SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
_X_ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
and Exchange Act of 1934
For the Quarterly period ended MARCH 31, 2001
--------------
or
___ Transition report pursuant to Section 13 or 15(d) of the Securities
and Exchange Act of 1934
For the transition period from ________________ to ___________________.
Commission File No. 1-9727
------
FRANKLIN CAPITAL CORPORATION
----------------------------
(Exact name of registrant specified in its charter)
DELAWARE 13-3419202
- --------------------------- -------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
450 PARK AVENUE, 10TH FLOOR, NEW YORK, NEW YORK 10022
- ----------------------------------------------- ------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 486-2323
---------------------------
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $1.00 par value
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Corporation was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of April 30, 2001 was $3,381,516 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 April 30, 2001 was
1,091,400.
1
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets
Statements of Operations
Statements of Cash Flows
Statements of Changes in Net Assets
Portfolio of Investments
Notes to Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Statement of Operations
Financial Condition
Investments
Results of Operations
Liquidity and Capital Resources
Risks
Item 3. Quantitative and Qualitative Disclosures about Market Risk
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURE
EXHIBIT INDEX
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 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The information furnished in the accompanying financial statements reflects
all adjustments that are, in the opinion of management, necessary for a fair
presentation of the results for the interim period presented.
3
FRANKLIN CAPITAL CORPORATION
================================================================================
Balance Sheets
- --------------------------------------------------------------------------------
March 31, December 31,
2001 2000
(unaudited)
- --------------------------------------------------------------------------------
ASSETS
Marketable investment securities, at market
value (cost: March 31, 2001 - $96,124;
December 31, 2000 - $122,231) (Note 2) $ 90,675 $ 112,019
Investments, at fair value
(cost: March 31, 2001 - $2,140,589;
December 31, 2000 - $3,505,159) (Note 2)
Affiliate investments 377,430 1,338,389
Other investments 2,162,549 3,548,504
---------- ----------
2,539,979 4,886,893
---------- ----------
Cash and cash equivalents (Note 2) 1,719,322 647,565
Other assets 116,584 120,235
---------- ----------
$4,466,560 $5,766,712
TOTAL ASSETS
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accounts payable and accrued liabilities $ 79,092 $ 187,632
---------- ----------
TOTAL LIABILITIES 79,092 187,632
---------- ----------
Commitments and contingencies (Note 5)
STOCKHOLDERS' EQUITY
Convertible preferred stock, $1 par value,
cumulative 7% dividend:
5,000,000 shares authorized; 16,450 shares
issued and outstanding at March 31, 2001 and
December 31, 2000
(Liquidation preference $1,645,000) (Note 4) 16,450 16,450
Common stock, $1 par value: 5,000,000 shares
authorized; 1,505,888 shares issued:1,096,900
shares outstanding at March 31, 2001 and
1,098,200 at December 31,2000 (Note 7) 1,505,888 1,505,888
Paid-in capital - common stock 8,643,060 8,643,060
preferred stock 1,628,550 1,628,550
Unrealized appreciation of investments,
net of deferred income taxes (Notes 2 and 3) 393,941 1,371,522
Accumulated deficit (5,395,280) (5,190,908)
---------- ----------
6,776,159 7,958,112
Deduct common stock held in treasury, at cost,
408,988 shares at March 31, 2001, and 407,688
shares at December 31, 2000 (Note 4) (2,405,141) (2,395,482)
---------- ----------
Net assets, equivalent to $4.00 basic, $3.60 as
if converted basis, and $ 2.50 as if
liquidated basis, per common share at
March 31, 2001, and $5.08 basic, $4.57 as if
converted basis, and $3.58 as if liquidated
basis at December 31, 2000 (Note 9) 4,371,018 5,562,630
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $4,450,110 $5,750,262
========== ==========
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
4
FRANKLIN CAPITAL CORPORATION
================================================================================
STATEMENTS OF OPERATIONS
(UNAUDITED)
- --------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED MARCH 31, 2001 2000
- --------------------------------------------------------------------------------
INVESTMENT INCOME
Dividend income $ 26,744 $ 10,500
Interest income 15,813 11,844
----------- -----------
42,557 22,344
