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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
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December 31, 2002
Franklin Capital Corporation
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(Exact name of registrant specified in its charter)
Delaware 13-3419202 .
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
450 Park Avenue, 20th Floor, New York, New York 10022 .
- ----------------------------------------------- ------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 486-2323 .
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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Common Stock, $1.00 par value The American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Corporation was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_ No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this form 10-K or any amendment to this
Form 10-K. ____
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes ___ No _X_
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of March 10, 2003 was $1,117,458 based on the last sale price as
quoted by The American Stock Exchange on such date (officers, directors and 5%
stockholders are considered affiliates for the purposes of this calculation).
The number of shares of common stock outstanding as of March 10, 2003 was
1,042,900.
TABLE OF CONTENTS
PART I
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item7a. Quantitative and Qualitative Disclosures
about Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure
PART III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions
Item 14. Controls and Procedures
PART IV
Item 15. Exhibits, Financial Statements, Schedules
and Reports on Form 8-K
SIGNATURES
CERTIFICATIONS
EXHIBIT INDEX
FORWARD LOOKING STATEMENTS
WHEN USED IN THIS ANNUAL REPORT ON FORM 10-K, THE WORDS "BELIEVES,"
"ANTICIPATES,""EXPECTS" AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY
FORWARD-LOOKING STATEMENTS. STATEMENTS LOOKING FORWARD IN TIME ARE INCLUDED IN
THIS ANNUAL REPORT ON FORM 10-K. SUCH STATEMENTS ARE SUBJECT TO CERTAIN RISKS
AND UNCERTAINTIES WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY,
INCLUDING, BUT NOT LIMITED TO, THOSE SET FORTH IN "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS." READERS ARE
CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH
SPEAK ONLY AS OF THE DATE HEREOF. THE CORPORATION UNDERTAKES NO OBLIGATION TO
PUBLICLY REVISE THESE FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR
CIRCUMSTANCES OCCURRING AFTER THE DATE HEREOF OR TO REFLECT THE OCCURRENCE OF
UNANTICIPATED EVENTS.
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PART I
ITEM 1. BUSINESS
Franklin Capital Corporation (the "Registrant", "Franklin," or the
"Corporation") was incorporated on March 31, 1987, under the laws of the state
of Delaware and operates as a business development company ("BDC") under the
Investment Company Act of 1940 (the "1940 Act"). The Corporation's common stock,
par value $1.00 per share, has been listed on The American Stock Exchange since
October 1, 1987.
As a BDC, the Corporation's objective is to achieve capital
appreciation through long-term investments in businesses believed to have
favorable growth potential. In the past the Corporation participated in start-up
and early stage financing, expansion or growth financing, leveraged buy-out
financing and restructurings in a variety of industries. At December 31, 2002,
Franklin had $4,632,338 in assets.
EXCELSIOR RADIO NETWORKS, INC.
On August 28, 2001, Franklin along with Sunshine Wireless LLC
("Sunshine") purchased the assets of Winstar Radio Networks, Global Media and
Winstar Radio Productions (collectively "WRN") for a total purchase price of
$6.25 million. The acquisition was consummated through eCom Capital Inc.,
subsequently renamed Excelsior Radio Networks, Inc. ("Excelsior"), a then
wholly-owned subsidiary of Franklin. Franklin's total investment was $2.5
million consisting of $1.5 million in cash and a $1 million note payable to WRN.
The note was due February 28, 2002 with interest at 3.54% and has a right of
set-off against certain representations and warranties made by WRN. In October
2001, a legal proceeding was filed against WRN, which also named Franklin as a
defendant, in which the representations and warranties made by WRN have been
challenged. Until the time that this action is settled the due date of the note
is extended indefinitely. (See Item 3 Legal Proceedings) Additionally, Franklin
provided a $150,000 note receivable to Excelsior. In connection with this note,
Franklin was granted warrants to acquire 12,879 shares of Excelsior common stock
at an exercise price of $1.125 per share. The note bears interest at 10% per
annum and is issued for a ninety-day rolling period. As of December 31, 2002,
this note has been repaid. On October 1, 2002, Franklin received 74,232 warrants
to acquire shares of Excelsior common stock at an exercise price of $1.20 per
share for arranging a financing for Excelsior.
At the closing, Franklin entered into a services agreement with
Excelsior whereby Franklin provides Excelsior with certain management services.
In consideration for the services provided, for a period of six months from the
closing of the transaction, Franklin received $30,000 per month and was
reimbursed for all direct expenses. Since then, Franklin's monthly fee is
determined by a majority of the non-Franklin directors on Excelsior's board;
however, the management fee will be no less than $15,000 per month and Franklin
will continue to be reimbursed for all direct expenses through December 31,
2003. Finally, Franklin's chief financial officer serves as Excelsior's chief
financial officer, and his salary and benefits are allocated between Excelsior
and Franklin 80% and 20%, respectively. During the year ended December 31, 2002,
Franklin earned $450,000 in management fees and was reimbursed $120,936 for
salary and benefits for Franklin's chief financial officer, which was recorded
as a reduction of expenses of Franklin.
On April 3, 2002, Dial Communications Global Media, Inc. ("Newco"), a
newly formed wholly-owned subsidiary of Excelsior, completed the acquisition of
substantially all of the assets of Dial Communications Group, Inc. ("DCGI"), and
Dial Communications Group, LLC ("DCGL" and together with DCGI, the "Dial
Entities") used in connection with the Dial Entities' business of selling
advertising relating to radio programming (the "Dial Acquisition"). The Dial
Acquisition was completed pursuant to
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the Asset Purchase Agreement (the "Purchase Agreement"), dated as of April 1,
2002, by and among the Dial Entities, Franklin and Excelsior. Immediately prior
to the closing of the transactions contemplated by the Purchase Agreement,
Excelsior assigned all of its rights and obligations under the Purchase
Agreement, as well as certain other assets and liabilities relating to the
portion of Excelsior's business dedicated to the sale of advertising relating to
radio programming, to Newco.
The total purchase price for the Dial Acquisition will be an amount
between $8,880,000 and $13,557,500. The initial consideration for the Dial
Acquisition consisted of $6,500,000 in cash and a three year promissory note
bearing interest at 4.5% issued by Newco in favor of DCGL in the aggregate
principal amount of $460,000. In addition, the Purchase Agreement provides for
the minimum payment of $1,920,000 of additional consideration, which is subject
to increase to a maximum amount of $6,597,500 based upon the attainment of
certain revenue and earnings objectives in 2002 and 2003. The additional
consideration will be comprised of both cash and two additional promissory notes
bearing interest at 4.5% issued by Newco in favor of DCGL, each with an initial
aggregate principal amount of $460,000 that is subject to increase upon the
attainment of such revenue and earnings objectives. Each of the promissory notes
issued in consideration of the Dial Acquisition is convertible into shares of
Franklin's common stock at a premium of 115% to 120% of the average closing
prices of Franklin's common stock during a specified pre and post closing
measurement period. The promissory notes are not convertible for at least a
one-year period. Excelsior has paid to Franklin an amount equal to $300,000 in
consideration of Franklin's obligations in connection with any Franklin common
stock that may be issued pursuant to the terms of the Purchase Agreement or the
promissory notes issued in consideration of the Dial Acquisition.
Sunshine along with Change Technology Partners, Inc. ("Change") both
existing stockholders of Excelsior, loaned Excelsior an aggregate amount of
$7,000,000 to finance the initial consideration of the Dial Acquisition. The
obligations under the loans are secured by certain of Excelsior's assets.
PROPOSED MERGER WITH CHANGE TECHNOLOGY PARTNERS, INC.
On July 1, 2002, Franklin executed its right to terminate the merger
agreement that had been entered into on December 4, 2001, between Change
Technology Partners, Inc. ("Change") and Franklin pursuant to which Change would
have been merged with and into Franklin. Had the merger gone through, Change
shareholders would have owned approximately 80% of Franklin with the balance
held by Franklin's current stockholders.
CURRENT PORTFOLIO OF INVESTMENTS
The Corporation invests primarily in equity securities, for example
common stock, preferred stock, convertible preferred stock or other equity
derivatives such as options, warrants or rights to acquire stock. As of December
31, 2002, the Corporation's portfolio of investments is a composite of illiquid
investments in developing companies.
The Corporation has invested a substantial portion of its assets in
private companies. The current portfolio, other than Excelsior is invested in
securities issued by a company involved in Internet software and information
services.
EXCELSIOR
Franklin's most significant investment is in Excelsior. As of December
31, 2002, Franklin owned 59.1% of Excelsior (29.3% on a fully diluted basis).
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Excelsior is a subsidiary of Franklin and was incorporated in 1999
under the laws of the State of Delaware. Excelsior had no operations until
August 2001 when a group led by Franklin invested in Excelsior for the purpose
of acquiring certain assets from Winstar Radio Networks, LLC, Winstar Global
Media, Inc. and Winstar Radio Productions, LLC.
On April 3, 2002, Excelsior purchased Dial Communications, whose
assets were combined with Excelsior's Global Media division to create a national
radio sales representation company with 2001 advertising sales revenues of
almost $50 million and a client roster of over forty independent radio
production companies.
Excelsior creates, produces, distributes and is a sales representative
for national radio programs and offers other miscellaneous services to the radio
industry. Excelsior offers radio programs to the industry in exchange for
commercial broadcast time, which Excelsior sells to national advertisers.
Excelsior currently offers approximately 100 programs to over 2,000 radio
stations across the country. The group of radio stations who contract with
Excelsior to broadcast a particular program constitutes a radio network.
Excelsior derives its revenue from selling the commercial broadcast time on its
radio networks to advertisers desiring national coverage.
