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 September 30, 2003
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, 20th Floor, New York, New York 10022
----------------------------------------------- -------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 486-2323
---------------------------
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
--- ---
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes _____ No __X___
The number of shares of common stock outstanding as of November 3, 2003 was
1,020,100.
1
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Balance Sheets
Statements of Operations
Statements of Cash Flows
Statements of Changes in Net Assets
Portfolio of Investments
Notes to Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Critical Accounting Policies
Statement of Operations
Financial Condition
Investments
Results of Operations
Taxes
Liquidity and Capital Resources
Risk Factors
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Item 4. Controls and Procedures
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURE
EXHIBIT INDEX
FORWARD LOOKING STATEMENTS
WHEN USED IN THIS QUARTERLY REPORT ON FORM 10-Q, THE WORDS "BELIEVES,"
"ANTICIPATES," "EXPECTS" AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY
FORWARD-LOOKING STATEMENTS. STATEMENTS LOOKING FORWARD IN TIME ARE INCLUDED IN
THIS QUARTERLY REPORT ON FORM 10-Q. SUCH STATEMENTS ARE SUBJECT TO CERTAIN RISKS
AND UNCERTAINTIES WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY,
INCLUDING, BUT NOT LIMITED TO, THOSE SET FORTH IN "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS." READERS ARE
CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH
SPEAK ONLY AS OF THE DATE HEREOF. THE CORPORATION UNDERTAKES NO OBLIGATION TO
PUBLICLY REVISE THESE FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR
CIRCUMSTANCES OCCURRING AFTER THE DATE HEREOF OR TO REFLECT THE OCCURRENCE OF
UNANTICIPATED EVENTS.
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The information furnished in the accompanying financial statements
reflects all adjustments that are, in the opinion of management, necessary for a
fair presentation of the results for the interim period presented.
3
FRANKLIN CAPITAL CORPORATION
================================================================================
BALANCE SHEETS
-------------------------------------------------------------------------------
SEPTEMBER 30,
2003 DECEMBER 31,
(UNAUDITED) 2002
-------------------------------------------------------------------------------
ASSETS
Marketable investment securities, at market value
(cost: September 30, 2003 - $40,899;
December 31, 2002 - $34,675) (Note 2) $ 37,424 $ 34,675
Investments, at fair value (cost: September 30,
2003 - $2,283,804; December 31, 2002 - $3,876,430)
(Note 2)
Excelsior Radio Networks, Inc. 2,671,270 2,957,875
Other investments 1,000,000 1,000,000
---------- ----------
3,671,270 3,957,875
---------- ----------
Cash and cash equivalents (Notes 1 & 2) 25,987 562,191
Other assets 85,573 77,597
---------- ----------
TOTAL ASSETS $3,820,254 $4,632,338
========== ==========
--------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Note payable $ 940,609 $ 951,817
Accounts payable and accrued liabilities 547,688 412,981
---------- ----------
TOTAL LIABILITIES 1,488,297 1,364,798
---------- ----------
Commitments and contingencies (Note 5)
STOCKHOLDERS' EQUITY
Convertible preferred stock, $1 par value,
cumulative 7% dividend: 5,000,000 shares
authorized; 10,950 shares issued and outstanding
at September 30, 2003 and December 31, 2002
(Liquidation preference $1,095,000) (Note 4) 10,950 10,950
Common stock, $1 par value: 5,000,000 shares
authorized; 1,505,888 shares issued:
1,040,100 shares outstanding at September 30, 2003
and 1,049,600 at December 31,2002 (Note 6) 1,505,888 1,505,888
Additional paid-in capital 10,439,610 10,439,610
Unrealized appreciation of investments
(Notes 2 and 3) 1,383,991 1,481,071
Accumulated deficit (8,403,750) (7,578,808)
---------- ----------
4,936,689 5,858,711
Deduct common stock held in treasury, at cost,
465,788 shares at September 30, 2003, and
456,288 shares at December 31, 2002 (Note 4) (2,604,732) (2,591,171)
---------- ----------
Net assets (See Note 9 for per share information) 2,331,957 3,267,540
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $3,820,254 $4,632,338
========== ==========
--------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
4
FRANKLIN CAPITAL CORPORATION
==============================================================================================================
STATEMENTS OF OPERATIONS
(UNAUDITED)
--------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2003 2002 2003 2002
--------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME
Interest and dividend income $ 90 $ 110 $ 848 $ 2,219
Management fees 45,000 120,000 135,000 330,000
-------- ---------- -------- --------
45,090 120,110 135,848 332,219
-------- ---------- -------- --------
EXPENSES
Salaries and employee benefits 111,660 195,957 422,854 589,848
Professional fees 30,000 35,325 132,605 106,575
Rent 18,404 15,768 53,655 79,164
Insurance 16,714 17,843 52,037 39,973
Directors' fees 2,001 501 6,003 1,502
Taxes other than income taxes 6,196 7,525 31,523 35,615
Newswire and promotion -- 1,001 -- 3,000
Depreciation and amortization 4,242 4,242 12,729 12,727
Interest expense 12,600 8,850 30,300 26,550
Expenses related to cancelled merger 73,500 265,782 73,500 465,782
General and administrative 41,456 39,536 143,978 132,599
-------- ---------- -------- --------
316,773 592,330 959,184 1,493,335
-------- ---------- -------- --------
Net investment loss from operations (271,683) (472,220) (823,336) (1,161,116)
Net realized gain (loss) on portfolio of investments:
Investment securities:
Affiliated 57,900 -- 57,900 --
Unaffiliated (2,017) (16,431) (2,017) (349,147)
-------- ---------- -------- --------
Net realized gain (loss) on portfolio of investments 55,883 (16,431) 55,883 (349,147)
Provision for current income taxes -- 331 -- 331
-------- ---------- -------- --------
55,883 (16,762) 55,883 (349,478)
-------- ---------- -------- --------
Net realized loss (215,800) (488,982) (767,453) (1,510,594)
Increase (decrease) in unrealized appreciation
of investments
Investment securities:
Affiliated 383,450 (885,000) (93,605) 2,115,000
Unaffiliated (3,475) 5,985 (3,475) 42,233
-------- ---------- -------- --------
Increase (decrease) in unrealized appreciation
of investments 379,975 (879,015) (97,080) 2,157,233
-------- ---------- -------- --------
Net increase (decrease) in net assets from operations 164,175 (1,367,997) (864,533) 646,639
Preferred dividends 19,162 28,787 57,489 86,362
-------- ---------- -------- --------
Net increase (decrease) in net assets attributable to
common stockholders $145,013 ($1,396,784) ($922,022) $560,277
======== ========== ======== ========
Basic and diluted net increase (decrease) per share in
net assets attributable to common stockholders (Note 8) $0.14 ($1.31) ($0.88) $0.52
===== ====== ====== =====
---------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
5
FRANKLIN CAPITAL CORPORATION
=============================================================================================
STATEMENTS OF CASH FLOWS
(UNAUDITED)
---------------------------------------------------------------------------------------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 2002
---------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net (decrease) increase in net assets from operations ($864,533) $ 646,639
Adjustments to reconcile net (decrease) increase in net assets
from operations to net cash used in operating activities:
Depreciation and amortization 12,729 12,727
Decrease (increase) in unrealized appreciation of investments 97,080 (2,157,233)
Net realized (gain) loss on portfolio of investments, net of
current income taxes (55,882) 349,477
Changes in operating assets and liabilities:
Increase in other assets (20,705) (11,428)
Decrease in accounts payable and accrued liabilities,
excluding change in current income taxes payable 134,707 617,532
-------- ---------
Total adjustments 167,929 (1,188,925)
-------- ---------
Net cash used in operating activities (696,604) (542,286)
-------- ---------
Cash flows from investing activities:
Proceeds from sale of securities in majority-owned affiliate 250,900 --
