|
|
|
Real
estate holdings
|
Alacra
Corporation
|
China
Nurse LLC
|
|
(i.e.,
undeveloped land
|
(1.6%
equity interest)
|
(5%
equity interest)
|
|
and
loans)
|
Digicorp
|
|
|
|
(26.9%
equity interest)
|
|
|
|
Excelsior
Radio Networks, Inc.
|
|
|
|
(stock
appreciation rights)
|
|
Since
both Franklin Capital and PSCG are wholly-owned subsidiaries we maintain
control
of the entities with full rights to their assets. However, in the event we
elect
to partner with a strategic third party the Limited Liability Company structure
provides more flexibility than a traditional corporation with an equivalent
level of liability protection. Further, by establishing distinct entities
we
believe that we are better able to segregate our core patient safety business
from our other business segments.
Overview
of our Business Plan and Restructuring
The
Restructuring Plan shifted our primary investment focus from the radio and
telecommunications industry to the medical products, health care solutions,
financial services and real estate industries. Accordingly, our primary
investment objective has also shifted and is now focused on maximizing long-term
capital growth through the appreciation of our investments in health care
and
medical products related companies, and to a lesser extent in the financial
services and real estate industries. Franklin Capital Properties, LLC, a
real
estate development and management company and Franklin Medical Products,
LLC, a
healthcare consulting services company, both wholly-owned subsidiaries of
Franklin, were created to augment our investments in these
industries.
The
Company and its operating subsidiaries are currently engaged in the acquisition
of controlling interests in companies and research and development of products
and services focused on the health care and medical products field,
particularly, the patient safety market, as well as the financial services
and
real estate industries.
On
February 25, 2005, in furtherance of the implementation of the Company's
Restructuring Plan the Company purchased SurgiCount, a privately held,
California-based developer of patient safety devices. SurgiCount is the
Company's first acquisition in its plan to become a leader in what it believes
to be the billion dollar patient safety field market and management believes
that the acquisition is a significant milestone in the Company's plan to
shift
its focus from radio and telecommunications to products and services targeting
patient safety.
Given
the
changing nature of our business and investment focus from investing,
reinvesting, owning, holding, or trading in investment securities in the
radio
and telecommunications industries toward that of an operating company whose
focus will be on acquisitions of controlling investments in operating companies
and assets in the healthcare and medical products industries, as well as
the
financial services and real estate industries, we believe that the regulatory
regime governing BDC’s is no longer appropriate and will hinder our future
growth. Accordingly, among other things, we are seeking shareholder approval
at
the upcoming annual meeting to withdraw our election to be treated as a BDC.
For
more information see, “Withdrawal
of the Company’s election to be treated as a BDC.”
Milton
“Todd” Ault III and Louis Glazer, M.D., Ph. G. currently serve as the principal
executives in the management group responsible for the operations and allocation
of the resources of the Company and its subsidiaries. Messrs. Ault and Glazer,
oversee and coordinate the activities of the Company’s health care, medical
products, financial services and real estate companies.
Our
capital is generally used to finance research and development of products
in the
health care and patient safety markets, organic growth, acquisitions,
recapitalizations and working capital. Our investment decisions are based
on
extensive analysis of potential portfolio companies’ business operations
supported by an in-depth understanding of the quality of their revenues and
cash
flow potential, variability of costs and the inherent value of their assets,
including proprietary intangible assets and intellectual property.
Our
target industries are heavily regulated. In the U.S., the principal authority
regulating the operations of our medical companies is the Food and Drug
Administration (“FDA”).
The
FDA regulates the safety and efficacy of the products we offer, our research
quality, our manufacturing processes and our promotion and advertising. In
addition, we are also currently subject to the requirements of the
1940 Act
applicable to BDC’s. For more information see “BDC
and Healthcare Regulation” below.
Withdrawal
of the Company’s election to be treated as a BDC
General
On
December 30, 2004, the Board unanimously approved a proposal to authorize
the Board to withdraw the Company’s election to be treated as a BDC as soon as
practicable so that it may begin conducting business as an operating company
rather than an investment company subject to the 1940 Act.
Such
proposal is scheduled to be voted upon by stockholders at the company’s Annual
Meeting.
The
Board
believes that given the changing nature of the Company’s business and investment
focus from investing, reinvesting, owning, holding, or trading in investment
securities in the radio and telecommunications industries toward that of
an
operating company whose focus will be on acquisitions of controlling investments
in operating companies and assets in the target industries, that the regulatory
regime governing BDC’s is no longer appropriate and will hinder the Company’s
future growth. In addition, the Board believes that the Company will not
be
required to be regulated under the 1940 Act
under
these circumstances.
Over
the
years, since the Company commenced operating as a BDC, the business, regulatory
and financial climates have shifted gradually but greatly, making operations
as
a BDC more challenging and difficult. Given the investment focus, asset mix,
business and operations of the Company that will result from the implementation
of the Restructuring Plan, the Board believes that it is prudent for the
Company
to withdraw its election as a BDC as soon as practicable to eliminate many
of
the regulatory, financial reporting and other requirements and restrictions
imposed by the 1940 Act
discussed below. For example:
§ |
Business
Focus.
As
a result of the Restructuring Plan, the nature of the Company’s business
is changing from a business that has historically been in the business
of
investing, reinvesting, owning, holding, or trading in investment
securities in the radio and telecommunications industry toward
that of an
operating company whose primary focus is on acquiring controlling
interests in companies in the medical products and health care
industries,
and to a lesser extent in the financial services and real estate
industries. The Board believes that BDC regulation would be inappropriate
for such activities.
|
§ |
Issuance
of Common Stock.
By
virtue of its BDC election, the Company may not issue new shares
of Common
Stock at a per share price less than the then net asset value per
share of
outstanding Common Stock without prior stockholder approval. Historically,
the market prices for BDC stocks have been lower than net asset
value,
making it much more difficult for BDC’s to raise equity capital. While
this restriction provides stockholders of an investment company
with
appropriate and meaningful protection against dilution of their
indirect
investment interest in portfolio securities, the Board believes
that this
would essentially be irrelevant to the interests of investors in
an
operating company, who look to its consolidated earnings stream
and cash
flow from operations for investment
value.
|
§ |
Issuance
of Securities other than Common Stock.
BDC’s are limited or restricted as to the type of securities other
than
common stock they issue. The issuance of convertible securities
and rights
to acquire shares of common stock (e.g., warrants and options)
is
restricted primarily because of the statutory interest in facilitating
computation of the Company’s net asset value per share. In addition,
issuances of senior debt and senior equity securities require that
certain
“asset coverage” tests and other criteria be satisfied on a continuing
basis. This significantly affects the use of these types of securities
because asset coverage continuously changes by variations in market
prices
of the Company’s investment securities. Operating companies, including
holding companies operating through subsidiaries, benefit from
having
maximum flexibility to raise capital through various financing
structures
and means.
|
§ |
Related
Party Transactions.
The 1940 Act
significantly restricts, among other things, (a) transactions
involving transfers of property between the Company and certain
affiliated
persons of the Company (or the affiliated persons of such affiliated
persons), and (b) transactions in which the Company and such
affiliated persons (or the affiliated persons of such affiliated
persons)
participate jointly vis-à-vis third parties on the other. To overcome
these investment company restrictions, approval of the United States
Securities and Exchange Commission (“SEC”)
is required, which is often a time-consuming and expensive procedure,
regardless of the intrinsic fairness of such transactions or the
approval
thereof by the independent directors of the Company. The Board
also
believes that situations may arise in which a company’s best interests are
served by such transactions. The Board believes that even with
the
protections afforded under the 1940 Act, stockholders are adequately
protected by the fiduciary obligations imposed on directors under
state
corporate law, which generally requires that the independent directors
determine fairness to the Company of an interested-party transaction
(provided full disclosure of all material facts regarding the transaction
and the interested party’s relationship with the Company is made), and SEC
disclosure rules, which require the Company to include specified
disclosure regarding transactions with related parties in its SEC
filings.
|
§ |
Compensation
of Executives.
The 1940 Act
limits the extent to which, and the circumstances under which executives
of a BDC may be paid compensation other than in the form of salary
payable
in cash. For example, the issuance of equity compensation in the
form of
restricted stock is generally prohibited. However, the Board believes
that
by achieving greater flexibility in the structuring of employee
compensation packages, the Company will be able to attract and
retain
additional talented and qualified personnel and to more fairly
reward and
more effectively motivate its personnel in accordance with industry
practice.
|
§ |
Eligible
Investments.
As
a BDC, the Company may not acquire any asset other than “Qualifying
Assets” unless, at the time the acquisition is made, Qualifying Assets
represent at least 70% of the value of the total assets (the “70%
test”).
Because of the limitations on the type of investments the Company
may
make, as well as the Company’s total asset composition, the Company may be
foreclosed from participating in prudent investment
opportunities.
|
Moreover,
the Company incurs significant costs in order to comply with the regulations
imposed by the 1940 Act.
Management devotes considerable time to issues relating to compliance with
the
1940 Act
and
the Company incurs substantial legal and accounting fees with respect to
such
matters. While these protections are for the benefit of the Company’s
stockholders, the costs of this regulation are none the less borne by the
stockholders of the Company. The Board believes that resources now being
expended on 1940 Act
compliance matters could be utilized more productively if devoted to the
operation of the Company’s business. The Board has determined that the costs of
compliance with the 1940 Act
are
substantial, especially when compared to the Company’s relative size and net
income, and that it would therefore be in the financial interests of the
stockholders for the Company to cease to be regulated under the 1940 Act
altogether.
The
Board
believes that the above reasons, among others, confirm that the restrictions
of
the 1940 Act
would
have the effect of hindering the Company’s financial growth in the future. The
Board has determined that the most efficacious way to reduce these costs,
improve profitability, and eliminate the competitive disadvantages the Company
experiences due to compliance with the many requirements and restrictions
associated with operating under the 1940 Act
would
be to withdraw the Company’s election to be treated as a BDC.
Effect
of
Election to Withdrawal as a BDC
In
the
event that the Board withdraws the Company’s election to be treated as a BDC and
the Company becomes an operating company, the fundamental nature of the
Company’s business will change from that of investing in a portfolio of
securities, with the goal of achieving gains on appreciation and dividend
income, to that of being actively engaged in the ownership and management
of
operating businesses, with the goal of generating income from the operations
of
those businesses.
The
election to withdraw the Company as a BDC under the 1940 Act
will
result in a significant change in the Company’s method of accounting. BDC
financial statement presentation and accounting utilizes the value method
of
accounting used by investment companies, which allows BDC’s to recognize income
and value their investments at market value as opposed to historical cost.
As an
operating company, the required financial statement presentation and accounting
for securities held will be either fair value or historical cost methods
of
accounting, depending on the classification of the investment and the Company’s
intent with respect to the period of time it intends to hold the investment.
Change in the Company’s method of accounting could reduce the market value of
its investments in privately held companies by eliminating the Company’s ability
to report an increase in value of its holdings as they occur. Also, as an
operating company, the Company would have to consolidate its financial
statements with subsidiaries, thus eliminating the portfolio company reporting
benefits available to BDC’s.
The
pro
forma unaudited balance sheet presented below gives effect to the withdrawal
of
the Company’s election to be regulated as a business development company. The
pro forma unaudited balance sheet assumes the withdrawal had occurred as
of
January 1, 2003. The pro forma unaudited balance sheet includes the historical
amounts of the Company adjusted to reflect the effects of the Company’s
withdrawal of its election to be regulated as a business development company.
The pro forma information should be read in conjunction with the historical
financial statements of the Company.
FRANKLIN
CAPITAL CORPORATION AND SUBSIDIARIES PRO FORMA
UNAUDITED
PRO FORMA BALANCE SHEET
December
31,
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
846,404
|
|
$
|
224,225
|
|
Trading
assets
|
|
|
4,020,154
|
|
|
1,955,169
|
|
Other
current assets
|
|
|
255,510
|
|
|
58,432
|
|
TOTAL
CURRENT ASSETS
|
|
|
5,122,068
|
|
|
2,237,826
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
23,657
|
|
|
20,206
|
|
Other
long-term investments
|
|
|
1,788,518
|
|
|
1,000,000
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
6,934,243
|
|
$
|
3,258,032
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
payable
|
|
$
|
892,530
|
|
$
|
915,754
|
|
Accounts
payable and accrued liabilities
|
|
|
939,568
|
|
|
318,140
|
|
Trading
assets sold short
|
|
|
1,075,100
|
|
|
|
|
Due
to broker
|
|
|
460,776
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
CURRENT LIABILITIES
|
|
|
3,367,974
|
|
|
1,233,894
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
preferred stock, $1 par value, cumulative 7% dividend:
10,000,000
shares authorized; 10,950 issued and outstanding at December
31, 2004 and
2003 (Liquidation preference $1,095,000)
|
|
|
10,950
|
|
|
10,950
|
|
Common
stock, $1 par value: 50,000,000 shares authorized;
2,042,689
and 1,505,888 shares issued: 1,556,901 and 1,020,100 shares outstanding
at
December 31, 2004 and 2003, respectively
|
|
|
2,042,689
|
|
|
1,505,888
|
|
Paid-in
capital
|
|
|
13,925,253
|
|
|
10,439,610
|
|
Accumulated
deficit
|
|
|
(9,795,791
|
)
|
|
(7,315,478
|
)
|
|
|
|
|
|
|
|
|
|
|
|
6,183,101
|
|
|
4,640,970
|
|
Deduct:
485,788 shares of common stock held in treasury at cost, at December
31,
2004 and 2003, respectively
|
|
|
(2,616,832
|
)
|
|
(2,616,832
|
)
|
|
|
|
|
|
|
|
|
Total
stockholders' equity
|
|
|
3,566,269
|
|
|
2,024,138
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
$
|
6,934,243
|
|
$
|
3,258,032
|
|
The
Company does not believe that the withdrawal of its election to be treated
as a
BDC will have any impact on its federal income tax status, since it has never
elected to be treated as a regulated investment company under Subchapter
M of
the Internal Revenue Code. (Electing for treatment as a regulated investment
company under Subchapter M generally allows a qualified investment company
to
avoid paying corporate level federal income tax on income it distributes
to its
stockholders.) Instead, the Company has always been subject to corporate
level
federal income tax on its income (without regard to any distributions it
makes
to its stockholders) as a “regular” corporation under Subchapter C of the Code.
There will be no change in its federal income tax status as a result of it
becoming an operating company.
In
addition, withdrawal of the Company’s election to be treated as a BDC will not
affect the Company’s registration under Section 12(b) of the Exchange Act.
Under the Exchange Act, the Company is required to file periodic reports
on
Form 10-K, Form 10-Q, Form 8-K, proxy statements and other
reports required under the Exchange Act. Withdrawal of the Company’s election to
be treated as a BDC is not expected to have any affect on the Company’s listing
status on the AMEX.
Steps
Toward Withdrawal
The
Company is using maximum efforts to qualify for this change of status and
has
undertaken several steps to meet the requirements for withdrawal of its election
to be treated as a BDC, including: (i) preparing a detailed plan of operations
in contemplation of such a change to the status for the Company and (ii)
consulting with outside counsel as to the requirements for withdrawing its
election as a BDC and exemption or exclusion from being deemed an “investment
company” under the 1940 Act.
As
of the date hereof, the Company believes that the Company meets the requirements
for filing an application to withdraw its election to be treated as a BDC.
However, we may not change the nature of our business so as to cease to be,
or
withdraw our election as, a BDC unless authorized by vote of a "majority
of the
outstanding voting securities," as defined in the 1940 Act, of our shares.
A
majority of the outstanding voting securities of a company is defined under
the
1940 Act as the lesser of: (i) 67% or more of such company's shares present
at a
meeting if more than 50% of the outstanding shares of such company are present
and represented by proxy or (ii) more than 50% of the outstanding shares
of such
company.
On
June
24, 2004, we received a letter from AMEX inquiring as to the Company's ability
to remain listed on AMEX. Specifically, AMEX indicated that the Company's
common
stock was subject to delisting under sections 1003(a)(i) and 1003(a)(ii)
of AMEX
Company Guide because the Company's stockholders' equity was below the level
required by AMEX's continued listing standards. Accordingly, AMEX requested
information relating to the Company's plan to retain its listing.
On
September 13, 2004, the Company presented the final components of its proposed
plan to AMEX to comply with AMEX's continued listing standards and on September
15, 2004, AMEX notified the Company that it had accepted the Company's plan
and
had granted the Company an extension until December 26, 2005 to be in compliance
with the AMEX contained listing standards, during which time AMEX will continue
the Company's listing subject to certain conditions. The Company cooperated,
and
has continue to cooperate, with AMEX regarding these issues and intends to
make
every effort to remain listed on AMEX. AMEX has notified the Company, however,
that failure to make progress consistent with the plan of compliance or to
be in
compliance with the continued listing standards could result in the Company's
common stock being delisted from AMEX, and no assurances can be made that
the
Company will be able to maintain its AMEX listing. A delisting from AMEX
would
have a material adverse effect on the price and liquidity of Franklin's common
stock.
On
November 11, 2004, our Board adopted and approved certain corporate
governance-related documents, including a code of business conduct and ethics,
and revised audit and compensation committee charters, in order to comply
with
certain of AMEX's corporate governance listing standards.
The
Company believes that it is currently in compliance with the AMEX
requirements.
If
the
stockholders approve this proposal to permit the Company to withdraw its
BDC
election, the withdrawal will become effective upon receipt by the SEC of
the
Company’s application for withdrawal. The Company does not anticipate filing the
application of withdrawal until it can be reasonably certain that the Company
will not be deemed to be an investment company without the protection of
its BDC
election. After the Company’s application for withdrawal of its BDC election is
filed with the SEC, the Company will no longer be subject to the regulatory
provisions of the 1940 Act
applicable to BDC’s generally, including regulations related to insurance,
custody, composition of its Board, affiliated transactions and any compensation
arrangements.
Initiation
of the Restructuring Plan and Change in Control
On
May
11, 2004, Ault Glazer & Company Investment Management, LLC (“Ault
Glazer”),
a
private investment management firm headquartered in Santa Monica, California
that manages approximately $20 million
in individual client accounts and private investment funds and is owned by
Milton “Todd” Ault III, Lynne Silverstein, and Louis and Melanie Glazer began
acquiring shares of our common stock, par value $1.00 (the “Common
Stock”)
through open-market purchases.
By
May
12, 2004, Ault Glazer indirectly beneficially owned or controlled approximately
11% of the outstanding shares of Common Stock. On May 18, 2004, in its original
filing with the SEC on Schedule 13D, Ault Glazer disclosed
its concerns regarding the ability and willingness of Franklin's then-current
management to maximize stockholder value and stated its intention to recommend
that Franklin's management coordinate with Ault Glazer to effect certain
fundamental changes within Franklin. Both prior to and following the filing
of
the Schedule 13D, Ault had several conversations with Stephen L. Brown,
Franklin's then Chairman and Chief Executive Officer ("Brown"), and other
members of the Board regarding Ault Glazer's ideas with respect to changing
Franklin's leadership and business.
On
May
19, 2004, by which time Ault Glazer indirectly beneficially owned or controlled
over 30% of the outstanding shares of Common Stock, the Board met to discuss
Ault Glazer's acquisitions of Common Stock and the Board's responsibilities
and
obligations to Franklin's stockholders in connection with these acquisitions,
as
well as an appropriate response. At the meeting, Ault confirmed to the Board
that Ault Glazer, in an effort to maximize long-term stockholder value, intended
to effect a change of control and a restructuring of Franklin involving,
among
other things, the introduction of a new management team to replace the existing
directors and officers of Franklin, the liquidation of Franklin's current
investment portfolio, the recapitalization of Franklin with new outside
financing, and the relocation of Franklin's headquarters to Santa Monica,
California. During the meeting, Franklin and Ault Glazer also entered into
a
confidentiality and "standstill" agreement, pursuant to which Ault Glazer
agreed, among other things, not to acquire any additional securities of Franklin
until May 30, 2004. On June 1, 2004, Ault Glazer and Ault also amended their
existing filing on Schedule 13D to confirm their intention to effect a change
of
control of Franklin.
In
response to the Board's request, Ault Glazer, through private discussions
with
the Board between June 3, 2004 and June 9, 2004, presented the basic terms
of
the Restructuring Plan. On June 9, 2004, the Board met to discuss the
Restructuring Plan. Following the discussion, the Board concluded that the
Restructuring Plan was in the best interests of Franklin and its stockholders.
As a result, the Board authorized and directed Franklin's management to hold
further discussions and negotiations with Ault Glazer with respect to the
Restructuring Plan.
Implementing
the Restructuring Plan
On
June 23, 2004, the Company entered into a Letter of Understanding (the
“LOU”)
with
Ault Glazer. This LOU set forth the understandings and agreements of the
Company
and Ault Glazer with respect to the Restructuring Plan. The Restructuring
Plan
was intended to maximize stockholder value through, among other things,
(i) a shift in the Company’s investment strategy away from the radio and
telecommunications industry toward a primary focus on the health care and
medical products related companies, and to a lesser extent in the financial
services and real estate industries, (ii) the liquidation of the Company’s
investments (including Excelsior Radio Networks, Inc. (“Excelsior”)),
(iii) the raising of new capital to fund new investments, and (iv) the
election of new directors and officers with experience and expertise in the
medical products, health care solutions, financial services and real estate
industries.
In
connection with the Restructuring Plan, Franklin also entered into a Termination
Agreement and Release (the "Termination
and Release Agreement")
with
Brown that contains the terms of Brown's prospective resignation from Franklin.
Franklin and Brown amended the Termination Agreement on September 30, 2004.
See“Termination
Agreement and Release” below.
On
October 22, 2004, the Company held a special meeting of stockholders to
approve certain proposals relating to the Restructuring Plan (the “Special
Meeting”).
At the
Special Meeting, the Company's stockholders approved proposals relating to:
(1)
the election of Louis Glazer, M.D., Ph.G., Herbert Langsam, Alice Campbell
and
Brigadier General (Ret.) Lytle Brown III to serve on the Company's Board
of
Directors; (2) the amendment and restatement of the Company's certificate
of
incorporation to increase the authorized number of shares of the Company's
common stock from 5,000,000 shares to 50,000,000 shares; (3) the amendment
and
restatement of the Company's certificate of incorporation to increase the
authorized number of shares of the Company's preferred stock from 5,000,000
shares to 10,000,000 shares; (4) the amendment and restatement of the Company's
certificate of incorporation to provide for the exculpation of director
liability to the fullest extent permitted by law; (5) the amendment and
restatement of the Company's certificate of incorporation to provide for
the
classification of the Board into three classes of directors; (6) the sale
by the
Company to Quince Associates, LP of all of the shares of, and warrants to
purchase shares of, common stock of Excelsior Radio Networks, Inc. beneficially
owned by the Company; and (7) the prospective sale by the Company of up to
5,000,000 shares of common stock and warrants to purchase up to an additional
1,500,000 shares of common stock. The proposal relating to the prospective
sale
by the Company of Common Stock and warrants to purchase Common Stock to certain
"interested stockholders" under Delaware law was not approved by the requisite
stockholder vote.
