ==========
- ------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accounts payable and accrued liabilities $204,583 $233,143
Deferred taxes payable 351,000 -
-------- --------------
TOTAL LIABILITIES 555,583 233,143
-------- --------
Commitments and contingencies (Note 5)
STOCKHOLDERS' EQUITY
Common stock, $1 par value: 5,000,000 shares authorized;
(2,000,000 shares authorized at December 31, 1998)
1,003,986 shares issued:730,588 and 750,686 shares outstanding
at December 31,1999 and 1998, respectively (Note 7) 1,003,986 1,003,986
Preferred stock, $1 par value: 5,000,000 shares authorized; 0 issued - -
Paid-in capital 8,998,051 8,997,877
Unrealized appreciation of investments,
net of deferred income taxes (Notes 2 and 3) 4,737,035 1,650,077
Accumulated deficit (4,030,368) (3,169,229)
----------- -----------
10,708,704 8,482,711
Deduct:273,398 and 253,300 shares of common stock held in treasury,
at cost, at December 31, 1999 and 1998, respectively (Note 4) (2,268,322) (2,167,158)
----------- -----------
Net assets, equivalent to $11.55 (diluted $11.33) per share at
December 31, 1999 and $8.41 per share at December 31, 1998 8,440,382 6,315,553
---------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $8,995,965 $6,548,696
=========== ==========
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
25
<PAGE>
FRANKLIN CAPITAL CORPORATION
<TABLE>
<CAPTION>
=================================================================================================================================
Statements of Operations
- ---------------------------------------------------------------------------------------------------------------------------------
For the Year Ended December 31, 1999 1998 1997
--------------------------------------------------------
INVESTMENT INCOME
<S> <C> <C> <C>
Interest on short term investments and money market accounts $30,382 $34,128 $49,112
Dividend income 42,000 - 1,996
Income from controlled affiliates (Note 6) - 229,195 257,258
Interest on loans and debt securities - - 176,728
Other Income - - 11,927
----------- --------------- ---------------
72,382 263,323 497,021
------- -------- -------
EXPENSES
Salaries and employee benefits (Note 7) 870,820 882,168 923,080
Professional fees 330,382 223,106 169,928
Appraisal fees 20,616 3,087 25,000
Investment banking fee - - 13,997
Rent (Note 5) 83,905 99,912 97,607
Insurance 41,301 43,201 43,748
Directors' fees 48,850 54,539 121,809
Taxes other than income taxes 28,980 49,919 43,259
Newswire and promotion 4,424 12,774 7,826
Depreciation and amortization 22,402 28,428 38,301
General and administrative 170,100 223,274 266,287
Professional fees related to conversion to
Business Development Corporation - - 114,991
Professional fees and expenses related to litigation - - 535,017
----------- --------------- ---------------
1,621,780 1,620,408 2,400,850
---------- ---------- ---------
Net investment loss from operations (1,549,398) (1,357,085) (1,903,829)
Net realized gain on portfolio of investments (Note 10) 688,259 1,628,004 3,105,165
-------- ---------- ---------
Net realized (loss) income (861,139) 270,919 1,201,336
Increase (decrease) in unrealized appreciation of investments,
net of deferred income taxes (Note 10) 3,086,958 (1,015,091) (1,130,879)
---------- ----------- -----------
Net increase (decrease) in net assets from operations $2,225,819 ($744,172) $70,457
=========== ========== =======
Basic net increase (decrease) in net assets from operations
per common share (Note 8) $2.97 ($0.94) $0.09
====== ======= =====
Diluted net increase (decrease) in net assets from operations
per common share (Note 8) $2.96 ($0.94) $0.09
====== ======= =====
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
26
<PAGE>
<TABLE>
<CAPTION>
FRANKLIN CAPITAL CORPORATION
===================================================================================================================
Statements of Cash Flows
- -------------------------------------------------------------------------------------------------------------------
For the Year Ended December 31, 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net increase (decrease) in net assets from operations $2,225,819 ($744,172) $70,457
Adjustments to reconcile net increase (decrease) in net
assets to net cash used in operating activities:
Depreciation and amortization 22,402 28,428 38,301
(Increase) decrease in unrealized appreciation of investments,
net of deferred taxes (3,086,958) 1,015,091 1,339,212
