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FORM N-14
FRANKLIN CAPITAL CORPORATION
450 Park Avenue, 10th Floor
Stephen L. Brown
Copies To:
|
Steven B. Boehm, Esq. Cynthia M. Krus, Esq. Sutherland Asbill & Brennan LLP 1275 Pennsylvania Avenue, N.W. Washington, DC 20004-2415 (202) 383-0100 |
James M. Dubin, Esq. Paul, Weiss, Rifkind, Wharton & Garrison 1285 Avenue of the Americas New York, New York 10019-6064 (212) 373-3000 |
Jeffrey J. Weinberg, Esq. Weil, Gotshal & Manges LLP 767 Fifth Avenue New York, New York 10153 (212) 310-8000 |
Approximate Date of Proposed Public Offering: As soon as practicable after the effective date of this Registration Statement.
Calculation of Registration Fee Under the Securities Act of 1933
| Proposed | Proposed | |||||||||||||||
| Maximum | Maximum | |||||||||||||||
| Amount | Offering Price | Aggregate | ||||||||||||||
| Title of Securities Being | Being | Per | Offering | Amount of | ||||||||||||
| Registered | Registered | Share(1) | Price(1) | Registration Fee | ||||||||||||
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Common Stock, $1.00 par value
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4,442,000 | $ | 3.90 | $ | 17,323,800 | $ | 1,594.00 | |||||||||
| (1) | Estimated solely for purposes of calculating the registration fee pursuant to Rule 457(f) on the basis of the high and low sales price on the common stock on April 22, 2002 as reported on the American Stock Exchange. |
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.
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To the stockholders of Franklin Capital Corporation and Change Technology Partners, Inc.:
Franklin Capital Corporation and Change Technology Partners, Inc. have entered into a merger agreement where Franklin Capital has agreed to acquire Change Technology in a merger. Franklin Capital will survive the merger and will change its name to Excelsior Communications Corporation. If the merger is completed, Change Technology common stockholders will receive 1.0 share of Franklin Capital common stock for each 40.985 shares of Change Technology common stock they own, and they will hold approximately 80% of Franklin Capital common stock after the merger. If the merger is completed, holders of Change Technology Series A preferred stock will receive one share of Franklin Capital Series B preferred stock for each share of Change Technology Series A preferred stock they own.
|
Franklin Capital will hold a special meeting of
both its common stockholders and its Series A preferred
stockholders
at Eastern
time,
on ,
2002
at ,
to: • approve the withdrawal of its election to be regulated as a business development company; • amend its certificate of incorporation to increase its authorized shares; • consider and vote upon the merger; • approve and adopt amendments to its Stock Incentive Plan; and • for its preferred stockholders only, vote for one preferred director. |
Change Technology will hold its annual meeting of
common and Series A preferred stockholders
at Eastern time
on ,
2002
at to: • consider and vote upon the merger; • approve and ratify the grant of an option to purchase common stock to William Avery; and • elect five directors to the Change Technology board of directors. |
The boards of directors of Franklin Capital and Change Technology have considered all aspects of the merger including any conflicts of interests as well as the other proposals. The boards of directors have approved the merger and determined the merger to be in the best interests of their respective stockholders and recommend that stockholders vote FOR the merger and the other proposals before the meetings.
The value of the shares of Franklin Capital common stock will continue to fluctuate, and Change Technology stockholders will not know the value of the Franklin Capital shares that they will receive in the merger at the time they vote. Based on the closing price of Franklin Capital common stock on April 22, 2002, the aggregate value of the merger consideration would be $17,323,800.
Franklin Capital is a business development company regulated under the Investment Company Act of 1940, and its common stock is traded on the American Stock Exchange under the symbol “FKL.” The closing price of Franklin Capital common stock on April 22, 2002 was $3.90 per share. The closing price of Change Technology common stock, which trades over-the-counter under the symbol “CTPI.OB”, on April 22, 2002 was $0.055 per share. Neither Franklin Capital’s Series A preferred stock nor Change Technology’s Series A preferred stock trades on an exchange.
This joint proxy statement/ prospectus sets forth concisely the information that you should know before voting on the merger and should be retained for future reference. Franklin Capital and Change Technology file periodic reports and statements with the Securities and Exchange Commission. For more information on how to obtain these reports, see “Where You Can Find More Information” on page 152.
Your vote is very important. Whether or not you plan to attend the special meeting or annual meeting, please take time to vote on the proposal by completing and mailing the enclosed proxy card.
| Sincerely, | Sincerely, | |
|
Stephen L. Brown
|
William Avery | |
|
Chairman of the Board
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President and Chief Executive Officer | |
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and Chief Executive Officer
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Change Technology Partners, Inc. | |
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Franklin Capital Corporation
|
||
See “The Merger Proposal — Special Factors Regarding the Merger Proposal ” and “Risk Factors” beginning on page 13 for a discussion of factors that should be evaluated in connection with the merger.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this proxy statement/ prospectus. Any representation to the contrary is a criminal offense.
This joint proxy statement/ prospectus is dated , 2002, and was mailed to you on or about
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FRANKLIN CAPITAL CORPORATION
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
To Our Stockholders:
A special meeting of both common and Series A preferred stockholders of Franklin Capital Corporation will be held at , Eastern time, on , 2002 at , for the following purposes:
| 1. | To approve the withdrawal of Franklin Capital’s election to be regulated as a business development company under the Investment Company Act of 1940; | |
| 2. | To approve and adopt an amendment to Franklin Capital’s certificate of incorporation to increase the number of authorized shares of capital stock from 10,000,000 to 31,000,000 (25,000,000 shares of common stock and 6,000,000 shares of preferred stock); | |
| 3. | To consider and vote upon the merger proposal to approve and adopt a merger agreement with Change Technology Partners, Inc. and the transactions contemplated thereby, including the merger of Change Technology with and into Franklin Capital; | |
| 4. | To approve amendments to Franklin Capital’s Stock Incentive Plan, including an amendment to increase the number of shares authorized under the plan; | |
| 5. | To elect Spencer L. Brown, a Vice President and Secretary of Franklin Capital, to serve on the board of directors for a term of one year or until his successor is duly elected and qualified (Series A preferred stockholders only); and | |
| 6. | To grant discretionary authority to vote in favor of an adjournment of the meeting, if necessary. |
None of the proposals is contingent upon the passage of any other proposal. These proposals are more fully described in the joint proxy statement/prospectus that accompanies this notice, which you should read carefully.
We have fixed the close of business on , 2002 as the record date for the determination of our common and Series A preferred stockholders entitled to vote at this meeting, and any and all adjournments or postponements thereof.
Whether or not you plan to attend the meeting, please vote your shares. You may complete, date and sign the enclosed proxy card and mail it in the postage-paid envelope. It is important that your interests be represented at the special meeting. You can revoke your proxy at any time before it is voted.
| By Order of the Board of Directors | |
| of Franklin Capital Corporation | |
| Spencer L. Brown | |
| Secretary |
New York, New York
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CHANGE TECHNOLOGY PARTNERS, INC.
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To Our Stockholders:
An annual meeting of both common and Series A preferred stockholders of Change Technology Partners, Inc. will be held at , Eastern time, on , 2002, at , for the following purposes:
| 1. | To consider and vote upon the merger proposal to approve and adopt a merger agreement with Franklin Capital Corporation and the transactions contemplated thereby, including the merger of Change Technology with and into Franklin Capital; | |
| 2. | To approve and ratify the grant to William Avery, the President, Chief Executive Officer and Secretary of Change Technology, of an option to purchase 6,000,000 shares of Change Technology common stock pursuant to the terms and conditions of a Stock Option Agreement dated September 21, 2001 between Change Technology and William Avery; | |
| 3. | To elect five (5) directors to serve on the board of directors for a term of one year or until their successors are duly elected and qualified; and | |
| 4. | To grant discretionary authority to vote in favor of an adjournment of the meeting, if necessary. |
None of the proposals is contingent upon the passage of any other proposal. The proposals are more fully described in the joint proxy statement/prospectus that accompanies this notice, which you should read carefully.
We have fixed the close of business on , 2002 as the record date for the determination of our common and Series A preferred stockholders entitled to vote at this meeting, and any and all adjournments or postponements thereof.
Whether or not you plan to attend the meeting, please vote your shares. You may complete, date and sign the enclosed proxy card and mail it in the postage-paid envelope. It is important that your interests be represented at the annual meeting. You can revoke your proxy at any time before it is voted.
| By Order of the Board of Directors | |
| of Change Technology Partners, Inc. | |
| William Avery | |
| Secretary |
Greenwich, Connecticut
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QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: What are we being asked to vote on?
A: You are being asked to vote on a merger proposal to permit Franklin Capital to acquire Change Technology in a stock for stock exchange. If the merger agreement is approved and the merger is consummated, common and preferred stockholders of Change Technology will become stockholders of Franklin Capital, and, Franklin Capital will change its name to Excelsior Communications Corporation. Franklin Capital stockholders are also being asked to approve the withdrawal of Franklin Capital’s election to be regulated as a business development company under the Investment Company Act of 1940.
In addition to voting on the merger proposal, Franklin Capital stockholders are being asked to approve an amendment to Franklin Capital’s certificate of incorporation increasing the number of shares of capital stock from 10,000,000 to 31,000,000 and to approve amendments to Franklin Capital’s Stock Incentive Plan. Franklin Capital Series A preferred stockholders are also being asked to elect one director to serve as a preferred stock director on Franklin Capital’s board of directors.
In addition to voting on the merger proposal, Change Technology stockholders are being asked to approve and ratify the grant of an option to purchase 6,000,000 shares of Change Technology common stock to William Avery, the President, Chief Executive Officer and Secretary of Change Technology, and to elect five (5) directors to serve on Change Technology’s board of directors.
None of the proposals is contingent upon the passage of any other proposal.
Q: Why are Franklin Capital and Change Technology proposing to merge?
A: Franklin Capital and Change Technology are proposing to merge in order to provide each company’s respective stockholders the opportunity to own stock in a larger and potentially more actively traded company. In addition, the respective boards approved the transaction, among other things, because:
| • | Franklin Capital will gain access to capital resources which it can use to build its Excelsior Radio Networks, Inc. subsidiary through acquisitions, joint ventures and internally funded efforts; | |
| • | Franklin Capital stockholders may have increased liquidity as a result of the merger by owning shares of a larger public company; | |
| • | Franklin Capital expects to have access to capital to continue as a going concern and to fund growth opportunities; | |
| • | Franklin Capital will receive assistance from Change Technology’s board of directors in executing its business strategy of acquiring additional businesses in radio and related media fields; | |
| • | Change Technology’s board of directors determined that the exchange ratio represents a substantial premium to the stock market price of Change Technology common stock; | |
| • | Change Technology’s stockholders will have the opportunity to own a stake in one or more profitable radio syndication businesses which represents a continuation of Change Technology’s strategy to exit the e-service businesses; and | |
| • | Change Technology stockholders may have increased liquidity because the shares are intended to be listed on an exchange. |
Q: What will I receive in the merger?
A: Change Technology common stockholders will receive 1.0 share of Franklin Capital common stock for each 40.985 shares of Change Technology common stock that they own. Change Technology Series A preferred stockholders will receive one share of Franklin Capital Series B preferred stock for each share of Change Technology
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On December 3, 2001, the last full trading day before the public announcement of the proposed merger, the closing price of Franklin Capital common stock on the American Stock Exchange was $4.20 per share. On December 3, 2001, the closing price of Change Technology common stock on the OTC Board was $0.04. On , 2002, the most recent practicable date prior to the printing of this joint proxy statement/ prospectus, the closing price of Franklin Capital common stock was $ per share, and the closing price of Change Technology common stock was $ per share. Assuming the , 2002 closing price, the Change Technology common stockholders would receive $ in Franklin Capital common stock or $ per share.
Q: Are stockholders entitled to appraisal rights?
A: Change Technology stockholders will be entitled to appraisal rights in accordance with Section 262 of the Delaware General Corporation Law. A copy of Section 262 is included as Appendix B to this joint proxy statement/prospectus.
Franklin Capital stockholders are not entitled to appraisal rights.
Q: When will the merger be completed?
A: We are working to complete the merger by June 30, 2002. We currently expect to complete the merger promptly following the Franklin Capital special meeting and the Change Technology annual meeting. If necessary or desirable, Franklin Capital and Change Technology may agree to complete the merger at a later date.
Q: What are the federal income tax consequences of the merger?
A: It is a condition to the closing of the merger that Franklin Capital and Change Technology each receive an opinion from their respective counsel, based on assumptions and representations made by Franklin Capital and Change Technology, that the merger will be treated as a tax-free reorganization for federal income tax purposes. As a result, the exchange by Change Technology common stockholders of shares of Franklin Capital common stock generally will not cause them to recognize any gain or loss for federal income tax purposes.
This tax treatment may not apply to all Change Technology stockholders. Determining the actual tax consequences of the merger to you can be complicated. They will depend on your specific situation and on variables not within our control. You should consult your own tax advisor for a full understanding of the merger’s tax consequences to you, including how any state, local or foreign tax laws may apply to you.
Q: Who must approve the merger?
A: In addition to the approvals by the Franklin Capital board of directors and the Change Technology board of directors, each of which has already been obtained, the merger must be approved by the Franklin Capital common and Series A preferred stockholders, voting together as a single class, and the Change Technology common and Series A preferred stockholders, voting together as a single class.
Q: What stockholder vote is required to approve the merger proposal?
A: A majority of the outstanding shares of Franklin Capital common and Series A preferred stock, taken together as a single class, entitled to vote constitutes a quorum for the Franklin Capital special meeting, and a majority of the outstanding shares of Change Technology common stock and Series A preferred stock, taken together as a single class, entitled to vote constitutes a quorum for the Change Technology annual meeting. The affirmative vote of the holders of the majority of the outstanding common and Series A preferred shares of Franklin Capital voting together as a single class and a majority of the outstanding Change Technology common and Series A preferred stock
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Q: Does the Franklin Capital board of directors recommend approval of the merger proposal?
A: Yes. After careful consideration, the Franklin Capital board of directors unanimously recommends that both its common and Series A preferred stockholders vote “FOR” the merger proposal on the enclosed proxy card. For a more complete description of the recommendation of the Franklin Capital board of directors, see the sections entitled “Franklin Capital’s Reasons for the Merger” on page 57 and “Recommendation of the Franklin Capital Board of Directors” on page 59.
Q: Does the Change Technology board of directors recommend approval of the merger proposal?
A: Yes. After careful consideration, the Change Technology board of directors unanimously recommends that its common and Series A preferred stockholders vote “FOR” the merger proposal on the enclosed proxy card. For a more complete description of the recommendation of the Change Technology board of directors, see the sections entitled “Change Technology’s Reasons for the Merger” on page 59 and “Recommendation of the Change Technology Board of Directors” on page 61.
Q: Why am I being asked to vote on the other proposals?
A: The vote on the proposals relating to the increase in authorized capital stock; the amendments to the Stock Incentive Plan; the withdrawal of the election to be regulated as a business development company; and the election of Spencer L. Brown to the board of directors are being sought to comply with the terms and conditions of the merger agreement.
Franklin Capital is seeking stockholder approval to increase the options available for issuance under the Stock Incentive Plan and to allow directors to participate in the plan. If the Franklin Capital stockholders approve this proposal, Franklin Capital will terminate its non-employee director stock option plan.
Change Technology stockholders are being asked to vote on the routine matter of electing its board of directors. In addition, Change Technology stockholders are being asked to approve the grant of 6,000,000 options outside of the option plan to William Avery.
Q: What stockholder vote is required to approve the other proposals?
A: The affirmative vote of a majority of the Franklin Capital common shares and the Series A preferred shares, voting separately, is necessary to approve the amendment to Franklin Capital’s certificate of incorporation to increase the number of authorized shares of Franklin Capital’s capital stock from 10,000,000 to 31,000,000.
The affirmative vote of a majority of the Franklin Capital common and Series A preferred shares, voting together as a single class, present at the Franklin Capital special meeting in person or by proxy is necessary to approve the amendment to Franklin Capital’s Stock Incentive Plan to increase the number of shares authorized under the plan from 67,500 to 1,000,000 and allow Franklin Capital to grant members of its board of directors awards under the plan.
The affirmative vote of a majority of the Franklin Capital Series A preferred shares present at the Franklin Capital special meeting in person or by proxy is necessary to approve election of Spencer L. Brown to the board of directors.
The affirmative vote of (A) 67% of the securities voted at the special meeting if more than 50% of the outstanding securities are present in person or by proxy at the meeting or (B) more then 50% of the outstanding voting securities, whichever is less, is necessary to approve the withdrawal of Franklin Capital’s election to be regulated as a business development company.
The affirmative vote of a majority of the Change Technology common and Series A preferred shares, voting together as a single class, present at the Change Technology
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Q: Does the Franklin Capital board of directors recommend approval of the other proposals?
A: Yes. After careful consideration, the Franklin Capital board of directors unanimously recommends that both its common and Series A stockholders vote “FOR” the other proposals on the enclosed proxy card.
Q: Does the Change Technology board of directors recommend approval of the other proposals?
A: Yes. After careful consideration, the Change Technology board of directors unanimously recommends that both its common and Series A stockholders vote “FOR” the other proposals on the enclosed proxy card.
Q: What do I need to do now?
A: We urge you to read this joint proxy statement/prospectus, including its annexes, carefully, and to consider how the merger proposal will affect you as a stockholder. You also may want to review the documents referenced under “Where You Can Find More Information” on page and consult with your accounting, legal and tax advisors.
Q: How do I vote my shares?
A: You may indicate how you want to vote on your proxy card and then sign and mail your proxy card in the enclosed return envelope as soon as possible so that your shares may be represented at the Franklin Capital special meeting or the Change Technology annual meeting, as applicable. You may also attend the Franklin Capital special meeting or Change Technology annual meeting, as applicable, in person instead of submitting a proxy.
If you fail either to return your proxy card, or to vote in person, or if you mark your proxy “abstain,” the effect will be a vote “against” the merger proposal. If you sign and send in your proxy without indicating how you want to vote, your proxy will be counted as a vote for the merger proposal unless your shares are held in a brokerage account.
Q: If my shares are held in a brokerage account, will my broker vote my shares for me?
A: Your broker will not be able to vote your shares without instructions from you on how to vote. Therefore, it is important that you follow the directions provided by your broker regarding how to instruct your broker to vote your shares. If you fail to provide your broker with instructions, it will have the same effect as a vote “against” the merger proposal.
Q: May I change my vote after I have mailed in my signed proxy card?
A: Yes. You may change your vote at any time before the vote takes place at the Franklin Capital special meeting or the Change Technology annual meeting, as applicable. To do so, you may either complete and submit a new proxy card or send a written notice stating that you would like to revoke your proxy. In addition, you may attend the Franklin Capital special meeting or the Change Technology annual meeting, as applicable, and vote in person. However, if you elect to vote in person and your shares are held by a broker, bank or other nominee, you must bring to the meeting a letter from the broker, bank or other nominee confirming your beneficial ownership of the shares.
Q: When and where is the Franklin Capital special meeting?
A: The Franklin Capital special meeting of stockholders will be held at , Eastern time, on , 2002 at .
Q: When and where is the Change Technology annual meeting?
A: The Change Technology annual meeting of stockholders will be held at , Eastern time, on , 2002 at .
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Q: Should I send in my stock certificates?
A: No. After the completion of the merger, Franklin Capital will send former Change Technology stockholders instructions explaining how to exchange Change Technology stock certificates for the appropriate number of shares of Franklin Capital common stock or Franklin Capital Series B preferred stock, as applicable. Current Franklin Capital common and Series A preferred stockholders will not be required to exchange their certificates.
Q: Who may I contact with any additional questions?
A: You may call Spencer L. Brown of Franklin Capital at 212-486-2323, or William Avery of Change Technology at 203-661-6942.
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TABLE OF CONTENTS
| Page | ||||
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SUMMARY
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1 | |||
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FORWARD-LOOKING STATEMENTS
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10 | |||
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FRANKLIN CAPITAL SUMMARY HISTORICAL SELECTED
CONSOLIDATED FINANCIAL INFORMATION
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11 | |||
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CHANGE TECHNOLOGY SUMMARY HISTORICAL SELECTED
CONSOLIDATED FINANCIAL INFORMATION
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12 | |||
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RISK FACTORS
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13 | |||
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PRO FORMA FINANCIAL INFORMATION
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19 | |||
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EQUIVALENT PER SHARE DATA
|
40 | |||
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THE FRANKLIN CAPITAL SPECIAL MEETING
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41 | |||
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THE CHANGE TECHNOLOGY ANNUAL MEETING
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45 | |||
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THE MERGER PROPOSAL
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53 | |||
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THE MERGER AGREEMENT
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65 | |||
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MATERIAL FEDERAL INCOME TAX
CONSEQUENCES
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73 | |||
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FRANKLIN CAPITAL CHARTER AMENDMENT
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76 | |||
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WITHDRAWAL OF FRANKLIN CAPITAL’S ELECTION
TO BE REGULATED AS A BUSINESS DEVELOPMENT COMPANY
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76 | |||
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AMENDMENTS TO FRANKLIN CAPITAL’S STOCK
INCENTIVE PLAN
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78 | |||
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ELECTION OF PREFERRED STOCK DIRECTOR OF
FRANKLIN CAPITAL
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78 | |||
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CHANGE TECHNOLOGY PROPOSAL TO APPROVE OPTION
GRANT TO WILLIAM AVERY
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79 | |||
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ELECTION OF CHANGE TECHNOLOGY
DIRECTORS
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79 | |||
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BUSINESS OF FRANKLIN CAPITAL
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81 | |||
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FRANKLIN CAPITAL’S MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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89 | |||
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FRANKLIN CAPITAL MANAGEMENT
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96 | |||
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BUSINESS OF CHANGE TECHNOLOGY
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109 | |||
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CHANGE TECHNOLOGY’S MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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115 | |||
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CHANGE TECHNOLOGY MANAGEMENT
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129 | |||
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BUSINESS OF EXCELSIOR COMMUNICATIONS
CORPORATION
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137 | |||
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DESCRIPTION OF FRANKLIN CAPITAL STOCK AND
DISTRIBUTIONS
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142 | |||
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COMPARISON OF RIGHTS OF FRANKLIN CAPITAL,
CHANGE TECHNOLOGY AND EXCELSIOR COMMUNICATIONS CORPORATION
STOCKHOLDERS
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146 | |||
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STOCKHOLDER PROPOSALS FOR FRANKLIN CAPITAL
2002 ANNUAL MEETING
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150 | |||
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STOCKHOLDER PROPOSALS FOR CHANGE TECHNOLOGY
2003 ANNUAL MEETING
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150 | |||
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OTHER MATTERS
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150 | |||
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LEGAL MATTERS
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150 | |||
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EXPERTS
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150 | |||
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WHERE YOU CAN FIND MORE INFORMATION
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152 | |||
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APPENDIX A —
AGREEMENT AND PLAN OF MERGER |
A-1 | |||
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APPENDIX B —
SECTION 262 OF THE DELAWARE GENERAL CORPORATION LAW |
B-1 | |||
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APPENDIX C —
AMENDMENT TO THE CERTIFICATE OF INCORPORATION OF FRANKLIN CAPITAL CORPORATION |
C-1 | |||
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SUMMARY
This summary highlights selected information from this proxy statement/prospectus and may not contain all of the information that is important to you. To understand the merger proposal fully and for a more complete description of the merger, you should read carefully this entire document and the documents to which we have referred you. See “Where You Can Find More Information” on page .
Franklin Capital Corporation (Page 81)
Currently, Franklin Capital is a business development company under the Investment Company Act of 1940. In the past, Franklin Capital has participated in start-up and early stage financing, expansion or growth financing, leveraged buy-out financing and restructuring in a variety of industries. Since 1997, Franklin Capital’s investment activity has been focused principally on securities issued by companies involved in early stage high technology sectors such as wireless communications, other telecommunications services, internet software and information services. At December 31, 2001, Franklin Capital had approximately $4,100,000 in assets.
Franklin’s most significant investment is a majority owned subsidiary, Excelsior Radio Networks, Inc. As of December 31, 2001, Franklin owned 50.8% of Excelsior Radio on a fully diluted basis and had 58.2% of Excelsior Radio’s voting control.
In August, 2001 Franklin Capital acquired certain assets from affiliates of Winstar Communications, Inc., which are held in its majority owned subsidiary, Excelsior Radio. Excelsior Radio creates, produces, distributes and through its Global Media sales division, is a sales representative for, national radio programs and offers other miscellaneous services to the radio industry. Excelsior Radio offers radio programs to the industry in exchange for commercial broadcast time, which Excelsior Radio sells to national advertisers. Excelsior Radio currently offers in excess of 100 radio programs to over 2,000 radio stations across the country.
On April 3, 2002, a newly formed wholly owned subsidiary of Excelsior Radio purchased substantially all of the assets of Dial Communications Group, Inc., and Dial Communications Group, LLC used in connection with the Dial entities’ business of selling advertising relating to radio programming. The combination of Excelsior Radio’s Global Media business and Dial’s business will create a national sales representation company with pro forma 2001 advertising sales revenue of approximately $50 million.
Change Technology and Sunshine Wireless LLC provided financing for both the Winstar and Dial acquisitions. Change Technology owns 16.5% of Excelsior Radio on a fully diluted basis and has 6.5% of voting control, and currently, William Avery serves as Change Technology’s representative on the Excelsior Radio board.
If the merger with Change Technology is consummated, Franklin Capital will change its name to Excelsior Communications Corporation. The business of the new combined company will focus on creating, producing and selling programs to the radio industry. In order to develop its business, Excelsior Communications intends to expand and grow the business of Excelsior Radio, through acquisitions, joint ventures and other efforts.
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Franklin Capital has determined that it may not have sufficient cash and cash equivalents to meet its working capital requirements during the current fiscal year. Franklin Capital’s independent auditors have issued an opinion in which the independent auditors have indicated that there is substantial doubt as to Franklin Capital’s ability to continue as a going concern, which is noted in Franklin Capital’s financial statements. If the merger with Change Technology is not consummated, Franklin Capital will be required to seek alternative sources of financing to continue operating through the current fiscal year. There can be no assurance that Franklin Capital would be able to obtain alternative financing.
The transactions contemplated by the merger agreement are intended to result in Franklin Capital no longer being subject to the 1940 Act because of the change in the nature of its business. However, Franklin Capital cannot change the nature of its business so as to cease to be regulated as a business development company unless such change is approved by Franklin Capital’s stockholders in accordance with the 1940 Act. See “Withdrawal of Franklin Capital’s Election to be Regulated as a Business Development Company.”
Franklin Capital is headquartered in New York, New York and is listed on the American Stock Exchange and trades under the symbol “FKL.”
Change Technology Partners, Inc. (Page 109)
Change Technology currently has limited operations. Since July 2001, Change Technology has focused on divesting its consulting businesses and using its cash position to develop and acquire businesses in the radio and media industries. Presently, its only operating business is Papke Textor, Inc. d/b/a Canned Interactive, which designs and produces interactive media, primarily for the entertainment industry.
Prior to July 2001, Change Technology and its subsidiaries have provided a broad range of professional consulting services, including e-services and technology strategy, online branding, web architecture and design, systems integration, systems architecture and outsourcing. However, in response to continued unfavorable market conditions for its services, Change Technology embarked on a review of its operations with the goal of formulating a course of action to minimize near-term losses, capital expenditures, and reduce cash outflows. As a result of such review, the Change Technology board of directors voted to sell its existing operations, other than Canned Interactive, and to use its assets to invest in and develop new businesses.
In connection with this decision, the board of directors terminated the employment of approximately 90% of its existing workforce including its President and Chief Executive Officer. As a result of such actions, Change Technology incurred severance expenses of approximately $1,326,000 ($493,000 of which were incurred in connection with the termination of its President and Chief Executive Officer).
Change Technology has provided financing to Excelsior Radio in connection with its acquisition of the Winstar and Dial assets.
Change Technology is headquartered in Greenwich, Connecticut. Change Technology is traded over-the-counter under the symbol “CTPI.OB.”
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The Merger Proposal (Page 53)
Franklin Capital plans to acquire Change Technology in a stock for stock exchange. The merger and related transactions will be accomplished as follows:
| • | Each 40.985 shares of Change Technology common stock will be exchanged for 1.0 share of Franklin Capital common stock. | |
| • | Each share of Change Technology Series A preferred stock will be exchanged for one share of Franklin Capital Series B preferred stock. | |
| • | Based upon the exchange ratio and an estimate of the shares of Change Technology common stock expected to be outstanding on April 22, 2002, Franklin Capital will issue 4,442,000 shares of common stock to Change Technology common stockholders and 645 shares of Series B preferred stock in connection with the merger. On April 22, 2002, the closing price of Franklin Capital’s common stock was $3.90. Assuming the April 22, 2002 closing price, the Change Technology common stockholders would receive $17,323,800 in Franklin Capital common stock or $0.095 per share. | |
| • | As a result of the merger, Franklin Capital will survive and will change its name to Excelsior Communications Corporation. |
The value of the Franklin Capital common stock to be received in the merger, based on the exchange ratio, on the date before the merger was announced and the record date, was:
| Implied Value | ||||||||
| of each | ||||||||
| Franklin Capital | Change | |||||||
| Date | Closing Sale Price | Technology Share | ||||||
|
December 3, 2001
|
$ | 4.20 | $ | 0.102 | ||||
|
,
2002
|
$ | $ | ||||||
The value of the shares of Franklin Capital common stock to be received by Change Technology common stockholders in the merger will continue to fluctuate and Change Technology common stockholders will not know the value of the Franklin Capital shares that they will receive in the merger at the time they vote.
The merger proposal requires the approval of the holders of the majority of the outstanding shares of Franklin Capital common stock and Series A preferred stock, voting together as a single class.
The merger proposal requires the approval of the holders of the majority of the outstanding shares of Change Technology common stock and Series A preferred stock, voting together as a single class.
Franklin Capital and Change Technology hope to complete the merger promptly after the Franklin Capital special meeting and the Change Technology annual meeting, if other required matters are completed by that time. It is expected that the merger will be completed by June 30, 2002.
The merger agreement is attached at the back of this joint proxy statement/prospectus as Appendix A. We encourage you to read the merger agreement.
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The following diagrams depict in summary form the structure of the merger and the related transactions assuming the Franklin Capital and Change Technology stockholders approve the merger and all other conditions are satisfied.
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Ownership of Franklin Capital Stock Following the Merger (Page 42)
Following the merger, existing Franklin Capital common stockholders on a fully diluted basis will own approximately 20% of the outstanding common stock of Franklin Capital, and Change Technology common stockholders will own approximately 80% of the outstanding common stock of Franklin Capital based on the number of shares of Franklin Capital and Change Technology common stock outstanding on April 22, 2002.
Franklin Capital’s Reasons for the Merger (Page 57)
The Franklin Capital board of directors approved the merger for the following principal reasons:
| • | The combined company intends to create value by growing Franklin Capital’s majority owned subsidiary Excelsior Radio Networks through acquisitions, joint ventures and other efforts; | |
| • | Franklin Capital expects to have access to working capital to continue as a going concern and to fund growth opportunities; | |
| • | Franklin Capital will receive assistance from Change Technology’s board of directors in executing its business strategy of acquiring additional businesses in radio and related media fields; and | |
| • | Franklin Capital stockholders may have increased liquidity by owning shares of a larger public company. |
The Franklin Capital board of directors believes that the merger is advisable and in the best interests of Franklin Capital and its common and Series A preferred stockholders. The Franklin Capital board of directors unanimously recommends that its common and Series A preferred stockholders vote “for” approval of the merger proposal.
Change Technology’s Reasons for the Merger (Page 59)
The Change Technology board of directors approved the merger for the following reasons:
| • | Change Technology’s board of directors determined that the exchange ratio represents a substantial premium to the market price of Change Technology common stock; | |
| • | Change Technology stockholders will have the opportunity to own a stake in one or more profitable radio syndication businesses which represents a continuation of Change Technology’s strategy to exit the e-services businesses; and | |
| • | Change Technology stockholders may have increased liquidity after the merger if their shares are listed on an exchange as intended. |
The Change Technology board of directors believes that the merger is advisable and in the best interests of Change Technology and its stockholders. The Change Technology board of directors unanimously recommends that its stockholders vote “for” approval of the merger proposal.
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Conditions to Completion of the Merger (Page 69)
The merger will be completed only if specific conditions, including, among other things, the following, are met or waived:
| • | the Franklin Capital common and Series A preferred stockholders, voting together as a single class, approve the merger; | |
| • | the Change Technology common and Series A preferred stockholders, voting together as a single class, approve the merger; | |
| • | no court order preventing the merger shall be in effect; | |
| • | the registration statement, including this joint proxy statement/ prospectus, is declared effective; | |
| • | William Avery, Stephen Brown and Spencer Brown have entered into employment agreements with Franklin Capital; | |
| • | Franklin Capital and Change Technology each receive an opinion from its tax counsel that the merger will qualify as a reorganization under section 368(a) of the Internal Revenue Code; | |
| • | Change Technology has a specified amount of cash or cash equivalents available; | |
| • | the Franklin Capital common and Series A preferred stockholders approve the withdrawal of Franklin Capital’s status as a business development company; | |
| • | Franklin Capital receives the consent of a majority of the holders of Series A Preferred Stock to designate Spencer Brown and Irving Levine (who currently serves as a preferred stock director) as the two directors of Franklin Capital such preferred holders are entitled to elect; and | |
| • | the representations and warranties made by Franklin Capital and Change Technology continue to be true and correct except for breaches that would not have a material adverse effect and covenants of the parties shall have been performed in all material respects. |
Termination of the Merger Agreement (Page 70)
Even if the Franklin Capital and Change Technology stockholders approve the merger, Franklin Capital and Change Technology can agree at any time to terminate the merger agreement without completing the merger. The merger agreement can also be terminated if, among other things, any of the following occurs:
| • | the merger is not completed by June 30, 2002; | |
| • | a court or other governmental authority prohibits the merger; | |
| • | either the Franklin Capital or Change Technology stockholders do not approve the merger; or | |
| • | if, prior to stockholder approval of the merger, either Franklin Capital or Change Technology’s board of directors authorizes the acceptance of a more favorable acquisition proposal. |
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Franklin Capital and Change Technology Cannot Solicit Other Offers (Page 68)
Franklin Capital and Change Technology have agreed not to encourage, solicit, discuss, or negotiate with anyone other than each other, regarding a merger or sale, unless such company receives an unsolicited acquisition proposal and the respective board of directors determines that it is consistent with its fiduciary obligations to its stockholders under applicable law to pursue such proposal and, in the case of any such discussions or negotiations, the board of directors determine that such proposal is superior to the merger.
If the merger agreement is terminated as a result of an acceptance of a superior acquisition proposal, the terminating party will pay the other party a termination fee of $500,000 plus reimbursement of expenses not to exceed $250,000. The termination fee is intended to compensate the non-terminating party for the loss of opportunities, and for its efforts and expenses incurred to structure the merger if a superior acquisition proposal is accepted.
Interests of Franklin Capital’s and Change Technology’s Officers and Directors in the Merger (Page 61)
When considering the recommendation by the Franklin Capital and Change Technology’s boards of directors to vote “for” the merger proposal, you should be aware that, as described below, specific officers, directors and stockholders of Franklin Capital and Change Technology have interests in the merger that are different from, and may conflict with, your interests. Senior officers of Franklin Capital and Change Technology will benefit from compensation and employment arrangements in the ordinary course of business. William Avery, Stephen L. Brown and Spencer L. Brown will enter into employment agreements with Franklin Capital. If the merger is completed, Franklin Capital will continue indemnification arrangements for officers and directors of Change Technology.
The directors of the combined company after the merger will be Stephen L. Brown (Co-Chairman), Michael R. Gleason (Co-Chairman), James M. Dubin, William E. Lipner, William Avery, Michael J. Levitt, Spencer L. Brown and Irving Levine. The executive officers will be Stephen L. Brown, William Avery, Spencer L. Brown and Hiram Lazar.
The Franklin Capital and Change Technology boards of directors were aware of these interests and considered them in approving the merger.
Federal Income Tax Consequences (Page 73)
It is a condition to the closing of the merger that Franklin Capital and Change Technology each receive an opinion from their respective counsel, based on assumptions and representations made by Franklin Capital and Change Technology, that the Merger will be treated as a tax-free reorganization for federal income tax purposes. As a result, the exchange by Change Technology common stockholders of shares of Franklin Capital common stock generally will not cause them to recognize any gain or loss for federal income tax purposes.
This tax treatment may not apply to all Change Technology shareholders. Determining the actual tax consequences of the merger to you can be complicated.
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Listing of Franklin Capital Common Stock
Due to the merger, Franklin Capital may be required to submit a new listing application to the American Stock Exchange. Franklin Capital believes that after the merger it will meet the requirements for listing on the American Stock Exchange.
Franklin Capital will use its best efforts to cause the shares of its common stock to be issued in the merger to be listed on the American Stock Exchange.
Dissenters’ Rights of Appraisal (Page 49)
Change Technology stockholders will be entitled to dissenters’ rights of appraisal under Section 262 of the Delaware General Corporation Law, a copy of which is attached to this proxy statement as Appendix B. Dissenters’ rights of appraisal allow stockholders to dissent from the merger and receive a fair cash payment for their shares. Certain procedural steps, including not voting in favor of the merger, must be followed by stockholders wishing to perfect and exercise their dissenters’ rights under Delaware law. Failure to comply with those procedures will result in the forfeiture of dissenters’ rights.
The Franklin Capital Special Meeting (Page 41)
A special meeting of common and Series A preferred stockholders of Franklin Capital will be held at , Eastern time, on , 2002, at , to consider and vote upon the following proposals to:
| • | approve the withdrawal of Franklin Capital’s election to be regulated as a business development company under the Investment Company Act of 1940; | |
| • | approve and adopt a merger agreement with Change Technology and the transactions contemplated thereby, including the merger of Change Technology with and into Franklin Capital; | |
| • | approve and adopt an amendment to Franklin Capital’s certificate of incorporation to increase the number of authorized shares from 10,000,000 to 31,000,000 (25,000,000 shares of common stock and 6,000,000 shares of preferred stock); | |
| • | approve certain amendments to Franklin Capital’s Stock Incentive Plan, including an increase the number of shares authorized under such plan; and | |
| • | elect Spencer L. Brown as a director of Franklin Capital (Series A preferred stockholders only). |
The stockholders will also be asked to consider and vote on a proposal to grant discretionary authority to vote in favor of an adjournment of the meeting, if necessary.