Excelsior currently produces over 20 network programs targeting the
most popular radio formats, including adult contemporary, rock, urban oldies,
album oriented rock, comedy and country. Excelsior produces both short form and
long form programs. Short form features are two to three minute daily vignettes
and include such programs as "African Americans Making History." Long form
programs, such as "Walt `Baby' Love's The Countdown" and "Gospel Traxx,"
"Keeping The Seventies Alive," "Behind the Hits" and "All Star Mix Party" are
programs that range from one to four hours in length. Excelsior offers these
programs to radio stations free of charge. The radio stations airing these
programs become networks for Excelsior to sell advertising time. Excelsior sells
the commercial broadcast time inside of these networks to advertisers desiring
national coverage.
Franklin's goal is to work with management in order to enhance the
value of Excelsior's current network. In order to do this, Excelsior will
increase its marketing efforts to radio stations across the United States. The
marketing efforts will focus primarily on the top 50 media markets. By
increasing its network presence in the top 50 media markets, Excelsior will be
able to charge a higher spot rate for its advertising time. The spot rate is the
price a national advertiser pays per commercial aired on Excelsior's network.
Excelsior currently has a network of over 2,000 radio affiliates, and with over
10,000 radio stations in the United States, Excelsior anticipates significantly
expanding its network. However, there can be no assurance that Excelsior will be
able to expand its operations.
Excelsior intends to focus its programming growth with both short-form
and long-form programs. For example during 2002, Excelsior announced the
launching of two new shows: "Daily Dose" and the "Ross Brittain Morning Prep
Show." Daily Dose is a morning prep show that is a joint venture between
Excelsior and The Source Magazine, "Ross Brittain Morning Prep Show" is a
morning prep show written by Mr. Brittain, a nationally recognized morning disc
jockey. Excelsior believes that it has developed a niche in short-form
programming specifically in the prep services that it provides to radio
stations. Moreover, Excelsior believes that it has a strong presence in urban
programming. Developing more programming that complements its existing programs
will provide Excelsior with more broadcast commercial inventory to sell on its
network. A typical short form program will have 2 to 4 commercials available for
sale while a typical long form program has 8 to 48 commercials available for
sale. Excelsior intends to offer additional programming in the future through
internal development, joint ventures, and the acquisition of businesses or
assets that complement Excelsior's operations.
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The creation of a radio network allows Excelsior to sell the acquired
commercial broadcast inventory to advertisers desiring national coverage. Rates
for the sale of network advertising are established on the basis of audience
delivery or ratings and the demographic composition of the listening audience.
Thus, if Excelsior expands its network, as previously discussed, it will be able
to charge more for broadcast commercial time on the network. In addition to
being able to charge more for its advertising time, by expanding its
programming, there will also be more commercial broadcast inventory available
for sale by Excelsior.
Excelsior sells commercial broadcast time by guaranteeing certain
ratings and demographics. There can be no assurance that the guarantee will be
achieved. If the radio network on which the commercial broadcast time is sold
does not achieve the guarantee, Excelsior may be obligated to offer the
advertiser additional advertising time on the same radio network or on an
alternate radio network. These "make goods" or "bonus spots" are the predominant
means whereby Excelsior satisfies such obligations to advertisers.
Alternatively, Excelsior could be obligated to refund or credit a portion of the
advertising revenue derived from such sales. Historically, Excelsior has not had
to refund any cash received as revenues.
According to the National Association of Broadcasters ("NAB"), there
are approximately 10,000 commercial radio stations in the United States.
Excelsior currently has broadcast commercial time on over 2,000 of these radio
stations. Radio is one of the most cost effective forms of advertising given its
wide reach and low cost in comparison to print and television media. Radio
advertising is attractive to advertisers for a variety of reasons:
o short lead time between commercial production and broadcast time;
o low cost of commercial production; and
o the fact that most radio listening occurs away from home, closer to
the point of purchase.
Radio stations attempt to develop formats, such as news/talk, music or
other types of entertainment programming, in order to appeal to a target
listening audience that will attract local, regional, and national advertisers
to their station. Most radio stations do not have the creative and financial
resources to produce nationally accepted programming. As a result, radio
stations look to syndicators, such as Excelsior, to enhance their existing local
programming. As a national network, Excelsior licenses radio stations to air its
programs in exchange for commercial broadcast time on the station. Excelsior
then resells the advertising time to advertisers requiring national coverage.
The commercial broadcast time may vary from market to market within a specified
time period depending on the requirements of the particular radio station. The
advertising rates are based upon audience ratings for the specific demographic
the advertiser is trying to reach. These ratings are determined by Arbitron
Research Company, which periodically measures the percentage of the radio
audience in a market area listening to a specific radio station during a
specific time period.
COMPETITION
Competition for radio advertising is very intense. The industry is
made up of a variety of competitive forces, including: (1) ownership groups,
which own blocks of radio stations across the industry; (2) syndicators, like
Excelsior, that offer programming and marketing services to radio stations; and
(3) independent producers and distributors that offer programs or services to
radio stations. Several of Excelsior's syndicating competitors also are
associated with major radio station group owners. In addition, many of these
competitors have recognized brand names and will pay compensation to radio
stations to broadcast their network commercials.
6
Excelsior's largest competitors that are associated with an ownership
group are Westwood One, Premier Radio Networks, and ABC Radio Networks.
Excelsior estimates that these competitors account for about 80% of the network
advertising revenues. Excelsior is a leader of the syndication companies not
associated with an ownership group. The principal competitive factors in the
radio industry are the quality and creativity of programming and the ability to
provide advertisers with a cost-effective method of reaching the target
demographic. In this respect, Excelsior has positioned itself by adding top
producers like Walt "Baby" Love, Mike Harvey, John Tesh, Talk Radio Network
featuring Michael Savage, WOR Radio featuring Joan Rivers and Jim Cramer.
Excelsior's principal operating strategy is to continue to provide high quality
programming in the most popular formats. Excelsior has developed and expanded
its network through internal operations and will look to continue this in the
future as well as acquire assets and businesses that compliment Excelsior's
operations.
GOVERNMENT REGULATIONS
Radio broadcasting and station ownership are regulated by the Federal
Communication Commission ("FCC"). Excelsior, as a producer and distributor of
radio programs, is generally not subject to regulation by the FCC. The FCC
regulates the radio stations that air Excelsior's programs. The radio station
affiliates are ultimately responsible for what material is broadcast on their
airwaves.
EMPLOYEES
As of February 1, 2003, Excelsior had 64 full time employees. In
addition, Excelsior maintains continuing relationships with over 40 independent
hosts, writers, and producers. Excelsior is not party to any collective
bargaining agreements. Excelsior believes its relationship with its employees
and independent contractors is good.
OTHER INVESTMENTS
See "Management's Discussion and Analysis of Financial Condition."
PRESENTATION OF FINANCIAL INFORMATION
Franklin presents its financial statements in accordance with
Securities and Exchange Commission ("SEC") regulations in the format applicable
to investment companies and with accounting principles generally accepted in the
United States. Generally, investments are reported at fair market value rather
than cost, including investments in wholly-owned subsidiaries. Because of such
reporting requirements, the operating results of Excelsior are not included in
the consolidated operating results of Franklin, and instead, Franklin reports
only the fair value of its investment in such companies.
ILLIQUIDITY OF INVESTMENTS
A majority of the Corporation's investments consist of securities
acquired directly from the issuer in private transactions. They may be subject
to restrictions on resale or otherwise be illiquid. Franklin anticipates that
there may not be an established trading market for such securities.
Additionally, many of the securities that the Corporation may invest in will not
be eligible for sale to the public without registration under the Securities Act
of 1933, which could prevent or delay any sale by the Corporation of such
investments or reduce the amount of proceeds that might otherwise be realized
therefrom. Restricted securities generally sell at a price lower than similar
securities not subject to restrictions on resale. Further, even if a portfolio
company registers its securities and becomes a reporting corporation under the
Securities Exchange Act of 1934, the Corporation may be considered an insider by
virtue of its board representation and would be restricted in sales of such
corporation's securities.
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MANAGERIAL ASSISTANCE
The Corporation, as a BDC, is required by the 1940 Act to make
significant managerial assistance available to its portfolio companies. "Making
available significant managerial assistance" as defined in the 1940 Act with
respect to a BDC such as Franklin means (a) any arrangement whereby a BDC,
through its directors, officers, employees or general partners, offers to
provide, and if accepted, does so provide significant guidance and counsel
concerning the management, operations or business objectives and policies of a
portfolio company; or (b) the exercise of a controlling influence over the
management or policies of a portfolio company by a BDC acting individually or as
a part of a group acting together which controls such portfolio company. The
nature, timing and amount of managerial assistance provided by the Corporation
vary depending upon the particular requirements of each portfolio company.
In connection with its managerial assistance, the Corporation may be
represented by one or more of its officers or directors on the board of
directors of a portfolio company. The Corporation's goal has been to assist each
portfolio company in establishing its own independent and effective board of
directors and management.
