SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
Annual Report Pursuant to Section 13
or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended Commission File No. 1-9727
December 31, 2000 -------
Franklin Capital Corporation
(Exact name of registrant specified in its charter)
Delaware 13-3419202
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
450 Park Avenue, 10th Floor, New York, New York 10022
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 486-2323
------------------------
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $1.00 par value
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Corporation was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes _X__ No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this form 10-K or any amendment to this
Form 10-K. [ X ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of February 28, 2001 was $3,698,716 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 February 28, 2001 was
1,096,900.
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 Corporation's Common Equity and Related Stockholder Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations
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 Corporation
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions
PART IV
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K
SIGNATURES
EXHIBIT INDEX
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.
2
PART I
ITEM 1. BUSINESS
FORMATION
Franklin Capital Corporation(1) (the "Registrant", "Franklin," or the
"Corporation") filed on April 7, 1987, with the Securities and Exchange
Commission (the "SEC" or the "Commission") a notification of registration under
Section 8(a) of the Investment Company Act of 1940 (the "1940 Act") and
registered as a closed-end, non-diversified management investment company. On
July 10, 1987, the Corporation commenced operations as an investment company.
The Corporation's common stock, par value $1.00 per share, has been listed on
The American Stock Exchange since October 1, 1987.
The operating strategy of providing managerial assistance to companies
in which the Corporation invests has been pursued by Franklin since 1992. This
strategy is consistent with the legislative intent behind the statutory
framework governing business development companies under the 1940 Act. The
Business Development Company ("BDC") structure is available for companies that
are engaged in the business of furnishing capital and managerial expertise to
other companies that might not otherwise have access to such capital. In light
of this operating strategy and the Corporation's long-term objectives,
management and the Board of Directors determined that it was in the best
interests of the shareholders to explore the feasibility of electing to be
regulated as a BDC.
On August 5, 1997, the Board of Directors determined that it would be
in the best interests of the Corporation and its stockholders to elect to become
a BDC under the 1940 Act. On September 9, 1997, at the Annual Meeting of
Stockholders, the stockholders of Franklin approved the proposal that the
Corporation be regulated as a BDC. On November 18, 1997, the Corporation filed a
notification of election to become a BDC with the Commission. The election
became effective upon the receipt of the filing by the Commission. The
Corporation operates as an internally managed BDC whereby its officers and
employees, under the general supervision of its Board of Directors, conduct its
operations.
As a BDC, the Corporation's objective is to achieve capital
appreciation through long-term investments in businesses believed to have
favorable growth potential. The Corporation participates, or would participate,
in start-up and early stage financing, expansion or growth financing, leveraged
buy-out financing and restructurings. The Corporation has also invested and will
consider investing in a broad range of industry segments.
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1. On July 14, 1998, the Corporation filed a Certificate of Amendment
with the Secretary of State of the State of Delaware, changing its name from The
Franklin Holding Corporation (Delaware) to Franklin Capital Corporation. The
Corporation's shareholders had approved a proposal to change the Corporation's
name at the Annual Meeting of Stockholders held on June 16, 1998. The
Corporation had filed its original Articles of Incorporation with the Secretary
of State of the State of Delaware as The Franklin Holding Corporation (Delaware)
on March 31, 1987.
3
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, 2000, the Corporation's portfolio of investments is a composite of illiquid
investments in developing companies and securities in publicly traded developing
companies.
The Corporation has invested a substantial portion of its assets in
private development stage or start-up companies. The current portfolio is
invested principally but not exclusively in securities issued by companies
involved in early stage high technology sectors such as wireless communications,
other telecommunications services, Internet software and information services.
The Corporation generally favors investments in private companies that
it believes can achieve the necessary size, profitability, management depth and
sophistication to become public companies or become candidates for acquisition
by merger or otherwise. The Corporation seeks to enable its stockholders to
participate in investments not typically available to the public due to the
private nature of a substantial majority of the Corporations portfolio
companies, the size of the financial commitment often required in order to
participate in such investments, and/or the experience, skill and time
commitment required to identify and take advantage of these investment
opportunities.
The Corporation offers managerial assistance to its private portfolio
companies and expects that it will play a role in setting corporate strategies
and advising such companies regarding important decisions affecting their
businesses, including potential acquisitions, recruiting key managers, and
securing equity and debt financing.
Generally, most of the Corporation's investments are, and the
Corporation anticipates that they will continue to be, in small to medium sized
companies with total assets or annual sales under $500 million. Many of these
companies may have very limited operating histories. Each investment includes
portfolio companies that have the potential for substantial growth in sales and
earnings. The Corporation seeks to identify companies that management believes
have significant opportunities in the industry sectors they serve or that have
devised innovative products, services or ways of doing business that afford them
a distinct competitive advantage. Such companies might achieve growth either
internally or by acquisition.
ILLIQUIDITY OF INVESTMENTS
A majority of the Corporation's investments consist of securities
acquired directly from the issuer in private transactions. They may be subject
to restrictions on resale or otherwise be illiquid. Franklin anticipates that
there may not be an established trading market for such securities.
Additionally, many of the securities that the Corporation may invest in will not
be eligible for sale to the public without registration under the Securities Act
of 1933, as amended, which could prevent or delay any sale by the Corporation of
such investments or reduce the amount of proceeds that might otherwise be
realized therefrom. Restricted securities generally sell at a price lower than
similar securities not subject to restrictions on resale. Further, even if a
portfolio company (hereinafter referred to as an "investee") 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.
4
MANAGERIAL ASSISTANCE
The Corporation believes that providing managerial assistance to its
investees is critical to its business development activities. "Making available
significant managerial assistance" as defined in the 1940 Act with respect to a
BDC such as Franklin means (a) any arrangement whereby a BDC, through its
directors, officers, employees or general partners, offers to provide, and if
accepted, does so provide significant guidance and counsel concerning the
management, operations or business objectives and policies of a portfolio
company; or (b) the exercise of a controlling influence over the management or
policies of a portfolio company by a BDC acting individually or as a part of a
group acting together which controls such portfolio Corporation. The
Corporation, as a BDC, is required by the 1940 Act to make significant
managerial assistance available at least with respect to investees that the
Corporation treats as qualifying assets for purposes of the 70 percent test (see
"Regulation"). The nature, timing and amount of managerial assistance provided
by the Corporation vary depending upon the particular requirements of each
investee company.
In connection with its managerial assistance, the Corporation may be
represented by one or more of its officers or directors on the board of
directors of an investee. The Corporation's goal is to assist each investee
company in establishing its own independent and effective board of directors and
management.
NEED FOR FOLLOW-ON INVESTMENTS
Following its initial investments in investees, the Corporation has
made and anticipates that it will continue to make additional investments in
such investees as "follow-on" investments, in order to increase its investment
in an investee, and may exercise warrants, options or convertible securities
that were acquired in the original financing. Such follow-on investments may be
made for a variety of reasons including: 1) to increase the Corporation's
exposure to an investee, 2) to acquire securities issued as a result of
exercising convertible securities that were purchased in a prior financing, 3)
to preserve or reduce dilution of Franklin's proportionate ownership in a
subsequent financing, or 4) in an attempt to preserve or enhance the value of
the Corporation's investment. There can be no assurance that the Corporation
will make follow-on investments or have sufficient funds to make such
investments; the Corporation will have the discretion to make any follow-on
investments as it determines, subject to the availability of capital resources.
The failure to make such follow-on investments may, in certain circumstances,
jeopardize the continued viability of an investee and the Corporation's initial
investment, or may result in a missed opportunity for the Corporation to
increase its participation in a successful operation. Even if the Corporation
has sufficient capital to make a desired follow-on investment, the Company may,
under certain circumstances be inhibited 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.
5
DETERMINATION OF NET ASSET VALUE
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 the Corporation
(the "Board of Directors") may determine, if appropriate, to discount the value
where there is an impediment to the marketability of the securities held.
Investments for which there is no ready market are initially valued at
cost and, thereafter, at fair value based upon the financial condition and
operating results of the issuer and other pertinent factors as determined by the
Board of Directors. The financial condition and operating results have been
derived utilizing both audited and unaudited data. In the absence of a ready
market for an investment, numerous assumptions are inherent in the valuation
process. Some or all of these assumptions may not materialize. Unanticipated
events and circumstances may occur subsequent to the date of the valuation and
values may change due to future events. Therefore, the actual amounts eventually
realized from each investment may vary from the valuations shown and the
differences may be material. Franklin reports the unrealized gain or loss
resulting from such valuation in the Statements of Operations.
EMPLOYEES
At December 31, 2000, the Corporation had six employees.
REGULATION
The Corporation is not a registered investment company. However, as a
BDC it is subject to regulation under the 1940 Act, including many of the same
provisions that apply to registered investment companies. The following is a
brief description of the provisions of the 1940 Act applicable to the
Corporation.
Generally, to be eligible to elect BDC status, a corporation must
primarily engage in the business of furnishing capital and managerial expertise
to companies that do not have ready access to capital through conventional
financial channels. Such portfolio companies are termed "eligible portfolio
companies." More specifically, in order to qualify as a BDC, a corporation must
(i) be a domestic corporation; (ii) have registered a class of its securities or
have filed a registration statement with the SEC pursuant to Section 12 of the
Securities Exchange Act of 1934; (iii) operate for the purpose of investing in
the securities of certain types of portfolio companies, namely, immature or
emerging companies and businesses suffering or just recovering from financial
distress (see following paragraph); (iv) make available significant managerial
assistance to such portfolio companies; (v) have a majority of directors who are
not "interested persons" (as defined in the 1940 Act) and (vi) file (or, under
certain circumstances, intend to file) a proper notice of election with the SEC.
An eligible portfolio company generally is a domestic corporation that
is not an investment company and that does not have a class of securities
registered on which margin credit can be extended or is actively controlled by a
BDC and has an affiliate of a BDC on its board of directors. Control under the
1940 Act is presumed to exist where a BDC owns more than 25 percent of the
outstanding voting securities of the investee.
6
The 1940 Act restricts BDC investments in certain types of companies,
such as brokerage firms, insurance companies, investment banking firms and
investment companies. Moreover, the 1940 Act requires that at least 70 percent
of the value of the Corporation's assets consist of qualifying assets.
Qualifying assets include: (i) securities of companies that were eligible
portfolio companies at the time such company acquired their securities; (ii)
securities of bankrupt or insolvent companies that were eligible at the time of
such company's initial investment in those companies; (iii) securities received
in exchange for or distributed in or with respect to any of the foregoing and
(iv) cash items, government securities and high quality short-term debt. The
1940 Act also places restrictions on the nature of the transactions in which,
and the persons for whom, securities can be purchased in order for the
securities to be considered qualifying assets.