Proceeds from sale of other investments -- 78,715
Proceeds from sale of marketable investment securities 28,924 6,554
Loan payments from majority-owned affiliate -- 75,000
Purchases of marketable investment securities (37,166) (22,985)
-------- ---------
Net cash provided by investing activities 242,658 137,284
-------- ---------
Cash flows from financing activities:
Payment of preferred dividends (57,489) (86,362)
Decrease in note payable (11,208) (47,930)
Proceeds for conversion right -- 300,000
Purchases of treasury stock (13,561) (37,322)
-------- ---------
Net cash (used in) provided by financing activities (82,258) 128,386
-------- ---------
Net decrease in cash and cash equivalents (536,204) (276,616)
Cash and cash equivalents at beginning of period 562,191 279,728
-------- ---------
Cash and cash equivalents at end of period $ 25,987 $ 3,112
======== =========
---------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
6
FRANKLIN CAPITAL CORPORATION
==========================================================================================================================
STATEMENTS OF CHANGES IN NET ASSETS
(UNAUDITED)
--------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2003 2002 2003 2002
--------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in net assets from operations:
Net investment loss ($271,683) ($472,220) ($823,336) ($1,161,116)
Net realized gain (loss) on portfolio of investments,
net of current income taxes 55,883 (16,762) 55,883 (349,478)
Increase (decrease) in unrealized appreciation of investments 379,975 (879,015) (97,080) 2,157,233
---------- ---------- ---------- ----------
Net increase (decrease) in net assets from operations 164,175 (1,367,997) (864,533) 646,639
Capital stock transactions:
Payment of dividends on preferred stock (19,162) (28,787) (57,489) (86,362)
Proceeds for conversion right -- -- -- 300,000
Purchase of treasury stock -- (2,076) (13,561) (37,322)
---------- ---------- ---------- ----------
Total increase (decrease) in net assets 145,013 (1,398,860) (935,583) 822,955
---------- ---------- ---------- ----------
Net assets at beginning of period 2,186,944 5,143,560 3,267,540 2,921,745
---------- ---------- ---------- ----------
Net assets at end of period $2,331,957 $3,744,700 $2,331,957 $3,744,700
========== ========== ========== ==========
--------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
7
FRANKLIN CAPITAL CORPORATION
====================================================================================================================================
PORTFOLIO OF INVESTMENTS
------------------------------------------------------------------------------------------------------------------------------------
MARKETABLE INVESTMENT SECURITIES
------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF
SHARES OR MARKET
PRINCIPAL VALUE
SEPTEMBER 30, 2003 (2) AMOUNT ($) COST(1) (NOTE 2)
------------------------------------------------------------------------------------------------------------------------------------
Certificate of Deposit - 0.65%, due 11/03/2003 26,249 26,249
Xplor Technology 7,500 14,650 11,175
------ ------
Total Marketable Investment Securities
(1.0% of total investments and 1.6% of net assets) $40,899 $37,424
======= =======
------------------------------------------------------------------------------------------------------------------------------------
INVESTMENTS, AT FAIR VALUE
------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF
SHARES OR DIRECTORS'
EQUITY PRINCIPAL VALUATION
SEPTEMBER 30, 2003 (2) INVESTMENT INTEREST AMOUNT ($) COST(1) (NOTE 2)
------------------------------------------------------------------------------------------------------------------------------------
MAJORITY OWNED AFFILIATE
Excelsior Radio Networks, Inc. Common stock
and warrants 51.35% 1,370,915 $1,283,804 $2,671,270
Total Excelsior Radio Networks, Inc.
(72.0% of total investments and 114.6% of net assets) 22.09%
(Radio production and advertising sales) (fully diluted)
OTHER INVESTMENTS
Alacra Corporation (27.0% of total investments Convertible
and 42.9% of net assets) Preferred Stock 1.68% 321,543 1,000,000 1,000,000
---------- ---------
(Internet-based information provider)
Investments, at Fair Value 2,283,804 3,671,270
========== =========
------------------------------------------------------------------------------------------------------------------------------------
(1) Book cost equals tax cost for all investments
(2) Total investments refers to investments and marketable investment
securities.
The accompanying notes are an integral part of these financial statements.
8
FRANKLIN CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
1. DESCRIPTION OF BUSINESS
Franklin Capital Corporation ("Franklin", or the "Corporation") is a Delaware
corporation operating as a Business Development Company ("BDC") under the
Investment Company Act of 1940 (the "Act"). A BDC is a specialized type of
investment company under the Act. A BDC must be primarily engaged in the
business of furnishing capital and making available managerial expertise to
companies that do not have ready access to capital through conventional
financial channels. Such companies are termed "eligible portfolio companies".
The Corporation, as a BDC, generally may invest in other securities; however,
such investments may not exceed 30% of the Corporation's total asset value at
the time of any such investment.
The accompanying financial statements have been prepared assuming that the
Corporation will continue as a going concern. The Corporation has a working
capital deficiency of approximately $1,400,000 at September 30, 2003. (Working
capital is defined as total liabilities less liquid assets.) These conditions
raise substantial doubt about the Corporation's ability to continue as a going
concern. In order to alleviate the substantial doubt about the Corporation's
ability to continue as a going concern, the Corporation will seek to sell assets
or find an alternative financing source. There can be no assurance that the
Corporation would be able to obtain financing. The financial statements do not
include any adjustments to reflect the possible future effects on the
recoverability of assets or the amounts of liabilities that may result from the
outcome of this uncertainty.
On October 8, 2003, Franklin sold to Sunshine Wireless, LLC ("Sunshine") 375,000
shares of the common stock of Excelsior at $2.00 per share for an aggregate of
$750,000, realizing a gain of $375,000 (See Note 11). This asset sale reduced
Franklin's working capital deficiency to approximately $700,000. Franklin
continues to have a working capital deficiency primarily due to a note payable
of $940,609 to Winstar Communications, Inc. ("Winstar") in connection with the
acquisition of assets from Winstar (see Note 6). This note is taken into account
in calculating the working capital deficit as it is assumed to be payable within
the next year. Due to an action in which Franklin is a named party (see Note 5),
the due date of this note has been extended indefinitely and it is uncertain as
to when this note will come due. Franklin continues to seek adequate alternative
financing rather than additional asset sales in order to alleviate the going
concern issue.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
STATEMENTS OF CASH FLOWS
For purposes of the Statements of Cash Flows, Franklin considers only highly
liquid investments such as money market funds and commercial paper with
maturities of 90 days or less at the date of their acquisition to be cash
equivalents.
The Corporation paid no interest or income taxes during the nine months ended
September 30, 2003 and 2002.
At September 30, 2003 and 2002, the Corporation held cash and cash equivalents
primarily in money market funds at two commercial banking institutions, and one
broker/dealer.
9
FRANKLIN CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
VALUATION OF INVESTMENTS
Security investments which are publicly traded on a national exchange or Nasdaq
Stock Market are stated at the last reported sales price on the day of
valuation, or if no sale was reported on that date, then the securities are
stated at the last quoted bid price. The Board of Directors of Franklin (the
"Board of Directors") may determine, if appropriate, to discount the value where
there is an impediment to the marketability of the securities held.