NEED FOR FOLLOW-ON INVESTMENTS
Following its initial investments in portfolio companies, the
Corporation has made additional investments in such portfolio companies as
"follow-on" investments, in order to increase its investment in a portfolio
company, and exercised warrants, options or convertible securities that were
acquired in the original financing. Such follow-on investments may be made for a
variety of reasons including: 1) to increase the Corporation's exposure to a
portfolio company, 2) to acquire securities issued as a result of exercising
convertible securities that were purchased in a prior financing, 3) to preserve
or reduce dilution of Franklin's proportionate ownership in a subsequent
financing, or 4) in an attempt to preserve or enhance the value of the
Corporation's investment. There can be no assurance that the Corporation will
make follow-on investments or have sufficient funds to make such investments;
the Corporation will have the discretion to make any follow-on investments as it
determines, subject to the availability of capital resources. The failure to
make such follow-on investments may, in certain circumstances, jeopardize the
continued viability of a portfolio company and the Corporation's initial
investment, or may result in a missed opportunity for the Corporation to
increase its participation in a successful operation. Even if the Corporation
has sufficient capital to make a desired follow-on investment, the Company may,
under certain circumstances be prohibited from doing so if such an investment
would result in non-compliance with BDC regulations.
COMPETITION
Numerous companies and individuals are engaged in the venture capital
business and such business is extremely competitive. The Corporation competes
for attractive investment opportunities with venture capital partnerships and
corporations, merchant banks, venture capital affiliates of industrial and
financial companies, Small Business Investment Companies, other investment
companies, pension plans, other BDCs and private individual investors. Many of
these competitors have significantly greater resources and managerial
capabilities than the Corporation to obtain access to venture capital
investments. There can be no assurance that the Corporation will be able to
compete against those competitors for attractive investments.
DETERMINATION OF NET ASSET VALUE
Security investments that are publicly traded on a national exchange
or Nasdaq Stock Market are stated at the last reported sales price on the day of
valuation, or if no sale was reported on that date, then
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the securities are stated at the last quoted bid price. The Board of Directors
of the Corporation may determine, if appropriate, to discount the value where
there is an impediment to the marketability of the securities held.
Investments for which there is no ready market are initially valued at
cost and, thereafter, at fair value based upon the financial condition and
operating results of the issuer and other pertinent factors as determined by the
Board of Directors. The financial condition and operating results have been
derived utilizing both audited and unaudited data. In the absence of a ready
market for an investment, numerous assumptions are inherent in the valuation
process. Some or all of these assumptions may not materialize. Unanticipated
events and circumstances may occur subsequent to the date of the valuation and
values may change due to future events. Therefore, the actual amounts eventually
realized from each investment may vary from the valuations shown and the
differences may be material. Franklin reports the unrealized gain or loss
resulting from such valuation in the Statements of Operations.
EMPLOYEES
At December 31, 2002, the Corporation had four employees.
GOVERNMENT REGULATIONS IMPACTING FRANKLIN
Franklin operates in a highly regulated environment as a BDC. The
following discussion generally summarizes certain regulations.
A BDC is defined and regulated by the 1940 Act. It is an investment
company that primarily focuses on investing in or lending to small private
companies and making managerial assistance available to them. A BDC may use
capital provided by public stockholders and from other sources to invest in
long-term, private investments in growing small businesses. A BDC provides
stockholders the ability to retain the liquidity of a publicly traded stock,
while sharing in the possible benefits, if any, of investing in privately-owned
growth companies.
As a BDC, Franklin may not acquire any asset other than "Qualifying
Assets" unless, at the time the acquisition is made, Qualifying Assets represent
at least 70% of the value of the total assets (the "70% test"). The principal
categories of Qualifying Assets relevant to Franklin's business are:
(1) securities purchased in transactions not involving any public
offering, the issuer of which is an eligible portfolio company.
An eligible portfolio company is defined to include any issuer
that (a) is organized and has its principal place of business in
the United States, (b) is not an investment company other than an
SBIC wholly-owned by a business development company, and (c) does
not have any class of publicly traded securities with respect to
which a broker may extend margin credit;
(2) securities received in exchange for or distributed with respect
to securities described in (1) above or pursuant to the exercise
of options, warrants, or rights relating to such securities; and
(3) cash, cash items, government securities and high quality debt
securities (within the meaning of the 1940 Act), maturing in one
year or less from the time of the investment.
To include certain securities described above as Qualifying Assets for
the purpose of the 70% test, a BDC must make available to the issuer of those
securities significant managerial assistance such as
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providing significant guidance and counsel concerning the management,
operations, or business objectives and policies of a portfolio company, or
making loans to a portfolio company.
As a BDC, Franklin is entitled to issue senior securities in the form
of stock or senior securities representing indebtedness, including debt
securities and preferred stock, as long as each class of senior security has an
asset coverage of at least 200% immediately after each such issuance.
Franklin has adopted a Code of Ethics that establishes procedures for
personal investments and restricts certain transactions by its personnel.
The Corporation is permitted to adopt either a profit-sharing plan
pursuant to which management (including disinterested directors) could receive
up to 20% of the net after-tax profits of the Corporation or an option plan
covering up to 20% of the stock of the Corporation. Presently the Corporation
has incentive plans in effect covering 46,875 shares (4.3% on a diluted basis).
See "Item 11 Executive Compensation - Compensation Plans - Stock Option Plans."
RISK FACTORS
There are significant risks inherent in the Corporation's venture
capital business. The Corporation has invested a substantial portion of its
assets in small private companies. Because of the speculative nature of these
investments, there is significantly greater risk of loss than is the case with
traditional investment securities. The Corporation expects that from time to
time its venture capital investments may result in a complete loss of the
Corporation's invested capital or may be unprofitable. Other investments may
appear likely to become successful, but may never realize their potential.
Neither the Corporation's investments nor an investment in the Corporation is
intended to constitute a balanced investment program. The Corporation has in the
past relied and continues to rely to a large extent upon proceeds from sales of
investments rather than investment income to defray a significant portion of its
operating expenses.
INVESTING IN PRIVATE COMPANIES INVOLVES A HIGH DEGREE OF RISK. The
Corporation's portfolio consists primarily of investments in private companies.
Investments in private businesses involve a high degree of business and
financial risk, which can result in substantial losses and accordingly should be
considered speculative. There is generally no publicly available information
about the companies in which Franklin invests, and Franklin relies significantly
on the diligence of its employees and agents to obtain information in connection
with the Corporation's investment decisions. In addition, some smaller
businesses have narrower product lines and market shares than their competitors,
and may be more vulnerable to customer preferences, market conditions or
economic downturns, which may adversely affect the return on, or the recovery
of, the Corporation's investment in such businesses.
THE PORTFOLIO OF INVESTMENTS IS ILLIQUID. Franklin acquires most of
its investments directly from private companies. The majority of the investments
in its portfolio will be subject to restrictions on resale or otherwise have no
established trading market. The illiquidity of most of the portfolio may
adversely affect Franklin's ability to dispose of loans and securities at times
when it may be advantageous to liquidate such investments.
FRANKLIN'S PORTFOLIO INVESTMENTS ARE RECORDED AT FAIR VALUE AS
DETERMINED BY THE BOARD OF DIRECTORS IN ABSENCE OF READILY ASCERTAINABLE PUBLIC
MARKET VALUES. Pursuant to the requirements of the 1940 Act, the Corporation's
board of directors is required to value each asset quarterly, and Franklin is
required to carry the portfolio at a fair market value as determined by the
board of directors. Since there is typically no public market for the loans and
equity securities of the companies in which Franklin makes investments, the
board of directors estimates the fair value of these loans and equity securities
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pursuant to written valuation policy and a consistently applied valuation
process. Unlike banks, Franklin is not permitted to provide a general reserve
for anticipated loan losses; instead, Franklin is required by the 1940 Act to
specifically value each individual investment and record an unrealized loss for
an asset that it believes has become impaired. Without a readily ascertainable
market value, the estimated value of the portfolio of loans and equity
securities may differ significantly from the values that would be placed on the
portfolio if there existed a ready market for the loans and equity securities.
Franklin adjusts quarterly the valuation of the portfolio to reflect the board
of directors' estimate of the current realizable value of each investment in the
Corporation's portfolio. Any changes in estimated value are recorded in the
Corporation's statement of operations as "Net unrealized gains (losses)."
FRANKLIN OPERATES IN A COMPETITIVE MARKET FOR INVESTMENT
OPPORTUNITIES. Franklin competes for investments with many other companies and
individuals, some of whom have greater resources than does Franklin. Increased
competition would make it more difficult to purchase or originate investments at
attractive prices. As a result of this competition, sometimes Franklin may be
precluded from making otherwise attractive investments.
QUARTERLY RESULTS MAY FLUCTUATE AND MAY NOT BE INDICATIVE OF FUTURE
QUARTERLY PERFORMANCE. The Corporation's quarterly operating results could
fluctuate, and therefore, you should not rely on quarterly results to be
indicative of Franklin's performance in future quarters. Factors that could
cause quarterly operating results to fluctuate include, among others, variations
in the investment origination volume, variation in timing of prepayments,
variations in and the timing of the recognition of realized and unrealized gains
or losses, the degree to which Franklin encounters competition in its markets
and general economic conditions.
FRANKLIN IS DEPENDENT UPON KEY MANAGEMENT PERSONNEL FOR FUTURE
SUCCESS. Franklin is dependent for the selection, structuring, closing and
monitoring of its investments on the diligence and skill of its senior
management members and other management members. The future success of the
Corporation depends to a significant extent on the continued service and
coordination of its senior management team, particularly the Chairman and Chief
Executive Officer. The departure of any of the executive officers or key
employees could materially adversely affect the Corporation's ability to
implement its business strategy. Franklin does not maintain key man life
insurance on any of its officers or employees.
THERE IS SUBSTANTIAL DOUBT AS TO FRANKLIN'S ABILITY TO CONTINUE AS A
GOING CONCERN. Franklin has determined that it may not have sufficient cash and
cash equivalents to meet its working capital requirements over the next fiscal
year. Franklin's independent auditors have issued an opinion in which the
independent auditors have indicated that there is substantial doubt as to
Franklin's ability to continue as a going concern as noted in their explanatory
paragraph within their opinion, which is noted in Franklin's financial
statements. Franklin is seeking alternative sources of financing to continue
operating through the current fiscal year. If funds are not raised, Franklin may
not be able to continue its operations.