----------- -----------
EXPENSES
Salaries and employee benefits (Note 7) 252,190 191,979
Professional fees 41,325 117,851
Rent (Note 5) 29,784 20,484
Insurance 10,600 10,440
Directors' fees 18,500 13,875
Taxes other than income taxes 20,754 17,645
Newswire and promotion 1,000 1,500
Depreciation and amortization 4,998 5,221
General and administrative 53,503 66,111
----------- -----------
432,654 445,106
----------- -----------
Net investment loss from operations (390,097) (422,762)
Net realized gain on portfolio of investments:
Investment securities:
Affiliated 137,757 121,696
Unaffiliated 86,464 606,448
----------- -----------
Total investment securities 224,221 728,144
Other than investment securities 823 3,617
----------- -----------
Net realized gain on portfolio of investments 225,044 731,761
----------- -----------
Provision for current income taxes 10,532 19,000
----------- -----------
Net realized (loss) income (175,585) 289,999
(Decrease) increase in unrealized appreciation
of investments, net of deferred income taxes:
Investment securities:
Affiliated 419,699 2,488,160
Unaffiliated (1,397,280) (122,578)
----------- -----------
Total investment securities (977,581) 2,365,582
Other than investment securities 0 (951,862)
----------- -----------
Deferred income taxes 0 605,000
----------- -----------
(Decrease) increase in unrealized appreciation
of investments, net of deferred income taxes (977,581) 808,720
----------- -----------
Net (decrease) increase in net assets
from operations ($1,153,166) $ 1,098,719
----------- -----------
Preferred dividends 28,787 12,270
----------- -----------
Net (decrease) increase in net assets
attributable to common stockholders ($1,181,953) $ 1,086,449
=========== ===========
Basic net (decrease) increase in net assets
from operations per common share (Note 8) ($1.08) $0.99
====== =====
Diluted net (decrease) increase in net assets
from operations per common share (Note 8) ($1.08) $0.92
====== =====
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
5
FRANKLIN CAPITAL CORPORATION
================================================================================
STATEMENTS OF CASH FLOWS
(UNAUDITED)
- --------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED MARCH 31, 2001 2000
- --------------------------------------------------------------------------------
Cash flows from operating activities:
Net (decrease) increase in net assets
from operations ($1,153,166) $ 1,098,719
Adjustments to reconcile net (decrease)
increase in net assets to net cash used in
operating activities:
Depreciation and amortization 4,998 5,221
Decrease (increase) in unrealized
appreciation of investments, net of
deferred income tax expense 977,581 (808,720)
Net realized gain on portfolio of
investments, net of current income taxes (214,520) (712,761)
Changes in operating assets and liabilities:
Decrease in receivable from disposal
of investments -- 170,391
Increase in other assets (1,347) (67,101)
Decrease in accounts payable and
accrued liabilities (119,070) (142,191)
----------- -----------
Total adjustments 647,642 (1,555,161)
----------- -----------
Net cash used in operating activities (505,524) (456,442)
----------- -----------
Cash flows from investing activities:
Proceeds from sale of affiliates 1,519,421 218,081
Proceeds from sale of other investments 114,635 3,617
Proceeds from sale of marketable investment
securities 221,399 672,567
Purchases of other investments (49,094) (183,125)
Purchases of marketable investment securities (190,634) (23,991)
----------- -----------
Net cash provided by investing activities 1,615,727 687,149
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of preferred stock -- 1,645,000
Payment of preferred dividends (28,787) (12,270)
Purchases of treasury stock (9,659) --
----------- -----------
Net cash (used in) provided by
financing activities (38,446) 1,632,730
----------- -----------
Net increase in cash and cash equivalents 1,071,757 1,863,437
Cash and cash equivalents at beginning of period 647,565 571,341
----------- -----------
Cash and cash equivalents at end of period $ 1,719,322 $ 2,434,778
=========== ===========
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
6
FRANKLIN CAPITAL CORPORATION
================================================================================
STATEMENTS OF CHANGES IN NET ASSETS
(UNAUDITED)
- --------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED MARCH 31, 2001 2000
- --------------------------------------------------------------------------------
(Decrease) increase in net assets from operations:
Net investment loss ($390,097) ($422,762)
Net realized gain on portfolio of investments,
net of current income taxes 214,512 712,761
(Decrease) increase in unrealized appreciation
