SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
_X_ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934
For the Quarterly period ended _March 31, 2002_
or
___ Transition report pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934
For the transition period from ________________ to ___________________.
Commission File No. _1-9727_
FRANKLIN CAPITAL CORPORATION
----------------------------
(Exact name of registrant specified in its charter)
Delaware 13-3419202
--------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
450 Park Avenue, 10th Floor, New York, New York 10022
----------------------------------------------- ------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 486-2323
---------------------------
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $1.00 par value
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Corporation was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_ No ___
The number of shares of common stock outstanding as of May 13, 2002 was
1,071,900.
1
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets
Statements of Operations
Statements of Cash Flows
Statements of Changes in Net Assets
Portfolio of Investments
Notes to Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Critical Accounting Policies
Statement of Operations
Financial Condition
Proposed Merger with Change Technology Partners, Inc.
Investments
Results of Operations
Liquidity and Capital Resources
Risks
Item 3. Quantitative and Qualitative Disclosures about Market Risk
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURE
EXHIBIT INDEX
FORWARD LOOKING STATEMENTS
WHEN USED IN THIS QUARTERLY REPORT ON FORM 10-Q, THE WORDS "BELIEVES,"
"ANTICIPATES," "EXPECTS" AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY
FORWARD-LOOKING STATEMENTS. STATEMENTS LOOKING FORWARD IN TIME ARE INCLUDED IN
THIS QUARTERLY REPORT ON FORM 10-Q. 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.
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The information furnished in the accompanying financial statements reflects
all adjustments that are, in the opinion of management, necessary for a fair
presentation of the results for the interim period presented.
3
FRANKLIN CAPITAL CORPORATION
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Balance Sheets
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March 31, December 31,
2002 2001
(unaudited)
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ASSETS
Marketable investment securities, at market value
(cost: March 31, 2002 - $57,660;
December 31, 2001 - $34,675) (Note 2) $ 62,175 $ 34,675
Investments, at fair value
(cost: March 31, 2002 - $3,757,830;
December 31, 2001 - $3,876,430) (Note 2)
Excelsior Radio Networks, Inc. 2,250,000 2,325,000
Other investments 1,358,915 1,369,197
---------- ----------
3,608,915 3,694,197
---------- ----------
Cash and cash equivalents (Note 2) 116,737 279,728
Other assets 99,937 90,266
---------- ----------
TOTAL ASSETS $3,887,764 $4,098,866
========== ==========
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LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Notes payable $1,000,000 $1,000,000
Accounts payable and accrued liabilities 234,922 177,121
---------- ----------
TOTAL LIABILITIES 1,234,922 1,177,121
---------- ----------
Commitments and contingencies (Note 5)
STOCKHOLDERS' EQUITY
Convertible preferred stock, $1 par value,
cumulative 7% dividend: 5,000,000 shares
authorized; 16,450 shares issued and outstanding
at March 31, 2002 and December 31, 2001
(Liquidation preference $1,645,000) (Note 4) 16,450 16,450
Common stock, $1 par value: 5,000,000 shares
authorized; 1,505,888 shares issued:
1,074,700 shares outstanding at March 31, 2002
and at December 31, 2001 (Note 7) 1,505,888 1,505,888
Paid-in capital - common stock 10,271,610 10,271,610
Unrealized depreciation of investments
(Notes 2 and 3) (144,400) (182,233)
Accumulated deficit (6,477,350) (6,170,614)
---------- ----------
5,172,198 5,441,101
Deduct common stock held in treasury, at cost,
431,188 shares at March 31, 2002, and at
December 31, 2001 (Note 4) (2,519,356) (2,519,356)
---------- ----------
Net assets (Note 9 for per share information) 2,652,842 2,921,745
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $3,887,764 $4,098,866
========== ==========
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The accompanying notes are an integral part of these financial statements.
4
FRANKLIN CAPITAL CORPORATION
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Statements of Operations
(unaudited)
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For the Three Months Ended March 31, 2002 2001
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INVESTMENT INCOME
Dividend income $ -- $ 26,744
Interest income 1,549 15,813
Management fees 90,000 --
---------- -----------
91,549 42,557
---------- -----------
EXPENSES
Salaries and employee benefits (Note 7) 181,776 252,190
Professional fees 35,925 41,325
Rent (Note 5) 35,154 29,784
Insurance 11,148 10,600
Directors' fees 500 18,500
Taxes other than income taxes 18,896 20,754
Newswire and promotion 1,000 1,000
Depreciation and amortization 4,243 4,998
Interest expense 8,850 --
General and administrative 48,498 53,503
---------- -----------
345,990 432,654
---------- -----------
Net investment loss from operations (254,441) (390,097)
Net realized (loss) gain on portfolio
of investments:
Investment securities:
Affiliated -- 137,757
Unaffiliated (23,507) 87,287
---------- -----------
Total investment securities (23,507) 225,044
Net realized (loss) gain on portfolio
of investments (23,507) 225,044
---------- -----------
Provision for current income taxes -- 10,532
---------- -----------
Net realized loss (277,948) (175,585)
Increase (decrease) in unrealized appreciation
of investments:
Investment securities:
Affiliated -- 419,699
Unaffiliated 37,833 (1,397,280)
---------- -----------
Total investment securities 37,833 (977,581)
---------- -----------
Increase (decrease) in unrealized appreciation
of investments 37,833 (977,581)
---------- -----------
Net decrease in net assets from operations (240,115) (1,153,166)
---------- -----------
Preferred dividends 28,788 28,787
---------- -----------
Net decrease in net assets attributable to
common stockholders ($ 268,903) ($1,181,953)
========== ===========
Basic and diluted net decrease attributable to
common stockholders per share (Note 8) ($0.25) ($1.08)
===== =====
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The accompanying notes are an integral part of these financial statements.
