<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter ended September 30, 1995 Commission File No. 0-14841
FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 22-2476703
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE FRANKLIN PLAZA, BURLINGTON, NEW JERSEY 08016-4907
(Address of principal executive office) (Zip Code)
Registrant's telephone number (609) 386-2500
Indicate by check mark whether Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceeding 12 months (or for such shorter period that Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
COMMON STOCK OUTSTANDING AS OF
SEPTEMBER 30, 1995--7,781,722 SHARES
<PAGE>
FRANKLIN ELECTRONIC PUBLISHERS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
September 30, March 31,
1995 1995
------------- ---------
<S> <C> <C>
ASSETS
------
Current Assets:
Cash and cash equivalents $ 5,349 $21,018
Accounts receivable, less allowance for
doubtful accounts of $900 and $859 16,106 9,926
Inventories 34,006 20,916
Deferred income tax asset 1,047 1,622
Prepaids and other assets 1,901 1,958
------- -------
Total Current Assets 58,409 55,440
------- -------
Property and Equipment 10,719 8,111
Goodwill, less accumulated amortization
of $609 and $568 1,829 1,870
Other Assets 5,917 5,153
------- -------
Total Assets $76,874 $70,574
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts payable and accrued expenses $17,193 $16,601
------- -------
Shareholders' Equity:
Preferred stock, $2.50 par value, authorized
10,000,000 shares, none issued or outstanding -- --
Common stock, no par value, authorized 50,000,000
shares, issued and outstanding 7,781,722 and
7,710,150 shares 48,187 47,386
Retained earnings 11,453 6,799
Foreign currency translation adjustment 41 (212)
------- -------
Total Shareholders' Equity 59,681 53,973
------- -------
Total Liabilities and Shareholders' Equity $76,874 $70,574
======= =======
</TABLE>
See notes to consolidated financial statement.
2
<PAGE>
FRANKLIN ELECTRONIC PUBLISHERS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNT)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
--------------------------- ---------------------------
Pro-Forma Pro-Forma
1995 1994 1994 1995 1994 1994
------- ------- --------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Sales $27,077 $21,258 $21,258 $45,696 $36,383 $36,383
Cost of Sales 14,609 12,170 12,170 24,967 20,445 20,445
------- ------- ------- ------- ------- -------
Gross Profit 12,468 9,088 9,088 20,729 15,938 15,938
------- ------- ------- ------- ------- -------
Expenses:
Sales and marketing 3,868 2,533 2,533 6,985 5,256 5,256
Research and
development 1,435 1,171 1,171 2,708 2,311 2,311
General and
administrative 2,045 1,637 1,637 3,845 3,069 3,069
Interest (net) and
investment income (115) (51) (51) (315) (114) (114)
------- ------- ------- ------- ------- -------
7,233 5,290 5,290 13,223 10,522 10,522
------- ------- ------- ------- ------- -------
Income From Operations 5,235 3,798 3,798 7,506 5,416 5,416
Non-operating charges
to income -- -- -- -- 1,716 --
------- ------- ------- ------- ------- -------
Income Before Income
Taxes 5,235 3,798 3,798 7,506 3,700 5,416
Income Tax (Benefit)
Provision 1,989 209 1,443 2,852 (1,518) 2,058
------- ------- ------- ------- ------- -------
Net Income $ 3,246 $ 3,589 $ 2,355 $ 4,654 $ 5,218 $ 3,358
======= ======= ======= ======= ======= =======
Net Income Per Share:
Primary $ .39 $ .46 $ .30 $ .56 $ .67 $ .43
======= ======= ======= ======= ======= =======
Fully Diluted $ .39 $ .46 $ .30 $ .56 $ .66 $ .43
======= ======= ======= ======= ======= =======
Weighted Average Common
Shares and Common
Equivalents:
Primary 8,266 7,824 7,824 8,245 7,776 7,776
======= ======= ======= ======= ======= =======
Fully Diluted 8,333 7,876 7,876 8,329 7,853 7,853
======= ======= ======= ======= ======= =======
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
FRANKLIN ELECTRONIC PUBLISHERS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Common Stock Total
------------------ Retained Shareholders'
Shares Amount Earnings Other Equity
--------- ------- -------- ----- -------------
<S> <C> <C> <C> <C> <C>
Balance--March 31, 1995 7,710,150 $47,386 $ 6,799 $(212) $53,973
Issuance of common shares
under employee stock option
plan 64,630 691 -- -- 691
Issuance of shares and
amortization of deferred
compensation expense for
shares issued for services
net of forfeitures (unearned
portion $195) (750) 60 -- -- 60
Issuance of common shares for
warrants exercised 7,692 50 -- -- 50
Income for the period -- -- 4,654 -- 4,654
Foreign currency translation
adjustment -- -- -- 253 253