Investments for which there is no ready market are initially valued at cost and,
thereafter, at fair value based upon the financial condition and operating
results of the issuer and other pertinent factors as determined in good faith by
the Board of Directors. The financial condition and operating results have been
derived utilizing both audited and unaudited data. In the absence of a ready
market for an investment, numerous assumptions are inherent in the valuation
process. Some or all of these assumptions may not materialize. Unanticipated
events and circumstances may occur subsequent to the date of the valuation and
values may change due to future events. Therefore, the actual amounts eventually
realized from each investment may vary from the valuations shown and the
differences may be material. Franklin reports the unrealized gain or loss
resulting from such valuation in the Statements of Operations.
GAINS (LOSSES) ON PORTFOLIO OF INVESTMENTS
Amounts reported as realized gains (losses) are measured by the difference
between the proceeds of sale or exchange and the cost basis of the investment
without regard to unrealized gains (losses) reported in the prior periods. Gains
(losses) are considered realized when sales or dissolution of investments are
consummated.
INCOME TAXES
Franklin does not qualify for pass through tax treatment as a Regulated
Investment Company under Subchapter M of the Internal Revenue Code for income
tax purposes. Therefore, the Corporation is taxed under Regulation C.
Franklin accounts for income taxes in accordance with the provision of Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109"). The significant components of deferred tax assets and liabilities are
principally related to the Corporation's net operating loss carryforward and its
unrealized appreciation of investments.
DEPRECIATION AND AMORTIZATION
Depreciation is recorded using the straight-line method at rates based upon
estimated useful lives for the respective assets. Leasehold Improvements are
included in other assets and are amortized over their useful lives or the
remaining life of the lease, whichever is shorter.
NET (DECREASE) INCREASE IN NET ASSETS PER SHARE
ATTRIBUTABLE TO COMMON STOCKHOLDERS
Net (decrease) increase in net assets per share attributable to common
stockholders is calculated in accordance with the provisions of Statement of
Financial Accounting Standards No. 128, "Earnings per Share".
STOCK-BASED COMPENSATION
The Corporation has elected to follow APB Opinion 25, "Accounting for Stock
Issued to Employees," to account for its Non-Qualified Stock Option Plan under
which no compensation cost is recognized because the option exercise price is
equal to at least the market price of the underlying stock on the date of grant.
Had compensation cost for these plans been determined at the grant dates for
awards under the alternative accounting method provided for in SFAS No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure - an
Amendment of FASB Statement No. 123," net income and earnings per share, on a
pro forma basis, would have been:
10
FRANKLIN CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, September 30,
2003 2002
---------- --------
Net (decrease) increase in net assets
attributable to common stockholders:
As reported $ (922,022) $560,277
Deduct:
Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax effect -- 6,312
---------- --------
Pro forma $ (922,022) $553,965
========== ========
Basic and diluted net (decrease) increase in
net assets attributable to common stockholders:
As reported $(0.88) $0.52
Pro forma $(0.88) $0.52
RECLASSIFICATION
Certain amounts in prior years have been reclassified to conform with the
current year presentation.
3. INCOME TAXES
For the nine months ended September 30, 2003 and 2002, Franklin's tax
(provision) benefit was based on the following:
2003 2002
--------- -----------
Net investment loss from operations ............... $(823,336) $(1,161,116)
Net realized gain (loss) on portfolio
of investments .................................. 55,883 (349,147)
(Decrease) increase in unrealized appreciation .... (97,080) 2,157,233
--------- -----------
Pre-tax book (loss) income ..................... $(864,533) $ 646,970
========= ===========
2003 2002
--------- -----------
Tax benefit (provision) at 34% on $(864,533) and
$646,970, respectively .......................... $ 294,000 $ (220,000)
State and local, net of Federal benefit ........... -- --
Other ............................................. 45,000 (155,000)
Change in valuation allowance ..................... (339,000) 375,000
--------- -----------
$ -- $ --
========= ===========
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 September 30, 2003 and December 31, 2002, significant deferred tax assets and
liabilities consist of:
Asset (Liability)
----------------------------
September 30, September 30,
2003 2002
----------- -----------
Deferred Federal and state benefit from
net operating loss carryforward .............. $ 2,660,000 $ 2,356,000
Deferred Federal and state provision on
unrealized (appreciation) depreciation
of investments ............................... (498,000) (533,000)
Valuation allowance ............................ (2,162,000) (1,823,000)
----------- -----------
Deferred taxes ................................. $ -- $ --
=========== ===========
11
FRANKLIN CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
At December 31, 2002, Franklin had net operating loss carryforwards for income
tax purposes of approximately $6,544,000 that will begin to expire in 2011. At a
36% effective tax rate the after-tax net benefit from this loss would be
approximately $2,356,000.
4. STOCKHOLDERS' EQUITY
The accumulated deficit at September 30, 2003, consists of accumulated net
realized gains of $5,168,000 and accumulated investment losses of $13,572,000.
The Board of Directors has authorized Franklin to repurchase up to an aggregate
of 525,000 shares of its common stock in open market purchases on the American
Stock Exchange when such purchases are deemed to be in the best interest of the
Corporation and its stockholders. As of December 31, 2002, the Corporation had
purchased 507,450 shares of its common stock of which 456,288 remained in
treasury. During the nine months ended September 30, 2003, the Corporation
purchased 9,500 shares of its common stock at a total cost of $13,561. To date,
Franklin has repurchased 516,950 shares of its common stock of which 465,788
shares remain in treasury at September 30, 2003.
PREFERRED STOCK -
The preferred 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). The convertible preferred stock has antidilution provisions, which can
change the conversion price in certain circumstances if the Corporation issues
additional shares of common stock. The holder has the right to convert the
shares of convertible preferred stock at any time until February 22, 2010 into
common stock. Upon liquidation, dissolution or winding up of the Corporation,
the stockholders of the convertible preferred stock are entitled to receive $100
per share plus any accrued and unpaid dividends before distributions to any
holder of the Corporation's common stock. On December 31, 2002, the Corporation
redeemed from certain preferred stockholders 5,500 shares of convertible
preferred stock for $25.00 per share.
5. COMMITMENTS AND CONTINGENCIES
On October 15, 2001, Jeffrey A. Leve and Jeffrey Leve Family Partnership, L.P.
filed a lawsuit against Franklin, Sunshine and four other defendants affiliated
with Winstar in the Superior Court of the State of California for the County of
Los Angeles. The lawsuit, which has subsequently been removed to the United
States District Court for the Central District of California, alleges that the
Winstar defendants conspired to commit fraud and breached their fiduciary duty
to the plaintiffs in connection with the acquisition of the plaintiffs' radio
production and distribution business. The complaint further alleges that
Franklin and Sunshine joined the alleged conspiracy. The business was initially
acquired by certain entities affiliated with Winstar and, subsequently, the
assets of such business were sold to Franklin and Sunshine (see Note 6).
Concurrently with such purchase, Franklin transferred such assets to Excelsior.
The plaintiffs seek recovery of damages in excess of $10,000,000, costs and
attorneys' fees. On January 7, 2002, Franklin filed a motion to dismiss the
lawsuit or, in the alternative, to transfer venue to the United States District
Court of the Southern District of New York. The plaintiffs filed a motion
opposing Franklin's request on January 28, 2002. Franklin's motion for dismissal
was granted on February 25, 2002, due to improper venue. On June 7, 2002, the
plaintiffs filed their complaint to the United States District Court of the
Southern District of New York. On July 12, 2002, Franklin filed a motion to
dismiss the complaint. On February 25, 2003, the case against Franklin and
Sunshine was dismissed; however, the plaintiffs may file an appeal. An
unfavorable outcome in this lawsuit may have a material adverse effect on
Franklin's business, financial condition and results of operations.