of investments, net of deferred income taxes (977,581) 808,720
----------- -----------
Net (decrease) increase in net assets
from operations (1,153,166) 1,098,719
Capital stock transactions:
Issuance of preferred stock -- 1,645,000
Payment of dividends on preferred stock (28,787) (12,270)
Purchase of treasury stock (9,659) --
----------- -----------
Total (decrease) increase in net assets (1,191,612) 2,731,449
----------- -----------
Net assets at beginning of period 5,562,630 8,440,382
----------- -----------
Net assets at end of period $ 4,371,018 $11,171,831
=========== ===========
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
7
FRANKLIN CAPITAL CORPORATION
================================================================================
PORTFOLIO OF INVESTMENTS
(UNAUDITED)
- --------------------------------------------------------------------------------
MARKETABLE INVESTMENT SECURITIES
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF VALUE
MARCH 31, 2001 SHARES COST(1) (NOTE 2)
- ------------------------------------------------------------------------------------------------------------------------------------
New Media Spark - common stock 200,000 $61,449 $56,000
Certificate of Deposit - 4.81%, due 04/04/2001 (2) 34,675 34,675
---------- ----------
Total Marketable Investment Securities (3.4% of total investments and 2.1% of net assets) $ 96,124 $90,675
========== ==========
- ------------------------------------------------------------------------------------------------------------------------------------
INVESTMENTS, AT FAIR VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
EQUITY NUMBER OF VALUATION
MARCH 31, 2001 INVESTMENT INTEREST SHARES COST(1) (NOTE 2)
- ------------------------------------------------------------------------------------------------------------------------------------
AFFILIATES
Excom Ventures, LLC
(5.3% of total investments and 3.2% of net assets) Units 18.64% 140,000 $ 140,000 $ 140,000
(Purchase evaluation software)
Primal Solutions, Inc. (9.0% of total investments
and 5.4% of net assets) Common stock 7.30% 1,483,938 237,430 237,430
---------- ----------
(Internet-based Voice over IP billing software)
Total Affiliates 377,430 377,430
OTHER INVESTMENTS
Alacra Corporation (38.0% of total investments Convertible preferred stock 1.68% 321,543 1,000,000 1,000,000
and 22.8% of net assets)
(Internet-based information provider)
Go America Inc. (30.9% of total investments
and 18.5% of net assets) Common stock 0.76% 400,024 413,159 812,549
(Wireless internet service provider)
Structured Web, Inc. (13.3% of total
investments and 8.0% of net assets) Convertible preferred stock 3.60% 188,425 350,000 350,000
---------- ----------
(Internet-based application service provider)
Total Other Investments 1,763,159 2,162,549
---------- ----------
Total Investments, at Fair Value $2,140,589 $2,539,979
========== ==========
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Book cost equals tax cost for all investments
(2) Income producing security
The accompanying notes are an integral part of these financial statements.
8
FRANKLIN CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2001
1. ORGANIZATION
Franklin Capital Corporation ("Franklin", or the "Corporation") is a Delaware
corporation registered as a Business Development Company ("BDC") under the
Investment Company Act of 1940 (the "Act"). A BDC is a specialized type of
investment company under the Act. A BDC must be primarily engaged in the
business of furnishing capital and managerial expertise to companies that do not
have ready access to capital through conventional financial channels. Such
companies are termed "eligible portfolio companies". The Corporation, as a BDC,
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 or income taxes during the three months ended
March 31, 2001 and 2000.
At March 31, 2001, the Corporation held cash and cash equivalents primarily in
money market funds and overnight commercial paper at two commercial banking
institutions and one broker/dealer.
VALUATION OF INVESTMENTS
Security investments which are publicly traded on a national exchange or NASDAQ
are stated at the last reported sales price on the day of valuation, or if no
sale was reported on that date, then the securities are stated at the last
quoted bid price. The Board of Directors of Franklin (the "Board of Directors")
may determine, if appropriate, to discount the value where there is an
impediment to the marketability of the securities held.
Investments for which there is no ready market are initially valued at cost and,
thereafter, at fair value based upon the financial condition and operating
results of the issuer and other pertinent factors as determined by the good
faith of 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.