Amortization of discount on note receivable from Avery - (101,176) (127,760)
Net realized gain on portfolio of investments (688,259) (1,628,004) (3,105,165)
Changes in operating assets and liabilities:
(Increase) in receivable from disposal of investments (231,308) - -
(Increase) decrease in accrued interest and accounts receivable 163,203 150,869 (161,101)
Decrease (increase) in other assets 5,880 (7,596) 1,173,580
Decrease in accounts payable and accrued liabilities (28,560) (142,183) (1,592,196)
-------- --------- -----------
Total adjustments (3,843,600) (684,571) (2,435,129)
----------- --------- -----------
Net cash used in operating activities (1,617,781) (1,428,743) (2,364,672)
----------- ----------- -----------
Cash flows from investing activities:
Proceeds from sale of controlled affiliate - 2,500,000 -
Proceeds from sale of other investments 766,308 1,432,717 309,000
Proceeds from sale of marketable investment securities 2,483,077 217,481 7,296,186
Cash consolidated from dissolved subsidiary - - 1,710,702
Return of capital from investments 36,622 - 887,313
Loan payments received from investments 66,667 - -
Purchases of investment in majority owned affiliate (375,000) - -
Purchases of investments (529,346) (1,025,000) (2,448,963)
Purchases of marketable investment securities (1,247,440) (661,575) (2,749,730)
Purchases of fixed assets (2,402) - (5,890)
---------- ---------- ---------
Net cash provided by investing activities 1,198,486 2,463,623 4,998,618
---------- ---------- ---------
Cash flows from financing activities:
Distribution to stockholders charged to accumulated deficit - - (2,603,894)
Purchase of treasury stock (109,737) (283,407) -
---------- ---------- ---------
Net cash used in financing activities (109,737) (283,407) (2,603,894)
--------- --------- -----------
Net (decrease) increase in cash and cash equivalents (529,032) 751,473 30,052
Cash and cash equivalents at beginning of year 1,100,373 348,900 318,848
---------- -------- -------
Cash and cash equivalents at end of year $571,341 $1,100,373 $348,900
========= =========== ========
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
27
<PAGE>
<TABLE>
<CAPTION>
FRANKLIN CAPITAL CORPORATION
====================================================================================================================
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------------------------------------------
For the Year Ended December 31, 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Increase (decrease) in net assets from operations:
Net investment loss ($1,549,398) ($1,357,085) ($1,903,829)
Net realized gain on portfolio of investments,
net of current income taxes 688,259 1,628,004 3,313,498
Increase (decrease) in unrealized appreciation of investments,
net of deferred income taxes 3,086,958 (1,015,091) (1,339,212)
---------- ----------- -----------
Net increase (decrease) in net assets from operations 2,225,819 (744,172) 70,457
Distributions to stockholders charged to
accumulated deficit and earnings - - (2,603,894)
Capital stock transactions:
Issuance of stock from treasury to majority owned affiliate, net 8,747 - -
Purchase of treasury stock (109,737) (283,407) -
---------- ----------- -----------
Total increase (decrease) in net assets 2,124,829 (1,027,579) (2,533,437)
---------- ----------- -----------
Net assets at beginning of year 6,315,553 7,343,132 9,876,569
---------- ---------- ---------
Net assets at end of year $8,440,382 $6,315,553 $7,343,132
=========== =========== ==========
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
28
<PAGE>
<TABLE>
<CAPTION>
FRANKLIN CAPITAL CORPORATION
===================================================================================================================================
Financial Highlights
- -----------------------------------------------------------------------------------------------------------------------------------
For the Year Ended December 31, 1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE (1):
Net asset value, beginning of period $8.41 $9.17 $12.33 $14.67 $15.40
------ ------ ------- ------- ------
Net investment loss (2.07) (1.71) (2.37) (1.93) (1.43)
Net gain on portfolio of
investments (realized and unrealized) after taxes 5.03 0.77 2.46 0.45 1.46
----- ----- ----- ----- ----
Total from investment operations 2.96 (0.94) 0.09 (1.48) 0.03
----- ------ ----- ------ ----
Less dividends and distributions:
Distributions from accumulated