--------- ------- ------- ----- -------
Balance--September 30, 1995 7,781,722 $48,187 $11,453 $ 41 $59,681
========= ======= ======= ===== =======
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
FRANKLIN ELECTRONIC PUBLISHERS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
September 30, September 30,
---------------- -----------------
1995 1994 1995 1994
------- ------- -------- -------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 3,246 $ 3,589 $ 4,654 $ 5,218
Adjustments To Reconcile Net Income To
Net Cash Provided By Operating
Activities:
Depreciation and amortization 947 671 1,743 1,351
Provision for losses on accounts
receivable 49 119 75 138
Loss on disposal of property and
equipment 75 -- 75 --
Write down of fixed assets -- -- -- 350
Loss on sales of investment securities,
net -- 9 -- 101
Revaluation of investment securities to
market -- -- -- 416
Accrued retirement -- -- -- 560
Deferred income tax benefit -- -- 575 (1,722)
Source (use) of cash from change in
operating assets and liabilities:
Accounts receivable (3,933) (5,944) (6,255) (7,171)
Inventories (6,163) (4,046) (13,090) (9,509)
Prepaids and other assets (175) (243) 57 (425)
Accounts payable and accrued expenses (1,370) 2,639 592 3,939
------- ------- -------- -------
Net Cash Used In Operating Activities (7,324) (3,206) (11,574) (6,754)
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments (net) in investment
securities -- 4,029 -- 4,449
Purchase of property and equipment (1,878) (441) (4,076) (1,164)
Proceeds from sale of property and
equipment 450 -- 450 --
Change in other assets (819) (597) (1,463) (714)
------- ------- -------- -------
Net Cash Provided By (Used In) Investing
Activities (2,247) 2,991 (5,089) 2,571
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common shares 445 738 741 791
------- ------- -------- -------
Net Cash Provided By Financing
Activities 445 738 741 791
Effect Of Exchange Rate Changes On Cash 165 (34) 253 (112)
------- ------- -------- -------
Increase (Decrease) In Cash And Cash
Equivalents (8,961) 489 (15,669) (3,504)
Cash And Cash Equivalents At Beginning Of
Period 14,310 7,019 21,018 11,012
------- ------- -------- -------
Cash And Cash Equivalents At End Of
Period $ 5,349 $ 7,508 $ 5,349 $ 7,508
======= ======= ======== =======
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
FRANKLIN ELECTRONIC PUBLISHERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Reference is made to the financial statements included in the Company's Annual
Report (Form 10-K) filed with the Securities and Exchange Commission for the
year ended March 31, 1995.
The financial statements for the periods ended September 30, 1995 and 1994 are
unaudited and include all adjustments which, in the opinion of management, are
necessary to a fair statement of the results of operations for the periods then
ended. All such adjustments are of a normal recurring nature. The results of
the Company's operations for any interim period are not necessarily indicative
of the results of the Company's operations for a full fiscal year.
1. PRO-FORMA INCOME STATEMENT
The Company recognized its remaining federal tax benefits applicable to future
years in the June quarter of 1994 and, as a result, the Company's earnings
beginning in the June quarter of 1995 have been reported on a fully taxed
basis. The pro-forma 1994 second quarter and year to date results are reported
on a fully taxed basis and exclude the impact of the non-operating charges.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
QUARTERLY FINANCIAL HIGHLIGHTS
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNT)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
------------------- -----------------
1995 1994 1995 1994
Reported: --------- --------- -------- --------
<S> <C> <C> <C> <C>
Income From Operations: $ 5,235 $ 3,798 $ 7,506 $ 5,416
Net Income: $ 3,246 $ 3,589 $ 4,654 $ 5,218
Net Income Per Share: $ .39 $ .46 $ .56 $ .66
- ------------------------------------------------------------------
Pro-Forma:(a)
Income From Operations: $ 5,235 $ 3,798 $ 7,506 $ 5,416
Net Income: $ 3,246 $ 2,355 $ 4,654 $ 3,358
Net Income Per Share: $ .39 $ .30 $ .56 $ .43
- ------------------------------------------------------------------
</TABLE>
(a) The Company recognized its remaining federal tax benefits applicable to
future years in the June quarter of 1994 and, as a result, the Company's
earnings beginning in the June quarter of 1995 have been reported on a
fully taxed basis. The pro-forma 1994 second quarter and year to date
results are reported on a fully taxed basis and exclude the impact of the
non-operating charges.