9
FRANKLIN CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 three months ended March 31, 2001 and 2000, Franklin's tax (provision)
benefit was based on the following:
2001 2000
--------- ---------
Net investment loss from operations .................. $(390,097) $(422,762)
Net realized gain on portfolio of investments ........ 225,044 731,761
(Decrease) increase in unrealized appreciation ....... (977,581) 1,413,720
----------- ----------
Pre-tax book income loss ........................... $(1,142,634) $1,722,719
=========== ==========
2001 2000
--------- ---------
Tax benefit (provision) at 34% on $(1,142,634) and
$1,722,719 respectively ............................ $ 388,000 $(586,000)
State and local, net of Federal benefit .............. 15,000 (34,000)
Book losses for which no benefit is provided ......... (2,000) (4,000)
Change in valuation allowance ........................ (412,000) --
--------- ---------
$ (11,000) $(624,000)
========= =========
10
FRANKLIN CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The components of the tax provision are as follows:
2001 2000
--------- ---------
Current state and local tax provision ................ $ (11,000) $ (19,000)
Deferred tax expense ................................. -- (605,000)
--------- ---------
Provision for income taxes ........................... $ (11,000) $(624,000)
========= =========
Deferred income tax provision reflects the impact of "temporary differences"
between amounts of assets and liabilities for financial reporting purposes and
such amounts as measured by tax laws.
At March 31, 2001 and December 31, 2000, significant deferred tax assets and
liabilities consist of:
ASSET (LIABILITY)
----------------------
March 31, December 31,
--------- -----------
2001 2000
---------- ----------
Deferred Federal and state benefit from
net operating loss carryforward ................... $1,698,000 $1,638,000
Deferred Federal and state provision on
unrealized appreciation of investments ............ (142,000) (494,000)
Valuation allowance ................................. (1,556,000) (1,144,000)
---------- ----------
Deferred taxes ...................................... $ -- $ --
========== ==========
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 March 31, 2001 consists of accumulated net realized
gains of $4,826,000 and accumulated investment losses of $10,222,000.
On February 22, 2000, the Corporation issued 16,450 shares of convertible
preferred stock with a par value of $100 for $1,645,000. The stock has a
cumulative 7% quarterly dividend and is convertible into the number of shares of
common stock by dividing the purchase price for the convertible preferred stock
by conversion price in effect (which is currently $13.33), resulting in 123,375
shares of common stock. The convertible preferred stock has antidilution
provisions, which can change the conversion price in certain circumstances if
the Corporation issues additional shares of common stock. The holder has the
right to convert the shares of convertible preferred stock at any time until
February 22, 2010 into common stock.
Upon liquidation, dissolution or winding up of the Corporation, the stockholders
of the convertible preferred stock are entitled to receive $100 per share plus
any accrued and unpaid dividends before distributions to any holder of the
Corporation's common stock.
On 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.
11
FRANKLIN CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The Board of Directors has authorized Franklin to repurchase up to an aggregate
of 525,000 shares of its common stock in open market purchases on the American
Stock Exchange when such purchases are deemed to be in the best interest of the
Corporation and its stockholders. As of December 31, 2000 the Corporation had
purchased 458,850 shares of its common stock of which 407,688 remained in
treasury. During the three months ended March 31, 2001, the Corporation
purchased 1,300 shares of its common stock at a total cost of $9,659. To date,
Franklin has repurchased 460,150 shares of its common stock of which 408,988
shares remain in treasury at March 31, 2001.
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 three months ended March 31, 2001, and 2000 was $29,784 and
$20,484 respectively. For the three months ended March 31, 2001 and 2000, the
Corporation collected rents of $6,000 and $15,000, respectively, from subtenants
under month to month leases, for a portion of its existing office space which is
reflected as a reduction in rent expense for that period.
6. TRANSACTIONS WITH AFFILIATES
On February 1, 2001, Franklin sold to Avery Communications, Inc. ("Avery")
1,183,938 shares of common stock and 350,000 shares of preferred stock of Avery
representing Franklin's entire holding in Avery, for $1,557,617 plus accrued
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 Solutions, Inc. ("Primal") a wholly owned subsidiary of Avery. On
February 13, 2001, Primal announced that Avery had completed a spin-off of
Primal and Franklin received 1,533,938 fully registered and marketable shares of
Primal. During the three months ended March 31, 2001, Franklin sold 50,000
shares of Primal for total proceeds of $9,000, realizing a gain of $1,000.
