Item 1. Business
Formation
The Franklin Holding Corporation (Delaware) (the "Registrant", "Franklin," or the "Company") filed on April 7, 1987, with the Securities and Exchange Commission (the "SEC" or the "Commission") a notification of registration under Section 8(a) of the Investment Company Act of 1940 (the "1940 Act") and registered as a closed-end, non-diversified management investment company. On July 10, 1987, the Company commenced operations as an investment company. The Company's common stock, par value $1.00 per share, has been listed on The American Stock Exchange since October 1, 1987. The Company operates as an internally managed investment company whereby its officers and employees, under the general supervision of its Board of Directors, conduct its operations.
From 1987 through 1991, the Company operated primarily as a passive investor, both at the holding company level and through its wholly owned subsidiary, Franklin SBIC.
In 1992, Franklin SBIC was dissolved and the Company formed Excelsior Communications Corporation ("Excelsior"). Excelsior, through a partnership, acquired a number of radio stations, and Franklin's management was active in the operations of both Excelsior and its operating assets. At the end of 1995, Excelsior sold the last of its radio properties. Excelsior continued to operate through the first half of 1997.
The operating strategy of providing managerial assistance to companies in which the Company invests has been pursued by Franklin since at least 1992. This strategy is consistent with the legislative intent behind the statutory framework governing business development companies under the 1940 Act. The business development company ("BDC") is available for companies which are engaged in the business of furnishing capital and managerial expertise to other companies that might not otherwise have access to such capital. In light of this operating strategy and the Company's long-term objectives, management and the Board of Directors determined that it was in the best interest of the shareholders to explore the feasibility of moving on election to be regulated as a BDC.
On August 5, 1997, the Board of Directors determined that it would be in the best interest of the Company and its stockholders to elect to become a BDC under the 1940 Act. On September 9, 1997, at the Annual Meeting of Stockholders, the stockholders of Franklin approved the proposal that the Company be regulated as a BDC. On November 18, 1997, the Company filed a notification of election to become a BDC with the Commission. The election became effective upon the receipt of the filing by the Commission.
As a BDC, the Company's objective is to achieve capital appreciation through long-term investments in businesses believed to have favorable growth potential. The Company participates, or would participate, in start-
up and early stage financing, expansion or growth financing, leveraged buy-out financing and restructurings. The Company has also invested and will consider investing in a broad range of industry segments.
Portfolio of Investments
As of December 31, 1997, the Company's portfolio of investments is a composite of one controlled investment as defined under the 1940 Act, investments in developing companies, limited partnerships and one marketable security.
Illiquidity of Investments
Many 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 does not anticipate that there will be any 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, as amended, 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 or investee registers its securities and becomes a reporting company under the Securities and 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 company's securities.
Managerial Assistance
The Company believes that providing managerial assistance to its investees is critical to its business development activities. "Making available significant managerial assistance" as defined in the 1940 Act with respect to a business development company such as Franklin means (a) any arrangement whereby a BDC, through its directors, officers, employees or general partners, offers to provide, and if accepted, does so provide significant guidance and counsel concerning the management, operations or business objectives and policies of a portfolio company; or (b) the exercise of a controlling influence over the management or policies of a portfolio company by a BDC acting individually or as a part of a group acting together which controls such portfolio company. The Company, as a BDC, is required by the 1940 Act to make significant managerial assistance available at least with respect to investee companies that the Company treats as qualifying assets for purposes of the 70 percent test (see "Regulation"). The nature, timing and amount of managerial assistance provided by the Company vary depending upon the particular requirements of each investee company.
In connection with its managerial assistance, Franklin may be represented by one or more of its officers or directors on the board of directors of an investee. The Company's goal is to assist each investee company in establishing its own independent and effective board of directors and management.
Need for Follow-on Investments
Following its initial investments in investees, the Company has made and anticipates that it will continue to make additional investments in such investees as "follow-on" investments, in order to increase its investment in an investee, and may exercise warrants, options or convertible securities that were acquired in the original financing. Such follow-on investments may be made for a variety of reasons including: 1) to increase the Company's exposure to an investee, 2) to acquire securities issued as a result of exercising convertible securities that were purchased in the original financing, 3) to preserve Franklin's proportionate ownership in a subsequent financing, or 4) in an attempt to preserve or enhance the value of the Company's investment. There can be no assurance that the Company will make follow-on investments or have sufficient funds to make such investments;
the Company will have the discretion to make any follow-on investments as it determines, subject to the availability of capital resources. The failure to make such follow-on investments may, in certain circumstances, jeopardize the continued validity of an investee and the Company's initial investment, or may result in a missed opportunity for the Company to increase its participation in a successful operation.