ITEM 2. PROPERTIES
Franklin maintains its offices at 450 Park Avenue, New York, New York
10022, where it leases approximately 3,600 square feet of office space pursuant
to a lease agreement expiring December 31, 2003. As of December 31, 2002,
Franklin had a sublet arrangement with one subtenant for a portion of Franklin's
office space.
11
ITEM 3. LEGAL PROCEEDINGS
On October 15, 2001, Jeffrey A. Leve and Jeffrey Leve Family
Partnership, L.P. filed a lawsuit against Franklin, Sunshine Wireless, LLC
("Sunshine") and four other defendants affiliated with Winstar Communications,
Inc. in the Superior Court of the State of California for the County of Los
Angeles. The lawsuit, which has subsequently been removed to the United States
District Court for the Central District of California, alleges that the Winstar
defendants conspired to commit fraud and breached their fiduciary duty to the
plaintiffs in connection with the acquisition of the plaintiffs' radio
production and distribution business. The complaint further alleges that
Franklin and Sunshine joined the alleged conspiracy. The business was initially
acquired by certain entities affiliated with Winstar Communications and,
subsequently, the assets of such business were sold to Franklin and Sunshine.
Concurrently with such purchase, Franklin transferred such assets to Excelsior.
The plaintiffs seek recovery of damages in excess of $10,000,000, costs and
attorneys' fees. On January 7, 2002, Franklin filed a motion to dismiss the
lawsuit or, in the alternative, to transfer venue to the United States District
Court of the Southern District of New York. The plaintiffs filed a motion
opposing Franklin's request on January 28, 2002. Franklin's motion for dismissal
was granted on February 25, 2002, due to improper venue. On June 7, 2002, the
plaintiffs filed their complaint to the United States District of the Southern
District of New York. On July 12, 2002, Franklin filed a motion to dismiss the
complaint. On February 25, 2003, the case against Franklin and Sunshine was
dismissed, however the plaintiffs may file an appeal. An unfavorable outcome in
this lawsuit may have a material adverse effect on Franklin's business,
financial condition and results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On November 12, 2002, the Corporation held an annual meeting of its
common and preferred stockholders. Stephen L. Brown, Irving Levine, Michael P.
Rolnick, Laurence I. Foster and David T. Lender were elected to serve as
directors of the Corporation for a term of one year or until their successors
are duly elected and qualified. The number of common and preferred shares,
voting together as a single class, voted for and against each director is as
follows:
- ---------------------------- ------------------------- -------------------------
FOR WITHHELD
- ---------------------------- ------------------------- -------------------------
Stephen L. Brown 982,581 10,989
- ---------------------------- ------------------------- -------------------------
David Lender 990,418 3,152
- ---------------------------- ------------------------- -------------------------
Laurence I. Foster 990,418 3,152
- ---------------------------- ------------------------- -------------------------
Michael P. Rolnick 990,418 3,152
- ---------------------------- ------------------------- -------------------------
Irving Levine* 11,350 0
- ---------------------------- ------------------------- -------------------------
Peter D. Gottlieb* 11,350 0
- ---------------------------- ------------------------- -------------------------
* - Only preferred stockholders voted for these directors.
In addition, stockholders were asked to ratify the selection of Ernst
& Young LLP as the Corporation's independent auditors for the fiscal year ended
December 31, 2002. 991,396 shares voted for, 1,570 shares voted against and 604
shares abstained from ratifying Ernst & Young LLP as the Corporation's
independent auditors.
12
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
STOCK TRANSFER AGENT
Mellon Investor Services, 85 Challenger Road, Overpack Center,
Ridgefield Park, NJ 07660 (Telephone (800) 851-9677) serves as transfer agent
for the Corporation's common stock. Certificates to be transferred should be
mailed directly to the transfer agent, preferably by registered mail.
MARKET PRICES
The Corporation's common stock is traded on The American Stock
Exchange under the symbol "FKL." The following table sets forth the range of the
high and low selling price of the Corporation's shares during each quarter of
the last two years, as reported by the American Stock Exchange.
2002 QUARTER ENDING LOW HIGH
March 31 $ 3.76 $ 4.24
June 30 $ 3.46 $ 4.02
September 30 $ 2.90 $ 3.72
December 31 $ 1.45 $ 2.97
2001 QUARTER ENDING LOW HIGH
March 31 $ 5.875 $ 8.125
June 30 $ 4.875 $ 5.75
September 30 $ 4.65 $ 5.05
December 31 $ 4.09 $ 4.87
DIVIDENDS
The Corporation paid $115,152, $115,150 and $98,633 in dividends to
preferred stockholders during 2002, 2001 and 2000, respectively, and has not
paid any dividends to common stockholders during the past two years.
STOCKHOLDERS
As of March 10, 2003, there were 568 registered shareholders of record
of the Corporation's common stock. The Corporation has 5,000,000 shares of
common stock authorized, of which 1,505,888 are issued and 1,042,900 shares are
outstanding at March 10, 2003. The Corporation has 5,000,000 shares of
convertible preferred stock authorized, of which 16,450 were issued on February
22, 2000 and 10,950 shares are outstanding at March 10, 2003. (See Item 7
Management's Discussion and Analysis of Financial Condition - Liquidity and
Capital Resources.)
13
ITEM 6. SELECTED FINANCIAL DATA
The following tables should be read in conjunction with the Financial
Statements included in Item 8 of this Form 10-K.
BALANCE SHEET DATA
FINANCIAL POSITION AS OF DECEMBER 31:
2002 2001 2000 1999 1998
----------- ----------- ----------- ----------- -----------
Total assets $4,632,338 $4,098,866 $5,766,712 $8,995,965 $6,548,696
Liabilities $1,364,798 $1,177,121 $187,632 $555,583 $233,143
Net asset value $3,267,540 $2,921,745 $5,579,080 $8,440,382 $6,315,553
Net asset value per share attributable
to common stockholders $2.07 $1.19 $3.58 $7.70 $5.61
Net asset value per share, as if converted basis $2.89 $2.44 $4.57 $7.70 $5.61
Shares outstanding 1,049,600 1,074,700 1,098,200 1,095,882 1,126,029
OPERATING DATA FOR THE YEAR ENDED DECEMBER 31:
2002 2001 2000* 1999 1998
----------- ----------- ----------- ----------- -----------
Investment income $455,081 $192,697 $115,015 $72,382 $263,323
Expenses $1,985,450 $1,579,382 $2,372,797 $1,621,780 $1,620,408
Net investment loss from operations $(1,530,369) $(1,386,685) $(2,257,782) $(1,549,398) $(1,357,085)
Net realized gain on portfolio of
investments, net of current income taxes $237,326 $522,131 $1,195,875 $688,259 $1,628,004
Net increase (decrease) in
unrealized appreciation of investments,
net of deferred income taxes $1,663,304 $(1,553,756) $(3,365,513) $3,086,958 $(1,015,091)
Net increase (decrease) in net Assets
attributable to common stockholders $255,110 $(2,533,460) $(4,526,053) $2,225,819 $(744,172)
Basic and diluted net increase (decrease)
in net assets from operations per weighted
average number of shares outstanding $0.24 $(2.34) $(4.14) $1.98 $(0.63)
* Expenses in the year ended December 31, 2000 include non-cash compensation
of $349,644 due to the exercise of employee incentive stock options.
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE INFORMATION CONTAINED IN THIS SECTION SHOULD BE READ IN CONJUNCTION WITH THE
CORPORATION'S 2002 FINANCIAL STATEMENTS AND NOTES THERETO IN ITEM 8.
CRITICAL ACCOUNTING POLICIES
Franklin's discussion and analysis of its financial condition and
results of operations are based upon the Corporation's financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these financial statements
requires the Corporation to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses and related
disclosure of contingent assets and liabilities. On an ongoing basis, the
Corporation evaluates its estimates, the most critical of which are those
related to the fair value of the portfolio of investments.
STATEMENT OF OPERATIONS
The Corporation accounts for its operations under accounting
principles generally accepted in the United States for investment companies. On
this basis, the principal measure of its financial performance is captioned "Net
increase (decrease) in net assets from operations," which is composed of the
following:
o "Net investment loss from operations," which is the difference between
the Corporation's income from interest, dividends and fees and its
operating expenses;
o "Net realized gain on portfolio of investments," which is the
difference between the proceeds received from dispositions of
portfolio securities and their stated cost;
o any applicable income tax provisions (benefits); and
o "Net increase (decrease) in unrealized appreciation of investments,"
which is the net change in the fair value of the Corporation's
investment portfolio, net of any increase (decrease) in deferred
income taxes that would become payable if the unrealized appreciation
were realized through the sale or other disposition of the investment
portfolio.
"Net realized gain (loss) on portfolio of investments" and "Net
increase (decrease) in unrealized appreciation of investments" are directly
related. When a security is sold to realize a gain, the net unrealized
appreciation decreases and the net realized gain increases. When a security is
sold to realize a loss, the net unrealized appreciation increases and the net
realized gain decreases.
FINANCIAL CONDITION
The Corporation's total assets and net assets were, respectively,
$4,632,338 and $3,267,540 at December 31, 2002 versus $4,098,866 and $2,921,745
at December 31, 2001. Net asset value per share attributable to common
stockholders and on an as if converted basis was $2.07 and $2.89 at December 31,
2002, respectively, versus $1.19 and $2.44, respectively, at December 31, 2001.