7. STOCK OPTIONS
On September 9, 1997, Franklin's stockholders approved two Stock Option Plans: a
Stock Incentive Plan ("SIP") to be offered to the Corporation's consultants,
officers and employees (including any officer or employee who is also a director
of the Corporation) and a Non-Statutory Stock Option Plan ("SOP") to be offered
to the Corporation's "outside" directors, i.e., those directors who are not also
officers or employees of Franklin. 112,500 shares of the Corporation's Common
Stock have been reserved for issuance under these plans, of which 67,500 shares
have been reserved for the SIP and 45,000 shares have been reserved for the SOP.
Shares subject to options that terminate or expire prior to exercise will be
available for future grants under the Plans. Because the issuance of options to
"outside" directors is not permitted under the Act, without an exemptive order
by the Securities and Exchange Commission ("the Commission"), the issuance
12
FRANKLIN CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
of options under the SOP was conditioned upon the granting of such order. The
Commission granted the order on January 18, 2000.
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 March 1, 2000, 1,875 forfeited options were reissued under the SIP to an
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.
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:
MARCH 31, MARCH 31,
2001 2000
----------- ----------
Net (decrease) increase in net assets
from operations:
As reported ....................................... ($1,153,166) $1,098,719
Pro forma ......................................... ($1,159,244) $1,019,758
Net increase (decrease) in net assets
per common share:
As reported ....................................... ($ 1.08) $ 0.99
Pro forma - Basic ................................. ($ 1.09) $ 0.92
Pro forma - Diluted ............................... ($ 1.09) $ 0.86
Net Asset Value per share:
As reported - Basic ............................... $ 4.00 $ 10.19
Pro forma - Basic ................................. $ 3.99 $ 10.12
Pro forma - As if converted basis ................. $ 3.59 $ 8.62
Pro forma - As if liquidated basis ................ $ 2.49 $ 8.62
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:
MARCH 31, 2000
--------------
Stock volatility 41.9%
Risk-free interest rate 5.5%
Option term in years 4
Stock dividend yield --
No options were granted during the three months ended March 31, 2001.
The following is a summary of the status of the Stock Option Plans during the
three months ended:
13
FRANKLIN CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2001 MARCH 31, 2000
------------------ ------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------ ------ ------ ------
Outstanding at beginning
of period 39,375 $11.27 65,625 $ 4.59
Granted -- -- 31,875 $11.65
Exercised -- -- -- --
Forfeited -- -- -- --
Expired -- -- -- --
Outstanding at end of period 39,375 $11.27 97,500 $ 8.97
====== ======
Exercisable at end of period 14,375 $10.73 73,750 $ 5.61
====== ======
Weighted average fair value
of options granted -- $ 2.59
The options issued under the SIP have a remaining contractual life of 7.8 years.
The options issued under the SOP have a remaining contractual life of 8.9 years.
8. NET INCREASE IN NET ASSETS ATTRIBUTABLE TO COMMON STOCKHOLDERS PER SHARE
The following table sets forth the computation of basic and diluted change in
net assets per common share:
MARCH 31,
--------------------------
2001 2000
----------- -----------
Numerator:
Net (decrease) increase in net assets from
operations ($1,153,166) $ 1,098,719
Preferred stock dividends (28,787) (12,270)
----------- -----------
Numerator for basic earnings per share -
net (loss) income available for common
stockholders ($1,181,953) $ 1,086,449
Effect of dilutive securities:
Preferred stock dividends -- 12,270
----------- -----------
Numerator for diluted earnings per share -
net (decrease) increase in net assets
available for common stockholders after
assumed conversions ($1,181,953) $ 1,098,719
=========== ===========
Denominator:
Denominator for basic (decrease) increase
in net assets from operations
weighted - average shares 1,097,166 1,095,882
14
FRANKLIN CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Effect of dilutive securities:
Convertible preferred stock - weighted -
average common equivalent shares -- 52,875
Employee stock options - weighted -
average shares -- 38,168
----------- -----------
Dilutive potential common stock -- 91,043
----------- -----------
Denominator for diluted (decrease) increase
in net assets available for common
stockholders - adjusted weighted - average
shares and assumed conversions 1,097,166 1,186,925
=========== ===========
Basic net (decrease) increase in net assets
attributable to common stockholders ($1.08) $0.99
====== =====
Diluted net (decrease) increase in net assets
attributable to common stockholders ($1.08) $0.92
====== =====
The following securities have been excluded from the dilutive per share
computation as they are antidilutive:
THREE MONTHS
ENDED MARCH 31,
------- -------
2001 2000
------- -------
Preferred stock convertible into 123,375
shares of common stock 123,375 --
For additional information on the above securities, see Note 4.