deficit and earnings 0.00 0.00 (3.25) (1.00) (1.00)
----- ----- ------ ------ ------
Total dividends and distributions 0.00 0.00 (3.25) (1.00) (1.00)
----- ----- ------ ------ ------
Treasury stock transactions 0.18 0.18 0.00 0.14 0.24
----- ----- ----- ----- ----
Net asset value, end of period $11.55 $8.41 $9.17 $12.33 $14.67
======= ====== ====== ======= ======
Market value per share, end of period $10.25 $5.25 $6.50 $10.13 $10.13
======= ====== ====== ======= ======
TOTAL INVESTMENT RETURN:
Based on market value per share (%) 95.24 (19.23) (16.62) 9.64 35.45
RATIOS TO AVERAGE NET ASSETS:
Expenses (%) 24.97 23.73 28.97 20.58 16.59
Net investment loss (%) (23.86) (19.88) (22.97) (13.29) (11.17)
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of period (000 omitted) $8,440 $6,316 $7,343 $9,877 $12,120
Portfolio turnover rate (%) 36 39 77 8 32
- -----------------------------------------------------------------------------------------------------------------------------------
(1) Calculated based on weighted average number of shares outstanding during the period.
</TABLE>
The accompanying notes are an integral part of these financial highlights.
29
<PAGE>
<TABLE>
<CAPTION>
FRANKLIN CAPITAL CORPORATION
==============================================================================================================================
Portfolio of Investments
- ------------------------------------------------------------------------------------------------------------------------------
Marketable Investment Securities
- ------------------------------------------------------------------------------------------------------------------------------
Number of
Shares or Market
Principal Value
December 31, 1999 Amount ($) Cost(1) (Note 2)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Communication Intelligence Corp. - common stock................................. 100,000 $42,125 $825,000
New Medial Spark - common stock................................................. 8,000 22,477 21,280
Certificate of Deposit - 4.5%, due 05/04/2000................................... 45,182 45,182
------ ------
Total Marketable Investment Securities (11.1% of total
investments and 10.6% of net assets)..................................... $109,784 $891,462
======== ========
- ------------------------------------------------------------------------------------------------------------------------------
Investments, at Fair Value
- ------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Number of
Shares or Directors'
Equity Principal Valuation
December 31, 1999 Investment Interest Amount ($) Cost(1) (Note 2)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Majority Owned Affiliate
eMattress.com (1.2% of total
investments and 1.2% of net assets).............. Common stock 87.19% 1,157 $383,748 $100,000
(equity in net loss for 1999 was
approximately $350,000)
Affiliate
Avery Communications Inc.......................... Common stock 1,385,940 $1,486,088
(Telecommunications)
Avery Communications Inc.......................... Convertible preferred
(Telecommunications) stock - Series E;
12.0% dividend rate(2) 350,000 350,000
--------
Total Avery Communications (43.1% of total
investments and 41.1% of net assets).............. 9.32% 1,836,088 3,471,880
(fully diluted basis)
Other Investments
Go America Inc.................................... Common stock 52,386 374,740
(Internet software)
Go America Inc.................................... Convertible Preferred Stock 125 125,000
--------
(Internet software)
Total Go America Inc. (Note 11)
(31.0% of total investments and 29.6% of net assets) 1.39% 499,740 2,502,191
CIC Standby Ventures, L.P.(12.6% of total
investments and 12.1% of net assets) Limited partnership 1.80% N/A 66,987 1,018,849
(Computer handwriting systems) Interest
Trading News, Inc. (0.9% of total investments Convertible Preferred
and 0.9% of net assets).......................... Stock 2.14% 249,999 75,000 75,000
------- -------
(Investment information provider)
Total Other Investments........................................................................ 641,727 3,596,040
-------- ----------
Total Investments, at Fair Value.......................................................... $2,861,563 $7,167,920
=========== ==========
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Book cost equals tax cost for all investments
(2) Income producing security
The accompanying notes are an integral part of these financial statements.