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1995 AS COMPARED WITH SEPTEMBER 30, 1994:
Net Sales
Sales of $27,077,000 for the quarter ended September 30, 1995 were 27% higher
than sales of $21,258,000 for the same quarter one year earlier. Sales of
electronic books increased by 29% to $26,442,000 (98% of sales) from
$20,471,000 (96% of sales) in the quarter one year ago. Sales increased due to
new electronic books such as the BOOKMAN(R) series, with revenue gains
attributable to the Company's domestic consumer division supported by improved
performance by international operations. Royalties from technology licenses
decreased as a percentage of sales from 3% to 2%.
Gross Profits
Gross profit margins increased from 43% in the prior year's quarter to 46% as a
result of manufacturing cost efficiencies and a favorable product mix. As gross
profits increased from $9,088,000 in fiscal 1995 to $12,468,000 in the fiscal
1996 September quarter coupled with the increase in sales, the Company
experienced a 38% increase in earnings for the second quarter to $3,246,000,
$.39 per share, as compared with earnings of $2,355,000, $.30 per share, last
year on a comparable basis.
7
<PAGE>
Operating Expenses
Total operating expenses increased to $7,233,000, or 27% of sales, in the
current quarter as compared with $5,290,000, or 25% of sales, in the same
quarter last year. Sales and marketing expenses increased from $2,533,000 (12%
of sales) to $3,868,000 (14% of sales) primarily due to increased advertising
and marketing expenditures and the opening of two new foreign sales
subsidiaries. Research and development expenses increased to $1,435,000 (5% of
sales) as compared with $1,171,000 (6% of sales) in the period one year earlier
as the Company accelerated its development efforts for new products in the
BOOKMAN series. General and administrative expenses remained constant at 8% of
sales, increasing from $1,637,000 to $2,045,000 to support expansion into new
markets, such as Germany and Australia. Interest and investment income
increased from $51,000 to $115,000 during the quarter due to the Company's
strong cash position during the period.
SIX MONTHS ENDED SEPTEMBER 30, 1995 AS COMPARED WITH SEPTEMBER 30, 1994:
Net Sales
Sales of $45,696,000 were 26% higher than sales of $36,383,000 for the
comparable period one year earlier. During the period, sales of electronic
books increased by 27% from $34,758,000 (96% of sales) to $44,156,000 (97% of
sales). The increase in sales of electronic books is primarily attributed to
the introduction of new titles. Royalties from technology licenses decreased as
a percentage of sales from 4% to 3%.
Gross Profits
Gross profits increased from $15,938,000 (44% of sales) to $20,729,000 (45% of
sales) as sales increased and margins increased for the reasons set forth in
the three month comparison. As gross margins and sales increased, the Company's
net earnings increased to $4,654,000, $.56 per share, for the six month period
compared with $3,358,000, $.43 per share, on a comparable basis one year
earlier.
Operating Expenses
Total expenses increased to $13,223,000 in the period from $10,522,000 last
year. Sales and marketing expenses increased by $1,729,000 from last year's
level of $5,256,000 (14% of sales) to $6,985,000 (15% of sales). Research and
development expenses were $2,708,000 (6% of sales) as compared with $2,311,000
(6% of sales) in the period one year earlier as development efforts for new
products continued unabated. General and administrative expenses, remaining at
8% of sales, increased by $776,000 to $3,845,000, from $3,069,000. Interest and
investment income increased from $114,000 to $315,000 due to the Company's
strong cash position during the period.
CHANGES IN FINANCIAL CONDITION
Inventories increased from $20,916,000 at March 31, 1995 to $34,006,000 at
September 30 primarily due to planned inventory increases in anticipation of
increasing sales in the third quarter. Inventory increases were also a function
of the establishment of new international subsidiaries. Cash and cash
equivalents decreased from $21,018,000 at March 31 to $5,349,000 as working
capital was employed to support seasonal inventory build-up, accounts
receivable increases and construction and outfitting of the Company's new
8
<PAGE>
facility. Accounts receivable increased from $9,926,000 to $16,106,000 at
September 30 as a result of higher sales in the second quarter over the first
fiscal quarter. Current liabilities increased slightly from $16,601,000 at
March 31 to $17,193,000 at September 30 as the Company's working capital was
employed to increase inventory levels for the seasonally active third quarter.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of liquidity over the last three fiscal years was
cash flow from operations. Management believes that cash flow from operations
and its bank line of credit will be adequate to provide for the Company's
liquidity and capital needs for at least the next fiscal year.