The Corporation is permitted by the 1940 Act, under specified
conditions, to issue multiple classes of senior debt and a single class of
preferred stock if its asset coverage, as defined in the 1940 Act, is at least
200 percent after the issuance of the debt or the preferred stock (i.e., such
senior securities may not be in excess of 50 percent of its net assets). If the
value of the Corporation's assets, as defined, were to increase through the
issuance of additional capital stock or otherwise, the Corporation would be
permitted under the 1940 Act to issue senior securities. These securities may be
convertible into common stock subject to various statutory limitations. On
February 22, 2000, the Corporation issued $1,645,000 worth of preferred stock
with a 7% coupon convertible into the Corporation's common stock at $13.33 per
share. The preferred stock is convertible into common stock at the discretion of
the preferred stock holder beginning one year after issuance and continuing
until 10 years after issuance. The Corporation at the time of the issuance and
as of the date of this filing complied with the 1940 Act provisions relating to
the issuance of convertible preferred stock.
Certain transactions involving certain closely affiliated persons of
the Corporation, including its directors, officers, and employees, may require
the prior approval of the SEC. The 1940 Act generally does not restrict
transactions between the Corporation and its portfolio companies. A BDC may
change the nature of its business so as to cease being a BDC (and in connection
therewith withdraws its election to be treated as a BDC) only if authorized to
do so by a majority vote (as defined in the 1940 Act) of its outstanding voting
securities. The Corporation is entitled to change its diversification status
without stockholder approval.
The Corporation is permitted to adopt either a profit-sharing plan
pursuant to which management (including disinterested directors) could receive
up to 20% of the net after-tax profits of the Corporation or an option plan
covering up to 20% of the stock of the Corporation. Presently the Corporation
has an option plan in effect covering 46,875 shares (4.1% on a diluted basis).
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 a bulletin board listed public
corporation. Because of the speculative nature of these investments, there is
significantly greater risk of loss than is the case with traditional investment
securities. The Corporation expects that from time to time its venture capital
investments may result in a complete loss of the Corporation's invested capital
or may be unprofitable. Other investments may appear likely to become
successful, but may never realize their potential. Neither the Corporation's
investments nor an investment in the Corporation is intended to constitute a
balanced investment program. The Corporation has in the past relied and
continues to rely to a
7
large extent upon proceeds from sales of investments rather than investment
income to defray a significant portion of its operating expenses.
INVESTING IN THE CORPORATION'S STOCK IS HIGHLY SPECULATIVE AND YOU
COULD LOSE SOME OR ALL OF THE AMOUNT YOU INVEST
The value of the Corporation's common stock may decline and may be
affected by numerous market conditions, which could result in the loss of some
or all of your investment in the Corporation's shares. The securities markets
frequently experience extreme price and volume fluctuation which affect market
prices for securities of companies generally, and technology companies in
particular. Because of the Corporation's focus on the technology sector, its
stock price is likely to be impacted by these market conditions. General
economic conditions and general conditions in the Internet and information
technology and other high technology industries will also affect the
Corporation's stock price.
INVESTING IN THE CORPORATION'S SHARES MAY BE INAPPROPRIATE FOR YOUR
RISK TOLERANCE
Investing in the Corporation's shares may be inappropriate for your
risk tolerance. The Corporation's investments in accordance with its investment
objective and principal strategies may result in an above average amount of risk
and volatility or loss of principal. The Corporation's investments in portfolio
companies are highly speculative and aggressive and, therefore, an investment in
its shares may not be suitable for you.
THE MARKET FOR VENTURE CAPITAL INVESTMENTS IS HIGHLY COMPETITIVE. IN
SOME CASES, THE CORPORATION'S STATUS AS A BUSINESS DEVELOPMENT COMPANY
MAY HINDER ITS ABILITY TO PARTICIPATE IN INVESTMENT OPPORTUNITIES.
The Corporation faces substantial competition in its investing
activities from private venture capital funds, investment affiliates of large
industrial, technology, service and financial companies, small business
investment companies, wealthy individuals and foreign investors. As a business
development company, the Corporation is required to disclose quarterly the name
and business description of portfolio companies and value of any portfolio
securities. Most of the Corporation's competitors are not subject to this
disclosure requirement. The Corporation's obligation to disclose this
information could hinder its ability to invest in certain portfolio companies.
Additionally, other regulations, current and future, may make the Corporation
less attractive as a potential investor to a given portfolio company than a
private venture capital fund not subject to the same regulations.
REGULATORY RISKS
Securities and tax laws and regulations governing the Corporation's
activities may change in ways negative to the Corporation's and its
shareholders' interests and interpretations of such laws and regulations may
change with unpredictable consequences.
THE CORPORATION IS DEPENDENT UPON KEY MANAGEMENT PERSONNEL FOR FUTURE
SUCCESS
The Corporation is dependent for the selection, structuring, closing
and monitoring of its investments on the diligence and skill of its senior
management and other management members.
8
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. The Corporation does not maintain
key man life insurance on any of its officers or employees.
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 are 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 estimated net asset value are recorded in the
Corporation's statement of operations as "Change in unrealized appreciation on
investments."
9
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 2. PROPERTIES
Franklin maintains its offices at 450 Park Avenue, 10th Floor, New
York, New York 10022, where it leases approximately 3,600 square feet of office
space pursuant to a lease agreement expiring December 31, 2003. As of December
31, 2000, Franklin had a sublet arrangement with one subtenant for a portion of
Franklin's office space.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Corporation did not submit any matters to a vote of its
stockholders during the fourth quarter of the 2000 fiscal year.
10
PART II
ITEM 5. MARKET FOR CORPORATION'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
STOCK TRANSFER AGENT
Chase Mellon Shareholder Services, 85 Challenger Road, Overpack Center,
Ridgefield Park, NJ 07660 (Telephone (800) 851-9677) serves as transfer agent
for the Corporation's common stock. Certificates to be transferred should be
mailed directly to the transfer agent, preferably by registered mail.
MARKET PRICES
The Corporation's common stock is traded on The American Stock Exchange
under the symbol "FKL". The following table sets forth the range of the high and
low selling price of the Corporation's shares during each quarter of the last
two years, as reported by the American Stock Exchange.
2000 QUARTER ENDING LOW HIGH
March 31 $ 6.833 $ 31.000
June 30 $ 7.333 $ 21.000
September 30 $ 8.250 $ 9.500
December 31 $ 7.500 $ 8.750
1999 QUARTER ENDING LOW HIGH
March 31 $ 3.083 $ 4.167
June 30 $ 3.333 $ 5.000
September 30 $ 3.333 $ 3.917
December 31 $ 3.417 $ 7.417
DIVIDENDS
The Corporation paid $98,633 in dividends to preferred stockholders
during 2000 and did not pay dividends to common stockholders during the past two
years.
RECENT SALES OF UNREGISTERED SECURITIES
On February 22, 2000, the Corporation issued 16,450 shares of
unregistered convertible preferred stock under Section 4(2) of the Securities
Exchange Act of 1934 as a private placement at a price of $100 per share. The
convertible preferred stock was issued with a 7% coupon convertible into the
Corporation's common stock at $13.33 per share. The preferred stock is
convertible into common stock at the discretion of the preferred stock holder
beginning one year after issuance and continuing until 10 years after issuance.
The preferred stock offered was purchased by officers, directors and
other accredited investors. (See Item 12 Security Ownership of Certain
Beneficial Owners and Management).
11
STOCKHOLDERS
As of February 28, 2001, there were 599 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 1,096,900 are
outstanding at February 28, 2001. The Corporation has 5,000,000 shares of
convertible preferred stock authorized, of which 16,450 were issued on February
22, 2000 and are outstanding at February 28, 2001. (See section on Liquidity and
Capital Resources for details of preferred stock.)
ITEM 6. SELECTED FINANCIAL DATA
The following tables should be read in conjunction with the Financial
Statements included in Item 8 of this form 10-K.
BALANCE SHEET DATA
FINANCIAL POSITION AS OF DECEMBER 31:
2000 1999 1998 1997* 1996
----------- ----------- ----------- ------------ ------------
Total assets $ 5,766,712 $ 8,995,965 $ 6,548,696 $ 7,718,458 $ 11,798,044
Liabilities $ 187,632 $ 555,583 $ 233,143 $ 375,326 $ 1,921,475
Net asset value $ 5,579,080 $ 8,440,382 $ 6,315,553 $ 7,343,132 $ 9,876,569
Basic net asset value per share $ 5.08 $ 7.70 $ 5.61 $ 6.11 $ 8.22
Diluted net asset value per share $ 4.57 $ 7.55 $ 5.61 $ 6.11 $ 8.22
Shares outstanding 1,098,200 1,095,882 1,126,029 1,201,797 1,201,797
OPERATING DATA FOR THE YEAR ENDED DECEMBER 31:
2000** 1999 1998 1997 1996
----------- ----------- ----------- ------------ ------------
Investment income $ 115,015 $ 72,382 $ 262,323 $ 497,021 $ 852,211
Expenses $ 2,372,797 $ 1,621,780 $ 1,620,408 $ 2,400,850 $ 2,406,102
Net investment loss from operations $(2,257,782) $(1,549,398) $(1,357,085) $ (1,903,829) $ (1,553,891)
Net realized gain on investments,
net of income taxes $ 1,215,875 $ 688,259 $ 1,628,004 $ 3,105,165 $ 95,085
Net (decrease) increase in
unrealized appreciation
of investments, net of
deferred income taxes $(3,365,513) $ 3,086,958 $(1,015,091) $ (1,130,879) $ 266,694
Net (decrease) increase in net
assets from operations $(4,427,420) $ 2,225,819 $ (744,172) $ 70,457 $ (1,192,112)
12
2000** 1999 1998 1997 1996
----------- ----------- ----------- ------------ ------------
Basic net (decrease) increase in net
assets from operations per
weighted average number of
shares outstanding $ (4.05) $ 1.98 $ (0.99) $ (0.63) $ (0.99)
Diluted net (decrease) increase in
net assets from operations per
weighted average number of
shares outstanding $ (4.05) $ 1.98 $ (0.99) $ (0.63) $ (0.99)
* A special distribution of $3.25 per share was declared in July 1997.
** Expenses in the year ended December 31, 2000 include non-cash compensation
of $349,644 due to the exercise of employee incentive stock options.
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 2000 FINANCIAL STATEMENTS AND NOTES THERETO IN ITEM 8.