12
FRANKLIN CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. EXCELSIOR RADIO NETWORKS, INC.
Franklin valued its position in Excelsior at $2.00 per common share based on the
sale of 375,000 common shares to Sunshine on October 8, 2003 (See Note 11) and
the receipt of an unsolicited non-binding expression of interest by Excelsior
from a third party at a price greater than $2.00 per common share.
Franklin issued a $1,000,000 note as part of the purchase price of Excelsior.
This note was due February 28, 2002 with interest at 3.54% but has a right of
set-off against certain representations and warranties made by Winstar Radio
Networks, Inc. (See Note 5)
On October 1, 2002, Franklin received 74,232 warrants to acquire shares of
Excelsior common stock at an exercise price of $1.20 per share for arranging a
refinancing of Excelsior debt.
Franklin entered into a services agreement with Excelsior whereby Franklin
provides Excelsior with certain services. Franklin receives a management fee of
not less than $15,000 per month as determined by Excelsior's board.
Additionally, Franklin's chief financial officer serves in that capacity for
Excelsior and his salary and benefits are allocated between Excelsior and
Franklin on an 80/20 basis. During the nine months ended September 30, 2003, and
2002, Franklin earned $135,000 and $330,000, respectively, in management fees
and was reimbursed $108,000 and $90,702, respectively, for salary and benefits
for Franklin's chief financial officer, which was recorded as a reduction of
expenses on Franklin.
Excelsior issued notes, each with an initial aggregate principal amount of
$460,000 in connection with the acquisition of substantially all of the assets
of Dial Communications Group, Inc., and Dial Communications Group, LLC in April
2002. Each of the promissory notes is convertible into shares of Franklin's
common stock at a premium ranging from 115% to 120% of the average closing
prices of Franklin's common stock during a specified pre and post closing
measurement period. Excelsior has paid to Franklin an amount equal to $300,000
in consideration of Franklin's obligations in connection with any Franklin
common stock that may be issued pursuant to the terms of the promissory notes.
For each share of common stock Franklin is required to issue under the
promissory notes, Franklin will receive 0.86 shares of common stock in
Excelsior. The note holders have entered into advanced discussions with
Excelsior to amend the conversion feature so that the notes would become
convertible into stock appreciation rights on Excelsior's common stock rather
than convertible into Franklin's common stock. It is expected that this
agreement will be signed after the filing of this 10Q but prior to year-end. If
the agreement is not signed, then the note holders will continue to hold the
right to convert the notes into shares of Franklin's common stock.
Franklin along with Sunshine initially purchased Excelsior on August 28, 2001.
On October 3, 2002, Franklin sold 773,196 common shares for $1.94 per share for
$1,500,000 realizing a gain of $726,804. On August 12, 2003, Franklin sold
193,000 common shares for $1.30 per share for $250,900 realizing a gain of
$57,900. Franklin has stock appreciation rights on these commons shares as
follows, a) in the event that Excelsior is sold on or before August 8, 2004 for
gross proceeds of no less than $40,000,000, then Franklin shall be entitled to
receive fifty percent (50%) of any net value above $1.30 per share not to exceed
proceeds to Franklin of $1.94 per share, and b) in the event that Excelsior is
sold on or before August 8, 2005 for gross proceeds of no less than $40,000,000,
then Franklin shall be entitled to receive fifty percent (50%) of any net value
above $1.30 per share not to exceed proceeds to Franklin of $1.625 per share. On
October 8, 2003, Franklin sold additional shares to Sunshine (Note 11). There
can be no guarantee that Franklin will be able to continue to sell shares of
Excelsior to Sunshine.
7. STOCK OPTION PLANS
On September 9, 1997, Franklin's stockholders approved two Stock Option Plans: a
Stock Incentive Plan ("SIP") to be offered to the Corporation's consultants,
officers and employees (including any officer or employee who is also a director
of the Corporation) and a Non-Statutory Stock Option Plan ("SOP") to be offered
to the Corporation's "outside" directors, (i.e., those directors who are not
also officers or employees of Franklin). 112,500 shares of the Corporation's
Common Stock have been reserved for issuance under these plans, of which 67,500
shares have been reserved for the SIP and 45,000 shares have been reserved for
the SOP. Shares subject to options that terminate or expire prior to exercise
will be available for future grants under the Plans. Because the issuance of
options to "outside" directors is not permitted under the Act without an
exemptive order by the Securities and Exchange
13
FRANKLIN CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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.
The following is a summary of the status of the Stock Option Plans during the
nine months ended:
September 30, 2003 September 30, 2002
------------------ ------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------ ------ ------ ------
Outstanding at beginning
of period 20,625 $11.39 39,375 $11.27
Granted -- -- -- --
Exercised -- -- -- --
Forfeited -- -- 18,750 $11.13
Expired -- -- -- --
------ ------
Outstanding at end of period 20,625 $11.39 20,625 $11.39
====== ======
Exercisable at end of period 20,625 $11.39 20,625 $11.39
====== ======
The options issued under the SIP have a remaining contractual life of 4.2 years.
The options issued under the SOP have a remaining contractual life of 6.3 years.
8. NET INCREASE (DECREASE) IN NET ASSETS ATTRIBUTABLE TO COMMON STOCKHOLDERS
PER SHARE
The following table sets forth the computation of basic and diluted change in
net assets attributable to common stockholders per share:
Three Months ended Nine months ended
September 30, September 30,
-------------------------------------------------------
2003 2002 2003 2002
-------------------------------------------------------
Numerator:
Net increase (decrease) in net assets
from operations $ 164,175 ($1,367,997) ($864,533) $ 646,639
Preferred stock dividends (19,162) (28,787) (57,489) (86,362)
--------- ----------- --------- ---------
Numerator for basic and diluted earnings
per share - net increase (decrease) in net
assets attributable to common stockholders $ 145,013 ($1,396,784) ($922,022) $ 560,277
========= =========== ========= =========
Denominator:
Denominator for basic and diluted increase
(decrease) in net assets from operations
- weighted - average shares 1,040,100 1,064,593 1,042,262 1,068,155
Basic and diluted net increase (decrease) in
net assets from operations per share $0.14 ($1.31) ($0.88) $0.52
===== ====== ====== =====
Common shares which would be issued upon conversion of the Corporation's
preferred stock or exercise of options have been excluded from the dilutive per
share computation as they are antidilutive (see Notes 4 and 7):
14
FRANKLIN CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Period ended September 30,
-------------------------
2003 2002
-------------------------
Preferred stock convertible into common stock 82,125 123,375
Stock options 20,625 20,625
9. NET ASSET VALUE PER SHARE
The following table sets forth the computation of net asset value per common
share attributable to common stockholders:
September 30, December 31,
2003 2002
---------- ----------
Numerator:
Numerator for net asset value per
common share, as if converted basis $2,331,957 $3,267,540
Liquidation value of convertible
preferred stock (1,095,000) (1,095,000)
---------- ----------
Numerator for net asset value per share
attributable to common stockholders $1,236,957 $2,172,540
========== ==========
Denominator:
Number of common shares outstanding,
denominator for net asset value per share
attributable to common stockholders 1,040,100 1,049,600
Number of shares of common stock to be
issued upon conversion of preferred stock 82,125 82,125
---------- ----------
Denominator for net asset value per common
share as if converted basis 1,122,225 1,131,725
========== ==========
Net asset value per share attributable
to common stockholders $1.19 $2.07
===== =====
Net asset value per common share,
as if converted basis $2.08 $2.89
===== =====
10. PURCHASES AND SALES OF INVESTMENT SECURITIES
The cost of purchases and proceeds from sales of investment securities excluding
short-term investments, aggregated $37,166 and $271,398 respectively, for the
nine months ended September 30, 2003, and $22,985 and $85,269 respectively, for
the nine months ended September 30, 2002.