9. NET ASSET VALUE PER SHARE
The following table sets forth the computation of basic, as if converted basis
and as if liquidated basis net asset value per common share:
MARCH 31, DECEMBER 31,
---------- ----------
2001 2000
---------- ----------
Numerator:
Net assets, numerator for basic and as if
converted basis, net asset value per
common share $4,387,468 $5,579,080
Liquidation value of convertible preferred
stock 1,645,000 1,645,000
---------- ----------
Numerator for as if liquidated basis, net
asset value per common share $2,742,468 $3,934,080
========== ==========
15
FRANKLIN CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Denominator:
Number of common shares outstanding,
denominator for basic and as if liquidated
net asset value per common share 1,096,900 1,098,200
Number of shares of common stock to be
issued upon conversion of preferred stock 123,375 123,375
---------- ----------
Denominator for as if converted net asset value
per common share 1,220,275 1,221,575
========== ==========
Net asset value per common share, basic $ 4.00 $ 5.08
========== ==========
Net asset value per common share, as if
converted basis $ 3.60 $ 4.57
========== ==========
Net asset value per common share, as if
liquidated basis $ 2.50 $ 3.58
========== ==========
10. PURCHASES AND SALES OF INVESTMENT SECURITIES
The cost of purchases and proceeds from sales of investment securities excluding
short term investments, aggregated $239,728 and $1,854,632 respectively, for the
three months ended March 31, 2001; $207,116 and $894,265 respectively, for the
three months ended March 31, 2000.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
STATEMENT OF OPERATIONS
The Corporation accounts for its operations under Generally Accepted
Accounting Principles for investment companies. On this basis, the principal
measure of its financial performance is captioned "Net increase (decrease) in
net assets from operations", which is composed of the following: "Net investment
loss from operations," which is the difference between the Corporation's income
from interest, dividends and fees and its operating expenses; "Net realized gain
on portfolio of investments," which is the difference between the proceeds
received from dispositions of portfolio securities and their stated cost; any
applicable income tax provisions (benefits); and "Net increase (decrease) in
unrealized appreciation of investments," which is the net change in the fair
value of the Corporation's investment portfolio, net of any increase (decrease)
in deferred income taxes that would become payable if the unrealized
appreciation were realized through the sale or other disposition of the
investment portfolio.
"Net realized gain (loss) on portfolio of investments" and "Net increase
(decrease) in unrealized appreciation of investments" are directly related. When
a security is sold to realize a gain, the net unrealized appreciation decreases
and the net realized gain increases. When a security is sold to realize a loss,
the net unrealized appreciation increases and the net realized gain decreases.
FINANCIAL CONDITION
The Corporation's total assets and net assets were, respectively,
$4,466,560 and $4,387,468 at March 31, 2001, versus $5,766,712 and $5,579,080 at
December 31, 2000. Net asset value per share was $4.00 basic, $3.60 as if
converted basis, and $2.50 as if liquidated basis at March 31, 2001, versus
$5.08 basic, $4.57 as if converted, and $3.58 as if liquidated at December 31,
2000.
The Corporation's financial condition is dependent on the success of its
investments. A summary of the Corporation's investment portfolio is as follows:
MARCH 31, DECEMBER 31,
2001 2000
---------- ----------
Investments, at cost $2,236,713 $3,627,390
Unrealized appreciation, net of
deferred taxes 393,941 1,371,522
---------- ----------
Investments, at fair value $2,630,654 $4,998,912
========== ==========
INVESTMENTS
At March 31, 2001, the Corporation had an investment in Alacra Corporation
("Alacra"), formerly known as Data Downlink, valued at $1,000,000, which
represents 22.4% of the Corporation's total assets and 22.8% of its net assets.