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None of the proposals is contingent upon the passage of any other proposal; however, the withdrawal of Franklin Capital’s business development company status is a condition to the merger.
Voting Power; Voting by Franklin Capital Management (Page 42)
On the record date, shares of Franklin Capital common stock were outstanding, of which shares, or % of the shares were owned by directors and executive officers of Franklin Capital. Each share of Franklin Capital common stock entitles the holder to one vote.
On the record date, shares of Franklin Capital Series A preferred stock were outstanding, of which shares or % of the shares were owned by directors and executive officers of Franklin Capital. Each share of Franklin Capital Series A preferred stock entitles the holder to one vote.
The Change Technology Annual Meeting (Page 45)
An annual meeting of stockholders of Change Technology will be held at , Eastern time, on , 2002, at , to consider and vote upon the following proposals:
| • | to approve and adopt a merger agreement with Franklin Capital providing for the merger; | |
| • | to approve and ratify the grant to William Avery of an option to purchase 6,000,000 shares of Change Technology common stock pursuant to the terms of a Stock Option Agreement dated September 21, 2001 between Change Technology and William Avery; and | |
| • | to elect William Avery, James M. Dubin, Michael Gleason, William E. Lipner and Michael Levitt to serve as directors of Change Technology. |
The stockholders will also be asked to consider and vote on a proposal to grant discretionary authority to vote in favor of an adjournment of the meeting, if necessary.
None of the proposals is contingent upon the passage of any other proposal.
Voting Power; Voting by Change Technology Management (Page 46)
On the record date, shares of Change Technology common stock were outstanding, of which shares, or % of the shares were owned by directors and executive officers of Change Technology. Each share of Change Technology common stock entitles the holder to one vote. As of the record date, 645 shares of Change Technology Series A preferred stock were outstanding, none of which were owned by directors or executive officers of Change Technology. Each Series A preferred share of Change Technology is entitled to one vote.
Legal Proceedings (Page 88)
On October 15, 2001, Jeffrey A. Leve and Jeffrey Leve Family Partnership, L.P. filed a lawsuit against Franklin Capital Corporation, Sunshine Wireless, LLC and four
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FORWARD-LOOKING STATEMENTS
This document and documents to which we refer you in this document include various forward-looking statements about Franklin Capital and Change Technology that are subject to risks and uncertainties. Forward-looking statements include information concerning future results of operations of Franklin Capital and Change Technology. Also, statements that use the words “anticipate,” “believe,” “could,” “estimate,” “expect,” “forecast,” “intend,” “may,” “plan,” “possible,” “project,” “should,” “will,” or similar expressions are forward-looking statements. Many factors, some of which are discussed elsewhere in this document and in documents to which we have referred you, could affect the future financial results of Franklin Capital and Change Technology. These factors could cause actual results to differ materially from those expressed in forward-looking statements contained in this document or related documents. These factors include adverse changes in economic conditions and in the markets served by Franklin Capital and Change Technology and a significant delay in the completion of the merger.
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FRANKLIN CAPITAL SUMMARY
The following selected financial data as of and for the years ended December 31, 2001, 2000, 1999 and 1998 has been derived from the financial statements of Franklin Capital and the notes to the accompanying statements, which have been audited by Ernst & Young LLP. The 1997 financial data has been derived from financial statements audited by Arthur Anderson LLP, Franklin Capital’s predecessor auditor. You should read this information in conjunction with the audited consolidated financial statements and notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operation” included elsewhere in this joint proxy statement/ prospectus.
| Year Ended December 31, | ||||||||||||||||||||
| (In thousands, | 2001 | 2000** | 1999 | 1998 | 1997 | |||||||||||||||
| except per share data) | ||||||||||||||||||||
|
Operating Data:
|
||||||||||||||||||||
|
Investment income
|
$ | 192,697 | $ | 115,015 | $ | 72,382 | $ | 263,323 | $ | 497,021 | ||||||||||
|
Expenses
|
$ | 1,579,382 | $ | 2,372,797 | $ | 1,621,780 | $ | 1,620,408 | $ | 2,400,850 | ||||||||||
|
Net investment loss from operations
|
$ | (1,386,685 | ) | $ | (2,257,782 | ) | $ | (1,549,398 | ) | $ | (1,357,085 | ) | $ | (1,903,829 | ) | |||||
|
Net realized gain on investments, net of current
income taxes
|
$ | 522,131 | $ | 1,195,875 | $ | 688,259 | $ | 1,628,004 | $ | 3,105,165 | ||||||||||
|
Net (decrease) increase in unrealized
appreciation of investments, net of deferred income taxes
|
$ | (1,553,756 | ) | $ | (3,365,513 | ) | $ | 3,086,958 | $ | (1,015,091 | ) | $ | (1,130,879 | ) | ||||||
|
Net (decrease) increase in net assets
attributable to common stockholders
|
$ | (2,533,460 | ) | $ | (4,526,053 | ) | $ | 2,225,819 | $ | (744,172 | ) | $ | 70,457 | |||||||
|
Basic net (decrease) increase in net assets from
operations per weighted average number of shares outstanding
|
$ | (2.34 | ) | $ | (4.14 | ) | $ | 1.98 | $ | (0.63 | ) | $ | 0.06 | |||||||
|
Diluted net (decrease) increase in net assets
from operations per weighted average number of shares outstanding
|
$ | (2.34 | ) | $ | (4.14 | ) | $ | 1.98 | $ | (0.63 | ) | $ | 0.06 | |||||||
| At December 31, | ||||||||||||||||||||
| 2001 | 2000 | 1999 | 1998 | 1997* | ||||||||||||||||
|
Balance Sheet Data:
|
||||||||||||||||||||
|
Total assets
|
$ | 4,098,866 | $ | 5,766,712 | $ | 8,995,965 | $ | 6,548,696 | $ | 7,718,458 | ||||||||||
|
Liabilities
|
$ | 1,177,121 | $ | 187,632 | $ | 555,583 | $ | 233,143 | $ | 375,326 | ||||||||||
|
Net asset value
|
$ | 2,921,745 | $ | 5,579,080 | $ | 8,440,382 | $ | 6,315,553 | $ | 7,343,132 | ||||||||||
|
Net asset value per share attributable to common
stockholders
|
$ | 1.19 | $ | 3.58 | $ | 7.70 | $ | 5.61 | $ | 6.11 | ||||||||||
|
Net asset value per share, as if converted basis
|
$ | 2.44 | $ | 4.57 | $ | 7.70 | $ | 5.61 | $ | 6.11 | ||||||||||
|
Shares outstanding
|
1,074,700 | 1,098,200 | 1,095,882 | 1,126,029 | 1,201,797 | |||||||||||||||
| * | A special distribution of $2.17 per share was declared in July 1997. |
| ** | Expenses in the year ended December 31, 2000 include non-cash compensation of $349,644 due to the exercise of employee incentive stock options. |
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CHANGE TECHNOLOGY SUMMARY
The following selected financial data as of and for the years ended December 31, 1999, 1998 and 1997 has been derived from the financial statements of Change Technology and the notes accompanying the statements, which have been audited by Grant Thornton LLP, Change Technology’s predecessor independent accountants. The selected financial data as of and for the years ended December 31, 2001 and 2000 has been derived from Change Technology’s financial statements and the accompanying notes, which have been audited by KPMG LLP, Change Technology’s current independent auditors. Note that historical results of operations are not indicative of Change Technology’s future performance because of the new business strategy implemented in the spring of 2000 and Change Technology’s recent decision to divest its consulting businesses and use its significant cash position, in combination with the proposed merger with Franklin Capital, to develop and acquire businesses in the radio and media industries. You should read this information in conjunction with the audited consolidated financial statements, including the notes to those statements, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this joint proxy statement/prospectus.
| Fiscal Year Ended December 31, | |||||||||||||||||||||
| 2001 | 2000 | 1999 | 1998 | 1997 | |||||||||||||||||
| (in thousands, except per share amounts) | |||||||||||||||||||||
|
Statement of Operations Data:
|
|||||||||||||||||||||
|
Revenue
|
$ | 5,567 | $ | 1,370 | $ | — | $ | — | $ | — | |||||||||||
|
Cost of revenues
|
7,276 | 1,119 | — | — | — | ||||||||||||||||
|
Gross profit (loss)
|
(1,709 | ) | 251 | — | — | — | |||||||||||||||
|
Operating expenses:
|
|||||||||||||||||||||
|
Selling, general and administrative
|
13,738 | 3,305 | 12 | 11 | 3 | ||||||||||||||||
|
Equity based compensation
|
3,086 | 2,921 | — | — | — | ||||||||||||||||
|
Severance
|
1,326 | — | — | — | — | ||||||||||||||||
|
Loss on disposal of subsidiaries
|
377 | — | — | — | — | ||||||||||||||||
|
Impairment losses
|
7,263 | — | — | — | — | ||||||||||||||||
|
Total operating expenses
|
25,790 | 6,226 | 12 | 11 | 3 | ||||||||||||||||
|
Operating loss
|
(27,499 | ) | (5,975 | ) | (12 | ) | (11 | ) | (3 | ) | |||||||||||
|
Other income (expense)
|
(4,701 | ) | (263 | ) | 20 | (42 | ) | (29 | ) | ||||||||||||
|
Net income (loss) before extraordinary item
|
(32,200 | ) | (6,238 | ) | 8 | (53 | ) | (32 | ) | ||||||||||||
|
Extraordinary item
|
— | — | — | 666 | — | ||||||||||||||||
|
Dividends
|
— | — | (14 | ) | (24 | ) | (24 | ) | |||||||||||||
|
Deemed dividend attributable to issuance of
convertible preferred stock
|
— | 40,000 | — | — | — | ||||||||||||||||
|
Net income (loss) applicable to common
stockholders
|
(32,200 | ) | (46,238 | ) | (6 | ) | 589,000 | (56 | ) | ||||||||||||
|
Net income (loss) per
share — basic and diluted
|
(.23 | ) | (1.31 | ) | — | .13 | (.01 | ) | |||||||||||||
| December 31, | ||||||||||||||||||||
| 2001 | 2000 | 1999 | 1998 | 1997 | ||||||||||||||||
| (in thousands) | ||||||||||||||||||||
|
Balance Sheet Data:
|
||||||||||||||||||||
|
Cash, cash equivalents and marketable securities
|
$ | 8,892 | $ | 30,333 | $ | 245 | $ | 173 | $ | 270 | ||||||||||
|
Working capital
|
10,719 | 30,012 | 245 | 236 | (377 | ) | ||||||||||||||
|
Total assets
|
16,152 | 38,576 | 246 | 238 | 270 | |||||||||||||||
|
Accumulated deficit
|
(80,801 | ) | (48,601 | ) | (2,363 | ) | (2,371 | ) | (2,984 | ) | ||||||||||
|
Stockholders’ equity (deficit)
|
14,660 | 37,182 | 245 | 236 | (377 | ) | ||||||||||||||
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RISK FACTORS
In addition to the other information contained in this joint proxy statement/ prospectus, Franklin Capital and Change Technology Stockholders should carefully consider the following risk factors.
This joint proxy statement/ prospectus contains forward-looking statements which involve risks and uncertainties. Actual results may differ significantly from the results discussed in such forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed below.
Risks Related to Franklin Capital’s Business
Investing in Private Companies Involves a High Degree of Risk. Franklin Capital’s portfolio consists primarily of investments in private companies. Investments in private businesses involve a high degree of business and financial risk, which can result in substantial losses and accordingly should be considered speculative. There is generally no publicly available information about the companies in which Franklin Capital invests, and Franklin Capital relies significantly on the diligence of its employees and agents to obtain information in connection with Franklin Capital’s investment decisions. In addition, some smaller businesses have narrower product lines and market shares than their competitors, and may be more vulnerable to customer preferences, market conditions or economic downturns, which may adversely affect the return on, or the recovery of, Franklin Capital’s investment in such businesses.
Portfolio of Investments Is Illiquid. Franklin Capital acquires most of its investments directly from private companies. The majority of the investments in its portfolio will be subject to restrictions on resale or otherwise have no established trading market. The illiquidity of most of the portfolio may adversely affect Franklin Capital’s ability to dispose of loans and securities at times when it may be advantageous to liquidate such investments.
Franklin Capital’s Portfolio Investments are Recorded at Fair Value as Determined by the Board of Directors in Absence of Readily Ascertainable Public Market Values. Pursuant to the requirements of the 1940 Act, Franklin Capital’s board of directors is required to value each asset quarterly, and Franklin Capital is required to carry the portfolio at fair 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 Capital makes investments, the board of directors estimates the fair value of these loans and equity securities pursuant to a written valuation policy and a consistently applied valuation process. Unlike banks, Franklin Capital is not permitted to provide a general reserve for anticipated loan losses; instead, Franklin Capital 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 Capital adjusts quarterly the valuation of the portfolio to reflect the board of directors’ estimate of the current realizable value of each investment in Franklin Capital’s portfolio. Any changes in estimated value are recorded in Franklin Capital’s statement of operations as “Net unrealized gains (losses).”
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Franklin Capital Operates in a Competitive Market for Investment Opportunities. Franklin Capital competes for investments with many other companies and individuals, some of whom have greater resources than does Franklin Capital. Increased competition would make it more difficult to purchase or originate investments at attractive prices. As a result of this competition, sometimes Franklin Capital may be precluded from making otherwise attractive investments.
Quarterly Results May Fluctuate and May Not Be Indicative of Future Quarterly Performance. Franklin Capital’s quarterly operating results could fluctuate, and therefore, you should not rely on quarterly results to be indicative of Franklin Capital’s performance in future quarters. Factors that could cause quarterly operating results to fluctuate include, among others, variations in the investment origination volume, variation in timing of prepayments, variations in and the timing of the recognition of realized and unrealized gains or losses, the degree to which Franklin Capital encounters competition in its markets and general economic conditions.
Franklin Capital is Dependent Upon Key Management Personnel for Future Success. Franklin Capital is dependent for the selection, structuring, closing and monitoring of its investments on the diligence and skill of its senior management members and other management members. The future success of Franklin Capital depends to a significant extent on the continued service and coordination of its senior management team, particularly the Chairman and Chief Executive Officer. The departure of any of the executive officers or key employees could materially adversely affect Franklin Capital’s ability to implement its business strategy. Franklin Capital does not maintain key man life insurance on any of its officers or employees.
There is Substantial Doubt as to Franklin Capital’s Ability to Continue as a Going Concern. Franklin Capital has determined that it may not have sufficient cash or cash equivalents to meet its working capital requirements over the next fiscal year. Franklin Capital’s independent auditors have issued an opinion in which the independent auditors have indicated that there is substantial doubt as to Franklin Capital’s ability to continue as a going concern, which is noted in Franklin Capital’s financial statements. If the merger with Change Technology is not consummated, Franklin Capital will be required to seek alternative sources of financing to continue operating through the current fiscal year. If funds were not raised, Franklin Capital may not be able to continue its operations. See Notes 1 and 11 to Franklin Capital’s financial statements.
Risks Related to the Merger
The Merger Agreement Does Not Contain Any Provisions For Adjustment of the Exchange Ratio and Does Not Provide For Rights of Termination by Either Party Based Upon Fluctuations in the Per Share Price of Franklin Capital or Change Technology Common Stock. Because no adjustment will be made to the exchange ratio, the value of consideration to be received by holders of Change Technology common stock in connection with the merger is not presently ascertainable and will vary based upon the market price of Franklin Capital common stock at the time of the merger. Such variations may be the result of changes in the business operations or prospects of Franklin Capital, market assessments of the likelihood that the merger will be consummated, the timing thereof, the prospects for the post-merger operations of the combined company, general market and economic
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Change Technology May be Considered an Investment Company Under the Investment Company Act of 1940. Prior to the consummation of the merger, Change Technology may own investment securities having a value exceeding 40% of the value of its total assets (exclusive of government securities and cash items) on an unconsolidated basis, and may therefore meet the definition of an “investment company” under the 1940 Act. The Change Technology board of directors believes that Change Technology will not be deemed an “investment company” by virtue of the “primarily engaged” exemption under Section 3(b)(1) of the 1940 Act. This statutory exemption provides that, even if a company owns investment securities having a value exceeding 40% of its total assets, it may not be an investment company if it in fact is directly or indirectly (through wholly owned subsidiaries) “primarily engaged” in a non-investment company business. While Change Technology’s board of directors believes that Change Technology is primarily engaged in a business other than owning securities, the applicability of the “primarily engaged” exclusion is determined on a case-by-case basis, and it is possible that Change Technology may be deemed by the SEC to be an investment company subject to the 1940 Act. In the event that the SEC determines that Change Technology cannot take advantage of the “primarily engaged” exclusion, the board of directors believes that Change Technology could rely on Rule 3a-2 under the 1940 Act, which deems an issuer otherwise subject to the 1940 Act not to be subject to the registration requirements of the 1940 Act for up to one year if certain conditions are met. However, it is possible that the SEC may disagree with Change Technology’s conclusion that this safe harbor is available to Change Technology, thus subjecting Change Technology to the risk that it should have registered as an investment company and that therefore Change Technology may be in violation of the 1940 Act. Such a violation could lead to penalties and other enforcement action by the SEC.
No Fairness Opinion Was Obtained Regarding the Merger. Because the terms of the merger were negotiated at arms-length between the management of Franklin Capital and Change Technology, and taking into consideration the time and expense that would be incurred in obtaining an investment banker’s opinion on the fairness of the terms of the merger in light of Change Technology’s lack of an operating business, neither Franklin Capital nor Change Technology has sought or obtained such an opinion. Accordingly, there can be no assurance that consummation of the merger will be fair from a financial point of view to the stockholders of Change Technology.
The Combined Company May be Unable to Realize the Benefits Anticipated by Franklin Capital and Change Technology. The merger involves the integration of two companies that have previously operated independently. There can be no assurances that the companies will not encounter significant difficulties in integrating their respective operations or that the benefits expected from such integration will be realized. Incurring unexpected costs or delays in connection with such integration could have a material adverse effect on the combined company’s business, financial condition or results of operations.
Franklin Capital Stockholders Will Be Diluted as a Result of the Merger. If the merger is consummated, Change Technology stockholders will own approximately 80% of the outstanding common stock of Franklin Capital after the merger. As
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The Combined Company May Experience Adverse Effects from Combining Operations of Franklin Capital and Change Technology. The boards of directors of Franklin Capital and Change Technology approved the merger and the merger agreement with the expectation that the merger will result in a number of benefits, including operating efficiencies, revenue enhancements and other synergies. However, as a result of the merger, the management of the combined company will be faced with unfamiliar business issues. Following the merger and the withdrawal of Franklin Capital’s status as a business development company, Franklin Capital’s business, which is conducted through Excelsior Radio and its subsidiaries, will change from that of a business development company to an operating company. In addition, the current management of Change Technology, who will take on management positions in Franklin Capital upon consummation of the merger, have no experience with Franklin Capital’s radio business.
Franklin Capital and Change Technology May Not Be Able to Accurately Predict Transaction Costs. Franklin Capital’s board of directors estimates that, as a result of the merger, Franklin Capital and Change Technology will incur combined transaction costs of between $250,000 and $500,000, including legal, accounting and advisory fees. Franklin Capital and Change Technology will be forced to bear their own costs regardless of whether the merger is consummated. In addition, the combined company will incur significant integration and consolidation expenses which cannot be accurately estimated at this time. The amount of the transaction costs is a preliminary estimate and is subject to change. Actual transaction costs may substantially exceed the initial estimates, and, when combined with the expenses incurred in connection with the consolidation and integration of the companies, could have an adverse effect on the financial condition and operating results of the combined company.
The Merger Will Result in Changes to the Board of Directors and Senior Management of the Combined Company. Upon consummation of the merger, Stephen L. Brown will become Executive Chairman and William Avery will become President and Chief Executive Officer of the combined company. Also, Spencer L. Brown, James M. Dubin, Michael R. Gleason, William E. Lipner, William Avery and Michael J. Levitt will join the board of directors in addition to Stephen L. Brown and Irving Levine who are currently directors of Franklin Capital. The new directors, with the exception of William Avery and Spencer L. Brown, have no experience with the current operations of Franklin Capital’s radio business. As a result of their positions within Franklin Capital, these individuals will have substantial influence and control over matters to be considered by Franklin Capital’s board of directors and as to those matters that the board of directors determines to submit to the stockholders for consideration. In addition, William Avery, as President and Chief Executive Officer, will have substantial influence over the combined company’s day-to-day operations.
Some Directors and Officers of Franklin Capital and Change Technology May Have Interests in the Merger That Are Different From or in Addition to the Interests of Franklin Capital and Change Technology Stockholders Generally. In considering the recommendation of Franklin Capital and Change Technology’s boards of directors to vote in favor of the approval and adoption of the merger
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| • | William Avery, Stephen L. Brown and Spencer L. Brown will enter into employment agreements with the combined company which will be renamed Excelsior Communications Corporation; | |
| • | After the merger, Spencer L. Brown and Irving Levine will serve as directors by the Series A preferred stock of the combined company; | |
| • | Upon consummation of the merger, the Franklin Capital directors’ option plan will be canceled, and all unvested and unexercised options will be surrendered. In addition, Franklin Capital’s current directors have agreed to waive directors’ fees owed to them for past service which in the aggregate total $66,000. To compensate Franklin Capital’s current directors for this surrender, options to purchase common stock of the combined entity will be granted upon the completion of the merger by the new Franklin Capital board of directors. The exercise price of the options will be the closing price of Franklin Capital’s stock on the date that they are issued. | |
| • | Option holders and warrant holders of Change Technology, which includes all of the Change Technology directors, will have their options and warrants converted into options and warrants of the combined company; | |
| • | Upon the signing of the merger agreement, Change Technology purchased 250,000 shares of common stock of Excelsior Radio for $250,000. If the merger is not consummated, Franklin Capital will be required to repurchase these shares for $250,000 plus interest at a rate of 10% per annum from Change Technology. |
Risks Related to the Combined Company
The Combined Company Faces Intense Competition for Audience and Advertising Revenues. The combined company will operate in a highly competitive business. Its radio programming will compete for audiences and advertising revenues directly with radio stations and other syndicated programming, as well as with other media such as television, newspapers, magazines, cable television, outdoor advertising and direct mail. Audience ratings and revenue shares are subject to change, and any adverse change in a particular geographic area could have a material and adverse effect on the combined company’s ability to attract not only advertisers in that region but also national advertisers. Future operations are further subject to many factors which could have an adverse effect on the combined company’s financial performance. These factors include but are not limited to the following:
| • | economic conditions, both generally and relative to the broadcasting industry; | |
| • | shifts in population and other demographics; | |
| • | the level of competition for advertising dollars; | |
| • | fluctuations in programming costs; |
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| • | technological changes and innovations; and | |
| • | changes in labor conditions. |
Although Franklin Capital and Change Technology believe that the combined company’s radio programming will be able to compete effectively and will continue to attract audiences and advertisers, there can be no assurance that the combined company will be able to maintain or increase the current audience ratings and advertising revenues of Excelsior Radio.
Major Radio Station Groups Could Choose to Develop Their Own Programming or Obtain Programming from Other Providers. The radio broadcasting industry has experienced a significant amount of consolidation in recent years. As a result, certain major station groups have emerged as powerful forces in the industry. Given the size and financial resources of these station groups, they may be able to develop their own programming as a substitute to that offered by the combined company. Alternatively, they could seek to obtain programming from the combined company’s competitors. Any such occurrences, or the threat of such occurrences, could adversely affect the combined company’s ability to negotiate favorable terms with its station affiliates, to attract audiences and to attract national advertisers.
The Combined Company Will Not Pay Dividends on Common Stock. The combined company does not intend to declare dividends on its common stock for the foreseeable future. The combined company currently intends to retain all future earnings to finance the continuing development of its business except for required dividends on preferred stock.
Franklin Capital is Involved in Certain Legal Proceedings That Could Affect the Combined Company. On October 15, 2001, Jeffrey A. Leve and Jeffrey Leve Family Partnership, L.P. filed a lawsuit against Franklin Capital Corporation, Sunshine Wireless, LLC and four other defendants affiliated with Winstar Communications, Inc. The lawsuit alleges that the Winstar defendants conspired to commit fraud and breached their fiduciary duty to the plaintiffs in connection with the acquisition of the plaintiffs’ radio production and distribution business. The plaintiffs seek recovery of damages in excess of $10,000,000, plus costs and attorneys’ fees. On January 7, 2002, Franklin Capital filed a motion to dismiss the lawsuit or, in the alternative, to transfer venue to the United States District Court for the Southern District of New York. Franklin Capital’s motion for dismissal was granted on February 25, 2002 due to improper venue. The plaintiff may refile in New York. Management believes the claims are without merit and intends to defend this lawsuit vigorously, though the outcome cannot be predicted at this time. An unfavorable outcome in this lawsuit may have a material adverse effect on the combined company’s business, financial condition and results of operations. See “Business of Franklin Capital — Legal Proceedings.”
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PRO FORMA FINANCIAL INFORMATION
Introduction
The following unaudited pro forma financial information for Change Technology and Franklin Capital gives effect to the merger.
Pro forma information for Change Technology and Franklin Capital is presented separately followed by a pro forma of the combined company. Upon closing of the transaction, Change Technology stockholders will own approximately 80% of Franklin Capital common stock, with the balance being held by Franklin Capital’s current stockholders. In accordance with accounting principles generally accepted in the United States, Change Technology was deemed to be the accounting acquiror based on the relative post merger voting interest and Board representation, as well as the market capitalization of the predecessors immediately prior to initiation of the merger. Therefore, the acquisition will be accounted for by Change Technology using the purchase method of accounting, although Franklin Capital remains the surviving legal entity and the registrant for SEC reporting purposes. Change Technology will allocate the estimated purchase price to the net tangible and amortizable intangible assets acquired, and intangible assets with indefinite lives, based on their respective fair values at the date of the completion of the merger. Any excess of the estimated purchase price over those fair values will be accounted for as goodwill.
The unaudited pro forma condensed combined statement of operations for the year ended December 31, 2001 gives pro forma effect to the merger as if the merger had occurred on January 1, 2001. The unaudited pro forma condensed combined balance sheet as of December 31, 2001 gives pro forma effect to the merger and related purchase accounting adjustments as if the merger and related transactions had occurred on December 31, 2001. The pro forma adjustments relating to the merger are described in the notes to the pro forma condensed combined financial information.
The unaudited pro forma condensed combined financial information does not purport to represent the results of operations or the financial position of Franklin Capital that would have resulted had the merger been consummated as of the date or for the period indicated. The historical financial information set forth below has been derived from, and is qualified by reference to, the financial statements of Franklin Capital and the financial statements of Change Technology and should be read in conjunction with those financial statements and notes thereto. The pro forma adjustments were determined in accordance with accounting principles generally accepted in the United States.
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Change Technology Partners, Inc.
Pro Forma Condensed Consolidated Financial Information
Introduction
In February 2001, Change Technology acquired from non-employee shareholders the remaining outstanding minority interest of its subsidiary, eHotHouse, for 2,155,519 shares of Change Technology’s common stock valued at $2,680,000 and approximately $218,000 in cash.
In March 2001, Change Technology acquired Iguana Studios, Inc. (“Iguana”), a New York City-based interactive agency, for approximately $5,771,000, including $2,786,000 in cash, 2,700,000 shares of Change Technology’s common stock valued at approximately $1,990,000, and replacement options to purchase 1,681,888 shares of Change Technology common stock, which vested upon the change in control, valued at approximately $995,000.
In June, 2001, Change Technology acquired Papke-Textor, Inc. d/b/a Canned Interactive (“Canned”) for approximately $1,100,000 in cash, including acquisition costs, and 6,436,552 shares of common stock valued at approximately $1,000,000.
Beginning in July, 2001, in response to continued unfavorable market conditions for its services, Change Technology embarked on a review of all operations with the goal of formulating a course of action to minimize near-term losses, capital expenditures and reduce cash outflows. As an initial course of action, Change Technology terminated the employment of approximately 90% of its existing workforce. Change Technology did not terminate any employees of Canned.
As a result of these terminations, coupled with historical, current, and projected operating and cash flow losses, Change Technology evaluated the recoverability of its intangible assets and goodwill recorded in connection with the acquisitions of InSys Technology LLC (“InSys”), RAND Interactive (“RAND”), eHotHouse and Iguana by comparison of the carrying value relative to future cash flows. As a result, Change Technology recorded impairment charges totaling $5,013,000. Also as a result of these actions, Change Technology incurred severance charges of $1,326,000.
On November 2, 2001, Change Technology sold all issued and outstanding shares of its subsidiary RAND Interactive (“Rand”) to certain members of the Rand management team in exchange for 375,039 shares of Change Technology’s common stock, and a warrant to purchase such amount of shares of common stock that shall equal, at the time of exercise, 30% of the issued and outstanding shares of Rand common stock on a fully diluted basis. Such warrants have a stated exercise price of $1.00 in the aggregate, expire on November 3, 2013, and are contingently exercisable upon the occurrence of certain prospective events, as defined.
On November 8, 2001, Change Technology sold a 51% voting interest in its subsidiary InSys Technology LLC to a certain member of the management team in exchange for $50 and concurrently forgave approximately $400,000 of advances to InSys.
As of December 31, 2001 all employees of Iguana had been terminated, and the subsidiary’s operating activities had ceased.
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The following unaudited pro forma condensed consolidated financial information is presented to give effect to the acquisition of all of the outstanding stock of Canned, and Iguana, and the outstanding minority interest of eHotHouse, and the disposition of all of the outstanding stock of Rand, 51% of Change Technology’s membership interest in InSys, and the termination of all of the employees and cessation of operations of Iguana, (collectively, “the Transactions”).
The unaudited pro forma condensed consolidated statement of operations for the year ended December 31, 2001 gives pro forma effect to the Transactions as if the Transactions occurred on January 1, 2001. The unaudited pro forma condensed consolidated balance sheet as of December 31, 2001 gives pro forma effect to the Transactions and related purchase accounting adjustments as if the Transactions had occurred on December 31, 2001. The pro forma adjustments relating to these Transactions are described in the notes to the pro forma condensed consolidated financial information.
The unaudited pro forma condensed consolidated financial information does not purport to represent the results of operations or the financial position of Change Technology that would have resulted had the Transactions been consummated as of the date or for the period indicated. The historical financial information set forth below has been derived from, and is qualified by reference to, the financial statements of Change Technology and should be read in conjunction with those financial statements and notes thereto.
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Change Technology Partners, Inc.
Pro Forma Condensed Consolidated Balance Sheet
| Change Technology | |||||||||||||
| Change Technology | Pro Forma | Partners, Inc. | |||||||||||
| Partners, Inc. | Adjustments | Pro Forma | |||||||||||
|
Assets
|
|||||||||||||
|
Cash and Cash Equivalents
|
$ | 8,892,229 | $ | $ | 8,892,229 | ||||||||
|
Accounts Receivable, net of allowances
|
146,557 | — | 146,557 | ||||||||||
|
Unbilled Receivables
|
— | — | — | ||||||||||
|
Related Party Receivables
|
204,132 | — | 204,132 | ||||||||||
|
Notes Receivables, Short-Term
|
2,393,205 | — | 2,393,205 | ||||||||||
|
Prepaid and other Current Assets
|
441,893 | — | 441,893 | ||||||||||
|
Total Current Assets
|
12,078,016 | — | 12,078,016 | ||||||||||
|
Notes Receivable, Long-Term
|
333,000 | 333,000 | |||||||||||
|
Investments in and loans to Unconsolidated Subs
|
720,030 | — | 720,030 | ||||||||||
|
Investments in warrant
|
— | — | — | ||||||||||
|
Property and Equipment, net
|
785,790 | — | 785,790 | ||||||||||
|
Purchased intangibles assets and goodwill
|
1,568,195 | — | 1,568,195 | ||||||||||
|
Other Assets
|
666,911 | — | 666,911 | ||||||||||
|
Total Assets
|
$ | 16,151,942 | — | $ | 16,151,942 | ||||||||
|
Accounts Payable
|
$ | 280,318 | — | $ | 280,318 | ||||||||
|
Accrued Expenses
|
983,300 | — | 983,300 | ||||||||||
|
Deferred Revenues
|
3,500 | — | 3,500 | ||||||||||
|
Loan Payable
|
— | — | — | ||||||||||
|
Capital Lease Obligation
|
91,672 | — | 91,672 | ||||||||||
|
Total Current Liabilities
|
1,358,790 | — | 1,358,790 | ||||||||||
|
Loan Payable, excluding current portion
|
— | — | — | ||||||||||
|
Capital Lease Obligation, less current
|
124,173 | — | 124,173 | ||||||||||
|
Deferred Rent
|
8,924 | — | 8,924 | ||||||||||
|
Total Liabilities
|
1,491,887 | — | 1,491,887 | ||||||||||
|
Stockholders’ equity:
|
|||||||||||||
|
Preferred Stock
|
65 | — | 65 | ||||||||||
|
Common Stock
|
1,790,229 | — | 1,790,229 | ||||||||||
|
APIC
|
94,637,425 | — | 94,637,425 | ||||||||||
|
Deferred Compensation
|
(966,200 | ) | — | (966,200 | ) | ||||||||
|
Accumulated deficit
|
(80,801,464 | ) | — | (80,801,464 | ) | ||||||||
|
Total Stockholders’ Equity
|
14,660,055 | — | 14,660,055 | ||||||||||
|
Total Liabilities and Stockholders’ Equity
|
$ | 16,151,942 | — | $ | 16,151,942 | ||||||||
See accompanying Notes to Unaudited Condensed Consolidated Information.
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Change Technology Partners, Inc.
Pro Forma Condensed Consolidated Statement of Operations
| Change Technology | |||||||||||||||||
| Partners, Inc. | |||||||||||||||||
| Change Technology | Pro Forma | Consolidated | |||||||||||||||
| Partners, Inc. | Adjustments | Notes | Pro Forma | ||||||||||||||
|
Revenues
|
$ | 5,567,115 | $ | (4,023,801 | ) | (1)(3) | $ | 1,543,314 | |||||||||
|
Cost of Revenues
|
7,275,542 | (5,224,445 | ) | (1)(2)(3) | 2,051,097 | ||||||||||||
|
Gross Profit (Loss)
|
(1,708,427 | ) | 1,200,644 | (507,783 | ) | ||||||||||||
|
Operating Expenses:
|
|||||||||||||||||
|
SG&A, exclusive of equity based comp
|
13,738,173 | (2,740,454 | ) | (1)(3) | 10,997,719 | ||||||||||||
|
Equity Based Compensation
|
3,086,298 | — | 3,086,298 | ||||||||||||||
|
Loss on disposal of subsidiary
|
377,011 | — | 377,011 | ||||||||||||||
|
Impairment Losses
|
7,263,000 | (877,000 | ) | (3) | 6,386,000 | ||||||||||||
|
Severance Charges
|
1,326,000 | — | (3) | 1,326,000 | |||||||||||||
|
Total Operating Expenses
|
25,790,482 | (3,617,454 | ) | 22,173,028 | |||||||||||||
|
Loss from Operations
|
(27,498,909 | ) | 4,818,098 | (22,680,811 | ) | ||||||||||||
|
Other Income:
|
|||||||||||||||||
|
Interest Income
|
845,064 | 2 | (1) | 845,066 | |||||||||||||
|
Interest Expense
|
— | (16,541 | ) | (3) | (16,541 | ) | |||||||||||
|
Equity in Losses of unconsolidated affiliate
|
(5,545,910 | ) | (178,590 | ) | (4) | (5,724,500 | ) | ||||||||||
|
Net Loss
|
$ | (32,199,755 | ) | $ | 4,622,969 | $ | (27,576,786 | ) | |||||||||
See accompanying Notes to Unaudited Condensed Consolidated Information.
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Change Technology Partners, Inc.
Pro Forma Condensed Consolidated Financial Information
Notes to Pro Forma Condensed Consolidated Financial Information:
Pro Forma Condensed Consolidated Balance Sheet:
No pro forma adjustments are required, as the transactions are fully reflected in the historical balance sheet.
Pro Forma Condensed Consolidated Income Statement
1. To record the operations of Canned for the period prior to the acquisition date of June 2001.
2. To record the amortization, for the period prior to the acquisition, of identified intangible assets recorded in connection with the acquisition of Canned.
3. To eliminate the current year operations of Rand, InSys, and Iguana, and amortization of the intangible assets recorded in connection with the acquisitions of these subsidiaries.
4. To eliminate impairment losses recorded relating to Rand and InSys intangible assets. Under the pro forma scenario, InSys and Rand are disposed of on January 1, 2001, prior to the third quarter impairment indicators.
5. To increase the impairment losses recorded in connection with Iguana intangibles, as such intangibles became impaired upon Iguana employee terminations, which occur under the pro forma scenario as of the date of Change Technology’s acquisition of Iguana. Had the impairment loss been measured as of that date, the loss would have been greater because the carrying value of the intangible assets would not have been net of amortization.
6. To record 49% of the current year results of operations of InSys, representing Change Technology’s proportionate share of InSys’ aggregate losses as if InSys had been an equity method investee for the full year.
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Franklin Capital Corporation
Pro Forma Condensed Consolidated Financial Information
Introduction
The following unaudited pro forma condensed consolidated financial information for Franklin Capital converts the financial statements of Franklin Capital, a business development Company regulated under the Investment Company Act of 1940 (a ”1940 Act Filer“), to those of a non 1940 Act Filer, including consolidation of the operations of Excelsior Radio Networks, Inc. (“Excelsior Radio”), a majority-owned subsidiary, from the date of its inception on August 28, 2001. The unaudited pro forma condensed consolidated statement of operations for the year ended December 31, 2001 gives pro forma effect to the conversion as of January 1, 2001. The unaudited pro forma condensed consolidated balance sheet as of December 31, 2001 gives pro forma effect to the conversion as of December 31, 2001. The pro forma adjustments relating to the conversion are described in the notes to the pro forma condensed consolidated financial information.