5
FRANKLIN CAPITAL CORPORATION
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Statements of Cash Flows
(unaudited)
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For the Three Months Ended March 31, 2002 2001
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Cash flows from operating activities:
Net decrease in net assets from operations ($ 240,115) ($1,153,166)
Adjustments to reconcile net decrease in net
assets to net cash used in operating activities:
Depreciation and amortization 4,243 4,998
(Increase) decrease in unrealized appreciation
of investments (37,833) 977,581
Net realized loss (gain) on portfolio of
investments, net of current income taxes 23,507 (214,520)
Changes in operating assets and liabilities:
Increase in other assets (13,914) (1,347)
Increase (decrease) in accounts payable
and accrued liabilities 57,801 (119,070)
---------- -----------
Total adjustments 33,804 647,642
---------- -----------
Net cash used in operating activities (206,311) (505,524)
Cash flows from investing activities:
Proceeds from sale of affiliates -- 1,519,421
Proceeds from sale of other investments 20,093 114,635
Proceeds from sale of marketable
investment securities -- 221,399
Loan payments from majority-owned affiliate 75,000 --
Purchases of other investments -- (49,094)
Purchases of marketable investment securities (22,985) (190,634)
---------- -----------
Net cash provided by investing activities 72,108 1,615,727
---------- -----------
Cash flows from financing activities:
Payment of preferred dividends (28,788) (28,787)
Purchases of treasury stock -- (9,659)
---------- -----------
Net cash used in by financing activities (28,788) (38,446)
---------- -----------
Net (decrease) increase in cash and cash equivalents (162,991) 1,071,757
Cash and cash equivalents at beginning of period 279,728 647,565
---------- -----------
Cash and cash equivalents at end of period $ 116,737 $ 1,719,322
========== ===========
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The accompanying notes are an integral part of these financial statements.
6
FRANKLIN CAPITAL CORPORATION
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Statements of Changes in Net Assets
(unaudited)
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For the Three Months Ended March 31, 2002 2001
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Decrease in net assets from operations:
Net investment loss ($ 254,441) ($ 390,097)
Net realized (loss) gain on portfolio of
investments, net of current income taxes (23,507) 214,512
Increase (decrease) in unrealized appreciation
of investments, 37,833 (977,581)
---------- -----------
Net decrease in net assets from operations (240,115) (1,153,166)
Capital stock transactions:
Payment of dividends on preferred stock (28,788) (28,787)
Purchase of treasury stock -- (9,659)
---------- -----------
Total decrease in net assets (268,903) (1,191,612)
Net assets at beginning of period 2,921,745 5,579,080
---------- -----------
Net assets at end of period $2,652,842 $ 4,387,468
========== ===========
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The accompanying notes are an integral part of these financial statements.
7
FRANKLIN CAPITAL CORPORATION
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PORTFOLIO OF INVESTMENTS
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MARKETABLE INVESTMENT SECURITIES
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NUMBER OF
SHARES OR MARKET
PRINCIPAL VALUE
MARCH 31, 2002(2) AMOUNT ($) COST(1) (NOTE 2)
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Communications Intelligence Corporation (Common Stock) $22,985 $27,500
Certificate of Deposit - 1.21%, due 04/04/2002 34,675 34,675
---------- ----------
Total Marketable Investment Securities
(1.7% of total investments and 2.3% of net assets) $57,660 $62,175
========== ==========
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INVESTMENTS, AT FAIR VALUE
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NUMBER OF
SHARES OR DIRECTORS'
EQUITY PRINCIPAL VALUATION
MARCH 31, 2002 (2) INVESTMENT INTEREST AMOUNT ($) COST(1) (NOTE 2)
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MAJORITY OWNED AFFILIATE
Excelsior Radio Networks, Inc. Common stock 90.00% 2,250,000 $2,250,000 $2,250,000
Excelsior Radio Networks, Inc. Warrants -- 12,879 -- --
Total Excelsior Radio Networks, Inc. ---------- ----------
(61.3% of total investments and 84.8% of net assets) 50.81% 2,250,000 2,250,000
(Radio production and advertising sales) (fully diluted)
AFFILIATES
Excom Ventures, LLC
(0.0% of total investments and 0.0% of net assets) Units 18.64% 140,000 140,000 --
(Purchase evaluation software)
OTHER INVESTMENTS
Alacra Corporation
(27.2% of total investments and 37.7% of net assets) Convertible 1.68% 321,543 1,000,000 1,000,000
(Internet-based information provider) Preferred Stock
Primal Solutions, Inc.
(0.2% of total investments and 0.3% of net assets) Common Stock 0.55% 111,438 17,830 8,915
(Internet-based Voice over IP billing software)
Structured Web, Inc.
(9.5% of total investments and 13.2% of net assets) Convertible 3.60% 188,425 350,000 350,000
(Internet-based application service provider) Preferred Stock --------- ---------
Total Other Investments 1,367,830 1,358,915
--------- ---------
Investments, at Fair Value 3,757,830 3,608,915
========= =========
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(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.