On
October 22, 2004, Stephen L. Brown, resigned from his positions as the
Company’s Chairman and Chief Executive Officer, Hiram M. Lazar resigned from his
positions as the Company’s Chief Financial Officer and Secretary. To fill the
vacancies created by these resignations, the newly elected Board (consisting
of
Louis Glazer, Alice Campbell, Herbert Langsam, and Lytle Brown III)
appointed Ault to serve as the Company’s Chairman and Chief Executive Officer
and Silverstein to serve as the Company’s President and Secretary.
Termination
Agreement and Release
In
connection with the Restructuring Plan, the Company entered into a Termination
Agreement and Release (the “Termination
Agreement”)
with
Mr. Brown that contained the terms of his resignation from the Company. Pursuant
to the terms of the Termination Agreement, we paid Mr. Brown a severance
payment
of $250,000. In addition, we also agreed to: (i) pay Mr. Brown an aggregate
amount of $200,000 payable over eight months for consulting services to the
Company on historical matters concerning the Company’s operations and stock
portfolio as may be reasonably requested from time to time by a designee
of the
Board, and (ii) continue to provide coverage to Mr. Brown and his wife under
our
medical, dental and vision plans for a period of three years following the
date
of termination. The Company recorded a charge to operations of approximately
$483,000 in 2004 under the Termination Agreement.
A
copy of
the Termination Agreement was included as an exhibit to the Company’s report on
Form 8-K filed with the SEC on June 24, 2004 and a copy of Amendment No.
1 to
the Termination Agreement was included as an exhibit to the Company’s current
report on Form 8-K filed with the SEC on September 30, 2004.
All
of
the foregoing events are discussed in more detail in the definitive proxy
materials filed with the SEC on September 30, 2004, and March 3,
2005.
Our
Current Business Plan
The
Medical Products and Healthcare Solutions Industry
The
Company believes that the healthcare delivery system is under tremendous
pressure to identify and commercialize simple medical solutions quickly to
lower
costs, control infections, reduce liability and eliminate preventable errors.
Increased litigation and a renewed focus on patient safety by regulators
is
spurring demand for new innovative medical devices. With the convergence
of
scientific, electronic and digital technologies, new breakthroughs in medical
devices will play a critical role in solving the problems in healthcare and
enhancing patient safety in the future.
Surgeries
are increasing in both number and complexity, creating a need for newer,
more
efficient and safer medical devices. The urgency to reduce the high level
of
preventable medical errors, reduce liability issues, control infection and
offer
new health care services, will focus command attention and resources as never
before.
The
medical community recognizes the importance of improving patient safety,
not
only to enhance the quality of care, but also to help manage skyrocketing
medical costs and related litigation costs. We are confident the medical
profession and healthcare professionals will rise to the occasion and help
develop the medical solutions to revolutionize health care.
Franklin
is dedicated to leading this effort through the development and introduction
of
ground-breaking patient safety products such as its lead product, the patented
Safety-SpongeTM
System,
which management believes will allow the Company to capture a significant
portion of the United States and European surgical sponge sales. Based upon
assumptions by the Company’s management that take into consideration factors
such as the approximate number of hospitals and operating rooms in the United
States and Europe, the approximate number of surgeries performed annually,
and
estimates for the average cost of surgical sponges, incorporating the
Safety-SpongeTM
System,
per surgery, we believe that the existing market for surgical sponge sales
in
the United States and Europe represents a market opportunity equal to or
in
excess of $650 million in annual sales. Such estimate assumes approximately
61
million surgeries performed annually in the United States and Europe, and
an
average cost of surgical sponges of $10.60 per sponge. In addition, the Company
believes that its innovative Safety-Sponge(TM) System could save up to an
estimated $1.0 billion annually in retained sponge litigation. The estimated
size of the surgical sponge market and actual savings derived from utilization
of the Safety-Sponge(TM) System from retained sponge litigation is based
on
management’s estimates and assumptions made by management. Although management
took into consideration statistics from research and published articles by
the
American Hospital Association and New England Journal of Medicine, as well
as
various articles located through a search of retained sponge verdicts the
specific assumptions is management’s interpretation of those multiple sources.
Further, management believes that a large amount of the litigation relating
to
medical malpractice claims are settled under the terms of confidentially
agreements, thus the actual amount of many settlements are never disclosed
and
therefore subject to speculation.
To
augment the Company’s focus in the medical products industry the Company formed
Franklin Medical Products, LLC, a wholly-owned healthcare consulting services
company. Effective February 23, 2005, Franklin Medical Products, LLC changed
its
name to Patient Safety Consulting Group, LLC. (“PSCG”).
Initially, efforts at PSCG will be directed at products and services that
promote usage of our lead product.
Customers
The
Company intends to target hospitals, physicians, nurses and clinics as its
initial source of customers. In addition, the Company also plans to develop
strategic alliances with universities, medical facilities and notable medical
researchers around the United States, that will provide research, development
and promotional support for the Company’s products and services.
Geographic
Areas
The
Company intends to market and sell its patient safety products and services
in
the United States and in Europe. However, the principal markets, products
and
methods of distribution will vary by country based on a number of factors,
including, healthcare regulations, insurance coverage and customer demographics.
Investments and activities in some countries outside the United States are
subject to higher risks than comparable U.S. activities because the investment
and commercial climate is influenced by restrictive economic policies and
political uncertainties.
Product
Development
The
Company’s Safety-SpongeTM
System
allows for faster and more accurate counting of surgical sponges. The
Safety-SpongeTM
System
is a two-part system consisting of a SurgiCount handheld scanner/imager/computer
and of SurgiCount supplied surgical dressings. Our sponges unique in that
they
are individually labeled with a “bar code” at the point of manufacture. The
sponges are scanned in by a SurgiCount handheld scanner at the beginning
of a
surgical procedure, and then scanned out at the end of a procedure after
their
use. Each sponge, having a unique bar code, can accurately be accounted for
at
the end of the procedure. Without using our Safety-SpongeTM
System,
in a typical surgical procedure, a nurse and a scrub tech manually count
all
sponges used and un-used. The core of the Safety-SpongeTM
System
is the ability to uniquely identify an individual dressing. This is covered
by
SurgiCount’s patent #5,931,824, which solely permits the holder to label or
identify a dressing with a unique identifier. Patent #5,931,824 will expire
in
August of 2019.
SurgiCount
began development of the Safety-SpongeTM
line of
sponges in February 1994 and received confirmation from the FDA that the
product
line was granted 510k exempt status on November 8, 1999. The
Safety-SpongeTM
line of
sponges has passed required FDA biocompatibility tests including ISO
sensitization, cytotoxicity and skin irritation tests. The Center for Devices
and Radiological Health (“CDRH”)
handles
the premarket notification process for medical devices at the FDA. The CDRH
requires the biological evaluation of medical devices to determine the potential
toxicity resulting from contact of the component materials of the device
with
the human body. Evaluation of any new device intended for human use requires
data from systemic testing to ensure that the benefits provided by the final
product will exceed any potential risk produced by device materials. CDRH
Blue
Book Memo G95-1 provides guidance for required biocompatibility testing
procedures for medical devices. SurgiCount requested specific guidance from
the
CDRH as to the required biocompatibility tests for the Safety-SpongeTM
line of
products. The CDRH specifically guided SurgiCount to three required
biocompatibility tests for the Safety-SpongeTM
line:
Cytotoxicity, Sensitization and Irritation/Intracutaneous Reactivity. SurgiCount
Medical has performed and in 2003 passed all three of these required
biocompatibility tests. Cytotoxicity testing is to determine whether or not
the
materials used in a medical device are harmfully reactive to certain biological
elements on a cellular level. Sensitization or hypersensitivity reactions
usually occur as a result or prolonged contact with a chemical substance
that
interacts with the body’s immune system. The tests are used to eliminate the
possibility that patients will be exposed to strong sensitizing chemicals
extracted from the medical device.
The
tests
were completed prior to the Company’s acquisition of SurgiCount, which occurred
in February 2005. At the time the acquisition of the SurgiCount assets was
completed the Company focused on developing the product for commercialization.
Although passing the three biocompatibility tests was necessary to satisfy
any
questions as to whether or not the product was safe for use in the body it
was
only a part of the process required to commercialize the product. In order
to
utilize the product as designed investment in specialized software, hardware
as
well as modification of current operating room procedures was needed.
Software
development, which was initially expected to take a few months, required
approximately nine months for completion. Initially the Company expected
that
basic modification to existing software would be sufficient, however, based
upon
feedback from third party users and consultants the Company elected to abandon
its plan to modify existing software currently in use and develop its own
proprietary software for the system.
Finally,
due to the nature of the medical products business any changes in the procedures
requires rigorous rounds of testing and review in every
adopter. Demonstrations are given to relevant parties and small
“in-service” (an in-hospital teaching of how to use the system to the relevant
staff members) sessions are performed with the results evaluated. Where the
results are viewed in a positive fashion a second larger in-service session
is
usually performed, which results are again reviewed. Assuming a positive
outcome of the in-service sessions, the entire staff must then be trained
to use
the system prior to the placement of any order. In the event the Company
is
successful during the in-service sessions the Company would expect to begin
receiving orders for the Safety-SpongeTM
System
sometime in the first half of 2005.
The
Company’s current patient safety products such as the Safety-SpongeTM
System
are presently in the optimization and commercialization phase. Development
of
the Safety-SpongeTM
System
has been completed and the system is in final preparations to be rolled out
into
the market as a commercial product. It is anticipated in the future that
distribution of the Company's medical products to health care professional
markets will be done both directly and through surgical supply and other
dealers.
The
Company intends to do further research and development to advance its products
as is normal for any other company. However, we intend to outsource much
of the
R&D functions and focus our direct efforts on optimizing this product and
establishing distribution channels with strategic alliances with hospitals
to
deploy the products. We also seek qualified input from professionals in the
healthcare profession as well as University hospitals such as Harvard and
the
University of California, San Francisco (“USCF”). These physicians and
researchers maintain medical practices primarily at University hospitals
and are
involved in various research and clinical development programs. We meet on
an as
needed basis to discuss medical, technology and development issues. Through
direct contracts and sponsorship of studies, recommendations from these
professionals have improved various aspects of the Safety-SpongeTM.
Examples where recommendations were utilized include: the ideal location
for
labels, label coarse and thickness, improved operating room procedures, label
structure and scanner function. In addition, the Company is developing
relationships with Universities to co-development and distribute patient
safety
continuing medical education (CME) products as well as University-developed
patient safety products such as guides, specially designed notepads and bedside
tools.
In
the
past the Company has relied on the professional advice of Dr. Jeffrey Pearl
relating to operating room procedures and how to best adapt the
Safety-SpongeTM
for use
in an operating room. Dr. Pearl is the Vice-chair of the Department of Surgery
at UCSF, as well as the vice dean of the medical school and a highly respected
medical researcher. In August of 2005, Dr. Pearl accepted a one-year consulting
contract for continued services relating to operating room procedures and
integration of the Safety-SpongeTM
System.
Integration of the Safety-SpongeTM
System
covers areas such as teaching nurses to use the system, optimum locations
in the
operating room, and optimum procedures for how to perform the count. The
contract provides for a monthly cash payment of $2,000 and warrants to purchase
12,500 shares of the Company’s common stock.
The
Company is currently finalizing the terms of a clinical trial agreement with
Brigham and Women's Hospital, the teaching affiliate of Harvard Medical School,
relating to SurgiCount's Safety-SpongeTM
System.
The clinical trial is the result of an on-going collaboration between Harvard
and SurgiCount to refine the Safety-SpongeTM
System
in a clinical optimization study. Under terms of the proposed agreement,
Brigham
and Women's Hospital will collect data on how the Safety-Sponge System saves
time, reduces costs and increases patient safety in the operating room. The
study will also continue to refine the system's technical processes in the
operating room to provide clear guidance and instruction to hospitals, easily
integrating the Safety-SpongeTM
System
into operating rooms. Brigham and Women's Hospital will receive a non-exclusive
license to use the Safety-SpongeTM
System,
while the company will own all technical innovations and other intellectual
properties derived from the study. The Company will provide a research grant
to
Brigham and Women’s Hospital over the course of the clinical trial in the
aggregate amount of $430,513.
Manufacturing
and Raw Materials
The
Company has not begun commercial manufacturing of its Safety-SpongeTM
System.
Upon such initiative, the Company intends to enter into agreements or
relationships with several vendors to commercially produce our products.
We
believe that the materials used in our products are readily available and
can be
purchased and/or produced by several different vendors and, therefore, we
do not
anticipate being dependent on any one vendor.
Research
and Development
Research
and development activities are important to the Company’s business. However, at
this time the Company does not have a research facility but rather focuses
its
efforts on acquisitions of companies operating within our target industries
that
have demonstrated product viability through their own research and development
activities. We intend to outsource much of the research and development
activities relating to improving our existing products or expanding our
intellectual property to similar products or products that have similar
characteristics in our target industries. The Company did not incur any costs
in
2004 relating to the development of new products, the improvement of existing
products, technical support of products and compliance with governmental
regulations for the protection of the consumer. In the future, these costs
will
be charged directly to income in the year in which they are incurred.
Patents
and Trademarks
The
Company intends to make a practice of obtaining patent protection on its
products and processes where possible. The Company’s patents and trademarks are
protected by registration in the United States and other countries where
its
products are marketed.
The
Company currently owns patents issued in the United States and Europe related
to
patient safety, among them, the Safety-SpongeTM
System.
Sales of the Safety-SpongeTM
System
in the future will be expected to play a significant part of the Company’s total
revenues. The Company considers these patents and trademarks in the aggregate
to
be of material importance in the operation of its business. The loss or
expiration of any product patent or trademark could result in a loss of market
exclusivity and can result in a significant reduction in sales.
Competition
The
medical products and healthcare solutions industry is highly competitive.
We
expect that if our investment model proves to be successful, our current
competitors in the medical products and healthcare solutions market may
duplicate our strategy and new competitors may enter the market. We compete
against other medical products and healthcare solutions companies, some of
which
are much larger and have significantly greater financial resources than we
do.
In addition, these companies will be competing with our portfolio companies
to
acquire technologies from universities and research laboratories. We also
compete against large companies that seek to license medical products and
healthcare solutions technologies for themselves. We cannot assure you that
we
will be able to successfully compete against these competitors in the
acquisition, development, or commercialization of any medical products and
healthcare solutions, funding of medical products and healthcare solutions
companies or marketing of our products and solutions.
Competition
in research, involving the development of new products and processes and
the
improvement of existing products and processes, is particularly significant
and
results from time to time in product and process obsolescence. The development
of new and improved products is important to the Company’s success in all areas
of its business. This competitive environment requires substantial investments
in continuing research, multiple sales forces and strategic alliances. In
addition, the winning and retention of customer acceptance of the Company’s
patient safety products involves heavy expenditures for health care regulatory
compliance, advertising, promotion and selling.
Competitive
Advantages
We
believe that we are well positioned to provide financing and research and
development resources to medical products and health care-related companies
for
the following reasons:
· |
Focus
on innovative technologies, products and
services;
|
· |
Network
of well respected industry affiliations and medical
expertise;
|
· |
Expertise
in originating, structuring and monitoring
investments;
|
· |
Flexible
investment approach; and
|
· |
Established
deal sourcing network.
|
Though
by
the nature of our patents, we can have no direct competition, there are several
existing individuals/companies that are trying to address the same issues
as
SurgiCount's Safety-Sponge System. Among these are a medical malpractice
lawyer named Daniel Ballard and two radio frequency identification (RFID)-based
companies, RF Surgical and ClearCount Medical.
Mr.
Ballard’s invention and patent revolves around imbedding radio-opaque pellets
(similar to BB’s) into the sponges. These would be read by placing the used
sponges into a special machine after a surgery that would count the pellets,
and
thus the sponges placed in the machine.
The
RFID
companies both have similar approaches to solving retained sponges. Their
approach is to “impregnate” sponges with RFID tags. RFID-reading wands would be
held over the patients at the end of surgeries to ensure that no sponges
are
left behind. It is our understanding from limited discussions with the
principals of RF Surgical and ClearCount Medical, and from discussions with
sponge manufacturers, that the RFID companies are still in the development
stage
with their competing products. SurgiCount has received FDA exemption for
its
Safety-Sponge System and its scanner is currently registered in the FDA’s
database as non-interfering medical equipment. With SurgiCount’s Safety-Sponge
System is fully developed and ready for manufacturing and distribution, the
Company believes this provides an advantage over the above competing products.
Financial
Services Industry
In
recent
years there has been substantial convergence among companies in the financial
services industry. A large number of corporate entities, including, commercial
banks, insurance companies and other broad-based financial services companies
have established or acquired broker-dealers and asset management firms to
compliment their existing lines of business. In general, there are two types
of
institutions that will be the initial focus of the Company's entry into the
financial services industry -- broker-dealers and investment management firms.
Other types of entities in which the Company may acquire or invest in the
future, include, but are not necessarily limited to: finance companies
(including real-estate and mortgage related finance companies), mutual fund
companies, collection companies, technology companies related to the financial
services industry and companies engaged in financing activities.
The
Company intends to enter the financial services business through the
establishment of a broker-dealer or asset management subsidiary or through
a
majority or minority acquisition or joint venture interest in a company engaged
in the provision of brokerage, asset management and/or similarly related
services. The Company also intends to provide financial advice on mergers,
acquisitions, restructurings and similar corporate finance matters in
furtherance of its financial services business line.
The
Company has not invested in the financial services industry in the past and
therefore has not compiled a track record regarding the financial performance
to
be expected in connection with the operation of this line of business. However,
the Company intends to utilize and rely on its relationship with Ault Glazer,
a
private investment management firm owned and managed by Milton "Todd" Ault
III
and other principals of the Company as well as other third parties, to
facilitate its acquisitions and/or joint investments the forgoing types of
financial services companies.
Competition
The
financial services industry is a highly competitive environment where there
are
no long-term contracted sources of revenue. Each engagement is separately
awarded and negotiated. Our competitors are other investment banking firms,
merchant banks and financial advisory firms. We compete with our competitors
primarily on a regional, product or niche basis. We compete on the basis
of a
number of factors, including our range of products and services, innovation,
and
reputation.
As
we
expand our financial services business, we face competition to acquire
investments in attractive portfolio companies. The activity of identifying,
completing and realizing attractive private equity investments of the types
we
expect to make is competitive and involves a high degree of uncertainty.
We may
be competing with other investors and corporate buyers for the investments
that
we make.
Competition
is also intense for the attraction and retention of qualified employees.
Our
ability to compete effectively in financial services industry will depend
upon
our ability to attract new employees and retain and motivate our existing
employees.
Real
Estate Industry
The
Company's real estate operations will eventually include a mixture of commercial
properties, residential land development projects and other unimproved land,
all
in various stages of development and all available for sale. Therefore,
performance of the real estate operations will largely be dependent upon
the
performance of the operating properties, the current status of the Company's
development projects and non-recurring gains or losses recognized when and
if
real estate assets are sold. As a result, the results of operations for the
Company’s real estate operations are likely to be unpredictable and may
experience significant year-over-year fluctuations.
The
Company had several real estate investments at December 31, 2004. These
investments consisted of eight vacant single family buildings and two multi-unit
buildings in Baltimore, Maryland, approximately 8.5 acres of undeveloped
land in
Heber Springs, Arkansas, and various loans secured by real estate in Heber
Springs, Arkansas. The Company’s real estate investments are held in Franklin
Properties. Franklin Properties is evaluating alternative uses for its real
estate holdings, which range from development and capital investments as
a means
of generating recurring revenue to the liquidation of specific properties.
As of
December 31, 2004, the Company had not generated any revenue, nor does it
expect
to generate any recurring revenue during 2005, from rental activities on
any of
its real estate investments. Further, the Company has not yet defined a rental
strategy for its existing properties. In the event that Franklin Properties
elects to liquidate some or all of its real estate holdings the Company expects
that any gain or loss recognized on the liquidation would be insignificant
to
the Company primarily due to the short period of time that the properties
were
owned combined with the absence of any significant changes in property values
in
the real estate markets where the Company’s real estate holdings are located.
COMPETITION
The
Company’s real estate operations are in competitive environments. The
Company has concentrations of investments in Baltimore, Maryland and Heber
Springs, Arkansas. The Company competes with a large number of real estate
property owners and developers. Principal factors of competition are rent
charged, attractiveness of location, the quality of the property and breadth
and
quality of services provided. Since the Company has not generated any
revenue from its real estate holdings, the relative competitive position
of the
properties cannot be determined. The success of the Company’s real estate
operations depends upon, among other factors, trends of the national and
local
economies, financial condition and operating results of prospective tenants
and
customers, availability and cost of capital, construction and renovation
costs,
taxes, governmental regulations, legislation and population trends.
Recent
Developments
On
February 25, 2005, in furtherance of the implementation of the Company’s
Restructuring Plan the Company purchased SurgiCount, a privately held,
California-based developer of patient safety devices. SurgiCount is the
Company’s first acquisition in its plan to become a leader in the billion dollar
patient safety field market and management believes that the acquisition
is a
significant milestone in the Company’s plan to shift its focus from radio and
telecommunications to products and services targeting patient
safety.
On
March
2, 2005, the Company made an investment in the common stock of Administration
for International Credit & Investments, Inc. (“AICI”),
valued
at $450,000. As part of its investment, the Company received 225,000 warrants
to
purchase common stock at $1.50 per share and 225,000 warrants to purchase
common
stock at $2.00 per share. The warrants are exercisable for a period of five
years and are callable by AICI in certain instances. AICI operates an electronic
market for collecting, detecting, converting, enhancing and routing
telecommunication traffic and digital content. Members of the exchange
anonymously exchange information based on route quality and price through
a
centralized, web accessible database and then route traffic. AICI’s
fully-automatic, highly scalable Voice over Internet Protocol routing platform
updates routes based on availability, quality and price and executes the
capacity request of the orders using proprietary software and delivers them
through AICI’s system. AICI invoices and processes payments for its members’
transactions and offsets credit risk through its credit management programs
with
third parties. AICI’s name changed to IPEX, Inc. and began trading on the OTC
Bulletin Board on March 29, 2005. As of March 31, 2005, excluding shares
issuable to the Company upon exercise of the warrants, the Company owned
1.6% of
the outstanding common stock of IPEX, Inc.