Competition
The Company competes for attractive investment opportunities with venture capital partnerships and corporations, merchant banks, venture capital affiliates of industrial and financial companies, Small Business Investment Companies ("SBICs") other BDCs and wealthy individuals.
Employees
At December 31, 1997, the Company had six employees.
Regulation
The Small Business Investment Incentive Act of 1980 modified the provisions of the 1940 Act that are applicable to a closed-end investment BDC. After filling its election to be treated as a BDC, a company may not withdraw its election without first obtaining the approval of holders of a majority of its outstanding voting securities. The following is a brief description of the 1940 Act, as modified by the Small Business Investment Incentive Act of 1980, and is qualified in its entirety by the reference to the full text of the 1940 Act and the rules thereunder by the SEC.
Generally, to be eligible to elect BDC status, a company must primarily engage in the business of furnishing capital and managerial expertise to companies which do not have ready access to capital through conventional financial channels. Such portfolio companies are termed "eligible portfolio companies." More specifically, in order to qualify as a BDC, a company must (i) be a domestic company; (ii) have registered a class of its securities or have filed a registration statement with the SEC pursuant to Section 12 of the Exchange Act of 1934; (iii) operate for the purpose of investing in the securities of certain types of portfolio companies, namely, immature or emerging companies and businesses suffering or just recovering from financial distress (see following paragraph); (iv) extend significant managerial assistance to such portfolio companies; (v) have a majority of "disinterested" directors (as defined in the 1940 Act) and (vi) file (or, under certain circumstances, intend to file) a proper notice of election with the SEC.
An eligible portfolio company generally is a domestic company that is not an investment company and that (i) does not have a class of securities registered on an exchange or included in the Federal Reserve Board's over-the-counter margin list; (ii) is actively controlled by a BDC and has an affiliate of a BDC on its board of directors or (iii) meets such other criteria as may be established by the SEC. Control under the 1940 Act is presumed to exist when a BDC owns 25 percent of the outstanding securities of the investee.
The 1940 Act prohibits or restricts companies subject to the 1940 Act from investing in certain types of companies, such as brokerage firms, insurance companies, investment banking firms and investment companies. Moreover, the 1940 Act limits the type of certain assets necessary for its operations (such as office furniture, equipment and facilities) if, at the time of acquisition, less than 70 percent of the value of the Company's assets consist of qualifying assets. Qualifying assets include: (i) securities of companies that were eligible portfolio companies at the time such company acquired their securities; (ii) securities of bankrupt or insolvent companies that were eligible at the time of such company's initial investment in those companies; (iii) securities received in exchange for or distributed in or with respect to any of the foregoing and (iv) cash items, government securities and high quality short-term debt. The 1940 Act also places restrictions on the nature of the transactions in which,
and the persons for whom, securities can be purchased in order for the securities to be considered qualifying assets. Such restrictions include limiting purchases to transactions not involving a public offering and acquiring securities from either the portfolio company or their officers, directors or affiliates.
The Company is permitted by the 1940 Act, under specified conditions, to issue multiple classes of senior debt and a single class of preferred stock if its asset coverage, as defined in the 1940 Act, is at least 200 percent after the issuance of the debt or the preferred stock (i.e., such senior securities may not be in excess of 50 percent of its net assets). If the value of the Company's assets, as defined, were to increase through the issuance of additional capital stock or otherwise, the Company would be permitted under the 1940 Act to issue senior securities.
The Company may sell its securities at a price that is below the prevailing net asset value per share only after a majority of its disinterested directors has determined that such sale would be in the best interest of the Company and its stockholders and upon the approval by the holders of a majority of its outstanding voting securities, including a majority of the voting securities held by non-affiliated persons. If the offering of the securities is underwritten, a majority of the disinterested directors must determine in good faith that the price of the securities being sold is not less than a price which closely approximates market value of the securities, less any distribution discount or commission. As defined by the 1940 Act, the term "majority of the Company's outstanding voting securities" means the vote of (i) 67 percent or more of the Company's Common Stock present at the meeting, if the holders of more than 50 percent of the outstanding Common Stock are present or represented by proxy or (ii) more than 50 percent of the Company's outstanding Common Stock, whichever is less.