8
FRANKLIN CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
MARCH 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. For the three months ended March
31, 2002 and for the years ended December 31, 2001, and 2000, the Corporation
has incurred a net investment loss from operations of approximately $0.3
million, $1.4 million, and $2.3 million, respectively, a net decrease in net
assets from operations of approximately $0.3 million, $2.4 million, and $4.4
million, respectively, and has a working capital deficiency of approximately $1
million at March 31, 2002. (Working capital is defined as total liabilities less
liquid assets.) These conditions raise substantial doubt about the Corporation's
ability to continue as a going concern. The Corporation has entered into a
proposed merger with Change Technology Partners, Inc. (see Note 11), which
management believes will alleviate the doubt as to whether the Corporation, as
the surviving company in the merger, will be able to continue as a going
concern, although there can be no assurance in this regard. The merger is
subject to a number of conditions, however, and therefore there can be no
assurance that the merger will be completed on or before June 30, 2002 or at
all. If the merger is not completed by June 30, 2002, either party may terminate
the merger agreement. In the event the merger is not completed, in order to
alleviate the substantial doubt about the Corporation's ability to continue as a
going concern, the Corporation would likely seek another merger partner or seek
alternative financing. There can be no assurance that the Corporation would be
able to find a suitable merger partner or 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 three months ended
March 31, 2002 and 2001.
9
FRANKLIN CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
At March 31, 2002 and 2001, the Corporation held cash and cash equivalents
primarily in money market funds at two commercial banking institutions, and one
broker/dealer.
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 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.
DEPRECIATION AND AMORTIZATION
Depreciation is recorded using the straight-line method at rates based upon
estimated useful lives for the respective assets. Leasehold Improvements are
included in other assets and are amortized over their useful lives or the
remaining life of the lease, whichever is shorter.
10
FRANKLIN CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NET INCREASE (DECREASE) IN NET ASSETS ATTRIBUTABLE TO COMMON STOCKHOLDERS
PER SHARE
Net increase (decrease) in net assets attributable to common stockholders per
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 three months ended March 31, 2002 and 2001, Franklin's tax (provision)
benefit was based on the following:
2002 2001
----------- -----------
Net investment loss from operations ................ $ (254,441) $ (390,097)
Net realized (loss) gain on portfolio
of investments ................................... (23,507) 225,044
Increase (decrease) in unrealized appreciation ..... 37,833 (977,581)
----------- -----------
Pre-tax book income loss ......................... $ (240,115) $(1,142,634)
=========== ===========
2002 2001
----------- -----------
Tax benefit at 34% on $(240,115) and
$(1,142,634), respectively ....................... $ 82,000 $ 388,000
State and local, net of Federal benefit ............ -- 15,000
Other .............................................. (3,000) (2,000)
Change in valuation allowance ...................... (79,000) (412,000)
----------- -----------
$ -- $ (11,000)
=========== ===========
The components of the tax provision are as follows:
2002 2001
----------- -----------
Current state and local tax provision .............. $ -- $ (11,000)
Deferred tax expense ............................... -- --
----------- -----------
Provision for income taxes ......................... $ -- $ (11,000)
=========== ===========
Deferred income tax provision reflects the impact of "temporary differences"
between amounts of assets and liabilities for financial reporting purposes and
such amounts as measured by tax laws.
At March 31, 2002 and December 31, 2001, significant deferred tax assets and
liabilities consist of:
Asset (Liability)
-------------------------
March 31, December 31,
2002 2001
----------- -----------
Deferred Federal and state benefit from
net operating loss carryforward .................. $ 1,998,000 $ 1,905,000
Deferred Federal and state provision on
unrealized appreciation of investments ........... 52,000 66,000
Valuation allowance ................................ (2,050,000) (1,971,000)
----------- -----------
Deferred taxes ..................................... $ -- $ --
=========== ===========
11
FRANKLIN CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
At December 31, 2001, Franklin had net operating loss carryforwards for income
tax purposes of approximately $5,291,000 that will begin to expire in 2011. At a
36% effective tax rate the after-tax net benefit from this loss would be
approximately $1,905,000.
4. STOCKHOLDERS' EQUITY
The accumulated deficit at March 31, 2002, consists of accumulated net realized
gains of $4,995,000 and accumulated investment losses of $11,472,000.
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. During the three months ended March 31, 2002,
Franklin did not purchase any shares of its common stock. As of December 31,
2001, the Corporation has repurchased 482,350 shares of its common stock of
which 431,188 shares remain in treasury at March 31, 2002.
5. COMMITMENTS AND CONTINGENCIES
Franklin is obligated under an operating lease, which provides for annual
minimum rental payments as follows:
December 31,
2002 ................................................................. $149,600
2003 ................................................................. 149,600
--------
$299,200
========
Rent expense for the three months ended March 31, 2002, and 2001 was $35,154 and
$29,784 respectively. For the three months ended March 31, 2002 and 2001, the
Corporation collected rents of $8,000 and $6,000, respectively, from subtenants
under month to month leases, for a portion of its existing office space which is
reflected as a reduction in rent expense for that period.
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 defendents 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 (see Note 6). 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. The venue has been transferred to New
York. Franklin believes that plaintiffs' claims are without merit and intends to
defend this lawsuit
12
FRANKLIN CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
vigorously, though the outcome cannot be predicted at this time. An unfavorable
outcome in this lawsuit may have a material adverse effect on Franklin's
business, financial condition and results of operations.
6. TRANSACTIONS WITH AFFILIATES
On February 1, 2001, Franklin sold to Avery Communications, Inc. ("Avery")
1,183,938 shares of common stock and 350,000 shares of preferred stock of Avery
representing Franklin's entire holding in Avery, for $1,557,617 plus accrued
dividends on the preferred stock for a realized gain net of expenses of
$137,759. As part of the sale Franklin retained the right to receive 1,533,938
shares of Primal Solutions, Inc. ("Primal") a then wholly-owned subsidiary of
Avery. On February 13, 2001, Primal announced that Avery had completed a
spin-off of Primal and Franklin received 1,533,938 fully registered and
marketable shares of Primal. During the year ended December 31, 2001, Franklin
sold 1,150,000 shares of Primal for total proceeds of $53,861, realizing a loss
of $130,139.