On
March
16, 2005, Ault Glazer filed a Schedule 13D with the SEC relating to its holdings
in Tuxis Corporation, a Maryland corporation (“Tuxis”). Tuxis is currently
registered under the 1940 Act, as a closed-end management investment company.
Tuxis is a real estate development and service company. Tuxis is currently
following through on shareholder approval to change the nature of its business
so as to cease to be an investment company and to concentrate in real estate
and
related services and in that connection its management is conducting a real
estate review, development, and acquisition program. On May 3, 2004, Tuxis
filed
an application with the SEC to de-register as an investment company. At March
16, 2005, the Company directly held 36,000 shares and indirectly, by virtue
of
its relationship with Ault Glazer, held 98,000 shares of Tuxis common stock,
which represented approximately 3.66% and 9.96%, respectively, of the total
outstanding shares. At December 31, 2004, Tuxis had reportable net assets
of
approximately $9.1 million.
Investment
Process
The
Company identifies investment opportunities in our target industries through
an
extensive network of contacts in the medical products and health care solutions
industries, relationships with venture capital firms and other associations
with
University hospitals such as those operated by Harvard and the University
of
California, San Francisco. Several Factors are considered in determining
what
opportunities we will ultimately invest. Among the factors that may influence
our decision are the size of the investment and the potential need for follow
on
investments, our expertise in the industry, the expected duration of the
investment, the level of management assistance required to devote to the
investment, as well as the cash and personnel needs of our core businesses.
Typically an investment will not be in excess of 10% of our total assets
at the
time the investment is made unless the investment is complimentary to our
core
target industries and the investment results in the Company owning a controlling
stake in the investee upon making of the investment. Upon identification
of an
investment opportunity the Company relies upon the executive management team
to
conduct a thorough evaluation of the company and its technology. As required,
the executive management team may consult with individuals that have specialized
expertise in the target industry. In the case of an investment where Franklin
is
the sole or lead investor and the executive management team is satisfied
with
its evaluation, the basic terms of an investment are negotiated directly
by the
executive management team and, depending on the amount of the transaction,
presented to the Board for approval. Upon mutual acceptance of the basic
terms,
outside counsel would prepare the transaction investment documents.
Investments
are typically disposed of on the basis of three primary factors, (i) when
market
conditions allow, (ii) when our management role in the investee company has
been
eliminated or significantly diminished, and (iii) the investment is no longer
deemed complimentary to our core target industries.
Portfolio
of Investments
The
Company has historically invested in equity securities of start-up and early
stage companies in the radio and telecommunications industry. Short selling
is a
component of the Company’s investment strategy and these trades typically range,
in any particular month, from 0% to 20% of total trading activity. As a result
of the Company’s Restructuring Plan, the Company has shifted its investment
focus toward that of investments in companies in the medical products/health
care solutions and financial services industries. These private businesses
may
be thinly capitalized, unproven, small companies that lack management depth,
are
dependent on new, commercially unproven technologies and have little or no
history of operations.
The
following is a discussion of our most significant investments at February
25,
2005. Pursuant to the Restructuring Plan, the Company shifted its primary
investment focus from the radio and telecommunications industry to the medical
products and health care solutions industries, and to a lesser extent in
the
financial services and real estate industries. In conjunction with this shift,
on October 22, 2004, we sold our remaining equity interests in Excelsior
Radio
Networks, Inc.(“Excelsior”)
to
Quince Associates, LP (“Quince”)
for
$1,489,210. For a more detailed discussion of this transaction, see "Management's
Discussion and Analysis of Financial Condition and Results of
Operations”
-
“Overview”
and
"Investments
- Excelsior Radio Networks, Inc."
Current
Investments & Relationships
SurgiCount
On
February 25, 2005, the Company purchased SurgiCount Medical Inc.
(“SurgiCount”),
a
privately held, California-based developer of patient safety devices. Under
the
terms of the agreement, the Company paid to Brian Stewart and Dr. William
Stewart, the holders of 100% of the outstanding capital stock of SurgiCount
(the
“Shareholders”), consideration in the amount of $340,000 in cash and
200,000 shares of Common Stock, of which 10,000 shares of Common Stock
will be held in escrow until August 2005. In addition, if certain milestones
are
satisfied, the Company will issue up to an additional 33,334 shares of
Common Stock to the Shareholders.
SurgiCount
is the Company’s first acquisition in its plan to become a leader in the billion
dollar patient safety field market. Management believes that the acquisition
is
a significant milestone in the Company’s plan to shift its focus from radio and
telecommunications to products and services targeting health care and patient
safety. SurgiCount owns patents issued in the United States and Europe related
to patient safety, among them, the Safety-SpongeTM
System,
an innovation which management believes will allow the Company to capture
a
significant portion of what we believe to be approximately $650 million in
annual U.S. and European surgical sponge sales.
The
Safety-SpongeTM
System
allows for faster and more accurate counting of surgical sponges. SurgiCount
has
obtained FDA 510k exempt status for the Safety-SpongeTM
line.
The Safety-SpongeTM
line of
sponges has passed required FDA biocompatibility tests including ISO
sensitization, cytotoxicity and skin irritation tests. SurgiCount is now
a
wholly-owned subsidiary of the Company.
China
Nurse
On
November 23, 2004, the Company entered into an agreement with China Nurse
LLC
("China Nurse"), an international nurse-recruiting firm based in New York
that
focuses on recruiting and training qualified nurses from China and Taiwan
for
job placement with hospitals and other health care facilities in the United
States. In connection with this agreement, the Company received a 5.0% ownership
interest in China Nurse, agreed to provide referrals and other assistance
and
has also made a small capital investment of $50,000 in that company. The
primary
purpose for the strategic investment was in anticipation of leveraging the
relationships that China Nurse developed during the ordinary course of its
business for the Company’s other patient safety products. This investment was a
seed investment in a concept that may ultimately be completely impaired within
a
one year time frame if China Nurse is unable to secure additional interest
both
in the form of additional investment and interest from hospitals and health
care
facilities in the United States.
Digicorp
On
December 29, 2004, the Company entered into a Common Stock Purchase Agreement
with certain shareholders of Digicorp (the "Agreement"), to purchase an
aggregate of 3,453,527 shares of Digicorp common stock. Of such shares,
2,229,527 shares were purchased for $.135 per share on December 29, 2004,
100,787 shares were purchased for $.145 on December 29, 2004. Franklin agreed
to
purchase an additional 1,224,000 shares of Digicorp common stock from the
selling shareholders at such time as the shares are registered for resale
with
the SEC. The purchase price for such shares is $.135 or $.145 per share,
depending on when the closing occurs. At December 31, 2004, excluding the
1,224,000 additional shares the Company agreed to purchase, the Company had
an
approximate 26.9% ownership interest in Digicorp. Digicorp's common stock
is
traded on the OTC Bulletin Board. Since June 30, 1995, DigiCorp has been
in the
developmental stage and has had no operations other than issuing shares of
common stock for financing the preparation of financial statements and for
preparing filings for the SEC. In connection with the Agreement, Franklin
is
entitled to designate two members to the Board of Directors of Digicorp.
Franklin's first designee, Melanie Glazer, was appointed on December 29,
2004.
The Company is currently evaluating several strategic alternatives for the
use
of the Digicorp entity, however, no definitive plan has been decided upon
at
this time.
Alacra
Corporation
At
December 31, 2004, the Company had an investment in shares of Series F
Convertible Preferred Stock of Alacra Corporation, valued at $1,000,000,
which
represented 14.4% of the Company’s total assets and 28.0% of its net assets.
This investment equates to an approximate 1.6% ownership interest in Alacra.
Franklin has the right to have the Series F convertible preferred stock redeemed
by Alacra for face value plus accrued dividends on December 31, 2006. Alacra,
based in New York, is a global provider of business and financial information.
Alacra provides a diverse portfolio of fast, sophisticated online services
that
allow users to quickly find, analyze, package and present mission-critical
business information. Alacra's customers include more than 750 financial
institutions, management consulting, law and accounting firms and other
corporations throughout the world.
Alacra’s
online service allows users to search, locate and extract business information
from the Internet and from the Alacra library of premium content. The company’s
team of information professionals selects, categorizes and indexes more than
45,000 sites on the Web containing reliable and comprehensive business
information. Simultaneously, users can search more than 100 premium commercial
databases that contain financial information, economic data, business news,
and
investment and market research. Alacra provides the requisite information
in a
user friendly format, gleaned from such prestigious content partners as Thomson
Financial™, Barra, The Economist Intelligence Unit, Factiva, Mergerstat® and
many others.
The
information services industry is intensely competitive and we expect it to
remain so. Although Alacra has been in operation since 1996 they are
significantly smaller in terms of revenue than a large number of companies
offering similar services. Companies such as ChoicePoint, Inc. (NYSE: CPS),
LexisNexis Group, and Dow Jones Reuters Business Interactive, LLC report
revenues that range anywhere from $100 million to several billion dollars,
as
reported by Hoovers, Inc. As such, Alacra’s competitors can offer a far greater
range of products and services, greater financial and marketing resources,
larger customer bases, greater name recognition, greater global reach and
more
established relationships with potential customers than Alacra has. These
larger
and better capitalized competitors may be better able to respond to changes
in
the financial services industry, to compete for skilled professionals, to
finance investment and acquisition opportunities, to fund internal growth
and to
compete for market share generally.
On
April
20, 2000, the Company purchased $1,000,000 worth of Alacra Series F Convertible
Preferred Stock. In connection with this investment, Franklin was granted
observer rights at Alacra board of director meetings. Alacra has recorded
revenue growth in every year since the Company’s original investment, further,
2004 revenues of approximately $11.4 million, were in excess of the prior
years
revenues by approximately 38%. At December 31, 2004, Alacra had total assets
of
approximately $4.4 million with total liabilities of approximately $7.2 million.
Deferred revenue, which represents subscription revenues are amortized over
the
term of the contract, which is generally one year, and represented approximately
$3.3 million of the total liabilities.
Real
Estate Investments
At
December 31, 2004, the Company held a portfolio of real estate investments
through Franklin Capital Properties, LLC (“Franklin Properties”), a Delaware
limited liability company and a wholly owned subsidiary. Each real estate
investment was made during the fourth quarter of 2004 and, based upon Company’s
assessment of the respective real estate markets, on prices that the Company
believes to be favorable. As of December 31, 2004, Franklin Properties was
valued at $738,518, which represents 10.7% of the Company’s total assets and
20.7% of its net assets. Franklin Properties primary focus is on the acquisition
and management of income producing real estate holdings. Franklin Properties
real estate holdings consist of eight vacant single family buildings and
two
multi-unit buildings in Baltimore, Maryland, approximately 8.5 acres of
undeveloped land in Heber Springs, Arkansas, and various loans secured by
real
estate in Heber Springs, Arkansas. Franklin Properties is evaluating alternative
uses for its real estate holdings, which range from development and capital
investments as a means of generating recurring revenue to the liquidation
of
specific properties. As of December 31, 2004, the Company had not generated
revenue, nor does it expect to generate any recurring revenue during 2005,
from
rental activities on any of its real estate investments. Further, the Company
has not defined a rental strategy for its existing properties. In the event
that
Franklin Properties elects to liquidate some or all of its real estate holdings
the Company expects that any gain or loss recognized on the liquidation would
be
insignificant to the Company primarily due to the short period of time that
the
properties were owned combined with the absence of any significant changes
in
property values in the real estate markets where the Company’s real estate
holdings are located.
For
more
information about the Company’s other investments, including its real estate
holdings, see Item 7“Management's
Discussion and Analysis of Financial Condition.”
Investments
Disposed of in 2004
Excelsior
Radio Networks, Inc.
During
the year ended December 31, 2004, the Company liquidated its investment in
Excelsior Radio Networks, Inc. (“Excelsior”).
Excelsior produces and syndicates programs and services heard on more than
2,000
radio stations nationwide across most major formats. Through its Dial
Communications Global Media sales subsidiary, Excelsior sells the advertising
inventory radio stations provide in exchange for the Excelsior content. The
programming and content includes prep services as well as long form and short
form programming. Additionally, Dial Communications Global Media has a number
of
independent producer clients, which range from talk and music programs to
news
and traffic services.
At
December 31, 2003, the Company had an investment in Excelsior Radio Networks,
Inc., formerly known as eCom Capital, Inc., valued at $1,921,270 which
represented 59.0% of the Company's total assets and 94.9%
of
its net assets. Franklin along with Sunshine Wireless, LLC (“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 January 31, 2003, Franklin
purchased and subsequently on May 29, 2003, Franklin cancelled the purchase,
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 $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 total 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
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. On March 19, 2004 Franklin
sold an additional 58,804 shares of the common stock of Excelsior to Sunshine
for an aggregate purchase price of $117,608, $2.00 per common share. Franklin
has stock appreciation rights on the common shares sold to Sunshine on October
8, 2003 and March 19, 2004, 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.
On
June
30, 2004, Franklin sold 200,000 common shares of Excelsior to Quince Associates,
LP (“Quince”)
for an
aggregate purchase price of $500,000, $2.50 per common share. On July 5,
2004,
Franklin entered into an agreement with Quince to sell Franklin's remaining
interest in Excelsior. The transactions contemplated by this agreement were
subject to shareholder approval. On October 22, 2004, Franklin’s shareholders
approved the sale and Franklin agreed to sell its remaining 550,000 shares
of
Excelsior common stock at $2.50 per share and warrants exercisable for 74,232
shares of Excelsior common stock at an exercise price of $1.20 per share
at
$1.30 per warrant and warrants exercisable for 12,879 shares of Excelsior
common
stock at an exercise price of $1.125 per share at $1.375 per warrant. On
September 24, 2004, 100,000 shares of common stock of Excelsior were sold
for an
aggregate purchase price of $250,000 as an advance to the final sale. On
October
22, 2004, Franklin sold its remaining interest in Excelsior to Quince for
an
aggregate purchase price of $1,489,210. Cumulative realized gains on the
sale of
Excelsior common stock and warrants to purchase Excelsior common stock to
Quince
amounted to $1,389,210.
The
purchase price in connection with the June 30, 2004, September 24, 2004 and
October 22, 2004 sales of our equity interests in Excelsior to Quince is
subject
to a potential adjustment whereby, in the event that the per share net proceeds
from any liquidation of Excelsior exceeds $3.00 (or an amount equal to $3.00
plus $.050 multiplied by the number of years, up to five, elapsed since the
closing date of the sale), Franklin will be entitled to receive 80% of the
value
greater than $3.00 (or such other applicable amount) per share. The purchase
price adjustment for the sale will expire as of a date 5 years following
the
closing of each sale transaction.
Other
Investments
In
2001,
Franklin maintained group life and dental insurance with Principal Financial
Group ("PFG").
Upon
the demutualization of PFG in October 2001, Franklin received 4,338 common
shares of PFG. However, Franklin did not receive notification for the receipt
of
such shares. In 2004, Franklin became aware of its ownership of PFG common
shares, and recorded the fair value of such shares within marketable
investments. On April 23, 2004, Franklin sold the common shares of PFG for
$151,400, which was recorded as other realized gains in the accompanying
statement of operations.
Employees
As
of
December 31, 2004, we had 7 employees in our offices, all based in our Santa
Monica office. We believe our relations with our employees are
good.
Material
U.S. Federal Income Tax Considerations
For
federal and state income tax purposes, we are taxed at regular corporate
rates
on ordinary income and recognize gains on distributions of appreciated property.
We are not entitled to the special tax treatment available to BDCs that elect
to
be treated as regulated investment companies under the Internal Revenue Code
because, among other reasons, we do not distribute at least 90% of “investment
company taxable income” as required by the Internal Revenue Code for such
treatment. Distributions of cash or property by us to our stockholders, if
any,
will be taxable as dividends only to the extent that we have current or
accumulated earnings and profits. Distributions in excess of current or
accumulated earnings and profits will be treated first as a return of capital
to
the extent of the holder’s tax basis and then as gain from the sale or exchange
of property.
In
the
event that the company withdraws its election to be treated as a BDC, the
Company does not believe that the withdrawal of its election to be treated
as a
BDC will have any impact on its federal income tax status, since it has never
elected to be treated as a regulated investment company under Subchapter
M of
the Internal Revenue Code. (Electing for treatment as a regulated investment
company under Subchapter M generally allows a qualified investment company
to
avoid paying corporate level federal income tax on income it distributes
to its
stockholders.) Instead, the Company has always been subject to corporate
level
federal income tax on its income (without regard to any distributions it
makes
to its stockholders) as a “regular” corporation under Subchapter C of the Code.
There will be no change in its federal income tax status as a result of it
becoming an operating company.
For
more
information about the Company’s plans to withdraw its election as a BDC, see
"Withdrawal
of the Company’s Election to be treated as a BDC may increase the risks to our
shareholders since the Company would not be subject to many of the regulatory
restrictions imposed by, or receive the financial reporting benefits, of
the
1940 Act” below.
Regulation
of the Medical Products and Healthcare Industry
The
healthcare industry is affected by extensive government regulation at the
federal and state levels. In addition, the Company’s business may also be
subject to varying degrees of governmental regulation in the countries in
which
operations are conducted, and the general trend is toward regulation of
increasing stringency. In the United States, the drug, device, diagnostics
and
cosmetic industries have long been subject to regulation by various federal,
state and local agencies, primarily as to product safety, efficacy, advertising
and labeling. The exercise of broad regulatory powers by the FDA continues
to
result in increases in the amounts of testing and documentation required
for FDA
clearance of new drugs and devices and a corresponding increase in the expense
of product introduction. Similar trends toward product and process regulation
are also evident in a number of major countries outside of the United States,
especially in the European Economic Community where efforts are continuing
to
harmonize the internal regulatory systems.
The
FDA
administers the Food, Drug and Cosmetics Act (the “FDC Act”). Under the FDC Act,
most medical devices must receive FDA clearance through the Section 510(k)
notification process (“510(k)”) or the more lengthy premarket approval (“PMA”)
process before they can be sold in the United States. All of our products,
currently comprising only the Safety-Sponge™ System, must receive 510(k)
clearance or PMA approval. The Center for Devices and Radiological Health
(“DRH”) handles the PMA approval process for medical devices at the FDA. The
CDRH places medical devices into one of many predefined groups, then classifies
each group into one of three classes (Class I, II or III) based on the levels
of
controls necessary to assure the safety and effectiveness of the specific
device
group. Class I and II devices also have subsets of “exempt devices” which are
exempt from the PMA approval requirement subject to certain limitations.
21 CFR
878.4450 (”Gauze/Sponge, Internal, X-Ray Detectable”) is the defined device
group that the Safety-Sponge line of products falls into. This defined device
group is specifically denoted as being “exempt” from the premarket notification
process. SurgiCount submitted specific information on its Safety-Sponge product
directly to the CDRH and received confirmation of the 501(k) exempt status
of
this line of products.
To
obtain
510(k) marketing clearance, a company must show that a new product is
“substantially equivalent” in terms of safety and effectiveness to a product
already legally marketed and which does not require a PMA. Therefore, it
is not
always necessary to prove the actual safety and effectiveness of the new
product
in order to obtain 510(k) clearance for such product. To obtain a PMA, we
must
submit extensive data, including clinical trial data, to prove the safety,
effectiveness and clinical utility of our products. FDA’s quality system
regulations also require companies to adhere to certain good manufacturing
practices requirements, which include testing, quality control, storage,
and
documentation procedures. Compliance with applicable regulatory requirements
is
monitored through periodic site inspections by the FDA. In addition, we are
required to comply with FDA requirements for labeling and promotion. The
Federal
Trade Commission also regulates most device advertising.
The
costs
of human health care have been and continue to be a subject of study,
investigation and regulation by governmental agencies and legislative bodies
in
the United States and other countries. In the United States, attention has
been
focused on drug prices and profits and programs that encourage doctors to
write
prescriptions for particular drugs or recommend particular medical devices.
Managed care has become a more potent force in the market place and it is
likely
that increased attention will be paid to drug and medical device pricing,
appropriate drug and medical device utilization and the quality of health
care.
The
regulatory agencies under whose purview the Company operates have administrative
powers that may subject the Company to such actions as product recalls, seizure
of products and other civil and criminal sanctions. In some cases the Company
may deem it advisable to initiate product recalls voluntarily. We are also
subject to the Safe Medical Devices Act of 1990, which imposes certain reporting
requirements on distributors in the event of an incident involving serious
illness, injury or death caused by a medical device.
In
addition, sales and marketing practices in the health care industry have
come
under increased scrutiny by government agencies and state attorney generals
and
resulting investigations and prosecutions carry the risk of significant civil
and criminal penalties.
Changes
in regulations and healthcare policy occur frequently and may impact our
results, growth potential and the profitability of products we sell. There
can
be no assurance that changes to governmental reimbursement programs will
not
have a material adverse effect on the Company.
REGULATION
AS A BUSINESS DEVELOPMENT COMPANY
General
A
BDC is
regulated by the 1940 Act. A BDC must be organized in the United States for
the
purpose of investing in or lending to primarily private companies and making
managerial assistance available to them. A BDC may use capital provided by
public stockholders and from other sources to invest in long-term, private
investments in businesses.
We
may
not change the nature of our business so as to cease to be, or withdraw our
election as, a BDC unless authorized by vote of a majority of the outstanding
voting securities, as required by the 1940 Act. A majority of the outstanding
voting securities of a company is defined under the 1940 Act as the lesser
of:
(i) 67% or more of such company’s voting securities present at a meeting if more
than 50% of the outstanding voting securities of such company are present
or
represented by proxy, or (ii) more than 50% of the outstanding voting securities
of such company. We do not anticipate any substantial change in the nature
of
our business.
As
with
other companies regulated by the 1940 Act, a BDC must adhere to certain
substantive regulatory requirements. A majority of our directors must be
persons
who are not interested persons, as that term is defined in the 1940 Act.
Additionally, we are required to provide and maintain a bond issued by a
reputable fidelity insurance company to protect the BDC. Furthermore, as
a BDC,
we are prohibited from protecting any director or officer against any liability
to the company or our stockholders arising from willful misfeasance, bad
faith,
gross negligence or reckless disregard of the duties involved in the conduct
of
such person’s office.