Most of the transactions involving the Company and its affiliates (as well as affiliates of those affiliates) which were prohibited without the prior approval of the Commission under the 1940 Act prior to its amendment by the Small Business Investment Incentive Act are now permissible upon the prior approval of a majority of the Company's independent directors and a majority of the directors having no financial interest in the transactions. However, certain transactions involving certain closely affiliated persons of the Company, including its directors, officers, and employees, may still require the prior approval of the Commission. In general, (i) any person who owns, controls or holds power to vote more than 5 percent of the Company's outstanding Common Stock; (ii) any director, executive officer or general partner of that person and (iii) any person who directly controls, is controlled by, or is under common control with that person, must obtain the prior approval of a majority of the Company's independent directors and, in some situations, the prior approval of the Commission, before engaging in certain transactions involving the Company or any company controlled by the Company. The 1940 Act generally does not restrict transactions between the Company and its portfolio companies. While a BDC may change the nature of its business so as to cease being a BDC (and in connection therewith withdraws its election to be treated as a BDC) only if authorized to do so by a majority vote (as defined in the 1940 Act) of its outstanding voting securities, stockholder approval of changes in other fundamental investment policies of a BDC is not required (in contrast to the general 1940 Act requirement, which requires stockholder approval for a change in any fundamental investment policy). The Company is entitled to change its diversification status without stockholder approval.
Item 2.
Item 2. Properties
Franklin maintains its offices at 450 Park Avenue, 10th Floor, New York, New York 10022, where it leases approximately 3,600 square feet of office space pursuant to a lease agreement expiring in 2003.
Item 3.
Item 3. Legal Proceedings
The Company is a plaintiff in an action brought against National Union Fire Insurance Company of Pittsburgh, PA ("National Union") in the Supreme Court of the State of New York. The action seeks reimbursement of $1,000,000 for fees and expenses incurred in connection with certain shareholder litigation brought against Franklin and its directors. National Union filed a motion to dismiss the complaint which the Company opposed. The motion is pending before the Court. The Company is unaware of any other material legal proceedings pending to which it is a party or to which any of its property is subject.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
The Company did not submit any matters to a vote of its stockholders during the fourth quarter of the 1997 fiscal year.
PART II
Item 5.
Item 5. Market for Company's Common Equity and Related Stockholder Matters
Stock Transfer Agent
Chase Mellon Shareholder Services, 85 Challenger Road, Overpack Center, Ridgefield Park, NJ 07660 (Telephone (800) 851-9677) serves as transfer agent for the 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.
1997 Quarter Ending Low High
March 31 $ 9.375 $10.125 June 30 $ 8.875 $ 9.750 September 30* $ 7.000 $11.750 December 31 $ 6.250 $ 7.750
1996 Quarter Ending Low High
March 31 $ 9.250 $10.500 June 30 $10.000 $11.375 September 30 $10.625 $11.500 December 31** $ 9.000 $11.500
* A special distribution of $3.25 per share was declared in July 1997. ** A special distribution of $1.00 per share was declared in November 1996.
Stockholders
As of March 16, 1998, there were 706 holders of record of the Company's common stock, which hold the Company's common stock for approximately 1,300 beneficial owners. The Company has 2,000,000 shares authorized, of which 1,003,986 are issued and 801,198 are outstanding at March 16, 1998.
Item 6.
Item 6. Selected Financial Data
The following tables should be read in conjunction with the Financial Statements included in Item 8
Item 8. Financial Statements and Supplementary Data
See Index to Financial Statements for a list of the Financial Statements and Supplementary Data included in this Form 10-K.
Item 9.
Item 9. Disagreements with Accountants on Accounting and Financial Disclosure
None.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Company
Officers
Stephen L. Brown, Chairman and Chief Executive Officer. For additional information about Mr. Brown, please see the Directors' biographical information section below.
Spencer L. Brown, age 32, has been Senior Vice President of the Company since November 1995, Secretary of the Company since October 1994 and was Vice President from August 1994 to November 1995. From September 1993 to July 1994, Mr. Brown was an attorney with the firm of Wilson, Elser, Moskowitz, Edelman & Dicker, and from September 1991 to September 1993, he was an attorney with the firm of Weil, Gotshal & Manges LLP. Mr. Brown is also a director of Avery. Mr. Brown is the son of Stephen L. Brown, the Chairman and Chief Executive Officer of the Company.
John Greenbaum, Chief Financial Officer and Treasurer of the Company. For additional information about Mr. Greenbaum, please see the Directors' biographical information section below.
Stephen J. Mayer, age 45, has been Vice President and Controller of the Company since December 1994. From April 1994 to October 1994, he was Chief Financial Officer of Biltmore Mortgage Corp. From 1992 to April 1994, Mr. Mayer was Vice President and Controller of Midcoast Mortgage Corp.
Directors
Stephen L. Brown, age 59, was elected to the Company's Board of Directors and appointed Chairman of its Board of Directors in October 1986. He has been Chief Executive Officer since October 1986. Since June 1984, Mr. Brown has been Chairman of S.L. Brown & Company, Inc. ("SLB & Co., Inc."), a private investment firm. Mr. Brown is a director of Copley Financial Services Corporation (advisor to Copley Fund, Inc., a mutual fund) and Avery.