Alacra, headquartered in New York and London, is a leading provider of
Internet-based online information services. Alacra provides a service called
.xls, which aggregates and cross-indexes over 70 premier business databases,
delivering information directly to Microsoft Excel, HTML, Microsoft Word or PDF
formats at the desktop. Other products include privatesuiteTM, a fast, easy,
cost-effective way to identify and retrieve profiles of privately held companies
around the world; compbook(TM), a tool for company peer analysis; and Portal
BTM, a fully integrated business information portal.
17
On April 20, 2000, the Corporation purchased $1,000,000 worth of Alacra
Series F Convertible Preferred Stock. In connection with this investment,
Franklin was granted observer rights for Alacra Board of Directors meetings.
At March 31, 2001, the Corporation had an investment in Excom Ventures, LLC
("Excom") valued at $140,000, which represents 3.1% of the Corporation's total
assets and 3.2% 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 March 31, 2001 the Corporation owned 400,024 of common stock of Go
America, Inc. ("Go America"), a wireless internet service provider valued at
$812,549, which represents 18.2% of the Corporation's total assets and 18.5% 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 investment in a private placement in Go
America during 1996. The Corporation made add-on investments in Go America
during 1998 and 1999. On April 7, 2000, Go America's common stock began trading
on the NASDAQ National Market.
At March 31, 2001, the Corporation owned 1,483,938 of common stock of
Primal Solutions, Inc. ("Primal") valued at $237,430, which represents 5.3% of
the Corporation's total assets and 5.4% of its net assets. Primal, based in
Irvine, California, is a leading provider of Web-based integrated customer
management and intelligence solutions that allow rapidly evolving communications
and Internet service providers to stay connected with and grow their customers.
It does this through an integrated suite of applications that can track and
analyze customer behavior and preferences, collect usage information, and
support billing and customer care back-office requirements, including those of
emerging IP billing markets.
On February 13, 2001, Primal was spun-off from Avery Communications, Inc.
As a result of this spin-off Franklin received 1,533,938 fully registered and
marketable shares of common stock of Primal. Primal trades over the counter on
the OTC Bulletin Board.
At March 31, 2001, the Corporation had an investment in Structured Web,
Inc. ("Structured Web") valued at $350,000, which represents 7.8% of the
Corporation's total assets and 8.0% 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.
18
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.
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 $42,557 and $22,344 for
the three months ended March 31, 2001 and 2000, respectively. The increase in
interest and dividend income for the three months ended March 31, 2001 when
compared to March 31, 2000, was primarily the result of a portion of the Primal
spin-off being declared a dividend as well as Franklin having more cash on hand
during the three months ended March 31, 2001.
Operating expenses were $432,654 and $445,106 for the three months ended
March 31, 2001 and 2000, respectively. A majority of the Corporation's operating
expenses consist of employee compensation, office and rent expense, other
expenses related to identifying and reviewing investment opportunities and
professional fees. Professional fees consist of general legal fees, audit and
tax fees and investment related legal fees.
Net investment losses from operations were $390,097 and $422,762 for the
three months ended March 31, 2001 and 2000, respectively.
The Corporation has relied and continues to rely to a large extent upon
proceeds from sales of investments rather than investment income to defray a
significant portion of its operating expenses. Because such sales cannot be
predicted with certainty, the Corporation attempts to maintain adequate working
capital to provide for fiscal periods when there are no such sales.
NET REALIZED GAINS AND LOSSES ON PORTFOLIO OF INVESTMENTS:
During the three months ended March 31, 2001 and 2000, the Corporation
realized net gains before taxes of $225,044 and $731,761 respectively, from the
disposition of various investments.
UNREALIZED APPRECIATION OF INVESTMENTS:
Unrealized appreciation of investments, net of deferred taxes, decreased by
$977,581 during the three months ended March 31, 2001, primarily from unrealized
gains due to the decrease in value of Franklin's investment in Go America. This
increase was partially offset by the sale of Franklin's investment in Avery
Communications.
Unrealized appreciation of investments, net of deferred taxes, increased by
$808,720 during the three months ended March 31, 2000, primarily from unrealized
gains due to the
19
increase in value of Franklin's investment in Avery. This increase was partially
offset by a decrease in the value of Franklin's investment in CIC.
LIQUIDITY AND CAPITAL RESOURCES
The Corporation's reported total cash and cash equivalents and marketable
investment securities (the primary measure of liquidity) at March 31, 2001, was
$1,809,997 compared to $768,582 at December 31, 2000. Management believes that
these assets provide the Corporation with sufficient liquidity for its
operations.