As
a BDC,
we are required to meet a coverage ratio of the value of total assets to
total
senior securities, which include all of our borrowings and any preferred
stock
we may issue in the future, of at least 200%. We may also be prohibited under
the 1940 Act from knowingly participating in certain transactions with our
affiliates without the prior approval of our directors who are not interested
persons and, in some cases, prior approval by the SEC.
We
are
not generally able to issue and sell our common stock at a price below net
asset
value per share. See “Risk
factors—Risks relating to our business and structure—Regulations governing our
operation as a BDC affect our ability to, and the way in which we raise
additional capital.”
We may,
however, sell our common stock, or warrants, options or rights to acquire
our
common stock, at a price below the then-current net asset value of our common
stock if our Board of Directors determines that such sale is in our best
interests and the best interests of our stockholders, and our stockholders
approve such sale. In addition, we may generally issue new shares of our
common
stock at a price below net asset value in rights offerings to existing
stockholders, in payment of dividends and in certain other limited
circumstances.
We
will
be periodically examined by the SEC for compliance with the 1940 Act.
As
a BDC,
we are subject to certain risks and uncertainties. See “Risk
factors—Risks relating to our business and structure.”
In
addition, the Company currently has plans, subject to shareholder approval
at
the Annual Meeting, to withdraw the Company’s election to be treated as a BDC
regulated under the 1940 Act. See "Withdrawal
of the Company’s Election to be treated as a BDC may increase the risks to our
shareholders since the Company would not be subject to many of the regulatory
restrictions imposed by, or receive the financial reporting benefits, of
the
1940 Act” below.
Regulation
of the Financial Services Industry
Financial
Services Industry Regulation
The
growth and earnings performance of a financial institution are affected not
only
by management decisions (such as the development of a business plan and lending
decisions) and general economic conditions (such as interest rates, housing
demand and business cycles), but also by the various governmental regulations
and authorities, including, but not limited to, regulation by the Board of
Governors of the Federal Reserve System ("FRB"),
the
Federal Deposit Insurance Corporation ("FDIC"),
the
Office of the Comptroller of the Currency ("OCC"),
the
Office of Thrift Supervision ("OTS"),
the
Internal Revenue Service ("IRS"),
and
other federal and state authorities.
In
addition, the Company will also be subject to extensive regulation by
self-regulatory bodies, including the New York Stock Exchange (NYSE) and
various
other stock exchanges, the Securities and Exchange Commission (SEC), the
National Association of Securities Dealers Regulation, Inc. (NASDR) and foreign
regulatory bodies.
Federal
and state laws and regulations generally applicable to financial institutions
regulate, among other things, the scope of business, investment activities,
capital levels, reserves against deposits, collateral requirements, transactions
with insiders and certain affiliates, the establishment of branches, mergers,
acquisitions, consolidations, the issuance of equity and debt, and the payment
of dividends.
Broker-dealers
and investment advisers are subject to regulation covering virtually all
aspects
of their businesses. These regulatory authorities have adopted rules that
govern
the securities industry and, as a normal part of their procedures, conduct
periodic examinations of the Company's securities brokerage and asset management
operations. Additional legislation, changes in rules promulgated by the SEC,
foreign regulatory agencies, or any self-regulatory organization, or changes
in
the interpretation or enforcement of existing laws and rules, may directly
affect the mode of operation and profitability of the Company. In the United
States, brokerage firms and certain investment advisers also are subject
to
regulation by state securities commissions in the states in which they conduct
business. These regulatory authorities, including state securities commissions,
may conduct administrative proceedings which can result in censure, fine,
suspension or expulsion of a broker-dealer or investment adviser, its officers
or employees.
Regulation
of the Real Estate Industry
The
real
estate development industry is subject to substantial environmental, building,
construction, zoning and real estate regulations that are imposed by various
federal, state and local authorities. In order to develop its properties,
the
Company must obtain the approval of numerous governmental agencies regarding
such matters as permitted land uses, density, the installation of utility
services (such as water, sewer, gas, electric, telephone and cable television)
and the dedication of acreage for various community purposes. Furthermore,
changes in prevailing local circumstances or applicable laws may require
additional approvals or modifications of approvals previously obtained. Delays
in obtaining required approvals and authorizations could adversely affect
the
profitability of the Company's projects.
Qualifying
Assets
As
a BDC,
we may not acquire any asset other than “qualifying assets” unless, at the time
we make the acquisition, the value of our qualifying assets represent at
least
70% of the value of our total assets. The principal categories of qualifying
assets relevant to our business are:
· |
Securities
of an eligible portfolio company that are purchased in transactions
not
involving any public offering. An eligible portfolio company is
defined
under the 1940 Act to include any issuer
that:
|
o |
is
organized and has its principal place of business in the
U.S.;
|
o |
is
not an investment company or a company operating pursuant to certain
exemptions under the 1940 Act, other than a small business investment
company wholly owned by a BDC; and
|
o |
does
not have any class of publicly traded securities with respect to
which a
broker may extend margin credit (i.e., a “marginable
security”).
|
· |
Securities
received in exchange for or distributed with respect to securities
described in the bullet above or pursuant to the exercise of options,
warrants, or rights relating to those securities;
and
|
· |
Cash,
cash items, government securities, or high quality debt securities
(as
defined in the 1940 Act), maturing in one year or less from the
time of
investment.
|
Amendments
promulgated in 1998 by the Federal Reserve expanded the definition of a
marginable security under the Federal Reserve’s margin rules to include any
non-equity security. Thus, any debt securities issued by any entity are
marginable securities under the Federal Reserve’s current margin rules. As a
result, the staff of the SEC has raised the question to the BDC industry
as to
whether a private company that has outstanding debt securities would qualify
as
an “eligible portfolio company” under the 1940 Act.
The
SEC
has recently issued proposed rules to correct the unintended consequence
of the
Federal Reserve’s 1998 margin rule amendments of apparently limiting the
investment opportunities of business development companies. In general, the
SEC’s proposed rules would define an eligible portfolio company as any company
that does not have securities listed on a national securities exchange or
association. We are currently in the process of reviewing the SEC’s proposed
rules and assessing their impact, to the extent such proposed rules are
subsequently approved by the SEC, on our investment activities. We do not
believe that these proposed rules will have a material adverse effect on
our
operations.
Until
the
SEC or its staff has taken a final public position with respect to the issue
discussed above, we will continue to monitor this issue closely, and may
be
required to adjust our investment focus to comply with and/or take advantage
of
any future administrative position, judicial decision or legislative
action.
In
addition, a BDC must have been organized and have its principal place of
business in the United States and must be operated for the purpose of making
investments in eligible portfolio companies, or in other securities that
are
consistent with its purpose as a BDC.
Significant
Managerial Assistance
To
include certain securities described above as qualifying assets for the purpose
of the 70% test, a BDC must offer to make available to the issuer of those
securities significant managerial assistance such as providing guidance and
counsel concerning the management, operations, or business objectives and
policies of a portfolio company. We offer to provide managerial assistance
to
our portfolio companies.
Investment
Concentration
Our
investment objective is to maximize our portfolio’s total return, principally by
investing in the debt and/or equity securities of companies in the medical
products, healthcare solutions, financial services and real estate industries.
In this respect, we concentrate in these sectors and invest, under normal
circumstances, at least 80% of the value of our net assets (including the
amount
of any borrowings for investment purposes) in the medical products, healthcare
solutions, financial services and real estate industries. This 80% policy
is not
a fundamental policy and therefore may be changed without the approval of
our
stockholders. However, we may not change or modify this policy unless we
provide
our stockholders with at least 60 days prior notice, pursuant to Rule 35d-1
of
the 1940 Act. See “Risk
factors—Risks related to our investments—Our portfolio may be concentrated in a
limited number of portfolio companies.”
1940
Act Code of Ethics
As
required by the 1940 Act, we maintain a code of ethics that establishes
procedures for personal investments and restricts certain transactions by
our
personnel. See “Risk factors—Risks relating to our business and structure—There
are significant potential conflicts of interest.” Our code of ethics generally
does not permit investments by our employees in securities that may be purchased
or held by us. A copy of the code of ethics may be obtained, without charge,
upon a written request mailed to: Franklin Capital Corporation c/o Corporate
Secretary, 100 Wilshire Boulevard, Suite 1500, Santa Monica, California
90401.
Code
of Business Conduct and Ethics
Each
executive officer and director as well as every employee of the Company is
subject to the Company’s Code of Business Conduct and Ethics which was adopted
by the Board on November 11, 2004 and filed as Appendix D to the definitive
proxy materials filed with the SEC on March 2, 2005. The code of ethics applies
to all the directors, officers and certain employees of the Company, including
the principal executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar functions.
A
copy of the Code of Business Conduct and Ethics may be obtained, without
charge,
upon a written request mailed to: Franklin Capital Corporation c/o Corporate
Secretary, 100 Wilshire Boulevard, Suite 1500, Santa Monica, California 90401.
The Code of Business Conduct and Ethics is also posted on the Company’s Internet
website, which is located at www.patientsafetytechnologies.com.
Compliance
Policies and Procedures
We
have
adopted and implemented written policies and procedures reasonably designed
to
prevent violation of the federal securities laws, and are required to review
these compliance policies and procedures annually for their adequacy and
the
effectiveness of their implementation, and to designate a Chief Compliance
Officer to be responsible for administering the policies and procedures.
Lynne
Silverstein serves as Chief Compliance Officer for the Company.
Sarbanes-Oxley
Act of 2002
On
July
30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002.
The
Sarbanes-Oxley Act, as well as the rules and regulations promulgated thereunder,
imposed a wide variety of new regulatory requirements on publicly-held companies
and their insiders. Many of these requirements affect us. For
example:
· |
Pursuant
to Rule 13a-14 of the Securities Exchange Act of 1934, as amended
(the
“1934 Act”), our Chief Executive Officer and Chief Financial Officer must
certify the accuracy of the financial statements contained in our
periodic
reports;
|
· |
Pursuant
to Item 307 of Regulation S-K, our periodic reports must disclose
our
conclusions about the effectiveness of our disclosure controls
and
procedures;
|
· |
Pursuant
to Rule 13a-15 of the 1934 Act, our management must prepare a report
regarding its assessment of our internal control over financial
reporting,
which must be audited by our independent registered public accounting
firm; and
|
· |
Pursuant
to Item 308 of Regulation S-K and Rule 13a-15 of the 1934 Act,
our
periodic reports must disclose whether there were significant changes
in
our internal controls or in other factors that could significantly
affect
these controls subsequent to the date of their evaluation, including
any
corrective actions with regard to significant deficiencies and
material
weaknesses.
|
The
Sarbanes-Oxley Act requires us to review our current policies and procedures
to
determine whether we comply with the Sarbanes-Oxley Act and the regulations
promulgated thereunder. We will continue to monitor our compliance with all
regulations that are adopted under the Sarbanes-Oxley Act and will take actions
necessary to ensure that we are in compliance therewith.
Available
Information
Copies
of
the Company quarterly reports on Form 10-Q, annual reports on Form 10-K and
current reports on Form 8-K, and any amendments to the foregoing, will be
provided without charge to any shareholder submitting a written request to
the
Corporate Secretary, Franklin Capital Corporation, 100 Wilshire Boulevard,
Suite 1500, Santa Monica, CA 90401 or by calling (310) 752-1416. You may
also obtain the documents filed by Franklin Capital with the Securities and
Exchange Commission for free at the Internet website maintained by the
Securities and Exchange Commission at www.sec.gov. The Company does not
currently make these documents available on its website.
Risk
Factors
An
investment in our securities involves a high degree of risk relating to our
business, strategy, structure and investment objectives. The risks set out
below
are not the only risks we face, and we face other risks which are not yet
predictable or identifiable. If any events underlying or relating to the
following risks occur, our business, financial condition and results of
operations could be materially adversely affected. In such case, our net
asset
value and the trading price of our Common Stock could decline, and you may
lose
all or part of your investment. In addition to the risk factors described
below,
other factors that could cause actual results to differ materially generally
include:
•
|
changes
in or conditions affecting the economy;
|
|
|
•
|
risk
associated with possible disruption in the Company’s operations due to
terrorism;
|
|
|
•
|
future
regulatory actions and conditions in the Company’s operating areas or
target industries for investments; and
|
|
|
•
|
other
risks and uncertainties as may be detailed from time to time in
the
Company’s public announcements and SEC
filings.
|
Risks
Relating to our Business and Structure
We
recently restructured our investment strategy and objective and have limited
operating history under our new structure.
Upon
the
change of control that occurred in October 2004, we restructured our investment
strategy and objective to focus on the medical products, healthcare solutions
and financial services industries instead of the radio and telecommunications
industries. We have a limited operating history under this new structure.
We are
subject to all of the business risks and uncertainties associated with any
new
investment strategy or objective, including the risk that we will not achieve
our investment objective and that the value of your investment in us could
decline substantially.
The
Company may not successfully implement its Restructuring
Plan
The
Restructuring Plan has shifted Franklin’s investment strategy away from the
radio and telecommunications industry and refocused it on the medical products,
healthcare solutions, financial services and real estate industries. Franklin
has not typically invested in these industries in the past and therefore
has not
compiled a track record regarding the financial performance to be expected
in
connection with these new investments. There can be no assurance regarding
the
return on, or the recovery of, Franklin’s investments in businesses in these
industries, and whether such investments will be profitable.
Moreover,
there are a number of inherent risks for entities doing business in the medical
products, healthcare solutions, financial services and real estate industries,
including a complex array of regulatory requirements. These risks could have
a
material adverse effect on the profitability of the businesses in which Franklin
invests, which in turn could have a material adverse effect on the return
on, or
the recovery of, Franklin’s investment in such businesses.
Withdrawal
of the Company’s election to be treated as a BDC may increase the risks to our
shareholders since the Company would not be subject to many of the regulatory
restrictions imposed by, or receive the financial reporting benefits, of
the
1940 Act
If
the
Company withdraws its election to be treated as a BDC, the Company would
no
longer be subject to regulation under the 1940 Act,
which is designed to protect the interests of investors in investment companies.
As a non-BDC, the Company will not be subject to many of the regulatory,
financial reporting and other requirements and restrictions imposed by the
1940 Act
including, but not necessarily limited to, limitations on the amounts, types
and
prices at which securities which may be issued, participation in related
party
transactions, the payment of compensation to executives, and the scope of
eligible investments.
In
the
event that the Company withdraws its election to be treated as a BDC and
becomes
an operating company, the fundamental nature of the Company’s business will
change from that of investing in a portfolio of securities in the radio and
telecommunications industries, with the goal of achieving gains on appreciation
and dividend income, to that of being actively engaged in the ownership and
management of operating businesses in the medical products, health care
solutions, financial services and real estate industries, with the goal of
generating income from the operations of those businesses. No assurance can
be
given that our business strategy or investment objectives will be achieved
by
withdrawing our election to be treated as a BDC.
Further,
the election to withdraw the Company as a BDC under the 1940 Act
will
result in a significant change in the Company’s method of accounting. BDC
financial statement presentation and accounting utilizes the value method
of
accounting used by investment companies, which allows BDCs to recognize income
and value their investments at market value as opposed to historical cost.
As an operating company, the required financial statement presentation and
accounting for securities held will be either fair value or historical cost
methods of accounting, depending on the classification of the investment
and the
Company’s intent with respect to the period of time it intends to hold the
investment. A change in the Company’s method of accounting could reduce the
market value of its investments in privately held companies by eliminating
the
Company’s ability to report an increase in the value of its holdings as they
occur. Also, as an operating company, the Company would have to consolidate
its
financial statements with subsidiaries, thus eliminating the portfolio company
reporting benefits available to BDCs.
We
are dependent upon our key management personnel for our future success,
particularly Milton “Todd” Ault III.
The
Company is dependent on the diligence and skill of its senior management
and
other key personnel for the selection, structuring, closing and monitoring
of
its investments. The future success of the Company depends to a significant
extent on the continued service and coordination of its senior management
team,
principally our Chief Executive Officer and Chairman, Milton “Todd” Ault III.
Mr. Ault is not currently subject to an employment contract with us. The
departure of any key management personnel, or Mr. Ault in particular, could
have
a material adverse effect on the Company’s ability to implement its business
strategy or achieve its investment objective.
As
a
result of the implementation of the Restructuring Plan and pursuant to the
Termination
Agreement,
on
October 22, 2004, Stephen
Brown resigned as the Chairman and Chief Executive Officer of the Company.
In
addition, certain other members of senior management and the board of directors
either resigned or were replaced with new directors and/or officers.
These
new
directors and/or officers have not previously been involved with the
Company.
Profitability of the Company would be dependent on this new management, as
opposed to former management. As a result, there can be no assurance that
the
new senior management would operate the Company in a profitable manner.
Our
management has limited experience in managing and operating as a public company
under the Securities Act of 1933, as amended, or the Securities Exchange
Act of
1934, as amended, or a BDC under the 1940 Act, as amended.
Prior
to
the change in control that occurred in October 2004, our senior management
were
primarily engaged in operating a private investment management firm. In this
capacity they developed a general understanding of the administrative and
regulatory environment in which public companies operate. However, our senior
management lacks practical experience operating a public company and relies
in
many instances on the professional experience and advice of third parties
including its consultants, attorneys and accountants. Additionally, utilization
of professionals is expensive and in the event we fail to reach profitability
and/or raise additional capital there can be no assurance that these resources
will be available to the Company in the future.
Failure
to comply or adequately comply with any laws, rules, or regulations applicable
to our business or us may result in fines or regulatory actions, which may
materially adversely affect our business, results of operation, or financial
condition.
Our
financial condition and results of operations will depend on our ability
to
manage our future growth effectively.
As
part
of the Restructuring Plan, we changed our investment strategy and objective
and
are currently recapitalizing our business. As such, our success in achieving
our
investment objective will depend on our ability to grow effectively and
efficiently, including our ability to identify, analyze, and invest in and
finance companies in a timely manner. Accomplishing this result will also
require us to raise capital on a cost-effective and timely basis. As we grow,
we
will need to hire, train, supervise and manage new employees. Our failure
to
manage our future growth effectively could have a material adverse effect
on our
business, financial condition and results of operations.
Our
business model depends upon the development of strong referral relationships
with private equity and venture capital funds and investment banking
firms.
If
we
fail to maintain our relationships with key firms, or if we fail to establish
strong referral relationships with other firms or other sources of investment
opportunities, we will not be able to grow our portfolio of private companies
and achieve our investment objective. In addition, persons with whom we have
informal relationships are not obligated to provide us with investment
opportunities, and therefore there is no assurance that such relationships
will
lead to the origination of debt or other investments.
We
may experience fluctuations in our quarterly results.
We
may
experience fluctuations in our quarterly operating results due to a number
of
factors, including the rate at which we identify and make new investments,
the
success rate of our new investments, the level of our expenses, variations
in
and the timing of the recognition of realized and unrealized gains or losses,
the degree to which we encounter competition in our markets and general economic
conditions. As a result of these factors, results for any period should not
be
relied upon as being indicative of performance in future periods.
Economic
recessions or downturns could impair our portfolio companies and harm our
operating results.
Many
of
the companies in which we have made or will make investments may be susceptible
to economic slowdowns or recessions. An economic slowdown may affect the
ability
of a company to engage in a liquidity event such as a sale, recapitalization,
or
initial public offering. Our nonperforming assets are likely to increase
and the
value of our portfolio is likely to decrease during these periods. These
conditions could lead to financial losses in our portfolio and a decrease
in our
revenues, net income, and assets.
Our
business of making private equity investments and positioning them for liquidity
events also may be affected by current and future market conditions. The
absence
of an active senior lending environment may slow the amount of private equity
investment activity generally. As a result, the pace of our investment activity
may slow. In addition, significant changes in the capital markets could have
an
effect on the valuations of private companies and on the potential for liquidity
events involving such companies. This could affect the amount and timing
of
gains realized on our investments.
The
inability of our portfolio companies to successfully market their products
would
have a negative impact on our investment returns
Even
if
our 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 our
portfolio companies may not be successful.
We
may need to undertake additional financings to meet our growth, operating
and/or
capital needs.
We
anticipate that monetizable revenue from our operations for the foreseeable
future may not be sufficient to meet our growth, operating and/or capital
requirements. We believe that we currently have the financial resources to
meet
our operating requirements for the next twelve months. We may however undertake
additional equity financings to better enable the Company to meet its future
growth, operating and/or capital requirements. We have no commitments for
any
financings, and there can be no assurance that any such commitments can be
obtained on terms acceptable to us, if at all. Any equity financing may be
dilutive to our stockholders, and debt financing, if available, may involve
restrictive covenants or other adverse terms with respect to raising future
capital and other financial and operational matters. If we are unable to
obtain
financing as needed, we may be required to reduce the scope of our expansion
and
growth plans, as well as operations, which could have a material adverse
effect
on us.
There
are significant potential conflicts of interest, which could impact our
investment returns.
Our
executive officers and directors serve or may serve as officers and directors
of
entities who operate in the same or related line of business as we do.
Accordingly, they may have obligations to investors in those entities, the
fulfillment of which might not be in the best interests of us or our
stockholders. For example, certain of the Company’s officers, directors and/or
their family members have existing responsibilities and, in the future, may
have
additional responsibilities, to act and/or provide services as executive
officers, directors, owners and/or managers of Ault Glazer. Accordingly,
certain
conflicts of interest between the Company and Ault Glazer may occur from
time to
time. The Company will attempt to resolve any such conflicts of interest
in its
favor. Because of these possible conflicts of interest, such individuals
may
direct potential business and investment opportunities to other entities
rather
than to us.
The
Board
does not believe that the Company has any conflicts of interest with the
business of Ault Glazer, other than certain of the Company’s officers
responsibility to provide certain management and administrative services
to Ault
Glazer and its clients from time-to-time. However, subject to applicable
law,
the Company may engage in transactions with Ault Glazer and related parties
in
the future. These related party transactions may raise conflicts of interest
and, although the Company does not have a formal policy to address such
conflicts of interest, the Audit Committee intends to evaluate relationships
and
transactions involving conflicts of interest on a case by case basis and
the
approval of the Audit Committee shall be required for all such transactions.
The
Audit Committee intends that any related party transactions will be on terms
and
conditions no less favorable to the Company than those terms and conditions
reasonably obtainable from third parties and in accordance with applicable
law.