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.
Change Technology Partners, Inc. ("Change"), a public company, provided $2.25
million of senior financing for the deal. 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 is 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 Note 5). Additionally, Franklin
provided a $150,000 note receivable to Excelsior. The note bore interest at 10%
per annum and was issued for a ninety-day rolling period. 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 March 31, 2002,
this note has been repaid. In contemplation of the proposed merger agreement
between Franklin and Change (see Note 11), Franklin sold to Change 250,000
shares of common stock in Excelsior for $250,000. If the merger is not
consummated, Franklin is required to repurchase the 250,000 shares of
Excelsior's common stock for $250,000 plus interest at an annual rate of 10%
from December 4, 2001 to the date of repurchase. As a result of the transaction,
Franklin now owns 50.8% of Excelsior on a fully diluted basis and has 58.2% of
voting control. In addition, Franklin has the right to nominate four directors
to Excelsior's seven-person board of directors.
At the closing, Franklin entered into a services agreement with Excelsior
whereby Franklin will provide Excelsior with certain services. In consideration
for the services provided, for a period of six months Franklin would receive
$30,000 per month and be reimbursed for all direct expenses. Subsequently,
Franklin's monthly fee will be determined by a majority of the non-Franklin
directors; however, said management fee will be no less than $15,000 per month.
Franklin will continue to be reimbursed for all direct expenses. Finally,
Franklin's chief financial officer will serve in that capacity for Excelsior and
his salary and benefits will be allocated between Excelsior and Franklin on an
80/20 basis. During the three months ended March 31, 2002, Franklin earned
$90,000 in management fees and was reimbursed $30,234 for salary and benefits
for Franklin's chief financial officer, which was recorded as a reduction of
expenses on Franklin.
13
FRANKLIN CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. STOCK OPTION PLANS
On September 9, 1997, Franklin's stockholders approved two Stock Option Plans: a
Stock Incentive Plan ("SIP") to be offered to the Corporation's consultants,
officers and employees (including any officer or employee who is also a director
of the Corporation) and a Non-Statutory Stock Option Plan ("SOP") to be offered
to the Corporation's "outside" directors, (i.e., those directors who are not
also officers or employees of Franklin). 112,500 shares of the Corporation's
Common Stock have been reserved for issuance under these plans, of which 67,500
shares have been reserved for the SIP and 45,000 shares have been reserved for
the SOP. Shares subject to options that terminate or expire prior to exercise
will be available for future grants under the Plans. Because the issuance of
options to "outside" directors is not permitted under the Act without an
exemptive order by the Securities and Exchange Commission, the issuance of
options under the SOP was conditioned upon the granting of such order. The order
was granted by the Commission on January 18, 2000.
Franklin accounts for the options issued to employees under APB Opinion No. 25,
under which no compensation cost has been recognized. Proforma information
determined consistent with the fair value method required by FASB Statement No.
123, is as follows for the years ended:
March 31, 2002 March 31, 2001
-------------- --------------
Net decrease in net assets attributable
to common stockholders:
As reported ($268,903) ($1,181,953)
Pro forma ($270,087) ($1,191,449)
Basic and diluted net decrease in net assets
attributable to common stockholders per share:
As reported ($0.25) ($1.08)
Pro forma ($0.25) ($1.09)
No options were granted during the three months ended March 31, 2002 and 2001.
The following is a summary of the status of the Stock Option Plans during the
three months ended:
March 31, 2002 March 31, 2001
------------------ ------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------ ------ ------ ------
Outstanding at beginning of period 39,375 $11.27 39,375 $11.27
Granted -- -- -- --
Exercised -- -- -- --
Forfeited -- -- -- --
Expired -- -- -- --
------ ------
Outstanding at end of period 39,375 $11.27 39,375 $11.27
====== ======
Exercisable at end of period 36,875 $11.27 14,375 $10.73
====== ======
14
FRANKLIN CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The options issued under the SIP have a remaining contractual life of 6.8 years.
The options issued under the SOP have a remaining contractual life of 7.9 years.
8. NET DECREASE IN NET ASSETS ATTRIBUTABLE TO COMMON STOCKHOLDERS PER SHARE
The following table sets forth the computation of basic and diluted change in
net assets attributable to common stockholders per share:
March 31,
-------------------------
2002 2001
-------------------------
Numerator:
Net decrease in net
assets from operations ($240,115) ($1,153,166)
Preferred stock dividends (28,788) (28,787)
----------- -----------
Numerator for basic and diluted earnings
per share - net decrease in net assets
attributable to common stockholders ($268,903) ($1,181,953)
=========== ===========
Denominator:
Denominator for basic and diluted
decrease in net assets from operations -
weighted - average shares 1,074,700 1,097,166
Basic and diluted net decrease in net
assets from operations per share $(0.25) $(1.08)
====== ======
The following securities have been excluded from the dilutive per share
computation as they are antidilutive:
Period ended March 31,
-------------------------
2002 2001
-------------------------
Preferred stock convertible into 123,375
shares of common stock 123,375 123,375
Stock options 39,375 39,375
For additional information on the above securities, see Notes 4 and 7.