11. SUBSEQUENT EVENT
On October 8, 2003, Franklin sold to Sunshine 375,000 shares of the common stock
of Excelsior for an aggregate purchase price of $750,000, realizing a gain of
$375,000, pursuant to a stock purchase agreement between Sunshine and Franklin.
Franklin has stock appreciation rights on these common shares such that if
Excelsior is sold and the purchaser of the common shares from Franklin receives
more than $3.50 per share, Franklin is entitled to receive 80% of the value
greater than $3.50 per share. After giving effect to the purchase of the common
stock, Sunshine owns approximately 63.6% and the Company owns 36.4% of the
issued and outstanding common stock, and voting power, of Excelsior. On a fully
diluted basis, after giving effect to the exercise of the outstanding warrants
and the conversion of Sunshine's outstanding preferred stock of Excelsior into
common stock, the Corporation owns approximately 13.8% of Excelsior.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CRITICAL ACCOUNTING POLICIES
Franklin's discussion and analysis of its financial condition and results
of operations are based upon the Corporation's financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires the
Corporation to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses and related disclosure of contingent
assets and liabilities. On an ongoing basis, the Corporation evaluates its
estimates, the most critical of which are those related to the fair value of the
portfolio of investments.
STATEMENT OF OPERATIONS
The Corporation accounts for its operations under accounting principles
generally accepted in the United States for investment companies. On this basis,
the principal measure of its financial performance is captioned "Net increase
(decrease) in net assets from operations", which is composed of the following:
"Net investment loss from operations," which is the difference between the
Corporation's income from interest, dividends and fees and its operating
expenses; "Net realized gain on portfolio of investments," which is the
difference between the proceeds received from dispositions of portfolio
securities and their stated cost; any applicable income tax provisions
(benefits); and "Net increase (decrease) in unrealized appreciation of
investments," which is the net change in the fair value of the Corporation's
investment portfolio, net of any increase (decrease) in deferred income taxes
that would become payable if the unrealized appreciation were realized through
the sale or other disposition of the investment portfolio.
"Net realized gain (loss) on portfolio of investments" and "Net increase
(decrease) in unrealized appreciation of investments" are directly related. When
a security is sold to realize a gain, the net unrealized appreciation decreases
and the net realized gain increases. When a security is sold to realize a loss,
the net unrealized appreciation increases and the net realized gain decreases.
FINANCIAL CONDITION
The Corporation's total assets and net assets were, respectively,
$3,820,254 and $2,331,957 at September 30, 2003, versus $4,632,338 and
$3,267,540 at December 31, 2002. Net asset value per share attributable to
common shareholders and on an as if converted basis was $1.19 and $2.08,
respectively at September 30, 2003, versus $2.07 and $2.89 at December 31, 2002.
The Corporation's financial condition is dependent on the success of its
investments. A summary of the Corporation's investment portfolio is as follows:
SEPTEMBER 30, 2003 DECEMBER 31, 2002
------------------ -----------------
Investments, at cost $2,324,703 $2,511,479
Unrealized appreciation 1,383,991 1,481,071
---------- ----------
Investments, at fair value $3,708,694 $3,992,550
========== ==========
16
The accompanying financial statements have been prepared assuming that the
Corporation will continue as a going concern. The Corporation has a working
capital deficiency of approximately $1,400,000 at September 30, 2003. This
condition raises substantial doubt about the Corporation's ability to continue
as a going concern. There can be no assurance that the Corporation would be able
to find a suitable merger partner or be able to obtain alternative financing.
The financial statements do not include any adjustments to reflect the possible
future effects on the recoverability of assets or the amounts of liabilities
that may result from the outcome of this uncertainty.
On October 8, 2003, Franklin sold to Sunshine Wireless, LLC ("Sunshine")
375,000 shares of the common stock of Excelsior at $2.00 per share for an
aggregate of $750,000, realizing a gain of $375,000 (See Note 11 to the
financial statements). This asset sale reduced Franklin's working capital
deficiency to approximately $700,000. Franklin continues to have a working
capital deficiency primarily due to a note payable of $940,609 to Winstar
Communications, Inc. ("Winstar") in connection with the acquisition of assets
from Winstar (see Note 6 to the financial statements). This note is taken into
account in calculating the working capital deficit as it is assumed to be
payable within the next year. Due to an action in which Franklin is a named
party (see Note 5 to the financial statements), the due date of this note has
been extended indefinitely and it is uncertain as to when this note will come
due. Franklin continues to seek adequate alternative financing rather than
additional asset sales in order to alleviate the going concern issue.
INVESTMENTS
Franklin's primary investment is in Excelsior. A description of Franklin's
other investment follows the description of Excelsior.
EXCELSIOR
At September 30, 2003, the Corporation has an investment in Excelsior,
valued at $2,671,270, which represents 69.9% of the Corporation's total assets
and 114.6% of its net assets.
Franklin valued its position in Excelsior at $2.00 per common share based
on the sale of 375,000 common shares to Sunshine on October 8, 2003 (See Note
11) and the receipt of an unsolicited non-binding expression of interest by
Excelsior from a third party at a price greater than $2.00 per common share.
Excelsior was incorporated in 1999 under the laws of the State of
Delaware. Excelsior had no operations until August 2001 when a group led by
Franklin invested in Excelsior for the purpose of acquiring certain assets from
Winstar Radio Networks, LLC, Winstar Global Media, Inc. and Winstar Radio
Productions, LLC.
Excelsior creates, produces, distributes and is a sales representative for
national radio programs and offers other miscellaneous services to the radio
industry. Excelsior offers radio programs to the industry in exchange for
commercial broadcast time, which Excelsior sells to national advertisers.
Excelsior currently offers approximately 100 programs to over 2,000 radio
stations across the country. The group of radio stations who contract with
Excelsior to broadcast a particular program constitutes a radio network.
Excelsior derives its revenue from selling the commercial broadcast time on its
radio networks to advertisers desiring national coverage.
Excelsior issued notes, each with an initial aggregate principal amount of
$460,000 in connection with the acquisition of substantially all of the assets
of Dial Communications Group, Inc., and Dial Communications Group, LLC in April
2002. Each of the promissory notes is convertible into shares of Franklin's
common stock at a premium ranging from 115% to 120% of the average closing
prices of Franklin's common stock during a specified pre and post closing
measurement period. Excelsior has paid to Franklin an amount equal to $300,000
in
17
consideration of Franklin's obligations in connection with any Franklin common
stock that may be issued pursuant to the terms of the promissory notes. For each
share of common stock Franklin is required to issue under the promissory notes,
Franklin will receive 0.86 shares of common stock in Excelsior. The note holders
have entered into advanced discussions with Excelsior to amend the conversion
feature so that the notes would become convertible into shares of Excelsior's
common stock rather than Franklin's common stock. It is expected that this
agreement will be signed after the filing of this 10Q but prior to year-end. If
the agreement is not signed, then the note holders will continue the hold right
to convert the notes into shares of Franklin's common stock.