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 (decrease) increase 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 (benefits) provisions; and "Net (decrease) increase in
unrealized appreciation of investments," which is the net change in the fair
value of the Corporation's investment portfolio, net of any (decrease) increase
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
(decrease) increase 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,
$5,766,712 and $5,579,080 at December 31, 2000 versus $8,995,965 and $8,440,382
at December 31, 1999. Net asset value per share was $5.08 ($4.57 diluted) at
December 31, 2000 versus $7.70 ($7.55 diluted) at December 31, 1999.
The Corporation's financial condition is dependent on the success of
its investments. A summary of the Corporation's investment portfolio is as
follows:
13
DECEMBER 31, 2000 DECEMBER 31, 1999
----------------- ------------------
Investments, at cost $3,627,390 $2,971,347
Unrealized appreciation, net of
deferred taxes 1,371,522 4,737,035
---------- -----------
Investments, at fair value $4,998,912 $7,708,382
========== ===========
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 development stage companies that may lack
management depth and have little history of operations.
The Corporation has an investment in Avery Communications Corporation
("Avery Communications") valued at $1,198,389 at December 31, 2000, which
represents 20.8% of the Corporation's total assets and 21.5% of its net assets.
Avery Communication's common stock is quoted on the OTC Electronic Bulletin
Board under the symbol "ATEX". Avery Communications is the public parent of two
companies, Primal Solutions, Inc. ("Primal") and HBS Billing Service, Ltd
("HBS"), both of which operate in the telecommunications industry. Primal, based
in Irvine, California, is a leading provider of 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. HBS, based in San Antonio, Texas is a nationwide
provider of a comprehensive range of Local Exchange Carrier (LEC) Billing and
Collection services through an established billing network of more than 1,300
LECs. HBS has built strong billing and collection relationships with all
Regional Bell Operating Companies (RBOCs), GTE, AllTel, Sprint, and several
hundred independent telephone companies throughout the United States. Through
these billing agreements, HBS provides clearinghouse billing services to its
clients for a variety of telecommunication-related services and products,
including Direct Dialed 1+, Dial-Around 10-10-xxx, and qualified non-regulated
telecommunication services. On August 10, 2000, Avery Communications announced
that it had revised its previously stated plan to spin-off its HBS Subsidiary to
its shareholders. Pending regulatory approval, under the new plan Avery
Communications shareholders will receive one share of stock in Primal for every
one Avery Communications common share held on the record date. Primal has filed
a registration statement with the Securities and Exchange Commission to register
the Primal shares to be issued in the spin-off.
During the year ended December 31, 2000, Franklin sold 202,000 shares
of Avery Communications for total proceeds of $379,527 realizing a gain of
$161,531. Franklin's remaining shares represent 10.5% of Avery Communications
outstanding voting stock on a primary share basis and 9.5% on a fully diluted
basis. Stephen L. Brown and Spencer L. Brown, officers of Franklin, did not
stand for re-election to the Avery Communications Board of Directors at the
annual meeting held on September 13, 2000 and are therefore, no longer members
of the Avery Communications Board of Directors. In addition, Spencer L. Brown
resigned from the Primal Board of Directors on December 11, 2000.
Subsequent to year-end, on February 1, 2001, the Corporation sold to
Avery Communications in a private transaction 1,183,938 shares of common stock
and 350,000 shares of preferred stock, representing the entire ownership
interest in Avery for $1,551,617 plus
14
accrued interest 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 once the spin-off, as discussed above, occurred. On February
13, 2001, Primal announced that Avery Communications had completed the spin-off
of Primal and Franklin received 1,533,938 fully registered and marketable shares
of Primal.
At December 31, 2000, the Corporation had an investment in Data
Downlink Corporation ("Data Downlink") valued at $1,000,000, which represents
17.3% of the Corporation's total assets and 17.9% of its net assets. Data
Downlink, headquartered in New York and London, is a leading provider of
Internet-based online information services. Data Downlink 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 privatesuiteTM, a
fast, easy, cost-effective way to identify and retrieve profiles of privately
held companies around the world; compbookTM, 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 Data
Downlink Series F Preferred Stock. In connection with this investment, Franklin
was granted observer rights for Data Downlink Board of Directors meetings.
At December 31, 2000, the Corporation had an investment in Excom
Ventures, LLC ("Excom") valued at $140,000, which represents 2.4% of the
Corporation's total assets and 2.5% of its net assets. 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, 2000, the Corporation owned 409,024 shares of common
stock of Go America, Inc. ("Go America"), a wireless internet service provider
valued at $2,198,504, which represents 38.1% of the Corporation's total assets
and 39.4% of its net assets. Go America is a leading provider of nationwide
wireless Internet services. Go America enables business and individual
subscribers to access remotely the Internet, email and corporate intranets in
real time through a wide variety of mobile computing and communications devices.
Go America's Wireless Internet Connectivity Center offers subscribers
comprehensive and flexible mobile data solutions for wireless Internet access by
providing wireless network services, mobile devices, software and subscriber
service and support.
The Corporation made an initial purchase of $25,000 worth of Go America
common stock in 1996. The Corporation made additional purchases of common stock
of $25,000 and $324,740 in 1998 and in November 1999, respectively.
Additionally, in November 1999, the Corporation purchased $125,000 of
convertible preferred stock. On April 7, 2000, Go America's common stock began
trading on the Nasdaq National Market. All of the convertible preferred stock
owned by Franklin was converted to common on this date as well. During the year
ended December 31, 2000, Franklin sold 105,760 shares of Go America for total
proceeds of $946,332 realizing a gain of $843,663.
At December 31, 2000, the Corporation had an investment in Structured
Web, Inc. ("Structured Web") valued at $350,000, which represents 6.1% of the
Corporation's total assets
15
and 6.3% 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.
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 for Structured Web Board of Directors
meetings.
During the third quarter of 2000 eMattress ceased operations and as of
December 31, 2000, Franklin has written off its entire investment including a
loan of $56,311 that was determined to be non-collectible. eMattress was
dissolved effective December 26, 2000.
On December 22, 2000, TradingNews, Inc. announced that it was ceasing
operations immediately and that there would be no funds available to pay back
stockholders or convertible note holders. As of December 31, 2000, Franklin has
written off its entire investment in TradingNews, Inc.
RESULTS OF OPERATIONS
INVESTMENT INCOME AND EXPENSES:
The Corporation's principal objective is to achieve capital
appreciation through long-term investments in businesses believed to have
favorable growth potential. Therefore, a significant portion of the investment
portfolio is structured to maximize the potential for capital appreciation and
provides little or no current yield in the form of dividends or interest. The
Corporation earns interest income from loans, preferred stocks, corporate bonds
and other fixed income securities. The amount of interest income varies based
upon the average balance of the Corporation's fixed income portfolio and the
average yield on this portfolio.
The Corporation had interest and dividend income of $93,015 in 2000,
$72,382 in 1999, and $34,128 in 1998. The increase in 2000 from 1999 was the
result of an increase in the amount of cash on hand in 2000 as compared to 1999.
Income from controlled affiliates was $0 in 2000 and 1999, and $229,195 in 1998,
representing dividend and interest income from preferred stock and a note
received in connection with the Corporation's investment in Avery
Communications. Avery Communications ceased being a controlled investment of
Franklin during 1998. (See Footnote 6 to the Financial Statements.) The
Corporation had $22,000 in other income during 2000 representing a patent
infringement settlement.
Operating expenses were $2,372,797 in 2000, $1,621,780 in 1999, and
$1,620,408 in 1998. 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.
Net investment losses from operations were $2,257,782 in 2000,
$1,549,398 in 1999, and $1,357,085 in 1998.
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
16
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, 2000, 1999, and 1998, the
Corporation realized net gains before taxes of $1,215,875, $688,259, and
$1,628,004, respectively, from the disposition of various investments.
During 2000, Franklin realized a gain of $956,576 from the sale of
241,131 shares of Communication Intelligence Corporation ("CIC") common stock, a
portfolio holding company 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.
During 1999, Franklin realized a gain of $922,118 from the sale of
775,000 shares of CIC common stock as well as a gain of $92,300 from the
liquidation of Seneca and $36,622 from the liquidation of the investment in the
FMA High Yield Income Limited Partnership. Additionally, the Corporation
realized $73,797 in gains from the sale of various marketable securities. These
gains were offset by a loss of $226,023 from the liquidation of the
Corporation's investment in Codman Research Inc., and $148,014 from the write
off of the Corporation's investment in Pacific Healthcare Group. Additionally,
the Corporation realized losses of $62,541 from the sale of various marketable
securities.
During 1998, Franklin realized a net gain from the sale of a portion of
its investment in and subsequent exercise of warrants in Avery Communications of
$1,308,208, as well as $350,000 in gains from Seneca, and $96,370 in gains from
other investment partnerships, the sale of various marketable securities and
loans. These gains were offset by a loss of $126,574 on the sales of various
marketable securities, loans, and investment partnerships.
UNREALIZED APPRECIATION OF INVESTMENTS:
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"). 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,
increased by $3,086,958 during the year ended December 31, 1999, primarily from
the increased value of CIC and CIC Ventures and the increased value of Go
America.
Unrealized appreciation of investments, net of deferred taxes,
decreased by $1,015,091 during the year ended December 31, 1998, primarily from
realized gains due to the sale of a
17
portion of Franklin's investment in Avery Communications. This was offset by
increased values for CIC and 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. Therefore, the Corporation is taxed under Regulation C.
LIQUIDITY AND CAPITAL RESOURCES:
The Corporation's reported total cash and cash equivalents, accrued
interest and accounts receivable and marketable investment securities (the
primary measure of liquidity) at December 31, 2000 was $768,582 compared to
$1,710,087 at December 31, 1999 and $1,979,256 at December 31, 1998. In addition
to the above amount the Corporation's portfolio position in Go America is
available for sale at December 31, 2000. Management believes that these assets
provide the Corporation with sufficient liquidity for its operations.
On February 22, 2000, the Corporation issued $1,645,000 of convertible
preferred stock. The stock was issued at a price of $100 per share and has a 7%
quarterly dividend. The stock is convertible into Franklin common stock at a
conversion price of $13.33 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 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
investee corporation 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.