The unaudited pro forma condensed consolidated financial information does not purport to represent the results of operations or the financial position of Franklin Capital that would have resulted had the conversion been consummated as of the date or for the period indicated and does not purport to be indicative of the effects that may be expected to occur in the future. The historical financial information set forth below has been derived from, and is qualified by reference to, the financial statements of Franklin Capital and should be read in conjunction with those financial statements and notes thereto.
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Franklin Capital Corporation
Pro Forma Condensed Consolidated Balance Sheet
| Franklin Capital | Excelsior Radio | Pro Forma | Pro Forma | ||||||||||||||||
| Corporation | Networks, Inc | Adjustments | Notes | Consolidated | |||||||||||||||
|
ASSETS
|
|||||||||||||||||||
|
Cash and Cash Equivalents
|
$ | 279,728 | $ | 694,206 | — | $ | 973,934 | ||||||||||||
|
Accounts Receivable, net of allowances
|
— | 5,039,310 | — | 5,039,310 | |||||||||||||||
|
Prepaid and other Current Assets
|
— | 69,763 | — | 69,763 | |||||||||||||||
|
Total Current Assets
|
279,728 | 5,803,279 | — | 6,083,007 | |||||||||||||||
|
Investments in and loans to Unconsolidated Subs
|
3,728,872 | — | (2,325,000 | ) | (1a)(1d) | 1,403,872 | |||||||||||||
|
Property and Equipment, net
|
— | 418,659 | — | 418,659 | |||||||||||||||
|
Purchased intangibles assets and goodwill
|
— | 5,146,607 | — | 5,146,607 | |||||||||||||||
|
Other Assets
|
90,266 | 26,715 | — | 116,981 | |||||||||||||||
|
Total Assets
|
$ | 4,098,866 | $ | 11,395,260 | $ | (2,325,000 | ) | $ | 13,169,126 | ||||||||||
|
Accounts Payable
|
$ | 177,121 | $ | 471,062 | $ | — | $ | 648,183 | |||||||||||
|
Producer Payables
|
— | 3,363,289 | — | 3,363,289 | |||||||||||||||
|
Accrued Expenses
|
— | 575,394 | — | 575,394 | |||||||||||||||
|
Loan Payable
|
1,000,000 | 925,000 | (75,000 | ) | (1a) | 1,850,000 | |||||||||||||
|
Current portion of Long Term Debt
|
— | 2,172,460 | — | 2,172,460 | |||||||||||||||
|
Total Current Liabilities
|
1,177,121 | 7,507,205 | (75,000 | ) | 8,609,326 | ||||||||||||||
|
Minority Interest
|
— | — | 238,805 | (1b) | 238,805 | ||||||||||||||
|
Preferred Stock of Subsidiary
|
— | 1,500,000 | (1c) | 1,500,000 | |||||||||||||||
|
Total Liabilities
|
1,177,121 | 7,507,205 | 1,663,805 | 10,348,131 | |||||||||||||||
|
Stockholders’ equity:
|
|||||||||||||||||||
|
Preferred Stock
|
16,450 | 15,000 | (15,000 | ) | (1c) | 16,450 | |||||||||||||
|
Common Stock
|
1,074,700 | 25,000 | (25,000 | ) | (1b)(1d) | 1,074,700 | |||||||||||||
|
Treasury Stock
|
431,188 | — | — | 431,188 | |||||||||||||||
|
APIC
|
7,752,254 | 4,014,821 | (3,965,482 | ) | (1b)(1c)(1d) | 7,801,593 | |||||||||||||
|
Comprehensive Income
|
(182,233 | ) | — | — | (182,233 | ) | |||||||||||||
|
Accumulated deficit
|
(6,170,614 | ) | (166,766 | ) | 16,677 | (1b) | (6,320,703 | ) | |||||||||||
|
Total Stockholders’ Equity
|
2,921,745 | 3,888,055 | (3,988,805 | ) | 2,820,995 | ||||||||||||||
|
Total Liabilities and Stockholders’ Equity
|
$ | 4,098,866 | $ | 11,395,260 | $ | (2,325,000 | ) | $ | 13,169,126 | ||||||||||
See accompanying Notes to Unaudited Condensed Consolidated Information.
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Franklin Capital Corporation
Pro Forma Condensed Consolidated Income Statement of Operations
| Franklin Capital | Excelsior Radio | ||||||||||||||||||||
| Corporation | Networks | ||||||||||||||||||||
| 12 Months | Period from August | Franklin Capital | |||||||||||||||||||
| Ended | 28, 2001 (Inception) | Corporation | |||||||||||||||||||
| December 31, | Through December 31, | Pro Forma | Pro Forma | ||||||||||||||||||
| 2001 | 2001 | Adjustments | Notes | Consolidated | |||||||||||||||||
|
Revenues
|
$ | 120,000 | $ | 6,528,497 | $ | (120,000 | ) | (1a) | $ | 6,528,497 | |||||||||||
|
Cost of Revenues
|
— | 4,322,910 | — | 4,322,910 | |||||||||||||||||
|
Gross Profit (Loss)
|
120,000 | 2,205,587 | (120,000 | ) | 2,205,587 | ||||||||||||||||
|
Operating Expenses:
|
|||||||||||||||||||||
|
SG&A, exclusive of equity based comp
|
1,579,382 | 2,199,988 | (120,000 | ) | (1a) | 3,659,370 | |||||||||||||||
|
Total Operating Expenses
|
1,579,382 | 2,199,988 | (120,000 | ) | 3,659,370 | ||||||||||||||||
|
Income (Loss) from
Operations |
(1,459,382 | ) | 5,599 | — | (1,453,783 | ) | |||||||||||||||
|
Minority Interest
|
16,677 | (1b) | 16,677 | ||||||||||||||||||
|
Other Income:
|
|||||||||||||||||||||
|
Interest and dividend income
|
72,697 | — | — | 72,697 | |||||||||||||||||
|
Interest and dividend expense
|
— | (133,937 | ) | (38,428 | ) | (1c) | (172,365 | ) | |||||||||||||
|
Realized gains (losses) on trading securities
|
520,455 | — | — | 520,455 | |||||||||||||||||
|
Unrealized gains (losses) on trading
securities
|
(1,553,756 | ) | — | 1,553,756 | (2) | — | |||||||||||||||
|
Net Loss before (benefit) provision for taxes
|
(2,419,986 | ) | (128,338 | ) | 1,532,005 | (1,016,319 | ) | ||||||||||||||
|
Benefit provision for current income taxes
|
1,676 | — | 1,676 | ||||||||||||||||||
|
Net Loss
|
(2,418,310 | ) | (128,338 | ) | 1,532,005 | (1,014,643 | ) | ||||||||||||||
|
Preferred Stock Dividends
|
(115,150 | ) | (38,428 | ) | 38,428 | (115,150 | ) | ||||||||||||||
|
Net Loss attributable to Common Stock:
|
$ | (2,533,460 | ) | $ | (166,766 | ) | $ | 1,570,433 | $ | (1,129,793 | ) | ||||||||||
See accompanying Notes to Unaudited Condensed Consolidated Information.
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Franklin Capital Corporation
Pro Forma Condensed Consolidated Financial Information
Notes to Pro Forma Condensed Consolidated Financial Information:
Pro Forma Combined Balance Sheet and Pro Forma Combined Income Statement
1) To consolidate the items of Excelsior Radio, including:
| a. Elimination of intercompany transactions, consisting of a management fee charged by Franklin Capital to Excelsior Radio in the amount of $120,000 and a promissory note issued by Excelsior Radio to Franklin Capital in the amount of $75,000; | |
| b. Reclassification of Excelsior Radio common stock held by Change Technology, and the related proportionate share of equity transactions, from equity to minority interest; | |
| c. Reclassification of Excelsior Radio preferred stock and preferred stock dividend held by a third party; | |
| d. Elimination of Excelsior Radio’s common stock held by Franklin Capital. |
2) Adjustment to remove the effect of unrealized gains and losses in trading securities while operating as an investment company. The effect of unrealized gains and losses is included in other comprehensive income.
No adjustments are required to the carrying value, or method of accounting for, other investments held by Franklin Capital as all such investments are properly reported at fair value in the historical financial statements of Franklin Capital.
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Franklin Capital Corporation
Pro Forma Condensed Consolidated Financial Information
Introduction
On April 3, 2002 Franklin Capital Corporation consummated an asset acquisition whereby Excelsior Radio Networks, Inc., a majority owned subsidiary of Franklin Capital, acquired certain intangible assets of Dial Communications Group, Inc. and Dial Communications Group LLC (together, the “Dial Assets”) in exchange for an aggregate cash purchase price between $8,880,000 and $13,557,500. The initial consideration consisted of $6,500,000 in cash and a three-year promissory note bearing interest at 4.5% in the aggregate principal amount of $460,000. In addition, the acquisition agreement provides for the minimum payment of $1,920,000 of additional consideration, which is subject to increase to a maximum amount of $6,597,500, based upon the attainment of certain revenue earnings and objectives in 2002 and 2003. The additional consideration will be comprised of cash and two additional promissory notes bearing interest at 4.5% each with an initial aggregate minimum principal amount of $460,000 that is subject to increase upon the attainment of such revenue and earnings objectives. Each of the promissory notes issued in consideration of the acquisition of the Dial Assets is convertible into shares of Franklin Capital’s common stock at a premium of 115% to 120% of the average closing prices of Franklin Capital’s common stock during a specified pre and post closing measurement period. In addition, Dial Communications Group, Inc. agreed to provide $500,000 of cash, as working capital, to be repaid on April 1, 2003.
Concurrent with the acquisition of the Dial Assets, Excelsior Radio issued promissory notes to its minority shareholder Change Technology and to its preferred shareholder, totaling $7,000,000, the proceeds of which were used to finance the acquisition of the Dial Assets.
The following unaudited pro forma condensed consolidated financial information for Franklin Capital gives effect to the acquisition of the Dial Assets and issuance of the notes. The unaudited pro forma condensed consolidated statements of operations for the year ended December 31, 2001 give pro forma effect to the acquisition of the Dial Assets and issuance of the Notes as if the acquisition of the Dial Assets had occurred, and the notes had been issued, on January 1, 2001. The unaudited pro forma condensed consolidated balance sheet as of December 31, 2001 gives pro forma effect to the acquisition of the Dial Assets and related purchase accounting adjustments as if the acquisition of the Dial Assets had occurred, and the notes had been issued on December 31, 2001. The pro forma adjustments relating to the acquisition of the Dial Assets and notes are described in the notes to the pro forma condensed combined financial information.
The unaudited pro forma condensed consolidated financial information does not purport to represent the results of operations or the financial position of Franklin Capital that would have resulted had the acquisition of the Dial Assets been consummated as of the date or for the period indicated, and does not purport to be indicative of the effects that may be expected to occur in the future. The historical financial information set forth below has been derived from, and is qualified by
29
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30
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Franklin Capital Corporation
Pro Forma Condensed Consolidated Balance Sheet
| Franklin Capital | Franklin Capital | ||||||||||||||||
| Corporation | Corporation | ||||||||||||||||
| Consolidated | Pro Forma | Consolidated | |||||||||||||||
| Pro Forma | Adjustments | Notes | Pro Forma | ||||||||||||||
|
Assets
|
|||||||||||||||||
|
Cash and Cash Equivalents
|
$ | 973,934 | $ | 500,000 | (2a)(2b) | $ | 1,473,934 | ||||||||||
|
Marketable Securities
|
— | — | — | ||||||||||||||
|
Accounts Receivable, net of allowances
|
5,039,310 | — | 5,039,310 | ||||||||||||||
|
Prepaid and other Current Assets
|
69,763 | — | 69,763 | ||||||||||||||
|
Total Current Assets
|
6,083,007 | 500,000 | 6,583,007 | ||||||||||||||
|
Investments in and loans to Unconsolidated
Subsidiaries
|
1,403,872 | — | 1,403,872 | ||||||||||||||
|
Property and Equipment, net
|
418,659 | — | 418,659 | ||||||||||||||
|
Purchased intangibles assets and goodwill
|
5,146,607 | 9,380,000 | (2b) | 14,526,607 | |||||||||||||
|
Other Assets
|
116,981 | — | 116,981 | ||||||||||||||
|
Total Assets
|
$ | 13,169,126 | $ | 9,880,000 | $ | 23,049,126 | |||||||||||
|
Accounts Payable
|
$ | 648,183 | $ | — | $ | 648,183 | |||||||||||
|
Producer Payables
|
3,363,289 | — | 3,363,289 | ||||||||||||||
|
Accrued Expenses
|
575,394 | — | 575,394 | ||||||||||||||
|
Loan Payable
|
1,850,000 | 960,000 | (1)(2b) | 2,810,000 | |||||||||||||
|
Current portion of Long Term Debt
|
2,172,460 | — | 2,172,460 | ||||||||||||||
|
Total Current Liabilities
|
8,609,326 | 960,000 | 9,569,326 | ||||||||||||||
|
Loan Payable, excluding current portion
|
— | 8,920,000 | (2a)(2b) | 8,920,000 | |||||||||||||
|
Minority Interest
|
238,805 | — | 238,805 | ||||||||||||||
|
Preferred Stock of Subsidiary
|
1,500,000 | — | 1,500,000 | ||||||||||||||
|
Total Liabilities
|
10,348,131 | 9,880,000 | 20,228,131 | ||||||||||||||
|
Stockholders’ equity:
|
|||||||||||||||||
|
Preferred Stock
|
16,450 | — | 16,450 | ||||||||||||||
|
Common Stock
|
1,074,700 | — | 1,074,700 | ||||||||||||||
|
Treasury Stock
|
431,188 | — | 431,188 | ||||||||||||||
|
APIC
|
7,801,593 | — | 7,801,593 | ||||||||||||||
|
Comprehensive Income
|
(182,233 | ) | — | (182,233 | ) | ||||||||||||
|
Accumulated deficit
|
(6,320,703 | ) | — | (6,320,703 | ) | ||||||||||||
|
Total Stockholders’ Equity
|
2,820,995 | — | 2,820,995 | ||||||||||||||
|
Total Liabilities and Stockholders’ Equity
|
$ | 13,169,126 | $ | 9,880,000 | $ | 23,049,126 | |||||||||||
See accompanying Notes to Unaudited Condensed Consolidated Information.
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Franklin Capital Corporation
Pro Forma Condensed Consolidated Income Statement of Operations
| Franklin Capital | |||||||||||||||||||||
| Franklin Capital | Corporation | ||||||||||||||||||||
| Corporation | Dial | Pro Forma | Pro Forma | ||||||||||||||||||
| Consolidated | Communications | Adjustments | Notes | Consolidated | |||||||||||||||||
|
Revenues
|
$ | 6,528,497 | $ | 4,405,558 | $ | $ | 10,934,055 | ||||||||||||||
|
Cost of Revenues
|
4,322,910 | — | 4,322,910 | ||||||||||||||||||
|
Gross Profit (Loss)
|
2,205,587 | 4,405,558 | 6,611,145 | ||||||||||||||||||
|
Operating Expenses:
|
|||||||||||||||||||||
|
SG&A, exclusive of equity based compensation
|
3,659,370 | 3,350,149 | 7,009,519 | ||||||||||||||||||
|
Total Operating Expenses
|
3,659,370 | 3,350,149 | — | 7,009,519 | |||||||||||||||||
|
Income (Loss) from Operations
|
(1,453,783 | ) | 1,055,409 | (398,374 | ) | ||||||||||||||||
|
Minority Interest
|
16,677 | (8,941 | ) | (3 | ) | 7,736 | |||||||||||||||
|
Other Income:
|
|||||||||||||||||||||
|
Interest Income
|
72,697 | — | 72,697 | ||||||||||||||||||
|
Interest and dividend Expense
|
(172,365 | ) | — | (900,000 | ) | (4 | ) | (1,072,365 | ) | ||||||||||||
|
Realized gains (losses) on trading securities
|
520,455 | — | 520,455 | ||||||||||||||||||
|
Net Loss before (benefit) provision for taxes
|
(1,016,319 | ) | 1,055,409 | (908,941 | ) | (869,851 | ) | ||||||||||||||
|
Benefit (provision) for current income taxes
|
1,676 | (66,000 | ) | — | (64,324 | ) | |||||||||||||||
|
Net Loss
|
(1,014,643 | ) | 989,409 | (908,941 | ) | (934,175 | ) | ||||||||||||||
|
Preferred Stock Dividends
|
(115,150 | ) | — | — | (115,150 | ) | |||||||||||||||
|
Net Loss attributable to Common Stockholders:
|
$ | (1,129,793 | ) | $ | 989,409 | $ | (908,941 | ) | $ | (1,049,325 | ) | ||||||||||
See accompanying Notes to Unaudited Condensed Consolidated Information.
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Franklin Capital Corporation
Pro Forma Condensed Consolidated Financial Information
Notes to Pro Forma Condensed Consolidated Financial Information:
Pro Forma Condensed Combined Balance Sheet
1. Franklin acquired the operations of the Dial assets exclusive of certain assets and liabilities.
2. Adjustments to record the purchase of the Dial assets by Franklin Capital are as follows:
| a. Adjustment to record promissory notes issued by Excelsior Radio to its minority shareholder Change Technology and to its preferred shareholder, totaling $7,000,000, and to Dial, totaling $500,000 for working capital; | |
| b. Adjustment to intangible assets and goodwill to reflect the fair value of the assets acquired: |
|
Cash due at closing, and transaction costs
|
$ | 7,000,000 | ||
|
Promissory notes issued in acquisition
|
2,380,000 | |||
|
Purchase price
|
9,380,000 | |||
|
Fair value of net tangible assets acquired
|
0 | |||
|
Goodwill and intangible assets
|
$ | 9,380,000 | ||
| c. Adjustment to reflect the promissory notes issued to shareholders of the Dial in connection with the acquisition; |
Pro Forma Condensed Consolidated Income Statement
3. Adjustment of Change’s minority interest.
4. Adjustment to record interest expense for promissory notes issued by Excelsior.
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Franklin Capital Corporation
Pro Forma Condensed Combined Financial Information
Introduction
On December 4, 2001, Change Technology and Franklin Capital entered into a definitive agreement and plan of merger pursuant to which Change Technology will be merged with and into Franklin Capital (the “Merger”). Under the terms of the merger agreement, Change Technology common stockholders will receive one share of Franklin Capital for each 40.985 shares of Change Technology common stock that they own. Change Technology Series A preferred stockholders will receive one share of Franklin Capital Series B preferred stock for each share of Change Technology Series A preferred stock they own. As a result of the merger, Franklin Capital will issue approximately 4,442,000 shares of its common stock and 645 shares of its Series B preferred stock to Change Technology stockholders.
Upon closing of the transaction, Change Technology stockholders will own approximately 80% of Franklin Capital common stock with the balance being held by Franklin Capital’s current stockholders. The boards of both companies have approved the transaction, subject to stockholder approval by both Franklin Capital and Change Technology common and preferred stockholders and the satisfaction or waiver of conditions to the merger.
Upon closing of the transaction, Change Technology stockholders will own approximately 80% of Franklin Capital common stock, with the balance being held by Franklin Capital’s current stockholders. In accordance with accounting principles generally accepted in the United States, Change Technology was deemed to be the accounting acquiror based on the relative post merger voting interest and Board representation, as well as the market capitalization of the predecessors immediately prior to initiation of the merger. Therefore, the acquisition will be accounted for by Change Technology using the purchase method of accounting, although Franklin Capital remains the surviving legal entity and the registrant for SEC reporting purposes. Change Technology will allocate the estimated purchase price to the net tangible and amortizable intangible assets acquired, and intangible assets with indefinite lives, based on their respective fair values at the date of the completion of the merger. Any excess of the estimated purchase price over those fair values will be accounted for as goodwill.
The following unaudited pro forma condensed combined financial information for Franklin Capital gives effect to the merger by including the pro forma condensed consolidated financial information for Change Technology, as the accounting acquiror, and reflecting the acquisition of Franklin Capital under the purchase method of accounting. The unaudited pro forma condensed combined statements of operations for the year ended December 31, 2001 give pro forma effect to the merger as if the merger had occurred on January 1, 2001. The unaudited pro forma condensed combined balance sheet as of December 31, 2001 gives pro forma effect to the merger and related purchase accounting adjustments as if the merger had occurred on December 31, 2001. The pro forma adjustments relating to the merger are described in the notes to the pro forma condensed combined financial information.
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The unaudited pro forma condensed combined financial information does not purport to represent the results of operations or the financial position of Franklin Capital that would have resulted had the merger been consummated as of the date or for the period indicated, and does not purport to be indicative of the effects that may be expected to occur in the future. The historical financial information set forth below has been derived from, and is qualified by reference to, the financial statements of Change Technology Partners, Inc. and the financial statements of Franklin Capital Corporation and should be read in conjunction with those financial statements and notes thereto. The pro forma adjustments have been prepared in accordance with accounting principles generally accepted in the United States.
35
Table of Contents
Franklin Capital Corporation
Pro Forma Condensed Combined Balance Sheet
| Change | Franklin | Franklin | |||||||||||||||||||
| Technology | Capital | Capital | |||||||||||||||||||
| Partners, | Corporation | Corporation | |||||||||||||||||||
| Inc. | Pro Forma | Pro Forma | Combined | ||||||||||||||||||
| Pro Forma | Combined | Adjustments | Notes | Pro Forma | |||||||||||||||||
|
Assets
|
|||||||||||||||||||||
|
Cash and Cash Equivalents
|
$ | 8,892,229 | $ | 1,473,934 | $ | (5,108,200 | ) | (1a)(3) | $ | 5,257,963 | |||||||||||
|
Accounts Receivable, net of allowances
|
146,557 | 5,039,310 | — | 5,185,867 | |||||||||||||||||
|
Unbilled Receivables
|
— | — | — | — | |||||||||||||||||
|
Related Party Receivables
|
204,132 | — | — | 204,132 | |||||||||||||||||
|
Notes Receivables, Short-Term
|
2,393,205 | — | (2,172,460 | ) | (2) | 220,745 | |||||||||||||||
|
Prepaid and other Current Assets
|
441,893 | 69,763 | — | 511,656 | |||||||||||||||||
|
Total Current Assets
|
12,078,016 | 6,583,007 | (7,280,660 | ) | 11,380,363 | ||||||||||||||||
|
Notes Receivable, Long-Term
|
333,000 | — | — | 333,000 | |||||||||||||||||
|
Investments in and loans to Unconsolidated
Subsidiaries
|
720,030 | 1,403,872 | (286,484 | ) | (4) | 1,837,418 | |||||||||||||||
|
Property and Equipment, net
|
785,790 | 418,659 | (14,219 | ) | (1b) | 1,190,230 | |||||||||||||||
|
Purchased intangibles assets and goodwill
|
1,568,195 | 14,526,607 | (493,359 | ) | (1b) | 15,601,443 | |||||||||||||||
|
Other Assets
|
666,911 | 116,981 | (112,000 | ) | (2) | 671,892 | |||||||||||||||
|
Total Assets
|
$ | 16,151,942 | $ | 23,049,126 | $ | (8,186,722 | ) | $ | 31,014,346 | ||||||||||||
|
Accounts Payable
|
280,318 | 648,183 | — | 928,501 | |||||||||||||||||
|
Producer Payables
|
3,363,289 | — | 3,363,289 | ||||||||||||||||||
|
Accrued Expenses
|
983,300 | 575,394 | — | 1,558,694 | |||||||||||||||||
|
Deferred Revenues
|
3,500 | — | — | 3,500 | |||||||||||||||||
|
Loan Payable
|
— | 2,810,000 | — | 2,810,000 | |||||||||||||||||
|
Current portion of Long Term Debt
|
— | 2,172,460 | (2,172,460 | ) | (2) | — | |||||||||||||||
|
Capital Lease Obligation
|
91,672 | — | — | 91,672 | |||||||||||||||||
|
Total Current Liabilities
|
1,358,790 | 9,569,326 | (2,172,460 | ) | 8,755,656 | ||||||||||||||||
|
Loan Payable, excluding current portion
|
— | 8,920,000 | (4,708,200 | ) | (3) | 4,211,800 | |||||||||||||||
|
Capital Lease Obligation, less current
|
124,173 | — | — | 124,173 | |||||||||||||||||
|
Deferred Rent
|
8,924 | — | — | 8,924 | |||||||||||||||||
|
Minority Interest
|
— | 238,805 | (238,805 | ) | (4) | — | |||||||||||||||
|
Preferred Stock of Subsidiary
|
1,500,000 | — | 1,500,000 | ||||||||||||||||||
|
Total Liabilities
|
1,491,887 | 20,228,131 | (7,119,465 | ) | 14,600,553 | ||||||||||||||||
|
Stockholders’ equity:
|
|||||||||||||||||||||
|
Preferred Stock
|
65 | 16,450 | — | 16,515 | |||||||||||||||||
|
Common Stock
|
1,790,229 | 1,074,700 | 2,577,781 | (1c)(1d) | 5,442,710 | ||||||||||||||||
|
APIC
|
94,637,425 | 7,801,593 | (9,716,786 | ) | (1c)(1d)(2) | 92,722,232 | |||||||||||||||
|
Treasury Stock
|
— | 431,188 | (431,188 | ) | (1c) | — | |||||||||||||||
|
Deferred Compensation
|
(966,200 | ) | — | — | (966,200 | ) | |||||||||||||||
|
Unrealized Appreciation of Investments
|
— | (182,233 | ) | 182,233 | (1c) | — | |||||||||||||||
|
Accumulated deficit
|
(80,801,464 | ) | (6,320,703 | ) | 6,320,703 | (1c) | (80,801,464 | ) | |||||||||||||
|
Total Stockholders’ Equity
|
14,660,055 | 2,820,995 | (1,067,257 | ) | 16,413,793 | ||||||||||||||||
|
Total Liabilities and Stockholders’ Equity
|
$ | 16,151,942 | $ | 23,049,126 | $ | (8,186,722 | ) | $ | 31,014,346 | ||||||||||||
See accompanying Notes to Unaudited Condensed Consolidated Information.
36
Table of Contents
Franklin Capital Corporation
Pro Forma Condensed Combined Income Statement
| Franklin | Franklin | ||||||||||||||||||||
| Change | Capital | Capital | |||||||||||||||||||
| Technology | Corporation | Corporation | |||||||||||||||||||
| Partners, Inc. | Pro Forma | Pro Forma | Pro Forma | ||||||||||||||||||
| Pro Forma | Combined | Adjustments | Notes | Combined | |||||||||||||||||
|
Revenues
|
$ | 1,543,314 | $ | 10,934,055 | $ | $ | 12,477,369 | ||||||||||||||
|
Cost of Revenues
|
2,051,097 | 4,322,910 | 6,374,007 | ||||||||||||||||||
|
Gross Profit (Loss)
|
(507,783 | ) | 6,611,145 | — | 6,103,362 | ||||||||||||||||
|
Operating Expenses:
|
|||||||||||||||||||||
|
Selling, general and administrative expenses
|
10,997,719 | 7,009,519 | 18,007,238 | ||||||||||||||||||
|
Equity Based Compensation
|
3,086,298 | — | 3,086,298 | ||||||||||||||||||
|
Loss on disposal of Subsidiaries
|
377,011 | — | 377,011 | ||||||||||||||||||
|
Impairment Losses
|
6,386,000 | — | 6,386,000 | ||||||||||||||||||
|
Severance
|
1,326,000 | — | 1,326,000 | ||||||||||||||||||
|
Total Operating Expenses
|
22,173,028 | 7,009,519 | — | 29,182,547 | |||||||||||||||||
|
Income (Loss) from Operations
|
(22,680,811 | ) | (398,374 | ) | — | (23,079,185 | ) | ||||||||||||||
|
Minority Interest
|
7,736 | (7,736 | ) | (4 | ) | — | |||||||||||||||
|
Other Income:
|
|||||||||||||||||||||
|
Interest Income
|
845,066 | 72,697 | (36,000 | ) | (5 | ) | 881,763 | ||||||||||||||
|
Interest Expense
|
(16,541 | ) | (1,072,365 | ) | 601,000 | (5 | ) | (487,906 | ) | ||||||||||||
|
Realized gains (losses) on trading securities
|
— | 520,455 | 520,455 | ||||||||||||||||||
|
Unrealized gains (losses) on trading
securities
|
— | — | — | ||||||||||||||||||
|
Equity in Losses of unconsolidated affiliate
|
(5,724,500 | ) | — | (5,724,500 | ) | ||||||||||||||||
|
Net Loss before (benefit) provision for taxes
|
(27,576,786 | ) | (869,851 | ) | 557,264 | (27,889,373 | ) | ||||||||||||||
|
Benefit (provision) for current income taxes
|
— | (64,324 | ) | (64,324 | ) | ||||||||||||||||
|
Net Loss
|
(27,576,786 | ) | (934,175 | ) | 557,264 | (27,953,697 | ) | ||||||||||||||
|
Preferred Stock Dividends
|
— | (115,150 | ) | (115,150 | ) | ||||||||||||||||
|
Net Loss attributable to Common Stock
|
$ | (27,576,786 | ) | $ | (1,049,325 | ) | $ | 557,264 | $ | (28,068,847 | ) | ||||||||||
See accompanying notes to unaudited condensed consolidated information.
37
Table of Contents
Franklin Capital Corporation
Pro Forma Condensed Combined Financial Information
Notes to Pro Forma Condensed Combined Financial Information:
Pro Forma Condensed Combined Balance Sheet
1. Adjustments to record the purchase of Franklin Capital’s assets and assumption of liabilities by Change are as follows:
| a. Adjustment to cash for estimated transaction costs of $400,000 | |
| b. Adjustment to the carrying value of certain long lived assets to reflect the excess of the fair value of the net assets acquired over the purchase price, calculated as follows: |
|
Transaction costs
|
$ | 400,000 | ||
|
Value of stock portion of purchase price
|
1,865,738 | |||
|
Purchase price
|
2,265,738 | |||
|
Estimated fair value of net tangible liabilities
to be acquired
|
(11,705,612 | ) | ||
|
Excess of purchase price over net tangible
liabilities acquired
|
13,971,350 | |||
|
Estimated fair value of net intangible assets
acquired
|
14,526,607 | |||
|
Excess over purchase price
|
(555,257 | ) | ||
|
Amount applied proportionately to reduce carrying
value of investments in unconsolidated subsidiaries
|
(47,679 | ) | ||
|
Amount applied proportionately to reduce carrying
value of property and equipment
|
(14,219 | ) | ||
|
Amount applied proportionately to reduce carrying
value of intangible assets
|
(493,359 | ) | ||
|
Remaining excess over purchase price
|
$ | — | ||
| The process to estimate the fair value of the tangible and intangible assets acquired and liabilities assumed, and determination of estimated useful lives of amortizable intangible assets acquired, has not been completed. The final allocation of purchase price to assets assumed, liabilities acquired, and to goodwill, could differ materially from the results shown above. |
| c. Adjustment to reflect the elimination of all of Franklin Capital’s pro forma combined stockholders’ equity balances. | |
| d. Adjustment to reflect the proposed 40.985:1 conversion of Change’s common stock into Franklin’s common stock resulting in the issuance of 4,368,010 shares of common stock. |
2. To eliminate Change’s notes receivable, related discount accretion, and warrant from Excelsior Radio, a majority owned subsidiary of Franklin Capital.
On August 28, 2001, Change Technology purchased the promissory note and a warrant from Excelsior Radio for $2,250,000. The warrant to purchase 482,955 shares of Excelsior common stock at an exercise price of $1.125 per share had an allocated fair value of approximately $112,000. The warrant was included in other assets in the
38
Table of Contents
3. To eliminate that portion of the Excelsior Radio promissory notes payable and interest expense to Change Technology, issued in connection with the acquisition of the Dial Assets, which was included in the pro forma condensed consolidated financial information of Franklin Capital.
On April 3, 2002, Franklin consummated a transaction whereby Excelsior Radio acquired certain assets from Dial Communications Group LLC (“Dial”). Concurrent with the acquisition of Dial Assets, Excelsior Radio issued promissory notes to Change Technology and its preferred shareholder totaling $7,000,000. The proceeds of the notes were used by Excelsior Radio to finance the acquisition of the Dial Assets. This transaction has been reflected in the pro forma condensed consolidated financial information of Franklin Capital. As Excelsior Radio is reflected as a consolidated subsidiary of Franklin Capital, the balance of the notes that is due to Change Technology, totaling $4,708,200, will eliminate upon consolidation of Franklin Capital with Change Technology.
4. To eliminate Change Technology’s minority interest in Excelsior Radio. On December 4, 2001, Change Technology purchased from Franklin Capital 250,000 shares of common stock of Excelsior Radio, an approximate 10% equity interest, for $250,000. As Excelsior Radio is a consolidated subsidiary of Franklin Capital, this transaction will eliminate upon consolidation of Franklin Capital with Change Technology.
Pro Forma Condensed Combined Income Statement
5. Adjustment to eliminate interest recorded by Change Technology and Excelsior Radio in relation to the promissory note of Excelsior Radio held by Change.
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EQUIVALENT PER SHARE DATA
The following table sets forth certain data concerning the historical book value per share, cash dividends declared per share and income per share from continuing operations for Franklin Capital and Change Technology, respectively.
| Fiscal Year Ended | |||||
| December 31, 2001 | |||||
|
Book Value Per Common Share
|
|||||
|
Franklin Capital
|
$ | 1.19 | |||
|
Change Technology
|
$ | 0.08 | |||
|
Pro forma
|
$ | 2.71 | |||
|
Cash Dividends Declared Per Common
Share
|
|||||
|
Franklin Capital
|
$ | — | |||
|
Change Technology
|
$ | — | |||
|
Pro forma
|
$ | — | |||
|
Loss Per Common Share— Diluted
|
|||||
|
Franklin Capital
|
$ | (2.34 | ) | ||
|
Change Technology
|
$ | (0.23 | ) | ||
|
Pro forma
|
$ | (6.30 | ) | ||
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Table of Contents
THE FRANKLIN CAPITAL SPECIAL MEETING
Purpose of the Franklin Capital Special Meeting
At the Franklin Capital special meeting, holders of Franklin Capital common and Series A preferred stock will consider and vote:
| • | to approve the withdrawal of Franklin Capital’s election to be regulated as a business development company under the 1940 Act; | |
| • | to approve and adopt the merger agreement and the transactions contemplated thereby, including the merger of Change Technology with and into Franklin Capital; | |
| • | to approve and adopt an amendment to the certificate of incorporation of Franklin Capital to increase the number of shares authorized from 10,000,000 to 31,000,000; | |
| • | to approve amendments to the Stock Incentive Plan, including an increase in the number of shares available under the Stock Incentive Plan from 67,500 to 1,000,000; and | |
| • | for Franklin Capital Series A preferred stockholders only, to vote to elect Spencer L. Brown as a preferred stock director of Franklin Capital. |
None of the proposals is contingent upon the passage of any other proposal.
The Franklin Capital board of directors has unanimously approved the merger agreement, the merger and the other proposals and recommends a vote “for” approval and adoption of the merger and the other proposals to be presented at the annual meeting.
Voting Information
This joint proxy statement/ prospectus is being furnished in connection with the solicitation of proxies by the Franklin Capital board of directors for the Franklin Capital special meeting. The cost of the solicitation of proxies will be borne by Franklin Capital. Franklin Capital will pay brokers, nominees, fiduciaries, or other custodians their reasonable expenses for sending proxy materials to, and obtaining information from, persons for whom they hold stock of Franklin Capital. Franklin Capital expects the solicitation of proxies will be primarily by mail, but directors, officers and other employees of Franklin Capital may also solicit in person or by telephone.
Only common and Series A preferred stockholders of record at the close of business on , 2002 will be entitled to vote at the Franklin Capital special meeting. The total number of shares of stock outstanding and entitled to vote at the meeting as of the record date was shares of Franklin Capital common stock and shares of Series A preferred stock. Each share of Franklin Capital common stock and Series A preferred stock is entitled to one vote.
If the accompanying proxy is executed and returned in time for the Franklin Capital special meeting, your Franklin Capital shares will be voted in accordance with the instructions. Any proxy may be revoked at any time before it is voted by
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Table of Contents
Stockholder and Board Approvals
The merger and other proposals are being submitted at the Franklin Capital special meeting for approval by the common and Series A preferred stockholders of Franklin Capital. The approval of a majority of the outstanding common and Series A preferred shares of Franklin Capital voting together as a single class is required for the approval of the merger proposal. The amendment to the certificate of incorporation requires the affirmative vote of a majority of Franklin Capital’s common and Series A preferred shares, voting separately, and the amendments to the Stock Incentive Plan requires the affirmative vote of a majority of Franklin Capital’s common and Series A preferred shares voting together as a single class. The withdrawal of Franklin Capital’s election to be regulated as a business development company requires approval by a majority as defined in the 1940 Act. Abstentions will have the same effect as casting a vote “against” the merger proposal and the other proposals. The vote of the stockholders of Change Technology is also being solicited because their approval or consent is also required for the merger and related transactions to be consummated.
Beneficial Ownership of Franklin Capital
The following tables set forth certain information with respect to beneficial ownership (as that term is defined in the rules and regulations of the Commission) of Franklin Capital’s stock as of April 16, 2002, by 1) each person who is known by Franklin Capital to be the beneficial owner of more than five percent of the outstanding stock, 2) each director of Franklin Capital, 3) each current executive officer listed in the Summary Compensation Table and 4) all directors and executive officers of Franklin Capital as a group. Except as otherwise indicated, to Franklin Capital’s knowledge, all shares are beneficially owned and investment and voting power is held as stated by the persons named as owners. The address for all beneficial owners, unless stated otherwise below is c/o Franklin Capital Corporation 450 Park Avenue, Suite 1000, New York, NY 10022.