The change in total assets and net assets is primarily attributable to a
increase in the fair market value of the Corporation's investments.
The Corporation's financial condition is dependent on the success of
its investments. A summary of the Corporation's investment portfolio is as
follows:
15
DECEMBER 31, 2002 DECEMBER 31, 2001
----------------- -----------------
Investments, at cost $2,511,479 $3,911,105
Unrealized appreciation (depreciation),
net of deferred taxes 1,471,071 (182,233)
---------- ----------
Investments, at fair value $3,992,550 $3,728,872
========== ==========
INVESTMENTS
The Corporation's financial condition is dependent on the success of
its investments. The Corporation has invested a substantial portion of its
assets in thinly capitalized companies including one development stage company
that may lack management depth.
ALACRA CORPORATION
At December 31, 2002, the Corporation had an investment in Alacra
Corporation ("Alacra"), valued at $1,000,000, which represents 21.6% of the
Corporation's total assets and 30.6% of its net assets. Alacra, headquartered in
New York and London, is a leading provider of Internet-based online information
services. Alacra provides a service called .xls, which aggregates and
cross-indexes over 70 premier business databases, delivering information
directly to Microsoft Excel, HTML, Microsoft Word or PDF formats at the desktop.
Other products include privatesuite(TM), a fast, easy, cost-effective way to
identify and retrieve profiles of privately held companies around the world;
compbook(TM), a tool for company peer analysis; and Portal BTM, a fully
integrated business information portal.
On April 20, 2000, the Corporation purchased $1,000,000 worth of
Alacra Series F Convertible Preferred Stock. In connection with this investment,
Franklin was granted observer rights on Alacra board of directors meetings.
EXCELSIOR RADIO NETWORKS
At December 31, 2002, the Corporation had an investment in Excelsior
Radio Networks, Inc. ("Excelsior"), formerly known as eCom Capital, Inc., valued
at $2,957,875, which represents 63.9% of the Corporation's total assets and
90.5% of its net assets. Excelsior produces and syndicates programs and services
heard on more than 2,000 radio stations nationwide across most major formats.
Through its Dial Communications Global Media sales subsidiary, Excelsior sells
the advertising inventory radio stations provide in exchange for the Excelsior
content. The programming and content includes prep services as well as long form
and short form programming. Additionally, Dial Communications Global Media has a
number of independent producer clients, which range from talk and music programs
to news and traffic services. See Item 1 Business - Current Portfolio
Investments - Excelsior.
On August 28, 2001, the Corporation purchased $2,500,000 worth of
Excelsior Common Stock and issued a secured note for $150,000. In connection
with this note, Franklin was granted warrants to acquire 12,879 shares of
Excelsior common stock at an exercise price of $1.125 per share. As of December
31, 2002, the secured note was paid back to Franklin. Franklin sold 250,000
common shares for $1.00 per share on December 4, 2001 for no gain or loss in
connection with the proposed merger with Change. On October 1, 2002, Franklin
received 74,232 warrants to acquire shares of Excelsior common stock at an
exercise price of $1.20 per share for arranging a financing of Excelsior. On
October 3, 2002, Franklin sold 773,196 common shares for $1.94 per share for
total proceeds of $1,500,000 realizing a gain of $726,804.
16
RESULTS OF OPERATIONS
INVESTMENT INCOME AND EXPENSES
The Corporation's principal objective is to achieve capital
appreciation through long-term investments in businesses believed to have
favorable growth potential. Therefore, a significant portion of the investment
portfolio is structured to maximize the potential for capital appreciation and
provides little or no current yield in the form of dividends or interest. The
Corporation earns interest income from loans, preferred stock, corporate bonds
and other fixed income securities. The amount of interest income varies based
upon the average balance of the Corporation's fixed income portfolio and the
average yield on this portfolio.
The Corporation had interest and dividend income of $5,081 in 2002,
$72,697 in 2001, and $93,015 in 2000. The decrease in 2002 from 2001 was the
result of the sale of the Avery preferred stock on February 1, 2001. The
Corporation earned management fees of $450,000 in 2002, and $120,000 in 2001 in
from its majority-owned affiliate, Excelsior. The Corporation had $22,000 in
other income during 2000 representing a patent infringement settlement.
Operating expenses were $1,985,450 in 2002, $1,579,382 in 2001, and
$2,372,797 in 2000. A majority of the Corporation's operating expenses consist
of employee compensation (which for 2000 included a non-cash charge of $349,644
due to the cashless exercise of incentive options), office and rent expense,
other expenses related to identifying and reviewing investment opportunities and
professional fees. Professional fees consist of general legal fees, audit and
tax fees, consulting fees and investment related legal fees. During 2002, the
Corporation incurred professional fees related to the terminated merger with
Change of $490,782.
Net investment losses from operations were $1,530,369 in 2002,
$1,386,685 in 2001, and $2,257,782 in 2000.
The Corporation has relied and continues to rely to a large extent
upon proceeds from sales of investments rather than investment income to defray
a significant portion of its operating expenses. Because such sales cannot be
predicted with certainty, the Corporation attempts to maintain adequate working
capital to provide for fiscal periods when there are no such sales.
NET REALIZED GAINS AND LOSSES ON PORTFOLIO OF INVESTMENTS
During the three years ended December 31, 2002, 2001, and 2000, the
Corporation realized net gains before taxes of $237,658, $520,455, and
$1,215,875, respectively, from the disposition of various investments.
During 2002, Franklin realized a gain of $726,804 from the sale of
773,196 shares of Excelsior Radio Networks, Inc. common stock. This gain was
offset by a loss of $300,000 from the sale of 188,425 shares of Structured Web
common stock, a previous portfolio holding of the Corporation, a loss of
$140,000 from the write down of Excom Ventures, a previous portfolio holding of
the Corporation which was determined to be a worthless security, a loss of
$32,715 from the sale of 363,938 shares of Primal common stock as well as a
realized net loss of $16,430 from sale of marketable securities.
During 2001, Franklin realized a gain of $598,617 from the sale of
434,024 shares of Go America, Inc. ("Go America") common stock, an investment
Franklin has held since 1995, a gain of $87,013 from the sale of 1,183,938
shares of Avery common stock, and a gain of $50,750 from the sale of 350,000
shares of Avery preferred stock. These gains were offset by a loss of $130,139
from the sale of
17
1,150,000 shares of Primal common stock as well as a realized net loss of
$85,786 from the sale of various marketable securities.
During 2000, Franklin realized a gain of $956,576 from the sale of
241,131 shares of Communication Intelligence Corporation ("CIC") common stock,
an investment Franklin has held since 1996, a gain of $161,531 from the sale of
202,000 shares of Avery common stock, and a gain of $843,663 from the sale of
105,760 shares of Go America common stock. Additionally, gains of $3,819 were
realized on tail payments from partnerships liquidated during 1999. These gains
were offset by a loss of $440,057 from the write-off of the Corporation's
investment in eMattress.com and a loss of $300,626 from the write-off of the
Corporation's investment in TradingNews, Inc as well as a realized net loss of
$9,031 from the sale of various marketable securities.
UNREALIZED APPRECIATION OF INVESTMENTS
Unrealized appreciation of investments, net of deferred taxes,
increased by $1,663,304 during the year ended December 31, 2002, due primarily
to the increased valuation of Excelsior.
Unrealized appreciation of investments, net of deferred taxes,
decreased by $1,553,756 during the year ended December 31, 2001, primarily from
the sale of Franklin's position in Go America common stock and the sale of
Franklin's position in Avery Communications. The changes in the value of the
investments occurred during a period of extreme volatility of publicly traded,
small capitalization, high technology stocks. The volatility of the overall
market will continue to impact on the performance of the Corporation's
investments. The value of the Corporation's investments will vary on a quarterly
basis.
Unrealized appreciation of investments, net of deferred taxes,
decreased by $3,365,513 during the year ended December 31, 2000, primarily from
the decreased value of Avery Communications and the sale of Franklin's position
in CIC common stock and CIC Standby Ventures, L.P. ("CIC Ventures").
TAXES
Franklin does not qualify for pass through tax treatment as a
Regulated Investment Company under Subchapter M of the Internal Revenue Code for
income tax purposes. The Corporation is taxed under Regulation C of the Code
and, therefore, it is subject to federal income tax on the portion of its
taxable income and net capital as well as such distribution to its stockholders.
LIQUIDITY AND CAPITAL RESOURCES
The accompanying financial statements have been prepared assuming that
the Corporation will continue as a going concern. The Corporation has a working
capital deficiency of approximately $800,000 at December 31, 2002. This
condition raises substantial doubt about the Corporation's ability to continue
as a going concern. The Corporation is currently seeking financing. There can be
no assurance that the Corporation would be able to obtain financing. The
financial statements do not include any adjustments to reflect the possible
future effects on the recoverability of assets or the amounts of liabilities
that may result from the outcome of this uncertainty.
Cash and cash equivalents increased by $282,463 to $562,191 for the
year ended December 31, 2003, compared to an decrease of $367,837 for the year
ended December 31, 2001.
Operating activities used $1,282,171 of cash for the year ended
December 31, 2002, compared to providing $1,365,563 for the year ended December
31, 2001.
18
Operating activities for the year ended December 31, 2002, exclusive
of changes in operating assets and liabilities, used $1,513,400 of cash, as the
Corporation's net increase in net assets from operations of $370,262 included
non-cash charges for depreciation and amortization of $16,969, realized gains of
$237,327 and unrealized gains of $1,663,304. For the year ended December 31,
2001, operating activities, exclusive of changes in operating assets and
liabilities, used $1,366,691 of cash, as the Corporation's net loss of
$2,418,310 included non-cash charges of depreciation and amortization of
$19,994, realized gains of $522,131 and unrealized losses of $1,553,756.