18
Any changes in valuation are recorded in the Corporation's consolidated
statements of operations as "Net increase (decrease) in unrealized appreciation
on investments."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FRANKLIN CAPITAL CORPORATION
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
Page
----
Report of Ernst & Young, LLP.............................. 20
Balance Sheets as of
December 31, 2000 and 1999....................... 21
Statements of Operations for the years
ended December 31, 2000, 1999 and 1998........... 22
Statements of Cash Flows for the years
ended December 31, 2000, 1999 and 1998........... 23
Statements of Changes in Net Assets for the years
ended December 31, 2000, 1999 and 1998........... 24
Financial Highlights for the years ended December 31,
2000, 1999, 1998, 1997 and 1996.................. 25
Portfolio of Investments as of
December 31, 2000................................ 26
Notes to Financial Statements............................. 27-35
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
19
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, 2000 and 1999, including the portfolio of investments as of
December 31, 2000 and the related statements of operations, cash flows and
changes in net assets and the financial highlight for each of the three years in
the period ended December 31, 2000. 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 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 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, 2000 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 referred to above present fairly, in
all material respects, the financial position of Franklin Capital Corporation at
December 31, 2000 and 1999, the results of its operations, cash flows and
changes in net assets and the financial highlights for each of the three years
in the period ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States.
ERNST & YOUNG LLP
New York, New York
February 16, 2001
20
Exhibit 14(a)(i)
FRANKLIN CAPITAL CORPORATION
=================================================================================================================
BALANCE SHEETS
- -----------------------------------------------------------------------------------------------------------------
DECEMBER 31, 2000 1999
- -----------------------------------------------------------------------------------------------------------------
ASSETS
Marketable investment securities, at market value (cost: December 31,
2000 - $122,231; December 31, 1999 - $109,784) (Note 2) ................... $ 112,019 $ 891,462
Investments, at fair value (cost: December 31, 2000 - $3,505,159;
December 31, 1999 - $2,861,563) (Note 2)
Avery Communications, Inc. ............................................ 1,198,389 3,471,880
eMattress.com ......................................................... -- 100,000
Excom Ventures, LLC ................................................... 140,000 --
Other investments ..................................................... 3,548,504 3,596,040
------------ ------------
4,886,893 7,167,920
------------ ------------
Cash and cash equivalents (Note 2) ............................................. 647,565 571,341
Receivable from disposal of investments ........................................ -- 231,308
Accrued interest and accounts receivable (Note 6) .............................. 8,998 15,976
Other assets ................................................................... 111,237 117,958
------------ ------------
$ 5,766,712 $ 8,995,965
============ =============
TOTAL ASSETS
- ---------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accounts payable and accrued liabilities ....................................... $ 187,632 $ 204,583
Deferred taxes payable ......................................................... -- 351,000
------------ -------------
TOTAL LIABILITIES .............................................................. 187,632 555,583
------------ -------------
Commitments and contingencies (Note 5)
STOCKHOLDERS' EQUITY
Common stock, $1 par value: 5,000,000 shares authorized;
1,505,888 shares issued: 1,098,200 and 1,095,882 shares outstanding
at December 31, 2000 and 1999, respectively (Note 7) ...................... 1,505,888 1,003,986
Convertible preferred stock, $1 par value, cumulative 7% dividend:
5,000,000 shares authorized; 16,450 issued and outstanding at December 31,
2000, 0 issued and outstanding at December 31, 1999
(Liquidation preference $1,645,000) (Note 4) ............................... 16,450 --
Paid-in capital - common stock ................................................. 8,643,060 8,998,051
preferred stock .............................................. 1,628,550 --
Unrealized appreciation of investments,
net of deferred income taxes (Notes 2 and 3) .............................. 1,371,522 4,737,035
Accumulated deficit ............................................................ (5,190,908) (4,030,368)
------------ -------------
7,974,562 10,708,704
Deduct: 407,688 and 410,097 shares of common stock held in treasury,
at cost, at December 31, 2000 and 1999, respectively (Note 4) ............. (2,395,482) (2,268,322)
------------ -------------
Net assets, equivalent to $5.08 (diluted $4.57) per share at December 31,
2000 and $7.70 (diluted $7.55) per share at December 31, 1999 ............ 5,579,080 8,440,382
------------ -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ..................................... $ 5,766,712 $ 8,995,965
============ ============
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
21
FRANKLIN CAPITAL CORPORATION
===================================================================================================================================
STATEMENTS OF OPERATIONS
- -----------------------------------------------------------------------------------------------------------------------------------
For the Year Ended December 31, .............................................. 2000 1999 1998
-----------------------------------------
INVESTMENT INCOME
Interest on short term investments and money market accounts ............. $ 51,015 $ 30,382 $ 34,128
Dividend income .......................................................... 42,000 42,000 --
Income from controlled affiliates (Note 6) .............................. -- -- 229,195
Other income ............................................................. 22,000 -- --
----------- ----------- -----------
115,015 72,382 263,323
----------- ----------- -----------
EXPENSES
Salaries and employee benefits (Note 7) ................................. 1,419,941 870,820 882,168
Professional fees ........................................................ 367,629 330,382 223,106
Appraisal fees ........................................................... -- 20,616 3,087
Rent (Note 5) ........................................................... 104,332 83,905 99,912
Insurance ................................................................ 42,314 41,301 43,201
Directors' fees .......................................................... 67,981 48,850 54,539
Taxes other than income taxes ............................................ 45,306 28,980 49,919
Newswire and promotion ................................................... 6,823 4,424 12,774
Depreciation and amortization ............................................ 21,468 22,402 28,428
General and administrative ............................................... 297,003 170,100 223,274
----------- ----------- -----------
2,372,797 1,621,780 1,620,408
----------- ----------- -----------
Net investment loss from operations .......................................... (2,257,782) (1,549,398) (1,357,085)
Net realized gain (loss) on portfolio of investments:
Investment securities:
Affiliated ......................................................... (278,526) -- 1,308,208
Unaffiliated ....................................................... 1,490,582 559,337 (81,008)
----------- ----------- -----------
Total investment securities ............................................. 1,212,056 559,337 1,227,200
Other than investment securities ........................................ 3,819 128,922 400,804
----------- ----------- -----------
Net realized gain on portfolio of investments ................................ 1,215,875 688,259 1,628,004
Provision for current income taxes ........................................... 20,000 -- --
----------- ----------- -----------
Net realized loss ............................................................ (1,061,907) (861,139) 270,919
(Decrease) increase in unrealized appreciation of investments, net of deferred
income taxes:
Investment securities:
Affiliated ......................................................... (1,771,744) (196,487) (1,040,371)
Unaffiliated ....................................................... (992,907) 2,790,030 287,656
----------- ----------- -----------
Total investment securities ............................................. (2,764,651) 2,593,543 (752,715)
Other than investment securities ........................................ (951,862) 844,415 (262,376)
Deferred income tax benefit (expense) ................................... 351,000 (351,000) --
(Decrease) increase in unrealized appreciation of investments,
net of deferred income taxes ................................................ (3,365,513) 3,086,958 (1,015,091)
----------- ----------- -----------
Net (decrease) increase in net assets from operations ........................ (4,427,420) 2,225,819 (744,172)
=========== =========== ===========
Preferred dividends .......................................................... 98,633 -- --
----------- ----------- -----------
Net (decrease) increase in net assets attributable
to common stockholders .................................................... ($4,526,053) $ 2,225,819 ($ 744,172)
=========== =========== ===========
Basic net (decrease) increase in net assets from operations
per common share (Note 8) .................................................. ($4.05) $1.98 ($0.63)
=========== =========== ===========
Diluted net (decrease) increase in net assets from operations
per common share (Note 8) .................................................. ($4.05) $1.98 ($0.63)
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
22
FRANKLIN CAPITAL CORPORATION
===================================================================================================================================
STATEMENTS OF CASH FLOWS
- -----------------------------------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net (decrease) increase in net assets from operations ........................ ($4,427,420) $ 2,225,819 ($ 744,172)
Adjustments to reconcile net (decrease) increase in net assets to net cash
used in operating activities:
Depreciation and amortization ............................................ 21,468 22,402 28,428
Non-cash compensation expense from cashless exercise of officer options .. 349,644 -- --
Decrease (increase) in unrealized appreciation of investments,
net of deferred taxes ............................................... 3,365,513 (3,086,958) 1,015,091
Amortization of discount on note receivable from affiliate ............... -- -- (101,176)
Net realized gain on portfolio of investments, net of current income taxes (1,195,875) (688,259) (1,628,004)
Changes in operating assets and liabilities:
Decrease (increase) in receivable from disposal of investments ......... 231,308 (231,308) --
Decrease in accrued interest and accounts receivable ................... 6,978 163,203 150,869
(Increase) decrease in other assets .................................... (14,741) 5,880 (7,596)
Decrease in accounts payable and accrued liabilities ................... (36,951) (28,560) (142,183)
----------- ----------- -----------
Total adjustments .................................................... 2,727,344 (3,843,600) (684,571)
----------- ----------- -----------
Net cash used in operating activities ................................ (1,700,076) (1,617,781) (1,428,743)
----------- ----------- -----------
Cash flows from investing activities:
Proceeds from sale of affiliate .............................................. 379,527 -- 2,500,000
Proceeds from sale of other investments ...................................... 950,151 766,308 1,432,717
Proceeds from sale of marketable investment securities ....................... 1,259,323 2,483,077 217,481
Return of capital from investments ........................................... -- 36,622 --
Loan payments received from investments ...................................... -- 66,667 --
Purchases of investment in majority owned affiliate .......................... (56,311) (375,000) --
Purchase of investment in affiliate .......................................... (140,000) -- --
Purchases of other investments ............................................... (1,575,625) (529,346) (1,025,000)
Purchases of marketable investment securities ................................ (257,239) (1,247,440) (661,575)
Purchases of fixed assets .................................................... -- (2,402) --
----------- ----------- -----------
Net cash provided by investing activities ............................ 559,826 1,198,486 2,463,623
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from issuance of preferred stock .................................... 1,645,000 -- --
Payments of preferred dividends .............................................. (98,633) -- --
Cash paid to common stockholders in lieu of fractional shares due to