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Common Stock
| Name and Address of | Amount and Nature of | Percent | Percent of Class | |||||||||
| Beneficial Owner | Beneficial Ownership | of Class | After Merger | |||||||||
|
The Prudential Insurance
Company of America 751 Broad Street Newark, NJ 07102 |
211,557 | 19.7 | % | 3.9 | % | |||||||
|
Stephen L. Brown
|
143,291 | (1) | 13.4 | % | 2.6 | % | ||||||
|
Peter D. Gottlieb
|
77,400 | (2) | 7.0 | % | 1.4 | % | ||||||
|
Irving Levine
|
46,375 | (3) | 4.2 | % | * | |||||||
|
Spencer L. Brown
|
33,244 | (4) | 3.1 | % | * | |||||||
|
Hiram M. Lazar
|
9,085 | (5) | * | * | ||||||||
|
Michael P. Rolnick
|
7,250 | (6) | * | * | ||||||||
|
David T. Lender
|
300 | * | * | |||||||||
|
All officers and directors as a group
(7 persons)
|
316,945 | 27.4 | % | 5.7 | % | |||||||
* Less than 1.0%.
| (1) | Does not include 7,535 shares owned by Mr. Brown’s children and does not include 33,244 shares owned by Spencer L. Brown, who is also his son. See (4) below. Mr. Brown disclaims beneficial ownership of such shares. |
| (2) | Includes preferred stock held which is convertible into 3,750 shares of common stock. Also includes 38,900 shares of common stock and preferred stock which is convertible into 30,000 shares of common stock owned by Kuby Gottlieb Special Value Fund (KGSV) and 3,750 shares of common stock owned by Kuby Gottlieb Investments (KGI). Mr. Gottlieb may be deemed to be a controlling person of KGSV and KGI due to his position as portfolio manager. Therefore, Mr. Gottlieb may be deemed to be a beneficial owner of all shares owned by KGSV and KGI. |
| (3) | Includes options for 2,500 shares exercisable on February 14, 2000, options for 625 shares exercisable on June 7, 2000, options for 2,500 shares exercisable on February 14, 2001 and options for 625 shares exercisable on June 7, 2001. Also includes preferred stock which is convertible into 35,625 shares of common stock owned by Copley Fund, Inc. (Copley). Mr. Levine may be deemed to be a controlling person of Copley due to his position as Chairman and Chief Executive Officer. Therefore, Mr. Levine may be deemed to be a beneficial owner of all shares owned by Copley. |
| (4) | Includes preferred stock held which is convertible into 1,875 shares of common stock. |
| (5) | Includes options for 937 shares exercisable on March 1, 2000, and options for 938 shares exercisable on March 1, 2001. Also includes preferred stock held which is convertible into 750 shares of common stock. |
| (6) | Includes options for 2,500 shares exercisable on February 14, 2000, options for 625 shares exercisable on June 7, 2000, options for 2,500 shares exercisable on February 14, 2001 and options for 625 shares exercisable on June 7, 2001. |
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Preferred Stock
| Name and Address of | Amount and Nature of | Percent | |||||||
| Beneficial Owner | Beneficial Ownership | of Class | |||||||
|
Irving Levine
|
4,750 | (1) | 28.9% | ||||||
|
Peter D. Gottlieb
|
4,500 | (2) | 27.4% | ||||||
|
Mark Rattner
|
2,000 | (3) | 12.2% | ||||||
|
c/o Professional Indemnity
|
|||||||||
|
37 Radio Circle Drive
|
|||||||||
|
Mount Kisco, NY 10549
|
|||||||||
|
Gerry M. Ritterman
|
1,500 | 9.1% | |||||||
|
47 Lawrence Farms Crossways
|
|||||||||
|
Chappaqua, NY 10514
|
|||||||||
|
Spencer L. Brown
|
250 | 1.5% | |||||||
|
Hiram M. Lazar
|
100 | * | |||||||
|
Stephen L. Brown
|
— | * | |||||||
|
David T. Lender
|
— | * | |||||||
|
Michael P. Rolnick
|
— | * | |||||||
|
All officers and directors as a group
(7 persons)
|
9,600 | 58.4% | |||||||
| (1) | Preferred stock owned by Copley Fund, Inc. (Copley). Mr. Levine may be deemed to be a controlling person of Copley due to his position as Chairman and Chief Executive Officer. Therefore, Mr. Levine may be deemed to be a beneficial owner of all shares owned by Copley. |
| (2) | Includes 4,000 shares of preferred stock owned by Kuby Gottlieb Special Value Fund (KGSV). Mr. Gottlieb may be deemed to be a controlling person of KGSV due to his position as portfolio manager. Therefore, Mr. Gottlieb may be deemed to be a beneficial owner of all shares owned by KGSV. |
| (3) | Includes 1,000 shares of preferred stock owned by Marshall Rattner, Inc. (MRI). Mr. Rattner may be deemed to be a controlling person of MRI due to his position as Chief Executive Officer. Therefore, Mr. Rattner may be deemed to be a beneficial owner of all shares owned by MRI. |
Comparative Per Share Price
Franklin Capital’s common stock is traded on the American Stock Exchange under the symbol “FKL.” The following table lists the high and low closing sales prices for Franklin Capital common stock. The stock quotations are interdealer quotations and do not include markups, markdowns or commissions. On April 22, 2002, the last reported closing sale price of the common stock was $3.90 per share. The public announcement of the merger agreement occurred on December 4, 2001.
| Closing Sale Price(1) | |||||||||
| Low | High | ||||||||
|
Year ended December 31,
2000
|
|||||||||
|
First Quarter
|
$ | 6.833 | $ | 31.000 | |||||
|
Second Quarter
|
7.333 | 21.000 | |||||||
|
Third Quarter
|
8.250 | 9.500 | |||||||
|
Fourth Quarter
|
7.500 | 8.750 | |||||||
|
Year ended December 31,
2001
|
|||||||||
|
First Quarter
|
$ | 5.875 | $ | 8.125 | |||||
|
Second Quarter
|
4.875 | 5.750 | |||||||
|
Third Quarter
|
4.650 | 5.050 | |||||||
|
Fourth Quarter
|
4.090 | 4.870 | |||||||
|
Year ending December 31,
2002
|
|||||||||
|
First Quarter
|
$ | 3.76 | $ | 4.20 | |||||
|
Second Quarter (through April 22, 2002)
|
3.85 | 4.02 | |||||||
| (1) | The sales prices reflect a 3 for 2 stock split in June 2000. |
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Table of Contents
Quorum and Adjournments
Under Delaware law, a quorum is constituted by the presence in person or by proxy of the holders of a majority of the outstanding shares of Franklin Capital common stock and Series A preferred stock taken together as a single class. Votes cast by proxy or in person at the Franklin Capital special meeting will be tabulated by the inspector of election appointed for the meeting who will determine whether or not a quorum is present. Proxies properly executed and marked with a negative vote or an abstention, or broker non-votes, will be considered to be present at the Franklin Capital special meeting for the purposes of determining the existence of a quorum for the transaction of business. Broker non-votes exist where a broker proxy indicates that the broker is not authorized to vote on a particular proposal.
The stockholders will also be asked to consider and vote on a proposal to grant discretionary authority to vote in favor of an adjournment of the meeting, if necessary.
Adjournments may be made for the purpose of, among other things, soliciting additional proxies. Any adjournment may be made from time to time by approval of the holders of shares representing a majority of the votes present in person or by proxy at the meeting, whether or not a quorum exists, without further notice other than by an announcement made at the meeting. Franklin Capital does not currently intend to seek an adjournment of the meeting. Abstentions and broker non-votes will be treated for purposes of the adjournment as votes “against” the adjournment.
THE CHANGE TECHNOLOGY ANNUAL MEETING
Purpose of the Change Technology Annual Meeting
At the Change Technology annual meeting, holders of Change Technology common and Series A preferred stock will be asked to consider and vote:
| • | to approve and adopt the merger agreement and the transactions contemplated thereby, including the merger of Change Technology with and into Franklin Capital; | |
| • | to approve and ratify the grant to William Avery of an option to purchase 6,000,000 shares of Change Technology common stock pursuant to a Stock Option Agreement dated September 21, 2001 between Change Technology and William Avery; and | |
| • | to elect five (5) directors to serve on Change Technology’s board of directors. |
None of the proposals is contingent upon the passage of any other proposal.
The Change Technology board of directors has unanimously approved the merger agreement, the merger and the other proposals and recommends a vote “for” approval and adoption of the merger and other proposals.
Voting Information
This joint proxy statement/ prospectus is being furnished in connection with the solicitation of proxies by the Change Technology board of directors for the Change Technology annual meeting. The cost of the solicitation of proxies will be borne by
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Table of Contents
If the accompanying proxy is executed and returned in time for the Change Technology annual meeting, Change Technology shares will be voted in accordance with the instructions. Any proxy may be revoked at any time before it is voted by written notice, mailed or delivered to the Secretary of Change Technology or by revocation of a written proxy by request in person at the Change Technology annual meeting; but if not so revoked, the shares represented by such proxy will be voted in the manner directed by the stockholder. If no direction is made, proxies received from stockholders will be voted “for” the merger and other proposals set forth in the notice of the annual meeting.
Stockholder and Board Approvals
The merger and other proposals are being submitted at the Change Technology annual meeting for approval by the common and Series A preferred stockholders of Change Technology. The approval of a majority of the outstanding shares of Change Technology common and Series A preferred stock, voting together as a class, is required for the approval of the merger proposal. Abstentions will have the same effect as casting a vote “against” the merger and other proposals. The vote of the stockholders of Franklin Capital is also being solicited because their approval or consent is also required for the merger and related transactions to be consummated.
Beneficial Ownership of Change Technology
The following table sets forth certain information with respect to beneficial ownership (as that term is defined in the rules and regulations of the SEC) of Change Technology’s stock as of April 22, 2002 regarding (1) each person known by Change Technology to be the beneficial owner of more than five percent of the outstanding shares of common stock or Series A preferred stock, (2) each director of Change Technology, (3) the current and former Chief Executive Officer of Change Technology and certain of Change Technology’s other former executive officers and (4) all executive officers and directors as a group. Except as otherwise indicated, each person has sole voting and dispositive power with respect to such shares. The address for all beneficial owners, unless stated otherwise below is c/o Change Technology Partners, Inc., 573 Steamboat Rd, Greenwich, CT 06840.
Each share of the Series A Preferred Stock is convertible into one share of common stock.
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Beneficial ownership includes shares for which a person, directly or indirectly, has or shares voting or investment power, or both, and also includes options and warrants which are exercisable within sixty days of April 22, 2002.
| Series A | ||||||||||||||||||||
| Common Stock | Preferred Stock | |||||||||||||||||||
| Percent of | ||||||||||||||||||||
| Franklin Capital | ||||||||||||||||||||
| Percent | Common Stock | Percent | ||||||||||||||||||
| Name of Beneficial Owner | Shares | of Class | After the Merger | Shares | of Class | |||||||||||||||
|
Culmen Technology Partners, L.P. 201 Main Street, Suite 1955 Fort Worth, TX 76102 |
32,000,000 | 17.5 | % | 14.2 | % | 0 | 0 | % | ||||||||||||
|
Walter A. Forbes c/o FG II Ventures, LLC 537 Steamboat Road Greenwich, CT 06830 |
10,810,625 | (1) | 5.6 | 4.8 | 0 | 0 | ||||||||||||||
|
Cary S. Fitchey
|
||||||||||||||||||||
|
c/o FG II Ventures, LLC 537 Steamboat Road Greenwich, CT 06830 |
10,443,750 | (2) | 5.5 | 4.6 | 0 | 0 | ||||||||||||||
|
William Avery
|
9,115,625 | (3) | 4.8 | 4.0 | 0 | 0 | ||||||||||||||
|
James M. Dubin
|
1,629,520 | (4) | * | * | 0 | 0 | ||||||||||||||
|
Michael Gleason
|
33,316,520 | (5) | 18.1 | 14.7 | 0 | 0 | ||||||||||||||
|
Michael J. Levitt
|
5,800,000 | (6) | 3.1 | 2.9 | ||||||||||||||||
|
William E. Lipner
|
2,091,520 | (7) | 1.1 | * | 0 | 0 | ||||||||||||||
|
Matthew Ryan 313 Lake St. Pleasantville, NY 10570 |
2,344,494 | 1.3 | 1.0 | |||||||||||||||||
|
Kathleen Shepphird 65 Harding Road Old Greenwich, CT 06870 |
1,546,875 | (8) | * | * | ||||||||||||||||
|
Robert Westerfield P.O. Box 654 Dobbs Ferry, NY 10522 |
0 | 0 | * | |||||||||||||||||
|
Christopher H.B. Mils c/o J.O. Hambro Capital Management Limited Ryder Court 14 Ryder St London SW1Y 6QB, England |
12,939,700 | (9) | 7.1 | 5.7 | ||||||||||||||||
|
Gordon Bryant 9408 Avenido Del Oso NE Albequerque, NM 87111 |
0 | 0 | * | 645 | 100 | |||||||||||||||
|
All officers and directors as a group (10
persons)**
|
51,953,185 | (10) | 26.6 | 23.0 | % | 0 | 0 | |||||||||||||
| * | Represents less than 1% of the outstanding shares, both in number and in terms of voting power. | |
| ** | Duplications eliminated. | |
| (1) | Represents 1,220,000 shares of common stock and warrants to purchase an aggregate of 9,590,625 shares of common stock. |
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Table of Contents
| (2) | Represents 2,400,000 shares of common stock and warrants to purchase an aggregate of 8,043,750 shares of common stock. | |
| (3) | Represents 2,000,000 shares of common stock and warrants to purchase an aggregate of 7,115,625 shares of common stock. | |
| (4) | Represents 338,000 shares of common stock and options to purchase an aggregate of 1,291,520 shares of common stock. | |
| (5) | Represents 32,000,000 shares of common stock owned by Culmen Technology Partners, L.P. (“Culmen”). Mr. Gleason is the President and sole director of CTP, Inc., the general partner of Culmen. As a result, he may be deemed to have beneficial ownership over these shares. However, Mr. Gleason disclaims beneficial ownership of 28,400,000 shares of common stock. Also includes options to purchase an aggregate of 1,316,520 shares of common stock. | |
| (6) | Represents 3,800,000 shares of common stock and options to purchase an aggregate of 2,000,000 shares of common stock. | |
| (7) | Represents 800,000 shares of Common Stock and options to purchase an aggregate of 1,291,520 shares of Common Stock. | |
| (8) | Represents warrants to purchase an aggregate of 1,546,875 shares of Common Stock. | |
| (9) | According to a Schedule 13G filed with the Securities and Exchange Commission on July 19, 2001, Mr. Mills (i) shares voting and dispositive power over such shares with J.O. Hambro Capital Management (Holdings) Limited and J.O. Hambro Capital Management Limited, (ii) shares voting and dispositive power over 1,280,000 such shares with American Opportunity Trust plc, (iii) shares voting and dispositive power over 4,400,000 such shares with Growth Financial Services and North Atlantic Smaller Companies Investment Trust plc, (iv) shares voting and dispositive power over 640,000 such shares with Oryx International Growth Fund Limited and Consulta (Channel Islands) Limited and (v) shares voting and dispositive power over 1,498,000 such shares with The Trident North Atlantic Fund. |
| (10) | Represents 38,938,000 shares of Common Stock, warrants to purchase an aggregate of 7,115,625 shares of Common Stock and options to purchase 5,899,560 shares of Common Stock. Includes 32,000,000 shares of Common Stock owned by Culmen, which Mr. Gleason may be deemed to beneficially own. |
Comparative Per Share Prices
Change Technology’s common stock is listed for trading on the over-the-counter market through the OTC Electronic Bulletin Board under the symbol “CTPI.OB”. The following table lists the high and low sales prices, as reported by the OTC Electronic Bulletin Board National Quotation Bureau. Quotations represent prices between dealers and do not include retail mark-up, mark-down or commission, and may not necessarily represent actual transactions. On April 22, 2002, the last reported closing sale price of Change Technology’s common stock was $0.055.
| Closing Sale | |||||||||
| Price | |||||||||
| Low | High | ||||||||
|
Year ended December 31,
2000
|
|||||||||
|
First Quarter
|
$ | 0.02 | $ | 5.50 | |||||
|
Second Quarter
|
1.12 | 4.00 | |||||||
|
Third Quarter
|
1.25 | 3.75 | |||||||
|
Fourth Quarter
|
0.37 | 2.94 | |||||||
|
Year ended December 31,
2001
|
|||||||||
|
First Quarter
|
$ | 0.25 | $ | 2.00 | |||||
|
Second Quarter
|
0.07 | 0.31 | |||||||
|
Third Quarter
|
0.02 | 0.14 | |||||||
|
Fourth Quarter
|
0.03 | 0.10 | |||||||
|
Year ending December 31,
2002
|
|||||||||
|
First Quarter
|
$ | 0.04 | $ | 0.09 | |||||
|
Second Quarter (through April 22, 2002)
|
0.05 | 0.06 | |||||||
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Table of Contents
Quorum and Adjournments
Under Delaware law, a quorum is constituted by the presence in person or by proxy of the holders of a majority of the outstanding shares of Change Technology common and Series A preferred stock taken together as a single class. Votes cast by proxy or in person at the Change Technology annual meeting will be tabulated by the inspector of election appointed for the meeting who will determine whether or not a quorum is present. Proxies properly executed and marked with a negative vote or an abstention, or broker non-votes, will be considered to be present at the Change Technology annual meeting for the purposes of determining the existence of a quorum for the transaction of business. Broker non-votes exist where a broker proxy indicates that the broker is not authorized to vote on a particular proposal.
The stockholders will also be asked to consider and vote on a proposal to grant discretionary authority to vote in favor of an adjournment of the meeting, if necessary.
Adjournments may be made for the purpose of, among other things, soliciting additional proxies. Any adjournment may be made from time to time by approval of the holders of shares representing a majority of the votes present in person or by proxy at the meeting, whether or not a quorum exists, without further notice other than by an announcement made at the meeting. Change Technology does not currently intend to seek an adjournment of the meeting. Abstentions and broker non-votes will be treated for purposes of the adjournment as votes “against” the adjournment.
DISSENTERS’ RIGHTS OF APPRAISAL
Under Delaware law, if Change Technology stockholders do not wish to accept the shares of Franklin Capital stock provided for in the merger agreement, Change Technology stockholders have the right to dissent from the merger and to receive payment in cash for the fair value of their Change Technology common stock as determined by the Delaware Court of Chancery. Change Technology stockholders electing to exercise appraisal rights must comply with the provisions of Section 262 of the Delaware General Corporation Law in order to perfect their rights. Change Technology will require strict compliance with the statutory procedures.
The following is intended as a brief summary of the material provisions of the Delaware statutory procedures required to be followed by a stockholder in order to dissent from the merger and perfect appraisal rights. This summary, however, is not a complete statement of all applicable requirements and is qualified in its entirety by reference to Section 262 of the Delaware General Corporation Law, the full text of which appears as Appendix B to this joint proxy statement/prospectus.
Section 262 requires that stockholders be notified not fewer than 20 days before the special meeting to vote on the merger that appraisal rights will be available. A copy of Section 262 must be included with such notice. This joint proxy statement/prospectus constitutes Change Technology’s notice to its stockholders of the availability of appraisal rights in connection with the merger in compliance with the requirements of Section 262. If you wish to consider exercising your appraisal rights, you should carefully review the text of Section 262 because failure to timely
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Table of Contents
If you elect to demand appraisal of your shares, you must satisfy each of the following conditions:
| • | You must deliver to Change Technology a written demand for appraisal of your shares before the vote with respect to the merger is taken. This written demand for appraisal must be in addition to and separate from any proxy or vote abstaining from or voting against the merger. Voting against or failing to vote for the merger by itself does not constitute a demand for appraisal within the meaning of Section 262. | |
| • | You must not vote in favor of the merger. |
If you fail to comply with either of these conditions and the merger is completed, you will be entitled to receive the Franklin Capital common stock in exchange for your shares of Change Technology common stock as provided for in the merger agreement, but you will have no appraisal rights with respect to your shares of Change Technology common stock.
All demands for appraisal should be addressed to William Avery, Secretary of Change Technology at the company address, before the vote on the merger is taken at the special meeting and should be executed by, or on behalf of, the record holder of the shares of Change Technology common stock. The demand must reasonably inform Change Technology of the identity of the stockholder and the intention of the stockholder to demand appraisal of his or her shares. To be effective, a demand for appraisal by a holder of Change Technology common stock must be made by, or on behalf of the recordholder made by the beneficial owner if he or she does not also hold the shares of record. The beneficial holder must, in such cases, have the registered owner submit the required demand in respect of such shares.
A person having a beneficial interest in shares of Change Technology common stock that are held of record in the name of another person, such as a broker, fiduciary, depositary or other nominee, must act promptly to cause the record holder to follow the steps summarized herein properly and in a timely manner to perfect appraisal rights. If the shares of Change Technology common stock are owned of record by a person other than the beneficial owner, including a broker, fiduciary (such as a trustee, guardian or custodian), depositary or other nominee, such demand must be executed by or for the record owner. If the shares of Change Technology common stock are owned of record by more than one person, as in a joint tenancy or tenancy in common, such demand must be executed by or for all joint owners. An authorized agent, including an agent for two or more joint owners, may execute the demand for appraisal for a stockholder of record; however, the agent must identify the record owner and expressly disclose the fact that, in exercising the demand, such person is acting as agent for the record owner. If a stockholder holds shares of Change Technology common stock through a broker who in turn holds the shares through a central securities depository nominee such as Cede & Co., a demand for appraisal of such shares must be made by or on behalf of the depository nominee and must identify the depository nominee as record holder.
A record holder, such as a broker, fiduciary, depositary or other nominee, who holds shares of Change Technology common stock as a nominee for others, may
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Within 10 days after the effective date of the merger, Franklin Capital, as the surviving corporation, must give written notice that the merger has become effective to each Change Technology stockholder who has properly filed a written demand for appraisal and who did not vote in favor of the merger. Within 120 days after the effective date, either the surviving corporation or any stockholder who has complied with the requirements of Section 262 may file a petition in the Delaware Court of Chancery, with a copy served on Change Technology in the case of a petition filed by a stockholder demanding a determination of the fair value of the shares held by all stockholders entitled to appraisal. The surviving corporation has no obligation to file such a petition in the event there are dissenting stockholders. Accordingly, the failure of a stockholder to file such a petition within the period specified could nullify such stockholder’s previously written demand for appraisal. Within 120 days after the effective time, any stockholder who has theretofore complied with the applicable provisions of Section 262 will be entitled, upon written request, to receive from the surviving corporation a statement setting forth the aggregate number of shares of Change Technology common stock not voting in favor of the merger and with respect to which demands for appraisal were received by the surviving corporation and the number of holders of such shares. Such statement must be mailed (i) within 10 days after the written request therefor has been received by the surviving corporation or (ii) within 10 days after the expiration of the period for the delivery of demands as described above, whichever is later.
If a petition for appraisal is duly filed by a stockholder and a copy of the petition is delivered to the surviving corporation, the surviving corporation will then be obligated within 20 days after receiving service of a copy of the petition to provide the Chancery Court with a duly verified list containing the names and addresses of all stockholders who have demanded an appraisal of their shares. After notice to dissenting stockholders, the Chancery Court is empowered to conduct a hearing upon the petition, to determine those stockholders who have complied with Section 262 and who have become entitled to the appraisal rights provided thereby. The Chancery Court may require the stockholders who have demanded payment for their shares to submit their stock certificates to the Register in Chancery for notation thereon of the pendency of the appraisal proceedings; and if any stockholder fails to comply with such direction, the Chancery Court may dismiss the proceedings as to such stockholder.
After determination of the stockholders entitled to appraisal of their shares of Change Technology common stock, the Chancery Court will appraise the shares, determining their fair value exclusive of any element of value arising from the accomplishment or expectation of the merger, together with a fair rate of interest, if any, to be paid upon the amount determined to be the fair value. When the value is determined, the Chancery Court will direct the payment of such value, with interest thereon accrued during the pendency of the proceeding, if the Chancery Court so determines, to the stockholders in exchange for certificates representing such shares.
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You should be aware that the fair value of your shares as determined under Section 262 could be more, the same, or less than the value that you are entitled to receive pursuant to the merger agreement.
Costs of the appraisal proceeding may be imposed upon the surviving corporation and/or the stockholders participating in the appraisal proceeding by the Chancery Court as the Chancery Court deems equitable in the circumstances. However, costs do not include attorneys’ and expert witness fees. Each dissenting stockholder is responsible for his or her attorneys’ and expert witness expenses, although, upon the application of a stockholder, the Chancery Court may order all or a portion of the expenses incurred by any stockholder in connection with the appraisal proceeding, including, without limitation, reasonable attorneys’ fees and the fees and expenses of experts, to be charged pro rata against the value of all shares entitled to appraisal. Any stockholder who had demanded appraisal rights will not, after the effective date, be entitled to vote shares subject to such demand for any purpose or to receive payments of dividends or any other distribution with respect to such shares (other than with respect to payment as of a record date prior to the effective date). At any time within 60 days after the effective date, any stockholder who has demanded an appraisal has the right to withdraw the demand and to accept the consideration specified in the merger agreement for his or her shares of Change Technology common stock. If no petition for appraisal is filed within 120 days after the effective date of the merger, or if such stockholder delivers a written withdrawal of his or her demand for appraisal and an acceptance of the merger within 60 days after the effective date of the merger, then the right of such stockholder to appraisal will cease and such stockholder will be entitled to receive the Franklin Capital common stock in exchange for shares of his or her Change Technology common
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Franklin Capital stockholders are not entitled to dissenters’ rights of appraisal.
This section of the joint proxy statement/prospectus describes the proposed merger and related transactions. While this section summarizes the material terms of the merger and related transactions, this summary may not contain all of the information that is important to each stockholder. Stockholders should carefully read this entire document and the merger agreement attached as Appendix A for a more complete understanding of the merger.
Franklin Capital plans to acquire Change Technology in a stock for stock exchange, where Franklin Capital will be the surviving entity. At the Franklin Capital special meeting or the Change Technology annual meeting, you will be asked to vote to approve and adopt the merger agreement and the transactions contemplated thereby, including the merger of Change Technology with and into Franklin Capital.
The merger agreement provides that the merger will be completed if approved by both the Franklin Capital and Change Technology stockholders and all other conditions of the merger agreement are satisfied or waived.
The effect of the merger is to create a combined company that will focus primarily on developing and acquiring assets primarily in the media and advertising business, provided that the combined company will continue Change Technology’s historic business, or use a significant portion of Change Technology’s historic business assets in a business, to the extent required under applicable tax regulations.
Assuming stockholder approval and all other required approvals are received and all other conditions are met or waived, the merger and related transactions will be accomplished as follows:
| • | Franklin Capital will file a Form N-54C with the Securities and Exchange Commission withdrawing its election to be regulated as a business development company. | |
| • | Change Technology will merge with and into Franklin Capital. | |
| • | Each 40.985 shares of Change Technology common stock will be exchanged for 1.0 share of Franklin Capital common stock. | |
| • | The Change Technology Series A preferred stockholders will receive one share of Franklin Capital Series B preferred stock for each Change Technology Series A preferred stock they own. | |
| • | Franklin Capital will change its name to Excelsior Communications Corporation. |
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Based upon the capitalization of Change Technology and Franklin Capital as of the record date, the common stockholders of Change Technology on a fully diluted basis will own in the aggregate approximately 80% of the outstanding Franklin Capital common stock following consummation of the merger.
The Exchange
If the merger is completed, Change Technology stockholders will receive 1.0 share of Franklin Capital common stock for each 40.985 shares of Change Technology common stock that they own. Franklin Capital will issue one share of Franklin Capital common stock to Change Technology stockholders for each fractional share such stockholder is entitled to after taking into account all certificates delivered by that stockholder. Each share of Change Technology Series A preferred stock will be exchanged for one share of Franklin Capital Series B preferred stock.
Based upon the capitalization of Change Technology and Franklin Capital as of the record date, the common stockholders of Change Technology will own in the aggregate approximately 80% of the outstanding Franklin Capital common stock following consummation of the merger.
As soon as practicable after the effective time of the merger, Mellon Investor Services, as the exchange agent, will mail to each holder of record of Change Technology common stock and Series A preferred stock as of the effective time a transmittal letter to be used in forwarding such stockholder’s certificates representing such shares for surrender to Mellon. Upon such surrender, Mellon will forward such holder certificates evidencing their ownership of Franklin Capital common stock or Series B preferred stock that such shareholder received as a result of the merger.
Change Technology stockholders should not forward stock certificates to Mellon until they have received transmittal letters, nor should they return stock certificates with the enclosed proxy.
Until surrendered to Mellon, outstanding stock certificates previously issued by Change Technology will, by virtue of the merger, represent the right to receive shares of Franklin Capital common stock or Series B preferred stock, as applicable, on an exchange ratio-adjusted basis without interest.
No dividends or distributions with respect to Franklin Capital common or preferred stock, as applicable, shall be paid to the holder of any certificate of Change Technology common or preferred stock until the surrender for exchange of such certificate has been made in accordance with the terms of the merger agreement and letter of transmittal. After the exchange of any such certificate, the holder shall be paid, without interest, any dividends or other distributions with a record date after the effective time of the merger.
Closing Date
The closing date of the merger will occur upon the filing of a certificate of merger with the Secretary of State of the State of Delaware or at such later date as is specified on such certificate. The filing of the certificate of merger will occur as soon as practicable after the satisfaction of the conditions set forth in the merger agreement. The merger agreement may be terminated by either party if the merger
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Background of the Merger
During the first quarter of 2001, the executive officers and directors of Franklin Capital determined that it would be in the best interests of Franklin Capital and its shareholders to acquire an operating company rather than continuing to engage in the business of investing in small private companies and holding minority stakes in such companies. Franklin Capital’s executive officers and directors also believed that by merging with or acquiring an operating company Franklin Capital would be likely to achieve greater stability in the valuation of its assets and would be able to prosper and grow with a long-term strategy of operating as an on-going business rather than a business development company.
In July 2001, Franklin Capital entered into a letter of intent with Winstar Radio Networks, LLC, Winstar Global Media, Inc., and Winstar Radio Productions, LLC to acquire certain of their operating assets for an aggregate purchase price of $6.25 million as well as the assumption of certain liabilities totaling approximately $1.5 million. Franklin Capital approached Change Technology to inquire about its interest in providing capital in connection with the acquisition of such assets and to further explore the possibility of combining Franklin Capital and Change Technology. Since July 2001, Change Technology’s board of directors had discussed changing its business strategy and operating focus. In the fall of 2001, Change Technology had accelerated its focus on exiting the e-services business and creating shareholder value by using its assets to develop and acquire businesses in radio and related media fields.
On August 28, 2001, Franklin Capital along with Sunshine Wireless LLC acquired the assets of the Winstar entities through Excelsior Radio, a then wholly owned subsidiary of Franklin Capital. Sunshine Wireless holds shares of preferred stock in Excelsior Radio. In connection with such asset acquisition, Change Technology provided Franklin Capital’s subsidiary Excelsior Radio, with a loan in the amount of $2.25 million. In the event that Franklin Capital and Change Technology had mutually agreed to a term sheet relating to a business combination on or before December 31, 2001, the loan would be extended upon the consummation of the business combination and become an asset of the combined company. In addition, if Franklin Capital and Change Technology had not mutually agreed to a term sheet regarding a business combination on or before December 31, 2001, Change Technology would have the right to accelerate the payment of all principal and interest due on the loan. Change Technology also received a warrant to purchase 482,955 shares of common stock of Excelsior Radio, approximately 11% of the fully diluted common stock, at an exercise price of $1.125 per share.
Upon completion of the asset acquisition, Mr. Stephen L. Brown, the Chief Executive Officer of Franklin Capital and Mr. Spencer L. Brown, the Senior Vice President of Franklin Capital, commenced preliminary discussions with William B. Avery, the Chief Executive Officer of Change Technology, regarding a potential merger between Franklin Capital and Change Technology.
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On September 16, 2001, Change Technology’s board of directors met telephonically to discuss the status of the proposed merger transaction with Franklin Capital. At such meeting, Mr. Avery made an informal presentation of the business of Franklin Capital and his plans for the combined company after the merger. The board of directors asked Mr. Avery a variety of questions concerning the proposed transaction and discussed the radio industry and the future market outlook for the industry. The board of directors instructed Mr. Avery to continue his negotiations with Franklin Capital.
On October 11, 2001, the board of directors of Franklin Capital met to discuss the proposed merger transaction with Change Technology. At such meeting, Mr. Brown outlined the parameters of the proposed transaction and informed the board of directors that Houlihan Lokey Howard & Zukin had been engaged to help identify some of the positive and negative aspects of the proposed merger as well as to raise any additional issues that it believes should be addressed if Franklin Capital decided to proceed with the discussions. A memorandum of Houlihan Lokey outlining such matters was circulated at the board meeting. After a discussion of the proposed transaction, the board of directors determined that Mr. Brown should continue merger negotiations with Change Technology.
During the period from October 12, 2001 to November 6, 2001, Franklin Capital and Change Technology and their respective advisors and counsel continued to negotiate definitive documentation evidencing the proposed transactions and continued their mutual due diligence.
On November 7, 2001, the board of directors of Change Technology met telephonically to discuss the Franklin Capital merger negotiations. Drafts of an initial merger agreement and exhibits and schedules were circulated to the board of directors for its review. At such meeting, Mr. Avery gave a detailed presentation of the proposed merger and reported on the valuation that he had prepared in determining the exchange ratio that he had discussed with Franklin Capital. After the board of directors discussed Mr. Avery’s report and presentation, it determined that it was satisfied with Mr. Avery’s valuation report and that it was not necessary to engage the services of an outside valuation firm.
On November 8, 2001, the board of directors of Franklin Capital met telephonically to discuss the Change Technology merger negotiations. An executive summary of the merger agreement and drafts of an merger agreement were circulated to the board of directors for its review. At such meeting, Mr. Brown answered questions posed by the board of directors regarding the structure, proposed exchange ratio and benefits of the proposed merger transaction.
Major discussions during that period and thereafter involved: (i) the exchange ratio and (ii) the appropriate management organization for the combined company. In this regard, Change Technology insisted that its shareholders own approximately 80% of the combined entity while Franklin Capital maintained that its representatives on the board of directors of the combined entity have certain rights that would allow them to determine the combined company’s business strategy.
On November 15, 2001, Franklin Capital and Change Technology issued a press release announcing that they had agreed in principle to the preliminary terms of the transaction in which Franklin Capital offered to purchase Change Technology in a
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On November 29, 2001, the Franklin Capital board of directors met with its legal and financial advisors to review the definitive merger agreement. At the meeting, Houlihan Lokey presented its findings regarding the reasonableness of the exchange ratio to the Franklin Capital Stockholders. Following deliberations, the board of directors of Franklin Capital unanimously approved the terms of the transactions with certain modifications, concluding that the transaction was fair to, and in the best interests of, Franklin Capital and its stockholders and authorized management of Franklin Capital to execute any and all documentation required in connection with, or relating to, the transaction.
On November 30, 2001, the board of directors of Change Technology met telephonically with its legal advisor to review the definitive merger agreement. After a discussion of the merger agreement, the board of directors of Change Technology unanimously approved the terms of the transactions, concluding that the transaction was fair to, and in the best interests of, Change Technology and its stockholders and authorized management of Change Technology to execute any and all documentation required in connection with, or relating to, the transaction.
Concurrently with the execution of the merger agreement, the parties entered into a stock purchase agreement pursuant to which Change Technology agreed to purchase 250,000 shares of common stock of Excelsior Radio Networks from Franklin Capital for an aggregate purchase price of $250,000. In the event that the merger between Franklin Capital and Change Technology is terminated pursuant to the terms of the merger agreement, Franklin Capital shall be required to repurchase all of such common stock from Change Technology at a repurchase price equal to $250,000, plus interest thereon at an annual rate of 10% from December 4, 2001 to the date of repurchase.
The parties agreed to enter into a definitive agreement and plan of merger dated as of December 4, 2001.
On April 3, 2002 Franklin Capital’s majority owned subsidiary, Excelsior Radio, purchased substantially all of the assets of the Dial entities, whose assets will be combined with Excelsior Radio’s Global Media division to create a national radio sales representation company. Change Technology and Sunshine Wireless LLC, both existing stockholders of Excelsior Radio, loaned Excelsior Radio an aggregate amount of $7,000,000 to finance the initial consideration of the Dial acquisition. The obligations under the loans are secured by certain of Excelsior Radio’s assets.
Franklin Capital’s Reasons for the Merger
Franklin Capital’s board of directors approved the merger after determining that it was in the best interests of Franklin Capital’s stockholders. In reaching its
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| • | The combined company intends to create value by growing Franklin Capital’s majority owned subsidiary, Excelsior Radio, through acquisitions, joint ventures and other efforts; | |
| • | The Franklin Capital board of directors considered that on a stand-alone basis, Franklin Capital would be unable to access sufficient capital to continue as a going concern and to fund growth opportunities. The Franklin Capital board of directors considered that by merging with Change Technology, Franklin Capital would have access to a funding source with significant financial resources; | |
| • | Franklin Capital would receive assistance from Change Technology’s board of directors in executing its business strategy of acquiring additional businesses in radio and related media fields; | |
| • | The Franklin Capital board of directors reviewed information with respect to Change Technology’s financial condition, results of operations and business prospects, including the due diligence review by Franklin Capital’s management and legal advisors; | |
| • | Franklin Capital stockholders may have increased liquidity by owning shares of a larger public company; | |
| • | The Franklin Capital board of directors considered that Change Technology’s size and business would benefit Franklin Capital stockholders; and | |
| • | The Franklin Capital board of directors considered the likelihood of consummation of the merger, including the terms and conditions of the merger agreement and the limited conditions to the consummation of the merger. |
The Franklin Capital board of directors also considered certain potentially negative factors in its deliberations concerning the merger, including, without limitation, the following:
| • | the possibility that the merger would not be consummated following the execution of the merger agreement; | |
| • | the possible disruption of Franklin Capital’s business operations pending completion of the merger; | |
| • | the costs of integrating the businesses and transaction expenses arising from the merger; and | |
| • | the structure and amount of the termination fee and its effect on the financial condition of Franklin Capital. See “The Merger Agreement — Termination of the Merger Agreement.” |
The Franklin Capital board of directors considered that specified Franklin Capital officers and directors would continue as officers and directors of Franklin Capital, and as a result would benefit from compensation and employment arrangements in the ordinary course of business.
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The Franklin Capital board of directors concluded that the benefits of the transaction to Franklin Capital and its stockholders outweighed the risks associated with the foregoing factors.
The above discussion of the information and factors considered by the Franklin Capital board of directors is not all-inclusive but is believed to include all material factors considered by the Franklin Capital board of directors.