In order to accommodate seasonal inventory and accounts receivable buildup, the
Company may finance its day to day operations by drawing down advances against
a recently increased $35,000,000 revolving line of credit facility. The
Company's new credit arrangement with its lending bank has been extended
through October 1998. At September 30, 1995, there were no borrowings under the
bank line of credit. The Company believes that it has sufficient borrowing
capacity to utilize for seasonal cash requirements. Borrowings against the line
of credit bear interest at the bank's prime rate or 1 1/2% over LIBOR. The
Company also pays a commitment fee of 1/4 of 1% per annum on the unused portion
of the line of credit.
The Company occupied its new facility during the June 1995 quarter. During the
past year, the Company expended approximately $6.5 million from available cash
flow from operations for the construction and outfitting of its new facility.
The Company has no additional material commitments for capital expenditures in
the next twenty-four months.
9
<PAGE>
PART II
ITEM 1. LEGAL PROCEEDINGS
In April 1995 Berkeley Speech Technologies ("Berkeley") filed a declaratory
judgment action to invalidate one of the Company's registered copyrights, which
action also demands monetary damages. The Company filed counterclaims against
Berkeley for infringing the Company's registered copyright and for contract
violations. The Company believes that Berkeley's action is without merit and
intends vigorously to defend this action and to prosecute its counterclaims;
therefore, the Company believes that the resolution of this matter will not
have a material adverse effect on its financial condition and results of
operations as reported in the accompanying financial statements.
ITEM 2. CHANGES IN SECURITIES--NONE
ITEM 3. DEFAULT UPON SENIOR SECURITIES--NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS--
The Annual Meeting of Shareholders of the Company was held on July 27, 1995.
Reference is made to the Company's Proxy Statement furnished to shareholders in
connection with the solicitation of proxies in connection with that Annual
Meeting. In connection with the annual election of directors, all ten incumbent
directors were re-elected with each of Messrs. Edward H. Cohen, Morton E.
David, Bernard Goldstein, Michael R. Strange and William H. Turner receiving
6,228,285 votes for their election, with 50,124 votes for their election
withheld; Messrs. Leonard M. Lodish, Howard L. Morgan, Jerry R. Schubel, James
H. Simons, and Richard E. Snyder receiving 6,228,275 votes for their election,
with 50,134 votes for their election withheld. Other matters voted upon were
changes to the Company's Employee Stock Option Plan including an increase from
1,750,000 shares to 2,250,000 shares of the Company's common stock subject to
the Plan, which matter passed by a vote of 3,589,957 for, 1,344,945 against and
6,620 abstentions; shareholders ratified the appointment of Feldman Radin &
Co., P.C. as auditors for the Company's 1996 fiscal year by vote of 6,271,867
for, 4,500 against, and 2,042 abstentions.
ITEM 5. OTHER INFORMATION--NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K--NONE
10
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
FRANKLIN ELECTRONIC PUBLISHERS,
INCORPORATED
REGISTRANT
NOVEMBER 2, 1995 /s/ Gregory J. Winsky
________________ ___________________________________________________
Date Gregory J. Winsky
Senior Vice President,
General Counsel
(Duly Authorized Officer)
NOVEMBER 2, 1995 /s/ Kenneth H. Lind
________________ ___________________________________________________
Date Kenneth H. Lind
Vice President, Finance and
Treasurer
(Chief Accounting Officer)
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF FRANKLIN ELECTRONIC PUBLISHERS, INC. AND
SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-START> APR-01-1995
<PERIOD-END> SEP-30-1995
<CASH> 5,349
<SECURITIES> 0
<RECEIVABLES> 17,006
<ALLOWANCES> 900
<INVENTORY> 34,006
<CURRENT-ASSETS> 58,409
<PP&E> 10,719
<DEPRECIATION> 0
<TOTAL-ASSETS> 76,874
<CURRENT-LIABILITIES> 17,193
<BONDS> 0
<COMMON> 48,187
0
0
<OTHER-SE> 11,494
<TOTAL-LIABILITY-AND-EQUITY> 76,874
<SALES> 45,696
<TOTAL-REVENUES> 45,696
<CGS> 24,967
<TOTAL-COSTS> 24,967
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 7,506
<INCOME-TAX> 2,852
<INCOME-CONTINUING> 4,654
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,654
<EPS-PRIMARY> .56
<EPS-DILUTED> .56
</TABLE>