stock split of common shares ............................................... (1,448) -- --
Purchases of treasury stock .................................................. (328,445) (109,737) (283,407)
----------- ----------- -----------
Net cash provided by (used in) financing activities .................. 1,216,474 (109,737) (283,407)
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents ........................... 76,224 (529,032) 751,473
Cash and cash equivalents at beginning of year ................................. 571,341 1,100,373 348,900
----------- ----------- -----------
Cash and cash equivalents at end of year ....................................... $ 647,565 $ 571,341 $ 1,100,373
=========== =========== ===========
- -----------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
23
FRANKLIN CAPITAL CORPORATION
===================================================================================================================================
STATEMENTS OF CHANGES IN NET ASSETS
- -----------------------------------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in net assets from operations:
Net investment loss ............................................ ($2,257,782) ($1,549,398) ($1,357,085)
Net realized gain on portfolio of investments,
net of current income taxes ................................ 1,195,875 688,259 1,628,004
(Decrease) increase in unrealized appreciation of investments,
net of deferred income taxes ............................... (3,365,513) 3,086,958 (1,015,091)
----------- ----------- -----------
Net (decrease) increase in net assets from operations ...... (4,427,420) 2,225,819 (744,172)
Capital stock transactions:
Issuance of stock from treasury to majority owned affiliate, net -- 8,747 --
Issuance of preferred stock .................................... 1,645,000 -- --
Payment of dividends on preferred stock ........................ (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) -- --
Purchase of treasury stock ..................................... (328,445) (109,737) (283,407)
----------- ----------- -----------
Total (decrease) increase in net assets .................... (2,861,302) 2,124,829 (1,027,579)
----------- ----------- -----------
Net assets at beginning of year ................................... 8,440,382 6,315,553 7,343,132
----------- ----------- -----------
Net assets at end of year ......................................... $ 5,579,080 $ 8,440,382 $ 6,315,553
=========== =========== ===========
--------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
24
FRANKLIN CAPITAL CORPORATION
===============================================================================================================
FINANCIAL HIGHLIGHTS
- ---------------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 2000 1999 1998 1997(1) 1996(1)
- ---------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE (2):
Net asset value, beginning of period ...................... $7.70 $5.61 $6.11 $8.22 $9.78
----- ----- ----- ----- ------
Net investment loss ............................... (2.07) (1.38) (1.14) (1.58) (1.29)
Net gain on portfolio of
investments (realized and unrealized) after taxes (1.98) 3.35 0.51 1.64 0.30
----- ----- ----- ----- ------
Total from investment operations .......................... (4.05) 1.97 (0.63) 0.06 (0.99)
----- ----- ----- ----- -------
Less dividends and distributions:
Distributions from accumulated
deficit and earnings ........................... 0.00 0.00 0.00 (2.17) (0.67)
----- ----- ----- ----- ------
Total dividends and distributions ......................... 0.00 0.00 0.00 (2.17) (0.67)
----- ----- ----- ----- -----
Capital stock transactions ................................ 1.43 0.12 0.12 0.00 0.09
----- ----- ----- ----- -----
Net asset value, end of period ............................ $5.08 $7.70 $5.61 $6.11 $8.22
===== ===== ===== ===== =====
Market value per share, end of period ..................... $8.00 $6.83 $3.50 $4.33 $6.75
===== ===== ===== ===== =====
TOTAL INVESTMENT RETURN:
Based on market value per share (%) ....................... 17.13 95.24 (19.23) (16.62) 9.64
RATIOS TO AVERAGE NET ASSETS:
Expenses (%) .............................................. 25.99 24.97 23.73 28.97 20.58
Net investment loss (%) ................................... (24.73) (23.86) (19.88) (22.97) (13.29)
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of period (000 omitted) ................. $5,579 $8,440 $6,316 $7,343 $9,877
Portfolio turnover rate (%) ............................... 24 36 39 77 8
- --------------------------------------------------------------------------------
(1) - Audited by predecessor auditor
(2) - Calculated based on weighted average number of shares outstanding during
the period.
The accompanying notes are an integral part of these financial highlights.
25
FRANKLIN CAPITAL CORPORATION
================================================================================
PORTFOLIO OF INVESTMENTS
- --------------------------------------------------------------------------------
MARKETABLE INVESTMENT SECURITIES
- --------------------------------------------------------------------------------
NUMBER OF
SHARES OR MARKET
PRINCIPAL VALUE
DECEMBER 31, 2000 AMOUNT ($) COST(1) (NOTE 2)
- ----------------------------------------------------------------------------------------------------------
Communications Intelligence Corporation - common stock 75,000 $ 87,556 $77,344
Certificate of Deposit - 5.03%, due 01/03/2001 34,675 34,675
-------- --------
Total Marketable Investment Securities
(2.2% of total investments and 2.0% of net assets) $122,231 $112,019
======== ========
- --------------------------------------------------------------------------------
INVESTMENTS, AT FAIR VALUE
- --------------------------------------------------------------------------------
NUMBER OF
SHARES OR DIRECTORS'
EQUITY PRINCIPAL VALUATION
DECEMBER 31, 2000 INVESTMENT INTEREST AMOUNT ($) COST(1) (NOTE 2)
- -----------------------------------------------------------------------------------------------------------------------------------
AFFILIATES
Avery Communications, Inc. Common stock 1,183,938 $1,268,089
Avery Communications, Inc. Convertible preferred
stock - Series E;
12.0% dividend rate(2) 350,000 350,000
---------
Total Avery Communications, Inc.
(24.0% of total investments and 21.5% of net assets) 9.32% 1,618,089 $1,198,389
(Telecommunications) (fully diluted basis)
Excom Ventures, LLC
(2.8% of total investments and 2.5% of net assets) Units 18.64% 140,000 140,000 140,000
(Purchase evaluation software)
OTHER INVESTMENTS
Data Downlink Corporation
(20.0% of total investments and 17.9% of net assets) Convertible Preferred 1.68% 321,543 1,000,000 1,000,000
(Internet-based information provider) Stock
Go America, Inc.
(44.0% of total investments and 39.4% of net assets) Common stock 0.77% 409,024 397,070 2,198,504
(Wireless internet service provider)
Structured Web, Inc.
(7.0% of total investments and 6.3% of net assets) Convertible Preferred 2.02% 188,425 350,000 350,000
(Internet-based application service provider) Stock
Total Other Investments 1,747,070 3,548,504
---------- ----------
Total Investments, at Fair Value $3,505,159 $4,886,893
========== ==========
- --------------------------------------------------------------------------------
(1) Book cost equals tax cost for all investments
(2) Income producing security
The accompanying notes are an integral part of these financial highlights.
26
FRANKLIN CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2000
1. ORGANIZATION
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 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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
STATEMENTS OF CASH FLOWS
For purposes of the Statements of Cash Flows, Franklin considers only highly
liquid investments 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 during the years ended December 31, 2000 and
1999, and paid income taxes of $2,000 during the year ended December 31, 1999.
On January 25, 1999, the Corporation issued 30,069 shares of treasury stock
valued at $175,000, the Net Asset Value ("NAV") on the date of the transaction,
as part of an investment in a controlled affiliate. On September 30, 1999,
28,566 of these shares valued at $166,252, were canceled and placed back into
treasury. (See Note 6 - Transactions with Affiliates.)
At December 31, 2000, 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
27
FRANKLIN CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
utilizing both audited and unaudited data. In the absence of a ready market for
an investment, numerous assumptions are inherent in the valuation process. Some
or all of these assumptions may not materialize. Unanticipated events and
circumstances may occur subsequent to the date of the valuation and values may
change due to future events. Therefore, the actual amounts eventually realized
from each investment may vary from the valuations shown and the differences may
be material. Franklin reports the unrealized gain or loss resulting from such
valuation in the Statements of Operations.
GAINS ON PORTFOLIO OF INVESTMENTS
Amounts reported as realized gains are measured by the difference between the
proceeds of sale or exchange and the cost basis of the investment without regard
to unrealized gains reported in the prior periods. Gains are considered realized
when sales or dissolution of investments are consummated.
INCOME TAXES
Franklin does not qualify 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.
NET INCREASE (DECREASE) IN NET ASSETS PER COMMON SHARE
Basic and diluted net increase (decrease) in net assets per common share is
calculated in accordance with the provisions of Statement of Financial
Accounting Standards No. 128, "Earnings per Share".
3. INCOME TAXES
For the years ended December 31, 2000, 1999 and 1998, Franklin's tax (provision)
benefit was based on the following:
2000 1999 1998
------------ ------------- ------------
Net investment loss from operations $(2,257,782) $(1,549,398) $(1,357,085)
Net realized gain on portfolio of investments 1,215,875 688,259 1,628,004
(Decrease) increase in unrealized appreciation (3,716,513) 3,437,958 (1,015,091)
------------ ------------ ------------
Pre-tax book (loss) income $(4,758,420) $ 2,576,819 $ (744,172)
=========== =========== ============
28
2000 1999 1998
----------- ---------- ---------
Federal tax benefit (provision) at 34% on $(4,758,420),
$2,576,819, and $(744,172) respectively .... $ 1,618,000 $ (876,000) $ 253,000
State and local, net of Federal benefit .... (13,000) (49,000) --
Book losses for which no benefit is provided (130,000) (10,000) (253,000)
Change in valuation allowance .............. (1,144,000) 584,000 --
----------- ---------- ---------
$ 331,000 $ (351,000) $ --
=========== ========== =========
The components of the tax benefit (provision) are as follows:
2000 1999 1998
---------- --------- -------
Current state and local tax expense......... $ ( 20,000) $ -- $ --
Deferred tax benefit (expense).............. 351,000 (351,000) --
---------- --------- -------
Benefit (provision) for income taxes........ $ 331,000 $(351,000) $ --
=========== ========= =======
- --------------------------------------------------------------------------------
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, 2000 and December 31, 1999, significant deferred tax assets and
liabilities consist of:
Asset (Liability)
-------------------------
December 31, December 31,
2000 1999
----------- -------------
Deferred Federal and state benefit from net operating
loss carryforward .................................. $ 1,638,000 $ 1,481,000
Deferred Federal and state provision on unrealized
appreciation of investments ........................ (494,000) (1,832,000)
Valuation allowance .................................. (1,144,000) --
----------- ------------
Deferred taxes ..................................... $ -- $( 351,000)
=========== =============
At December 31, 2000, Franklin had net operating loss carryforwards for income
tax purposes of approximately $4,551,000 that will begin to expire in 2011. At a
36% effective tax rate the after-tax net benefit from this loss would be
approximately $1,638,000.
4. STOCKHOLDERS' EQUITY
The Accumulated Deficit at December 31, 2000, consists of accumulated net
realized gains of $4,641,000 and accumulated investment losses of $9,831,000.
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.
29
FRANKLIN CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 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. The Corporation issued 30,069 shares of stock
from treasury pursuant to an investment made by Franklin on January 25, 1999. On
September 30, 1999, 28,566 of these shares were canceled and placed back into
the Corporation's treasury. (See Note 6 - Transactions with Affiliates) As of
December 31, 1999 the Corporation had purchased 426,600 shares of its common
stock of which 410,097 remained in treasury. During the year ended December 31,
2000, the Corporation purchased 32,250 shares of its common stock at a total
cost of $328,445. On May 9, 2000, 17,399 shares were issued from treasury
pursuant to the exercise of options by one of Franklin's officers. On September
11, 2000, 14,369 shares were issued from treasury pursuant to the exercise of
options by one of Franklin's officers. On December 21, 2000, 2,891 shares were
issued from treasury pursuant to the exercise of options by three of Franklin's
officers. To date, Franklin has repurchased 458,850 shares of its common stock
of which 407,688 shares remain in treasury at December 31, 2000.