In
order
to minimize the potential conflicts of interest that might arise, we have
adopted a Code of Ethics in accordance with the requirements of Investment
Company Act that applies to all the directors, officers and certain employees
of
the Company. A copy of the Code of Ethics may be obtained, without charge,
upon
a written request mailed to the Company.
Any
transactions we engage in with affiliates will involve conflicts of
interest.
Affiliated
transactions between us and any of our affiliates, including our officers,
directors or employees and principal stockholders are subject to inherent
conflicts of interest. In many cases, the 1940 Act, as well as Federal and
State
securities laws and applicable State corporate regulations, prohibit
transactions between such persons and ourselves unless we first apply for
and
obtain an exemptive order from the SEC. Delays and costs in obtaining necessary
approvals may decrease or even eliminate any profitability of such transactions
or make it impracticable or impossible to consummate such transactions. These
affiliations could cause circumstances that would require the SEC's approval
in
advance of proposed transactions by us in portfolio companies. Further,
depending upon the extent of our management's influence and control with
respect
to such portfolio companies, the selection of the affiliates of management
to
perform such services may not be a disinterested decision, and the terms
and
conditions for the performance of such services and the amount and terms
of such
compensation may not be determined at arm's-length negotiations.
The
sale or issuance of securities to interested stockholders may be dilutive
to our
existing shareholders
In
the
event that the Company is no longer a BDC, and subject to approval of the
stockholders at the Annual Meeting of the sale of securities to “interested
stockholders” (as defined in Section 203 of the Delaware General Corporate Law),
the Company may from time to time issue common stock, warrants to purchase
common stock, or other securities representing indebtedness to Milton “Todd”
Ault III, Lynne Silverstein, Louis Glazer or Melanie Glazer. Any sale of
equity
securities may be dilutive to the Company’s stockholders, and debt financing, if
available, may involve restrictive covenants with respect to raising future
capital and other financial and operational matters. The securities which
may be
issued to Milton “Todd” Ault III, Lynne Silverstein, Louis Glazer or Melanie
Glazer may have a material adverse effect on the market price of the Common
Stock as a result of the potential for dilution created by the issuance of
additional common stock, warrants to purchase common stock, or other securities
representing indebtedness. In addition, resales by Milton “Todd” Ault III, Lynne
Silverstein or Louis and Melanie Glazer may be made at times that are adverse
to
the interests of other stockholders. Such sales could further consolidate
voting
control in Milton “Todd” Ault III, Lynne Silverstein or Louis and Melanie
Glazer.
One
of our current stockholders has significant influence over our management
and
affairs.
Milton
“Todd” Ault III, our Chief Executive Officer and Chairman, beneficially owns
approximately 27.1% of our common stock as of February 28, 2005. Therefore
Mr. Ault may be able to exert influence over our management and policies.
Mr.
Ault may acquire additional equity in the future. The concentration of ownership
may also have the effect of delaying, preventing or deterring a change of
control of us, could deprive our shareholders of an opportunity to receive
a
premium for their common stock as part of the sale of us and might ultimately
affect the market price of our common stock.
Regulations
governing our operation as a BDC affect our ability to, and the way in which
we
raise additional capital, which may expose us to risks, including the typical
risks associated with leverage.
Our
business will require a substantial amount of capital, which we may acquire
from
the following sources:
Senior
securities and other indebtedness
We
may
issue debt securities or preferred stock and/or borrow money from banks or
other
financial institutions, which we refer to collectively as “senior securities,”
up to the maximum amount permitted by the 1940 Act. Under the provisions
of the
1940 Act, we are permitted, as a BDC, to issue senior securities in amounts
such
that our asset coverage ratio, as defined in the 1940 Act, equals at least
200%
of gross assets, less all liabilities and indebtedness not represented by
senior
securities, after each issuance of senior securities. If we issue senior
securities, including preferred stock and debt securities, we will be exposed
to
typical risks associated with leverage, including an increased risk of loss.
If
we incur leverage to make investments, a decrease in the value of our
investments would have a greater negative impact on the value of our common
stock. If we issue debt securities or preferred stock, it is likely that
such
securities will be governed by an indenture or other instrument containing
covenants restricting our operating flexibility. In addition, such securities
may be rated by rating agencies, and in obtaining a rating for such securities,
we may be required to abide by operating and investment guidelines that could
further restrict our operating flexibility.
Our
ability to pay dividends or issue additional senior securities would be
restricted if our asset coverage ratio was not at least 200%. If the value
of
our assets declines, we may be unable to satisfy this test. If that happens,
we
may be required to sell a portion of our investments and, depending on the
nature of our leverage, repay a portion of our indebtedness at a time when
such
sales may be disadvantageous. Furthermore, any amounts that we use to service
our indebtedness would not be available for distributions to our common
stockholders.
In
the
event that the Company is no longer a BDC, the Company will not be subject
to
the prohibitions and limitations listed above which are currently imposed
by
1940 Act.
The
Company does not currently have a self-imposed lower threshold limit with
respect to its asset coverage ratio, and does not anticipate that such a
limit
would apply if it withdraws its election to be treated as a BDC.
Common
stock
We
are
not generally able to issue and sell our common stock at a price below net
asset
value per share. We may, however, sell our common stock, or warrants, options
or
rights to acquire our common stock, at a price below the then-current net
asset
value of our common stock if our Board of Directors determines that such
sale is
in the best interests of the Company and its stockholders, and our stockholders
approve such sale. In certain limited circumstances, pursuant to an SEC staff
interpretation, we may also issue shares at a price below net asset value
in
connection with a transferable rights offering so long as: (1) the offer
does
not discriminate among shareholders; (2) we use our best efforts to ensure
an
adequate trading market exists for the rights; and (3) the ratio of the offering
does not exceed one new share for each three rights held. If we raise additional
funds by issuing more common stock or senior securities convertible into,
or
exchangeable for, our common stock, the percentage ownership of our stockholders
at that time would decrease and they may experience dilution. Moreover, we
can
offer no assurance that we will be able to issue and sell additional equity
securities in the future, on favorable terms or at all.
In
the
event that the Company is no longer a BDC, the Company will not be subject
to
the prohibitions and limitations listed above which are currently imposed
by
1940 Act.
Any
change in regulation of our business could negatively affect the profitability
of our operations.
We
are
currently subject to government regulations because of our status as a BDC.
As a
BDC, the 1940 Act imposes numerous restrictions on our activities, including
restrictions on the nature of our investments and transactions with affiliates.
Any change in the law or regulations that govern our business could have
a
material impact on us or our operations. Laws and regulations may be changed
from time to time, and the interpretations of the relevant laws and regulations
also are subject to change. In the event that the Company is no longer a
BDC,
many of the regulatory, financial reporting and other requirements and
restrictions imposed by the 1940 Act
will
be removed. This could significantly impact the way the Company operates
its
business from a financial reporting, tax, legal, and accounting structure.
Additionally,
changes in the laws, regulations or interpretations of the laws and regulations
that govern our portfolio companies, regulated investment companies or
non-depository commercial lenders could significantly affect our operations
and
our cost of doing business. We are subject to federal, state and local laws
and
regulations and are subject to judicial and administrative decisions that
affect
our operations. If these laws, regulations or decisions change, or if we
expand
our business into jurisdictions that have adopted more stringent requirements
than those in which we currently conduct business, we may have to incur
significant expenses in order to comply or we might have to restrict our
operations.
Provisions
of the Delaware General Corporation Law and of our charter and bylaws could
deter takeover attempts and have an adverse impact on the price of our common
stock.
Our
charter and bylaws, as well as certain statutory and regulatory requirements,
contain certain provisions that may have the effect of discouraging a third
party from making an acquisition proposal for us. These anti-takeover provisions
may inhibit a change of control in circumstances that could give the holders
of
our common stock the opportunity to realize a premium over the market price
for
our common stock.
Risks
Related to our Investments
Investing
in private companies involves a high degree of risk.
The
Company’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. 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 Company has
invested a substantial portion of its assets in private small private companies
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. There is
generally no publicly available information about the companies in which
we
invest, and we rely significantly on the diligence of our employees and agents
to obtain information in connection with our investment decisions. In addition,
some smaller businesses have narrower product lines and market shares than
their
competition and may be more vulnerable to customer preferences, market
conditions, loss of key personnel, or economic downturns, which may adversely
affect the return on, or the recovery of, our investment in such
businesses.
The
Company expects that some of its 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 Company has been risk seeking rather than
risk averse in its approach to its investments. Neither the Company's
investments nor an investment in the Company is intended to constitute a
balanced investment program. The Company 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.
Our
investments in our portfolio companies may be concentrated in one or more
industries and if these industries should decline or fail to develop as expected
our investments will be lost.
Our
investments in our portfolio companies may be concentrated in one or more
industries. This concentration will mean that our investments will be
particularly dependent on the development and performance of those industries.
Accordingly, our investments may not benefit from any advantages, which might
be
obtained with greater diversification of the industries in which our portfolio
companies operate. If those industries should decline or fail to develop
as
expected, our investments in our portfolio companies in those industries
will be
subject to loss.
The
medical products and healthcare-related sector is subject to many risks,
including volatility, intense competition, decreasing life cycles and periodic
downturns.
We
invest
in companies in the medical products and healthcare-related sector, some
of
which may have relatively short operating histories. The revenues, income
(or
losses) and valuations of medical products and healthcare-related companies
can
and often do fluctuate suddenly and dramatically. Also, the medical products
and
healthcare-related market is generally characterized by abrupt business cycles
and intense competition. In addition, because of rapid technological change,
the
average selling prices of products and some services provided by the medical
products and healthcare-related sector have historically decreased over their
productive lives. As a result, the average selling prices of products and
services offered by our portfolio companies may decrease over time, which
could
adversely affect their operating results and their ability to meet their
financial obligations, as well as the value of any equity securities, that
we
may hold. This could, in turn, materially adversely affect our business,
financial condition and results of operations.
Our
investments in the medical products and healthcare-related companies that
we are
targeting may be extremely risky and we could lose all or part of our
investments.
Although
a prospective portfolio company’s assets are one component of our analysis when
determining whether to provide equity or debt capital, we generally do not
base
an investment decision primarily on the liquidation value of a company’s balance
sheet assets. Instead, given the nature of the companies that we invests
in, we
also review the company’s historical and projected cash flows, equity capital
and “soft” assets, including intellectual property (patented and non-patented),
databases, business relationships (both contractual and non-contractual)
and the
like. Accordingly, considerably higher levels of overall risk will likely
be
associated with our portfolio.
Specifically,
investment in the medical products and healthcare-related companies that
we are
targeting involves a number of significant risks, including:
· |
these
companies may have limited financial resources and may be unable
to meet
their current or future financial obligations, which may result
in the
deterioration in the value of any collateral and a reduction in
the
likelihood of us realizing any value from the liquidation of such
collateral;
|
· |
they
typically have limited operating histories, narrower product lines
and
smaller market shares than larger businesses, which tend to render
them
more vulnerable to competitors’ actions and market conditions, as well as
general economic downturns;
|
· |
because
they tend to be privately owned, there is generally little publicly
available information about these businesses; therefore, although
the
Company will perform “due diligence” investigations on these portfolio
companies, their operations and their prospects, we may not learn
all of
the material information we need to know regarding these
businesses;
|
· |
they
are more likely to depend on the management talents and efforts
of a small
group of persons; therefore, the death, disability, resignation
or
termination of one or more of these persons could have a material
adverse
impact on our portfolio company and, in turn, on us;
and
|
· |
they
generally have less predictable operating results, may from time
to time
be parties to litigation, may be engaged in rapidly changing businesses
with products subject to a substantial risk of obsolescence, and
may
require substantial additional capital to support their operations,
finance expansion or maintain their competitive
position.
|
We
face strong competition from far larger firms in the Financial Services
Industry
The
financial services industry is intensely competitive and we expect it to
remain
so. We compete on the basis of a number of factors, including the quality
of our
advice and service, innovation, and reputation. Most of our competitors in
the
financial services industry have a far greater range of products and services,
greater financial and marketing resources, larger customer bases, greater
name
recognition, greater global reach and more established relationships with
potential customers than we have. These larger and better capitalized
competitors may be better able to respond to changes in the financial services
industry, to compete for skilled professionals, to finance investment and
acquisition opportunities, to fund internal growth and to compete for market
share generally.
Difficult
market conditions could adversely affect our financial services business
Adverse
market or economic conditions would likely affect the number and size of
transactions on which we provide mergers and acquisitions advice and therefore
adversely affect the amount of capital we commit to these strategic
relationships.
Adverse
market or economic conditions as well as a slowdown of activity in the sectors
in which the portfolio companies of our merchant banking funds operate could
have an adverse effect on the earnings of those portfolio companies, and
therefore, our earnings, especially in the future as we seek to increase
our
merchant banking fund management revenues.
Real
Estate Investments’ Value and Income Fluctuate Due to Various
Factors.
The
value of real estate fluctuates depending on conditions in the general economy
and the real estate business. These conditions may also limit our revenues
and
available cash.
The
factors that may affect the value of the our real estate include, among other
things, national, regional and local economic conditions; consequences of
any
armed conflict involving, or terrorist attack against, the United States;
our
ability to secure adequate insurance; local conditions such as an oversupply
of
space or a reduction in demand for real estate in the area; competition from
other available space; whether tenants consider a property attractive; the
financial condition of tenants, including the extent of tenant bankruptcies
or
defaults; whether we are able to pass some or all of any
increased operating costs through to tenants; how well we manage our properties;
fluctuations in interest rates; changes in real estate taxes and other expenses;
changes in market rental rates; the timing and costs associated with property
improvements and rentals; changes in taxation or zoning laws; government
regulation; availability of financing on acceptable terms or at all; potential
liability under environmental or other laws or regulations; and general
competitive factors.
The
rents
we expect to receive and the occupancy levels at our properties may not
materialize as a result of adverse changes in any of these factors. If our
rental revenues fail to materialize, we generally would expect to have less
cash
available to pay our operating costs. In addition, some expenses, including
mortgage payments, real estate taxes and maintenance costs, generally do
not
decline when the related rents decline.
We
anticipate on leasing space to tenants on economically favorable terms and
collecting rent from our tenants, who may not be able to
pay.
Our
financial results depend on leasing space in our properties to tenants on
economically favorable terms. If a tenant does not pay its rent, we might
not be
able to enforce our rights as landlord without delays and might incur
substantial legal costs to enforce those rights.
Bankruptcy
or insolvency of tenants may decrease our expected revenues and available
cash.
A
number
of companies have declared bankruptcy in recent years. If a major tenant
were to
declare bankruptcy or become insolvent, the rental property where it leases
space may have lower revenues and operational difficulties. As a result,
the
bankruptcy or insolvency of a major tenant could result in a lower level
of
funds from operations available to pay our operating cost.
Real
estate is a competitive business.
For
a
discussion of risks related to competition in the real estate business, see
“The
Real Estate Industry - Competition.”
Our
Real Estate Investments Are Concentrated in Baltimore, Maryland and Heber
Springs, Arkansas. Circumstances Affecting These Areas Generally Could
Adversely Affect Our Business.
A
significant proportion of our real estate investments are in Baltimore, Maryland
and Heber Springs, Arkansas and are affected by the economic cycles and risks
inherent to those regions. Like other real estate markets, the real estate
markets in these areas have experienced economic downturns in the past, and
we
cannot predict how the current economic conditions will impact these markets
in
both the short and long term. Further declines in the economy or a decline
in the real estate markets in these areas could hurt our financial performance
and the value of our properties. The factors affecting economic conditions
in these regions include: business layoffs or downsizing; industry slowdowns;
relocations of businesses; changing demographics; and any oversupply of or
reduced demand for real estate.
As
a BDC, our ability to invest in private companies may be limited in certain
circumstances.
If
we
maintain our status as a BDC, we must not acquire any assets other than
“qualifying assets” unless, at the time of and after giving effect to such
acquisition, at least 70% of our total assets are qualifying assets. If we
acquire debt or equity securities from an issuer that has outstanding marginable
securities at the time we make an investment, these acquired assets cannot
be
treated as qualifying assets. This result is dictated by the definition of
“eligible portfolio company” under the 1940 Act, which in part looks to whether
a company has outstanding marginable securities. For a more detailed discussion
of the definition of an “eligible portfolio company” and the marginable
securities requirement, see the section entitled “Regulation
as a Business Development Company.”
Amendments
promulgated in 1998 by the Federal Reserve expanded the definition of a
marginable security under the Federal Reserve’s margin rules to include any
non-equity security. Thus, any debt securities issued by any entity are
marginable securities under the Federal Reserve’s current margin rules. As a
result, the staff of the SEC has raised the question to the BDC industry
as to
whether a private company that has outstanding debt securities would qualify
as
an “eligible portfolio company” under the 1940 Act.
The
SEC
has recently issued proposed rules to correct the unintended consequence
of the
Federal Reserve’s 1998 margin rule amendments of apparently limiting the
investment opportunities of business development companies. In general, the
SEC’s proposed rules would define an eligible portfolio company as any company
that does not have securities listed on a national securities exchange or
association. We are currently in the process of reviewing the SEC’s proposed
rules and assessing their impact, to the extent such proposed rules are
subsequently approved by the SEC, on our investment activities. We do not
believe that these proposed rules will have a material adverse effect on
our
operations.
Until
the
SEC or its staff has taken a final public position with respect to the issue
discussed above, we will continue to monitor this issue closely, and may
be
required to adjust our investment focus to comply with and/or take advantage
of
any future administrative position, judicial decision or legislative
action.
The
lack of liquidity in our investments may adversely affect our
business.
A
majority of the Company's investments consist of securities acquired directly
from the issuer in private transactions. They may be subject to restrictions
on
resale or otherwise be illiquid. Franklin anticipates that there may not
be an
established trading market for such securities. Additionally, many of the
securities that the Company may invest in will not be eligible for sale to
the
public without registration under the Securities Act of 1933, which could
prevent or delay any sale by the Company of such investments or reduce the
amount of proceeds that might otherwise be realized therefrom. Restricted
securities generally sell at a price lower than similar securities not subject
to restrictions on resale. Further, even if a portfolio company registers
its
securities and becomes a reporting corporation under the Securities Exchange
Act
of 1934, the Company may be considered an insider by virtue of its board
representation and would be restricted in sales of such corporation's
securities.
We
typically exit our investments when the portfolio company has a liquidity
event
such as a sale, recapitalization, or initial public offering of the company.
The
illiquidity of our investments may adversely affect our ability to dispose
of
debt and equity securities at times when it may be otherwise advantageous
for us
to liquidate such investments. In addition, if we were forced to immediately
liquidate some or all of the investments in the portfolio, the proceeds of
such
liquidation would be significantly less than the value at which we acquired
those investments.
We
may not realize gains from our equity investments.
We
intend
to invest, from time to time, in the equity securities of other companies.
However, these equity interests may not appreciate in value and, in fact,
may
decline in value. Accordingly, we may not be able to realize gains from our
equity interests, and any gains that we do realize on the disposition of
any
equity interests may not be sufficient to offset any other losses we
experience.
Because
most of our investments are not in publicly traded securities, there is
uncertainty regarding the value of our investments, which could adversely
affect
the determination of our net asset value.
Our
portfolio investments are not generally in publicly traded securities. As
a
result, the fair value of these securities is not readily determinable. We
value
these securities at fair value as determined in good faith by our Board of
Directors based upon the recommendation of its Valuation Committee. The types
of
factors that the Valuation Committee takes into account in providing its
fair
value recommendation to the Board of Directors includes, as relevant, the
nature
and value of any collateral, the portfolio company’s ability to make payments
and its earnings, the markets in which the portfolio company does business,
comparison to valuations of publicly traded companies, comparisons to recent
sales of comparable companies, the discounted value of the cash flows of
the
portfolio company and other relevant factors. Because such valuations are
inherently uncertain and may be based on estimates, our determinations of
fair
value may differ materially from the values that would be assessed if a ready
market for these securities existed.
Our
investments are recorded at fair value as determined by the board of directors
in the absence of readily ascertainable public market
values.
Pursuant
to the requirements of the 1940 Act, the Company’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. There is no
single standard for determining fair value in good faith. As a result,
determining fair value requires that judgment be applied to the specific
facts
and circumstances of each portfolio investment while employing a consistently
applied valuation process for the types of investments we make. If we were
required to sell any of such investments, there is no assurance that the
fair
value, as determined by the Board of Directors, would be obtained. If we
were
unable to obtain fair value for such investments, there would be an adverse
effect on our net asset value and on the price of our common stock. 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 Company’s
portfolio. Any changes in estimated value are recorded in the Company’s
statement of operations as “Net unrealized gains (losses).”
Our
financial results could be negatively affected if a significant investment
fails
to perform as expected.
We
intend
to purchase controlling equity stakes in companies and our total debt and
equity
investment in controlled companies may be significant individually or in
the
aggregate. Investments in controlled portfolio companies are generally larger
and in fewer companies than our investments in companies that we do not control.
As a result, if a significant investment in one or more controlled companies
fails to perform as expected, our financial results could be more negatively
affected and the magnitude of the loss could be more significant than if
we had
made smaller investments in more companies.
In
the
case of SurgiCount, acquired subsequent to December 31, 2004, we own patents
issued in the United States and Europe related to patient safety, among them,
the Safety-Sponge ™ System. These patents are a key element to the success of
SurgiCount and our Company as a whole could be materially impacted if the
patent
is compromised. Our ability to enforce our patents is subject to general
litigation risks as well as uncertainty as to the enforceability in various
countries We believe that the duration of the applicable patents are adequate
relative to the expected life of the product. Because of the fast pace of
innovation and product development our product may be obsolete before the
patents related to it expire.
We
borrow money, which magnifies the potential for gain or loss on amounts invested
and may increase the risk of investing in us.
Borrowings,
also known as leverage, magnify the potential for gain or loss on amounts
invested and, therefore, increase the risks associated with investing in
our
securities. We borrow from and issue senior debt securities to banks, insurance
companies, and other lenders. Lenders of these senior securities have fixed
dollar claims on our consolidated assets that are superior to the claims
of our
common shareholders. If the value of our consolidated assets increases, then
leveraging would cause the net asset value attributable to our common stock
to
increase more sharply than it would have had we not leveraged. Conversely,
if
the value of our consolidated assets decreases, leveraging would cause net
asset
value to decline more sharply than it otherwise would have had we not leveraged.
Similarly, any increase in our consolidated income in excess of consolidated
interest payable on the borrowed funds would cause our net income to increase
more than it would without the leverage, while any decrease in our consolidated
income would cause net income to decline more sharply than it would have
had we
not borrowed. Leverage is generally considered a speculative investment
technique.