9. NET ASSET VALUE PER SHARE
The following table sets forth the computation of net asset value per common
share attributable to common stockholders:
15
FRANKLIN CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
March 31, December 31,
-------------------------
2002 2001
-------------------------
Numerator:
Numerator for net asset value per
common share, as if converted basis $2,652,842 $2,921,745
Liquidation value of convertible
preferred stock (1,645,000) (1,645,000)
----------- -----------
Numerator for net asset value per share
attributable to common stockholders $1,007,842 $1,276,745
=========== ===========
Denominator:
Number of common shares outstanding,
denominator for net asset value per share
attributable to common stockholders 1,074,700 1,074,700
Number of shares of common stock to be
issued upon conversion of preferred stock 123,375 123,375
----------- -----------
Denominator for net asset value per common
share as if converted basis 1,198,075 1,198,075
=========== ===========
Net asset value per share attributable
to common stockholders $0.94 $1.19
===== =====
Net asset value per common share,
as if converted basis $2.21 $2.44
===== =====
10. PURCHASES AND SALES OF INVESTMENT SECURITIES
The cost of purchases and proceeds from sales of investment securities excluding
short-term investments, aggregated $22,985 and $95,093 respectively, for the
three months ended March 31, 2002, and $239,728 and $1,854,632 respectively, for
the three months ended March 31, 2001.
11. MERGER WITH CHANGE TECHNOLOGY PARTNERS, INC.
On December 4, 2001, Change and Franklin entered into a definitive agreement and
plan of merger pursuant to which Change will be merged with and into Franklin.
Under the terms of the merger agreement, Change's common stockholders will
receive one share of Franklin for each 40.985 shares of Change common stock that
they own. Change's Series A preferred stockholders will receive one share of
Franklin Series B preferred stock for each share of Change Series A preferred
stock they own. As a result of the merger, Franklin will issue approximately
4,442,000 shares of its common stock and 645 shares of its Series B preferred
stock to Change stockholders. Upon closing of the transaction, Change
shareholders will own approximately 80% of Franklin with the balance being held
by Franklin's current stockholders. The boards of both companies have approved
the transaction.
Concurrently with the execution of the merger agreement, the parties entered
into a stock purchase agreement pursuant to which Change agreed to purchase
250,000 shares of common stock of Excelsior from Franklin for an aggregate
purchase price of $250,000. In the event the merger between Franklin and Change
is terminated pursuant to the terms of the merger agreement, Franklin shall be
required to repurchase all of
16
FRANKLIN CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
such common stock from Change at a repurchase price equal to $250,000, plus
interest thereon at an annual rate of 10% from December 4, 2001 to the date of
repurchase.
12. SUBSEQUENT EVENT
On April 3, 2002, Dial Communications Global Media, Inc. ("Newco"), a newly
formed wholly-owned subsidiary of Excelsior, a majority-owned affiliate of
Franklin, 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 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 issued by Newco in
favor of DCGL, each with an initial aggregate principal amount of $460,000
bearing interest at 4.5% 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. 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. For each share
of common stock Franklin is required to issue under the Purchase Agreement or
the promissory notes, Franklin will receive 0.86 shares of common stock in
Excelsior.
Change and Sunshine, 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.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 Generally Accepted
Accounting Principles for investment companies. On this basis, the principal
measure of its financial performance is captioned "Net increase (decrease) in
net assets from operations", which is composed of the following: "Net investment
loss from operations," which is the difference between the Corporation's income
from interest, dividends and fees and its operating expenses; "Net realized gain
on portfolio of investments," which is the difference between the proceeds
received from dispositions of portfolio securities and their stated cost; any
applicable income tax provisions (benefits); and "Net increase (decrease) in
unrealized appreciation of investments," which is the net change in the fair
value of the Corporation's investment portfolio, net of any increase (decrease)
in deferred income taxes that would become payable if the unrealized
appreciation were realized through the sale or other disposition of the
investment portfolio.
"Net realized gain (loss) on portfolio of investments" and "Net increase
(decrease) in unrealized appreciation of investments" are directly related. When
a security is sold to realize a gain, the net unrealized appreciation decreases
and the net realized gain increases. When a security is sold to realize a loss,
the net unrealized appreciation increases and the net realized gain decreases.
FINANCIAL CONDITION
The Corporation's total assets and net assets were, respectively,
$3,887,764 and $2,652,842 at March 31, 2002, versus $4,098,866 and $2,921,745 at
December 31, 2001. Net asset value per share and on an as if converted basis was
$0.94 and $2.21, respectively at March 31, 2001, versus $1.19 and $2.44 at
December 31, 2001.
The Corporation's financial condition is dependent on the success of its
investments. A summary of the Corporation's investment portfolio is as follows:
MARCH 31, DECEMBER 31,
2002 2001
----------- -----------
Investments, at cost $ 3,815,490 $ 3,911,105
Unrealized depreciation (144,400) (182,233)
----------- -----------
Investments, at fair value $ 3,671,090 $ 3,728,872
=========== ===========
The accompanying financial statements have been prepared assuming that the
Corporation will continue as a going concern. For the three months ended March
31, 2002 and for the years ended December 31, 2001, and 2000, the Corporation
has incurred a net investment loss
18
from operations of approximately $0.3 million, $1.4 million and $2.3 million,
respectively, a net decrease in net assets from operations of approximately $0.3
million, $2.4 million and $4.4 million, respectively, and has a working capital
deficiency of approximately $1,000,000 at December 31, 2001. These conditions
raise substantial doubt about the Corporation's ability to continue as a going
concern. The Corporation has entered into a proposed merger with Change
Technology Partners, Inc. ("Change"), which management believes will alleviate
the doubt as to whether the Corporation, as the surviving company in the merger,
will be able to continue as a going concern, although there can be no assurance
in this regard. See Note 11 to the Franklin financial statements. The merger is
subject to a number of conditions, however, and therefore there can be no
assurance that the merger will be completed on or before June 30, 2002 or at
all. If the merger is not completed by June 30, 2002, either party may terminate
the merger agreement. In the event merger is not completed, in order to
alleviate the substantial doubt about the Corporation's ability to continue as a
going concern, the Corporation would likely seek another merger partner or seek
alternative financing. There can be no assurance that the Corporation would be
able to find a suitable merger partner or 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.