5. COMMITMENTS AND CONTINGENCIES
Franklin is obligated under an operating lease, which provides for annual
minimum rental payments as follows:
December 31,
2001........................................$149,600
2002........................................ 149,600
2003........................................ 149,600
--------
$448,800
========
Rent expense for the years ended December 31, 2000, 1999 and 1998 was $104,332,
$83,905 and $99,912 respectively. For the years ended December 31, 2000 and
1999, the Corporation collected rents of $40,000 and $58,032, respectively, from
subtenants under month-to-month leases, for a portion of its existing office
space that is reflected as a reduction in rent expense for that period. Of the
amount collected from subtenants during the years ended December 31, 2000 and
1999, $30,000 and $25,000, respectively was received from a corporation included
in Franklin's investment portfolio during the year ended December 31, 2000, and
$10,812 was received during the year ended December 31, 1999, from a partnership
in which two officers of Franklin have a non-controlling interest.
6. TRANSACTIONS WITH AFFILIATES
During the year ended December 31, 2000, the Corporation invested $140,000 in
Excom Ventures, LLC. ("Excom"). Excom was formed as a holding company for the
purpose of investing in Expert Commerce,
30
FRANKLIN CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Inc. ("Expert Commerce") a Business-to-Business purchase evaluation engine that
simulates the way people make decisions.
In January 1999, Franklin formed eCom Capital Corporation ("eCom"), a wholly
owned subsidiary of Franklin, for the purposes of investing in Internet related
ventures. On January 25, 1999, eCom invested a total of $387,500 in
eMattress.com Inc. ("eMattress"), consisting of $175,000 worth of Franklin
common stock (30,069 shares from treasury stock valued at the Net Asset Value on
the date of the transaction) and $212,500 in cash. Franklin received preferred
stock convertible into a 50% equity interest in eMattress. Two officers of
Franklin were elected to serve on the five member eMattress Board of Directors.
In August 1999, Franklin invested an additional $87,500 in eCom. Pursuant to
this transaction, eMattress was merged into eCom and 28,566 shares of Franklin
common stock were returned to Franklin's treasury. The surviving entity,
eMattress.com is a Delaware corporation. In November 1999, Franklin invested an
additional $75,000 into eMattress and as a result of this transaction, on
December 31, 1999, Franklin owned 87.2% of eMattress. During 2000 eMattress
ceased operations and has legally dissolved. Franklin has written off its entire
investment including a loan of $56,311 that was determined to be
non-collectible.
On July 6, 1998, Franklin sold 1,500,000 shares of Avery Communications
preferred Series D stock and a $1,000,000 Avery note along with 280,000 warrants
to purchase Avery Communications common stock for a total of $2,500,000 to the
Thurston Group, Inc. The president of the Thurston Group is the current chairman
of Avery Communications. Franklin realized a net gain of $935,297 as a result of
this sale.
On July 13, 1998, Franklin entered into a cashless exercise of warrants to
purchase 386,667 shares of Avery Communications common stock at $1.50 per share
realizing a net gain of $372,911 and a decrease in unrealized appreciation of a
like amount. In return, Franklin received 196,503 shares of Avery Communications
common stock.
During the year ended December 31, 2000, Franklin sold 202,000 shares of Avery
Communications for total proceeds of $379,527 realizing a gain of $161,531.
Effective July 8, 1998, Avery Communications was no longer a controlled
affiliate of Franklin. At December 31, 2000, Franklin owned 9.32% of Avery
Communications on a fully diluted basis, and 16.1% of Avery Communications on a
primary basis.
For the year ended December 31, 1998, Avery Communications was a controlled
affiliate of Franklin. Income during that period received from Avery
Communications was $118,431 in dividends and $110,764 in interest.
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
31
FRANKLIN CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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.
On January 27, 1998, 67,500 options were granted to three eligible officers of
the Corporation under the SIP. The strike price of the options was $4.67 per
share, which represented the closing price of Franklin's Common Stock as
reported by the American Stock Exchange on that date. One-third of the options
granted vested immediately; another one-third vested one year from the date of
issuance; and the final one-third vested two years after the date of issuance.
The options expire after ten years. On December 31, 1998, one of the eligible
officers resigned from the Corporation and forfeited 15,000 options upon
resignation and an additional 7,500 options three months after resignation.
15,000 of these options were reissued on March 18, 1999 to three eligible
officers of the Corporation at a strike price of $3.83 per share, which
represented the closing price of Franklin's Common Stock as reported by the
American Stock Exchange on that date. These options will expire as originally
issued. One-half of the reissued options vested immediately, and one-half vested
on January 27, 2000. 5,625 of the remaining forfeited options were reissued on
December 9, 1999 to three eligible officers of the Corporation at a strike price
of $6.00 per share, which represented the closing price of Franklin's Common
Stock as reported by the American Stock Exchange on that date. These options
will expire as originally issued. One-half of the reissued options vested
immediately, and one-half vested on December 9, 2000. The remaining 1,875 of
forfeited options were reissued on March 1, 2000, to one eligible officer of the
Corporation at a strike price of $14.00 per share, which represented the closing
price of Franklin's Common Stock as reported by the American Stock Exchange on
that date. These options will expire as originally issued. One-half of the
reissued options vested immediately, and one-half will vest on March 1, 2001.
On February 14, 2000, 30,000 options were granted under the SOP to four eligible
"outside" directors. The strike price of the options was $11.50 per share, which
represented the closing price of Franklin's Common Stock as reported by the
American Stock Exchange on that date. One-third of the options granted vested
immediately; another one-third vest one year from the date of issuance; and the
final one-third vest two years after the date of issuance. The options expire
after ten years. On June 7, 2000, 7,500 options were granted under the SOP to
four eligible "outside" directors. The strike price of the options was $9.67 per
share, which represented the closing price of Franklin's Common Stock as
reported by the American Stock Exchange on that date. One-third of the options
granted vested immediately; another one-third vest one year from the date of
issuance; and the final one-third vest two years after the date of issuance. The
options expire after ten years.
On May 9, 2000, one of Franklin's officers made a cash-less exercise of 29,062
options resulting in a non-cash charge to compensation expense of $197,188. On
September 11, 2000, one of Franklin's officers made a cash-less exercise of
29,062 options resulting in a non-cash charge to compensation expense of
$129,317. On December 21, 2000, three of Franklin's officers made cash-less
exercises of 7,501 options resulting in a non-cash charge to compensation
expense of $23,139.
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:
32
FRANKLIN CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 2000 December 31, 1999
----------------- -------------------
Net (decrease) increase in net assets from operations:
As reported $(4,427,420) $2,225,819
Pro forma $(4,568,005) $2,196,909
Net (decrease) increase in net assets per common share:
As reported $(4.05) $1.98
Pro forma - Basic $(4.17) $1.95
Pro forma - Diluted $(4.17) $1.95
Net Asset Value per share:
As reported $5.08 $7.70
Pro forma - Basic $4.95 $7.63
Pro forma - Diluted $4.45 $7.48
The fair value of the options granted was estimated on the date of the grant
using the Black-Scholes option pricing model with the following assumptions:
December 31, 2000 December 31, 1999
----------------- -----------------
Stock volatility 41.3% 30.6%
Risk-free interest rate 5.5% 5.5%
Option term in years 4 4
Stock dividend yield -- --
The following is a summary of the status of the Stock Option Plans during the
years ended:
December 31, 2000 December 31, 1999
----------------------- -------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------ -------- ------ --------
Outstanding at beginning of
period 65,625 $ 4.42 52,500 $4.67
Granted 39,375 $11.27 20,625 $4.42
Exercised 65,625 $4.42 -- --
Forfeited -- -- 7,500 $4.67
Expired -- -- -- --
Outstanding at end of period 39,375 $11.27 65,625 $4.59
Exercisable at end of period 13,438 $11.33 40,312 $4.42
Weighted average fair value of
options granted $2.40 $1.42
33
FRANKLIN CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The options issued under the SIP have a remaining contractual life of 7.1 years.
The options issued under the SOP have a remaining contractual life of 9.1 years.
8. NET (DECREASE) INCREASE IN NET ASSETS PER COMMON SHARE
The following table sets forth the computation of basic and diluted change in
net assets per common share:
December 31,
-----------------------------------------
2000 1999 1998
------------ ---------- ----------
Numerator:
Net (decrease) increase in net
assets from operations ($4,427,420) $2,225,819 ($744,172)
Preferred stock dividends (98,633) -- --
----------- ---------- ----------
Numerator for basic earnings per share -
net (loss) income available for common
stockholders (4,526,053) 2,225,819 (744,172)
Effect of dilutive securities:
Preferred stock dividends 98,633 -- --
Numerator for diluted earnings per share -
Net (decrease) increase in net assets
available for common stockholders after
assumed conversions (4,427,420) 2,225,819 (744,172)
Denominator:
Denominator for basic (decrease)
increase in net assets from
operations - weighted -
average shares 1,094,373 1,124,740 1,188,858
Effect of dilutive securities:
Employee stock options -
weighted - average shares -- 1,763 --
----------- ---------- ----------
Denominator for diluted (decrease)
increase in net assets from
operations - adjusted weighted - average
shares and assumed conversions 1,094,373 1,126,503 1,188,858
=========== ========== ==========
Basic and diluted net (decrease) increase in
net assets from operations per share $(4.05) $1.98 ($0.63)
=========== ========== ==========
Diluted net (decrease) increase in net
assets from operations per share $(4.05) $1.98 ($0.63)
=========== ========== ==========
34
FRANKLIN CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The following securities have been excluded from the dilutive per share
computation as they are antidilutive:
Period ended December 31,
-----------------------------------------
2000 1999 1998
-----------------------------------------
Preferred stock convertible into 123,375
shares of common stock 123,375 -- --
Stock options 21,925 -- --
For additional information on the above securities, see Notes 4 and 7.
9. PURCHASES AND SALES OF INVESTMENT SECURITIES
The cost of purchases and proceeds from sales of investment securities,
including the issuance of treasury stock for December 31, 1999, and the cashless
exercise of the Avery warrants for December 31, 1998, as discussed in Note 6 and
excluding short term investments, aggregated $1,944,500 and $2,543,819
respectively, for the year ended December 31, 2000; $2,158,804 and $3,352,674
respectively, for the year ended December 31, 1999; and $4,730,199 and
$2,365,820 respectively, for the year ended December 31, 1998.