Changes
in interest rates may affect our cost of capital and net investment
income.
Because
we may borrow money to make investments, our net investment income is dependent
upon the difference between the rate at which we borrow funds and the rate
at
which we invest these funds. As a result, there can be no assurance that
a
significant change in market interest rates will not have a material adverse
effect on our net investment income. In periods of rising interest rates,
our
cost of funds would increase, which would reduce our net investment income.
We
may use a combination of long-term and short-term borrowings and equity capital
to finance our investing activities. We utilize our revolving line of credit
as
a means to bridge to long-term financing. Our long-term fixed-rate investments
are financed primarily with long-term fixed-rate debt and equity. We may
use
interest rate risk management techniques in an effort to limit our exposure
to
interest rate fluctuations. Such techniques may include various interest
rate
hedging activities to the extent permitted by the 1940 Act. Accordingly,
no
assurances can be given that such changes will not have a material adverse
effect on the return on, or the recovery of, Franklin’s investments.
Risks
Related to an Investment in our Common Stock
Our
common stock price may be volatile.
The
trading price of our common stock may fluctuate substantially. The price
of the
common stock that will prevail in the market after this offering may be higher
or lower than the price you pay, depending on many factors, some of which
are
beyond our control and may not be directly related to our operating performance.
These factors include, but are not limited to, the following:
· |
price
and volume fluctuations in the overall stock market from time to
time;
|
· |
significant
volatility in the market price and trading volume of securities
of
regulated investment companies, business development companies
or other
financial services companies;
|
· |
changes
in regulatory policies or tax guidelines with respect to regulated
investment companies or business development
companies;
|
· |
actual
or anticipated changes in our earnings or fluctuations in our operating
results or changes in the expectations of securities
analysts;
|
· |
general
economic conditions and trends;
|
· |
loss
of a major funding source; or
|
· |
departures
of key personnel.
|
In
the
past, following periods of volatility in the market price of a company’s
securities, securities class action litigation has often been brought against
that company. Due to the potential volatility of our stock price, we may
therefore be the target of securities litigation in the future. Securities
litigation could result in substantial costs and divert management’s attention
and resources from our business.
Our
shares may trade at discounts from net asset value or at premiums that are
unsustainable over the long term.
Shares
of
business development companies may trade at a market price that is less than
the
net asset value that is attributable to those shares. The possibility that
our
shares of common stock will trade at a discount from net asset value or at
premiums that are unsustainable over the long term are separate and distinct
from the risk that our net asset value will decrease. During the second and
third quarters of 2004, our shares of common stock traded at a discount to
the
net asset value attributable to those shares. It is not possible to predict
whether our shares will trade at, above, or below net asset value.
There
is a risk that you may not receive dividends or that our dividends may not
grow
over time.
We
cannot
assure you that we will achieve investment results that will allow any specified
level of cash distributions or year-to-year increases in cash distributions.
Historically, the only dividends the Company has paid have been those required
by our Preferred Stock, currently 7% a year. We currently have no intention
of
paying dividends on our Common Stock.
If
the Company’s stockholders approve a three-for-one stock split there is an
increased risk that the Company’s shares of Common Stock may sell at a low price
per share and increase the risk of a delisting on the
AMEX.
The
Company is requesting stockholder approval of the Board’s proposal to amend the
Company’s Amended and Restated Certificate of Incorporation (the “Current
Certificate”)
to
reduce the par value of each share of Common Stock, from $1.00 per share
to
$0.33 per share and effect a three-for-one stock split of the Common Stock
of
the Company (the “Stock
Split”).
As
of
February 28, 2005,
there
were 1,758,776 shares of Common Stock issued and outstanding and 10,950 shares
of Preferred Stock issued and outstanding. Additionally, as of December 31,
2004, there were 1,875 options to purchase Common Stock outstanding and 18,750
options available for future issuance under the 1997 Non-Statutory Stock
Option
Plan. If this Proposal is approved by the stockholders, there would be an
additional 3,517,552 shares of Common Stock issued to existing stockholders
of
record as of the effective date of the Stock Split. This means that on a
post-split basis, the Company would have approximately 5,276,328 shares of
Common Stock outstanding. In addition, each share of Preferred Stock which
is
currently convertible into 7.5 shares of Common Stock would become convertible
into 22.5 shares of Common Stock after the Stock Split.
The
Company’s Common Stock is listed for trading on the AMEX under the symbol “FKL.”
The new shares of Common Stock to be issued as a result of the Stock Split
would
be included in our listing on the AMEX. The AMEX may
delist a security when it sells for a substantial period of time at a low
price
per share (“the low selling price”). As a result of the proposed significant
increase in the outstanding shares of our Common Stock it is highly probable
that the per share price would experience an immediate decrease. Further,
in the
event any other factors outside the control of the Company were to put downward
pressure on the Company’s stock price the actual price could fall and remain
within the low selling price.
If
the Company fails to comply with the requirements of the forum in which their
securities are quoted or the trading market on which their securities are
listed, the liquidity and prices of your investment in the Company would
be
materially adversely affected.
On
June
24, 2004, Franklin received a letter from AMEX inquiring as to Franklin's
ability to remain listed on AMEX. Specifically, AMEX indicated that the Common
Stock was subject to delisting under sections 1003(a)(i) and 1003(a)(ii)
of
AMEX's Company Guide because Franklin's stockholders' equity was below the
level
required by AMEX's continued listing standards. Accordingly, AMEX requested
information relating to Franklin's plan to retain its listing. On September
13,
2004, Franklin presented the final components of its proposed plan to AMEX
to
comply with AMEX's continued listing standards and on September 15, 2004,
AMEX
notified Franklin that it had accepted Franklin's plan and had granted Franklin
an extension until December 26, 2005 to regain compliance, during which time
AMEX will continue Franklin's listing subject to certain conditions. Franklin
has cooperated, and will continue to cooperate, with AMEX regarding these
issues
and intends to make every effort to remain listed on AMEX irrespective of
the
outcome of the Special Meeting. AMEX has notified Franklin, however, that
failure to make progress consistent with the plan of compliance or to regain
compliance with the continued listing standards by December 26, 2005 could
result in the Common Stock being delisted from AMEX, and no assurances can
be
made that Franklin will be able to maintain its listing. A delisting from
AMEX
could have a material adverse effect on the price and liquidity of the Common
Stock.
At
September 30, 2004, Franklin securities were quoted on the AMEX under the
ticker
“FKL”. In order for our securities to be eligible for continued quotation on the
AMEX, the Company must remain in compliance with certain listing standards.
Among other things, these standards require that the Company remain current
in
their filings with the SEC and comply with certain of the provisions of the
Sarbanes-Oxley Act of 2002. If the Company is no longer in compliance with
these
requirements, there would be no forum or market for the quotation or listing
of
the securities of our portfolio companies. Without such a forum or market,
the
liquidity and prices of your investments in the Company’s securities would be
materially adversely affected. We cannot give any assurance that the Company
will remain in compliance with the requirements to be quoted on the
AMEX.
Technologies
or products acquired or developed by us, or the companies in which we invest,
may become obsolete.
Neither
we, nor the companies in which we invest, have any control over the pace
of
technology or product development. There is a significant risk that we, or
the
companies in which we invest, could develop or acquire the rights to a
technology that is currently or is subsequently made obsolete by other
technological developments. We cannot assure you that we, or any of the
companies in which we may invest, will successfully acquire, develop, transfer
or sell any new technology or products.
Forward-Looking
Statements
This
annual report contains forward-looking statements that involve substantial
risks
and uncertainties. These forward-looking statements are not historical facts,
but rather are based on current expectations, estimates and projections about
our industry, our beliefs, and our assumptions. Words such as ‘‘anticipates,’’
‘‘expects,’’ ‘‘intends,’’ ‘‘plans,’’ ‘‘believes,’’ ‘‘seeks,’’ and ‘‘estimates’’
and variations of these words and similar expressions are intended to identify
forward-looking statements. These statements are not guarantees of future
performance and are subject to risks, uncertainties, and other factors, some
of
which are beyond our control and difficult to predict and could cause actual
results to differ materially from those expressed or forecasted in the
forward-looking statements. Forward looking statements include, among other,
the
following statements related to:
· |
our
strategy for growing our operations in the target
industries;
|
· |
our
ability to operate successfully in highly regulated
environments;
|
· |
an
economic downturn could disproportionately impact the target industries
in
which we concentrate causing us to suffer losses in our portfolio
and
experience diminished demand for capital in these industry
sectors;
|
· |
a
contraction of available credit and/or an inability to access the
equity
markets could impair our investment
activities;
|
· |
interest
rate volatility could adversely affect our results;
and
|
· |
the
risks, uncertainties and other factors we identify in ‘‘Risk Factors’’ and
elsewhere in this Form 10-K and in our filings with the
SEC.
|
Although
we believe that the assumptions on which these forward-looking statements
are
based are reasonable, any of those assumptions could prove to be inaccurate,
and
as a result, the forward-looking statements based on those assumptions also
could be inaccurate. Important assumptions include our ability to originate
new
loans and investments, certain margins and levels of profitability and the
availability of additional capital. In light of these and other uncertainties,
the inclusion of a projection or forward-looking statement in this annual
report
should not be regarded as a representation by us that our plans and objectives
will be achieved. These risks and uncertainties include those described or
identified in ‘‘Risk Factors’’ and elsewhere in this annual report. You should
not place undue reliance on these forward-looking statements, which apply
only
as of the date of this annual report.
We
do not
own any real estate or other physical properties materially important to
our
operation. Our headquarters are located at 100 Wilshire Boulevard, Suite
1500,
Santa Monica, California 90401, where we occupy our office space with Ault
Glazer at no cost to the Company. Our office space is currently approximately
2,000 square feet. The Company anticipates leasing office space in
2005.
In
addition, we also have several real estate investments in our wholly-owned
subsidiary Franklin Capital Properties LLC. These investments range in fair
value, as carried in our financial statements, from $75,000 to $300,000 and
are
comprised of eight
vacant single family buildings and two multi-unit buildings in Baltimore,
Maryland, approximately 8.5 acres of undeveloped land in Heber Springs,
Arkansas, and various loans secured by real estate in Heber Springs, Arkansas.
Based upon the number of real estate investments, and related fair values,
management does not currently believe that the Company’s real estate holdings
represent a material risk to the Company.
On
October 15, 2001, Jeffrey A. Leve and Jeffrey Leve Family Partnership, L.P.
filed a lawsuit against Franklin, Sunshine Wireless, LLC, and four other
defendants affiliated with Winstar Communications, Inc. On February 25, 2003,
the case against Franklin and Sunshine was dismissed. However, on October
19,
2004, the plaintiffs exercised their right to appeal. The initial lawsuit
alleged 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
alleged that Franklin and Sunshine joined the alleged conspiracy. The plaintiffs
seek recovery of damages in excess of $10,000,000, costs and attorneys' fees.
An
unfavorable outcome in an appeal, together with an unfavorable outcome in
the
lawsuit may have a material adverse effect on Franklin's business, financial
condition and results of operations. The Company believes the lawsuit is
without
merit and intends to vigorously defend itself.
The
following proposals were submitted to shareholders at our Special Meeting
of
Stockholders held October 28, 2004. The following proposals were approved
by a majority of the shares present at the meeting.
1.
To
elect four directors to hold office until the next annual meeting of
stockholders or until their successors have been duly elected and qualified
(two
of whom are to be elected by the holders of Franklin's Common Stock and
Franklin's Preferred Stock, par value $1.00 per share (the "Preferred
Stock"),
voting
together as a single class, and two of whom are to be elected by the holders
of
Preferred Stock, voting as a separate class). This proposal was approved.
Results of the voting were as follows:
No.
of Shares
|
|
|
|
|
|
|
|
Nominees
|
|
Shares
For
|
|
Shares
Withheld
|
|
Broker
non-votes
|
Common
and Preferred Stock Nominees
|
|
|
|
|
|
|
Lytle Brown III
|
|
|
976,510
|
|
|
3,693
|
|
|
N/A
|
Alice Campbell
|
|
|
976,510
|
|
|
3,693
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
Preferred
Stock Nominees
|
|
|
|
|
|
|
|
|
|
Louis
Glazer
|
|
|
9,750
|
|
|
None
|
|
|
N/A
|
Herbert
Langsam
|
|
|
9,750
|
|
|
None
|
|
|
N/A
|
2.
To
approve the amendment and restatement of Franklin's certificate of incorporation
to increase the authorized number of shares of Common Stock from 5,000,000
shares to 50,000,000 shares. This proposal was approved. Results of the voting
were as follows:
No.
of Shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
For
|
|
Against
|
|
Abstain
|
|
Broker
non-votes
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
|
914,280
|
|
|
55,006
|
|
|
1,167
|
|
|
0
|
|
Preferred
Stock
|
|
|
9,750
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Common
Stock and Preferred Stock
|
|
|
924,030
|
|
|
55,006
|
|
|
1,167
|
|
|
0
|
|
3.
To
approve the amendment and restatement of Franklin's certificate of incorporation
to increase the authorized number of shares of Preferred Stock from 5,000,000
shares to 10,000,000 shares. This proposal was approved. Results of the voting
were as follows:
No.
of Shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
For
|
|
Against
|
|
Abstain
|
|
Broker
non-votes
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
|
713,793
|
|
|
53,521
|
|
|
2,667
|
|
|
200,472
|
|
Preferred
Stock
|
|
|
9,750
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Common
Stock and Preferred Stock
|
|
|
723,543
|
|
|
53,521
|
|
|
2,267
|
|
|
200,472
|
|
4.
To
approve the amendment and restatement of Franklin's certificate of incorporation
to provide for the exculpation of director liability to the fullest extent
permitted by law. This proposal was approved. Results of the voting were
as
follows:
No.
of Shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
For
|
|
Against
|
|
Abstain
|
|
Broker
non-votes
|
|
Common
Stock and Preferred Stock
|
|
|
924,860
|
|
|
55,119
|
|
|
224
|
|
|
0
|
|
5.
To
approve the amendment and restatement of Franklin's certificate of incorporation
to provide for the classification of Franklin's board of directors (the "Board")
into three classes of directors. This proposal was approved. Results of the
voting were as follows:
No.
of Shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
For
|
|
Against
|
|
Abstain
|
|
Broker
non-votes
|
|
Common
Stock and Preferred Stock
|
|
|
723,552
|
|
|
8,409
|
|
|
47,800
|
|
|
200,472
|
|
6.
To
approve the sale by Franklin to Quince Associates, LP, a Maryland limited
partnership ("Quince"), of all of the shares of common stock, and warrants
to
purchase shares of common stock, of Excelsior Radio Networks, Inc. ("Excelsior")
beneficially owned by Franklin, upon the terms and subject to the conditions
described in this proxy statement. This proposal was approved. Results of
the
voting were as follows:
No.
of Shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
For
|
|
Against
|
|
Abstain
|
|
Broker
non-votes
|
|
Common
Stock and Preferred Stock
|
|
|
773,540
|
|
|
5,779
|
|
|
412
|
|
|
200,472
|
|
7.
To
approve the issuance of an aggregate of up to 5,000,000 shares of Common
Stock,
and warrants to purchase an aggregate of up to 1,500,000 additional shares
of
Common Stock upon terms that are approved by a majority of the Board consistent
with its fiduciary duties and consistent with prevailing market terms relating
to price per share, warrant coverage and registration rights for such issuances
at the time of such issuances, as described in this proxy statement. This
proposal was approved. Results of the voting were as follows:
No.
of Shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
For
|
|
Against
|
|
Abstain
|
|
Broker
non-votes
|
|
Common
Stock and Preferred Stock
|
|
|
723,058
|
|
|
55,586
|
|
|
1,087
|
|
|
200,472
|
|
No.
of Shares (after subtraction)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
For
|
|
Against
|
|
Abstain
|
|
Broker
non-votes
|
|
Common
Stock and Preferred Stock
|
|
|
158,474
|
|
|
55,586
|
|
|
1,087
|
|
|
200,472
|
|
8.
To
approve the sale of Common Stock and warrants to purchase Common Stock to
certain "interested stockholders" (as such term is defined in Section 203
of the
Delaware General Corporation Law (the "DGCL")) on terms that are approved
by a
majority of the Board consistent with its fiduciary duties and consistent
with
prevailing market terms relating to price per share, warrant coverage and
registration rights for such issuances at the time of such issuances. This
proposal was not approved. Results of the voting were as follows:
No.
of Shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
For
|
|
Against
|
|
Abstain
|
|
Broker
non-votes
|
|
Common
Stock and Preferred Stock
|
|
|
771,633
|
|
|
7,386
|
|
|
712
|
|
|
200,472
|
|
No.
of Shares (after subtraction)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
For
|
|
Against
|
|
Abstain
|
|
Broker
non-votes
|
|
Common
Stock and Preferred Stock
|
|
|
259,199
|
|
|
7,386
|
|
|
712
|
|
|
200,472
|
|
No
other
matters were submitted to a vote of security holders during the fourth quarter
of the fiscal year ended December 31, 2004. However, on March 2, 2005, Company
filed definitive proxy materials with the Securities and Exchange Commission
in
connection with its 2004 Annual Meeting of the Stockholders (the “Annual
Meeting”).
The
Annual Meeting is being held on March 30, 2005 in order to vote on the following
proposals: (i) the election of Lytle Brown III as a Class I Director to hold
office for a three-year term expiring in 2007, or until his successor has
been
duly elected and qualified or until his earlier death, resignation or removal,
in accordance with the Company’s bylaws, as amended; (ii) the ratification of
the appointment by the Board of Directors of the Company (the “Board”)
of
Rothstein, Kass & Company, P.C. (“Rothstein
Kass”)
to serve
as independent auditors for the fiscal year ended December 31, 2004; (iii)
the authorization and approval of the stock option component of the stock
option
and restricted stock plan for the Company (the “New
Plan”);
(iv)
the authorization and approval of the restricted stock component of the New
Plan; (v) the authorization and approval of the payment of cash and equity
compensation to Milton “Todd” Ault III (“Ault”),
Lynne
Silverstein (“Silverstein”),
and
Louis Glazer and Melanie Glazer (the “Glazers”),
each
of whom may be deemed to be an “interested stockholder” (as defined in
Section 203 of the Delaware General Corporate Law (“DGCL”))
of the
Company; (vi) the authorization and approval of the sale of common stock
par
value $1.00 of the Company (“Common
Stock”),
warrants to purchase Common Stock (“Warrants”)
and
other securities representing indebtedness convertible into Common Stock
to
Ault, Silverstein and the Glazers, each of whom may be deemed to be an
“interested stockholder” (as defined in Section 203 of the DGCL), on terms
that are approved by the Board consistent with its fiduciary duties and market
terms existing at the time of such offering, including those relating to
price
per share, interest rate, warrant coverage and registration rights for such
issuances and the requirements of applicable law, including the 1940 Act,
as
described in this proxy statement; (vii) the authorization and approval of
the
certificate of amendment to the Amended and Restated Certificate of
Incorporation of the Company (the “Certificate
of Amendment”)
to
reduce the par value of the Common Stock from $1.00 per share to
$0.33 per share and effect a three-for-one split of the Common Stock (the
“Stock
Split”);
(viii)
the authorization and approval of the prospective issuance of bonds, notes
or
other evidences of indebtedness that are convertible into Common Stock
(“Convertible
Bonds,” “Convertible Notes”
or
“Other
Convertible Indebtedness”)
in
accordance with the requirements of the 1940 Act;
(ix)
the authorization and approval of the Board to withdraw the Company’s election
to be treated as a BDC pursuant to Section 54(c) under the 1940 Act;
(x)
the authorization and approval of the Certificate of Amendment to change
the
name of the Company to “Patient Safety Technologies, Inc.”; and (xi) the
authorization and approval of the Certificate of Amendment to decrease the
authorized number of shares of Common Stock from 50,000,000 shares to
25,000,000 shares and decrease the authorized number of shares of Preferred
Stock from 10,000,000 shares to 1,000,000 shares.
PART
II
Item
5. Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities
Stock
Transfer Agent
Mellon
Investor Services, 85 Challenger Road, Overpack Center, Ridgefield Park,
NJ
07660 (Telephone (800) 851-9677) serves as transfer agent for the Company’s
common stock. Certificates to be transferred should be mailed directly to
the
transfer agent, preferably by registered mail.
Market
Prices
The
Company’s common stock is traded on The American Stock Exchange under the symbol
“FKL.” The following table sets forth the range of the high and low selling
price of the Company’s shares during each quarter of the last two years, as
reported by the American Stock Exchange.
2004
Quarter Ending
|
|
Low
|
|
High
|
|
|
|
|
|
|
|
December
31
|
|
$
|
9.20
|
|
$
|
12.75
|
|
September
30
|
|
$
|
3.20
|
|
$
|
14.75
|
|
June
30
|
|
$
|
0.90
|
|
$
|
8.90
|
|
March
31
|
|
$
|
1.05
|
|
$
|
1.52
|
|
|
|
|
|
|
|
|
|
2003
Quarter Ending
|
|
|
Low
|
|
|
High
|
|
|
|
|
|
|
|
|
|
December
31
|
|
$
|
0.50
|
|
$
|
1.55
|
|
September
30
|
|
$
|
0.75
|
|
$
|
1.05
|
|
June
30
|
|
$
|
0.77
|
|
$
|
1.26
|
|
March
31
|
|
$
|
1.10
|
|
$
|
1.62
|
|
Dividends
The
Company paid $76,650, and $76,652 and $115,152 in dividends to preferred
stockholders during 2004, 2003 and 2002, respectively, and has not paid any
dividends to common stockholders during the past three years. Dividends to
our
preferred stockholders are cumulative and paid at the rate of 7% a year.
We
currently have no intention of paying dividends on our common
stock.
Stockholders
As
of
February 28, 2005, there were 615 registered shareholders of record of the
Company’s common stock. The Company has 50,000,000 shares of common stock
authorized, of which 2,242,689 are issued and 1,758,776 shares are outstanding
at March 7, 2005. The Company has 10,000,000 shares of convertible preferred
stock authorized, of which 16,450 were issued on February 22, 2000 and 10,950
shares are outstanding at March 7, 2005. See Item 7 “Financial
Condition, Liquidity and Capital Resources.”
We
are
seeking shareholder approval at Annual Meeting to, among other items, reduce
the
par value of our Common Stock from $1.00 per share to $0.33 per share
and effect a Stock Split; to decrease the authorized number of shares of
Common
Stock from 50,000,000 shares to 25,000,000 shares and decrease the
authorized number of shares of Preferred Stock from 10,000,000 shares to
1,000,000 shares.