PROPOSED MERGER WITH CHANGE TECHNOLOGY PARTNERS, INC.
On December 4, 2001, Change and Franklin entered into a definitive
agreement and plan of merger pursuant to which Change will be merged with and
into Franklin. Under the terms of the merger agreement, Change's common
stockholders will receive one share of Franklin for each 40.985 shares of Change
common stock that they own. Change's Series A preferred stockholders will
receive one share of Franklin Series B preferred stock for each share of Change
Series A preferred stock they own. As a result of the merger, Franklin will
issue approximately 4,442,000 shares of its common stock and 645 shares of its
Series B preferred stock to Change stockholders.
Upon closing of the transaction, Change stockholders will own approximately
80% of Franklin common stock with the balance being held by Franklin's current
stockholders. The boards of both companies have approved the transaction,
subject to stockholder approval by both Franklin and Change common and preferred
stockholders and the satisfaction or waiver of conditions to the merger.
Concurrently with the execution of the merger agreement, the parties
entered into a stock purchase agreement pursuant to which Change agreed to
purchase 250,000 shares of common stock of Excelsior Radio Networks, Inc.
("Excelsior") from Franklin for an aggregate purchase price of $250,000. In the
event the merger between Franklin and Change is terminated, Franklin is required
to repurchase all of such common stock from Change at a repurchase price equal
to $250,000, plus interest thereon at an annual rate of 10% from December 4,
2001 to the date of repurchase. As a result of this transaction, Franklin owns
50.8% of Excelsior on a fully diluted basis and has 58.2% of voting control and
Change owns 16.5% on a fully diluted basis and has 6.5% of voting control.
19
The transactions contemplated by the merger agreement are intended to
result in Franklin no longer being subjected to the 1940 Act because of the
change in the nature of its business; however, Franklin cannot change the nature
of its business so as to cease to be regulated as a BDC unless such change is
approved by Franklin's stockholders in accordance with the 1940 Act. At the
special meeting to approve the merger with Change, Franklin stockholders will
also be asked to approve the withdrawal of Franklin's election to be regulated
as a BDC.
INVESTMENTS
Franklin's primary investment is in Excelsior. A description of Franklin's
other investments follows the description of Excelsior.
EXCELSIOR
At March 31, 2002, the Corporation had an investment in Excelsior, formerly
known as eCom Capital, Inc., valued at $2,250,000, which represents 57.9% of the
Corporation's total assets and 84.8% of its net assets. As of December 31, 2001,
Franklin owned 50.8% of Excelsior on a fully diluted basis and had 58.2% of
Excelsior's voting control.
If the merger with Change is consummated, Franklin will change its name to
Excelsior Communications Corporation. The business of the new combined company
will focus on creating, producing and selling programs to the radio industry. In
order to develop its business, Excelsior Communications will expand and grow the
business of its majority-owned subsidiary, Excelsior through acquisitions, joint
ventures and other efforts.
Excelsior is a majority-owned affiliate 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. Excelsior's principal executive
offices are located at 450 Park Avenue, 10th Floor, New York, NY 10022.
On April 3, 2002, Dial Communications Global Media, Inc. ("Newco"), a newly
formed wholly-owned subsidiary of Excelsior Radio Networks, Inc. ("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 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
20
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.
The assets purchased in the Dial Acquisition will be 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 23 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.
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. On November 28, 2001, $75,000 of
the secured note was paid back to Franklin. On February 28, 2002, the remaining
$75,000 of the secured note was paid back to Franklin. As part of the merger
agreement between Franklin and Change, Franklin sold to Change 250,000 shares of
its common stock in Excelsior.
ALACRA CORPORATION
At March 31, 2002, the Corporation had an investment in Alacra Corporation
("Alacra"), valued at $1,000,000, which represents 25.7% of the Corporation's
total assets and 37.7% 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
21
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 B(TM), 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 for Alacra Board of Directors meetings.
EXCOM VENTURES, LLC
At March 31, 2002, the Corporation had an investment in Excom Ventures, LLC
("Excom") valued at $0 at March 31, 2002. Excom was formed as a limited
liability holding company for the purpose of investing in Expert Commerce, Inc.
("Expert Commerce"). Expert Commerce is a Business-to-Business purchase
evaluation engine that simulates the way people make decisions. Based on
intelligent and proven technology, the engine helps structure complex decisions
and provides an audit trail to justify transactions, empowering buyers to make
purchase decisions with confidence.
On June 26, 2000, the Corporation purchased $140,000 worth of Excom Units.
At December 31, 2001, the Board of Franklin had determined that this investment
had no value and had marked these securities down to reflect that determination.
PRIMAL SOLUTIONS, INC.
The Corporation has an investment in Primal Solutions, Inc. ("Primal")
valued at $8,915 at March 31, 2002, which represents 0.2% of the Corporation's
total assets and 0.3% of its net assets. Primal's common stock is quoted on the
OTC Electronic Bulletin Board under the symbol "PSOL." Primal, based in Irvine,
California, is a leading provider of Web-based integrated customer management
and intelligence solutions that allow rapidly evolving communications and
Internet service providers to stay connected with and grow their customers. It
does this through an integrated suite of applications that can track and analyze
customer behavior and preferences, collect usage information, and support
billing and customer care back-office requirements, including those of emerging
IP billing markets.
On February 13, 2001, Primal was spun-off from Avery Communications, Inc.