Miles L. Berger, age 67, joined the Board as a director in 1996. Mr. Berger has been Vice Chairman of Heitman Financial Ltd., a real estate service company, for more than the past five years. Mr. Berger is also Chairman of the Board of Mid Town Bank, Chicago, and a director of Innkeepers USA Trust, a Maryland real estate investment trust.
Carl D. Glickman, age 71, has been a director of the Company since 1986. He is the President of The Glickman Organization, a real estate investment firm, for more than the past five years. Mr. Glickman is a director of The Bear Stearns Companies Inc., Alliance Tyre & Rubber Co., Andal Corp., Continental Health Affiliates, Inc., Infu Tech, Inc., Jerusalem Economics Corp., LTD, Lexington Growth Properties and Office Max, Inc.
John Greenbaum, age 47, joined the Board as a director in 1992. Since March 1996, he has been Chief Financial Officer and Treasurer of the Company. Mr. Greenbaum acted as principal of Digital Media Group, a venture capital firm, from October 1994 through March 1996. From March 1988 to September 1994, he was Vice President of the Company, and from May 1992 to September 1994 acted as Secretary of the Company. Mr. Greenbaum is also a director of Avery.
Irving Levine, age 76, became a director of the Company in 1990. He has been Chairman of the Board and President of Copley Fund, Inc., a mutual fund, since 1978, and Chairman and Treasurer of Stuffco International, Inc., a ladies handbag processor and chain-store operator, since 1978. Mr. Levine is also President and a director of Copley Financial Services Corporation (advisor to Copley Fund, Inc.), and a director of Rexnord Holdings, Inc.
Jonathan A. Marshall, age 59, has been a director since 1987. Mr. Marshall is a Senior Partner in the law firm of Pennie & Edmonds, and has been a member of that firm since 1974. He is a member of the Bar of the State of New York and is admitted to practice before the United States Supreme Court and the United States Patent and Trademark Office.
Jeffrey J. Steiner, age 60, joined the Board as a director in 1986. He has been Chairman and Chief Executive Officer of The Fairchild Corporation, an aviation services company, since October 1985. Mr. Steiner is also Chairman, Chief Executive Officer and a director of Banner Aerospace, Inc., a Vice Chairman and director of Shared Technology Fairchild, Inc., and a director of Copley Financial Service Corporation.
Item 11.
Item 11. Executive Compensation
Summary Compensation Table
The following table sets forth a summary for each of the last three years of the cash and non-cash compensation awarded to, earned by, or paid to the Chief Executive Officer of the Company and the other executive officers of the Company, whose individual remuneration exceeded $100,000 for the year ended December 31, 1997.
(1) Mr. Brown is employed under a contract with the Company at a base salary of $390,000 per annum. The initial term of such employment contract expired on December 31, 1995, and is automatically extended from year to year thereafter unless the Company elects not to extend the term. In compliance with the terms of the Settlement (as described in footnote 5 to the financial statements), Mr. Brown's base salary was reduced to $350,000 effective January 1, 1998.
(2) Mr. Greenbaum joined the Company as Chief Financial Officer & Treasurer in March 1996 at an annual base salary of $120,000. During 1995 and through March 1996, Mr. Greenbaum served as an outside director of the Company for which he received compensation of $18,000 and $4,500, respectively.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information with respect to beneficial ownership (as that term is defined in the rules and regulations of the Commission) of the Company's common stock as of March 16, 1998 by 1) each person who is known by the Company to be the beneficial owner of more than five percent of the outstanding common stock, 2) each director of the Company, 3) each current executive officer listed in the Summary Compensation Table and 4) all directors and executive officers of the Company as a group. Except as otherwise indicated, to the Company's knowledge, all shares are beneficially owned and investment and voting power is held as stated by the persons named as owners. The Company is not aware of any arrangement which may, at a subsequent date, result in a change of control of the Company.
(1) Includes the 25,000 shares of Common Stock owned by SLB & Co., Inc. Mr. Brown has, subject to certain limitations, voting and investment power over the voting securities owned by SLB & Co. Inc. Mr. Brown is Chairman of SLB & Co., Inc. Includes 117,936 shares of Common Stock owned by certain stockholders of SLB & Co., Inc. for which Mr. Brown has an irrevocable proxy through no later than July 1, 1998. Does not include 1,250 shares owned by Mr. Brown's children. Mr. Brown disclaims beneficial ownership of such shares.
(2) Includes 30,981 shares owned by Primrose Associates, Inc., a corporation controlled by Mr. Steiner. 26,228 of these shares are subject to an irrevocable proxy given to Stephen L. Brown through no later than July 1, 1998. Does not include 25,000 shares of Common Stock owned by SLB & Co., Inc. Mr. Steiner is an indirect stockholder of SLB & Co., Inc. Mr. Steiner disclaims beneficial ownership of the shares of Common Stock owned by SLB & Co., Inc.