The
following selected financial data for the fiscal year ended December 31,
2004
and for the periods ended December 31, 2003, December 31, 2002, December
31,
2001 and December 31, 2000 are derived from our financial statements which
have
been audited by Ernst & Young, LLP (December 31, 2000 through December 31,
2003) and Rothstein Kass (December 31, 2004), our independent registered
public
accounting firms. The data should be read in conjunction with our
financial statements and related notes thereto and “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” included elsewhere in
this report.
BALANCE
SHEET DATA
|
|
|
|
|
|
|
|
|
|
|
|
Financial
Position as of December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
2003
|
|
2002
|
|
2001
|
|
2000
|
|
Total
assets
|
|
$
|
6,934,243
|
|
$
|
3,258,032
|
|
$
|
4,632,338
|
|
$
|
4,098,866
|
|
$
|
5,766,712
|
|
Liabilities
|
|
$
|
3,367,974
|
|
$
|
1,233,894
|
|
$
|
1,364,798
|
|
$
|
1,177,121
|
|
$
|
187,632
|
|
Net
assets
|
|
$
|
3,566,269
|
|
$
|
2,024,138
|
|
$
|
3,267,540
|
|
$
|
2,921,745
|
|
$
|
5,579,080
|
|
Net
asset value per share attributable to common stockholders
|
|
$
|
1.59
|
|
$
|
0.91
|
|
$
|
2.07
|
|
$
|
1.19
|
|
$
|
3.58
|
|
Net
asset value per share, as if converted basis
|
|
$
|
2.18
|
|
$
|
1.84
|
|
$
|
2.89
|
|
$
|
2.44
|
|
$
|
4.57
|
|
Shares
outstanding
|
|
|
1,556,901
|
|
|
1,020,100
|
|
|
1,049,600
|
|
|
1,074,700
|
|
|
1,098,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Data for the year ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
2001
|
|
|
2000*
|
|
Investment
income
|
|
$
|
11,056
|
|
$
|
183,159
|
|
$
|
455,081
|
|
$
|
192,697
|
|
$
|
115,015
|
|
Expenses
|
|
$
|
2,951,173
|
|
$
|
1,279,526
|
|
$
|
1,985,450
|
|
$
|
1,579,382
|
|
$
|
2,372,797
|
|
Net
investment loss from operations
|
|
$
|
(2,940,117
|
)
|
$
|
(1,096,367
|
)
|
$
|
(1,530,369
|
)
|
$
|
(1,386,685
|
)
|
$
|
(2,257,782
|
)
|
Net
realized gain on portfolio of investments, net of tax
|
|
$
|
1,591,156
|
|
$
|
430,883
|
|
$
|
237,327
|
|
$
|
522,131
|
|
$
|
1,195,875
|
|
Net
(decrease) increase in unrealized appreciation of
investments
|
|
$
|
(1,054,702
|
)
|
$
|
(475,605
|
)
|
$
|
1,663,304
|
|
$
|
(1,553,756
|
)
|
$
|
(3,365,513
|
)
|
Net
(decrease) increase in net assets attributable to common
stockholders
|
|
$
|
(2,480,313
|
)
|
$
|
(1,217,741
|
)
|
$
|
255,110
|
|
$
|
(2,533,460
|
)
|
$
|
(4,526,053
|
)
|
Basic
and diluted net (decrease) increase in net assets from operations
per
weighted average number of shares outstanding
|
|
$
|
(2.25
|
)
|
$
|
(1.17
|
)
|
$
|
0.24
|
|
$
|
(2.34
|
)
|
$
|
(4.14
|
)
|
|
*
|
Expenses
in the year ended December 31, 2000 include non-cash compensation
of
$349,644 due to the exercise of employee incentive stock
options.
|
The
following analysis of our financial condition and results of operations should
be read in conjunction with our financial statements and the related notes
thereto contained elsewhere in this Form 10-K.
The
following “Overview” section is a brief summary of the significant issues
addressed in Management’s Discussion and Analysis of Financial Condition and
Results of Operations (“MD&A”). Investors should read the relevant sections
of the MD&A for a complete discussion of the issues summarized below. The
entire MD&A should be read in conjunction with Item 6. Selected Financial
Data and Item 8. Financial Statements and Supplementary Data appearing elsewhere
in this Form 10K.
Overview
Franklin
Capital Corporation is a publicly traded, non-diversified internally managed,
closed-end investment company that elected to be treated as a BDC under the
1940
Act. We are currently involved in providing capital and managerial assistance
to
early stage companies primarily in the medical products and health care
solutions industries, and to a lesser extent in the financial services and
real
estate industries. Franklin Capital Properties, LLC, a real estate development
and management company and Franklin Medical Products, LLC, a healthcare
consulting services company, both wholly-owned subsidiaries of Franklin,
were
created to augment our investments in these industries. Effective February
23,
2005, Franklin Medical Products, LLC changed its name to Patient Safety
Consulting Group, LLC.
In
the
first half of 2004, we focused our investment strategy on the achievement
of
capital appreciation through long-term equity investments in start-up and
early
stage companies in the radio and telecommunications industries. However,
beginning in June 2004, we undertook a
Restructuring Plan which ultimately culminated in a subsequent change in
control
in our management and a shift in our business focus away from the radio and
telecommunications industries toward a primary focus on the medical products
and
health care solutions industries, particularly, the patient safety market
as
well as the financial services and real estate industries.
In
addition to shifting a significant amount of our available capital to
investments in the above-referenced industries our primary investment objective
has also shifted and is now focused on maximizing long-term capital growth
through the appreciation of controlling interests in operating companies
and
assets in the target industries. As such, it is management’s belief that the
regulatory regime governing BDC’s is no longer appropriate and will hinder the
Company’s future growth. Accordingly, among other things, we are seeking
shareholder approval at the upcoming annual meeting to withdraw its election
to
be treated as a BDC.
Since
the
Restructuring Plan became effective at the end of 2004, and the reporting
period
for this Form 10-K is as of December 31, 2004, the operating results discussed
in this MD&A primarily relate to the investment focus that existed for the
majority of the year and the liquidation of those investments. During 2004,
the
Company realized approximately $1,448,014 in gains on its sale of Excelsior
common stock. The Company continues to rely on the increase in the value
of its
investments and the ability to sell them in order to fund its ongoing
operations. Operating expenses increased by approximately $1,672,000 due
to the
severance payment to Stephen L. Brown, our former Chairman and Chief Executive
Officer and professional fees related to the negotiation of the LOU with
Ault
Glazer and the filing of proxy statements in connection with the Special
Meeting
of the Stockholders of the Company held on October 22, 2004, and the 2004
Annual
Shareholder Meeting of the Company to be held on March 30, 2005.
Critical
Accounting Policies
Franklin’s
discussion and analysis of its financial condition and results of operations
are
based upon the Company’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 management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses and related disclosure of contingent assets
and liabilities. On an ongoing basis, management evaluates its estimates,
the
most critical are those that are both important to the presentation of our
financial condition and results of operations and require management's most
difficult, complex, or subjective judgments. Our most critical accounting
policy
relates to the valuation of our investments.
As
a
business development company, we invest primarily in illiquid equity securities
of private companies. Our investments are generally subject to restrictions
on
resale and generally have no established trading market. Because of the type
of
investments that we make and the nature of our business, our valuation process
requires an analysis of various factors.
Pursuant
to the requirements of the 1940 Act, our Board of Directors (the "Board")
is
responsible for determining in good faith the fair value of our investments
for
which market quotations are not readily available. At December 31, 2004,
approximately 26% of our total assets represented investments recorded at
fair
value. Value, as defined in Section 2(a)(41) of the 1940 Act, is (i) the
market
price for those securities for which a market quotation is readily available
and
(ii) for all other securities and assets, fair value is as determined in
good
faith by the board of directors. Since there is typically no readily available
market value for the investments in our portfolio, we value substantially
all of
our investments at fair value as determined in good faith by our Board pursuant
to a valuation policy and a consistent valuation process. Because of the
inherent uncertainty of determining the fair value of investments that do
not
have a readily available market value, the fair value of our investments
determined in good faith by our Board may differ significantly from the values
that would have been used had a ready market existed for the investments,
and
the differences could be material. For the years ended December 31, 2004,
2003
and 2002, as reported in our 2004 Statements
of Operations, variances
between the estimates utilized to determine the fair market value of our
investments have been consistent with the amounts actually received upon
liquidation of those 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. Our Board 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 “(Decrease) increase in unrealized appreciation of investments” in the
Statements of Operations.
Accounting
Developments
In
December 2004, Statement of Financial Accounting Standards (“SFAS”)
No.
123(R), “Share-Based
Payment,”
which
addresses the accounting for employee stock options, was issued. SFAS 123(R)
revises the disclosure provisions of SFAS 123, “Accounting
for Stock Based Compensation”
and
supersedes Accounting Principles Board (“APB”)
Opinion
No. 25, “Accounting
for Stock Issued to Employees.”
SFAS
123(R) requires that the cost of all employee stock options, as well as other
equity-based compensation arrangements, be reflected in the financial statements
based on the estimated fair value of the awards. This statement is effective
for
the Company as of the beginning of the first interim or annual reporting
period
that begins after June 15, 2005. We adopted Statement 123(R) as of January
1,
2005, and it did not have a material effect on the Company's accounting for
employee stock options.
Statement
of Operations
The
Company 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 (decrease)
increase in net assets from operations,” which is composed of the following:
§ |
“Net
investment loss from operations,” which is the difference between the
Company’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
(decrease) increase in unrealized appreciation of investments,” which is
the net change in the fair value of the Company’s investment portfolio,
net of any (decrease) increase in deferred income taxes that would
become
payable if the unrealized appreciation were realized through the
sale or
other disposition of the investment
portfolio.
|
“Net
realized gain (loss) on portfolio of investments” and “Net (decrease) increase
in unrealized appreciation of investments” are directly related. When a security
is sold to realize a gain, the net unrealized appreciation decreases and
the net
realized gain increases. When a security is sold to realize a loss, the net
unrealized appreciation increases and the net realized gain
decreases.
Financial
Condition, Liquidity and Capital Resources
The
Company’s total assets and net assets were, respectively, $6,934,243 and
$3,566,269 at December 31, 2004 versus $3,258,032 and $2,024,138 at December
31,
2003. Net asset value per share attributable to common stockholders and on
an as
if converted basis was $1.59 and $2.18 at December 31, 2004, respectively,
versus $0.91 and $1.84, respectively, at December 31, 2003. The change in
total
assets and net assets is primarily attributable to the Company’s operating
losses and financing activities.
At
December 31, 2004 and December 31, 2003, we had $846,404 and $224,225 in
cash
and cash equivalents. Our Board has given our Chairman and Chief Executive
Officer, Milton "Todd" Ault III, the authority to invest our cash balances
in
the public equity and debt markets as appropriate to maximize the short-term
return on such assets. Such
investments are typically short-term and focus on mispriced domestic public
equities and instruments. Short selling is a component of this strategy and
these trades typically range, in any particular month, from 0% to 20% of
the
total trading activity. The
making of such investments entails risks related to the loss of investment
and
price volatility.
During
2004, the Company raised net proceeds of approximately $3.925 million in
a
private placement transaction. Management believes that existing cash resources,
together with anticipated revenues from its operations, should be adequate
to
fund its operations for the twelve months subsequent to December 31, 2004.
However, long-term liquidity is dependent on the Company's ability to attain
future profitable operations. Management may undertake additional debt or
equity
financings to better enable the Company to grow and meet its future operating
and capital requirements.
As
of
December 31, 2004, we had no outstanding commitments other than those reflected
on our balance sheet. Management was, however, in discussions with various
companies regarding acquisition transactions, of which SurgiCount was one.
As in
our acquisition of SurgiCount, we intend to use a combination of common stock
and warrants to purchase common stock as the primary means to acquire companies.
Accordingly, the Company’s need to raise significant amounts of cash can be
minimized, provided the companies we acquire are willing to accept non-cash
forms of consideration.
Cash
and
cash equivalents increased by $622,179 to $846,404 for the year ended December
31, 2004, compared to a decrease of $337,966 for the year ended December
31,
2003.
Operating
activities used $2,684,458 of cash for the year ended December 31, 2004,
compared to using $1,192,248 for the year ended December 31, 2003.
Operating
activities for the year ended December 31, 2004, exclusive of changes in
operating assets and liabilities, used $2,939,254 of cash, as the Company's
net
decrease in net assets from operations of $2,403,663 included non-cash charges
for depreciation and amortization of $863, realized gains of $1,591,156 and
unrealized losses of $1,054,702. For the year ended December 31, 2003, operating
activities, exclusive of changes in operating assets and liabilities, used
$1,079,395 of cash, as the Company's net decrease in net assets from operations
of $1,141,089 included non-cash charges for depreciation and amortization
of
$16,972, realized gains of $430,883 and unrealized losses of $475,605.
Changes
in operating assets and liabilities produced cash of $254,796 for the year
ended
December 31, 2004, principally due an increase in the level of accounts payable
and accrued expenses. For the year ended December 31, 2003, changes in operating
assets and liabilities decreased cash by $112,853.
The
principal factor in the $560,121 of cash used in investing activities in
the
year ended December 31, 2004 was the sale of the remaining interest of the
Company’s holding in Excelsior for $2,356,818, the increase in the amount due to
the Company’s broker of $460,776, offset by net purchases of marketable
investment securities of $2,589,197, and investments in Franklin Properties
of
$738,518. The $460,776 due to the Company’s broker is directly attributable to
purchases of marketable investment securities that were purchased on margin,
which includes approximately $2,000,000 of U.S. Treasuries. During the year
ended December 31, 2004, the Company invested its cash balances in the public
equity and debt markets in an attempt to maximize the short-term return on
such
assets. The amount due to the Company’s broker varied throughout the year
depending upon the aggregate amount of marketable investment securities held
by
the Company. The actual amount of marketable investment securities held was
influenced by several factors, including but not limited to, the Company’s
expectations of potential returns available from what it considered to be
mispriced securities as well as the cash needs of the Company’s operating
activities. During times when the Company was heavily invested in marketable
investment securities the Company’s liquidity position was significantly
reduced. To the extent we have a need for an excess cash balance to meet
our
financial obligations the amount of securities purchased on margin will either
decrease or disappear altogether. However, if the Company is in a position
where
it has excess cash with no immediate need for liquidity, and the Company
believes opportunities exist to maximize the short-term return on such assets
then we may purchase marketable securities on margin. The principal factor
in
the $992,658 of cash provided by investing activities in the year ended December
31, 2003 was the sale of a portion of the Company’s holding in Excelsior for
$1,000,900.
Cash
provided by financing activities for the year ended December 31, 2004, of
$3,866,758 resulted primarily from the net proceeds from issuance of common
stock of $3,924,786 and payment of preferred dividends of $76,650. Cash used
in
financing activities for the year ended December 31, 2003, of $138,376 resulted
primarily from the payment of preferred dividends of $76,652 and the purchase
of
treasury stock of $25,661. Additionally, during the years ended December
31,
2004 and 2003 the note payable was offset by certain payments made allowed
for
in the note payable.
At
December 31, 2004, the Company had 10,950 shares of convertible preferred
stock
outstanding. The stock was issued at a price of $100 per share and has a
7%
quarterly dividend. The stock is convertible into Franklin common stock at
a
conversion price of $13.33 per common share.
On
November 3, 2004, the Company entered into a Subscription Agreement and sold
an
aggregate of 405,625 shares of its Common Stock and warrants to purchase
an
aggregate of up to 202,810 shares of its Common Stock in a private placement
transaction to certain accredited investors. Pursuant to the terms of the
Subscription Agreement, the Company held additional closings of the private
placement on November 15, 2004, December 2, 2004, and on December 27, 2004,
and
sold an aggregate of 100,275 additional shares of its Common Stock and warrants
to purchase an aggregate of up to 50,137 shares of its Common Stock. The
Company
received aggregate net proceeds from all the closings of $3,924,786. The
Company
is required to file a registration statement with the SEC on or before May
2,
2005, which is 180 days after closing of the first sale transaction, registering
the resale of the shares of our Common Stock (including the shares of common
stock issuable upon exercise of the warrants) sold in the private placement
transactions on a continuous or delayed basis under the Securities Act of
1933.
We are required to use our reasonable best efforts to cause the registration
statement to become effective within 90 days after the date we file such
registration statement with the SEC. If the registration statement has not
been
filed on or prior to the 180th day after the closing of the sale transaction,
we
will pay liquidated damages to the purchasers of the 505,900 shares of our
Common Stock and the warrants to purchase 252,950 shares of our Common Stock
equal to 1.0% per month of the aggregate gross proceeds of $4,047,200. We
intend
to use the net proceeds from the private placement transaction primarily
for
general corporate purposes and in buying controlling equity stakes in companies
and/or assets in the medical products, health care solutions, financial services
and real estate industries.
The
Company’s financial condition is dependent on the success of its investments. A
summary of the Company’s investment portfolio is as follows:
|
|
December
31,
|
|
December
31,
|
|
Investments,
at cost
|
|
$
|
4,782,808
|
|
$
|
1,949,703
|
|
Unrealized
(depreciation) appreciation
|
|
|
(49,236
|
)
|
|
1,005,466
|
|
Investments,
at fair value
|
|
$
|
4,733,572
|
|
$
|
2,955,169
|
|
Investments
The
Company’s financial condition is dependent on the success of its investments.
The Company has invested a substantial portion of its assets in thinly
capitalized companies including one development stage company that may lack
management depth.
Real
Estate Investments
At
December 31, 2004, the Company had several real estate investments, valued
at
$738,518, which represents 10.7% of the Company’s total assets and 20.7% of its
net assets. The Company holds its real estate an investment in Franklin Capital
Properties, LLC (“Franklin Properties”), a Delaware limited liability company
and a wholly owned subsidiary. Franklin Properties’ primary focus is on the
acquisition and management of income producing real estate holdings. Franklin
Properties real estate holdings consist of eight vacant single family buildings
and two multi-unit buildings in Baltimore, Maryland, approximately 8.5 acres
of
undeveloped land in Heber Springs, Arkansas, and various loans secured by
real
estate in Heber Springs, Arkansas Franklin Properties is evaluating alternative
uses for its real estate holdings, which range from development and capital
investments as a means of generating recurring revenue to the liquidation
of
specific properties. As of December 31, 2004, the Company had not generated
revenue from rental activities on any of its real estate
investments.
Alacra
Corporation
At
December 31, 2004, the Company had an investment in Alacra Corporation
(“Alacra”), valued at $1,000,000, which represents 14.4% of the Company’s total
assets and 28.0% of its net assets. Alacra, based in New York, is a leading
global provider of business and financial information. Alacra provides a
diverse
portfolio of fast, sophisticated online services that allow users to quickly
find, analyze, package and present mission-critical business information.
Alacra’s customers include more than 750 leading financial institutions,
management consulting, law and accounting firms and other corporations
throughout the world.
Alacra’s
online service allows users to search via a set of robust, sophisticated
tools
designed to locate and extract business information from the Internet and
from
the Alacra library of premium content. The company’s team of information
professionals selects, categorizes and indexes more than 45,000 sites on
the Web
containing the most reliable and comprehensive business information.
Simultaneously, users can search more than 100 premium commercial databases
that
contain financial information, economic data, business news, and investment
and
market research. Alacra provides the requisite information in the appropriate
format, gleaned from such prestigious content partners as Thomson Financial™,
Barra, The Economist Intelligence Unit, Factiva, Mergerstat® and many others.
On
April
20, 2000, the Company purchased $1,000,000 worth of Alacra Series F Convertible
Preferred Stock. Alacra has recorded revenue growth in every year since the
Company’s original investment, further, 2004 revenues were in excess of the
prior years revenues by greater than 20%. Franklin has the right to have
the
preferred stock redeemed by Alacra for face value plus accrued dividends
on
December 31, 2006. In connection with this investment, Franklin was granted
observer rights on Alacra board of directors meetings.
Excelsior
Radio Networks, Inc.
During
the year ended December 31, 2004, the Company liquidated its investment in
Excelsior Radio Networks, Inc. (“Excelsior”). Excelsior produces and syndicates
programs and services heard on more than 2,000 radio stations nationwide
across
most major formats. Through its Dial Communications Global Media sales
subsidiary, Excelsior sells the advertising inventory radio stations provide
in
exchange for the Excelsior content. The programming and content includes
prep
services as well as long form and short form programming. Additionally, Dial
Communications Global Media has a number of independent producer clients,
which
range from talk and music programs to news and traffic services.
Franklin
has stock appreciation rights on various sales transactions of Excelsior
common
stock to Sunshine Wireless, LLC (“Sunshine”)
and
Quince Associates, LP (“Quince”).
In the
event that Excelsior is sold Franklin may be entitled to additional proceeds
from these stock appreciation rights. Franklin has stock appreciation rights
on
193,000 common shares sold to Sunshine on August 12, 2003 such that 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. Franklin has stock appreciation rights on 433,804 shares
of
common stock sold to Sunshine on October 8, 2003, and on March 19, 2004,
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. Franklin has stock appreciation rights
on
the 200,000 shares of common stock sold on June 30, 2004, on the 100,000
shares
of common stock sold on September 24, 2004, and on the 550,000 shares of
common
stock sold on October 22, 2004, to Quince. In the event that the per share
net
proceeds from any liquidation of Excelsior exceeds $3.00 (or an amount equal
to
$3.00 plus $.050 multiplied by the number of years, up to five, elapsed since
the closing date of the sale), Franklin will be entitled to receive 80% of
the
value greater than $3.00 (or such other applicable amount) per share. The
purchase price adjustment for the sale will expire as of a date 5 years
following the closing of each sale transaction.
SurgiCount
On
February 25, 2005, the Company purchased SurgiCount Medical Inc. ("SurgiCount"),
a
privately held, California-based developer of patient safety devices. Under
the
terms of the agreement, the Company paid to Brian Stewart and Dr. William
Stewart, the holders of 100% of the outstanding capital stock of SurgiCount
(the
"Shareholders"), consideration in the amount of $340,000 in cash and 200,000
shares of Common Stock, of which 10,000 shares of Common Stock will be held
in
escrow until August 2005. In addition, if certain milestones are satisfied,
the
Company will issue up to an additional 33,334 shares of Common Stock to the
Shareholders.