RISKS
There are significant risks inherent in the Corporation's venture capital
business. The Corporation has invested a substantial portion of its assets in
small private companies and a bulletin board listed public corporation. Because
of the speculative nature of these investments, there is significantly greater
risk of loss than is the case with traditional investment securities. The
Corporation expects that from time to time its venture capital investments may
result in a complete loss of the Corporation's invested capital or may be
unprofitable. Other investments may appear likely to become successful, but may
never realize their potential. Neither the Corporation's investments nor an
investment in the Corporation is intended to constitute a balanced investment
program. The Corporation has in the past relied and continues to rely to a large
extent upon proceeds from sales of investments rather than investment income to
defray a significant portion of its operating expenses.
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.
20
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. 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.
21
ILLIQUIDITY OF PORTFOLIO INVESTMENTS
Most of the investments of the Corporation are or will be equity securities
acquired directly from small companies. The Corporation's portfolio of equity
securities is and will usually be subject to restrictions on resale or otherwise
have no established trading market. The illiquidity of most of the Corporation's
portfolio of equity securities may adversely affect the ability of the
Corporation to dispose of such securities at times when it may be advantageous
for the Corporation to liquidate such investments.
THE INABILITY OF THE CORPORATION'S PORTFOLIO COMPANIES TO SUCCESSFULLY
MARKET THEIR PRODUCTS WOULD HAVE A NEGATIVE IMPACT ON ITS INVESTMENT
RETURNS
Even if the Corporation's portfolio companies are able to develop
commercially viable products, the market for new products and services is highly
competitive and rapidly changing. Commercial success is difficult to predict and
the marketing efforts of the Corporation's portfolio companies may not be
successful.
VALUATION OF PORTFOLIO INVESTMENTS
There is typically no public market of equity securities of the small
private companies in which the Corporation invests. As a result, the valuation
of the equity securities in the Corporation's portfolio is subject to the good
faith determination of the Corporation's Board of Directors. In the absence of a
readily ascertainable market value, the estimated value of the Corporation's
portfolio of equity securities may differ significantly from the values that
would be placed on the portfolio if a ready market for the equity securities
existed. Any changes in estimated net asset value are recorded in the
Corporation's statement of operations as "Change in unrealized appreciation on
investments."
FLUCTUATIONS OF QUARTERLY RESULTS
The Corporation's quarterly operating results could fluctuate as a result
of a number of factors. These include, among others, variations in and the
timing of the recognition of realized and unrealized gains or losses, the degree
to which the Corporation encounters competition in its markets and general
economic conditions. As a result of these factors, results for any one quarter
should not be relied upon as being indicative of performance in future quarters.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Corporation's business activities contain elements of risk. The
Corporation considers a principal type of market risk to be valuation risk.
Investments are stated at "fair value" as defined in the 1940 Act and in the
applicable regulations of the Securities and Exchange Commission. All assets are
valued at fair value as determined in good faith by, or under the direction of,
the Board of Directors.
Neither the Corporation's investments nor an investment in the Corporation
is intended to constitute a balanced investment program. The Corporation has
exposure to public-market price fluctuations to the extent of its publicly
traded portfolio.
The Corporation has invested a substantial portion of its assets in private
development stage or start-up companies. These private businesses tend to be
thinly capitalized, unproven, small companies that lack management depth and
have not attained profitability or have no
22
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. In the absence of a readily ascertainable market value,
the estimated value of the Corporation's portfolio of equity interests may
differ significantly from the values that would be placed on the portfolio if a
ready market for the equity interests existed. Any changes in valuation are
recorded in the Corporation's consolidated statements of operations as "Net
increase (decrease) in unrealized appreciation on investments."
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities Holders
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits. The exhibits which are filed with the Form 10-Q or
incorporated herein by reference are set for in the Exhibit Index
on page 24.
(b) Reports on Form 8-K. The Company did not file any reports on Form
8-K during the first three months of 2001.
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Corporation has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
FRANKLIN CAPITAL CORPORATION
Date: May 14, 2001 By: /s/
-----------------------------
Hiram M. Lazar
CHIEF FINANCIAL OFFICER
23
EXHIBIT INDEX
None.
24