(3) Includes 26,228 shares owned by Mr. Glickman that are subject to an irrevocable proxy given to Stephen L. Brown through no later than July 1, 1998. Does not include 25,000 shares of Common Stock owned by SLB & Co., Inc. Mr. Glickman is a direct stockholder of SLB & Co., Inc. Mr. Glickman disclaims Beneficial ownership of the shares of Common Stock owned by SLB & Co., Inc.
(4) Ownership is through Greenbaum Brothers Partnership, in which Mr. Greenbaum has a 33% general Partnership interest.
(5) Includes 1,338 shares owned by Spencer L. Brown that are subject to an irrevocable proxy given to Stephen L. Brown through no later than July 1, 1998. Does not include 25,000 shares of Common Stock owned by SLB & Co., Inc. Spencer Brown is a direct stockholder of SLB & Co., Inc. Spencer Brown disclaims Beneficial ownership of the shares of Common Stock owned by SLB & Co., Inc.
(6) Includes 53,794 shares owned by other officers and directors that are subject to an irrevocable proxy given to Stephen L. Brown through no later than July 1, 1998.
Item 13.
Item 13. Certain Relationships and Related Transactions
See Items 10 through 12 and Footnote 6 to the Financial Statements for discussion of related transactions.
PART IV
Item 14.
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K
(a) (1) Financial Statements (2) Exhibits (3) (i) Articles of Incorporation* (3) (ii) By-laws* (23) Consent of Independent Auditors (23) Financial Data Schedule (for EDGAR purposes only)
(b) Reports on Form 8-K. The Company did not file any reports on Form 8-K during the last quarter of 1997.
- --------------- *Incorporated by reference to the Company's Form N-2, as amended, filed July 31, 1992.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
THE FRANKLIN HOLDING CORPORATION (DELAWARE)
Date: March 24, 1998 By: /s/Stephen L. Brown ------------------------------- Stephen L. Brown Chairman & President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Company in the capacities and on the dates indicated.
THE FRANKLIN HOLDING CORPORATION (DELAWARE)
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
The following reports and financial schedules of The Franklin Holding Corporation (Delaware) are filed herewith and included in response to Item 14(a).
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ----------------------------------------
To the Stockholders and Board of Directors of The Franklin Holding Corporation (Delaware):
We have audited the accompanying balance sheets of The Franklin Holding Corporation (Delaware) (a Delaware corporation) as of December 31, 1997 and 1996, including the portfolio of investments as of December 31, 1997, and the related statements of operations, cash flows and changes in net assets for the three years ended December 31,1997, and the financial highlights for the five years ended December 31, 1997. 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 generally accepted auditing standards. 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. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included the physical inspection of securities on hand at December 31, 1997 and 1996, and the confirmation of marketable investment securities owned as of December 31, 1997 and 1996, by correspondence with brokers. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As explained in Note 2, the financial statements include investments valued at $6,833,318 (93% of net assets) as of December 31, 1997 whose fair values have been estimated by the Board of Directors in the absence of readily ascertainable market values. Because of the inherent uncertainty of valuation, those estimated values may differ significantly from the values that would have been used had a ready market for the securities existed, and the differences could be material.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of The Franklin Holding Corporation (Delaware) as of December 31, 1997 and 1996, the results of its operations, cash flows and changes in net assets for the three years ended December 31, 1997, and the financial highlights for the five years ended December 31, 1997 in conformity with generally accepted accounting principles.
/s/Arthur Andersen LLP - ------------------------ Arthur Andersen LLP
New York, New York March 24, 1998
The accompanying notes are an integral part of these financial statements.
The accompanying notes are an integral part of these financial highlights.
The accompanying notes are an integral part of this schedule.
Notes to Financial Statements
1. ORGANIZATION
The Franklin Holding Corporation (Delaware) ("Franklin Holding" or the "Corporation") is a Delaware corporation registered as a business development company ("BDC") under the Investment Company Act of 1940 (the "Act"). A BDC is a specialized type of investment company under the Act. A BDC must be primarily engaged in the business of furnishing capital and managerial expertise to companies that do not have ready access to capital through conventional financial channels. Such companies are termed "eligible portfolio companies". The Corporation, as a BDC, may invest in the securities of public companies and other investments that are not qualifying assets of eligible portfolio companies, however such investments may not exceed 30% of the Corporation's total asset value at the time of any such investment.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
Effective July 2, 1997, Franklin Holding's wholly owned subsidiary, Excelsior Communications Corporation ("Excelsior"), was dissolved. For financial reporting purposes as of and for the year ended December 31, 1997, the assets and operations of Excelsior have been consolidated with Franklin Holding. The Corporation, as a closed-end investment company registered under the Act, does not consolidate its non-investment company subsidiaries.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principals requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Statements of Cash Flows
For purposes of the Statements of Cash Flows, Franklin Holding considers only highly liquid investments with maturities of 90 days or less at the date of their acquisition to be cash equivalents.