On August 28, 2001, the Corporation purchased $2,500,000 worth of
Excelsior Common Stock and issued a secured note for $150,000, which has
subsequently been repaid. In connection with this note, Franklin was granted
warrants to acquire 12,879 shares of Excelsior common stock at an exercise price
of $1.125 per share. Franklin sold 250,000 common shares for $1.00 per share on
December 4, 2001 for no gain or loss in connection with a proposed merger with
Change Technology Partners, Inc. On October 1, 2002, Franklin received 74,232
warrants to acquire shares of Excelsior common stock at an exercise price of
$1.20 per share for arranging a financing of Excelsior. On October 3, 2002,
Franklin sold 773,196 common shares for $1.94 per share for total proceeds of
$1,500,000 realizing a gain of $726,804. On January 31, 2003, Franklin purchased
and subsequently on May 29, 2003, Franklin sold, 33,750 common shares for $1.625
per share and 65,199 warrants to acquire shares of Excelsior common stock at an
exercise price of $1.125 per share for $0.50 per warrant. On August 12, 2003,
Franklin sold 193,000 common shares for $1.30 per share for total proceeds of
$250,900 realizing a gain of $57,900. Franklin has stock appreciation rights on
these common shares as follows, a) in the event that Excelsior is sold on or
before August 8, 2004 for gross proceeds of no less than $40,000,000, then
Franklin shall be entitled to receive fifty percent (50%) of any net value above
$1.30 per share not to exceed proceeds to Franklin of $1.94 per share, and b) in
the event that the Excelsior is sold on or before August 8, 2005 for gross
proceeds of no less than $40,000,000, then Franklin shall be entitled to receive
fifty percent (50%) of any net value above $1.30 per share not to exceed
proceeds to Franklin of $1.625 per share.
On October 8, 2003, Franklin sold to Sunshine 375,000 shares of the common
stock of Excelsior for an aggregate purchase price of $750,000, realizing a gain
of $375,000, pursuant to a stock purchase agreement between Sunshine and
Franklin. Franklin has stock appreciation rights on these common shares such
that if Excelsior is sold and the purchaser of the common shares from Franklin
receives more than $3.50 per share, Franklin is entitled to receive 80% of the
value greater than $3.50 per share. After giving effect to the purchase of the
common stock, Sunshine owns approximately 63.6% and the Company owns 36.4% of
the issued and outstanding common stock, and voting power, of Excelsior. On a
fully diluted basis, after giving effect to the exercise of the outstanding
warrants and the conversion of Sunshine's outstanding preferred stock of
Excelsior into common stock, the Corporation owns approximately 13.8% of
Excelsior. Franklin continues to maintain a seat on the board of directors of
Excelsior.
ALACRA CORPORATION
At September 30, 2003, the Corporation has an investment in Alacra
Corporation ("Alacra"), valued at $1,000,000, which represents 26.2% of the
Corporation's total assets and 42.9% 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
18
include privatesuite(TM), a fast, easy, cost-effective way to identify and
retrieve profiles of privately held companies around the world; compbook(TM), a
tool for company peer analysis; and Portal B(TM), a fully integrated business
information portal.
On April 20, 2000, the Corporation purchased $1,000,000 worth of Alacra
Series F Convertible Preferred Stock. Franklin has the right to have the
preferred stock redeemed by Alacra for face value plus accrued dividends on
December 31, 2005. In connection with this investment, Franklin was granted
observer rights for Alacra 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 investment income of $135,848 and $332,219 for the
nine months ended September 30, 2003 and 2002, respectively. The decrease in
investment income for the nine months ended September 30, 2003 when compared to
September 30, 2002, was primarily the result of the decrease in the management
fee from Excelsior. The Corporation had investment income of $45,090 and
$120,110 for the three months ended September 30, 2003 and 2002, respectively.
The decrease in investment income for the three months ended September 30, 2003
when compared to September 30, 2002, was primarily the result of a decrease in
the management fee from Excelsior.
Operating expenses were $959,184 and $1,493,335 for the nine months ended
and $316,773 and $592,330 for the three months ended September 30, 2003 and
2002, 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. In 2002, the Corporation incurred $465,782 in
expenses related to a terminated merger. In 2003, the Corporation settled with
two vendors related to the terminated merger for an additional $73,500. The
Corporation was reimbursed approximately $108,000 and $90,702 for the nine
months ended September 30, 2003 and 2002 respectively, for salary and benefit
expense for its chief financial officer under the terms of the management
agreement with Excelsior. This reimbursement has been recorded as a reduction in
operating expenses.
Net investment losses from operations were $823,336 and $1,161,116 for the
nine months ended and $271,683 and $472,220 for the three months ended September
30, 2003 and 2002, respectively. The decrease resulted primarily from the
decrease in expenses related to the cancelled merger.
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.
19
NET REALIZED GAINS AND LOSSES ON PORTFOLIO OF INVESTMENTS:
During the nine months ended September 30, 2003 and 2002, the Corporation
realized net losses before taxes of $55,883 and $349,147 respectively, from the
disposition of various investments.
UNREALIZED APPRECIATION OF INVESTMENTS:
Unrealized appreciation of investments, decreased by $97,080 during the
nine months ended September 30, 2003, primarily from the sale of a portion of
Excelsior.
Unrealized appreciation of investments, increased by $2,157,233 during the
nine months ended September 30, 2002, primarily from unrealized gains in
Excelsior.
TAXES
Franklin does not qualify for pass through tax treatment as a Regulated
Investment Company under Subchapter M of the Internal Revenue Code for income
tax purposes. The Corporation is taxed under Regulation C of the Code and,
therefore, it is subject to federal income tax on the portion of its taxable
income and net capital as well as such distribution to its stockholders.
LIQUIDITY AND CAPITAL RESOURCES
The accompanying financial statements have been prepared assuming that the
Corporation will continue as a going concern. The Corporation has a working
capital deficiency of approximately $1,400,000 at September 30, 2003. This
condition raises substantial doubt about the Corporation's ability to continue
as a going concern. The Corporation is seeking alternative financing. There can
be no assurance that the Corporation would be able to obtain alternative
financing. The financial statements do not include any adjustments to reflect
the possible future effects on the recoverability of assets or the amounts of
liabilities that may result from the outcome of this uncertainty.
On October 8, 2003, Franklin sold to Sunshine Wireless, LLC ("Sunshine")
375,000 shares of the common stock of Excelsior at $2.00 per share for an
aggregate purchase price of $750,000, realizing a gain of $375,000 (See Note 11
to the financial statements). This asset sale reduced Franklin's working capital
deficiency to approximately $700,000. Franklin continues to have a working
capital deficiency primarily due to a note payable of $940,609 to Winstar
Communications, Inc. ("Winstar") in connection with the acquisition of assets
from Winstar (see Note 6 to the financial statements). This note is taken into
account in calculating the working capital deficit as it is assumed to be
payable within the next year. Due to an action in which Franklin is a named
party (see Note 5 to the financial statements), the due date of this note has
been extended indefinitely and it is uncertain as to when this note will come
due. Franklin continues to seek adequate alternative financing rather than
additional asset sales in order to alleviate the going concern issue.
Cash and cash equivalents decreased by $536,204 to $25,987 for the nine
months ended September 30, 2003, compared to a decrease of $279,728 for the nine
months ended September 30, 2002.