No Fairness Opinion
Franklin Capital’s board of directors decided not to retain an independent financial advisor to deliver a fairness opinion in connection with the proposed merger. In deciding not to obtain a fairness opinion, Franklin Capital’s board of directors considered a number of factors including, without limitation, the familiarity of the members of the board of directors with Franklin Capital’s business affairs and prospects, the process by which the board of directors and management had sought to locate a potential strategic transaction in order to preserve Franklin Capital’s viability and enhance stockholder value, the limited size of the transaction, and the expenses that would be incurred in obtaining a fairness opinion. In addition, Franklin Capital’s board of directors considered the factors that an independent financial advisor would evaluate in determining whether a merger is fair, from a financial point of view, to the stockholders of Franklin Capital.
Recommendation of the Franklin Capital Board of Directors
The Franklin Capital board of directors believes that the terms of the merger proposal are fair to, and in the best interests of, Franklin Capital and stockholders of Franklin Capital and has unanimously approved the merger agreement and the transactions contemplated thereby, including the merger of Change Technology with and into Franklin Capital.
The Franklin Capital board of directors unanimously recommends that the holders of Franklin Capital common and Series A preferred stock vote “for” the merger proposal.
Change Technology’s Reasons for the Merger
Change Technology’s board of directors believes its merger with Franklin Capital will enhance Change Technology’s business, both with respect to current operations and future growth. Change Technology stockholders will own approximately 80% of the common stock of Franklin Capital after the merger. Change Technology believes there is opportunity to add value to and grow Franklin Capital.
Change Technology believes that the merger is the most appropriate means of joining the two companies. In reaching its conclusion to approve the merger, the board of directors considered that:
| • | the exchange ratio represents a substantial premium to the market price of Change Technology common stock; |
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| • | The merger is intended to qualify as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code. See “The Merger Agreement — Material Federal Income Tax Consequences;” | |
| • | Change Technology’s stockholders will have the opportunity to own a stake in one or more profitable radio syndication businesses; and | |
| • | Assuming the shares will be listed on the American Stock Exchange, Change Technology stockholders will have increased liquidity of their shares. |
The Change Technology board of directors also considered certain potentially negative factors in its deliberations concerning the merger, including, among other things, the following:
| • | the fact that the merger included a fixed exchange ratio, and as a result, the value of consideration to be received by Change Technology stockholders will fluctuate as the market value of Franklin Capital stock fluctuates; | |
| • | the costs of integrating the businesses and transaction expenses arising from the merger; | |
| • | the possibility that the merger would not be consummated; and | |
| • | the structure and amount of the termination fee and its effect on the financial condition of Change Technology. See “The Merger Agreement — Termination of the Merger Agreement.” |
The Change Technology board of directors considered that specified Change Technology officers and directors would continue as officers and directors of Franklin Capital, and as a result would benefit from compensation and employment arrangements in the ordinary course of business.
The Change Technology board of directors concluded that the benefits of the transaction to Change Technology and its stockholders outweighed the risks associated with the factors listed above.
The above discussion of the information and factors considered by the Change Technology board of directors is not all-inclusive but is believed to include all material factors considered by the Change Technology board of directors.
No Fairness Opinion
Change Technology’s board of directors decided not to retain an independent financial advisor to deliver a fairness opinion in connection with the proposed merger. In deciding not to obtain a fairness opinion, Change Technology’s board of directors considered a number of factors, including, without limitation, the familiarity of the members of the board of directors with Change Technology’s business affairs and prospects, the process by which the board of directors and management had sought to locate a potential strategic transaction in order to preserve Change Technology’s viability and enhance stockholder value, the limited size of the transaction, and the expenses that would be incurred in obtaining a fairness opinion. In addition, Change Technology’s board of directors considered the factors that an independent financial advisor would evaluate in determining whether a merger is fair, from a financial point of view, to the stockholders of Change Technology.
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Recommendation of the Change Technology Board of Directors
The Change Technology board of directors believes that the terms of the merger proposal are fair to, and in the best interests of, Change Technology and stockholders of Change Technology and has unanimously approved the merger agreement and the transactions contemplated thereby, including the merger of Change Technology with and into Franklin Capital.
The Change Technology board of directors unanimously recommends that the holders of Change Technology common and Series A preferred stock vote “for” the merger proposal.
Interests of Certain Persons in the Merger
In considering the recommendation of the Franklin Capital and Change Technology board of directors with respect to the merger, Franklin Capital and Change Technology stockholders should be aware that some members of Franklin Capital’s and Change Technology’s management have interests in the merger, in addition to those of the stockholders generally. The members of the Franklin Capital and Change Technology board of directors were aware of these interests when they considered and approved the merger agreement. See “Business of Franklin Capital — Related Party Transactions,” “The Franklin Capital Special Meeting — Beneficial Ownership of Franklin Capital,” “Business of Change Technology — Related Party Transactions” and “The Change Technology Annual Meeting — Beneficial Ownership of Change Technology.”
Management of Franklin Capital after the Merger
Upon consummation of the merger, the executive officers of Franklin Capital will be:
|
Stephen L. Brown
|
Executive Chairman | |
|
William Avery
|
President and Chief Executive Officer | |
|
Spencer L. Brown
|
Executive Vice President | |
|
Hiram M. Lazar
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Chief Financial Officer |
The Franklin Capital board of directors after the merger will be composed of eight members all of whom are currently officers or directors of Franklin Capital or Change Technology:
• Stephen L. Brown (co-chairman)
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Employment Agreements
It is a condition of the merger that Franklin Capital enter into new employment agreements with William Avery, Stephen L. Brown and Spencer L. Brown.
After the merger, William Avery will serve as President and Chief Executive Officer, Stephen L. Brown will serve as Executive Chairman and Spencer L. Brown will serve as Executive Vice President of Franklin Capital, which will change its name to Excelsior Communications Corporation. It is a condition to the consummation of the merger that Messrs. Avery, Stephen L. Brown and Spencer L. Brown terminate any existing employment agreements and enter into new ones to be effective as of the effective time of the merger.
Messrs. Avery, Stephen L. Brown, and Spencer L. Brown will enter into agreements with a term beginning at the effective time of the merger and expiring December 31, 2004. Mr. Avery’s employment agreement is automatically renewed from year to year after the expiration date unless either the company or Mr. Avery provides written notice of an intention not to renew such employment agreement at least 120 days prior to December 31 of any year.
Each employment agreement provides that the duties of such employee shall be prescribed by the board of directors and that each employee shall devote substantially all of his business time to performing his duties under the employment agreement.
Compensation, bonuses, perquisites and other benefits are to be provided to each of Messrs. Avery, Stephen L. Brown and Spencer L. Brown subject to the approval of the compensation committee and commensurate with compensation and benefits provided to other senior executives of the combined company. The initial base salary payable to Messrs. Avery, Stephen L. Brown and Spencer L. Brown is $300,000, $360,000, and $225,000, respectively. Each of Messrs. Avery, Stephen L. Brown and Spencer L. Brown will be entitled to participate in any benefit plan available to senior executives of the company. In addition, Excelsior Communications Corporation (formerly known as Franklin Capital) will provide term life insurance to Messrs. Avery, Stephen L. Brown and Spencer L. Brown in an amount that may be purchased for an initial annual premium of $10,000, $14,000, and $2,750 or coverage for $2,250,000, whichever is lower, respectively.
The employment agreements also provide for the grant of options to purchase shares of common stock of the combined company. Mr. Stephen L. Brown will be granted options to purchase 37,500 shares of common stock, Mr. Spencer L. Brown will be granted options to purchase 62,500 shares of common stock, and Mr. William Avery will not be granted any new options to purchase shares of common stock.
Each employment agreement provides for the termination of the employee upon the first to occur of the following:
| • | the expiration of the term of the employment agreement; | |
| • | the death of the employee; | |
| • | the delivery of a notice from the employee of a voluntary termination of the employment agreement; |
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| • | the delivery of a notice to the employee of a termination of the employment agreement for cause or disability of the employee; or |
| • | the delivery of a notice from the employee of a resignation due to a change of control of the company. |
If the employee is terminated by the company as a result of the employee’s disability, the company will pay to the employee an amount equal to accrued but unpaid base salary and one-half of such employee’s base salary. If the employment agreement is terminated because of the death of the employee, the company shall pay any base salary and bonus that is accrued but unpaid. In addition, Mr. Stephen L. Brown’s and Mr. Spencer L. Brown’s agreement provide for the payment of life insurance proceeds upon death.
If the employment agreement is terminated for any reason other than those described in the above paragraph, the company shall pay to the employee a severance amount equal to the sum of the following:
| • | accrued but unpaid salary; | |
| • | the full base salary for the remainder of the term of the employment agreement; | |
| • | one year of health insurance coverage; | |
| • | any bonus for a prior year which has not been paid to the employee; and | |
| • | any expenses of the employee incurred in connection with the collection of the severance amount. |
If the employment agreement is terminated within one year of a change of control, such employee is entitled to the following:
| • | a lump sum equal to 1.5 times the employee’s average base salary, incentive compensation, bonus and other compensation for the previous five (5) years; | |
| • | a lump sum equal to any amounts forfeited under any employee pension benefit plan; and | |
| • | continued coverage (until the latter of (i) the day the employee excepts new full-time employment or (ii) three (3) years from the date of termination) under all employee welfare benefit plans. |
A change of control is defined under each employment agreement as the occurrence of any of the following events:
| • | any person other than the company or one of its subsidiaries becomes the beneficial owner of thirty-five percent (35%) of the company’s outstanding equity securities, unless such acquisition has been approved by not less than two-thirds of the board of directors prior to such acquisition; | |
| • | individuals who constitute the board of directors on a given day cease (for any reason other than death or resignation) to constitute a majority of the board of directors on the following day, unless any subsequent director was approved or nominated by not less than three-quarters of the incumbent board |
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| of directors or two-thirds of the nominating committee of the incumbent board of directors; | ||
| • | the stockholders of the company approve any reorganization, merger or consolidation of the company or any other transaction in which the company’s existing securities are exchanged for securities of another issuer or the company issues new equity securities in excess of 35% of the existing securities, unless such transaction was recommended to the stockholders of the company by not less than two-thirds of the board in existence prior to the transaction; | |
| • | the approval by stockholders of the company of a sale of all or substantially all of the assets of the company, unless such sale was recommended to the stockholders by not less than two-thirds of the board of directors; | |
| • | the dissolution or liquidation of the company; | |
| • | the failure of nominees of the board of directors for election to the board to be so elected other than by death or withdrawal of the nominee; or | |
| • | a change in control required to be reported pursuant to Item 1(a) of Form 8-K under the Securities Exchange Act of 1934 unless such change in control was approved by not less than two-thirds of the board of directors. |
Stock Options and Warrants of Change Technology
Pursuant to the merger agreement, Franklin Capital will assume all outstanding stock options and warrants of Change Technology. The assumed stock options and warrants will be deemed to be options or warrants to purchase the number of shares of Franklin Capital common stock that such option or warrant would be convertible into if it had been exercised just prior to the merger.
Stock Purchase
Simultaneously with the execution of the merger agreement, Change Technology purchased from Franklin Capital 250,000 shares of common stock of Excelsior Radio Networks, Inc., a subsidiary of Franklin Capital, for an aggregate purchase price of $250,000. If the merger agreement is terminated, Franklin Capital is required to repurchase the shares from Change Technology for a purchase price of $250,000 plus interest at a rate of 10% per annum.
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THE MERGER AGREEMENT
General
The merger agreement provides that Change Technology will merge with and into Franklin Capital, with Franklin Capital being the surviving corporation. The merger between Change Technology and Franklin Capital is subject to the receipt of the requisite approvals of the Franklin Capital common and Series A preferred stockholders and the Change Technology common and Series A preferred stockholders and the satisfaction or waiver of the other conditions to the merger. Upon consummation of the merger, Franklin Capital will change its name to Excelsior Communications Corporation. Franklin Capital will adopt a new certificate of incorporation and new bylaws which are filed as exhibits to this joint proxy statement/prospectus.
The parties intend to close the merger by filing a certificate of merger with the Secretary of State of the State of Delaware as soon as practicable after the Franklin Capital special meeting and the Change Technology annual meeting, assuming all other conditions to the merger have been satisfied or waived. The parties are working to complete the transaction by June 30, 2002.
Treatment of Franklin Capital Common Stock and Change Technology Common Stock in the Merger
Each share of Franklin Capital common stock that was issued and outstanding prior to the merger will continue to represent the same number of shares of Franklin Capital after the effective time of the merger.
Each 40.985 shares of Change Technology common stock issued and outstanding at the effective time of the merger will be converted into the right to receive 1.0 share of Franklin Capital common stock. Change Technology stockholders will receive one share of Franklin Capital common stock for each fractional share such holder is entitled to after taking into account all certificates delivered by that stockholder.
Treatment of Franklin Capital Series A Preferred Stock and Change Technology Series A Preferred Stock in the Merger
Each share of Franklin Capital Series A Preferred Stock will continue to represent the same number of shares of Franklin Capital Series A Preferred Stock after the effective time of the merger.
Each share of Change Technology Series A preferred stock issued and outstanding at the effective time of the merger will be converted into one share of Franklin Capital Series B Preferred Stock.
Treatment of Change Technology Stock Options and Warrants in the Merger
Each Change Technology stock option and warrant issued and outstanding as of the effective time will be assumed by Franklin Capital and deemed to be an option or warrant to purchase that number of shares of Franklin Capital common stock that
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Exchange of Stock Certificates
In connection with the merger, all Change Technology stock certificates will be canceled. Soon after the closing of the merger (and not later than five business days after the closing), Franklin Capital will deposit with Mellon Investor Services as the exchange agent, common stock and Series B preferred stock in the amount required by the merger agreement. Following the merger, Franklin Capital will cause the exchange agent to mail to each holder of record of Change Technology common stock and Series A preferred stock a letter of transmittal with instructions on how to exchange Change Technology common stock certificates and Series A preferred stock certificates for the merger consideration. Upon surrender by a Change Technology common stockholder or a Change Technology Series A preferred stockholder of its Change Technology stock certificates to the exchange agent, such Change Technology stockholder will be entitled to receive a certificate representing that number of whole shares of Franklin Capital common stock or Franklin Capital Series B preferred stock to which such stockholder is entitled to receive in the merger. Change Technology stockholders should not enclose stock certificates with their proxy cards.
Fractional Shares
Franklin Capital will not issue fractional shares in the merger. Each holder of Change Technology common stock who would otherwise be entitled to receive a fractional share of Franklin Capital common stock will receive one share of Franklin Capital common stock for each fractional share such stockholder would be entitled to after taking into account all certificates delivered by that stockholder.
Representations and Warranties
Franklin Capital and Change Technology have made customary representations and warranties to each other in the merger agreement relating, among other things, to:
| • | their organization, the organization of their subsidiaries, their charter documents, their good standing and similar corporate matters; | |
| • | their capital structure; | |
| • | their authority to deliver and execute the merger agreement, its legal force and effect and the absence of conflicts between the agreement and their charter documents, the material contracts they are parties to, and the laws applicable to them; | |
| • | the filing of reports and documents with the Securities Exchange Commission; | |
| • | the absence of changes or events that have had material adverse effects on any operation of the companies other than in the ordinary course of business; | |
| • | employee benefit plans and labor matters; |
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| • | voting requirements for approval of the merger and related transactions; |
| • | brokers’ fees and expenses; | |
| • | compliance with laws; | |
| • | absence of undisclosed liabilities; | |
| • | litigation issues; | |
| • | transactions with affiliates; and | |
| • | tax matters, including that the parties have not taken any action that would create a material risk that the merger would not qualify as a reorganization under the Internal Revenue Code. |
In addition, Change Technology represented that it had reduced its ownership interest in InSys Technology LLC and had sold its interest in RAND Interactive Corporation in exchange for a warrant to acquire 30% of RAND.
Additional Agreements Between Franklin Capital and Change Technology
In connection with the merger, Franklin Capital and Change Technology have also, among other things, agreed to:
| • | the filing of this joint proxy statement/prospectus, including supplying accurate and complete information for the preparation of the joint proxy statement/prospectus; | |
| • | hold special meetings of their stockholders to approve the merger and related transactions; | |
| • | identify affiliates of Franklin Capital and Change Technology for purposes of Rule 145 under the Securities Act of 1933; | |
| • | continue insurance coverage for directors and officers of Change Technology so long as the annual premium for such coverage does not exceed 200% of the last premium paid prior to the date of the merger agreement; | |
| • | to provide each other with comfort letters from each accountant (i) prior to the effectiveness of this registration statement and (ii) prior to the closing of the merger; and | |
| • | to use their best efforts to consummate the merger. |
In addition, Franklin Capital has agreed to use its best efforts to cause the shares of Franklin Capital common stock to be issued in the merger to be listed on the American Stock Exchange.
Certain Covenants
Franklin Capital and Change Technology have agreed, pursuant to the terms of the merger agreement, that from the time the merger agreement was executed until the effective time of the merger that they will each operate their businesses in the
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| • | make any distributions or redemptions with respect to stock except for the payment of regular cash dividends on Franklin Capital’s Series A preferred stock or Change Technology’s Series A preferred stock; | |
| • | issue any stock, options or warrants to purchase stock except for rights outstanding as of the date of the merger agreement; | |
| • | amend any organizational documents of the companies; | |
| • | subject to limited exceptions, acquire any business or make any material new investments; | |
| • | encumber assets or incur indebtedness or otherwise dispose of any property or assets material to the businesses of Franklin Capital and Change Technology, respectively; | |
| • | incur any indebtedness or guarantee any indebtedness other than working capital borrowings in the ordinary course; | |
| • | make or rescind any tax election or settle any tax liability that would have a material adverse effect on to Franklin Capital or Change Technology unless otherwise required by law; | |
| • | pay, discharge or settle any material claims, liabilities or obligations; | |
| • | fail to pay any liabilities or obligations in the ordinary course consistent with past practice; | |
| • | enter into a leasing arrangement or subleasing arrangement other than those disclosed on Franklin Capital’s or Change Technology’s disclosure letter; | |
| • | make any material commitments or agreements for capital expenditures inconsistent with past practice; | |
| • | increase the number of employees at Franklin Capital or Change Technology other than in the ordinary course or make any change in the compensation or benefits other than as required under existing agreements; | |
| • | adopt, enter into, amend, alter or terminate any benefit plan or any election related to a benefit plan to accelerate any payments or obligations with respect to such plans; and | |
| • | except in the ordinary course, modify, amend or terminate any material agreement, permit, concession, franchise, license or similar instrument. |
Non-Solicitation of Acquisition Proposals
From the date of the merger agreement until the effective time, Franklin Capital and Change Technology have agreed not to solicit, initiate, negotiate or participate in any proposal with respect to a merger, consolidation, share exchange or similar transaction other than the transactions contemplated by the merger agreement. If, however, the Franklin Capital board of directors or the Change Technology board of
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Conditions to the Merger
The respective obligations of Franklin Capital and Change Technology to complete the transactions contemplated by the merger agreement are subject to the satisfaction or waiver of the following conditions prior to the effective time of the merger:
| • | all the proposals in this joint proxy statement/prospectus shall have been approved by the requisite stockholder votes; | |
| • | all required consents from governmental entities have been received; | |
| • | no court order has been issued preventing the merger; | |
| • | the registration statement of which this joint proxy statement/prospectus is a part shall have been declared effective and no stop order shall have been issued suspending the effectiveness of such registration statement; and | |
| • | William Avery, Spencer L. Brown and Stephen L. Brown have waived any “change of control” rights that may be triggered in connection with the merger and have entered into new employment agreements. |
Additional Conditions to Franklin Capital’s Obligation to Complete the Merger
The obligations of Franklin Capital to effect the merger are also subject to the satisfaction or waiver by Franklin Capital of the following conditions prior to the effective time of the merger:
| • | all of Change Technology’s representations and warranties shall be true and correct in all material respects; | |
| • | Change Technology shall have fully performed all of its obligations under the merger agreement; | |
| • | Franklin Capital shall have received an opinion of Weil, Gotshal & Manges LLP dated as of the closing date to the effect that the merger will be treated for federal income tax purposes as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code; and | |
| • | Change Technology shall have cash or cash equivalents of not less than $9,000,000, less certain permitted amounts. |
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Additional Conditions to Change Technology’s Obligation to Complete the Merger
The obligations of Change Technology to effect the merger are also subject to the satisfaction or waiver by Change Technology of the following conditions prior to the effective time of the merger:
| • | all of Franklin Capital’s representations shall be true and correct in all material respects; | |
| • | Franklin Capital shall have fully performed all of its obligations under the merger agreement; | |
| • | Change Technology shall have received the opinion of Paul, Weiss, Rifkind, Wharton & Garrison to the effect that the merger will be treated as a reorganization under Section 368(a) of the Internal Revenue Code; | |
| • | Franklin Capital shall have received stockholder approval to withdraw its election to be treated as a business development company under the 1940 Act and Franklin Capital shall have taken all necessary action to withdraw such election; and | |
| • | Franklin Capital shall have received the consent of a majority of the holders of Series A preferred stock to the designation of Spencer Brown and Irving Levine as the two directors of the Franklin Capital board of directors that such preferred stockholders are entitled to elect. |
On April 3, 2002, Change Technology and Franklin Capital entered into an amendment to the merger agreement whereby Franklin Capital amended the condition that Change Technology have not less than $9,000,000 cash on hand less certain permitted amounts at closing and consented to the loan from Change Technology to Franklin Capital of $4,708,200 in connection with the Dial acquisition. The amendment is included as part of Appendix A to this joint proxy statement/ prospectus. The amount of cash and cash equivalents that Change Technology is required to have on hand at closing is reduced by, among other things, the principal amount outstanding on the note issued by Change Technology in connection with the Dial Acquisition.
Termination of the Merger Agreement
The merger agreement may be terminated at any time by the mutual written consent of Franklin Capital and Change Technology.
In addition, either Franklin Capital or Change Technology may terminate the merger agreement:
| • | if any required approval of the stockholders of Franklin Capital or Change Technology, as the case may be, is not obtained; | |
| • | if the merger has not been consummated by June 30, 2002; provided, that the failure to consummate the merger is not the result of a willful and material breach of the merger agreement by the party seeking to terminate the merger agreement; |
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| • | if a governmental entity shall have issued an order prohibiting or restraining the merger and such order is final and nonappealable; or | |
| • | if the other party has breached the requirements of the merger agreement relating to (i) holding a stockholders meeting or (ii) acquisition proposals; provided, that the party seeking to terminate is not in material breach of the merger agreement. |
Franklin Capital may terminate the merger agreement if:
| • | Franklin Capital’s board has received the advice of independent counsel that a failure to terminate would be a breach of the board’s fiduciary duties to its stockholders; provided, that Franklin Capital has provided three business days prior notice of such intention to terminate to Change Technology; or | |
| • | Change Technology’s board has changed its recommendation with respect to the merger, Change Technology’s board has recommended a superior acquisition proposal or a tender offer is commenced with respect to Change Technology’s stock and the board of Change Technology has not recommended against such tender offer. |
Change Technology may terminate the merger agreement if:
| • | Change Technology’s board has received the advice of independent counsel that a failure to terminate would be a breach of the board’s fiduciary duties to its stockholders; provided, that Change Technology has provided three business days prior notice of such intention to terminate to Franklin Capital; or | |
| • | Franklin Capital’s board has changed its recommendation with respect to the merger, Franklin Capital’s board has recommended a superior acquisition proposal or a tender offer is commenced with respect to Franklin Capital stock and the board of Franklin Capital has not recommended against such tender offer. |
Fees and Expenses
Unless the merger agreement provides otherwise, Franklin Capital and Change Technology will each pay their own costs and expenses related to the merger and the merger agreement. Fees related to the preparation and filing of this joint proxy statement/prospectus will be borne by Franklin Capital and Change Technology equally.
Franklin Capital will be required to pay a break-up fee of $500,000 plus expenses not to exceed $250,000 if it terminates the agreement because of a superior acquisition proposal or because Change Technology has changed its recommendation in a manner adverse to Franklin Capital with respect to the merger. Change Technology will be required to pay a $500,000 break-up fee plus expenses not to exceed $250,000 if it terminates the agreement because of a superior acquisition proposal or because Franklin Capital has changed its recommendation in a manner adverse to Change Technology with respect to the merger.
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Accounting Treatment
Upon closing of the transaction, Change Technology stockholders will own approximately 80% of Franklin Capital common stock, with the balance being held by Franklin Capital’s current stockholders. In accordance with accounting principles generally accepted in the United States, Change Technology was deemed to be the accounting acquiror based on the relative post merger voting interest and Board representation, as well as the market capitalization of the predecessors immediately prior to initiation of the merger. Therefore, the acquisition will be accounted for by Change Technology using the purchase method of accounting, although Franklin Capital remains the surviving legal entity and the registrant for SEC reporting purposes. Change Technology will allocate the estimated purchase price to the net tangible and amortizable intangible assets acquired, and intangible assets with indefinite lives, based on their respective fair values at the date of the completion of the merger. Any excess of the estimated purchase price over those fair values will be accounted for as goodwill.
In accordance with the Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” goodwill and intangible assets with indefinite lives resulting from business combinations completed subsequent to June 30, 2001 will not be amortized but instead will be tested for impairment at least annually (more frequently if certain indicators are present). Change Technology has not yet completed the adoption of SFAS 142; therefore, an estimate of annual amortization is not available.
In the event that the management of the combined company determines that the value of goodwill or intangible assets with indefinite lives has become impaired, the combined company will incur an accounting charge for the amount of impairment during the fiscal quarter in which the determination is made. In addition, in the event that the management of the combined company determines that the useful life of any intangible assets with indefinite lives has become definite, the intangible asset will be amortized over its remaining useful life, and the combined company will incur an accounting charge related to such amortization during each fiscal quarter of the intangible asset’s remaining useful life.
Certain Legal Matters
Certain federal or state regulatory requirements or approvals (in addition to those that arise in connection with the registration of Franklin Capital common stock to be issued in the merger and the effectiveness of this joint proxy statement/ prospectus), must be complied with or obtained in connection with the merger.
Federal Securities Law Consequences
Generally, all Franklin Capital common stock issued in connection with the merger will be freely transferable, except that any Franklin Capital common stock received by persons who are deemed to be “affiliates” (as such term is defined under the Securities Act of 1933, as amended) of Change Technology or Franklin Capital prior to the merger may be sold by them only in transactions permitted by the resale provisions of Rule 145 under the Securities Act with respect to affiliates of Change Technology, or Rule 144 under the Securities Act with respect to persons who are or become affiliates of Franklin Capital, or as otherwise permitted under the Securities Act. Persons who may be deemed to be affiliates of Change Technology or Franklin
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Affiliates may not sell their shares of Franklin Capital common stock acquired in connection with the merger, except pursuant to an effective registration under the Securities Act covering such shares or in compliance with Rule 145 (or Rule 144 under the Securities Act in the case of persons who become affiliates of Franklin Capital) or another applicable exemption from the registration requirements of the Securities Act. In general, under Rule 145, for one year following the closing date an affiliate, together with certain related persons, would be entitled to sell shares of Franklin Capital common stock acquired in connection with the merger only through unsolicited “broker transactions” or in transactions directly with a “market maker,” as such terms are defined in Rule 144. Additionally, the number of shares to be sold by an affiliate (together with certain related persons and certain persons acting in concert) within any three-month period for purposes of Rule 145 may not exceed the greater of 1% of the outstanding shares of Franklin Capital common stock or the average weekly trading volume of such stock during the four calendar weeks preceding such sale. Rule 145 would only remain available, however, to affiliates if Franklin Capital remained current with its informational filings with the Commission under the Exchange Act. Beginning one year after the closing date, an affiliate would be able to sell such Franklin Capital common stock without such manner of sale or volume limitations provided that Franklin Capital was current with its Exchange Act informational filings and such affiliate was not then an affiliate of Franklin Capital. Two years after the closing date, an affiliate would be able to sell such shares of Franklin Capital common stock without any restrictions so long as such affiliate had not been an affiliate of Franklin Capital for at least three months prior thereto. See “The Merger Agreement — Certain Covenants.”
Market Listing
Franklin Capital has agreed to use its best efforts to cause the shares of Franklin Capital common stock to be issued in the merger to be listed on the American Stock Exchange.
Delisting and Deregistration of Change Technology Common Stock
Following the consummation of the merger, Change Technology common stock will be delisted from the over-the-counter bulletin board and will become eligible for termination of registration pursuant to Section 12(g)(4) of the Exchange Act. Change Technology intends to terminate the registration of Change Technology common stock under the Exchange Act as soon as practicable following the consummation of the merger. Upon termination of registration, Change Technology will cease to be a reporting company.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
General
The following describes the material federal income tax consequences that are generally applicable to U.S. Holders of Change Technology shares of the merger and
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As used herein, a “U.S. Holder” of Change Technology shares means a holder of Change Technology shares who or that is for U.S. Federal income tax purposes (i) a citizen or resident of the United States, (ii) a corporation or other entity taxable as a corporation organized under the laws of the United States or any political subdivision thereof (including the States and the District of Columbia), (iii) a trust if a court within the United States is able to exercise primary jurisdiction over its administration and one or more U.S. persons have authority to control all substantial decisions of the trust; or (iv) any person that is subject to U.S. Federal income tax on its worldwide income (each of the foregoing, a “U.S. Holder”). As used herein, a “Non-U.S. Holder” means any holder of Change Technology shares who is not a “U.S. Holder.”
This discussion is based on the Code, applicable Department of Treasury regulations, judicial authority, and administrative rulings and practice, all as of the date of this joint proxy statement/prospectus, as well as representations as to factual matters to be made by, among others, Franklin Capital and Change Technology. Future legislative, judicial, or administrative changes or interpretations, which may or may not be retroactive, or the failure of any such factual representation to be true, correct and complete in all material respects, may adversely affect the accuracy of the statements and conclusions described in this document. Neither Franklin Capital nor Change Technology is currently aware of any facts or circumstances that would cause any of their respective representations to be made by it to their respective counsel to be untrue or incorrect in any material respect.
Material Tax Consequences of the Merger
It is a condition to the closing of the merger that Franklin Capital and Change Technology each receive an opinion from their respective counsel, based on assumptions and representations made by Franklin Capital and Change Technology, that the merger will be treated as a “reorganization” within the meaning of
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| (a) The merger will constitute a reorganization within the meaning of Section 368(a) of the Internal Revenue Code for United States federal income tax purposes, and Change Technology and Franklin Capital will each be a party to such reorganization within the meaning of Section 368(b) of the Internal Revenue Code. | |
| (b) No gain or loss will be recognized by Change Technology or Franklin Capital as a result of the merger. | |
| (c) No gain or loss will be recognized by Change Technology shareholders upon receipt of Franklin Capital common stock in exchange for Change Technology common stock. | |
| (d) The aggregate tax basis of the shares of Franklin Capital common stock that you receive in exchange for your Change Technology common stock in the merger will be the same as the aggregate tax basis of your Change Technology common stock exchanged. | |
| (e) The holding period for shares of Franklin common stock that you receive in the merger will include the holding period of the Change Technology common stock exchanged. |
The obligation of Franklin Capital to complete the merger is conditioned upon its receipt of an opinion from Weil, Gotshal & Manges that the merger will be treated as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code. The obligation of Change Technology to complete the merger is conditioned upon its receipt of an opinion from Paul, Weiss, Rifkind, Wharton & Garrison that the merger will be treated as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code. These opinions of counsel referred to above will be based in part upon representations, made as of the effective time of the merger by Franklin Capital and Change Technology, which counsel will assume to be true, correct and complete. If the representations are inaccurate, the opinions of counsel could be adversely affected. No ruling has been sought from the Internal Revenue Service as to the United States federal income tax consequences of the merger, and the opinions of counsel will not be binding upon the Internal Revenue Service or any court.
Reporting Requirements
You will be required to attach a statement to your tax returns for the taxable year in which the merger is completed that contains the information set forth in Section 1.368-3(b) of the Department of Treasury regulations. The statement must include your tax basis in the Change Technology common stock surrendered and a description of the Franklin Capital common stock received in the merger.
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FRANKLIN CAPITAL CHARTER AMENDMENT
The Franklin Capital board of directors has adopted an amendment to Franklin Capital’s certificate of incorporation, subject to stockholder approval, to increase the number of authorized shares from 10,000,000 shares to 31,000,000 shares. The proposed amendment is attached as Appendix C to this joint proxy statement/prospectus. The authorized shares of Franklin Capital will consist of 25,000,000 shares of common stock and 6,000,000 shares of preferred stock. At Franklin Capital’s special meeting, Franklin Capital stockholders will be asked to consider and vote on the proposed amendment to the certificate of incorporation.
The affirmative vote of a majority of the outstanding common stock and Series A preferred stock of Franklin Capital, voting separately, entitled to vote at the special meeting is required to approve this proposal. If this proposal is approved, the amendment to the certificate of incorporation will become effective upon acceptance of its filing by the State of Delaware.
The certificate of incorporation currently authorizes 10,000,000 shares of Franklin Capital stock, 5,000,000 shares of common stock and 5,000,000 shares of preferred stock, of which 1,505,888 common shares were issued and 1,071,900 common shares were outstanding and 645 Series A preferred shares were issued and outstanding as of April 22, 2002. 112,500 common shares were reserved for issuance under Franklin Capital’s stock option plans as of April 22, 2002.
Based on the number of shares of Change Technology issued and outstanding as of April 22, 2002, Franklin Capital anticipates that if the merger is consummated, it will issue 4,442,000 shares of Franklin Capital common stock pursuant to the exchange ratio of 1.0 share of Franklin Capital common stock for each 40.985 shares of Change Technology common stock. In order for Franklin Capital to issue a sufficient number of shares of common stock to comply with the terms of the merger agreement and consummate the merger, Franklin Capital must amend its certificate of incorporation to increase the number of shares of common stock authorized to be issued by Franklin Capital.
In addition to the shares being issued in connection with the merger, Franklin Capital believes the increase in the authorized shares is desirable to enhance Franklin Capital’s flexibility in connection with possible future transactions, capital raising, stock splits, stock dividends, financing transactions, employee benefit plan issuances and such other corporate purposes as may arise. Having shares available for issuance in the future will give Franklin Capital greater flexibility to issue shares without the expense and delay of a stockholders’ meeting. Such a delay might deny Franklin Capital the flexibility the board of directors views as important in facilitating effective use of its securities.
The Franklin Capital board of directors recommends that Franklin Capital stockholders vote “FOR” the amendment to the certificate of incorporation.
WITHDRAWAL OF FRANKLIN CAPITAL’S ELECTION TO BE REGULATED AS A BUSINESS DEVELOPMENT COMPANY
Franklin Capital has elected to be regulated as a business development company as that term is defined under the 1940 Act. As such, Franklin Capital is subject to a
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If Franklin Capital’s stockholders approve withdrawal of its business development company status, the withdrawal will become effective only upon the Securities and Exchange Commission’s receipt of Franklin Capital’s notice of election to withdraw. After Franklin Capital’s election of withdrawal becomes effective, Franklin Capital will no longer be subject to the regulatory provisions of the 1940 Act for business development companies such as insurance, custody, composition of the board, affiliated transactions and compensation arrangements. Even after Franklin Capital withdraws its election as a business development company, it will continue to be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended. Under the Exchange Act, Franklin Capital would continue to file periodic reports on Form 10-K and Form 10-Q as well as reports on Form 8-K and proxy statements and any other reports required under the Exchange Act.
It is a condition to the merger with Change Technology that Franklin Capital’s stockholders approve the withdrawal of Franklin Capital’s election to be regulated as a business development company and that all necessary action to withdraw such election has been taken by Franklin Capital.
If the merger with Change Technology is consummated, Franklin Capital contemplates changing the nature of its business to focus on developing and acquiring assets primarily in the media and advertising business and to further grow and expand its subsidiary, Excelsior Radio. If the merger is consummated, Franklin Capital will no longer focus its business on providing private investment capital to private and undervalued public companies. Franklin Capital believes that withdrawing its status as a business development company will allow it the flexibility to pursue its revised business objectives.
As an operating company, the nature of Franklin Capital’s business will change from investing in a portfolio of securities to achieve gains on appreciation and dividend income, to becoming actively engaged in the management of a business for the generation of income from those operations. Thus, withdrawal of Franklin Capital’s status as a business development company will result in a significant change in Franklin Capital’s method of accounting from the value method of accounting required of investment companies to either fair value or historical cost accounting, depending on the classification of the investment and Franklin Capital’s intent with respect to the period it intends to hold the investment. See “Pro Forma Financial Information.”
The affirmative vote of (A) 67% of the securities voted at the special meeting if more than 50% of the outstanding voting securities are present in person or by proxy at the meeting or (B) more than 50% of the outstanding voting securities, whichever is less, is necessary to approve this proposal.
The Franklin Capital board of directors recommends that Franklin Capital stockholders vote “FOR” the proposal to approve the withdrawal of Franklin
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AMENDMENTS TO FRANKLIN CAPITAL’S STOCK INCENTIVE PLAN
At the special meeting of Franklin Capital stockholders, the Franklin Capital common and Series A preferred stockholders, voting together as a single class, will be asked to vote on and approve an amendment to Franklin Capital’s Stock Incentive Plan increasing the number of common shares authorized under such plan from 67,500 to 1,000,000. See “Business of Franklin Capital — Stock Option Plans.”
Pursuant to the terms of the merger agreement, if the merger is consummated, each outstanding option to purchase Change Technology common stock will, at the effective time of the merger, be converted into an option to purchase that number of Franklin Capital common stock that such Change Technology optionholder would be entitled to receive if the option had been exercised immediately prior to the effective time of the merger.
Based upon options to purchase 15,715,374 shares of Change Technology common stock outstanding as of April 22, 2002, Franklin Capital will issue options to purchase 383,442 shares of Franklin Capital common stock if the merger is consummated.
Franklin Capital’s Stock Incentive Plan is proposed to be amended to allow directors of Franklin Capital to participate in the plan. If approved, past and current directors of Franklin Capital will be granted options to purchase shares of Franklin Capital common stock under the Stock Incentive Plan. See “The Merger Proposal — Interests of Certain Persons in the Merger.”
The affirmative vote of a majority of Franklin Capital common and Series A preferred shares, voting together as a single class, present at the Franklin Capital special meeting in person or by proxy is necessary to approve this proposal.