The Corporation paid no interest during the year ended December 31, 1997, 1996 and 1995, and paid $54,265 , $173,018 and $6,190 for income taxes during the year ended December 31, 1997, 1996 and 1995, respectively.
Valuation of Investments
Security investments which are publicly traded on a national exchange or NASDAQ are stated at the last reported sales price on the day of valuation, or if no sale was reported on that date, then the securities are stated at the last quoted bid price. The Board of Directors of Franklin Holding (the "Board of Directors") may determine, if appropriate, to discount the value where there is an impediment to the marketability of the securities held.
Investments for which there is no ready market are initially valued at cost and, thereafter, at fair value based upon the financial condition and operating results of the issuer and other pertinent factors as determined by the Board of Directors. The financial condition and operating results have been derived utilizing both audited and unaudited data. In the absence of a ready market for an investment, numerous assumptions are inherent in the valuation process. Some or all of these assumptions may not materialize. Unanticipated events and circumstances may occur subsequent to the date of the valuation and values may change due to future events. Therefore, the actual amounts eventually realized from each investment may vary from the valuations shown and the differences may be material. Franklin Holding reports the unrealized gain or loss resulting from such valuation in the Statements of Operations.
Gains on Portfolio of Investments
Amounts reported as realized gains are measured by the difference between the proceeds of sale or exchange and the cost basis of the investment without regard to unrealized gains reported in the prior periods. Gains are considered realized when sales or dissolution of investments are consummated.
Income Taxes
Franklin Holding does not qualify as a Regulated Investment Company for income tax purposes. Therefore, the Corporation is taxed as a regular corporation.
Franklin Holding has adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). The significant components of deferred tax assets and liabilities are principally related to the Corporation's net operating loss carryforward and its unrealized appreciation of investments.
Depreciation and Amortization
Depreciation is recorded using the straight-line method at rates based upon estimated useful lives of five years for the respective assets. Franklin Holding amortizes its leasehold improvements over its useful life or the remaining life of the lease, whichever is shorter.
Net Increase (Decrease) in Net Assets Per Common Share
Net increase (decrease) in net assets per common share is based upon the weighted average number of shares of common stock outstanding. Franklin Holding has no common stock equivalents.
Reclassification
Certain reclassifications have been made to prior year finanical statements to conform with current year presentation.
3. INCOME TAXES
At December 31, 1997, Franklin Holding had a net operating loss carryforward for Federal income tax purposes of approximately $3,093,000 that will begin to expire in 2011. At a 34% Federal income tax rate the benefit from this loss would be approximately $1,052,000.
For the years ended December 31, 1997, 1996 and 1995, Franklin Holding's tax benefit (provision) was based on the following:
===============================================================================
The components of the tax benefit (provision) are as follows:
At December 31, 1997, the realization of deferred tax assets is dependent upon future appreciation of the Corporation's investments.
4. TREASURY STOCK
The Board of Directors has authorized Franklin Holding to repurchase up to an aggregate of 250,000 shares of its common stock in open market purchases on the American Stock Exchange when such purchases are deemed to be in the best interest of the Corporation and its stockholders. To date, Franklin Holding has repurchased 212,788 shares of its common stock of which 202,788 shares remain in treasury at December 31, 1997 and 1996.
5. COMMITMENTS AND CONTINGENCIES
Franklin Holding is obligated under an operating lease which provides for annual minimum rental payments as follows:
- -------------------------------------------------------------------------------- December 31, 1998.........................................................$ 139,000 1999......................................................... 149,000 2000......................................................... 149,000 2001......................................................... 149,000 2002......................................................... 149,000 2003 ........................................................ 151,000 ---------- $ 886,000 ========== - --------------------------------------------------------------------------------
Rent expense for the year ended December 31, 1997, 1996 and 1995 was $97,607, $108,857, and $135,008, respectively. For the years ended December 31, 1997 and 1996, the Corporation collected rents of $44,750 and $33,500, respectively, from subtenants for a portion of its existing office space which is reflected in rent expense for that year.
