<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, 1996 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, 1996 - 8,025,768 SHARES
<PAGE>
FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
September 30, March 31,
1996 1996
------------- ---------
ASSETS
------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 4,651 $10,827
Accounts receivable, less allowance for doubtful accounts
of $901 and $867 18,207 12,114
Inventories 40,543 34,890
Deferred income tax asset 2,484 1,723
Prepaids and other assets 4,684 2,948
------- -------
TOTAL CURRENT ASSETS 70,569 62,502
------- -------
PROPERTY AND EQUIPMENT 11,151 11,012
GOODWILL, less accumulated amortization of $700 and $649 2,035 1,789
OTHER ASSETS 8,264 7,566
------- -------
TOTAL ASSETS $92,019 $82,869
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued expenses $15,361 $16,678
Current portion of long-term debt 284 -
------- -------
TOTAL CURRENT LIABILITIES 15,645 16,678
------- -------
LONG-TERM LIABILITIES:
Long-term debt, net of current portion 6,929 -
Other liabilities 704 653
------- -------
TOTAL LONG-TERM LIABILITIES 7,633 653
------- -------
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 8,025,768 and 7,861,715 shares 48,894 48,599
Retained earnings 20,262 17,165
Foreign currency translation adjustment (415) (226)
------- -------
TOTAL SHAREHOLDERS' EQUITY 68,741 65,538
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $92,019 $82,869
======= =======
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
---------------------- ----------------------
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
SALES $ 24,231 $ 27,077 $ 39,302 $ 45,696
COST OF SALES 12,483 14,609 20,419 24,967
-------- -------- -------- --------
GROSS PROFIT 11,748 12,468 18,883 20,729
-------- -------- -------- --------
EXPENSES:
Sales and marketing 4,304 3,868 7,114 6,985
Research and development 1,355 1,435 2,734 2,708
General and administrative 2,059 2,045 4,008 3,845
Interest expense 105 2 115 4
Interest and investment income (37) (117) (83) (319)
-------- -------- -------- --------
Total expenses 7,786 7,233 13,888 13,223
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES 3,962 5,235 4,995 7,506
INCOME TAX PROVISION 1,505 1,989 1,898 2,852
-------- -------- -------- --------
NET INCOME $ 2,457 $ 3,246 $ 3,097 $ 4,654
======== ======== ======== ========
NET INCOME PER SHARE:
Primary $ .30 $ .39 $ .38 $ .56
======== ======== ======== ========
Fully diluted $ .30 $ .39 $ .38 $ .56
======== ======== ======== ========
WEIGHTED AVERAGE COMMON SHARES AND
COMMON EQUIVALENTS:
Primary 8,124 8,266 8,185 8,245
======== ======== ======== ========
Fully diluted 8,124 8,333 8,187 8,329
======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
------------------ RETAINED SHAREHOLDERS'
SHARES AMOUNT EARNINGS OTHER EQUITY
--------- ------- -------- ------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE--MARCH 31, 1996 7,861,715 $48,599 $17,165 $(226) $65,538
Issuance of common shares under
employee stock option plan 37,256 469 - - 469
Issuance of shares and amortization of deferred
compensation expense for shares issued for services
net of forfeitures (unearned portion $72) (1,350) 21 - - 21
Issuance of common shares for warrants exercised 189,993 1,235 - - 1,235
Issuance of common shares related to acquisition
of Systech GmbH 6,748 152 - - 152
Purchase and retirement of treasury shares received
under employee stock option plan and warrants exercised (68,594) (1,582) - - (1,582)
Income for the period - - 3,097 - 3,097
Foreign currency translation adjustment - - - (189) (189)
--------- ------- ------- ------ --------
BALANCE--SEPTEMBER 30, 1996 8,025,768 $48,894 $20,262 $(415) $68,741
========= ======= ======= ====== ========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
-------------------------- ----------------------------
1996 1995 1996 1995
------------ ------------ ------------- -----------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME $2,457 $ 3,246 $ 3,097 $ 4,654
ADJUSTMENTS TO RECONCILE NET INCOME TO
NET CASH PROVIDED BY OPERATING ACTIVITIES:
Depreciation and amortization 1,120 947 2,178 1,743
Provision for losses on accounts receivable 22 49 32 75
Loss on disposal of property and equipment 3 75 10 75
Deferred income tax benefit (301) - (761) 575
Source (use) of cash from change in operating
assets and liabilities excluding the effects of
acquisition:
Accounts receivable (7,334) (3,933) (6,093) (6,255)
Inventories 735 (6,163) (5,583) (13,090)
Prepaids and other assets (1,209) (175) (1,736) 57
Accounts payable and accrued expenses (115) (1,370) (1,418) 592
Other liabilities 26 - 51 -
-------- -------- -------- -------
NET CASH USED IN OPERATING ACTIVITIES (4,596) (7,324) (10,223) (11,574)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (951) (1,878) (1,499) (4,076)
Proceeds from sale of property and equipment 3 450 55 450
Change in other assets (665) (819) (1,484) (1,463)
Cash paid for Systech GmbH, net of cash acquired - - (171) -
-------- -------- -------- -------
NET CASH USED IN INVESTING ACTIVITIES (1,613) (2,247) (3,099) (5,089)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from mortgage - - 4,260 -
Principal payments of long-term debt (47) - (47) -
Proceeds from revolving credit agreement 3,000 - 3,000 -
Proceeds from issuance of common shares 2 445 122 741
-------- -------- -------- -------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,955 445 7,335 741
EFFECT OF EXCHANGE RATE CHANGES ON CASH 1 165 (189) 253
-------- -------- -------- -------
DECREASE IN CASH AND CASH EQUIVALENTS (3,253) (8,961) (6,176) (15,669)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 7,904 14,310 10,827 21,018
-------- -------- -------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $4,651 $ 5,349 $ 4,651 $ 5,349
======== ======== ======== =======
SCHEDULE OF NON-CASH FINANCING ACTIVITIES:
Purchase and retirement of treasury shares
received under employee stock option plan and
warrants exercised. $ - $ - $ 1,582 $ -
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED
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, 1996.