30
<PAGE>
Franklin Capital Corporation
Notes to Financial Statements
December 31, 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
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 years ended December 31, 1999 and
1998, and paid income taxes of $2,000 during the year ended December 31, 1999.
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 valued at $166,252, were canceled and placed back into
treasury. (See Note 6 - Transactions with Affiliates.)
Effective July 2, 1997, a wholly owned subsidiary of Franklin, Excelsior
Communications Corp., was dissolved and the assets and operations were
consolidated with Franklin.
At December 31, 1999 the Corporation held cash and cash equivalents primarily in
money market funds at two commercial banking institutions.
31
<PAGE>
Franklin Capital Corporation
Notes to Financial Statements (continued)
Valuation of Investments
Security investments which are publicly traded on a national exchange or NASDAQ
are stated at the last reported sales price on the day of valuation, or if no
sale was reported on that date, then the securities are stated at the last
quoted bid price. The Board of Directors of Franklin (the "Board of Directors")
may determine, if appropriate, to discount the value where there is an
impediment to the marketability of the securities held.
Investments for which there is no ready market are initially valued at cost and,
thereafter, at fair value based upon the financial condition and operating
results of the issuer and other pertinent factors as determined by the Board of
Directors. The financial condition and operating results have been derived
utilizing both audited and unaudited data. In the absence of a ready market for
an investment, numerous assumptions are inherent in the valuation process. Some
or all of these assumptions may not materialize. Unanticipated events and
circumstances may occur subsequent to the date of the valuation and values may
change due to future events. Therefore, the actual amounts eventually realized
from each investment may vary from the valuations shown and the differences may
be material. Franklin reports the unrealized gain or loss resulting from such
valuation in the Statements of Operations.
Gains on Portfolio of Investments
Amounts reported as realized gains are measured by the difference between the
proceeds of sale or exchange and the cost basis of the investment without regard
to unrealized gains reported in the prior periods. Gains are considered realized
when sales or dissolution of investments are consummated.
Income Taxes
Franklin does not qualify as a Regulated Investment Company for income tax
purposes. Therefore, the Corporation is taxed as a regular corporation.
Franklin accounts for income taxes in accordance with the provision of Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109"). The significant components of deferred tax assets and liabilities are
principally related to the Corporation's net operating loss carryforward and its
unrealized appreciation of investments.
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
Basic and diluted net increase (decrease) in net assets per common share is
calculated in accordance with the provisions of Statement of Financial
Accounting Standards No. 108, "Earnings per Share". See Note 7 for discussion of
Stock Option Plans.
32
<PAGE>
Franklin Capital Corporation
Notes to Financial Statements (continued)
3. INCOME TAXES
At December 31, 1999, Franklin had net operating loss carryforwards for income
tax purposes of approximately $4,115,000 that will begin to expire in 2011. At a
36% effective tax rate the after-tax net benefit from this loss would be
approximately $1,481,000.
For the years ended December 31, 1999, 1998 and 1997, Franklin's tax (provision)
benefit was based on the following:
<TABLE>
<CAPTION>
1999 1998 1997
--------- ---------- ----------
<S> <C> <C> <C>
Net investment loss from operations............................. $ (1,549,398) $ (1,357,085) $ (1,903,829)
Net realized gain on portfolio of investments................... 688,259 1,628,004 3,105,165
Increase (decrease) in unrealized appreciation.................. 3,437,958 (1,015,091) (1,339,212)
---------- ---------- -----------
Pre-tax book income (loss)................................. $ 2,576,819 $ (744,172) $ (137,876)
============== ============== ============
1999 1998 1997
--------- ---------- ----------
Tax (provision) benefit at 34% on $2,576,819, $(744,172),
and $(137,876) respectively.................................... $ (876,000) $ 253,000 $ 46,878
State and local, net of Federal benefit......................... ( 49,000) - (14,100)
Book losses for which no benefit is provided.................... ( 10,000) (253,000) (46,878)
Change in valuation allowance................................... 584,000 - -
Adjustment to deferred taxes provided in prior periods.......... - - 222,433
---------------- ------------ -------------
$ (351,000) $ - $ 208,333
============== ============== ============
The components of the tax benefit (provision) are as follows:
1999 1998 1997
--------- ---------- ----------
Current state and local tax