SurgiCount
is the Company's first acquisition in its plan to become a leader in the
billion
dollar patient safety field market. Management believes that the acquisition
is
a significant milestone in the Company's plan to shift its focus from radio
and
telecommunications to products and services targeting health care and patient
safety. SurgiCount owns patents issued in the United States and Europe related
to patient safety, among them, the Safety-Sponge(TM) System, an innovation
which
management believes will allow the Company to capture a significant portion
of
what we believe, based on industry sources, to be approximately $650 million
in
annual U.S., European and Japanese surgical sponge sales.
The
Safety-Sponge(TM) System allows for faster and more accurate counting of
surgical sponges. SurgiCount has obtained FDA 510k exempt status for the
Safety-Sponge(TM) line. The Safety-Sponge(TM) line of sponges has passed
required FDA biocompatibility tests including ISO sensitization, cytotoxicity
and skin irritation tests. SurgiCount is now a wholly-owned subsidiary of
the
Company.
China
Nurse
On
November 23, 2004, the Company entered into an agreement with China Nurse
LLC
("China Nurse"), an international nurse-recruiting firm based in New York
that
focuses on recruiting and training qualified nurses from China and Taiwan
for
job placement with hospitals and other health care facilities in the United
States. In connection with this agreement, the Company received a 5% ownership
interest in China Nurse, agreed to provide referrals and other assistance
and
has also made a small capital investment of $50,000 in that company. The
primary
purpose for the strategic investment was in anticipation of leveraging the
relationships that China Nurse developed during the ordinary course of its
business for the Company’s other patient safety products. This investment was a
seed investment in a concept that may ultimately be completely impaired within
a
one year time frame if China Nurse is unable to secure additional interest
both
in the form of additional investment and interest from hospitals and health
care
facilities in the United States.
Digicorp
On
December 29, 2004, the Company entered into a Common Stock Purchase Agreement
with certain shareholders of DigiCorp (the "Agreement"), to purchase an
aggregate of 3,453,527 shares of DigiCorp common stock. Of such shares,
2,229,527 shares were purchased for $.135 per share on December 29, 2004,
100,787 shares were purchased for $.145 on December 29, 2004. Franklin agreed
to
purchase an additional 1,224,000 shares of DigiCorp common stock from the
selling shareholders at such time as the shares are registered for resale
with
the SEC. The purchase price for such shares is $.135 or $.145 per share,
depending on when the closing occurs. Digicorp's common stock is traded on
the
OTC Bulletin Board. Since June 30, 1995, DigiCorp has been in the developmental
stage and has had no operations other than issuing shares of common stock
for
financing the preparation of financial statements and for preparing filings
for
the SEC. In connection with the Agreement, Franklin is entitled to designate
two
members to the Board of Directors of Digicorp. Franklin's first designee,
Melanie Glazer, was appointed on December 29, 2004. The Company is currently
evaluating several strategic alternatives for the use of the DigiCorp entity,
however, no definitive plan has been decided upon at this time.
Other
Investments
Administration
for International Credit & Investments, Inc.
On
March
2, 2005, the Company made an investment in the common stock of Administration
for International Credit & Investments, Inc. ("AICI"), valued at $450,000.
As part of its investment, the Company received 225,000 warrants to purchase
common stock at $1.50 per share and 225,000 warrants to purchase common stock
at
$2.00 per share. The warrants are exercisable for a period of five years
and are
callable by AICI in certain instances. IPEX, Inc. ("IPEX") was incorporated
in
the State of Nevada on June 27, 2002. On March 17, 2005 IPEX entered into
an
Agreement and Plan of Merger with AICI an Oregon corporation which provides
telecommunication services. The transaction has been reflected as a reverse
merger where IPEX was the surviving legal entity after the merger, but AICI
is
considered to be the accounting acquirer. The merger has been accounted for
as a
recapitalization of AICI. Accordingly, the historical financial statements
prior
to March 17, 2005 are those of AICI. Following the merger, IPEX changed its
fiscal year end from July 31 to December 31.
On
March
18, 2005 IPEX completed the private placement that the Company participated
in
for an aggregate of 3,500,000 shares of common stock, 1,750,000 Series A
Warrants and 1,750,000 Series B Warrants for aggregate proceeds of $3,500,000,
less issuance costs of $259,980, resulting in net realized proceeds of
$3,240,020. The common stock, Series A and Series B Warrants were sold as
Units,
with each Unit consisting of two shares of common stock, one series A Warrant
and one Series B Warrant. Each Series A Warrant entitles the holder to purchase
one share of common stock at $1.50 per share, exercisable for a period of
five
years. Each Series B Warrant entitles the holder to purchase one share of
common
stock at $2.00 per share, exercisable for a period of five years. Subsequent
to
the effectiveness of a registration statement covering shares underlying
the
warrants, the Series A and Series B Warrants are callable by IPEX, under
certain
circumstances, if IPEX's common stock trades at or above $2.00 and $2.50,
respectively, for ten consecutive trading days.
AICI
operates an electronic market for collecting, detecting, converting, enhancing
and routing telecommunication traffic and digital content. Members of the
exchange anonymously exchange information based on route quality and price
through a centralized, web accessible database and then route traffic. AICI's
fully-automatic, highly scalable Voice over Internet Protocol routing platform
updates routes based on availability, quality and price and executes the
capacity request of the orders using proprietary software and delivers them
through AICI's system. AICI invoices and processes payments for its members'
transactions and offsets credit risk through its credit management programs
with
third parties. AICI's name changed to Ipex, Inc and began trading on the
OTC
Bulletin Board on March 29, 2005.
Tuxis
Corporation
On
March
16, 2005, Ault Glazer filed a Schedule 13D with the SEC relating to its holdings
in Tuxis Corporation ("Tuxis"). Tuxis, a Maryland corporation, currently
is
registered under the 1940 Act, as a closed-end management investment company.
Tuxis previously received Board of Directors and shareholder approval to
change
the nature of its business so as to cease to be an investment company and
on May
3, 2004, filed an application with the SEC to de-register. At March 16, 2005,
the Company directly held 36,000 shares and indirectly, by virtue of its
relationship with Ault Glazer, held 98,000 shares of Tuxis common stock,
which
represented approximately 3.66% and 9.96%, respectively, of the total
outstanding shares. At December 31, 2004, Tuxis had reportable net assets
of
approximately $9.1 million.
Results
of Operations
The
principal measure of our financial performance is the "Net increase (decrease)
in net assets from operations" which is the sum of three elements. The first
element is "Net investment income (loss) from operations," which is the
difference between the Company's income from interest, dividends, fees and
other
income (such as management fees), and its operating expenses, net of applicable
income tax provision. The second element is "Net realized gain (loss) on
portfolio of investments," which is the difference between the proceeds received
from dispositions of portfolio securities and their stated cost, net of
applicable income tax provision. The third element, "Increase (decrease)
in
unrealized appreciation on investments," is the net change in the fair value
of
the Company'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.
The
Company generally 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 Company's fixed income portfolio and
the
average yield on this portfolio.
Investment
Income
The
Company had interest and dividend income of $11,056 in 2004, $3,159 in 2003,
and
$5,081 in 2002. The Company earned no management fees in 2004 as opposed
to
management fees of $180,000 in 2003, and $450,000 in 2002.
The
decrease in investment income was primarily the result of no management fees
being received by us from Excelsior, an affiliate, because our management
agreement with Excelsior expired on December 31, 2003.
The
Company 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 Company attempts to maintain adequate working capital to provide
for fiscal periods when there are no such sales.
Expenses
Operating
expenses were $2,951,173 in 2004, $1,279,526 in 2003, and $1,985,450 in 2002.
A
majority of the Company's operating expenses consist of employee compensation,
office and rent expense, other expenses related to identifying and reviewing
investment opportunities and professional fees as well as the accrual of
an
expense related to the severance package of Mr. Brown, our former Chairman
and
Chief Executive Officer. During 2004, the Company accrued a severance expense
of
$483,000 of which $160,142 was reflected as a current liability at December
31,
2004. Included in compensation was a $40,000 bonus paid to Stephen L. Brown.
Professional fees were $1,252,979 higher in 2004 due to legal and other costs
incurred in connection with the negotiation of the LOU with Ault Glazer and
the
filing of proxy statements in connection with the Special Meeting of the
Stockholders of the Company held on October 22, 2004, and the 2004 Annual
Shareholder Meeting of the Company to be held on March 30, 2005. The Company
was
reimbursed approximately $108,000 for salary and benefit expense for its
chief
financial officer under the terms of the management agreement with Excelsior.
This reimbursement has been recorded as a reduction in operating
expenses.
Net
Investment Loss from Operations
Net
investment losses from operations were $2,940,117 in 2004, $1,096,367 in
2003,
and $1,530,369 in 2002. The change in such amounts reflects the increase
in
operating expenses versus the decrease in investment income during such
periods.
Net
Realized Gain on Portfolio of Investments
During
the three years ended December 31, 2004, 2003, and 2002, the Company realized
net gains before taxes of $1,591,156, $430,883, and $237,658, respectively,
from
the disposition of various investments.
During
2004, the Company realized a gain of $1,448,014 from the sale of 908,804
shares
and warrants to purchase 87,111 shares of Excelsior common stock. Additionally,
the Company realized a net gain of $143,142 from the sale of marketable
securities.
During
2003, Franklin realized a gain of $432,900 from the sale of 568,000 shares
of
Excelsior Radio Networks, Inc. common stock. This gain was offset by a loss
of
$2,017 from the sale of marketable securities.
During
2002, Franklin realized a gain of $726,804 from the sale of 773,196 shares
of
Excelsior Radio Networks, Inc. common stock. This gain was offset by a loss
of
$300,000 from the sale of 188,425 shares of Structured Web common stock,
a
previous portfolio holding of the Company, a loss of $140,000 from the write
down of Excom Ventures, a previous portfolio holding of the Company which
was
determined to be a worthless security, a loss of $32,715 from the sale of
363,938 shares of Primal common stock a previous portfolio holding of the
Company as well as a realized net loss of $16,430 from the sale of marketable
securities.
The
Company 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 Company attempts to maintain adequate working capital to provide
for fiscal periods when there are no such sales.
Unrealized
Appreciation of Investments
Unrealized
appreciation of investments decreased by $1,054,702 during the year ended
December 31, 2004, primarily due to the sale of 908,804 shares and warrants
to
purchase 87,111 shares of Excelsior common stock. When we exit an investment
and
realize a gain, we make an accounting entry to reverse any unrealized
appreciation we had previously recorded to reflect the appreciated value
of the
investment.
Unrealized
appreciation of investments, net of deferred taxes, decreased by $475,605
during
the year ended December 31, 2003, primarily due to the sale of a portion
of the
Company’s holdings of Excelsior offset by the increased valuation of
Excelsior.
Unrealized
appreciation of investments, net of deferred taxes, increased by $1,663,304
during the year ended December 31, 2002, primarily due to the increased
valuation of Excelsior.
Taxes
Franklin
does not qualify for pass through tax treatment as a Regulated Investment
Company under Subchapter M of the Internal Revenue Code (the “Code”)
for
income tax purposes. The Company is taxed under Subchapter 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.
We
have a
net operating loss carryforward of approximately $8.6 million to offset future
taxable income for federal income tax purposes. The utilization of the loss
carryforward to reduce any such future income taxes will depend on our ability
to generate sufficient taxable income prior to the expiration of the net
operating loss carryforwards. The carryforward expires beginning on
2011.
A
change
in the ownership of a majority of the fair market value of the Company’s common
stock can delay or limit the utilization of existing net operating loss
carryforwards pursuant to the Internal Revenue Code Section 382. The Company
believes that such a change occurred during the year ended December 31, 2004.
Based upon a detail analysis of purchase transactions of our equity securities,
the Company believes that its net operating loss carryforward utilization
is
limited to approximately $755,000 per year.
Contractual
Obligations
The
following table sets forth information relating to our contractual obligations
as of December 31, 2004:
Contractual
obligations
|
|
Payments
due by period
|
|
|
|
Total
|
|
Less
than 1 year
|
|
Accrued
purchase price of investment in Digicorp
|
|
$
|
165,240
|
|
$
|
165,240
|
|
Note
Payable to Excelsior Radio Networks, Inc. (1)
|
|
$
|
892,530
|
|
$
|
892,530
|
|
Total
|
|
$$
|
1,057,770
|
|
$$
|
1,057,770
|
|
(1)
Franklin initially purchased Excelsior securities on August 28, 2001. As
part of
the purchase price Franklin issued a $1,000,000 note. 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. The due
date
of the note has been extended indefinitely until the action described under
Item
3. Legal Proceedings is settled.
Item
7a. Quantitative
and Qualitative Disclosures about Market Risk
The
Company's business activities contain elements of risk. The Company 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 Company's investments nor an investment in the Company is intended to
constitute a balanced investment program. The Company has exposure to
public-market price fluctuations to the extent of its publicly traded
portfolio.
The
Company 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 Company 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 Company invests, the valuation of the equity interests
in
the Company's portfolio is subject to the estimate of the Company'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 Company'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 Company's
consolidated statements of operations as "Net increase (decrease) in unrealized
appreciation on investments."
FRANKLIN
CAPITAL CORPORATION
INDEX
TO FINANCIAL STATEMENTS AND
SCHEDULES
|
|
|
Page
|
|
Report
of Rothstein, Kass & Company, P.C
|
|
54
|
|
|
|
|
|
Report
of Ernst & Young LLP
|
|
55
|
|
|
|
|
|
Balance
Sheets as of December 31, 2004 and 2003
|
|
56
|
|
|
|
|
|
Statements
of Operations for the years ended December 31, 2004, 2003 and
2002
|
|
57
|
|
|
|
|
|
Statements
of Cash Flows for the years ended December 31, 2004, 2003 and
2002
|
|
58
|
|
|
|
|
|
Statements
of Changes in Net Assets for the years ended December 31, 2004,
2003 and
2002
|
|
59
|
|
|
|
|
|
Financial
Highlights for the years ended December 31, 2004, 2003, 2002,
2001 and
2000
|
|
60
|
|
|
|
|
|
Portfolio
of Investments as of December 31, 2004
|
|
61
|
|
|
|
|
|
Portfolio
of Investments as of December 31, 2003
|
|
62
|
|
|
|
|
|
Notes
to Financial Statements
|
|
63-75
|
|
The
schedules for which provision is made in the applicable regulation of the
Securities and Exchange Commission are not required under the related
instruction or are inapplicable and, therefore, have been omitted
REPORT
OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Stockholders and Board of Directors of
Franklin
Capital Corporation
We
have
audited the accompanying consolidated balance sheet of Franklin Capital
Corporation and Subsidiaries (the "Company") as of December 31, 2004, including
the consolidated portfolio of investments as of December 31, 2004, and the
related consolidated statements of operations, cash flows and changes in
net
assets for the year ended December 31, 2004, and the financial highlights
for
the year ended December 31, 2004. These consolidated financial statements
and
financial highlights are the responsibility of the Company's management.
Our
responsibility is to express an opinion on these consolidated financial
statements and financial highlights based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an audit
of its
internal control over financial reporting. Our audit included consideration
of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose
of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements and financial highlights, assessing
the
accounting principles used and significant estimates made by management,
as well
as evaluating the overall financial statement presentation. Our procedures
included confirmation of securities owned as of December 31, 2004, by
correspondence with the custodian and brokers or by physical counts of
securities. We believe that our audit provides a reasonable basis for our
opinion.
In
our
opinion, the financial statements and financial highlights referred to above
present fairly, in all material respects, the financial position of the Company
as of December 31, 2004, and the results of its operations, its cash flows
and
changes in its net assets for the year ended December 31, 2004, and the
financial highlights for the year ended December 31, 2004, in conformity
with
accounting principles generally accepted in the United States of
America.
/s/
Rothstein, Kass & Company, P.C.
Roseland,
New Jersey
March
18,
2005
REPORT
OF
ERNST & YOUNG LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To
the
Stockholders and Board of Directors
Franklin
Capital Corporation
We
have
audited the accompanying balance sheet of Franklin Capital Corporation as
of
December 31, 2003, including the portfolio of investments as of December
31,
2003, and the related statements of operations, cash flows and changes in
net
assets for the two years in the period ended December 31, 2003, and the
financial highlights for each of the four years in the period ended December
31,
2003. These financial statements and financial highlights are the responsibility
of the Corporation's management. Our responsibility is to express an opinion
on
these financial statements and financial highlights based on our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. We
were
not engaged to perform an audit of the Company's internal control over financial
reporting. Our audit included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate
in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Company’s internal control over financial reporting.
Accordingly we express no such opinion. An audit also includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights, the confirmation of securities owned
as of
December 31, 2003 by correspondence with the custodian, assessing the accounting
principles used and significant estimates made by management, and evaluating
the
overall financial statement presentation. We believe that our audits provide
a
reasonable basis for our opinion.
In
our
opinion, the financial statements and financial highlights referred to above
present fairly, in all material respects, the financial position of Franklin
Capital Corporation at December 31, 2003, the results of its operations,
cash
flows and changes in net assets for the two years in the period ended December
31, 2003, and the financial highlights for each of the four years in the
period
ended December 31, 2003, in conformity with accounting principles generally
accepted in the United States.
/s/
ERNST
& YOUNG LLP
New
York,
New York
March
5,
2004
December
31,
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
Marketable
investment securities, at market value (cost: December 31,
|
|
|
|
|
|
2004
- $4,058,383; December 31, 2003 - $40,899)
|
|
$
|
4,020,154
|
|
$
|
33,899
|
|
Investments,
at fair value (cost: December 31, 2004 - $1,788,518;
|
|
|
|
|
|
|
|
December
31, 2003 - $1,908,804)
|
|
|
|
|
|
|
|
Excelsior
Radio Networks, Inc.
|
|
|
|
|
|
1,921,270
|
|
Other
investments
|
|
|
1,788,518
|
|
|
1,000,000
|
|
|
|
|
1,788,518
|
|
|
2,921,270
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
846,404
|
|
|
224,225
|
|
Other
assets
|
|
|
279,167
|
|
|
78,638
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
6,934,243
|
|
$
|
3,258,032
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
payable
|
|
$
|
892,530
|
|
$
|
915,754
|
|
Accounts
payable and accrued liabilities
|
|
|
939,568
|
|
|
318,140
|
|
Marketable
investments sold short, at market value (proceeds: December 31,
|
|
|
|
|
|
|
|
2004
- $1,064,093; December 31, 2003 - $0)
|
|
|
1,075,100
|
|
|
|
|
Due
to broker
|
|
|
460,776
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES
|
|
|
3,367,974
|
|
|
1,233,894
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
preferred stock, $1 par value, cumulative 7% dividend:
|
|
|
|
|
|
|
|
10,000,000
shares authorized; 10,950 issued and outstanding
|
|
|
|
|
|
|
|
at
December 31, 2004 and 2003
|
|
|
|
|
|
|
|
(Liquidation
preference $1,095,000)
|
|
|
10,950
|
|
|
10,950
|
|
Common
stock, $1 par value: 50,000,000 shares authorized;
|
|
|
|
|
|
|
|
2,042,689
and 1,505,888 shares issued: 1,556,901 and 1,020,100 shares
|
|
|
|
|
|
|
|
outstanding
at December 31, 2004 and 2003, respectively
|
|
|
2,042,689
|
|
|
1,505,888
|
|
Paid-in
capital
|
|
|
13,925,253
|
|
|
10,439,610
|
|
Unrealized
(depreciation) appreciation of investments
|
|
|
(49,236
|
)
|
|
1,005,466
|
|
Accumulated
deficit
|
|
|
(9,746,555
|
)
|
|
(8,320,944
|
)
|
|
|
|
|
|
|
|
|
|
|
|
6,183,101
|
|
|
4,640,970
|
|
Deduct:
485,788 shares of common stock held in treasury,
|
|
|
|
|
|
|
|
at
cost, at December 31, 2004 and 2003, respectively
|
|
|
(2,616,832
|
)
|
|
(2,616,832
|
)
|
|
|
|
|
|
|
|
|
Net
assets
|
|
|
3,566,269
|
|
|
2,024,138
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
$
|
6,934,243
|
|
$
|
3,258,032
|
|
The
accompanying notes are an integral part of these financial statements.
FRANKLIN
CAPITAL CORPORATION AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
Statements
of Operations
|
|
|
|
|
|
|
|
|
|
|
For
the Year Ended December 31,
|
|
2004
|
|
2003
|
|
2002
|
|
|
|
|
|
|
|
|
|
INVESTMENT
INCOME
|
|
|
|
|
|
|
|
Interest
on short term investments and money market accounts
|
|
$
|
11,056
|
|
$
|
3,159
|
|
$
|
5,081
|
|
Income
from affiliates
|
|
|
-
|
|
|
180,000
|
|
|
450,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,056
|
|
|
183,159
|
|
|
455,081
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
Salaries
and employee benefits, net of reimbursements
|
|
|
494,167
|
|
|
548,269
|
|
|
862,970
|
|
Officer's
severance
|
|
|
483,000
|
|
|
-
|
|
|
-
|
|
Professional
fees
|
|
|
1,484,143
|
|
|
231,164
|
|
|
191,900
|
|
Rent
|
|
|
76,276
|
|
|
71,942
|
|
|
98,982
|
|
Insurance
|
|
|
64,083
|
|
|
67,728
|
|
|
58,036
|
|
Directors'
fees
|
|
|
10,550
|
|
|
9,158
|
|
|
2,003
|
|
Taxes
other than income taxes
|
|
|
50,697
|
|
|
29,708
|
|
|
39,709
|
|
Newswire
and promotion
|
|
|
8,360
|
|
|
-
|
|
|
1,181
|
|
Depreciation
and amortization
|
|
|
863
|
|
|
16,972
|
|
|
16,969
|
|
Interest
expense
|
|
|
32,284
|
|
|
42,903
|
|
|
35,401
|
|
Expenses
related to terminated merger
|
|
|
-
|
|
|
73,500
|
|
|
490,782
|
|
General
and administrative
|
|
|
246,750
|
|
|
188,182
|
|
|
187,517
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,951,173
|
|
|
1,279,526
|
|
|
1,985,450
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
investment loss from operations
|
|
|
(2,940,117
|
)
|
|
(1,096,367
|
)
|
|
(1,530,369
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
realized gain on portfolio of investments:
|
|
|
|
|
|
|
|
|
|
|
Investment
securities:
|
|
|
|
|
|
|
|
|
|
|
Affiliated
|
|
|
1,448,014
|
|
|
432,900
|
|
|
254,088
|
|
Unaffiliated
|
|
|
143,142
|
|
|
|