In March 1994, Stearns and Foster Bedding Company ("Stearns & Foster") commenced a private cost recovery and contribution action against Franklin Holding and a number of other defendants in the United States District Court for the District of New Jersey (Newark). Stearns & Foster is the current owner of a site located in South Brunswick, New Jersey (the "Site"), which is the subject of an investigation and cleanup under the Industrial Site Recovery Act ("ISRA"). A settlement agreement concerning this matter was executed by the parties on February 28, 1997. Franklin Holding and its insurer respectively agreed therein to pay Stearns and Foster $375,000 and $1,125,000. In consideration for these payments, Stearns and Foster agreed to: (i) dismiss all claims against Franklin Holding and its related entities with prejudice; (ii) release Franklin Holding and its related entities from any past, present or future claims related to the matters at issue in the litigation; and (iii) indemnify and hold Franklin Holding and its related entities harmless as to any claims arising from or in any way related to the matters at issue in the litigation. All payments due under this settlement agreement were made in March, 1997.
In March 1995, a complaint was filed in the United States District Court for the Southern District of New York by a former director of Franklin Holding (who, in 1990, was not renominated for election to the Board
of Directors) against the Corporation, its chairman, certain of its directors and an affiliated company ("Action No. 1"). Action No. 1 was purportedly brought both on behalf of a class of minority stockholders of Franklin Holding and derivatively on behalf of the Corporation. Action No. 1, in substance, alleged that the Corporation's Board did not comply with the "interested persons" provisions of the Act; that there had not been full disclosure about various matters, including with respect to the Corporation's application to deregister as an investment company and about the business relationships between defendants in proxy statements from 1989 through 1994; and that management's and directors' compensation and benefits were excessive in relation to the financial performance of the Corporation. The complaint asserted claims under the Act and SEC Rules promulgated thereunder and under common law. In May 1995, an amended complaint was filed containing in substance, the same claims as the original complaint, but purporting to assert additional derivative and class action claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. The amended complaint alleged that Franklin Holding and its Board failed to disclose facts in various documents, including the Corporation's 1994 Annual Report and 1993 and 1994 Proxy Statements, with respect to, among other things, Franklin Holding's investment through Excelsior in various radio stations and the current status of the Corporation's operations.
After the filing of Action No.1, Mr. Jay B. Langner and a group of other individuals filed a Schedule 13D, pursuant to the 1934 Act and related regulatory requirements, announcing their intention to conduct a proxy campaign to gain control of the Corporation, with a view towards removing existing board members and bringing about the Corporation's dissolution and liquidation. In July 1995, the Corporation filed suit against Mr. Langner, and his group, claiming violations of the federal securities laws, in connection with the Schedule 13D filing and the group's subsequent proxy materials ("Action No.2").
In June 1995, the Corporation and the other defendants moved to dismiss the amended complaint in Action No.1 for failure to make the required demand upon the Board of Directors (as to purported derivative claims), for lack of standing to assert the purported derivative claims, for failure to state a claim upon which the requested relief can be granted and for failure to plead the claims for fraud with the required specificity. Plaintiff filed a second amended complaint in August 1995 containing in substance the same claims as the amended complaint, but including additional factual allegations. The second amended complaint sought unspecified monetary relief from the individual defendants and equitable and declaratory relief with respect to Franklin Holding, including setting aside the election of directors held at the Corporation's annual meeting in August 1994 and 1995 and Board action since August 1994, declaring the chairman's employment contract void, an accounting by defendants, and an injunction directing the liquidation of Franklin Holding and the appointment of a special fiscal agent, receiver or conservator to oversee same. The plaintiff and the defendants submitted supplemental briefings concerning the issue of whether the second amended complaint should be dismissed.
In January 1996, the Court issued an opinion partially granting and partially denying defendants' motion to dismiss. The Court dismissed plaintiff's derivative claims for failure to make the required demand upon the Board of Directors and abstained from entertaining plaintiff's claim that the Corporation be dissolved and that a special fiscal agent, receiver or conservator be appointed. The Court denied defendants' motion to dismiss with respect to the remainder of plaintiff's claims.
On December 10, 1996, the Court ruled that Action No. 1 could proceed as a class action and defined the class (the "Class") as the Corporation's stockholders excluding S. L. Brown & Company, Inc., the Corporation's
directors, and their controlling stockholders, the members of their immediate families, their partners and other legal representatives.
On July 14, 1997, the parties in Action No.1 and Action No. 2 entered into a Stipulation of Settlement (the "Settlement"). The Settlement was approved by the District Court on September 11, 1997.
Pursuant to terms of the Settlement, the Board of Directors declared on July 18, 1997 a $3.25 special dividend to stockholders of record of the Corporation's Common Stock as of July 28, 1997. The special dividend payable to the Corporation's stockholders who are members of the Class in Action No. 1 was placed in a settlement fund for the benefit of the Class on August 7, 1997. The settlement fund, which was reduced by an amount totaling $740,748 for attorneys' fees and expenses awarded by the District Court to plaintiff's counsel in Action No. 1, was distributed to class members on October 20, 1997. The Corporation's stockholders who were recordholders on July 28, 1997, but were not members of the Class (and also including by terms of the Settlement, Miles L. Berger and members of his immediate family) received the special dividend on August 4, 1997.