Changes in operating assets and liabilities increased cash $231,229
for the year ended December 31, 2002, principally due an increase in the level
of accounts payable and accrued expenses. For the year ended December 31, 2001,
changes in operating assets and liabilities produced $1,128 of cash.
The principal factor in the $1,637,284 of cash provided by investing
activities in the year ended December 31, 2002 was the sale of a portion of the
Corporation's holding in Excelsior for $1,500,000. In the year ended December
31, 2001, the principal factor in the $1,236,750 cash provided by investing
activities was proceeds from the sale of Avery Communications of $1,564,282 and
Go America of $1,044,782, partially offset by an investment in Excelsior of
$1,500,000.
Cash used in financing activities for the year ended December 31, 2002
of $72,650 resulted from payment of preferred dividends of $115,152, the
redemption of preferred stock of $137,500 and the purchase of treasury stock of
$71,815 offset by the issuance of certain rights to convert promissory notes
issued from Excelsior to Dial into Franklin stock of $300,000. Financing
activities used $239,024 in the prior year's comparable period for the payment
of preferred dividends of $115,150 and the purchase of treasury stock of
$123,874.
Franklin is obligated under an operating lease, which provides for
annual minimum rental payments through December 31, 2003 of $149,600.
On February 22, 2000, the Corporation issued $1,645,000 of convertible
preferred stock. The stock was issued at a price of $100 per share and has a 7%
quarterly dividend. The stock is convertible into Franklin common stock at a
conversion price of $13.33 per common share. On December 31, 2002 the
Corporation redeemed from certain preferred stockholders 5,500 shares of
convertible preferred stock for $25.00 per share.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Corporation's business activities contain elements of risk. The
Corporation considers a principal type of market risk to be valuation risk.
Investments are stated at "fair value" as defined in the 1940 Act and in the
applicable regulations of the Securities and Exchange Commission. All assets are
valued at fair value as determined in good faith by, or under the direction of,
the Board of Directors.
Neither the Corporation's investments nor an investment in the
Corporation is intended to constitute a balanced investment program. The
Corporation has exposure to public-market price fluctuations to the extent of
its publicly traded portfolio.
The Corporation has invested a substantial portion of its assets in
private development stage or start-up companies. These private businesses tend
to be thinly capitalized, unproven, small companies that lack management depth
and have not attained profitability or have no history of operations. Because of
the speculative nature and the lack of public market for these investments,
there is significantly greater risk of loss than is the case with traditional
investment securities. The Corporation expects that some of
19
its venture capital investments will be a complete loss or will be unprofitable
and that some will appear to be likely to become successful but never realize
their potential.
Because there is typically no public market for the equity interests
of the small companies in which the Corporation invests, the valuation of the
equity interests in the Corporation's portfolio is subject to the estimate of
the Corporation's Board of Directors. In making its determination, the Board may
consider valuation information provided by an independent third party or the
portfolio company itself. In the absence of a readily ascertainable market
value, the estimated value of the Corporation's portfolio of equity interests
may differ significantly from the values that would be placed on the portfolio
if a ready market for the equity interests existed. Any changes in valuation are
recorded in the Corporation's consolidated statements of operations as "Net
increase (decrease) in unrealized appreciation on investments."
20
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FRANKLIN CAPITAL CORPORATION
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
Page
Report of Ernst & Young LLP ......................................... 22
Balance Sheets as of
December 31, 2002 and 2001 .................................... 23
Statements of Operations for the years
ended December 31, 2002, 2001 and 2000 ........................ 24
Statements of Cash Flows for the years
ended December 31, 2002, 2001 and 2000 ........................ 25
Statements of Changes in Net Assets for the years
ended December 31, 2002, 2001 and 2000 ........................ 26
Financial Highlights for the years ended December 31,
2002, 2001, 2000, 1999 and 1998 ............................... 27
Portfolio of Investments as of
December 31, 2002 ............................................. 28
Notes to Financial Statements ....................................... 29-37
The schedules for which provision is made in the applicable regulation of the
Securities and Exchange Commission are not required under the related
instruction or are inapplicable and, therefore, have been omitted
21
REPORT OF INDEPENDENT AUDITORS
To the Stockholders and Board of Directors
Franklin Capital Corporation
We have audited the accompanying balance sheets of Franklin Capital
Corporation as of December 31, 2002 and 2001, including the portfolio of
investments as of December 31, 2002, and the related statements of operations,
cash flows and changes in net assets for each of the three years in the period
ended December 31, 2002, and the financial highlights for each of the five years
in the period ended December 31, 2002. These financial statements and financial
highlights are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
and financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements and financial highlights. Our procedures included the
confirmation of securities owned as of December 31, 2002 by correspondence with
the custodian. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
Franklin Capital Corporation at December 31, 2002 and 2001, the results of its
operations, cash flows and changes in net assets for each of the three years in
the period ended December 31, 2002, and the financial highlights for each of the
five years in the period ended December 31, 2002, in conformity with accounting
principles generally accepted in the United States.
The accompanying financial statements have been prepared assuming that
Franklin Capital Corporation will continue as a going concern. The Corporation
has incurred recurring operating losses and as more fully described in Note 1,
has a working capital deficiency. These conditions raise substantial doubt about
the Corporation's ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 1. The financial statements
do not include any adjustments to reflect the possible future effects on the
recoverability of assets or the amounts of liabilities that may result from the
outcome of this uncertainty.
ERNST & YOUNG LLP
New York, New York
March 7, 2003
22
FRANKLIN CAPITAL CORPORATION
================================================================================
Balance Sheets
- --------------------------------------------------------------------------------
December 31, 2002 2001
- --------------------------------------------------------------------------------
ASSETS
Marketable investment securities, at market
value (cost: December 31, 2002 and 2001 -
$34,675) (Note 2) $34,675 $34,675
Investments, at fair value
(cost: December 31, 2002 - $2,476,804;
December 31, 2001 - $3,876,430) (Note 2)
Excelsior Radio Networks, Inc. 2,957,875 2,325,000
Other investments 1,000,000 1,369,197
---------- ----------
3,957,875 3,694,197
---------- ----------
Cash and cash equivalents (Note 2) 562,191 279,728
Other assets 77,597 90,266
---------- ----------
TOTAL ASSETS $4,632,338 $4,098,866
========== ==========
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Notes payable (Note 6) $951,817 $1,000,000
Accounts payable and accrued liabilities 412,981 177,121
---------- ----------
TOTAL LIABILITIES 1,364,798 1,177,121
---------- ----------
Commitments and contingencies (Note 5)
STOCKHOLDERS' EQUITY
Convertible preferred stock, $1 par value,
cumulative 7% dividend: 5,000,000 shares
authorized; 10,950 and 16,450 issued and
outstanding at December 31, 2002 and 2001,
respectively
(Liquidation preference $1,095,000 and
$1,645,000) (Note 4) 10,950 16,450
Common stock, $1 par value: 5,000,000 shares
authorized; 1,505,888 shares issued: 1,049,600 and
1,074,700 shares outstanding at December 31, 2002
and 2001, respectively (Note 7) 1,505,888 1,505,888
Paid-in capital 10,439,610 10,271,610
Unrealized appreciation (depreciation) of
investments, net of deferred income taxes
(Notes 2 and 3) 1,481,071 (182,233)
Accumulated deficit (7,578,808) (6,170,614)
---------- ----------
5,858,711 5,441,101
Deduct: 456,288 and 431,188 shares of common stock
held in treasury, at cost, at December 31, 2002
and 2001, respectively (Note 4) (2,591,171) (2,519,356)
---------- ----------
Net assets (Note 9 for per share information) 3,267,540 2,921,745
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $4,632,338 $4,098,866
========== ==========
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
23
FRANKLIN CAPITAL CORPORATION
=============================================================================================================
Statements of Operations
- -------------------------------------------------------------------------------------------------------------
For the Year Ended December 31, 2002 2001 2000
- -------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME
Interest on short term investments and money market accounts $5,081 $45,953 $51,015
Dividend income -- 26,744 42,000
Income from majority-owned affiliates (Note 6) 450,000 120,000 --
Other income -- -- 22,000
----------- ----------- -----------
455,081 192,697 115,015
----------- ----------- -----------
EXPENSES
Salaries and employee benefits (Note 7) 862,970 933,081 1,419,941
Professional fees 191,900 168,618 367,629
Rent (Note 5) 98,982 126,134 104,332
Insurance 58,036 41,955 42,314
Directors' fees 2,003 18,802 67,981
Taxes other than income taxes 39,709 40,394 45,306
Newswire and promotion 1,181 5,707 6,823
Depreciation and amortization 16,969 19,994 21,468
Interest expense 35,401 11,988 --
Expenses related to terminated merger 490,782 -- --
General and administrative 187,517 212,709 297,003
----------- ----------- -----------
1,985,450 1,579,382 2,372,797
----------- ----------- -----------
Net investment loss from operations (1,530,369) (1,386,685) (2,257,782)
Net realized gain on portfolio of investments:
Investment securities:
Affiliated 254,088 7,613 (278,526)
Unaffiliated (16,430) 512,842 1,490,582
----------- ----------- -----------