provision..................................................... $ - - $ (14,100)
Deferred tax expense............................................ (351,000) - -
Adjustment to Federal, state and local taxes
provided in prior periods.................................... - - 222,433
---------------- ------------ -------------
(Provision) benefit for income taxes............................ $ (351,000) $ - $ 208,333
============== ============== ============
</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 December 31, 1999 and December 31, 1998, significant deferred tax assets and
liabilities consist of:
<TABLE>
<CAPTION>
Asset (Liability)
--------------------------------
December 31, December 31,
1999 1998
------------ -------------
<S> <C> <C>
Deferred Federal and state benefit from net operating
loss carryforward............................................................. $ 1,481,000 $ 1,178,000
Deferred Federal and state provision on unrealized
appreciation of investments................................................... (1,832,000) (594,000)
Valuation allowance............................................................. - (584,000)
------------ ---------------
Deferred taxes................................................................ $( 351,000) $ -
============= ===============
</TABLE>
33
<PAGE>
Franklin Capital Corporation
Notes to Financial Statements (continued)
4. STOCKHOLDERS' EQUITY
The Accumulated Deficit at December 31, 1999 consists of accumulated net
realized gains of $3,543,000 and accumulated investment losses of $7,574,000.
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 year ended December 31, 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 placed back into Treasury. (See Note 6 - Transactions with
Affiliates) To date, Franklin has repurchased 284,400 shares of its common stock
of which 273,398 shares remain in treasury at December 31, 1999.
5. COMMITMENTS AND CONTINGENCIES
Franklin is obligated under an operating lease, which provides for annual
minimum rental payments as follows:
December 31,
2000.................................................... $149,600
2001.................................................... 149,600
2002.................................................... 149,600
2003.................................................... 149,600
---------
$ 598,400
==========
Rent expense for the years ended December 31, 1999, 1998 and 1997 was $83,905,
$99,912 and $97,607 respectively. For the years ended December 31, 1999 and
1998, the Corporation collected rents of $58,032 and $43,542, respectively, from
subtenants under month to month leases, 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 year ended December 31, 1999,
$10,812 was received from a partnership in which two officers of Franklin have a
non-controlling interest, and $25,000 was received from a corporation included
in Franklin's investment portfolio on December 31, 1999.
In 1997 the Corporation reached settlements on certain legal actions filed
against the Corporation. Pursuant to the terms of the settlement, the Board of
Directors declared on July 18, 1997, a $3.25 special distribution to
stockholders of record as of July 28, 1997 and the Corporation paid legal fees
of $75,000 to plaintiffs counsel.
6. TRANSACTIONS WITH 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 in
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
34
<PAGE>
Franklin Capital Corporation
Notes to Financial Statements (continued)
$212,500 in cash. Franklin received preferred stock convertible into a 50%
equity interest in eMattress. Two officers of Franklin were elected to serve on
the five member eMattress Board of Directors.
In August 1999, Franklin invested an additional $87,500 in eCom. Pursuant to
this transaction, eMattress was merged into eCom and 19,044 shares of Franklin
common stock were returned to Franklin's treasury. The surviving entity,
eMattress.com is a Delaware corporation. In November 1999, Franklin invested an
additional $75,000 into eMattress and as a result of this transaction, on
December 31, 1999, Franklin owned 87.2% of eMattress. Unrealized gains are net
of unrealized losses related to eMattress of $283,748.
In August 1995, Franklin made an initial investment of $350,000 in Avery
Communications Inc. ("Avery Communications"), 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 Communications 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
Communications. 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 Communications 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
Communications. Each unit consists of 133,333 shares of common stock of Avery
Communications 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 Communications that the
Corporation held previously, resulted in Franklin owning in excess of 25% of
Avery Communications' outstanding voting stock on a primary basis. Additionally,
three officers of Franklin were appointed to Avery Communications' six person
Board of Directors and the Corporation's Chairman and Chief Executive Officer
was appointed as the Vice Chairman of Avery Communications' Board of Directors.