20
Operating activities used $696,604 of cash for the nine months ended
September 30, 2003, compared to using $542,286 for the nine months ended
September 30, 2002.
Operating activities for the nine months ended September 30, 2003,
exclusive of changes in operating assets and liabilities, used $810,606 of cash,
as the Corporation's net decrease in net assets from operations of $864,533
included non-cash charges for depreciation and amortization of $12,729,
unrealized losses of $97,080 and realized gains of $55,882. For the nine months
ended September 30, 2002, operating activities, exclusive of changes in
operating assets and liabilities, used $1,148,390 of cash, as the Corporation's
net increase in net assets from operations of $646,639 included non-cash charges
of depreciation and amortization of $12,727, unrealized gains of $2,157,233 and
realized losses of $349,477.
Changes in operating assets and liabilities increased cash $114,002 for
the nine months ended September 30, 2003, principally due to an increase in the
level of accounts payable and accrued expenses. For the nine months ended
September 30, 2002, changes in operating assets and liabilities produced
$606,104 of cash.
The sale of a portion of Excelsior provided $250,900 of cash offset by the
net purchase of marketable securities of $8,242 of cash provided in investing
activities for the nine months ended September 30, 2003. For the nine months
ended September 30, 2002, the principal factor in the $137,284 cash provided by
investing activities was repayment of a loan to Excelsior and the sale of other
investments offset by the net purchase and sale of marketable investment
securities.
Cash used in financing activities for the nine months ended September 30,
2003 of $82,258 resulted primarily from payment of preferred dividends of
$57,489 and the purchase of treasury stock of $13,561. Financing activities
provided by $128,386 in the prior year's comparable period from the proceeds for
conversion rights offset by the payment of preferred dividends of $86,362 and
the purchase of treasury stock of $37,322.
RISK FACTORS
There are significant risks inherent in the Corporation's venture capital
business. The Corporation has invested a substantial portion of its assets in
small private companies and one bulletin board listed public corporation.
Because of the speculative nature of these investments, there is significantly
greater risk of loss than is the case with traditional investment securities.
The Corporation expects that from time to time its venture capital investments
may result in a complete loss of the Corporation's invested capital or may be
unprofitable. Other investments may appear likely to become successful, but may
never realize their potential. Neither the Corporation's investments nor an
investment in the Corporation is intended to constitute a balanced investment
program. The Corporation has in the past relied and continues to rely to a large
extent upon proceeds from sales of investments rather than investment income to
defray a significant portion of its operating expenses.
INVESTING IN PRIVATE COMPANIES INVOLVES A HIGH DEGREE OF RISK. The
Corporation's portfolio consists primarily of investments in private companies.
Investments in private businesses involve a high degree of business and
financial risk, which can result in substantial losses and accordingly should be
considered speculative. There is generally no publicly available information
about the companies in which Franklin invests, and Franklin relies significantly
on the diligence of its employees and agents to obtain information in connection
with the Corporation's investment decisions. In addition, some smaller
businesses have narrower product
21
lines and market shares than their competitors, and may be more vulnerable to
customer preferences, market conditions or economic downturns, which may
adversely affect the return on, or the recovery of, the Corporation's investment
in such businesses.
THE PORTFOLIO OF INVESTMENTS IS ILLIQUID. Franklin acquires most of its
investments directly from private companies. The majority of the investments in
its portfolio will be subject to restrictions on resale or otherwise have no
established trading market. The illiquidity of most of the portfolio may
adversely affect Franklin's ability to dispose of loans and securities at times
when it may be advantageous to liquidate such investments.
FRANKLIN'S PORTFOLIO INVESTMENTS ARE RECORDED AT FAIR VALUE AS DETERMINED
BY THE BOARD OF DIRECTORS IN ABSENCE OF READILY ASCERTAINABLE PUBLIC MARKET
VALUES. Pursuant to the requirements of the 1940 Act, the Corporation's board of
directors is required to value each asset quarterly, and Franklin is required to
carry the portfolio at a fair market value as determined by the board of
directors. Since there is typically no public market for the loans and equity
securities of the companies in which Franklin makes investments, the board of
directors estimates the fair value of these loans and equity securities pursuant
to written valuation policy and a consistently applied valuation process. Unlike
banks, Franklin is not permitted to provide a general reserve for anticipated
loan losses; instead, Franklin is required by the 1940 Act to specifically value
each individual investment and record an unrealized loss for an asset that it
believes has become impaired. Without a readily ascertainable market value, the
estimated value of the portfolio of loans and equity securities may differ
significantly from the values that would be placed on the portfolio if there
existed a ready market for the loans and equity securities. Franklin adjusts
quarterly the valuation of the portfolio to reflect the board of directors'
estimate of the current realizable value of each investment in the Corporation's
portfolio. Any changes in estimated value are recorded in the Corporation's
statement of operations as "Net unrealized gains (losses)."
FRANKLIN OPERATES IN A COMPETITIVE MARKET FOR INVESTMENT OPPORTUNITIES.
Franklin competes for investments with many other companies and individuals,
some of whom have greater resources than does Franklin. Increased competition
would make it more difficult to purchase or originate investments at attractive
prices. As a result of this competition, sometimes Franklin may be precluded
from making otherwise attractive investments.
QUARTERLY RESULTS MAY FLUCTUATE AND MAY NOT BE INDICATIVE OF FUTURE
QUARTERLY PERFORMANCE. The Corporation's quarterly operating results could
fluctuate, and therefore, you should not rely on quarterly results to be
indicative of Franklin's performance in future quarters. Factors that could
cause quarterly operating results to fluctuate include, among others, variations
in the investment origination volume, variation in timing of prepayments,
variations in and the timing of the recognition of realized and unrealized gains
or losses, the degree to which Franklin encounters competition in its markets
and general economic conditions.
FRANKLIN IS DEPENDENT UPON KEY MANAGEMENT PERSONNEL FOR FUTURE SUCCESS.
Franklin is dependent for the selection, structuring, closing and monitoring of
its investments on the diligence and skill of its senior management members and
other management members. The future success of the Corporation depends to a
significant extent on the continued service and coordination of its senior
management team, particularly the Chairman and Chief Executive Officer. The
departure of any of the executive officers or key employees could materially
adversely affect the Corporation's ability to implement its business strategy.
Franklin does not maintain key man life insurance on any of its officers or
employees.
22
THERE IS SUBSTANTIAL DOUBT AS TO FRANKLIN'S ABILITY TO CONTINUE AS A GOING
CONCERN. Franklin has determined that it may not have sufficient cash and cash
equivalents to meet its working capital requirements over the next fiscal year.
Franklin's independent auditors have issued an opinion in which the independent
auditors have indicated that there is substantial doubt as to Franklin's ability
to continue as a going concern as noted in their explanatory paragraph within
their opinion, which is noted in Franklin's annual financial statements.
Franklin is currently seeking alternative sources of financing to continue
operating through the current fiscal year. If funds were not raised, Franklin
may not be able to continue its operations.
INVESTMENT IN SMALL, PRIVATE COMPANIES
There are significant risks inherent in the Corporation's venture capital
business. The Corporation has invested a substantial portion of its assets in
private development stage or start-up companies. These private businesses tend
to be thinly capitalized, unproven, small companies with risky technologies that
lack management depth and have not attained profitability or have no history of
operations. Because of the speculative nature and the lack of a public market
for these investments, there is significantly greater risk of loss than is the
case with traditional investment securities. The Corporation expects that some
of its venture capital investments will be a complete loss or will be
unprofitable and that some will appear to be likely to become successful but
never realize their potential. The Corporation has been risk seeking rather than
risk averse in its approach to venture capital and other investments. Neither
the Corporation's investments nor an investment in the Corporation is intended
to constitute a balanced investment program. The Corporation has in the past
relied, and continues to rely to a large extent, upon proceeds from sales of
investments rather than investment income to defray a significant portion of its
operating expenses.