("Avery"). As a result of this spin-off Franklin received 1,533,938 fully
registered and marketable shares of common stock of Primal at an allocated cost
basis of $245,430. During the three months ended March 31, 2002, Franklin sold
272,500 shares of common stock for $20,093 realizing a loss of $23,507.
STRUCTURED WEB, INC.
At March 31, 2002, the Corporation had an investment in Structured Web,
Inc. ("Structured Web") valued at $350,000, which represents 9.0% of the
Corporation's total assets and 13.2% of its net assets. Structured Web develops
web building blocks to enable small businesses to create and manage their own
digital nerve system easily and at an affordable price. Structured Web's
object-based proprietary technology enables customers to choose from a growing
selection of "WebBlocks" including content, communication, commerce and
services.
22
On August 8, 2000, the Corporation purchased $350,000 worth of Structured
Web convertible preferred stock. In connection with this investment, Franklin
was granted observer rights on Structured Web board of directors.
RESULTS OF OPERATIONS
INVESTMENT INCOME AND EXPENSES:
The Corporation's principal objective is to achieve capital appreciation
through long-term investments in businesses believed to have favorable growth
potential. Therefore, a significant portion of the investment portfolio is
structured to maximize the potential for capital appreciation and provides
little or no current yield in the form of dividends or interest. The Corporation
earns interest income from loans, preferred stocks, corporate bonds and other
fixed income securities. The amount of interest income varies based upon the
average balance of the Corporation's fixed income portfolio and the average
yield on this portfolio.
The Corporation had investment income of $91,549 and $42,557 for the three
months ended March 31, 2002 and 2001, respectively. The increase in investment
income for the three months ended March 31, 2002 when compared to March 31,
2001, was primarily the result of the receipt of a management fee from
Excelsior.
Operating expenses were $345,990 and $432,654 for the three months ended
March 31, 2002 and 2001, respectively. A majority of the Corporation's operating
expenses consist of employee compensation, office and rent expense, other
expenses related to identifying and reviewing investment opportunities and
professional fees. Professional fees consist of general legal fees, audit and
tax fees and investment related legal fees. The Corporation was reimbursed
approximately $30,000 for salary and benefit expense for its chief financial
officer under the terms of the management agreement with Excelsior. This
reimbursement has been recorded as a reduction in operating expenses.
Net investment losses from operations were $254,441 and $390,097 for the
three months ended March 31, 2002 and 2001, respectively.
The Corporation has relied and continues to rely to a large extent upon
proceeds from sales of investments rather than investment income to defray a
significant portion of its operating expenses. Because such sales cannot be
predicted with certainty, the Corporation attempts to maintain adequate working
capital to provide for fiscal periods when there are no such sales.
NET REALIZED GAINS AND LOSSES ON PORTFOLIO OF INVESTMENTS:
During the three months ended March 31, 2002 and 2001, the Corporation
realized net (loss) gains before taxes of ($23,507) and $225,044 respectively,
from the disposition of various investments.
UNREALIZED APPRECIATION OF INVESTMENTS:
Unrealized appreciation of investments, increased by $37,833 during the
three months ended March 31, 2002, primarily from unrealized gains due to the
sale of Primal.
Unrealized appreciation of investments, decreased by $977,581 during the
three months ended March 31, 2001, primarily from unrealized gains due to the
decrease in value of Franklin's
23
investment in Go America. This increase was partially offset by the sale of
Franklin's investment in Avery Communications.
LIQUIDITY AND CAPITAL RESOURCES
The accompanying financial statements have been prepared assuming that the
Corporation will continue as a going concern. For the three months ended March
31, 2002 and for the years ended December 31, 2001, and 2000, the Corporation
has incurred a net investment loss from operations of approximately $0.3, $1.4
million and $2.3 million, respectively, a net decrease in net assets from
operations of approximately $0.3, $2.4 million and $4.4 million, respectively,
and has a working capital deficiency of approximately $1,000,000 at December 31,
2001. These conditions raise substantial doubt about the Corporation's ability
to continue as a going concern. The Corporation has entered into a proposed
merger with Change Technology Partners, Inc., which management believes will
alleviate the doubt as to whether the Corporation, as the surviving company in
the merger, will be able to continue as a going concern, although there can be
no assurance in this regard. See Note 11 to the Franklin financial statements.
The merger is subject to a number of conditions, however, and therefore there
can be no assurance that the merger will be completed on or before June 30, 2002
or at all. If the merger is not completed by June 30, 2002, either party may
terminate the merger agreement. In the event merger is not completed, in order
to alleviate the substantial doubt about the Corporation's ability to continue
as a going concern, the Corporation would likely seek another merger partner or
seek alternative financing. There can be no assurance that the Corporation would
be able to find a suitable merger partner or 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.
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 and one bulletin board listed public corporation.
Because of the speculative nature of these investments, there is significantly
greater risk of loss than is the case with traditional investment securities.
The Corporation expects that from time to time its venture capital investments
may result in a complete loss of the Corporation's invested capital or may be
unprofitable. Other investments may appear likely to become successful, but may
never realize their potential. Neither the Corporation's investments nor an
investment in the Corporation is intended to constitute a balanced investment
program. The Corporation has in the past relied and continues to rely to a large
extent upon proceeds from sales of investments rather than investment income to
defray a significant portion of its operating expenses.
RISKS RELATED TO FRANKLIN
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
24
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 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.
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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. If the merger
with Change Technology is not consummated, Franklin will be required to seek
alternative sources of financing to continue operating through the current
fiscal year. If funds were not raised, Franklin may not be able to continue its
operations. See Note 11 to Franklin's financial statements for further
information.