Total investment securities 237,658 520,455 1,212,056
Other than investment securities -- -- 3,819
----------- ----------- -----------
Net realized gain on portfolio of investments 237,658 520,455 1,215,875
Provision (benefit) for current income taxes 331 (1,676) 20,000
----------- ----------- -----------
Net realized loss (1,293,042) (864,554) (1,061,907)
Increase (decrease) in unrealized appreciation of investments,
net of deferred income taxes:
Investment securities:
Affiliated 1,663,304 279,699 (1,771,744)
Unaffiliated -- (1,833,455) (992,907)
----------- ----------- -----------
Total investment securities 1,663,304 (1,553,756) (2,764,651)
Other than investment securities -- -- (951,862)
Deferred income tax benefit -- -- 351,000
----------- ----------- -----------
Increase (decrease) in unrealized appreciation of investments,
net of deferred income taxes 1,663,304 (1,553,756) (3,365,513)
----------- ----------- -----------
Net increase (decrease) in net assets from operations 370,262 (2,418,310) (4,427,420)
Preferred dividends 115,152 115,150 98,633
----------- ----------- -----------
Net increase (decrease) in net assets attributable
to common stockholders $255,110 ($2,533,460) ($4,526,053)
=========== =========== ===========
Basic and diluted net increase (decrease) in net assets
per share attributable to common stockholders (Note 8) $0.24 ($2.34) ($4.14)
=========== =========== ===========
- -------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
24
FRANKLIN CAPITAL CORPORATION
====================================================================================================================================
Statements of Cash Flows
- ------------------------------------------------------------------------------------------------------------------------------------
For the Year Ended December 31, 2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net increase (decrease) in net assets from operations $370,262 ($2,418,310) ($4,427,420)
Adjustments to reconcile net increase (decrease) in net assets from operations
to net cash used in operating activities:
Depreciation and amortization 16,969 19,994 21,468
Non-cash compensation expense from cashless exercise of officer options -- -- 349,644
(Increase) decrease in unrealized appreciation of investments,
net of deferred taxes (1,663,304) 1,553,756 3,365,513
Net realized gain on portfolio of investments, net of current income taxes (237,327) (522,131) (1,195,875)
Changes in operating assets and liabilities:
Decrease in receivable from disposal of investments -- -- 231,308
(Increase) decrease in other assets (4,300) 9,963 (7,763)
Increase (decrease) in accounts payable and accrued liabilities 235,529 (8,835) (36,951)
----------- ----------- -----------
Total adjustments (1,652,433) 1,052,747 2,727,344
----------- ----------- -----------
Net cash used in operating activities (1,282,171) (1,365,563) (1,700,076)
----------- ----------- -----------
Cash flows from investing activities:
Proceeds from sale of majority-owned affiliate 1,500,000 250,000 --
Proceeds from sale of affiliate 78,715 1,564,282 379,527
Proceeds from sale of other investments -- 1,044,782 950,151
Proceeds from sale of marketable investment securities 6,554 543,927 1,259,323
Loan payments received from majority-owned affiliate 75,000 75,000 --
Loan to majority owned affiliate -- (150,000) --
Purchases of investment in majority-owned affiliate -- (1,500,000) (56,311)
Purchase of investment in affiliate -- -- (140,000)
Purchases of other investments -- (49,095) (1,575,625)
Purchases of marketable investment securities (22,985) (542,146) (257,239)
----------- ----------- -----------
Net cash provided by investing activities 1,637,284 1,236,750 559,826
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from issuance of preferred stock -- -- 1,645,000
Payments of preferred dividends (115,152) (115,150) (98,633)
Cash paid to common stockholders in lieu of fractional shares due to
stock split of common shares -- -- (1,448)
Decrease in note payable (48,183) -- --
Proceeds from conversion right 300,000 -- --
Redemption of preferred stock (137,500) -- --
Purchases of treasury stock (71,815) (123,874) (328,445)
----------- ----------- -----------
Net cash (used in) provided by financing activities (72,650) (239,024) 1,216,474
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 282,463 (367,837) 76,224
Cash and cash equivalents at beginning of year 279,728 647,565 571,341
----------- ----------- -----------
Cash and cash equivalents at end of year $562,191 $279,728 $647,565
=========== =========== ===========
- ------------------------------------------------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
Non-cash liability issued in connection with purchase of majority owned affiliate -- $1,000,000 --
- ------------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
25
FRANKLIN CAPITAL CORPORATION
================================================================================================================
STATEMENTS OF CHANGES IN NET ASSETS
- ----------------------------------------------------------------------------------------------------------------
For the Year Ended December 31, 2002 2001 2000
- ----------------------------------------------------------------------------------------------------------------
Increase (decrease) in net assets from operations:
Net investment loss ($1,530,369) ($1,386,685) ($2,257,782)
Net realized gain on portfolio of investments,
net of current income taxes 237,327 522,131 1,195,875
Increase (decrease) in unrealized appreciation of investments,
net of deferred income taxes 1,663,304 (1,553,756) (3,365,513)
----------- ----------- -----------
Net increase (decrease) in net assets from operations 370,262 (2,418,310) (4,427,420)
Capital stock transactions:
Issuance of preferred stock -- -- 1,645,000
Payment of dividends on preferred stock (115,152) (115,150) (98,633)
Issuance of stock from treasury for exercise of officer options -- -- 349,644
Cash paid to common shareholders in lieu of fractional shares -- -- (1,448)
Proceeds for conversion right 300,000 -- --
Redemption of preferred stock (137,500) -- --
Purchase of treasury stock (71,815) (123,874) (328,445)
----------- ----------- -----------
Total increase (decrease) in net assets 345,795 (2,657,335) (2,861,302)
----------- ----------- -----------
Net assets at beginning of year 2,921,745 5,579,080 8,440,382
----------- ----------- -----------
Net assets at end of year $3,267,540 $2,921,745 $5,579,080
=========== =========== ===========
- ----------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
26
FRANKLIN CAPITAL CORPORATION
===========================================================================================================
FINANCIAL HIGHLIGHTS
- -----------------------------------------------------------------------------------------------------------
For the Year Ended December 31, 2002(1) 2001(1) 2000(1) 1999 1998
- -----------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE (2):
Net asset value attributable to common stockholders,
beginning of year $1.19 $3.58 $7.70 $5.61 $6.11
------ ------ ------ ------ ------
Net investment loss (1.44) (1.28) (2.07) (1.38) (1.14)
Net gain (loss) on portfolio of investments
(realized and unrealized) after taxes 1.78 (0.95) (1.98) 3.35 0.51
------ ------ ------ ------ ------
Total from investment operations 0.34 (2.23) (4.05) 1.97 (0.63)
------ ------ ------ ------ ------
Less dividends and distributions:
Distributions from accumulated
deficit and earnings 0.00 0.00 0.00 0.00 0.00
------ ------ ------ ------ ------
Total dividends and distributions 0.00 0.00 0.00 0.00 0.00
------ ------ ------ ------ ------
Capital stock transactions 0.54 (0.16) (0.07) 0.12 0.12
------ ------ ------ ------ ------
Net asset value attributable to common stockholders,
end of year $2.07 $1.19 $3.58 $7.70 $5.61
====== ====== ====== ====== ======
Market value per share, end of year $1.62 $4.18 $8.00 $6.83 $3.50
====== ====== ====== ====== ======
TOTAL INVESTMENT RETURN:
Based on market value per share (%) (58.85) (47.75) 17.13 95.24 (19.23)
RATIOS TO AVERAGE NET ASSETS:
Expenses (%) 56.61 37.67 25.99 24.97 23.73
Net investment loss from operations (%) (43.64) (33.08) (24.73) (23.86) (19.88)
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of period (000 omitted) $3,268 $2,922 $5,579 $8,440 $6,316
Portfolio turnover rate (%) 37 89 24 36 39
- -----------------------------------------------------------------------------------------------------------
(1) - Includes liquidation preference of preferred stockholders.
(2) - Calculated based on weighted average number of shares outstanding during
the period.
The accompanying notes are an integral part of these financial highlights.
27
FRANKLIN CAPITAL CORPORATION
====================================================================================================================================
PORTFOLIO OF INVESTMENTS
- ------------------------------------------------------------------------------------------------------------------------------------
MARKETABLE INVESTMENT SECURITIES
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF
SHARES OR MARKET
PRINCIPAL VALUE
DECEMBER 31, 2002 (2) AMOUNT ($) COST(1) (NOTE 2)
- ------------------------------------------------------------------------------------------------------------------------------------
Certificate of Deposit - 1.15%, due 01/04/2003 $34,675 $34,675
---------- ----------
Total Marketable Investment Securities (0.9% of total investments and 1.1% of net assets) $34,675 $34,675
---------- ----------
- ------------------------------------------------------------------------------------------------------------------------------------
INVESTMENTS, AT FAIR VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF
SHARES OR DIRECTORS'
EQUITY PRINCIPAL VALUATION
DECEMBER 31, 2002 (2) INVESTMENT INTEREST AMOUNT ($) COST(1) (NOTE 2)
- ------------------------------------------------------------------------------------------------------------------------------------
MAJORITY OWNED AFFILIATE
Excelsior Radio Networks, Inc. Common stock 59.07% 1,476,804 $1,476,804 $2,865,000
Excelsior Radio Networks, Inc. Warrants -- 87,111 -- 92,875
---------- ----------
Total Excelsior Radio Networks, Inc.
(74.1% of total investments and 90.5% of net assets) 29.26% 1,476,804 2,957,875
(Radio production and advertising sales) (fully diluted)
OTHER INVESTMENT
Alacra Corporation (25.0% of total investments and Convertible
30.6% of net assets) Preferred Stock 1.68% 321,543 1,000,000 1,000,000
---------- ----------
(Internet-based information provider)
Investments, at Fair Value 2,476,804 3,957,875
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Book cost equals tax cost for all investments
(2) Total investments refers to investments and marketable investment
securities.
The accompanying notes are an integral part of these financial statements.