ILLIQUIDITY OF PORTFOLIO INVESTMENTS
Most of the investments of the Corporation are or will be equity
securities acquired directly from small companies. The Corporation's portfolio
of equity securities is and will usually be subject to restrictions on resale or
otherwise have no established trading market. The illiquidity of most of the
Corporation's portfolio of equity securities may adversely affect the ability of
the Corporation to dispose of such securities at times when it may be
advantageous for the Corporation to liquidate such investments.
THE INABILITY OF THE CORPORATION'S PORTFOLIO COMPANIES TO SUCCESSFULLY
MARKET THEIR PRODUCTS WOULD HAVE A NEGATIVE IMPACT ON ITS INVESTMENT
RETURNS
Even if the Corporation's portfolio companies are able to develop
commercially viable products, the market for new products and services is highly
competitive and rapidly changing. Commercial success is difficult to predict and
the marketing efforts of the Corporation's portfolio companies may not be
successful.
VALUATION OF PORTFOLIO INVESTMENTS
There is typically no public market of equity securities of the small
private companies in which the Corporation invests. As a result, the valuation
of the equity securities in the Corporation's portfolio is subject to the good
faith determination of the Corporation's Board of Directors. In the absence of a
readily ascertainable market value, the estimated value of the Corporation's
portfolio of equity securities may differ significantly from the values that
would be placed on the portfolio if a ready market for the equity securities
existed. Any changes in
23
estimated net asset value are recorded in the Corporation's statement of
operations as "Change in unrealized appreciation on investments."
FLUCTUATIONS OF QUARTERLY RESULTS
The Corporation's quarterly operating results could fluctuate as a result
of a number of factors. These include, among others, variations in and the
timing of the recognition of realized and unrealized gains or losses, the degree
to which the Corporation encounters competition in its markets and general
economic conditions. As a result of these factors, results for any one quarter
should not be relied upon as being indicative of performance in future quarters.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Corporation's business activities contain elements of risk. The
Corporation considers a principal type of market risk to be valuation risk.
Investments are stated at "fair value" as defined in the 1940 Act and in the
applicable regulations of the Securities and Exchange Commission. All assets are
valued at fair value as determined in good faith by, or under the direction of,
the Board of Directors.
Neither the Corporation's investments nor an investment in the Corporation
is intended to constitute a balanced investment program. The Corporation has
exposure to public-market price fluctuations to the extent of its publicly
traded portfolio.
The Corporation has invested a substantial portion of its assets in
private development stage or start-up companies. These private businesses tend
to be thinly capitalized, unproven, small companies that lack management depth
and have not attained profitability or have no history of operations. Because of
the speculative nature and the lack of public market for these investments,
there is significantly greater risk of loss than is the case with traditional
investment securities. The Corporation expects that some of its venture capital
investments will be a complete loss or will be unprofitable and that some will
appear to be likely to become successful but never realize their potential.
Because there is typically no public market for the equity interests of
the small companies in which the Corporation invests, the valuation of the
equity interests in the Corporation's portfolio is subject to the estimate of
the Corporation's Board of Directors. In making its determination, the Board may
consider valuation information provided by an independent third party or the
portfolio company itself. In the absence of a readily ascertainable market
value, the estimated value of the Corporation's portfolio of equity interests
may differ significantly from the values that would be placed on the portfolio
if a ready market for the equity interests existed. Any changes in valuation are
recorded in the Corporation's consolidated statements of operations as "Net
increase (decrease) in unrealized appreciation on investments."
ITEM 4. CONTROLS AND PROCEDURES
(a) The Company maintains disclosure controls and procedures that are
designed to ensure that information required to be disclosed in the Company's
filings under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the periods specified in the rules and forms of
the Securities and Exchange Commission. Such information is accumulated and
communicated to the Company's management, including its principal executive
officer and principal financial officer, as appropriate, to allow timely
decisions regarding required disclosure. The Company's management, including the
principal executive officer and the
24
principal financial officer, recognizes that any set of controls and procedures,
no matter how well designed and operated, can provide only reasonable assurance
of achieving the desired control objectives.
Within 90 days prior to the filing date of this quarterly report on Form
10-Q, the Company has carried out an evaluation, under the supervision and with
the participation of the Company's management, including the Company's principal
executive officer and the Company's principal financial officer, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures. Based on such evaluation, the Company's principal executive
officer and principal financial officer concluded that the Company's disclosure
controls and procedures are effective.
(b) There have been no significant changes in the Company's internal
controls or in other factors that could significantly affect the internal
controls subsequent to the date of their evaluation in connection with the
preparation of this quarterly report on Form 10-Q.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On October 15, 2001, Jeffrey A. Leve and Jeffrey Leve Family Partnership,
L.P. filed a lawsuit against Franklin, Sunshine Wireless, LLC ("Sunshine") and
four other defendants affiliated with Winstar Communications, Inc. in the
Superior Court of the State of California for the County of Los Angeles. The
lawsuit, which has subsequently been removed to the United States District Court
for the Central District of California, alleges that the Winstar defendants
conspired to commit fraud and breached their fiduciary duty to the plaintiffs in
connection with the acquisition of the plaintiffs' radio production and
distribution business. The complaint further alleges that Franklin and Sunshine
joined the alleged conspiracy. The business was initially acquired by certain
entities affiliated with Winstar Communications and, subsequently, the assets of
such business were sold to Franklin and Sunshine. Concurrently with such
purchase, Franklin transferred such assets to Excelsior. The plaintiffs seek
recovery of damages in excess of $10,000,000, costs and attorneys' fees. On
January 7, 2002, Franklin filed a motion to dismiss the lawsuit or, in the
alternative, to transfer venue to the United States District Court of the
Southern District of New York. The plaintiffs filed a motion opposing Franklin's
request on January 28, 2002. Franklin's motion for dismissal was granted on
February 25, 2002, due to improper venue. On June 7, 2002, the plaintiffs filed
their complaint to the United States District of the Southern District of New
York. On July 12, 2002, Franklin filed a motion to dismiss the complaint. On
February 25, 2003, the case against Franklin and Sunshine was dismissed, however
the plaintiffs may file an appeal. An unfavorable outcome in this lawsuit may
have a material adverse effect on Franklin's business, financial condition and
results of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES HOLDERS
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
25
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
Exhibit 31.1 Certification of Chairman and Chief Executive
Officer
Exhibit 31.2 Certification of Chief Financial Officer
Exhibit 32.1 Certification Pursuant To 18 U.S.C. Section
1350, As Adopted By Section 906 Of The
Sarbanes-Oxley Act Of 2002
Exhibit 32.2 Certification Pursuant To 18 U.S.C. Section
1350, As Adopted By Section 906 Of The
Sarbanes-Oxley Act Of 2002
(B) REPORTS ON FORM 8-K.
None
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FRANKLIN CAPITAL CORPORATION
Date: November 14, 2003 By: /s/ Stephen L. Brown
------------------------------------
Stephen L. Brown
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
/s/ Hiram M. Lazar
------------------------------------
Hiram M. Lazar
CHIEF FINANCIAL OFFICER
26