The Franklin Capital board of directors unanimously recommends a vote “FOR” this proposal.
ELECTION OF PREFERRED STOCK DIRECTOR OF FRANKLIN CAPITAL
It is a condition to the consummation of the merger that both Irving Levine and Spencer L. Brown be appointed as the Series A preferred stockholders’ directors of Franklin Capital. Irving Levine currently serves as a director of Franklin Capital; thus, the Series A preferred stockholders voting as a separate class are being asked to elect Spencer L. Brown to serve on the Franklin Capital board of directors for a term of one year or until his successor is duly elected and qualified.
Mr. Brown is 36 years old and has been Senior Vice President of Franklin Capital since November 1995, Secretary of Franklin Capital since October 1994 and was Vice President from August 1994 to November 1995. Mr. Brown is the son of Mr. Stephen L. Brown, the Chairman and Chief Executive Officer of Franklin Capital. If elected, Mr. Spencer L. Brown will be an “interested person” of Franklin Capital
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The affirmative vote of a majority of the Series A preferred shares present at the meeting and entitled to vote is necessary to approve the election of Spencer Brown as a director.
The Franklin Capital board unanimously recommends a vote “FOR” the election of Spencer L. Brown to serve as a Series A preferred director.
CHANGE TECHNOLOGY PROPOSAL TO APPROVE
Change Technology common and Series A preferred stockholders are being asked to approve the grant to William Avery of an option to purchase 6,000,000 shares of Change Technology common stock pursuant to the terms and conditions of a Stock Option Agreement dated September 21, 2001 between Change Technology and William Avery. In addition, Mr. Avery was granted options to purchase 3,000,000 shares of Change Technology common stock under Change Technology’s 2000 Stock Option Plan. Issuance of these options does not require stockholder approval.
Pursuant to the Stock Option Agreement, the option to Mr. Avery was granted in accordance with the terms and conditions of Change Technology’s 2000 Stock Option Plan, although the option was granted outside of such plan. The option award was granted outside of the plan because the terms of the plan would not allow a grant of this size.
Twenty- five percent (25%) of the option vests on each of the first four anniversaries of the date of the option grant. The option can be exercised for $0.03 per share. Mr. Avery received this option grant in connection with his appointment as Chief Executive Officer of Change Technology as a retention and incentive mechanism.
If the merger is consummated, all of Mr. Avery’s options will be converted into options to purchase that number of shares of Franklin Capital common stock that the options would have been converted into had they been exercised just prior to the merger.
The affirmative vote of a majority of the Change Technology common and Series A preferred stock voting together as a single class entitled to vote and present in person or by proxy at the Change Technology annual meeting is necessary to approve this proposal.
The Change Technology board of directors unanimously recommends a vote “FOR” this proposal.
ELECTION OF CHANGE TECHNOLOGY DIRECTORS
Five (5) directors are to be elected at the annual meeting of Change Technology to hold office until the next annual meeting or until their successors are duly elected and qualified. Proxies of Change Technology stockholders will be voted in accordance with the directions stated on the card, or if no directions are stated, for
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Each of Change Technology’s directors was elected in 2000 to serve a one-year term or until their successors were duly elected and qualified. However, because Change Technology never had a 2001 Annual Meeting of Stockholders, they have been nominated for re-election at the 2002 Annual Meeting.
William Avery
Mr. Avery has served as Change Technology’s President and Chief Executive Officer since July 2, 2001. From March 28, 2000 to March 16, 2001, Mr. Avery served as a Managing Director of Change Technology. He has served as a director since September 12, 2000. Mr. Avery also serves as the Chairman of the Nominating Committee. Mr. Avery served as a managing partner of FG II Ventures, LLC (“FGII”), from October 1, 1999 to July 2, 2001. Prior to working with FGII, Mr. Avery was Corporate Senior Vice President and President of the International Division of CUC International Inc. (“CUC”), which merged with Cendant Corporation. With CUC, Mr. Avery developed CUC’s overseas memberships and Internet businesses. Mr. Avery is 52 years of age.
James M. Dubin
Mr. Dubin has served as a director of Change Technology since March 28, 2000. Mr. Dubin also serves as a member of the Compensation Committee. Mr. Dubin is also a Senior Partner and Co-Chair of the Corporate Department of Paul, Weiss, Rifkind, Wharton & Garrison, an international law firm headquartered in New York City, where he has worked since 1974. Mr. Dubin serves on the board of directors of Carnival Corporation, the world’s largest cruise line operator, and Conair Corporation, an international designer, manufacturer and marketer of branded consumer products. Mr. Dubin is 55 years of age.
Michael Gleason
Mr. Gleason has been Chairman of the Board since March 28, 2000. Mr. Gleason serves as a member of the Audit and Compensation Committees. He is also the Managing Partner of The Culmen Group, which has public and private equity investments in media, fixed income securities, oil and gas production and real estate, where he has worked since 1993. Mr. Gleason also represents Seven Network Australia in the United States and serves as Vice President of Seven Network (U.S.). Mr. Gleason also serves on the board of directors of Metro-Goldwyn-Mayer Inc., a producer and distributor of television programs and theatrical motion pictures. Mr. Gleason is 47 years of age.
William E. Lipner
Mr. Lipner has been a director of Change Technology since March 28, 2000. Mr. Lipner serves as the Chairman of the Compensation Committee and is a member of the Nominating Committee. He is also Chairman and Chief Executive Officer of
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Michael J. Levitt
Mr. Levitt has been a director of Change Technology since November 7, 2001. He currently acts as a private investor. From 1996 until 2001, Mr. Levitt was a partner with Hicks, Muse, Tate & Furst, Incorporated. He was involved in originating, structuring and monitoring Hicks Muse’s investments, primarily in the media and branded food industries, and he served as the partner principally responsible for the firm’s relationships with investment banks and commercial banking firms worldwide. Mr. Levitt also managed Hicks Muse’s New York Office. Mr. Levitt serves as a director of IDT Corporation. Mr. Levitt is 43 years of age.
For more information, see “Change Technology Management.”
The affirmative vote of a majority of the shares of Change Technology common stock and Series A preferred stock voting together as a single class entitled to vote and present at the annual meeting in person or by proxy is necessary to elect the above nominees for director.
The Change Technology board of directors unanimously recommends a vote “FOR” the above nominees for director.
BUSINESS OF FRANKLIN CAPITAL
Franklin Capital is a Delaware corporation operating as a business development company (“BDC”) under the 1940 Act. Franklin Capital’s common stock has been listed on the American Stock Exchange since October 1, 1987.
As a BDC, Franklin Capital’s objective is to achieve capital appreciation through long-term investments in businesses believed to have favorable growth potential. In the past Franklin Capital has participated in start-up and early stage financing, expansion or growth financing, leveraged buy-out financing and restructurings in a variety of industries. Since 1997, Franklin Capital has been focused principally on securities issued by companies involved in early stage high technology sectors such as wireless communications, other telecommunications services, internet software and information services.
On August 28, 2001, Franklin along with the Sunshine Wireless LLC purchased the assets of Winstar Radio Networks, Global Media and Winstar Radio Productions (collectively, “WRN”) for a total purchase price of $6.25 million. Change Technology Partners, Inc., a public company, provided $2.25 million of senior financing for the deal.
The acquisition was consummated through eCom Capital, Inc., subsequently renamed Excelsior Radio Networks, Inc., a then wholly owned subsidiary of Franklin Capital. Franklin Capital’s total investment was $2.5 million consisting of $1.5 million
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At the closing, Franklin Capital entered into a services agreement with Excelsior Radio whereby Franklin Capital will provide Excelsior Radio with certain management services. In consideration for the services provided, for a period of six months from the closing of the transaction, Franklin Capital will receive $30,000 per month and be reimbursed for all direct expenses. Subsequently, Franklin Capital’s monthly fee will be determined by a majority of the non-Franklin directors on Excelsior Radio’s board; however, the management fee will be no less than $15,000 per month and Franklin Capital will continue to be reimbursed for all direct expenses. Finally, Franklin Capital’s chief financial officer will serve as Excelsior Radio’s chief financial officer, and his salary and benefits will be allocated between Excelsior Radio and Franklin Capital 80% and 20%, respectively. During the year ended December 31, 2001, Franklin Capital earned $120,000 in management fees and was reimbursed $40,156 for salary and benefits of Franklin Capital’s chief financial officer, which was recorded as a reduction of expenses of Franklin Capital.
On April 3, 2002, Dial Communications Global Media, Inc. (“Newco”), a newly formed wholly-owned subsidiary of Excelsior Radio completed the acquisition of substantially all of the assets of Dial Communications Group, Inc. (“DCGI”), and Dial Communications Group, LLC (“DCGL” and together with DCGI, the “Dial Entities”) used in connection with the Dial Entities’ business of selling advertising relating to radio programming (the “Dial Acquisition”). The Dial Acquisition was completed pursuant to the Asset Purchase Agreement (the “Purchase Agreement”), dated as of April 1, 2002, by and among the Dial Entities, Franklin Capital and Excelsior Radio. Immediately prior to the closing of the transactions contemplated by the Purchase Agreement, Excelsior Radio assigned all of its rights and obligations under the Purchase Agreement, as well as certain other assets and liabilities relating to the portion of Excelsior Radio’s business dedicated to the sale of advertising relating to radio programming, to Newco.
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The total purchase price for the Dial Acquisition will be an amount between $8,800,000 and $13,557,500. The initial consideration for the Dial Acquisition consisted of $6,500,000 in cash and a three year promissory note bearing interest at 4.5% issued by Newco in favor of DCGL in the aggregate principal amount of $460,000. In addition, the Purchase Agreement provides for the minimum payment of $1,920,000 of additional consideration, which is subject to increase to a maximum amount of $6,597,500 based upon the attainment of certain revenue and earnings of objectives in 2002 and 2003. The additional consideration will be comprised of both cash and two additional promissory notes bearing interest at 4.5% issued by Newco in favor of DCGL, each with an initial aggregate principal amount of $460,000 that is subject to increase upon the attainment of such revenue and earnings objectives. Each of the promissory notes issued in consideration of the Dial Acquisition is convertible into shares of Franklin Capital’s common stock at a premium of 115% to 120% of the average closing prices of Franklin Capital’s common stock during a specified pre and post closing measurement period. Excelsior Radio has paid to Franklin Capital an amount equal to $300,000 in consideration of Franklin Capital’s obligations in connection with any Franklin Capital common stock that may be issued pursuant to the terms of the Purchase Agreement or the promissory notes issued in consideration of the Dial Acquisition.
Change Technology and Sunshine Wireless LLC, both existing stockholders of Excelsior Radio, loaned Excelsior Radio an aggregate amount of $7,000,000 to finance the initial consideration of the Dial Acquisition. The obligations under the loans are secured by certain of Excelsior Radio’s assets.
Proposed Merger with Change Technology Partners, Inc.
On December 4, 2001, Change Technology and Franklin Capital entered into a definitive agreement and plan of merger pursuant to which Change Technology will be merged with and into Franklin Capital. Under the terms of the merger agreement, Change Technology’s common stockholders will receive one share of Franklin Capital common stock for each 40.985 shares of Change Technology common stock that they own. Change Technology’s Series A preferred stockholders will receive one share of Franklin Capital Series B preferred stock for each share of Change Technology Series A preferred stock they own. As a result of the merger, Franklin Capital will issue approximately 4,442,000 shares of its common stock and 645 shares of its Series B preferred stock to Change Technology stockholders.
Upon closing of the transaction, Change Technology stockholders will own approximately 80% of Franklin Capital, with the balance being held by Franklin Capital’s current stockholders. The boards of directors of both companies have approved the transaction, subject to the receipt of stockholder approval by both Franklin Capital and Change Technology stockholders and the satisfaction or waiver of conditions to the merger.
Concurrently with the execution of the merger agreement, the parties entered into a stock purchase agreement pursuant to which Change Technology agreed to purchase 250,000 shares of common stock of Excelsior Radio from Franklin Capital for an aggregate purchase price of $250,000. In the event that the merger between Franklin Capital and Change Technology is terminated pursuant to the terms of the
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The transactions contemplated by the merger agreement are intended to result in Franklin Capital no longer being subject to the 1940 Act because of the change in the nature of its business. However, Franklin Capital cannot change the nature of its business so as to cease to be regulated as a business development company unless such change is approved by Franklin Capital’s stockholders in accordance with the 1940 Act. See “Withdrawal of Franklin Capital’s Election to be Regulated as a Business Development Company.”
Current Portfolio of Investments
Franklin Capital invests primarily in equity securities, for example common stock, preferred stock, convertible preferred stock or other equity derivatives such as options, warrants or rights to acquire stock. As of December 31, 2001, Franklin Capital’s portfolio of investments is a composite of illiquid investments in developing companies and one investment in a publicly traded development stage company.
Franklin Capital has invested a substantial portion of its assets in private development stage or start-up companies. The current portfolio, other than Excelsior Radio, is invested in securities issued by companies involved in early stage high technology sectors such as wireless communications, other telecommunications services, Internet software and information services.
Franklin Capital’s most significant investment is in Excelsior Radio Networks, Inc. As of December 31, 2001, Franklin Capital owned 50.8% of Excelsior Radio on a fully diluted basis and had 58.2% of voting control.
Excelsior Radio creates, produces, distributes and is a sales representative for national radio programs and offers other miscellaneous services to the radio industry. Excelsior Radio offers radio programs to the industry in exchange for commercial broadcast time, which Excelsior Radio sells to national advertisers. Excelsior Radio currently offers in excess of 100 radio programs to over 2,000 radio stations across the country. The group of radio stations who contract with Excelsior Radio to broadcast a particular program constitutes a radio network. Excelsior Radio derives its revenue from selling the commercial broadcast time on its radio networks to advertisers desiring national coverage.
Excelsior Radio derives its revenues from its sales representation division which operates under the name Global Media. The sales representation division operates as a sales staff for other nationally syndicated program producers who do not wish to sell their own product. The sales representation division generates its revenues by selling network advertising time for third party program producers and retaining a sales commission on gross revenue.
Excelsior Radio currently produces 23 network programs targeting the most popular radio formats, including adult contemporary, rock, urban oldies, album oriented rock, comedy and country. Excelsior Radio produces both short form and
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Presentation of Financial Information
Franklin Capital presents its financial statements in accordance with Securities and Exchange Commission regulations in the format applicable to investment companies and accounting principles generally accepted in the United States. Generally, investments are reported at fair market value rather than cost, including investments in wholly owned subsidiaries. Because of such reporting requirements, the operating results of Excelsior Radio are not included in the consolidated operating results of Franklin Capital, and instead, Franklin Capital reports only the fair value of its investments in such companies. If Franklin Capital withdraws its status as a BDC, Franklin Capital will consolidate Excelsior Radio’s operations with its own operations, and unrealized gains and losses on its other investments will be shown as accumulated other comprehensive income (loss) in stockholders’ equity. See “Pro Forma Financial Information.”
Illiquidity of Investments
A majority of Franklin Capital’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 Capital anticipates that there may not be an established trading market for such securities. Additionally many of the securities that Franklin Capital 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 Franklin Capital of such investments or reduce the proceeds that might otherwise be realized therefrom. Restricted securities generally sell at a price lower than similar securities not subject to restrictions on resale. Further, even if a portfolio company (hereinafter referred to as an “investee”) registers its securities and becomes a reporting corporation under the Securities Exchange Act of 1934, Franklin Capital may be considered an insider by virtue of its board representation and would be restricted in sales of such corporation’s securities.
Managerial Assistance
Franklin Capital, as a BDC, is required by the 1940 Act to make significant managerial assistance available to its portfolio companies. “Making available significant managerial assistance” as defined in the 1940 Act with respect to a business development company such as Franklin Capital 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
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In connection with its managerial assistance, Franklin Capital may be represented by one or more of its officers or directors on the board of directors of a portfolio company. Franklin Capital’s goal has been to assist each portfolio company in establishing its own independent and effective board of directors and management.
If the merger with Change Technology is consummated, Franklin Capital intends to focus on creating, producing and selling programs to the radio industry, which it will principally accomplish through Excelsior Radio.
Need for Follow-on Investments
Following its initial investments in portfolio companies, Franklin Capital has made additional investments in such portfolio companies as “follow-on” investments, in order to increase its investment in a portfolio company, and have exercised warrants, options or convertible securities that were acquired in the original financing. Such follow-on investments have been made for a variety of reasons including: 1) to increase Franklin Capital’s exposure to a portfolio company, 2) to acquire securities issued as a result of exercising convertible securities that were purchased in a prior financing, 3) to preserve or reduce dilution of Franklin Capital’s proportionate ownership in a subsequent financing, or 4) in an attempt to preserve or enhance the value of Franklin Capital’s investment. There can be no assurance that Franklin Capital will make follow-on investments or have sufficient funds to make such investments; Franklin Capital will have the discretion to make any follow-on investments as it determines, subject to the availability of capital resources. The failure to make such follow-on investments may, in certain circumstances, jeopardize the continued viability of an investee and Franklin Capital’s initial investment, or may result in a missed opportunity for Franklin Capital to increase its participation in a successful operation. Even if Franklin Capital has sufficient capital to make a desired follow-on investment, Franklin Capital may, under certain circumstances be inhibited from doing so if such an investment would result in non-compliance with BDC regulations. If the merger with Change Technology is consummated, Franklin Capital does not intend on making follow-on investments in any portfolio company other than through Excelsior Radio.
Competition
Numerous companies and individuals are engaged in the venture capital business and such business is extremely competitive. Franklin Capital competes for attractive investment opportunities with venture capital partnerships and corporations, merchant banks, venture capital affiliates of industrial and financial companies, Small Business Investment Companies, other investment companies, pension plans, other BDCs and private individual investors. Many of these competitors have significantly greater resources and managerial capabilities than Franklin Capital to obtain access to venture capital investments. There can be no assurance that Franklin Capital will be able to compete against those competitors for attractive investments.
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If the merger with Change Technology is consummated, Franklin Capital and Excelsior Radio will compete with radio station companies, radio syndication companies and independent distributors that offer programs and services to radio stations. Several of these competitors also are associated with major radio station group owners. In addition, many of these competitors have recognized brand names and will pay compensation radio stations to broadcast their network commercials.
Determination of Net Asset Value
Security investments which are publicly traded on a national exchange or Nasdaq Stock Market are stated at the last reported sales price on the day of valuation, or if no sale was reported on that date, then the securities are stated at the last quoted bid price. The board of directors 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 Capital reports the unrealized gain or loss resulting from such valuation in its Statements of Operations.
Employees
At December 31, 2001, Franklin Capital had four employees.
Government Regulations Impacting Franklin Capital
Franklin Capital operates in a highly regulated environment as a BDC. The following discussion generally summarizes certain regulations.
A BDC is defined and regulated by the 1940 Act. It is an investment company that primarily focuses on investing in or lending to small 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 growing small businesses. A business development company provides stockholders the ability to retain the liquidity of a publicly traded stock, while sharing in the possible benefits, if any, of investing in privately owned growth companies.
As a BDC, Franklin Capital may not acquire any asset other than “Qualifying Assets” unless, at the time the acquisition is made, Qualifying Assets represent at
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| (1) | securities purchased in transactions not involving any public offering, the issuer of which is an eligible portfolio company. An eligible portfolio company is defined to include any issuer that (a) is organized and has its principal place of business in the United States, (b) is not an investment company other than an SBIC wholly owned by a business development company, and (c) does not have any class of publicly traded securities with respect to which a broker may extend margin credit; | |
| (2) | securities received in exchange for or distributed with respect to securities described in (1) above or pursuant to the exercise of options, warrants, or rights relating to such securities; and | |
| (3) | cash, cash items, government securities, or high quality debt securities (within the meaning of the 1940 Act), maturing in one year or less from the time of investment. |
To include certain securities described above as Qualifying Assets for the purpose of the 70% test, a BDC must make available to the issuer of those securities significant managerial assistance such as providing significant guidance and counsel concerning the management, operations, or business objectives and policies of a portfolio company, or making loans to a portfolio company.
As a BDC, Franklin Capital is entitled to issue senior securities in the form of stock or senior securities representing indebtedness, including debt securities and preferred stock, as long as each class of senior security has an asset coverage of at least 200% immediately after each such issuance. See “Risk Factors.”
As a BDC, Franklin Capital is permitted to adopt either a profit-sharing plan pursuant to which management (including disinterested directors) could receive up to 20% of the net after-tax profits of Franklin Capital or an option plan covering up to 20% of the stock of Franklin Capital. Presently, Franklin Capital has incentive plans in effect covering 46,875 shares (3.8% on a diluted basis).
Properties
Franklin Capital maintains its offices at 450 Park Avenue, 10th Floor, New York, New York 10022, where it leases approximately 3,600 square feet of office space pursuant to a lease agreement expiring December 31, 2003. As of December 31, 2001, Franklin Capital had a sublease arrangement with one subtenant for a portion of Franklin Capital’s office space.
Legal Proceedings
On October 15, 2001, Jeffrey A. Leve and Jeffrey Leve Family Partnership, L.P. filed a lawsuit against Franklin Capital Corporation, Sunshine Wireless, LLC and four other defendants affiliated with Winstar Communications, Inc. in the Superior Court of the State of California for the County of Los Angeles. The lawsuit, which has subsequently been removed to the United States District Court for the Central District of California, alleges that the Winstar defendants conspired to commit fraud and breached their fiduciary duty to the plaintiffs in connection with the acquisition
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FRANKLIN CAPITAL’S MANAGEMENT’S DISCUSSION AND ANALYSIS
The following discussion should be read in conjunction with Change Technology’s audited consolidated financial statements and accompanying notes for the fiscal year ended December 31, 2001. Certain statements contained within the discussion constitute forward-looking statements. See “Forward Looking Statements.”
Critical Accounting Policies
Franklin Capital’s discussion and analysis of its financial condition and results of operations are based upon Franklin Capital’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 Franklin Capital to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets, and liabilities. On an ongoing basis, Franklin Capital evaluates its estimates, the most critical of which are those related to the fair value of the portfolio of investments. See “Business of Franklin Capital — Determination of Net Asset Value.”
Statement of Operations
Franklin Capital accounts for its operations under generally accepted accounting principles for investment companies. On this basis, the principal measure of its financial performance is “net (decrease) increase in net assets from operations”, which is composed of the following:
| • | “Net investment loss from operations,” which is the difference between Franklin Capital’s income from interest, dividends and fees and its operating expenses; | |
| • | “Net realized gain on portfolio of investments,” which is the difference between the proceeds received from dispositions of portfolio securities and their stated cost; any applicable income tax (benefits) provisions; |
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| • | Any applicable income tax (benefits) provisions; and | |
| • | “Net (decrease) increase in unrealized appreciation of investments,” which is the net change in the fair value of Franklin Capital’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
Franklin Capital’s total assets and net assets were, respectively, $4,098,866 and $2,921,745 at December 31, 2001 versus $5,766,712 and $5,579,080 at December 31, 2000. Net asset value per share attributable to common stockholders and on an as if converted basis was $1.19, and $2.44 at December 31, 2001, versus $3.58 and $4.57, respectively at December 31, 2000. The change in total assets and net assets is primarily attributable to a decrease in the fair market value of Franklin Capital’s investments.
Franklin Capital’s financial condition is dependent on the success of its investments. A summary of Franklin Capital’s investment portfolio is as follows:
| December 31, 2001 | December 31, 2000 | |||||||
|
Investments, at cost
|
$ | 3,911,105 | $ | 3,627,390 | ||||
|
Unrealized (depreciation) appreciation, net of
deferred taxes
|
(182,233 | ) | 1,371,522 | |||||
|
Investments, at fair value
|
$ | 3,728,872 | $ | 4,998,912 | ||||
Investments
Franklin Capital’s financial condition is dependent on the success of its investments. Franklin Capital has invested a substantial portion of its assets in thinly capitalized development stage companies that may lack management depth and have little history of operations.
Alacra Corporation
At December 31, 2001, Franklin Capital had an investment in Alacra Corporation, valued at $1,000,000, which represents 24.4% of Franklin Capital’s total assets and 34.2% of its net assets. Alacra, headquartered in New York and London, is a leading provider of Internet-based online information services. Alacra provides a service called .xls, which aggregates and cross-indexes over 70 premier business databases, delivering information directly to Microsoft Excel, HTML, Microsoft Word or PDF formats at the desktop. Other products include privatesuiteTM, a fast, easy, cost-effective way to identify and retrieve profiles of privately held companies around
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On April 20, 2000, Franklin Capital purchased $1,000,000 worth of Alacra Series F convertible preferred stock. In connection with this investment, Franklin Capital was granted observer rights on Alacra’s board of directors.
Excelsior Radio Networks, Inc.
At December 31, 2001, Franklin Capital had an investment in Excelsior Radio Networks, Inc., formerly known as Ecom Capital, Inc., valued at $2,325,000, which represents 56.7% of Franklin Capital’s total assets and 79.6% of its net assets. Excelsior Radio produces and syndicates programs and services heard on more than 2,000 radio stations nationwide across most major formats. Through its Global Media sales unit, Excelsior Radio sells the advertising inventory radio stations provide in exchange for the Excelsior Radio content. The programming and content includes prep services as well as long form and short form programming. Additionally, Global Media has a number of independent producer clients, which range from talk and music programs to news and traffic services.
On August 28, 2001, Franklin Capital purchased $2,500,000 worth of Excelsior Radio common stock and issued a secured note for $150,000. In connection with this note, Franklin Capital was granted warrants to acquire 12,879 shares of Excelsior Radio common stock at an exercise price of $1.125 per share. On November 28, 2001, $75,000 of the secured note was paid back to Franklin Capital. As part of the merger agreement between Franklin Capital and Change Technology, Franklin Capital sold to Change Technology 250,000 shares of its common stock in Excelsior Radio for $250,000.
On April 3, 2002, Excelsior Radio purchased Dial Communications, whose assets will be combined with Excelsior Radio’s Global Media division to create a national radio sales representation company with 2001 advertising sales revenues of almost $50 million and a client roster of over forty independent radio production companies.
Excom Ventures, LLC
At December 31, 2001, Franklin Capital had an investment in Excom Ventures, LLC valued at $0, which represents 0.0% of Franklin Capital’s total assets and 0.0% of its net assets. Excom was formed as a limited liability holding company for the purpose of investing in Expert Commerce, Inc. Expert Commerce is a Business-to-Business purchase evaluation engine that simulates the way people make decisions. Based on intelligent and proven technology, the engine helps structure complex decisions and provides an audit trail to justify transactions, empowering buyers to make purchase decisions with confidence.
On June 26, 2000, Franklin Capital purchased $140,000 worth of Excom limited liability company units. At December 31, 2001, the board of directors of Franklin Capital has determined that this investment has no value and has marked these securities down to reflect that determination.
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Primal Solutions, Inc.
Franklin Capital has an investment in Primal Solutions, Inc. valued at $19,197 at December 31, 2001, which represents 0.5% of Franklin Capital’s total assets and 0.7% of its net assets. Primal’s common stock is quoted on the OTC Electronic Bulletin Board under the symbol “PSOL.” Primal, based in Irvine, California, is a leading provider of Web-based integrated customer management and intelligence solutions that allow rapidly evolving communications and Internet service providers to stay connected with and grow their customers. It does this through an integrated suite of applications that can track and analyze customer behavior and preferences, collect usage information, and support billing and customer care back-office requirements, including those of emerging IP billing markets.
On February 13, 2001, Primal was spun-off from Avery Communications, Inc. (“Avery”). As a result of this spin-off, Franklin Capital received 1,533,938 fully registered and marketable shares of common stock of Primal at an allocated cost basis of $245,430. During the year ended December 31, 2001, Franklin Capital sold 1,150,000 shares of common stock of Primal realizing a loss of $130,139.
Structured Web, Inc.
At December 31, 2001, Franklin Capital had an investment in Structured Web, Inc. valued at $350,000, which represents 8.5% of Franklin Capital’s total assets and 12.0% of its net assets. Structured Web develops web building blocks to enable small businesses to create and manage their own digital nerve system easily and at an affordable price. Structured Web’s object-based proprietary technology enables customers to choose from a growing selection of “WebBlocks” including content, communication, commerce and services.
On August 8, 2000, Franklin Capital purchased $350,000 worth of Structured Web convertible preferred stock. In connection with this investment, Franklin Capital was granted observer rights on Structured Web’s board of directors.
Results of Operations
Investment Income and Expenses
Franklin Capital’s principal objective is to achieve capital appreciation through long-term investments in businesses believed to have favorable growth potential. Therefore, a significant portion of the investment portfolio is structured to maximize the potential for capital appreciation and provides little or no current yield in the form of dividends or interest. Franklin Capital earns interest income from loans, preferred stock, corporate bonds and other fixed income securities. The amount of interest income varies based upon the average balance of Franklin Capital’s fixed income portfolio and the average yield on this portfolio.
Franklin Capital had interest and dividend income of $72,697 in 2001, $93,015 in 2000, and $72,382 in 1999. The decrease in 2001 from 2000 was the result of the sale of preferred stock of Avery Communications, Inc. on February 1, 2001. Franklin Capital earned $120,000 in management fees from its majority-owned affiliate Excelsior Radio. Franklin Capital had $22,000 in other income during 2000 representing a patent infringement settlement.
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Operating expenses were $1,579,382 in 2001, $2,372,797 in 2000, and $1,621,780 in 1999. A majority of Franklin Capital’s operating expenses consist of employee compensation, (which for 2000 included a non-cash charge of $349,644 due to the cashless exercise of incentive options) office and rent expense, other expenses related to identifying and reviewing investment opportunities and professional fees. Professional fees consist of general legal fees, audit and tax fees, consulting fees and investment related legal fees.
Net investment losses from operations were $1,386,685 in 2001, $2,257,782 in 2000, and $1,549,398 in 1999.
Franklin Capital has relied and continues to rely to a large extent upon proceeds from sales of investments rather than investment income to pay for a significant portion of its operating expenses. Because such sales cannot be predicted with certainty, Franklin Capital attempts to maintain adequate working capital to provide for fiscal periods when there are no such sales.
Net Realized Gains and Losses on Portfolio of Investments
During the fiscal years ended December 31, 2001, 2000, and 1999, Franklin Capital realized net gains before taxes of $520,455, $1,215,875, and $688,259 respectively, from the disposition of various investments.
During 2001, Franklin Capital realized a gain of $598,617 from the sale of 434,024 shares of Go America, Inc. common stock, an investment Franklin Capital has held since 1995, a gain of $87,013 from the sale of 1,183,938 shares of Avery common stock, and a gain of $50,750 from the sale of 350,000 shares of Avery preferred stock. These gains were offset by a loss of $130,139 from the sale of 1,150,000 shares of Primal common stock as well as a realized net loss of $85,786 from the sale of various marketable securities.
During 2000, Franklin Capital realized a gain of $956,576 from the sale of 241,131 shares of Communication Intelligence Corporation common stock, an investment Franklin Capital has held since 1996, a gain of $161,531 from the sale of 202,000 shares of Avery common stock, and a gain of $843,663 from the sale of 105,760 shares of Go America common stock. Additionally, gains of $3,819 were realized on tail payments from partnerships liquidated during 1999. These gains were offset by a loss of $440,057 from the write-off of Franklin Capital’s investment in eMattress.com and a loss of $300,626 from the write-off of Franklin Capital’s investment in TradingNews, Inc. as well as a realized net loss of $9,031 from the sale of various marketable securities.
During 1999, Franklin Capital realized a gain of $922,118 from the sale of 775,000 shares of Communication Intelligence common stock as well as a gain of $92,300 from the liquidation of Seneca Capital, L.P. and $36,622 from the liquidation of the investment in the FMA High Yield Income Limited Partnership. Additionally, Franklin Capital realized $73,797 in gains from the sale of various marketable securities. These gains were offset by a loss of $226,023 from the liquidation of Franklin Capital’s investment in Codman Research Inc., and $148,014 from the write off of Franklin Capital’s investment in Pacific Healthcare Group. Additionally, Franklin Capital realized losses of $62,541 from the sale of various marketable securities.
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Unrealized Appreciation of Investments
Unrealized appreciation of investments, net of deferred taxes, decreased by $1,553,756 during the year ended December 31, 2001, primarily from the sale of Franklin Capital’s position in Go America common stock and the sale of Franklin Capital’s position in Avery Communications. The changes in the value of the investments occurred during a period of extreme volatility of publicly traded, small capitalization and high technology stocks. The volatility of the overall market will continue to impact the performance of Franklin Capital’s investments. The value of Franklin Capital’s investments will vary on a quarterly basis.
Unrealized appreciation of investments, net of deferred taxes, decreased by $3,365,513 during the year ended December 31, 2000, primarily from the decreased value of Avery Communications and the sale of Franklin Capital’s position in Communications Intelligence common stock and Communications Intelligence Standby Ventures, L.P.
Unrealized appreciation of investments, net of deferred taxes, increased by $3,086,958 during the year ended December 31, 1999, primarily from the increased value of Communications Intelligence and CIC Ventures and the increased value of Go America.
Quantitative and Qualitative Disclosures About Market Risk
Franklin Capital’s business activities contain elements of risk. Franklin Capital considers a principal type of market risk to be valuation risk. Investments are stated at a “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 Franklin Capital’s investments nor an investment in Franklin Capital is intended to constitute a balanced investment program. Franklin Capital has exposure to public-market price fluctuations to the extent of its publicly traded portfolio.
Franklin Capital 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. Franklin Capital expects that some of its venture capital investments will become 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 Franklin Capital invests, the valuation of the equity interests in Franklin Capital’s portfolio is subject to the estimate of Franklin Capital’s board of directors. In making its determination, the board of directors 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 Franklin Capital’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 Franklin Capital’s consolidated
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Taxes
Franklin Capital does not qualify for pass through tax treatment as a Regulated Investment Company under Subchapter M of the Internal Revenue Code for income tax purposes. As a result, Franklin Capital 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 gain as well as such distributions to its stockholders.
Liquidity and Capital Resources
The accompanying financial statements have been prepared assuming that Franklin Capital will continue as a going concern. For the years ended December 31, 2001, 2000 and 1999, Franklin Capital has incurred a net investment loss from operations of approximately $1.4 million, $2.3 million and $1.5 million, respectively, a net (decrease) increase in net assets from operations of approximately $(2.4 million), $(4.4 million) and $2.2 million, respectively, and has a working capital deficiency of approximately $800,000 at December 31, 2001. These conditions raise substantial doubt about Franklin Capital’s ability to continue as a going concern. Franklin Capital has entered into a proposed merger with Change Technology Partners, Inc. (see Note 11 to the Franklin Capital financial statements), which management believes will alleviate the doubt as to whether Franklin Capital, as the surviving company in the merger, will be able to continue as a going concern, although there can be no assurance in this regard. Franklin Capital expects the merger to occur on or before June 30, 2002. The merger is subject to a number of conditions, however, and therefore there can be no assurance that the merger will be completed on or before June 30, 2002 or at all. In the event merger is not completed, in order to alleviate the substantial doubt about Franklin Capital’s ability to continue as a going concern, Franklin Capital would likely seek another merger partner or seek alternative financing. There can be no assurance that Franklin Capital would be able to find a suitable merger partner or be able to obtain alternative financing. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability of assets or the amounts of liabilities that may result from the outcome of this uncertainty.
On February 22, 2000, Franklin Capital issued $1,645,000 of convertible preferred stock. The stock was issued at a price of $100 per share and has a 7% quarterly dividend. The stock is convertible into Franklin Capital common stock at a conversion price of $13.33 per share.
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FRANKLIN CAPITAL MANAGEMENT
Directors
Information regarding Franklin Capital’s board of directors is as follows:
Mr. Stephen L. Brown is an “interested person” of Franklin Capital as defined in the 1940 Act because he also serves as Chief Executive Officer of Franklin Capital.
| Director | Expiration | |||||||||||
| Name | Age | Since | of Term | |||||||||
|
Stephen L. Brown
|
63 | 1986 | 2002 | |||||||||
|
David T. Lender
|
49 | 2000 | 2002 | |||||||||
|
Michael P. Rolnick
|
36 | 1998 | 2002 | |||||||||
|
Peter D. Gottlieb**
|
34 | 2000 | 2002 | |||||||||
|
Irving Levine**
|
80 | 1990 | 2002 | |||||||||
Executive Officers
Information regarding Franklin Capital’s executive officers is as follows:
| Name | Age | Position | ||||
|
Stephen L. Brown
|
63 | Chairman and Chief Executive Officer | ||||
|
Spencer L. Brown
|
36 | Senior Vice President and Secretary | ||||
|
Hiram M. Lazar
|
37 | Chief Financial Officer | ||||
Biographical Information
Common Stock Directors
All of Franklin Capital’s directors are independent with the exception of Stephen L. Brown, who is an “interested person” as defined in the 1940 Act.
Stephen L. Brown, was elected to Franklin Capital’s board of directors and appointed Chairman of its Board of Directors in October 1986. He has been Chairman and Chief Executive Officer since October 1986. Prior to joining Franklin Capital, Mr. Brown was Chairman of S.L. Brown & Company, Inc. a private investment firm. Mr. Brown is a director of Copley Financial Services Corporation, advisor to Copley Fund, Inc., a mutual fund. Mr. Brown is an “interested person” of Franklin Capital as defined in the Investment Company Act because he serves as Chief Executive Officer of Franklin Capital. He is also the father of Spencer L. Brown, Senior Vice President and Secretary of Franklin Capital.
David T. Lender, joined the board as a director in 2000. Mr. Lender is a Managing Director at Banc of America Securities, LLC, where he specializes in mergers and acquisitions. Prior to joining Banc of America Securities, LLC, Mr. Lender was a Managing Director in the Mergers and Acquisitions Group of Rothschild, Inc.
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Michael P. Rolnick, joined the board as a director in 1998. Mr. Rolnick is currently a general partner at ComVentures, a venture capital firm that invests in early stage Internet and communications companies. Mr. Rolnick is responsible for private equity investments and managing portfolio companies. Prior to joining ComVentures, Mr. Rolnick was Vice President for New Ventures at E*Trade Group, Inc.