RISKS RELATED TO THE MERGER WITH CHANGE
THE PROPOSED MERGER MAY NOT OCCUR. If the merger agreement is terminated or
if the merger is not completed for any reason, Franklin may not be as well
positioned to effectuate its developing business plan. The success of Franklin
depends on its ability to effectuate such a plan subsequent to the merger. If
the merger is not consummated, Franklin will be forced to reassess its position
and future business strategy. If the merger is not completed for any reason,
Franklin may be subject to a number of other risks, including:
o Franklin may be required under certain circumstances to pay Change a
termination fee of $750,000.
o The price of the common stock may decline.
o Transaction costs related to the merger, such as financial, advisory,
legal, accounting and printing fees must be paid even if the merger is
not completed. The amount of the transaction costs may substantially
exceed our estimates and, could have an adverse effect on the
business, financial condition and operating results of the combined
company.
o If the merger is terminated and the board of directors seeks another
merger or business combination, Franklin's stockholders cannot be
certain that Franklin will be able to find a partner.
NO FAIRNESS OPINION WAS OBTAINED REGARDING THE MERGER. Because the terms of
the merger were negotiated at arm's length between the management of Franklin
and Change, and taking into consideration the time and expense that would be
incurred in obtaining an investment banker's opinion on the fairness of the
terms of the merger, Franklin has not sought or obtained such an opinion.
Accordingly, there can be no assurance that consummation of the merger will be
fair from a financial point of view to stockholders of Franklin.
THE COMBINED COMPANY MAY BE UNABLE TO REALIZE THE BENEFITS ANTICIPATED BY
FRANKLIN AND CHANGE. The merger involves the integration of two companies that
have previously operated independently. There can be no assurances that the
companies will not encounter significant difficulties in integrating their
respective operations or that the benefits expected from such integration will
be realized. Incurring unexpected costs or delays in connection with such
integration could have a material adverse effect on the combined company's
business, financial condition or results of operations.
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THE COMBINED COMPANY MAY EXPERIENCE ADVERSE EFFECTS FROM COMBINING
OPERATIONS OF FRANKLIN AND CHANGE. The boards of directors approved the merger
and the merger agreement with the expectation that the merger will result in a
number of benefits, including operating efficiencies, revenue enhancements and
other synergies. However, as a result of the merger, the management of the
combined company will be faced with unfamiliar business issues. In addition, the
current management of Change, who will take on management positions in Franklin
upon consummation of the merger, have no experience with Franklin's radio
business.
INVESTMENT IN SMALL, PRIVATE COMPANIES
There are significant risks inherent in the Corporation's venture capital
business. 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 with risky technologies that
lack management depth and have not attained profitability or have no history of
operations. Because of the speculative nature and the lack of a 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 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. The Corporation has been risk seeking rather than
risk averse in its approach to venture capital and other investments. 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.
ILLIQUIDITY OF PORTFOLIO INVESTMENTS
Most of the investments of the Corporation are or will be equity securities
acquired directly from small companies. The Corporation's portfolio of equity
securities is and will usually be subject to restrictions on resale or otherwise
have no established trading market. The illiquidity of most of the Corporation's
portfolio of equity securities may adversely affect the ability of the
Corporation to dispose of such securities at times when it may be advantageous
for the Corporation to liquidate such investments.
THE INABILITY OF THE CORPORATION'S PORTFOLIO COMPANIES TO
SUCCESSFULLY MARKET THEIR PRODUCTS WOULD HAVE A NEGATIVE IMPACT
ON ITS INVESTMENT RETURNS
Even if the Corporation's portfolio companies are able to develop
commercially viable products, the market for new products and services is highly
competitive and rapidly changing. Commercial success is difficult to predict and
the marketing efforts of the Corporation's portfolio companies may not be
successful.
VALUATION OF PORTFOLIO INVESTMENTS
There is typically no public market of equity securities of the small
private companies in which the Corporation invests. As a result, the valuation
of the equity securities in the Corporation's portfolio is subject to the good
faith determination of the Corporation's Board of Directors. In the absence of a
readily ascertainable market value, the estimated value of the Corporation's
portfolio of equity securities may differ significantly from the values that
would be placed on the portfolio if a ready market for the equity securities
existed. Any changes in
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estimated net asset value are recorded in the Corporation's statement of
operations as "Change in unrealized appreciation on investments."
FLUCTUATIONS OF QUARTERLY RESULTS
The Corporation's quarterly operating results could fluctuate as a result
of a number of factors. These include, among others, variations in and the
timing of the recognition of realized and unrealized gains or losses, the degree
to which the Corporation encounters competition in its markets and general
economic conditions. As a result of these factors, results for any one quarter
should not be relied upon as being indicative of performance in future quarters.
ITEM 3. 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 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."
PART II. OTHER INFORMATION
Item 1. 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,
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alleges that the Winstar defendents 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 (see Note 6). 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. The
venue has been changed to New York. Franklin believes that plaintiffs'
claims are without merit and intends to defend this lawsuit vigorously,
though the outcome cannot be predicted at this time. An unfavorable outcome
in this lawsuit may have a material adverse effect on Franklin's business,
financial condition and results of operations.
Item 2. Changes in Securities and Use of Proceeds
Not applicable
Item 3. Defaults Upon Senior Securities Holders
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Not applicable
(b) Reports on Form 8-K. The Corporation filed a report on Form 8-K
on April 3, 2002 announcing the acquisition of the Dial Entities.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FRANKLIN CAPITAL CORPORATION
Date: May 15, 2002 By: /s/
----------------------------------------
Hiram M. Lazar
CHIEF FINANCIAL OFFICER
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