28
FRANKLIN CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002
1. DESCRIPTION OF BUSINESS
Franklin Capital Corporation ("Franklin", or the "Corporation") is a Delaware
corporation operating as a Business Development Company ("BDC") under the
Investment Company Act of 1940 (the "Act"). A BDC is a specialized type of
investment company under the Act. A BDC must be primarily engaged in the
business of furnishing capital and making available managerial expertise to
companies that do not have ready access to capital through conventional
financial channels. Such companies are termed "eligible portfolio companies".
The Corporation, as a BDC, generally may invest in other securities; however,
such investments may not exceed 30% of the Corporation's total asset value at
the time of any such investment.
The accompanying financial statements have been prepared assuming that the
Corporation will continue as a going concern. The Corporation has a working
capital deficiency of approximately $800,000 at December 31, 2002. (Working
capital is defined as total liabilities less liquid assets.) This condition
raises substantial doubt about the Corporation's ability to continue as a going
concern. The Corporation is currently seeking financing. There can be no
assurance that the Corporation would be able to obtain alternative financing.
The financial statements do not include any adjustments to reflect the possible
future effects on the recoverability of assets or the amounts of liabilities
that may result from the outcome of this uncertainty.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
STATEMENTS OF CASH FLOWS
For purposes of the Statements of Cash Flows, Franklin considers only highly
liquid investments such as money market funds and commercial paper with
maturities of 90 days or less at the date of their acquisition to be cash
equivalents.
The Corporation paid no interest or income taxes during the years ended December
31, 2002, 2001 and 2000.
At December 31, 2002 and 2001, the Corporation held cash and cash equivalents
primarily in money market funds at two commercial banking institutions, and two
broker/dealers.
VALUATION OF INVESTMENTS
Security investments which are publicly traded on a national exchange or Nasdaq
Stock Market are stated at the last reported sales price on the day of valuation
or, if no sale was reported on that date, then the securities are stated at the
last quoted bid price. The Board of Directors of Franklin (the "Board of
Directors") may determine, if appropriate, to discount the value where there is
an impediment to the marketability of the securities held.
Investments for which there is no ready market are initially valued at cost and,
thereafter, at fair value based upon the financial condition and operating
results of the issuer and other pertinent factors as determined in good faith by
the Board of Directors. The financial condition and operating results have been
derived utilizing both audited and unaudited data. In the absence of a ready
market for an investment, numerous assumptions are inherent in the valuation
process. Some or all of these assumptions may not materialize. Unanticipated
events and circumstances may occur subsequent to the date of the valuation and
values may change due to future events. Therefore, the actual amounts
29
FRANKLIN CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
eventually realized from each investment may vary from the valuations shown and
the differences may be material. Franklin reports the unrealized gain or loss
resulting from such valuation in the Statements of Operations.
GAINS (LOSSES) ON PORTFOLIO OF INVESTMENTS
Amounts reported as realized gains (losses) are measured by the difference
between the proceeds of sale or exchange and the cost basis of the investment
without regard to unrealized gains (losses) reported in the prior periods. Gains
(losses) are considered realized when sales or dissolution of investments are
consummated.
INCOME TAXES
Franklin does not qualify for pass through tax treatment as a Regulated
Investment Company under Subchapter M of the Internal Revenue Code for income
tax purposes. Therefore, the Corporation is taxed under Regulation C.
Franklin accounts for income taxes in accordance with the provision of Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109"). The significant components of deferred tax assets and liabilities are
principally related to the Corporation's net operating loss carryforward and its
unrealized appreciation of investments.
STOCK-BASED COMPENSATION
The Corporation has elected to follow APB Opinion 25, "Accounting for Stock
Issued to Employees," to account for its Non-Qualified Stock Option Plan under
which no compensation cost is recognized because the option exercise price is
equal to at least the market price of the underlying stock on the date of grant.
Had compensation cost for these plans been determined at the grant dates for
awards under the alternative accounting method provided for in SFAS No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure - an
Amendment of FASB Statement No. 123," net income and earnings per share, on a
pro forma basis, would have been:
December 31, December 31, December 31,
2002 2001 2000
------------ ------------ ------------
Net increase (decrease) in net assets
attributable to common stockholders:
As reported $255,110 $(2,533,460) $(4,526,053)
Add:
Stock-based employee compensation
expense included in reported net
increase (decrease) in net assets
attributable to common stockholders -- -- 223,772
Deduct:
Total stock-based employee compensation
expense determined under fair value
based method for all awards, net of
related tax effect 4,734 37,985 140,585
-------- ----------- -----------
Pro forma $250,376 $(2,571,445) $(4,442,866)
Basic and diluted net increase
(decrease) in net assets attributable
to common stockholders:
As reported $0.24 $(2.34) $(4.14)
Pro forma $0.23 $(2.37) $(4.06)
30
FRANKLIN CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DEPRECIATION AND AMORTIZATION
Property and equipment are stated at cost. Depreciation is recorded using the
straight-line method at rates based upon estimated useful lives for the
respective assets. Leasehold Improvements are included in other assets and are
amortized over their useful lives or the remaining life of the lease, whichever
is shorter.
NET INCREASE (DECREASE) IN NET ASSETS PER COMMON SHARE
Net increase (decrease) in net assets attributable to common stockholders per
common share is calculated in accordance with the provisions of Statement of
Financial Accounting Standards No. 128, "Earnings per Share".
RECLASSIFICATION
Certain amounts in prior years have been reclassified to conform with the
current year presentation.
3. INCOME TAXES
For the years ended December 31, 2002, 2001 and 2000, Franklin's tax (provision)
benefit was based on the following:
2002 2001 2000
----------- ----------- -----------
Net investment loss from operations $(1,530,369) $(1,386,685) $(2,257,782)
Net realized gain on portfolio of investments 237,657 520,455 1,215,875
Increase (decrease) in unrealized appreciation 1,663,304 (1,553,756) (3,716,513)
----------- ----------- -----------
Pre-tax book income (loss) $ 370,592 $(2,419,986) $(4,758,420)
=========== =========== ===========
2002 2001 2000
----------- ----------- -----------
Federal tax (provision) benefit at 34% on $370,592,
$(2,419,986), and $(4,758,420), respectively $ (126,000) $ 823,000 $ 1,618,000
State and local, net of Federal benefit -- 1,000 (13,000)
Other (22,000) 5,000 (130,000)
Change in valuation allowance 148,000 (827,000) (1,144,000)
----------- ----------- -----------
$ -- $ 2,000 $ 331,000
=========== =========== ===========
The components of the tax benefit are as follows:
2002 2001 2000
----------- ----------- -----------
Current state and local tax benefit (expense) $ -- $ 2,000 $ (20,000)
Deferred tax benefit -- -- 351,000
----------- ----------- -----------
Benefit for income taxes $ -- $ 2,000 $ 331,000
=========== =========== ===========
Deferred income tax benefit (provision) reflects the impact of "temporary
differences" between amounts of assets and liabilities for financial reporting
purposes and such amounts as measured by tax laws.
At December 31, 2002 and 2001, significant deferred tax assets and liabilities
consist of:
Asset (Liability)
----------------------------
December 31, December 31,
2002 2001
----------- -----------
Deferred Federal and state benefit from
net operating loss carryforward $ 2,356,000 $ 1,905,000
Deferred Federal and state (provision)
benefit on unrealized (appreciation)
depreciation of investments (533,000) 66,000
Valuation allowance (1,823,000) (1,971,000)
----------- -----------
Deferred taxes $ -- $ --
=========== ===========
31
FRANKLIN CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
At December 31, 2002, Franklin had net operating loss carryforwards for income
tax purposes of approximately $6,544,000 that will begin to expire in 2011. At a
36% effective tax rate the after-tax net benefit from this loss would be
approximately $2,356,000.
4. STOCKHOLDERS' EQUITY
The accumulated deficit at December 31, 2002, consists of accumulated net
realized gains of $5,170,000 and accumulated investment losses of $12,749,000.
On February 22, 2000, the Corporation issued 16,450 shares of convertible
preferred stock with a par value of $100 for $1,645,000. The stock has a
cumulative 7% quarterly dividend and is convertible into the number of shares of
common stock by dividing the purchase price for the convertible preferred stock
by conversion price in effect (which is currently $13.33), resulting in 123,375
shares of common stock. The convertible preferred stock has antidilution
provisions, which can change the conversion price in certain circumstances if
the Corporation issues additional shares of common stock. The holder has the
right to convert the shares of convertible preferred stock at any time until
February 22, 2010 into common stock. Upon liquidation, dissolution or winding up
of the Corporation, the stockholders of the convertible preferred stock are
entitled to receive $100 per share plus any accrued and unpaid dividends before
distributions to any holder of the Corporation's common stock.
On December 31, 2002, the Corporation redeemed from certain preferred
stockholders 5,500 shares of convertible preferred stock for $25.00 per share.
On April 26, 2000, the Corporation declared a three-for-two stock split of the
Corporation's Common Stock in the form of a stock dividend to shareholders of
record on May 15, 2000, and payable June 7, 2000. The stock split has been
reflected in the accompanying financial statements and all applicable references
as to the number of common shares and per share information have been restated.
The Board of Directors has authorized Franklin to repurchase up to an aggregate
of 525,000 shares of its common stock in open market purchases on the American
Stock Exchange when such purchases are deemed to be in the best interest of the
Corporation and its stockholders. As of December 31, 2001, the Corporation had
purchased 482,350 shares of its common stock of which 431,188 remained in
treasury. During the year ended December 31, 2002, the Corporation purchased
25,100 shares of its common stock at a total cost of $71,815.