Preferred Stock Directors
Peter D. Gottlieb, joined the board as a director in 2000. Mr. Gottlieb is Vice-President of Investments at First Albany Corporation and is a portfolio manager for First Albany Asset Management. Mr. Gottlieb serves as a director of Midwest Bank & Trust and Gottlieb Health Services. Additionally, Mr. Gottlieb serves as Treasurer of STEP, Inc.
Irving Levine, joined the board as a director in 1990. He has been Chairman of the Board and President of Copley Fund, Inc., a mutual fund, since 1978, and Chairman and Treasurer of Stuffco International, Inc., a ladies handbag processor and chain-store operator, since 1978. Mr. Levine is President and a director of Copley Financial Services Corporation (advisor to Copley Fund, Inc.) as well as a director of U.S. Energy Systems, Inc., an independent producer of clean efficient energy for growing energy markets.
Executive Officers
Stephen L. Brown, Chairman and Chief Executive Officer. For additional information about Mr. Brown, please see the directors’ biographical information above.
Spencer L. Brown, has been Senior Vice President of Franklin Capital since November 1995, Secretary of Franklin Capital since October 1994 and was Vice President from August 1994 to November 1995. Mr. Brown is the son of Stephen L. Brown, the Chairman and Chief Executive of Franklin Capital. The election of Mr. Brown as a preferred stock director is being considered at the special meeting. If elected, Mr. Brown will be an “interested person” of Franklin Capital because he also serves as Senior Vice President and Secretary of Franklin Capital.
Hiram M. Lazar, joined Franklin Capital as Chief Financial Officer in January 1999. From June 1992 to January 1999, Mr. Lazar was the Vice-President of Finance and Corporate Controller for Lebenthal & Co., Inc., a regional full-service broker/dealer.
Franklin Capital Executive Compensation
Under SEC rules applicable to business development companies, Franklin Capital is required to set forth certain information regarding the compensation of certain executive officers and directors.
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 Franklin Capital and the other executive officers of Franklin
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| Securities | |||||||||||||||||||||||||
| Name & | Other Annual | Options | Other | ||||||||||||||||||||||
| Principal Position | Year | Salary($) | Bonus($) | Compensation($)(1) | Awarded(#) | Compensation($) | |||||||||||||||||||
|
Stephen L. Brown(2)
|
2001 | 420,000 | — | — | — | — | |||||||||||||||||||
| 2000 | 350,000 | 125,000 | — | — | — | ||||||||||||||||||||
| 1999 | 350,000 | 70,000 | — | 7,500 | — | ||||||||||||||||||||
|
Spencer L. Brown(3)
|
2001 | 225,000 | — | — | — | — | |||||||||||||||||||
|
Senior Vice President
|
2000 | 200,000 | 40,000 | — | — | — | |||||||||||||||||||
|
& Secretary
|
1999 | 151,250 | 30,000 | — | 7,500 | — | |||||||||||||||||||
|
Hiram M. Lazar
|
2001 | 130,000 | — | — | — | — | |||||||||||||||||||
|
Chief Financial
|
2000 | 120,000 | 15,000 | — | 1,875 | — | |||||||||||||||||||
|
Officer
|
1999 | 112,917 | 5,000 | — | 5,625 | — | |||||||||||||||||||
| (1) | There were no perquisites paid by Franklin Capital in excess of the lesser of $50,000 or 10% of the compensated person’s total salary and bonus for the year. |
| (2) | Stephen L. Brown is an “interested person” of Franklin Capital because he serves as both Chairman of the Board and Chief Executive Officer of Franklin Capital. |
| (3) | If elected to be a preferred stock director of Franklin Capital, Spencer L. Brown will be an “interested person” of Franklin Capital because he also serves as Senior Vice President and Secretary of Franklin Capital. |
Set forth below is the dollar range of equity securities beneficially owned by each nominee and continuing director as of April 22, 2002:
| Dollar Range of Equity | ||||
| Securities Beneficially | ||||
| Name of Director | Owned(1)(2)(5) | |||
|
Stephen L. Brown(3)
|
over $100,000 | |||
|
David T. Lender
|
$1 – $10,000 | |||
|
Michael P. Rolnick
|
$1 – $10,000 | |||
|
Spencer L. Brown(3)(4)
|
over $100,000 | |||
|
Peter D. Gottlieb
|
over $100,000 | |||
|
Irving Levine
|
over $100,000 | |||
| (1) | Beneficial ownership has been determined in accordance with Rule 16a-1(a)(2) of the Securities Exchange Act of 1934. |
| (2) | The dollar ranges are: None, $1-$10,000, $10,001-$50,000, $50,001-100,000, or over $100,000. |
| (3) | Denotes an individual who is an “interested person” as defined in the Investment Company Act of 1940. |
| (4) | Spencer L. Brown has been nominated to serve as a preferred stock director of Franklin Capital. If elected he will be an “interested person” as defined in the Investment Company Act of 1940. |
| (5) | Franklin Capital has not provided information with respect to the “Aggregate Dollar Range of Equity Securities in All Funds Overseen or to be Overseen by Director or Nominee in Family of Investment Companies” because it is not part of a family of investment companies. |
Compensation of Directors
In the past, each director of Franklin Capital, other than Mr. Stephen L. Brown has received a fee of $3,000 plus reimbursement of expenses incurred in attending board meetings.
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In May 2001, the directors agreed to waive all directors’ fees until further notice. In connection with the merger, directors of Franklin Capital are intended to receive options to purchase common stock of the combined company.
| Pension or | ||||||||||||||||
| Retirement Benefits | ||||||||||||||||
| Accrued As Part of | Estimated Annual | |||||||||||||||
| Aggregate | Corporation’s | Benefits Upon | Total Compensation | |||||||||||||
| Name of Director | Compensation | Expenses | Retirement | Paid to Directors | ||||||||||||
|
Stephen L. Brown
|
$ | — | — | — | — | |||||||||||
|
David T. Lender
|
$ | 3,000 | — | — | $ | 3,000 | ||||||||||
|
Jonathan A. Marshall(1)
|
$ | 3,000 | — | — | $ | 3,000 | ||||||||||
|
Michael P. Rolnick
|
$ | 3,000 | — | — | $ | 3,000 | ||||||||||
|
Peter D. Gottlieb
|
$ | 3,000 | — | — | $ | 3,000 | ||||||||||
|
Irving Levine
|
$ | 3,000 | — | — | $ | 3,000 | ||||||||||
| (1) | Mr. Marshall resigned from the board in April 2002. |
Option Grants
No options were granted during the year ended December 31, 2001, to the Chief Executive Officer of Franklin Capital or to the other executive officers of Franklin Capital.
Option Exercises
No options were exercised during the year ended December 31, 2001, by the Chief Executive Officer of Franklin Capital or to the other executive officers of Franklin Capital.
Current Employment Agreements
On May 1, 2000, Stephen L. Brown signed an employment agreement with Franklin Capital, which superseded an agreement that was set to expire on December 31, 2000. The agreement expires on December 31, 2003. The term will automatically renew from year to year thereafter, unless Franklin Capital notifies Mr. Brown not less than 120 days prior to the end of any term in writing that Franklin Capital will not be renewing the agreement.
During the period of employment, Mr. Stephen L. Brown shall serve as the Chairman and Chief Executive Officer of Franklin Capital, be responsible for the general management of the affairs of Franklin Capital, reporting directly to the board of directors of Franklin Capital, serve as a member of the board of directors for the period of which he is and shall from time to time be elected or reelected.
Mr. Stephen L. Brown receives compensation under the agreement in the form of base salary of $420,000. The board of directors may increase such salary at its discretion from time to time. Mr. Brown is also entitled to be paid bonuses as the board of directors determines in its sole discretion. Under the agreement, Franklin Capital is to provide Mr. Brown with an automobile and reimburses him for certain expenses related to such automobile. In addition, Mr. Brown is reimbursed for
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Mr. Stephen L. Brown is entitled to severance pay in the event of termination without cause or by constructive discharge equal to the remaining base salary payable under the agreement and provides for death benefits payable to the surviving spouse equal to Mr. Brown’s base salary for a period of one year.
In addition, Mr. Stephen L. Brown and Franklin Capital entered into a severance agreement on May 1, 2000. Under the severance agreement Mr. Brown is entitled to receive severance if following a change in control as defined in the severance agreement, his employment is terminated by Franklin Capital without cause or by him within one year of such change in control. Mr. Brown shall be entitled to severance compensation in a lump sum payment equal to 1.5 times his average compensation over the past five years.
On May 1, 2000, Spencer L. Brown signed an employment agreement with Franklin Capital. The agreement expires on December 31, 2003. The term will automatically renew from year to year thereafter, unless Franklin Capital notifies Mr. Brown not less than 120 days prior to the end of any term in writing that Franklin Capital will not be renewing the agreement.
During the period of employment, Mr. Spencer L. Brown shall serve as the Senior Vice-President and Secretary of Franklin Capital, be responsible for the general management of the affairs of Franklin Capital, reporting directly to the board of directors of Franklin Capital, serve as a member of the board for the period of which he is and shall from time to time be elected or reelected.
Mr. Spencer L. Brown receives compensation under his agreement in the form of base salary of $225,000. The board of directors may increase such salary at its discretion from time to time. Mr. Brown is also entitled to be paid bonuses as the board of directors determines in its sole discretion. Under the agreement, Franklin Capital is to reimburse Mr. Brown for expenses related to the use of an automobile and for expenses related to membership in a club to be used primarily for business purposes. Mr. Brown is entitled under the agreement to participate in any employee benefit plans or programs and to receive all benefits, perquisites and emoluments for which salaried employees are eligible.
Under the agreement, Mr. Spencer L. Brown is entitled to severance pay in the event of termination without cause or by constructive discharge equal to the remaining base salary payable under the agreement and provides for death benefits payable to the surviving spouse equal to Mr. Brown’s base salary for a period of one year.
In addition, Mr. Spencer L. Brown and Franklin Capital entered into a severance agreement on May 1, 2000. Under the Severance Agreement Mr. Brown is entitled to receive severance if following a change in control as defined in the severance agreement, his employment is terminated by Franklin Capital without cause or by him within one year of such change in control. Mr. Brown shall be entitled to severance compensation in a lump sum payment equal to 1.5 times his average compensation over the past five years.
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If the merger is consummated, Mr. Stephen L. Brown and Mr. Spencer L. Brown will enter into new employment agreements with the combined company. See “The Merger Proposal — Interests of Certain Persons in the Merger.”
Stock Option Plans
On September 9, 1997, Franklin Capital’s stockholders approved two Stock Option Plans: a Stock Incentive Plan (“SIP”) for Franklin Capital’s consultants, officers and employees (including any officer or employee who is also a director of Franklin Capital) and a Non-Statutory Stock Option Plan (“SOP”) for Franklin Capital’s “outside” directors, i.e., those directors who are not also officers or employees of Franklin Capital. 112,500 shares of Franklin Capital’s common stock have been reserved for issuance under these plans, of which 67,500 shares have been reserved for the SIP and 45,000 shares have been reserved for the SOP.
Shares subject to options that terminate or expire prior to exercise are available for future grants under the plans. The issuance of options to “outside” directors is not permitted under the Investment Company Act without an exemptive order by the Securities and Exchange Commission. Franklin Capital’s order was granted by the Commission on January 18, 2000.
On December 31, 2001, there were 39,375 options to purchase common stock outstanding and 7,500 remain available for future issuance.
The following is a description of each of the Stock Option Plans followed by a description of the provisions applicable to both Stock Option Plans.
Stock Incentive Plan (SIP)
Purpose. The purpose of the SIP is to give Franklin Capital and its affiliates a competitive advantage in attracting, retaining and motivating officers, employees and consultants of Franklin Capital and to provide Franklin Capital with a stock plan that provides incentives linked to the financial results of Franklin Capital and increase in stockholder value.
Type of Awards. The SIP permits, at the discretion of the Committee, the granting to SIP participants of options to purchase common stock (including incentive stock options within the meaning of Section 422 of the Code (“ISOs”) or “non-statutory stock options” (“non-ISOs”)), stock appreciation rights, restricted stock and tax offset bonuses. A stock appreciation right entitles an optionee to an amount equal to the excess of the fair market value of one share of common stock over the per share exercise price multiplied by the number of shares in respect of which the stock appreciation right is exercised. Stock appreciation rights may only be granted in conjunction with all or part of an option grant.
Restricted stock may be awarded to any participant, for no cash consideration and may be subject to such conditions, including vesting, forfeiture and restrictions on transfer, as the Committee shall determine. Such terms and conditions will be specified in an agreement evidencing the award.
Finally, the SIP permits the granting of a right to receive a cash payment at such time or times as an award under the SIP results in compensation income to the participant for the purpose of assisting the participant in paying the resulting taxes.
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Upon exercise of an ISO or non-ISO, the Committee may elect to cash out all or any portion of the shares of common stock for which an option is being exercised by paying the optionee the excess of the fair market value of a share of common stock over the per share exercise price for each such option share being cashed out. All options granted under the SIP become automatically exercisable upon a “change of control” and remain exercisable until expiration of their respective terms. A “change in control” is defined in the Stock Option Plans as the acquisition by any person or group (other than Stephen L. Brown and his affiliates) of more than 25% of the voting securities of Franklin Capital or a sale or other disposition of all or substantially all of the assets of Franklin Capital to any person.
Administration. The SIP is administered by a committee of the Board of Directors composed of not fewer than two outside directors each of whom will qualify as a “non-employee director” within the meaning of Rule 16b-3 of the 1934 Act and an “outside Director” within the meaning of Section 162(m) of the Code with all grants under the SIP approved pursuant to Section 57(o) of the 1940 Act. Section 57(o) of the 1940 Act requires that grants be approved by a majority of the directors with no financial interest in the grant and a majority of non-interested directors. The Committee will have the authority, among other rights, to select the participants to whom awards may be granted, determine whether to grant ISOs, non-ISOs, stock appreciation rights or restricted stock, or any combination thereof and determine the vesting terms and other conditions of an award to an SIP participant.
Participants. SIP participants are the officers, employees (including such officers and employees who are also directors) or consultants of Franklin Capital and its affiliates who are responsible for or contribute to the management, growth and profitability of the business of Franklin Capital and its affiliates. Each grant of an award under the SIP is evidenced by an agreement between the participant and Franklin Capital, which includes such terms and provisions as the Committee may determine from time to time.
Transition of Awards. Under the SIP, generally, upon an SIP participant’s death or when an SIP participant’s employment is terminated for any reason, all unvested stock options will be forfeited. Upon the termination of employment of an optionee other than as a result of the optionee’s death, unless otherwise provided in such optionee’s option agreement, an optionee’s right to exercise a vested option will expire three months after termination of employment. If an optionee’s employment is terminated by reason of death, the period of exercise for options vested at the optionee’s death is 12 months. Options are not transferable except on the death of the optionee, by will or the laws of descent and distribution. Stock appreciation rights may be exercised and transferred to the same extent that the options to with they relate may be exercised or transferred.
The board of directors may terminate, suspend, amend or revise the SIP at any time subject to limitations in the plan. The board may not, without the consent of the optionee, alter or impair rights under any award previously granted except in order to comply with applicable law.
Non-Statutory Stock Option Plan (SOP)
Purpose. The purpose of the SOP is to further the interests of Franklin Capital, its stockholders and its employees by providing the “outside” directors of Franklin Capital (i.e., those who are not also officers and employees of Franklin Capital) the
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Type of Awards. The SIP only permits the granting of options to purchase common stock. Only non-ISOs can be granted under the SOP.
Administration. The SOP is administered by the board of directors of Franklin Capital with all grants approved pursuant to Section 57(o) of the 1940 Act. Options granted under the SOP are intended to comply with the exemption afforded by Rule 16b-3 of the 1934 Act. The board, in its discretion, can impose any vesting or other restrictions on options granted under the SOP.
Participants. SOP participants are outside directors of Franklin Capital.
Termination of Awards. Under the SOP, options expire 30 days after the date of a SOP participant’s appointment with Franklin Capital is terminated except if such termination is by reason of death or disability. In the event of termination by reason of disability, options expire 12 months after such termination. In the event of the participant’s death while serving as director or within the 30-day period following termination of the participant’s appointment, options expire 12 months following the date of death.
Awards Under Non-Statutory Stock Option Plan. On February 14, 2000, 30,000 options were granted under the SOP to four eligible “outside” directors. The strike price of the options was $11.50 per share, which represented to closing price of Franklin’s common stock as reported by the American Stock Exchange on that date. One-third of the options granted vested immediately; another one-third vested one year from the date of issuance; and the final one-third vest two years after the date of issuance. The options expire after ten years. On June 7, 2000, 7,500 options were granted under the SOP to four eligible “outside” directors. The strike price of the options was $9.67 per share, which represented the closing price of Franklin’s common stock as reported by the American Stock Exchange on that date. One-third of the options granted vested immediately; another one-third vest one year from the date of issuance; and the final one-third vest two years after the date of issuance. The options expire after ten years.
Provisions Applicable to Both Stock Option Plans
Available Shares. The aggregate number of shares of common stock reserved for issuance under the Stock Option Plans is 112,500, of which 67,500 shares have been reserved for issuance under the SIP and 45,000 have been reserved for issuance under the SOP. Shares subject to options that terminate or expire prior to exercise will be available for future grants under the Stock Option Plan.
The number of shares of common stock reserved for issuance under the Stock Option Plans, the number of shares issuable upon the exercise of options or subject to stock appreciation rights, the exercise price of such awards and the number of restricted stock awards granted under the Stock Option Plans may be subject to “anti-dilution” adjustments, in the sole discretion of the Committee, in the event of any merger, reorganization, consolidation, separation, liquidation, stock dividend, stock split, share combination, recapitalization or other change in corporate structure affecting the outstanding common stock of Franklin Capital.
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Grant and Exercise of Awards. The exercise price for options under the Stock Option Plans is determined, in the case of the SIP, by the Committee, and in the case of the SOP, by the board of directors, but will not be less that the “Fair Market Value” of Franklin Capital’s common stock at the date of grant (as defined in the Stock Option Plans as the closing market price of the common stock on the American Stock Exchange on the date of such grant).
Options granted under the Stock Option Plans are exercisable for a period of 10 years from the date of grant (five years with respect to ISOs granted to optionees who own more than 10% of the voting power of Franklin Capital or any subsidiary) or such shorter period as the administrator of such plan (either the Committee or the board, as the case may be) may establish as to any or all shares of common stock subject to any option. Options will become exercisable in accordance with the vesting schedule prescribed in such optionee’s option agreement, and may be subject to satisfaction of such other conditions as the administrator may determine. Stock appreciation rights granted under the SIP are exercisable to the same extent as the options to which they relate and upon exercise terminate the related option.
An employee, officer or director exercising a non-ISO pursuant to the SIP may elect to have Franklin Capital withhold shares of Franklin Capital’s common stock to satisfy tax liabilities arising from the exercise of such options.
Certain Federal Income Tax Consequences of Options
The following discussion of certain relevant federal income tax effects applicable to stock options granted under the Stock Option Plans is a brief summary only, and reference is made to the Code and the regulations and interpretations issued thereunder for a complete statement of all relevant federal tax consequences.
Incentive Stock Options. No taxable income will be realized by an optionee upon the grant or timely exercise of an ISO. If shares are issued to an optionee pursuant to the timely exercise of an ISO and a disqualifying disposition of such shares is not made by the optionee (i.e., no disposition is made within two years after the date of grant or within one year after the receipt of shares by such optionee, whichever is later), then (i) upon sale of the shares, any amount realized in excess of the exercise price of the ISO will be taxed to the optionee as a long-term capital gain and any loss sustained will be long-term capital loss, and (ii) no deduction will be allowed to Franklin Capital. However, if shares acquired upon the timely exercise of an ISO are disposed of prior to satisfying the holding period described above, generally (a) the optionee will realize ordinary income in the year of disposition in an amount equal to the excess (if any) of the fair market value of the shares at the time of exercise (or, is less, the amount realized on the disposition of the shares) over the exercise price thereof, and (b) Franklin Capital will be entitled to deduct an amount equal to such income. Any additional gain recognized by the optionee upon a disposition of shares prior to satisfying the holding period described above will be taxed as a short-term or long-term capital gain, as the case may be, and will not result in any deduction for Franklin Capital.
If an ISO is not exercised on a timely basis, the option will be treated as a nonqualified stock option. Subject to certain expectations, an ISO generally will not be exercised on a timely basis if it is exercised more that three months following termination of employment.
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The amount that the fair market value of shares of common stock on the exercise date of an ISO exceeds the exercise price generally will constitute an item that increases the optionee’s alternative minimum taxable income.
In general, Franklin Capital will not be required to withhold income or payroll taxes on the timely exercise of an ISO.
Non-ISOs
In general, an optionee will not be subject to tax at the time a non-ISO is granted. Upon exercise of a non-ISO where the exercise price is paid in cash, the optionee generally must include in ordinary income at the time of exercise an amount equal to the excess, if any, of the fair market value of the shares of common stock at the time of exercise over the exercise price. The optionee’s tax basis in the shares acquired upon exercise will equal the exercise price plus the amount taxable as ordinary income to the optionee. The federal income tax consequences of an exercise of a non-ISO where the exercise price is paid in previously owned shares of common stock are generally similar to those where the exercise price is paid in cash. However, the optionee will not be subject to tax on the surrender of such shares, and the tax basis of the shares acquired on exercise that are equal in number to the shares surrendered will be the same as the optionee’s tax basis in such surrendered shares. Special timing rules may apply to an optionee who is subject to reporting under Section 16(a) of the 1934 Act (generally an executive officer of Franklin Capital) and would be subject to liability under Section 16(b) of the 1934 Act.
Franklin Capital generally is entitled to a deduction in the amount of an optionee’s ordinary income at the time such income is recognized by the optionee upon the exercise of a non-ISO. Income and payroll taxes are required to be withheld for employees on the amount of ordinary income resulting from the exercise of a non-ISO.
Committees and Meetings of the Board of Directors
During the year ended December 31, 2001, the board met on seven occasions and acted by unanimous written consent on one occasion.
The Audit Committee held one meeting during the year ended December 31, 2001. The Audit Committee meets with Franklin Capital’s independent auditors to review Franklin Capital’s financial statements and the adequacy of internal controls and accounting systems. The members of the Audit Committee as of December 31, 2001 were Messrs. Levine (Chairman), Lender and Marshall.
The Executive Committee meets between meetings of the board. The Executive Committee generally may exercise the authority of the board and may approve financings not to exceed $500,000. The Executive Committee did not meet during the year ended December 31, 2001. The members of the Executive Committee as of December 31, 2001 Messrs. Brown, Marshall and Levine.
The Compensation Committee meets to consider compensation of executive officers of Franklin Capital. The Compensation Committee did not meet during the year ended December 31, 2001. The members of the Compensation Committee as of December 31, 2001 were Messrs. Marshall (Chairman) and Levine.
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Each director attended at least 75% of the aggregate number of meetings of the board and of board committees on which he served. The board of directors acts as the Nominating Committee.
Audit Committee Report
The Audit Committee reviewed and discussed with management Franklin Capital’s audited financial statements as of and for the year ended December 31, 2001. The Audit Committee also discussed with the independent accountants the matters required to be discussed by Statement on Auditing Standards No. 61, Communication with Audit Committees, as amended, by the Auditing Standards Board of the American Institute of Certified Public Accountants.
The Audit Committee received and reviewed the written disclosures and the letter from the independent accountants required by Independence Standard No. 1, Independence Discussions with Audit Committees, as amended, by the Independence Standards Board, and have discussed with the accountants the accountants’ independence. The Audit Committee considered whether the provisions of non-financial audit services were compatible with Ernst & Young LLP’s independence in performing financial audit services.
Based on the reviews and discussions referred to above, the Audit Committee recommends to the board that the financial statements referred to above be included in Franklin Capital’s Annual Report on Form 10-K for the year ended December 31, 2001 for filing with the Commission. The Audit Committee also recommends the selection of Ernst & Young to serve as independent accountants for the year ending December 31, 2002.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires Franklin Capital’s officers and directors, and persons who own more than 10 percent of Franklin Capital’s common stock to file reports (including a year-end report) of ownership and changes in ownership with the Securities and Exchange Commission (the “SEC”) and to furnish Franklin Capital with copies of all reports filed.
Based solely on a review of the forms furnished to Franklin Capital, or written representations from certain reporting persons who were subject to Section 16(a) in 2001 complied with the filing requirements.
Related Party Transactions
On February 1, 2001, Franklin Capital sold to Avery Communications, Inc. 1,183,938 shares of common stock and 350,000 shares of preferred stock of Avery representing Franklin Capital’s entire holding in Avery, for $1,557,617 plus accrued interest on the preferred stock for a realized gain net of expenses of $137,759. As part of the sale Franklin retained the right to receive 1,533,938 shares of Primal Solutions, Inc. a wholly owned subsidiary of Avery. On February 13, 2001, Primal announced that Avery had completed a spin-off of Primal and Franklin Capital received 1,533,938 fully registered and marketable shares of Primal. During the year ended December 31, 2001, Franklin Capital sold 1,150,000 shares of Primal for total proceeds of $53,861, realizing a loss of $130,139.
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On August 28, 2001, Franklin Capital along with Sunshine Wireless LLC purchased the assets of Winstar Radio Networks, Global Media and Winstar Radio Productions (collectively “WRN”) for a total purchase price of $6.25 million. Change Technology Partners, Inc., a public company, provided $2.25 million of senior financing for the deal. The acquisition was consummated through eCom Capital Inc., subsequently renamed Excelsior Radio a then wholly owned subsidiary of Franklin Capital. Franklin Capital’s total investment was $2.5 million consisting of $1.5 million in cash and a $1 million note payable to WRN. The note is due February 28, 2002 with interest at 3.54% and has a right of set-off against certain representations and warranties made by WRN. In October 2001, a legal proceeding was filed against WRN, which also named Franklin as a defendant, in which the representations and warranties made by WRN have been challenged. Until the time that this action is settled the due date of the note is extended indefinitely. See “Business of Franklin Capital — Legal Proceedings.” Additionally, Franklin Capital provided a $150,000 note receivable to Excelsior Radio. The note bears interest at 10% per annum and is issued for a ninety day rolling period. In connection with this note, Franklin Capital was granted warrants to acquire 12,879 shares of Excelsior Radio common stock at an exercise price of $1.125 per share. As of December 31, 2001, $75,000 of this note has been repaid.
In contemplation of the proposed merger agreement between Franklin Capital and Change Technology (see Note 11 to the Franklin Capital financial statements), Franklin Capital sold to Change Technology 250,000 shares of common stock in Excelsior for $250,000. If the merger is not consummated, Franklin Capital is required to repurchase the 250,000 shares of Excelsior Radio’s common stock for $250,000 plus interest at an annual rate of 10% from December 4, 2001 to the date of repurchase. As a result of the transaction, Franklin Capital now owns 50.8% of Excelsior Radio on a fully diluted basis and has 58.2% of the voting control. In addition, Franklin has the right to nominate four directors to Excelsior Radio’s seven-person board of directors.
At the closing, Franklin Capital entered into a services agreement with Excelsior Radio whereby Franklin Capital will provide Excelsior Radio with certain services. In consideration for the services provided, for a period of six-months Franklin Capital will receive $30,000 per month and be reimbursed for all direct expenses. Subsequently, Franklin Capital’s monthly fee will be determined by a majority of the non-Franklin Capital directors; however, said management fee will be no less than $15,000 per month. Franklin Capital will continue to be reimbursed for all direct expenses. Finally, Franklin Capital’s chief financial officer will serve in that capacity for Excelsior Radio and his salary and benefits will be allocated between Excelsior Radio and Franklin Capital on an 80/20 basis. During the year ended December 31, 2001, Franklin earned $120,000 in management fees and was reimbursed $40,156 for salary and benefits for Franklin Capital’s chief financial officer, which was recorded as a reduction of expenses on Franklin Capital.
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Franklin Capital Fees and Expenses Table
This table describes the various costs and expenses that an investor in Franklin Capital common stock will bear directly or indirectly.
|
Stockholder Transaction Expenses
|
||||||
|
Sales load (as a percentage of offering price)
|
0% | |||||
|
Dividend reinvestment plan fees(1)
|
None | |||||
|
Annual Expenses (as a percentage of
consolidated net assets attributable to common stock and
preferred stock)(2)
|
||||||
|
Operating expenses(3)
|
54% | |||||
|
Interest payments on borrowed funds(4)
|
— | |||||
|
Total annual expenses
|
54% | |||||
| (1) | Franklin Capital does not maintain a dividend reinvestment or cash purchase plan. |
| (2) | “Consolidated net assets attributable to common stock and preferred stock” equals net assets (i.e., total assets less total liabilities) at December 31, 2001. On February 22, 2000, Franklin Capital issued 16,450 shares of convertible preferred stock with a par value of $100 per share for $1,6450,000. The stock has a cumulative 7% quarterly dividend and is convertible into 123,376 shares of common stock. |
| (3) | “Operating Expenses” represent the operating expenses of Franklin Capital for the year ended December 31, 2001. |
| (4) | “Total annual expenses” is based on expenses for the year ended December 31, 2001. |
Example
The following example, required by the SEC, demonstrates the projected dollar amount of total cumulative expenses that would be incurred over various periods with respect to a hypothetical investment in Franklin Capital. In calculating the following expense amounts, Franklin Capital assumed it would have no additional leverage and that its operating expenses would remain at the levels set forth in the table above. In the event that shares to which this prospectus relates are sold to or through underwriters, a corresponding prospectus supplement will restate this example to reflect the applicable sales load.
| 1 Year | 3 Years | 5 Years | 10 Years | |||||||||||||
|
You would pay the following expenses on a $1,000
investment, assuming a 5.0% annual return
|
$ | — | (1) | $ | — | $ | — | $ | — | |||||||
| (1) | Franklin Capital intends to withdraw its election to be regulated as a business development company, subject to stockholder approval. In connection with the proposed merger with Change Technology, Franklin Capital intends to change the nature of its business to focus on assets primarily in the media and advertising business. Therefore, the proposed example is not meaningful on a going forward basis. |
Although the example assumes (as required by the SEC) a 5.0% annual return, Franklin Capital’s performance will vary and may result in a return of greater or less than 5.0%.
The example should not be considered a representation of future expenses, and the actual expenses may be greater or less than those shown.
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BUSINESS OF CHANGE TECHNOLOGY
Overview
Change Technology currently has limited operations. Since July 2001, Change Technology has focused on divesting its consulting businesses and using its significant cash position to develop and acquire businesses in the radio and media industries. Presently, its only operating business is Canned Interactive, which designs and produces interactive media, primarily for the entertainment industry.
Prior to July 2001, Change Technology had provided a broad range of consulting services, including e-services and technology strategy, online branding, web architecture and design, systems integration, systems architecture and outsourcing. However, in response to continued unfavorable market conditions for such services, Change Technology embarked on a review of its operations with the goal of formulating a course of action to minimize near-term losses, capital expenditures, and reduce cash outflows. As a result of such review, the Change Technology board of directors voted to sell or wind down its existing operations, other than Canned Interactive, and use its assets to invest in and develop new businesses.
In connection with such decision, the Change Technology board of directors terminated the employment of approximately 90% of its existing workforce, including its President and Chief Executive Officer. As a result of such actions, Change Technology incurred severance expenses of $1,326,000 ($493,000 of which were incurred in connection with the termination of employment of its President and Chief Executive Officer).
The board of directors then appointed William Avery, a member of Change Technology’s board of directors, to serve as Change Technology’s President and Chief Executive Officer. He was charged with executing the board’s divesture and new business development plan.
In August 2001, Mr. Avery was approached by Franklin Capital regarding Change Technology’s interest in providing capital in connection with Franklin Capital’s acquisition of certain radio programming and services assets from affiliates of Winstar Communications, Inc. and to explore further the possibility of combining Change Technology and Franklin Capital.
In connection with the radio asset acquisition, Change Technology agreed to provide Excelsior Radio Networks Inc., a majority owned subsidiary of Franklin Capital, with a loan in the amount of $2,250,000. Pursuant to the terms of the loan, if Franklin Capital and Change Technology had not mutually agreed to a term sheet regarding a business combination on or before December 31, 2001, Change Technology would have had the right to accelerate the payment of all principal and interest due on the loan. Change Technology also received a warrant to purchase 482,955 shares of common stock of Excelsior Radio Networks at an exercise price of $1.125 per share.
On December 4, 2001, Change Technology and Franklin Capital entered into a definitive agreement and plan of merger.
Concurrently with the execution of the merger agreement, the parties entered into a stock purchase agreement pursuant to which Change Technology agreed to
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On April 3, 2002, Dial Communications Global Media, Inc., a newly formed wholly owned subsidiary of Excelsior Radio, completed the acquisition of substantially all of the assets of Dial Communications Group, Inc., and Dial Communications Group, LLC used in connection with the Dial entities’ business of selling advertising relating to radio programming. The Dial acquisition was completed pursuant to the Asset Purchase Agreement, dated as of April 1, 2002, by and among the Dial entities, Franklin Capital and Excelsior Radio. Immediately prior to the closing of the transactions contemplated by the Purchase Agreement, Excelsior Radio assigned all of its rights and obligations under the Purchase Agreement, as well as certain other assets and liabilities relating to the portion of Excelsior Radio’s business dedicated to the sale of advertising relating to radio programming, to Dial Communications Global Media, Inc. Change Technology and Sunshine, both existing stockholders of Excelsior Radio, loaned Excelsior Radio an aggregate amount of $7,000,000 to finance the initial consideration of the Dial acquisition. The obligations under the loans are secured by certain of Excelsior Radio’s assets.
Change Technology’s principal executive offices are located at 537 Steamboat Road, Greenwich, CT 06830. Change Technology also maintains offices in New York, NY and Los Angeles, CA.
Corporate History
Until March 28, 2000, Change Technology was known as Arinco Computer Systems Inc. and had no business operations. On March 28, 2000, an investor group acquired control of Arinco Computer Systems through an investment of $40,000,000 in exchange for newly issued convertible preferred stock of Arinco Computer Systems (which has since all been converted to common stock). Following this investment, Arinco Computer Systems changed its name to Change Technology Partners, Inc., redomesticated from New Mexico to Delaware, and commenced its consulting business strategy.
Subsidiaries
As of December 31, 2001, Change Technology’s subsidiaries were:
| • | Iguana Studios, Inc. — a New York City-based interactive consulting agency. | |
| • | Papke Textor, Inc. d/b/a Canned Interactive — a Los Angeles-based media and entertainment agency. |
Iguana Studios has no significant operations or assets and Change Technology plans on dissolving Iguana Studios during 2002. Change Technology has no plans to
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Investments and Loans
Change Technology has made investments in and loans to media and technology companies. The following table summarizes Change Technology’s media and technology investments and loans as of December 31, 2001:
| Type of | ||||
| Investment | Description | Investment Interest | ||
|
Excelsior Radio Networks, Inc.
|
Produces, syndicates, and distributes radio programs | 250,00 shares of common stock, warrant to purchase 482,955 shares of common stock and $2,250,000 note | ||
|
NetPro Holdings Inc.
|
Streaming media management services company | 39.15% equity interest | ||
|
Broadstream, Inc.
|
No current operations | 43% equity interest | ||
|
Livesky, Inc.
|
Wireless technology developer, including mobile telephone business strategy and assessment as well as mobile application design and development | 2% equity interest | ||
|
Insys LLC
|
Provider of systems integration services | 49% equity interest and $100,000 note |
Acquisitions and Divestitures
eHotHouse. On September 15, 2000, Change Technology acquired majority voting control of eHotHouse Inc., an interdisciplinary e-services consulting firm, in a transaction where eHotHouse issued Series A convertible participating preferred stock to Change Technology in exchange for $3,000,000 and a covenant, by Change Technology, to issue 6,374,502 shares of Change Technology’s common stock as directed by eHotHouse. The operations of eHotHouse prior to acquisition were de minimis. No consideration was provided to the existing shareholders of eHotHouse in the transaction. During the period from September 2000 through February 2001, eHotHouse completed several business combinations. However, eHotHouse did not exercise its right under the aforementioned covenant to have Change Technology issue additional shares of Change Technology’s common stock.
In February 2001, Change Technology acquired the outstanding minority interest of eHotHouse for 5,300,013 shares of Change Technology common stock and approximately $400,000 in cash.
Subsequent to February 2001, Change Technology merged eHotHouse with and into Change Technology. As a result of Change Technology’s divesture plan, Change Technology does not intend on actively developing the former business of eHotHouse.
Iguana. In March 2001, Change Technology acquired Iguana Studios, Inc., a New York City-based interactive consulting agency, for approximately $5,800,000, including $2,800,000 in cash, 2,700,000 shares of Change Technology’s common stock
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Approximately 2,300,000 shares of Change Technology’s common stock were placed in escrow in connection with the Iguana acquisition. The shares will be held in escrow until June 30, 2002 and released thereafter to the former Iguana stockholders if Change Technology has not submitted a claim to the escrow agent with respect to breaches of the representatives and warranties of Iguana contained in the merger agreement.
In connection with the merger, all of the former Iguana stockholders agreed not to transfer their shares of Change Technology common stock for a period of 12 or 24 months. On October 31, 2001, certain former Iguana stockholders agreed to release Change Technology from any and all obligations arising under the escrow agreement and Change Technology agreed to release certain of the former Iguana stockholders from their obligation not to transfer their shares of Change Technology common stock.
Canned. In June 2001, Change Technology acquired Papke-Textor, Inc. d/b/a Canned Interactive, a Los Angeles-based media and entertainment interactive agency, for approximately $1,100,000 in cash, including acquisition costs, and 6,436,552 shares of Change Technology’s common stock valued at approximately $1,000,000.
Also in connection with the Canned acquisition, $200,000 and 715,172 shares of Change Technology’s common stock were placed in escrow for a period ending December 12, 2002. The cash and shares will be held in escrow until December 12, 2002 and released thereafter to the former Canned stockholders if Change Technology has not submitted a claim to the escrow agent with respect to breaches of the representatives and warranties of Canned contained in the merger agreement. In connection with the merger, certain Canned stockholders agreed not to transfer their shares of Change Technology common stock for a period of 24 months.
Canned Interactive is based in Los Angeles, California and designs and produces interactive media, primarily for the entertainment industry. Entertainment companies, as well as consumer goods, sports and technology companies, will contract with Canned to produce interactive media such as digital video discs (DVD) and web site design. Work is usually contracted with a purchase order and delivery of completed work is typically within 1 to 3 months of receipt of the order.