On July 6, 1998, Franklin sold the 1,500,000 shares of Avery Communications
preferred Series D stock and the $1,000,000 Avery note along with 280,000
warrants to purchase Avery Communications 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 Communications. Franklin realized a net gain of $935,297 as a
result of this sale. In conjunction with this transaction, Franklin's
representation on Avery Communication' 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 Communications 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 Communications common stock.
35
<PAGE>
Franklin Capital Corporation
Notes to Financial Statements (continued)
As a result of the July 6, 1998 transaction, Avery Communications is no longer a
controlled affiliate of Franklin. At December 31, 1999, Franklin owned 9.32% of
Avery Communications on a fully diluted basis, and 16.1% of Avery Communications
on a primary basis.
Franklin's income from Avery was $118,431 and $129,500 in dividends and $110,764
and $127,758 in interest for the years ended December 31, 1998 and 1997,
respectively. (Periods during which Avery was a controlled affiliate.) At
December 31, 1998, $112,523 is included in "Accrued interest and accounts
receivable" on the accompanying balance sheet for amounts due from Avery for
dividends and reimbursable expenses.
7. STOCK OPTION PLANS
On September 9, 1997, Franklin's stockholders approved two Stock Option Plans: a
Stock Incentive Plan ("SIP") to be offered to the Corporation's consultants,
officers and employees (including any officer or employee who is also a director
of the Corporation) and a Non-Statutory Stock Option Plan ("SOP") to be offered
to the Corporation's "outside" directors, i.e., those directors who are not also
officers or employees of Franklin. 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 order was granted by the Commission and on February 14, 2000, 20,000
options were granted under the SOP to four eligible "outside" directors. The
strike price of the options was $17.25 per share, which represented the closing
price of Franklin's Common Stock as reported by the American Stock Exchange on
that date.
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 vested one year from the date of
issuance; and the final one-third vested 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 upon
resignation and an additional 5,000 options three months after resignation.
10,000 of these 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
36
<PAGE>
Franklin Capital Corporation
Notes to Financial Statements (continued)
will vest on January 27, 2000. 3,750 of the remaining forfeited options were
reissued on December 9, 1999 to three eligible officers of the Corporation at a
strike price of $9.00 per share, which represented the closing price of
Franklin's Common Stock as reported by the American Stock Exchange on that date.
These options will expire as originally issued. One-half of the reissued options
vested immediately, and one-half will vest on December 9, 2000. 1,250 of the
forfeited options have not been reissued.
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, is as follows:
Net realized income (loss): December 31, 1999 December 31, 1998
----------------- -----------------
As reported $(861,139) $270,919
Pro forma $(890,049) $219,444
Net increase (decrease) in net assets per common share:
As reported $ 2.97 ($0.94)
Pro forma - Basic $ 2.93 ($1.00)
Pro forma - Diluted $ 2.93 ($1.00)
Net Asset Value per share:
As reported $ 11.55 $8.41
Pro forma - Basic $ 11.44 $8.34
Pro forma - Diluted $ 11.22 $8.34
The fair value of the options granted was estimated on the date of the grant
using the Black-Scholes option pricing model with the following assumptions:
December 31, 1999 December 31, 1998
----------------- -----------------
Stock volatility 30.6% 30.0%
Risk-free interest rate 5.5% 5.5%
Option term in years 4 4
Stock dividend yield - -
The following is a summary of the status of the Stock Option Plans during the
years ended:
December 31, 1999 December 31, 1998
----------------- -----------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------ -------- ------ ---------
Outstanding at beginning of
period 35,000 $7.00 - -
Granted 13,750 $6.64 45,000 $7.00
Exercised - - - -
Forfeited 5,000 $7.00 10,000 $7.00
Expired - - - -
37
<PAGE>
Franklin Capital Corporation
Notes to Financial Statements (continued)
Outstanding at end of 43,750 $6.89 35,000 $7.00
====== ======
Exercisable at end of period 26,875 $6.91 15,000 $7.00
====== ======
Weighted average fair
value of options granted $2.37 $2.13
The exercise price for the options issued on January 27, 1998 is $7.00 with a
remaining contractual life of 8 years. The exercise price for the options issued
on March 18, 1999 is $5.75 with a remaining contractual life of 8 years. The
exercise price for the options issued on December 9, 1999 is $9.00 with a
remaining contractual life of 8 years.