10. SUBSEQUENT EVENT
On February 1, 2001, Franklin sold to Avery Communications 1,183,938 shares of
common stock and 350,000 shares of preferred stock of Avery Communications for
$1,557,617 plus accrued interest 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 a wholly owned subsidiary of Avery
Communications. On February 13, 2001, Primal announced that Avery Communications
had completed a spin-off of Primal and Franklin received 1,533,938 fully
registered and marketable shares of Primal.
35
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no disagreements with our auditors, Ernst & Young LLP on
accounting or financial disclosure.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE CORPORATION
OFFICERS
STEPHEN L. BROWN, Chairman and Chief Executive Officer. For additional
information about Mr. Brown, please see the Directors' biographical information
section below.
SPENCER L. BROWN, age 35, has been Senior Vice President of the Corporation
since November 1995, Secretary of the Corporation since October 1994 and was
Vice President from August 1994 to November 1995. Mr. Brown is the son of
Stephen L. Brown, the Chairman and Chief Executive of the Corporation.
HIRAM M. LAZAR, age 36, joined the Corporation as Chief Financial Officer
in January 1999. From June 1992 to January 1999, Mr. Lazar was the
Vice-President of Finance and Corporate Controller for Lebenthal & Co., Inc., a
regional full-service broker/dealer.
COMMON STOCK DIRECTORS
STEPHEN L. BROWN, age 62, was elected to the Corporation's Board of
Directors and appointed Chairman of its Board of Directors in October 1986. He
has been Chairman and Chief Executive Officer since October 1986. Prior to
joining Franklin, Mr. Brown was Chairman of S.L. Brown & Company, Inc. ("SLB &
Co., Inc."), a private investment firm. Mr. Brown is a director of Copley
Financial Services Corporation, advisor to Copley Fund, Inc., a mutual fund.
MILES L. BERGER, age 70, joined the Board as a director in 1996. Mr. Berger
is Chairman of the Board of Mid Town Banc Corp, Chicago, and Berger Management
Services LLC. Additionally Mr. Berger serves as a board member of Innkeepers USA
Trust and Universal Health Realty Income Trust.
DAVID T. LENDER, age 48, joined the Board as a director in 2000. Mr. Lender
is a Managing Director at Banc of America Securities, LLC where he specializes
in mergers and acquisitions. Prior to joining Banc of America Securities, LLC,
Mr. Lender was a Managing Director in the Mergers and Acquisitions Group of
Rothschild, Inc.
JONATHAN A. MARSHALL, age 62, joined the Board as a director in 1987. Mr.
Marshall is a Senior Partner in the law firm of Pennie & Edmonds, and has been a
member of that firm since 1974. He is a member of the Bar of the State of New
York and is admitted to practice before the United States Supreme Court and the
United States Patent and Trademark Office.
MICHAEL P. ROLNICK, age 35, joined the Board as a director in 1998. Mr.
Rolnick is currently a General Partner at ComVentures, a venture capital firm
that invests in early stage
36
Internet and communications companies. Mr. Rolnick is responsible for private
equity investments and managing portfolio companies. Prior to joining
ComVentures, Mr. Rolnick was Vice President for New Ventures at E*Trade Group,
Inc.
PREFERRED STOCK DIRECTORS
PETER D. GOTTLIEB, age 33, joined the Board as a director in 2000. Mr.
Gottlieb is Vice-President of Investments at First Albany Corporation and is a
Portfolio Manager for First Albany Asset Management. Mr. Gottlieb serves as a
director of Midwest Bank & Trust and Gottlieb Health Services. Additionally, Mr.
Gottlieb serves as Treasurer of STEP, Inc.
IRVING LEVINE, age 79, joined the Board as a director in 1990. He has been
Chairman of the Board and President of Copley Fund, Inc., a mutual fund, since
1978, and Chairman and Treasurer of Stuffco International, Inc., a ladies
handbag processor and chain-store operator, since 1978. Mr. Levine is President
and a director of Copley Financial Services Corporation (advisor to Copley Fund,
Inc.) as well as a director of U.S. Energy Systems, Inc. an independent producer
of clean efficient energy for growing energy markets.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Corporation's officers and directors, and persons who own more than 10
percent of the Corporation's common stock to file reports (including a year-end
report) of ownership and changes in ownership with the Securities and Exchange
Commission (the "SEC") and to furnish the Company with copies of all reports
filed.
Based solely on a review of the forms furnished to the Corporation, or
written representations from certain reporting persons, the Corporation believes
that all persons who were subject to Section 16(a) in 2000 complied with the
filing requirements.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth a summary for each of the last three
years of the cash and non-cash compensation awarded to, earned by, or paid to
the Chief Executive Officer of the Corporation and the other executive officers
of the Corporation, whose individual remuneration exceeded $100,000 for the year
ended December 31, 2000.
SECURITIES
OTHER UNDERLYING
NAME & ANNUAL OPTIONS OTHER
PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) COMPENSATION($) (1) AWARDED (#) COMPENSATION ($)
------------------ ---- ----------- ---------- -------------------- ------------- ----------------
Stephen L. Brown 2000 350,000 125,000 - - -
CHAIRMAN & 1999 350,000 70,000 - 7,500 -
PRESIDENT 1998 350,000 32,500 - 22,500 -
Spencer L. Brown 2000 200,000 40,000 - - -
SENIOR VICE PRESIDENT 1999 151,250 30,000 - 7,500 -
& SECRETARY 1998 126,250 12,500 - 22,500 -
37
Hiram M. Lazar 2000 120,000 15,000 - 1,875 -
CHIEF FINANCIAL OFFICER 1999 112,917 5,000 - 5,625 -
(1) There were no perquisites paid by the Corporation in excess of the lesser
of $50,000 or 10% of the compensated person's total salary and bonus for
the year.
COMPENSATION OF DIRECTORS
Each director of the Corporation, other than Mr. Stephen L. Brown,
receives a yearly fee of $12,000 plus reimbursement of expenses incurred in
attending board meetings.
OPTION GRANTS
The following table sets forth a summary of the options granted during
the year ended December 31, 2000, to the Chief Executive Officer of the
Corporation and the other executive officers of the Corporation.
NUMBER OF
SECURITIES
UNDERLYING PERCENT OF EXERCISE GRANT DATE
OPTIONS TOTAL OPTIONS PRICE EXPIRATION PRESENT
NAME GRANTED(1) GRANTED PER SHARE DATE VALUE ($)(2)
- --------------- ------------- ------------- --------- ---------------- ------------
Hiram M. Lazar 1,875 100% $14.00 January 27, 2008 $10,463
(1) Options granted on March 1, 2000 are exercisable starting immediately with
respect to 50% of the shares granted and with the remaining 50% of the
shares granted becoming exercisable on the first anniversary of the grant
date. Full vesting would occur prior to the first anniversary in the case of
change of control of the Corporation.
(2) Black Scholes pricing model used to calculate. Assumptions used as follows,
expected volatility of 41.9%, risk free rate 5.5%, dividend yield 0%, time
of exercise 4 years.
OPTION EXERCISES
The following table sets forth a summary of the options exercised
during the year ended December 31, 2000, by the Chief Executive Officer of the
Corporation and the other executive officers of the Corporation.
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
SHARES ACQUIRED UNEXERCISED IN-THE-MONEY
NAME ON EXERCISE VALUE REALIZED OPTIONS OPTIONS
---- ----------- -------------- ------- -------
Stephen L. Brown 14,603 $131,192 -- --
Spencer L. Brown 17,632 $199,064 -- --
Hiram M. Lazar 2,423 $ 19,388 1,875 --
EMPLOYMENT AGREEMENTS
On May 1, 2000, Stephen L. Brown signed an Employment Agreement with
the Corporation ("the Employee Agreement"), which superseded an agreement that
was to expire on December 31, 2000. The Employee Agreement expires on December
31, 2003, ("the Term"). The Term will automatically renew from year to year
thereafter, unless the Corporation notifies
38
Mr. Brown not less than 120 days prior to the end of any Term in writing that
the Corporation will not be renewing the Employee Agreement.
During the period of employment, Mr. Stephen L. Brown shall serve as
the Chairman and Chief Executive Officer of the Corporation; be responsible for
the general management of the affairs of the Corporation, reporting directly to
the Board of Directors of the Corporation, serve as a member of the Board for
the period of which he is and shall from time to time be elected or reelected.
Mr. Stephen L. Brown is to receive compensation under the Employment
Agreement in the form of base salary of $420,000 beginning January 1, 2001. In
addition, the Board of Directors may increase such salary at its discretion from
time to time. Mr. Brown is also entitled to be paid bonuses as the Board of
Directors determines in its sole discretion. Under the Employment Agreement, the
Corporation is to provide Mr. Brown with a company car and membership in certain
clubs. Mr. Brown is entitled under the Employment Agreement to participate in
any employee benefit plans or programs and to receive all benefits, perquisites
and emoluments for which salaried employees are eligible.
Under the Employment Agreement, Mr. Stephen L. Brown is entitled to
severance pay in the event of termination without cause or by constructive
discharge equal to the remaining base salary payable under the Employment
Agreement and provides for death benefits payable to the surviving spouse equal
to Mr. Brown's base salary for a period of one year.
In addition, Mr. Stephen L. Brown and the Corporation entered into a
Severance Agreement ("the Severance Agreement") on May 1, 2000. Under the
Severance Agreement Mr. Brown is entitled to receive severance if following a
change in control as defined in the Severance Agreement, such individual's
employment is terminated by the Corporation without cause or by the executive
within one year of such change in control, the individual shall be entitled to
receive compensation in a lump sum payment equal to 1.5 times the individual's
average compensation over the past five years.
On May 1, 2000, Spencer L. Brown signed an Employment Agreement with
the Corporation ("the Employee Agreement"). The Employee Agreement expires on
December 31, 2003, ("the Term"). The Term will automatically renew from year to
year thereafter, unless the Corporation notifies Mr. Brown not less than 120
days prior to the end of any Term in writing that the Corporation will not be
renewing the Employee Agreement.
During the period of employment, Mr. Spencer L. Brown shall serve as
the Senior Vice-President and Secretary of the Corporation; be responsible for
the general management of the affairs of the Corporation, reporting directly to
the Board of Directors of the Corporation, serve as a member of the Board for
the period of which he is and shall from time to time be elected or reelected.