The terms of the Settlement provided that the Corporation's directors would use their reasonable best efforts to formulate and adopt, and to cause the Corporation to call a meeting of its stockholders to vote upon a plan to designate the Corporation as a Business Development Company pursuant to the Act. On September 9, 1997, the stockholders approved a proposal that the Corporation be regulated as a BDC. On November 18, 1997, the Corporation filed a notification of election to become a BDC with the Commission. The election became effective upon receipt of the filing by the Commission.
Under the terms of the Settlement, upon the Corporation becoming a BDC, for three years thereafter: (a) each director's annual fees for all meetings of the Board or Directors and its committees actually attended, including consulting fees, shall not exceed in the aggregate a total of $12,000 per year, but such directors may receive incentive compensation, as determined in and subject to the absolute discretion of the Board of Directors and provided that such incentive compensation is permissible under the Act; and (b) the base salary for Stephen Brown shall not exceed $350,000 per year, but, during those three years, Mr. Brown also may receive such additional incentive compensation, as determined by and subject to the absolute discretion of the Board of Directors, as is permissible under the Act.
The Corporation is a plaintiff in an action brought against National Union Fire Insurance Company of Pittsburgh, PA ("National Union") in the Supreme Court of the State of New York. The action seeks reimbursement of $1,000,000 for fees and expenses incurred in connection with certain shareholder litigation brought against Franklin and its directors. National Union filed a motion to dismiss the complaint which the Corporation opposed. The motion is pending before the court.
6. TRANSACTIONS WITH CONTROLLED AFFILIATES
On May 30, 1997, Franklin Holding made an additional investment of $2,500,000 in Avery Communications Inc. ("Avery"), a holding company in the telecommunications industry. The investment partially consisted of a $1,000,000 note with a maturity of three years that earns interest at the rate of 10.0% per annum. The first year's interest payment of $100,000 was made at the time the loan was made. As additional consideration for this note, the Corporation received warrants to purchase 666,667 shares of Avery common stock at $1.50 per share. These warrants expire in five years from the date of issuance. The remainder of the investment, $1,500,000, purchased 7.5 equity units in Avery. Each unit consists of 133,333 shares of common stock of Avery and 200,000 shares of preferred Series D stock which are convertible to 100,000 shares of common stock. The shares of preferred Series D stock earn a dividend of 10.0% per annum payable quarterly. This transaction, in conjunction with the investment in common and preferred stock of Avery that the Corporation held previously, resulted in Franklin Holding owning in excess of 25% of Avery's outstanding voting stock on a primary basis. Additionally, three officers of Franklin Holding were appointed to Avery's six person Board of Directors and the Corporation's Chairman and Chief Executive Officer was appointed as the Vice Chairman of Avery's Board of Directors.
For the year ended December 31, 1997, Franklin Holding's income from controlled affiliates consists of $129,500 in dividends from Avery and $127,758 of interest amortized on the note. At December 31, 1997, $170,403 is included in "Accrued interest and accounts receivable" on the accompanying balance sheet for amounts due from Avery for dividends and reimbursable expenses.
For the years ended December 31, 1996 and 1995, Franklin Holding's income from controlled affiliates consists of a management fee from Excelsior of $750,000 .
7. EMPLOYEE STOCK SAVINGS PLAN
At December 31, 1997, Franklin Holding had a contributory retirement plan (the "Plan") covering all employees. Contributions to the Plan were invested in Franklin Holding's common stock and/or a selected group of mutual funds. Contributions for the year ended December 31, 1997, 1996 and 1995 were $27,093, $21,163, and $25,070, respectively, and are included in salaries and employee benefits in the accompanying Statements of Operations. The Plan was terminated in January 1998 and all funds were distributed to the participating employees.
8. PURCHASES AND SALES OF INVESTMENT SECURITIES
The cost of purchases and proceeds from sales of investment securities, excluding short-term investments, aggregated $5,198,693 and $8,492,499, respectively, for the year ended December 31, 1997 and $4,837,273 and $3,350,826, respectively, for the year ended December 31, 1996.
9. STOCKHOLDERS' DISTRIBUTION
Franklin Holding paid a $3.25 per share special distribution on August 4, 1997 to its stockholders of record as of July 28,1997 totaling $2,603,894. Based on the calculation of current and cumulative earnings and profits at December 31, 1997, it was determined that this entire distribution was a return of capital to the stockholders. Franklin Holding also paid a $1.00 per share special distribution on December 4, 1996 to its stockholders of record as of November 25,1996 totaling $801,198. Based on the calculation of current and cumulative earnings and profits at that time, it was determined that this entire distribution was also a return of capital to the stockholders.