8. NET INCREASE (DECREASE) IN NET ASSETS PER COMMON SHARE
The following table sets forth the computation of basic and diluted change in
net assets per common share:
December 31,
------------------------------
1999 1998 1997
------------------------------
Numerator:
Net increase (decrease) in net
assets from operations $2,225,819 ($744,172) $70,457
========== ========== =======
Denominator:
Denominator for basic increase
(decrease) in net assets from
operations - weighted -
average shares 749,827 792,572 801,198
Effect of dilutive securities:
Employee stock options -
weighted - average shares 1,175 - -
----- ------- --------
Denominator for diluted
increase (decrease) in net
assets from operations -
adjusted weighted - average
shares and assumed conversions 751,002 792,572 801,198
========== ========== =======
Basic net increase (decrease) in net
assets from operations per share $2.97 ($0.94) $0.09
========== ========== =======
Diluted net increase (decrease) in net
assets from operations per share $2.96 ($0.94) $0.09
========== ========== =======
9. PURCHASES AND SALES OF INVESTMENT SECURITIES
The cost of purchases and proceeds from sales of investment securities,
including the issuance of treasury stock for December 31, 1999, and the cashless
exercise of the Avery warrants for December 31, 1998, as
38
<PAGE>
Franklin Capital Corporation
Notes to Financial Statements (continued)
discussed in Note 6 and excluding short term investments, aggregated $2,158,804
and $3,352,674 respectively, for the year ended December 31, 1999; $4,730,199
and $2,365,820 respectively, for the year ended December 31, 1998 and $5,198,693
and $8,492,499 respectively, for the year ended December 31, 1997.
10. NET REALIZED GAIN ON PORTFOLIO OF INVESTMENTS AND INCREASE (DECREASE) IN
UNREALIZED APPRECIATION OF INVESTMENTS, NET OF DEFERRED INCOME TAXES
December 31, 1999 December 31, 1998
----------------- ------------------
Net realized gains on portfolio of investments:
Investment securities
Affiliated - $1,308,208
Unaffiliated $ 559,337 ( 81,008)
----------- -----------
Total investment securities 559,337 1,227,200
Other than investment securities 128,922 400,884
------- -------
Total net realized gains on portfolio of
investments $ 688,259 $1,628,004
=========== ==========
Increase (decrease) in unrealized appreciation
of investments, net of deferred income taxes:
Investment securities $ 2,593,543 ( $ 752,715)
Other than investment securities 844,415 ( 262,376)
----------- -----------
Increase (decrease) in unrealized
appreciation of Investments 3,437,958 ( 1,015,091)
--------- -----------
Deferred income taxes 351,000 -
------- -----------
Increase (decrease) in unrealized appreciation
of investments, net of deferred income taxes $ 3,086,958 ($1,015,091)
=========== ============
11. SUBSEQUENT EVENT
On January 17, 2000, Go America Corporation executed a binding stock purchase
agreement, the "Agreement", with an external investment group for a strategic
investment to be made in Go America Corporation. The percentage owned and the
value of Go America Corporation as shown on the Portfolio of Investments on
December 31, 1999, takes into consideration the strategic investment in Go
America Corporation by the investment group. Subsequent to this transaction, Go
America Corporation filed form S-1 with the Securities and Exchange Commission
for an initial public offering of its common shares and split its common shares
eight for one.
39
<PAGE>
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-306-04) pertaining to the Non-Statutory Stock Option Plan for the
Directors and the Stock Incentive Plan of The Franklin Holding Corporation of
our report dated February 17, 2000, with respect to the financial statements of
Franklin Capital Corporation (formerly The Franklin Holding Corporation)
included in the Annual Report (Form 10-K) for the year ended December 31, 1999.
ERNST & YOUNG LLP
New York, New York
March 20, 2000
Exhibit 23 (ii)
<TABLE> <S> <C>
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION FROM FORM 10-K FOR THE
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SUCH FINANCIAL STATEMENTS
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