Mr. Spencer L. Brown is to receive compensation under his Employment
Agreement in the form of base salary of $225,000 beginning May 1, 2000. In
addition, the Board of Directors may increase such salary at its discretion from
time to time. Mr. Brown is also entitled to be paid bonuses as the Board of
Directors determines in its sole discretion. Under the Employment Agreement, the
Corporation is to provide Mr. Brown with a company car and membership in certain
clubs. Mr. Brown is entitled under the Employment Agreement to participate in
any employee benefit plans or programs and to receive all benefits, perquisites
and emoluments for which salaried employees are eligible.
39
Under the Employment Agreement, Mr. Spencer L. Brown is entitled to
severance pay in the event of termination without cause or by constructive
discharge equal to the remaining base salary payable under the Employment
Agreement and provides for death benefits payable to the surviving spouse equal
to Mr. Brown's base salary for a period of one year.
In addition, Mr. Spencer L. Brown and the Corporation entered into a
Severance Agreement ("the Severance Agreement") on May 1, 2000. Under the
Severance Agreement Mr. Brown is entitled to receive severance if following a
change in control as defined in the Severance Agreement, such individual's
employment is terminated by the Corporation without cause or by the executive
within one year of such change in control, the individual shall be entitled to
receive compensation in a lump sum payment equal to 1.5 times the individual's
average compensation over the past five years.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
COMMON STOCK -
The following table sets forth certain information with respect to
beneficial ownership (as that term is defined in the rules and regulations of
the Commission) of the Corporation's common stock as of February 28, 2001, by 1)
each person who is known by the Corporation to be the beneficial owner of more
than five percent of the outstanding common stock, 2) each director of the
Corporation, 3) each current executive officer listed in the Summary
Compensation Table and 4) all directors and executive officers of the
Corporation as a group. Except as otherwise indicated, to the Corporation's
knowledge, all shares are beneficially owned and investment and voting power is
held as stated by the persons named as owners. The Corporation is not aware of
any arrangement that may, at a subsequent date, result in a change of control of
the Corporation. The address for all beneficial owners, unless stated otherwise
below is c/o Franklin Capital Corporation 450 Park Avenue, Suite 1000, New York,
NY 10022.
AMOUNT AND
NATURE OF
NAME AND ADDRESS BENEFICIAL PERCENT
OF BENEFICIAL OWNER OWNERSHIP OF CLASS
-------------------- ---------- ---------
The Prudential Insurance
Company of America 211,557 19.3%
751 Broad Street
Newark, NJ 07102
Stephen L. Brown 138,059 (1) 12.6%
Peter D. Gottlieb 82,900 (2) 7.3%
Irving Levine 46,375 (3) 4.1%
Spencer L. Brown 32,944 (4) 3.0%
Miles L. Berger 21,250 (5) 1.9%
Jonathan A. Marshall 20,200 (6) 1.8%
Hiram M. Lazar 8,048 (7) *
Michael P. Rolnick 6,850 (5) *
David T. Lender 300 *
All officers and directors
as a group (9 persons) 356,926 29.8%
- -----------------------
* Less than 1.0%
40
(1) Does not include 5,023 shares owned by Mr. Brown's children and does not
include 32,944 shares owned by Spencer L. Brown, who is also his son. See
(4) below. Mr. Brown disclaims beneficial ownership of such shares.
(2) Includes preferred stock held which is convertible into 3,750 shares of
common stock. Also includes 44,400 shares of common stock and preferred
stock which is convertible into 30,000 shares of common stock owned by Kuby
Gottlieb Special Value Fund ("KGSV") and 3,750 shares of common stock owned
by Kuby Gottlieb Investments ("KGI"). Mr. Gottlieb may be deemed to be a
controlling person of KGSV and KGI due to his position as portfolio
manager. Therefore, Mr. Gottlieb may be deemed to be a beneficial owner of
all shares owned by KGSV and KGI.
(3) Includes options for 2,500 shares exercisable on February 14, 2000, options
for 625 shares exercisable on June 7, 2000, options for 2,500 shares
exercisable on February 14, 2001 and options for 625 shares exercisable on
June 7, 2001. Also includes preferred stock which is convertible into
35,625 shares of common stock owned by Copley Fund, Inc. ("Copley"). Mr.
Levine may be deemed to be a controlling person of Copley due to his
position as Chairman and Chief Executive Officer. Therefore, Mr. Levine may
be deemed to be a beneficial owner of all shares owned by Copley.
(4) Includes preferred stock held which is convertible into 1,875 shares of
common stock.
(5) Includes options for 2,500 shares exercisable on February 14, 2000, options
for 625 shares exercisable on June 7, 2000, options for 2,500 shares
exercisable on February 14, 2001 and options for 625 shares exercisable on
June 7, 2001.
(6) Includes options for 2,500 shares exercisable on February 14, 2000, options
for 625 shares exercisable on June 7, 2000, options for 2,500 shares
exercisable on February 14, 2001 and options for 625 shares exercisable on
June 7, 2001. Also includes preferred stock held which is convertible into
3,750 shares of common stock.
(7) Includes options for 937 shares exercisable on March 1, 2000, and options
for 938 shares exercisable on March 1, 2001. Also includes preferred stock
held which is convertible into 750 shares of common stock.
PREFERRED STOCK -
The following table sets forth certain information with respect to
beneficial ownership (as that term is defined in the rules and regulations of
the Commission) of the Corporation's preferred stock as of February 28, 2001, by
1) each person who is known by the Corporation to be the beneficial owner of
more than five percent of the outstanding preferred stock, 2) each director of
the Corporation, 3) each current executive officer listed in the Summary
Compensation Table and 4) all directors and executive officers of the
Corporation as a group. Except as otherwise indicated, to the Corporation's
knowledge, all shares are beneficially owned and investment and voting power is
held as stated by the persons named as owners. The Corporation is not aware of
any arrangement that may, at a subsequent date, result in a change of control of
the Corporation. The address for all beneficial owners, unless stated otherwise
below is c/o Franklin Capital Corporation 450 Park Avenue, Suite 1000, New York,
NY 10022.
41
AMOUNT AND
NATURE OF
NAME AND ADDRESS BENEFICIAL PERCENT
OF BENEFICIAL OWNER OWNERSHIP OF CLASS
------------------- --------- --------
Irving Levine 4,750 (1) 28.9%
Peter D. Gottlieb 4,500 (2) 27.3%
Mark Rattner 2,000 (3) 12.2%
c/o Professional Indemnity
37 Radio Circle Drive
Mount Kisco, NY 10549
Gerry M. Ritterman 1,500 9.1%
47 Lawrence Farms Crossways
Chappaqua, NY 10514
Jonathan A. Marshall 500 3.0%
Spencer L. Brown 250 1.5%
Hiram M. Lazar 100 *
Miles L. Berger - *
Stephen L. Brown - *
David T. Lender - *
Michael P. Rolnick - *
All officers and directors
as a group (9 persons) 10,100 61.4%
-----------------------
* Less than 1.0%
(1) Preferred stock owned by Copley Fund, Inc. ("Copley"). Mr. Levine may be
deemed to be a controlling person of Copley due to his position as Chairman
and Chief Executive Officer. Therefore, Mr. Levine may be deemed to be a
beneficial owner of all shares owned by Copley.
(2) Includes 4,000 shares of preferred stock owned by Kuby Gottlieb Special
Value Fund ("KGSV"). Mr. Gottlieb may be deemed to be a controlling person
of KGSV due to his position as portfolio manager. Therefore, Mr. Gottlieb
may be deemed to be a beneficial owner of all shares owned by KGSV.
(3) Includes 1,000 shares of preferred stock owned by Marshall Rattner, Inc.
("MRI"). Mr. Rattner may be deemed to be a controlling person of MRI due to
his position as Chief Executive Officer. Therefore, Mr. Rattner may be
deemed to be a beneficial owner of all shares owned by MRI.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See Items 10 through 12 and Footnote 6 to the Financial Statements.
42
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
The following financial statements are set forth under Item 8.
(a) (1) Financial Statements
Report of Ernst & Young, LLP
Balance Sheets as of December 31, 2000 and 1999
Statements of Operations for the years ended December 31,
2000, 1999 and 1998
Statements of Cash Flows for the years ended December 31,
2000, 1999 and 1998
Statements of Changes in Net Assets for the years ended
December 31, 2000, 1999 and 1998
Financial Highlights for the years ended December 31, 2000,
1999, 1998, 1997 and 1996
Portfolio of Investments as of December 31, 2000
Notes to Financial Statements
The following exhibits are filed herewith or incorporated as set forth below:
(2) Exhibits
(3) (i) Articles of Incorporation*
(3) (ii) By-Laws*
(3) (iii) Amendment to Articles of Incorporation
(4) (i) Certificate of Designation
(4) (ii) Registration Rights Agreement
(4) (iii) Preferred Stock Purchase Agreement
(10) (i) Employment Agreement - Stephen L. Brown
(10) (ii) Employment Agreement - Spencer L. Brown
(10) (iii) Severance Agreement - Stephen L. Brown
(10) (iv) Severance Agreement - Spencer L. Brown
(11) Computation of per share earnings are set forth in
Footnote 8 of the 2000 Financial Statements as set
forth in Item 8.
(23) Consent of Ernst & Young, LLP
(b) Reports on Form 8-K. The Corporation did not file any reports on Form
8-K during the last quarter of 2000.
- --------------------------------------------------------------------------------
* Incorporated by reference to the Corporation's Form N-2, as amended, filed
July 31, 1992.
43
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Corporation has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
FRANKLIN CAPITAL CORPORATION
Date: March 29, 2001 By: /s/
---------------------------------
Stephen L. Brown
CHAIRMAN & CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the
Corporation in the capacities and on the dates indicated.
SIGNATURES TITLE DATE
/s/ Chairman & March 29, 2001
- ----------------------------- Chief Executive Officer
Stephen L. Brown
/s/ Senior Vice President & March 29, 2001
- ----------------------------- Secretary
Spencer L. Brown
/s/ Chief Financial Officer March 29, 2001
- -----------------------------
Hiram M. Lazar
/s/ Director March 29, 2001
- -----------------------------
Miles L. Berger
/s/ Director March 29, 2001
- -----------------------------
Peter D. Gottlieb
/s/ Director March 29, 2001
- -----------------------------
David T. Lender
/s/ Director March 29, 2001
- -----------------------------
Irving Levine
/s/ Director March 29, 2001
- -----------------------------
Jonathan A. Marshall
/s/ Director March 29, 2001
- -----------------------------
Michael P. Rolnick
44