Most theatrical films, including new and library releases, are now released in DVD format. Canned designs interactive content for those titles, enriching the viewer experience and creating value for Canned’s clients. It also uses its design and technology skills to create and enhance web sites with interactive and streaming content.
Canned plans to exploit its ability to design, create and produce interactive DVD applications in two ways. First, Canned plans to support and marginally grow its business in the entertainment sector. Canned’s service to this business sector allowed it to develop top creative and technology skills. It has significantly penetrated the sector and will opportunistically pursue new business while ensuring sufficient
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Canned’s largest clients in 2001 were Disney Home Entertainment, Columbia Tristar Home Entertainment and Warner Home Video. Other clients in 2001 were Cisco Systems, Nike and the United States Olympic Committee. Until recently, most of Canned’s business was by way of referral and capitalization on the established contacts it has built in the entertainment sector. Canned has now developed a quota-bearing sales approach to sign new revenue sources outside the entertainment industry. Based on the success of these new initiatives, Canned is organized to add to its sales team and support that effort with appropriate public relations.
Competition for the development of interactive DVDs and web sites is strong and varied. Companies that compete with Canned in the DVD market include 1k Studios, dzn, B.D. Fox and Zuma Digital. In the web site marketplace there are numerous small, local competitors, as well as more established companies such as Razorfish and dna studios.
In 1999, Congress passed legislation that regulates certain aspects of the internet, including on-line content, copyright infringement, user privacy, taxation, access charges, liability for third-party activities and jurisdiction. In addition, federal, state, local and foreign governmental organizations also are considering, and may consider in the future, other legislative and regulatory proposals that would regulate the internet. The internet and e-commerce sectors are still relatively new areas and it is not known how courts will interpret or apply both existing and new laws. Therefore, Canned is uncertain how new laws or the application of existing laws will affect its web site design business.
Broadstream and NetPro. In June 2000, Change Technology purchased 7,626,165 shares of Series A convertible redeemable preferred stock of Broadstream, Inc., a streaming media management services company, (d/b/a Network Prophecy), representing an approximately 30% equity interest and approximately 47% voting interest in Broadstream in exchange for $6,500,000.
Following a recapitalization transaction in May 2001, on August 15, 2001 Change Technology purchased a secured convertible promissory note from Broadstream in exchange for $600,000 in connection with an aggregate $1,600,000 bridge loan financing consummated by Broadstream. The aggregate bridge loan financing was secured by all of Broadstream’s assets. The note also contained certain conversion provisions in the event Broadstream closes a new round of financing or enters into a change of control transaction.
On November 30, 2001 Change Technology assigned its note to a newly formed entity, NetPro Holdings Inc., in exchange for 13,674,753 shares of NetPro Series A-1
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On December 24, 2001, Change Technology purchased 1,585,479 shares of NetPro Series B-1 convertible redeemable participating preferred stock in exchange for $200,000. As of December 31, 2001, Change Technology’s interest in NetPro represents approximately 39.15% of NetPro’s outstanding equity. On January 10, 2002, Change Technology invested an additional $100,000 in NetPro Series B-1 stock. On March 14, 2002, the board of directors of NetPro voted to suspend all of the Company’s business operations and immediately terminate almost all of its employees due to NetPro’s inability to generate sufficient revenues. NetPro’s board of directors continues to evaluate alternatives to maximize the value of the company’s remaining assets.
Rand. On November 30, 2000, eHotHouse acquired all of the issued and outstanding common stock of RAND Interactive Corporation, a provider of media and technical services, in exchange for $700,000 of eHotHouse common stock and $700,000 in cash.
On November 2, 2001 Change Technology sold all issued and outstanding shares of Rand to certain members of the management team in exchange for 375,039 shares of Change Technology’s common stock, and a warrant to purchase such amount of shares of common stock of Rand that equals, at the time of exercise, 30% of the issued and outstanding shares of Rand common stock on a fully diluted basis. Such warrants have a stated exercise price of $1.00 per share in the aggregate, expire on November 3, 2013, and are contingently exercisable upon the occurrence of certain prospective events.
InSys. On October 18, 2000, eHotHouse acquired InSys Technology, Inc., a provider of systems integration services, in exchange for $900,000.
On November 8, 2001 Change Technology sold a 51% voting interest in InSys to a certain member of the management team in exchange for $50,000 and concurrently forgave approximately $400,000 of advances to Insys. Change Technology continues to evaluate its investment in InSys and may decide to sell or hold such investment in the future.
Legal Proceedings
Change Technology is subject to certain legal claims from time to time and is involved in litigation that has arisen in the ordinary course of its business. It is Change Technology’s opinion that it either has adequate legal defenses to such claims or that any liability that might be incurred due to such claims will not, in the aggregate, exceed the limits of Change Technology’s insurance policies or otherwise result in any material adverse effect on Change Technology’s operations or financial position.
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Regulatory
Prior to the consummation of the merger, Change Technology may own investment securities having a value exceeding 40% of the value of its total assets (exclusive of government securities and cash items) on an unconsolidated basis, and may therefore meet the definition of an “investment company” under the 1940 Act, the Change Technology board of directors believes that Change Technology will not be deemed an “investment company” by virtue of the “primarily engaged” exemption under Section 3(b)(1) of the 1940 Act. This statutory exemption provides that, even if a company owns investment securities having a value exceeding 40% of its total assets, it may not be an investment company if it in fact is directly or indirectly (through wholly owned subsidiaries) “primarily engaged” in a non-investment company business. While Change Technology’s board of directors believes that Change Technology is primarily engaged in a business other than owning securities, the applicability of the “primarily engaged” exclusion is determined on a case-by-case basis, and it is possible that Change Technology may be deemed by the SEC to be an investment company subject to the 1940 Act. In the event that the SEC determines that Change Technology cannot take advantage of the “primarily engaged” exclusion, the board of directors believes that Change Technology could rely on Rule 3a-2 under the 1940 Act, which deems an issuer otherwise subject to the 1940 Act not to be subject to the registration requirements of the 1940 Act for up to one year if certain conditions are met. However, it is possible that the SEC may disagree with Change Technology’s conclusion that this safe harbor is available to Change Technology, thus subjecting Change Technology to the risk that it should have registered as an investment company and that therefore Change Technology may be in violation of the 1940 Act. If the SEC determines that the safe harbor in Rule 3a-2 is unavailable to Change Technology, Change Technology would be in violation of the registration requirements under the 1940 Act which could subject Change Technology to penalties and other enforcement action by the SEC.
Employees
As of December 31, 2001, Change Technology employed 28 full time employees. Of the total number of employees, 20 were in professional services, 4 were in sales and marketing and 4 were in finance and administration. None of Change Technology’s employees are represented by any collective bargaining unit, and Change Technology has never experienced a work stoppage. Change Technology believes its relations with its employees are good.
CHANGE TECHNOLOGY’S MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with Change Technology’s audited consolidated financial statements and accompanying notes for the fiscal year ended December 31, 2001. Certain statements contained within this discussion constitute forward-looking statements. See “Forward Looking Statements.”
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Accounting Policies
The preparation of Change Technology’s financial statements in conformity with generally accepted accounting principles in the United States requires Change Technology 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. Change Technology’s estimates, judgments and assumptions are continually evaluated based on available information and experience. Because of the use of estimates inherent in the financial reporting process, actual results could differ from those estimates.
Change Technology provides services under time-and-material or fixed-price contracts which are generally short term. Under time-and-material and fixed-price contracts costs are generally incurred in proportion with contracted billing schedules and revenue is recognized when the services are rendered based on the percentage of costs incurred to date to total estimated project costs. Cumulative revenues recognized may be less or greater than cumulative costs and profits billed at any point in time during a contract’s term. The resulting difference is recognized as unbilled or deferred revenue.
Any estimation process, including that used in preparing contract accounting models, involves inherent risk. Change Technology reduces the inherent risk relating to revenue and cost estimates in percentage-of-completion models through corporate policy, approval and monitoring processes. Risks relating to service delivery, productivity and other factors are considered in the estimation process. For all client contracts, provisions for estimated losses on individual contracts are made in the period in which the loss first becomes apparent.
Change Technology maintains allowances for doubtful accounts for estimated losses resulting from the inability of customers to make payments. If the financial condition of Change Technology’s customers deteriorates, resulting in the customers’ inability to make payments, additional allowances will be required.
Change Technology establishes the estimated useful lives of Change Technology’s intangibles based on a number of factors, which are in part based on Change Technology’s assessments of the expected revenues to be generated by the acquired customer base, a specific evaluation of the capabilities and retention efforts associated with the workforce acquired and other general economic trends. If Change Technology experiences client turnover, employee turnover or deteriorating operating performance, the estimated useful lives of Change Technology’s intangibles may require adjustment.
Change Technology has reduced its deferred tax assets to an amount that Change Technology believes is more likely than not to be realized, $0 at December 31, 2001. In so doing, Change Technology has estimated future taxable losses in determining the valuation allowance. In the event that actual results differ from these estimates or these estimates are adjusted in future periods, Change Technology may need to modify its valuation allowance which could materially affect its financial position and results of operations.
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Overview and Recent Developments
Prior to commencement of the operational divesture described in Change Technology’s Form 10-Q for the quarter ended September 30, 2001, Change Technology was a provider of a broad range of professional consulting services, including e-services and technology strategy, online branding, web architecture and design, systems integration, systems architecture and outsourcing. Change Technology has served clients throughout the United States with offices in New York, Connecticut, Maryland, California and New Jersey.
On December 4, 2001, Change Technology entered into an agreement and plan of merger with Franklin Capital. Subject to the terms of the agreement, Change Technology will be merged with and into Franklin Capital in a transaction intended to qualify as a tax-free reorganization. The merger is subject to stockholder approval by Franklin Capital and Change Technology. The companies anticipate closing the transaction in the second quarter of 2002.
Change Technology has made two investments in Excelsior Radio Networks, Inc. (formerly known as eCom Capital), a subsidiary of Franklin Capital, which produces, syndicates and distributes radio programs and services. Change Technology purchased a promissory note and warrant for $2,250,000 from Excelsior Radio in August 2001 and in December of 2001, in connection with the merger agreement, purchased 250,000 shares of common stock of Excelsior Radio for $250,000 from Franklin Capital.
Based on Change Technology’s assessment of the investment in Excelsior Radio and its review of the opportunities in the radio industry, the board of directors of Change Technology decided to merge Change Technology with and into Franklin Capital and jointly develop and acquire network radio programming and sales and syndication businesses.
Other Significant Developments
In July 2001, the Board of Directors terminated the employment of Change Technology’s President and Chief Executive Officer. The former executive had an employment agreement with Change Technology dated August 21, 2000 that provided for severance benefits. Change Technology will pay the former executive the severance he is entitled to under his employment agreement and has incurred a charge totaling $493,000, which is included in severance charges in the consolidated statement of operations for the fiscal year ended December 31, 2001. Additionally, Change Technology has recorded an impairment loss in the amount of $2,250,000, reflecting the impact of the termination of the executive officer upon the carrying value of certain intangible assets, and reversed certain deferred compensation related to unvested options that were forfeited in connection with the termination. The impairment loss amount is included in the “Impairment Losses” section of the accompanying Statement of Operations.
During 2001, in response to continued unfavorable market conditions for its consulting services, Change Technology embarked on a review of all operations with the goal of formulating a course of action to minimize near-term losses, capital expenditures, and reduce cash outflows. As an initial course of action, Change
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These actions when coupled with the historical, and projected operating and cash flow losses of Change Technology resulted in the evaluation of the recoverability of Change Technology’s acquired intangible assets and goodwill. As a result, Change Technology recorded impairment charges totaling $5,013,000, which are included in impairment losses in the accompanying Statement of Operations.
Also, as a result of these actions Change Technology incurred severance charges of $1,326,000 which are included in the “Severance Charges” section of the accompanying Statement of Operations. $895,000 of this amount has been paid as of December 31, 2001.
On November 2, 2001, Change Technology executed a Share Purchase Agreement pursuant to which Change Technology sold all of the issued and outstanding capital stock of RAND to a member of the RAND management team. Under the terms of the share purchase agreement, Change Technology received 375,039 shares of RAND common stock and a warrant to purchase 30%, on a fully diluted basis when exercised, of RAND’s common stock at an aggregate exercise price of $1.00. The warrant, exercisable upon the occurrence of certain events, expires on November 3, 2013.
On November 8, 2001, Change Technology sold a 51% voting interest in InSys to a certain member of the management team in exchange for $50,000 and concurrently forgave approximately $400,000 in advances to InSys. In addition, Change Technology loaned InSys $100,000 evidenced by a promissory note. The note bears interest at a rate equal to the London Interbank Offer Rate plus 2%.
Overview of Historical Operations
Change Technology derives its revenues from services performed under one of two pricing arrangements: time-and-materials and fixed price. The services performed under either of these arrangements are substantially identical.
Revenues are recognized for fixed price arrangements as services are rendered using the percentage-of-completion method, based on the percentage of costs incurred to date to total estimated project costs, provided Change Technology has the ability to produce reasonably dependable estimates, and collection of the resulting receivable is probable. The cumulative impact of any revision in estimates of the costs to complete and losses on projects in process are reflected in the period in which they become known.
Revenues are recognized for time-and-materials based arrangements in the period when the underlying services are rendered, provided collection of the resulting receivable is probable and no significant obligations remain.
Provisions for estimated project specific losses on both types of contracts are made during the period in which such losses become probable and can be estimated. To date, such losses have not been significant. Change Technology reports revenue net of reimbursable expenses.
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Agreements entered into in connection with time-and-materials projects are generally terminable by the client upon 30-days’ prior written notice, and clients are required to pay Change Technology for all time, materials and expenses incurred by Change Technology through the effective date of termination. Agreements entered into in connection with fixed-fee projects are generally terminable by the client upon payment for work performed and the next progress payment due. If clients terminate existing agreements or if Change Technology is unable to enter into new agreements, Change Technology’s business, financial condition and results of operations could be materially and adversely affected. In addition, because a significant portion of Change Technology’s expenses are fixed, a variation in the number of client engagements can cause significant variations in operating results from quarter to quarter.
Change Technology’s projects vary in size and source. Therefore, a client that accounts for a significant portion of Change Technology’s revenues in one period may not generate a similar amount of revenue in subsequent periods. However, there is a risk that the source of Change Technology’s revenues may be generated from a small number of clients and these clients may not retain Change Technology in the future. Any cancellation, deferral or significant reduction in work performed for these principal clients or a significant number of smaller clients could have a material adverse effect on Change Technology’s business, financial condition and results of operations.
Change Technology’s costs consist primarily of compensation and related costs of personnel dedicated to customer assignments. Project personnel costs also include fees paid to subcontractors for work performed in connection with projects and non-reimbursed travel expenses.
Change Technology’s selling, general and administrative costs consist primarily of compensation and related costs of the management and administrative functions, including finance and accounting, marketing, human resources and internal information technology, the costs of Change Technology’s facilities and other general corporate expenses.
Change Technology’ equity based compensation expense is comprised of amortization of the deferred compensation associated with the grant of stock options to Change Technology’s board of directors and former President and Chief Executive Officer. Such cost is measured as the difference between the exercise price of options granted and the fair market value of the underlying stock on the date of measurement, and is being recognized as expense over the vesting period of the options. Also included in equity-based compensation during the twelve months ended December 31, 2001 is the cost associated with 3,144,494 shares of common stock of Change Technology issued as partial consideration in exchange for the former President and Chief Executive Officer’s shares of eHotHouse, a subsidiary. Such cost is measured as the excess of the fair value of Change Technology shares issued as settlement over the fair value of the eHotHouse shares on the original date of grant. Change Technology incurred approximately $3,086,000 in equity based compensation expense during the fiscal year ended December 31, 2001.
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Acquisitions and Divestitures
Change Technology evaluates acquisitions based on numerous quantitative and qualitative factors. Quantitative factors included historical and projected revenues and profitability, geographic coverage and backlog of projects under contract. Qualitative factors include strategic and cultural fit, management skills, customer relationships and technical proficiency.
eHotHouse. On February 21, 2001, Change Technology acquired the remaining outstanding interests in eHotHouse Inc., and merged eHotHouse with a newly formed, wholly owned subsidiary of Change Technology. Change Technology acquired this minority interest for approximately 2,200,000 shares of Change Technology common stock, valued at approximately $2,700,000, and $200,000 in cash. The acquisition was accounted for using the purchase method of accounting. On May 16, 2001, eHothouse merged with and into Change Technology.
As a result of the aforementioned terminations, coupled with the historical, current and projected operating and cash flow losses, Change Technology evaluated recoverability of its acquired intangible assets acquired from eHotHouse by comparison of the carrying value relative to future cash flows. As a result, Change Technology recorded impairment charges totaling $2,250,000, which are included in the “Impairment Charges” section of the accompanying Statement of Operations.
InSys. On October 18, 2000, eHotHouse acquired substantially all of the operating assets and assumed certain liabilities of InSys, a provider of systems integration services, in exchange for $900,000 in cash including acquisition costs. The business combination was accounted for using the purchase method.
During the year ended December 31, 2001 as a result of the aforementioned terminations, coupled with the historical, current and projected operating and cash flow losses, Change Technology evaluated the recoverability of its acquired intangible assets by comparison of the carrying value relative to future cash flows. As a result, Change Technology recorded impairment charges totaling $105,000 which are included in the “Impairment Charges” section of the accompanying Statement of Operations.
As discussed above, on November 8, 2001 Change Technology sold a 51% voting interest in InSys to a certain member of the management team in exchange for $50,000 and concurrently forgave approximately $400,000 of advances to InSys. In addition, Change Technology loaned InSys $100,000 evidenced by a promissory note.
RAND Interactive Corporation. On November 30, 2000, eHotHouse acquired all of the issued and outstanding common stock of RAND Interactive Corporation, a provider of media and technical services in exchange for $700,000 of eHotHouse common stock and $700,000 in cash including acquisition costs. The business combination was accounted for using the purchase method.
As a result of the aforementioned terminations, coupled with the historical, current and projected operating and cash flow losses, Change Technology evaluated the recoverability of its acquired intangible assets by comparison of the carrying value relative to future cash flows. As a result, Change Technology recorded impairment charges totaling $1,030,000 which are included in the “Impairment Charges” section of the accompanying Statement of Operations.
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As discussed above, on November 2, 2001 Change Technology sold all issued and outstanding shares of Rand to certain members of the management team in exchange for 375,039 shares of Change Technology’s common stock, and a warrant to purchase such amount of shares of common stock that shall equal, at the time exercise, 30% of the issued and outstanding shares of Rand common stock on a fully diluted basis.
Iguana. On March 1, 2001, Change Technology acquired all outstanding shares of Iguana Studios, Inc., a leading provider of media and technical services, in exchange for approximately $2,800,000 in cash, including acquisition costs, 2,700,000 shares of Change Technology common stock, valued at approximately $2,000,000, and replacement options to purchase 1,681,888 shares of Change Technology common stock valued at approximately $1,000,000. The acquisition was accounted for using the purchase method of accounting.
As a result of the aforementioned terminations, coupled with historical, current and projected operating and cash flow losses, Change Technology evaluated recoverability of its acquired intangible assets and goodwill acquired from Iguana by comparison of the carrying value relative to future cash flows. As a result, Change Technology recorded impairment charges totaling $3,878,000, which are included in the “Impairment Charges” section of the accompanying Statement of Operations.
Canned. On June 12, 2001, Change Technology acquired Papke-Textor, Inc. d/b/a Canned Interactive, a Los Angeles-based media and entertainment interactive agency, for approximately $1,100,000 in cash, including acquisition costs, and 6,436,552 shares of Change Technology’s common stock valued at approximately $1,000,000. The business combination was accounted for using the purchase method.
Broadstream and NetPro. In May 2001, Broadstream, Inc. completed a recapitalization whereby the holders of Series A convertible redeemable preferred stock exchanged their Series A shares for Series A-1 convertible redeemable preferred stock. The recapitalization modified the conversion ratio, policies regarding dividends and voting rights for Series A-1 holders. No additional consideration was paid by Change Technology or any other preferred shareholder in connection with this transaction. As a result of the recapitalization, the voting interest of common shareholders was reduced from 31% to 13%.
Also in May 2001, in connection with the recapitalization, Change Technology transferred 1,191,569 shares of Series A-1 convertible redeemable preferred stock to Adelson Investors, LLC, another shareholder of Broadstream. This transfer was accounted for as a contribution by Change Technology of such shares to Broadstream in exchange for no consideration. In connection with this non-reciprocal transfer of shares, Change Technology recorded a charge of $1,016,000, equal to Change Technology’s cost basis in such shares, which has been included in equity in losses of unconsolidated subsidiaries in the accompanying statement of operations. Subsequent to the recapitalization, and non-reciprocal share transfer, Change Technology owned 6,434,596 shares of Series A-1 convertible redeemable preferred stock of Broadstream, representing an approximately 43% equity interest (calculated on an as-if-converted basis) and 49% voting interest.
On August 15, 2002, Change Technology purchased a secured convertible promissory note from Broadstream in exchange for $600,000 in connection with an aggregate $1,600,000 bridge loan financing consummated by Broadstream. The
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On November 30, 2001, Change Technology assigned its note to a newly formed entity, NetPro Holdings, Inc., in exchange for 13,674,753 shares of NetPro Series A-1 Convertible Redeemable Participating Preferred Stock. On November 30, 2002, as a result of the application of the equity method, the net book value of the note approximated zero and no gain or loss was recorded as a result of this exchange. Concurrent with this transaction, NetPro foreclosed on the note and elected to take possession of all of Broadstream’s assets in full satisfaction of the notes. Broadstream remains in existence but is not conducting any business.
On December 24, 2001, Change Technology purchased 1,585,479 shares of NetPro Series B-1 Convertible Redeemable Preferred Stock in exchange for $200,000 in connection with a larger ongoing financing effort by NetPro. On January 10, 2002, Change Technology invested an additional $100,000 in NetPro Series B-1 stock. On March 14, 2002, the board of directors of NetPro voted to suspend all of NetPro’s business operations and immediately terminate almost all of its employees due to NetPro’s inability to generate sufficient revenues. NetPro’s board of directors continues to evaluate alternatives to maximize the value of the company’s remaining assets.
Results of Operations
Year ended December 31, 2001 compared to December 31, 2000.
Revenues. Revenues increased from $1,370,000 in 2000 to $5,567,000 in 2001. This increase is the result of the contribution to revenues of acquired companies’ revenue streams. As a result of Change Technology’s divestitures and continued unfavorable market conditions for its professional services, revenues from historical secure offerings are expected to decline on a prospective basis.
Cost of Revenues. Cost of revenues increased from $1,119,000 in 2000 to $7,276,000 in 2001. Cost of revenues consists primarily of compensation of billable employees, travel, subcontractor costs, and other costs directly incurred in the delivery of services to clients. Billable employees are full time employees and subcontractors whose time are spent servicing client projects. Also included in Cost of Revenues is the amortization of certain purchased intangible assets, representing the value of customer relationships and workforces acquired.
In connection with the acquisition of InSys, RAND, Iguana, and Canned, Change Technology recorded intangible assets representing the value ascribed to the customer lists and assembled workforces of the acquired companies. The aggregate amortization of these intangible assets totaled $50,000 and $2,588,000, respectively, and is included in Cost of Revenues.
As a result of Change Technology’s divestitures, terminations and unfavorable market conditions, cost of revenues decreased on a sequential basis during 2001 and are expected to decline on a prospective basis.
Selling General and Administrative Expenses. Selling, general and administrative expenses consist primarily of compensation and related benefits, professional
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Impairment Losses. As a result of the aforementioned terminations, Change Technology evaluated the recoverability of its acquired intangible assets and goodwill by comparison of the carrying value relative to future cash flows. As a result, Change Technology recorded impairment charges totaling $7,263,000, which are included in the “Impairment Losses” section of the accompanying Statement of Operations.
Severance Costs. Severance costs were $0 and $1,326,000 in the twelve months ended December 31, 2000 and 2001, respectively.
Equity in Losses of Unconsolidated Subsidiaries. Equity in losses of unconsolidated subsidiaries was $1,732,000 and $5,546,000 for the ended December 31, 2000 and 2001, respectively. Equity in losses of unconsolidated affiliates resulting from Change Technology’s minority ownership in Broadstream, NetPro and InSys have been accounted for under the equity method of accounting. Under the equity method of accounting, Change Technology’s proportionate share, calculated on an as-if-converted basis, of the investee’s operating losses and amortization of Change Technology’s net excess investment over its equity in the investee’s net assets is included in equity in losses of unconsolidated affiliates.
Interest and Dividend Income. Interest and dividend income was $1,469,000 and $845,000 for the year ended December 31, 2000 and 2001, respectively. The decrease in interest income over the prior year was attributable to a decrease in Change Technology’s invested cash balance, as it has funded its ongoing operations. Interest income in future periods may fluctuate as a result of the average cash we maintain and changes in the market rates of cash equivalents, and Change Technology expect that the average cash balance may continue to decrease as Change Technology continues to incur operating losses.
Income Taxes. Change Technology has available estimated net operating loss carryforwards for income tax purposes of approximately $20,000,000 as of December 31, 2001, which expire on various dates from 2001 through 2021. A valuation allowance has been established due to uncertainty whether Change Technology will generate sufficient taxable earnings to utilize the available net operating loss carryforwards. A portion of Change Technology’s net operating loss carryforwards may also be limited due to significant changes in its ownership as required under Section 382 of the Tax Reform Act of 1986.
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999
Change Technology commenced its new business strategy in the spring of 2000 and began its primary operations in the fall of 2000 concurrent with its acquisition of majority control of eHotHouse.
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Revenues. Revenues increased from $0 in 1999 to $1,370,000 in 2000. The increase is a result of the contribution to revenues of acquired companies’ revenue streams.
Cost of Revenues. Cost of revenues consists principally of costs directly incurred in the delivery of services to clients, primarily consisting of compensation of billable employees. Billable employees are full time employees and sub-contractors whose time spent working on client projects is charged to that client at agreed-upon rates. Billable employees are our primary source of revenue. This increase is a result of the contribution to such costs of acquired companies’ direct personnel and related costs.
In connection with Change Technology’s acquisitions of InSys and RAND, accounted for under the purchase method of accounting, Change Technology recorded intangible assets representing the value ascribed to the customer lists and assembled workforces of the acquired companies. The aggregate amortization of these intangibles totaled $50,000 for the year ended December 31, 2000 and is included in cost of revenues.
Selling, General and Administrative Expenses. Selling, general and administrative expenses consist primarily of compensation and related benefits, professional services fees, facilities costs and advertising and promotional costs. Selling, general and administrative expenses increased from $12,000 in 1999 to $3,305,000 in 2000. The increase was primarily the result of increased compensation, increased professional services fees and increases in other costs associated with the growth of our business and operations.
Equity in Losses of Unconsolidated Affiliates. Equity in losses of unconsolidated affiliates was $0 in 1999 and $1,732,000 in 2000. Equity in losses of unconsolidated affiliates resulting from Change Technology’s minority ownership in Broadstream has been accounted for under the equity method of accounting. Under the equity method of accounting, Change Technology’s proportionate share, calculated on an as-if-converted basis, of Broadstream’s operating losses and amortization of Change Technology’s net excess investment over its equity in Broadstream’s net assets is included in equity in losses of unconsolidated affiliates.
Interest And Dividend Income. Interest and dividend income was $5,000 in 1999 and $1,469,000 in 2000. The increase in interest income was attributable to interest earned on cash and cash equivalents primarily from the net proceeds from Change Technology’s sale of Series B convertible preferred stock in March 2000.
Income Taxes. Change Technology has available estimated net operating loss carryforwards for income tax purposes of approximately $4,066,000, which expires on various dates from 2001 through 2020. A valuation allowance has been established due to uncertainty whether Change Technology will generate sufficient taxable earnings to utilize the available net operating loss carryforwards. A portion of Change Technology’s net operating loss carryforwards may also be limited due to significant changes in ownership under Section 382 of the Tax Reform Act of 1986.
Liquidity and Capital Resources
On March 28, 2000, an investor group led by Pangea Internet Advisors, LLC purchased 4,000,000 shares of Series B convertible preferred stock for net proceeds to
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Change Technology had $8,892,000 in cash and cash equivalents available as of December 31, 2001. Change Technology used $21,441,000 to fund operations, finance acquisitions and make strategic investments during the year ended December 31, 2001. Change Technology has initiated a merger transaction with Franklin Capital Corporation, subject to certain terms, conditions and stockholder approvals, which would require outlays of capital to complete the merger. Further, Change Technology is continuously evaluating future acquisitions of businesses and other strategic assets which may also require considerable outlays of capital. If a business combination is consummated and the post combination operations require significant cash outlays to fund operations, Change Technology may be required to seek additional sources of financing.
However, beginning in the third quarter of 2001, in response to continued unfavorable market conditions for its services, Change Technology embarked on a review of its operations with the goal of formulating a course of action to minimize near term losses, capital expenditures and reduce cash outflows. As of December 31, 2001, Change Technology has a single operating subsidiary, a limited number of employees and has significantly reduced fixed expenses.
During the year ended December 31, 2001, Change Technology incurred legal fees in connection with certain transactions and other matters in the normal course of business. A portion of these services was provided by a firm of which a member of the board of directors is a partner. Fees incurred by this firm totaled approximately $881,000 and $821,000 for the year ended December 31, 2001 and 2000, respectively.
Additionally, during the year ended December 31, 2001, Change Technology incurred management and investment advisory service fees in connection with identifying, evaluating, negotiating, and managing investment opportunities for Change Technology. These services were provided by a firm of which the current President and Chief Executive Officer of Change Technology was previously affiliated. Fees incurred by Change Technology to this firm totaled $510,000 and $828,000 in 2001 and 2000, respectively. Additionally, this firm occupies a portion of Change Technology’s office space in Connecticut, for which it pays rent at an amount which approximates fair market value. Such payments to Change Technology totaled $283,000 during the year ended December 31, 2001. Furthermore, the firm was indebted to Change Technology in the amount of $204,000 at December 31, 2001 for its pro rata share of certain leasehold improvements and rental payments due.
Change Technology invests predominantly in instruments that are highly liquid, investment grade securities that have maturities of less than 45 days.
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Change Technology’s future contractual obligations at December 31, 2001 were as follows:
| 2006 and | ||||||||||||||||||||
| 2002 | 2003 | 2004 | 2005 | Thereafter | ||||||||||||||||
|
Operating leases
|
$ | 980 | $ | 842 | $ | 332 | $ | 46 | $ | — | ||||||||||
|
Capital Leases
|
92 | 124 | — | — | — | |||||||||||||||
|
Involuntary termination
|
247 | 246 | — | — | — | |||||||||||||||
| $ | 1,227 | $ | 1,088 | $ | 332 | $ | 46 | — | ||||||||||||
Change Technology intends to fund these obligations from its cash on hand at December 31, 2001.
Quantitative and Qualitative Disclosures About Market Risk
Change Technology’s primary objective in investing in securities and other instruments is to preserve principal while at the same time maximizing yields without significantly increasing risk. To achieve this objective, Change Technology maintains a portfolio of cash and cash equivalents and money market funds. As of December 31, 2001, Change Technology held cash and cash equivalents with an average maturity of 45 days or less.
Properties
Change Technology leases approximately 10,900 square feet of office space at 537 Steamboat Road, Greenwich, Connecticut for use as executive offices. Change Technology currently utilizes approximately 3,500 of the 10,900 square feet and has sublet the remaining 7,400 square feet to a third party. The current lease expires in October 2003. In addition, Change Technology subleases office space at 16 West 19th Street, New York, New York 10011 and leases space at 111 Water Street, Baltimore, Maryland 21202.
Committees
Audit Committee
The Audit Committee is composed of Michael Gleason. This committee is charged with the responsibility of overseeing the financial reporting process of Change Technology. In the course of performing its functions, the Audit Committee (i) reviews Change Technology’s internal accounting controls and its audited financial statements, (ii) reviews with Change Technology’s independent auditors the scope of their audit, their report and their recommendations, (iii) considers the possible effect on the independence of such accountants in approving non-audit services requested of them and (iv) recommends the action to be taken with respect to the appointment of Change Technology’s independent auditors. All of the members of the Audit Committee are independent as defined by the rules of The Nasdaq Stock Market, Inc. The Audit Committee met five times in 2001.
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Audit Committee Report
The Audit Committee monitors Change Technology’s financial reporting process and internal control system on behalf of the board. In addition, the Committee recommends to the board of directors, subject to stockholder ratification, the selection of Change Technology’s independent auditors. The member of the Audit Committee is independent as defined by the rules of The Nasdaq Stock Market, Inc.
Management is responsible for Change Technology’s internal controls and the financial reporting process. Change Technology’s independent auditors, KPMG LLP, are responsible for performing an independent audit of Change Technology’s financial statements in accordance with generally accepted auditing standards and to issue a report thereon. The Audit Committee’s responsibility is to monitor and oversee these processes. The Audit Committee’s role does not provide any special assurance with regard to Change Technology’s financial statements, nor does it involve a professional evaluation of the quality of the audits performed by KPMG.
In this context, the Audit Committee has met and held discussions with management and KPMG. Management represented to the Committee that Change Technology’s financial statements were prepared in conformity with accounting principals generally accepted in the United States of America, and the Committee has reviewed and discussed the financial statements with management and KPMG. The Committee discussed with KPMG the matters required to be discussed by Statement on Auditing Standards No. 61 (Communication with Audit Committees).
In addition, the Audit Committee has had discussions with KPMG regarding KPMG’s independence from Change Technology and its management, including matters in the written disclosures required by the Independence Standards Board Standard No. 1 (Independence Discussions with Audit Committees).
The Audit Committee discussed with KPMG the overall scope and plans for their audits. The Committee meets with KPMG, with and without management present, to discuss the results of their examinations, the evaluations of Change Technology’s internal controls, and the overall quality of Change Technology’s financial reporting.
Based upon the Audit Committee’s discussions with management, KPMG and the Committee’s review of the representations of management and the report of KPMG to the Committee, the Committee recommended that the board include the audited financial statements in Change Technology’s Annual Report on Form 10-K for the year ended December 31, 2001 filed with the Commission.
Audit Committee Member
Compensation Committee
The Compensation Committee is composed of William E. Lipner (Chairman), James M. Dubin and Michael Gleason. The Compensation Committee is charged with the responsibility of (i) reviewing, advising and making recommendations with respect to employee salary and compensation plans, benefits and standards applicable to the executive officers of Change Technology, (ii) taking all actions with respect thereto that are not specifically reserved for the board and (iii) administering
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Report of the Compensation Committee
The Compensation Committee of the Board, which met six times last year and acted by written consent one time, reviews and determines the compensation of the Change Technology’s executive officers. It also reviews and approves any employment, severance or similar agreements for executive officers. In addition, the committee oversees and approves grants of stock options and other stock-based awards pursuant to the Company’s stock option plan to employees and non-employee directors. Mr. Dubin, Mr. Gleason and Mr. Lipner (Chairman) served on the compensation committee in 2001.
Policy and Performance Measures
Change Technology has entered into an employment agreement with its Chief Executive Officer. The agreement provides for a base salary, discretionary bonuses, and restricted stock and stock option awards. The committee believes that entering into this agreement is in Change Technology’s best interest because the structure of the agreement assists Change Technology in retaining its key officers and focusing the efforts and energies of those officers on further enhancing the long-term value of Change Technology for the stockholders. The total compensation reflected in the employment agreement is generally based upon the officer’s prior compensation levels and peer group benchmarking surveys. Overall, compensation is targeted at the top half to top quarter of Change Technology’s peer group companies in order to attract and retain highly qualified employees, and an emphasis is placed upon incentive-based compensation.
The Internal Revenue Code generally limits to $1,000,000 the amount of compensation that Change Technology may deduct in any year with respect to certain of our officers. Accordingly, the Compensation Committee endeavors to structure executive compensation so that most of it will be deductible. At the same time, the committee has the authority to award compensation in excess of the $1 million limit, regardless of whether such additional compensation will be deductible, in cases where the Compensation Committee determines in good faith that such compensation is appropriate.
Chief Executive Officer Compensation
During the last fiscal year, Change Technology entered into a three-year employment agreement with Mr. Avery with automatic one-year extensions. The agreement provides for a base salary of $280,000, as well as a discretionary bonus. Mr. Avery also agreed to a non-competition and confidentiality provision for a period of one-year following termination or resignation. See “Employment Agreements.” The committee also granted to Mr. Avery options to purchase 9,000,000 shares of common stock at a price per share of $0.03. One-fourth of these options will vest on each anniversary of the date of grant. The Compensation Committee approved and ratified the compensation paid to Mr. Avery for fiscal year 2001 based on Mr. Avery’s business experience and his responsibilities to, among other things, guide Change
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Compensation Committee Members
Nominating Committee
The Nominating Committee is composed of William Avery (Chairman) and William E. Lipner. The Nominating Committee is charged with the responsibility of reviewing and recommending to the board proposed nominees for directors of Change Technology. The Nominating Committee does not accept nominees recommended by security holders. The board of directors in its entirety acted as the Nominating Committee to nominate the current nominees for election to the board of directors.
CHANGE TECHNOLOGY MANAGEMENT
The executive officer of Change Technology is:
| Name | Age | Present Position With the Company | ||||
|
William Avery
|
52 | President, Chief Executive Officer, Chief Financial Officer, Secretary and Director | ||||
Additional information concerning Mr. Avery and the other directors is provided under “Election of Change Technology Directors.”
Compensation of Directors
Non-employee directors receive annual remuneration of $2,500 for serving as directors of Change Technology, and are reimbursed for out-of-pocket expenses incurred in connection with such service. Additionally, non-employee directors have been granted options to purchase Common Stock under Change Technology’s 2000 Stock Option Plan. See “Executive Compensation — Certain Relationships and Related Party Transactions — Stock Options.”
Executive Compensation
Summary of Cash and Certain Other Compensation
The following Summary Compensation Table sets forth the compensation awarded to, earned by or paid to the President, Chief Executive Officer and certain former executive officers of Change Technology during the fiscal years ended December 31, 2001 and 2000 for services rendered in all capacities to Change Technology and its subsidiaries.
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