The financial statements for the periods ended September 30, 1996 and 1995 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. LONG-TERM DEBT
During the quarter ended June 30, 1996, the Company obtained a mortgage on its
new facility in Burlington, New Jersey. The mortgage totaling $4,260,000 has
monthly principal payments of $23,667, plus interest, and matures on June 28,
2006. Interest on the mortgage is currently payable at 1% over LIBOR. The
Company has the option to convert the mortgage to a fixed interest rate.
Long-term debt as of September 30, 1996 consisted of the following (in
thousands):
<TABLE>
<S> <C>
Mortgage note $4,213
Revolving credit 3,000
------
7,213
Less: current portion (284)
------
Total $6,929
======
</TABLE>
2. SUBSEQUENT EVENT
On October 4, 1996, the Company acquired certain assets and a trademark license
for the Rolodex(R) electronics product line for approximately $16 million from
Insilco Corporation. The acquisition gives the Company the right to build and
market certain electronic products under the acquired trademarks. The Company
utilized its revolving line of credit to finance the acquisition.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1996 AS COMPARED WITH SEPTEMBER 30, 1995:
Net Sales
Sales of $24,231,000 for the quarter ended September 30, 1996 were 11% lower
than sales of $27,077,000 for the same quarter one year earlier. The sales
decrease is attributable to lower sales of electronic books in the domestic
consumer market offset in part by increases in sales outside of the United
States. Royalties from technology licenses remained constant at approximately 2%
of sales.
Gross Profits
Decreased sales primarily contributed to the decrease in gross profits from
$12,468,000 to $11,748,000. Gross profit margins increased to 48% as compared
with 46% last year due to favorable product mix and lower price paid for solid
state memory. The Company reported net income of $2,457,000 or $.30 per share
for the second quarter ending September 30, 1996, compared with earnings of
$3,246,000 or $.39 per share last year.
Operating Expenses
Total operating expenses increased to $7,786,000 (32% of sales) in the current
quarter as compared with $7,233,000 (27% of sales) in the same quarter last
year. Sales and marketing expenses increased from $3,868,000 (14% of sales) to
$4,304,000 (18% of sales) as the Company increased advertising in both the
domestic and international markets. Research and development expenses were
constant at $1,355,000 (6% of sales) compared with $1,435,000 (5% of sales).
7
<PAGE>
General and administrative expenses remained constant, being $2,059,000 (8% of
sales) in the present period as compared with $2,045,000 (8% of sales) last
year. Interest and investment income decreased from $117,000 to $37,000 due to
the employment of cash for inventory and increased accounts receivable. Interest
expense increased in the quarter as interest was paid in connection with the
mortgage placed on the Company's headquarters facility during the first fiscal
quarter and borrowings under the revolving credit facility to support seasonal
cash requirements.
SIX MONTHS ENDED SEPTEMBER 30, 1996 AS COMPARED WITH SEPTEMBER 30, 1995:
Net Sales
Sales of $39,302,000 were 14% lower than sales of $45,696,000 for the comparable
period one year earlier. The sales decrease is attributable to lower sales of
electronic books in the domestic consumer market offset in part by international
sales increases. Royalties from technology licenses decreased from 3% to 2% of
total sales.
Gross Profits
Decreased sales primarily contributed to the decrease in gross profits from
$20,729,000 to $18,883,000. Gross profit margins increased to 48% as compared
with 45% last year due to favorable product mix and lower price paid for solid
state memory. The Company reported net income of $3,097,000 or $.38 per share
for the six months ending September 30, 1996 compared with earnings of
$4,654,000 or $.56 per share last year.
Operating Expenses
Total expenses were to $13,888,000 (35% of sales) in the period up from
$13,223,000 (29% of sales) last year. Sales and marketing expenses increased
from last year's level of $6,985,000 (15% of sales) to $7,114,000 (18% of sales)
primarily due to costs associated with new subsidiaries in
8
<PAGE>
international markets and increased advertising during the second quarter.
Research and development expenses were relatively constant at $2,734,000 (7% of
sales) as compared with $2,708,000 (6% of sales) in the period one year earlier.
General and administrative expenses of $4,008,000 (10% of sales) were higher
than $3,845,000 (8% of sales) last year. Interest and investment income
decreased and interest expense increased for the reasons stated in the quarterly
comparisons.
CHANGES IN FINANCIAL CONDITION
Inventories increased from $34,890,000 at March 31, 1996 to $40,543,000 at the
end of the September quarter due primarily to lower than expected sales in the
first and second fiscal quarters and production to support sales in the
seasonally active third quarter. The inventory increase in part was required in
order to bring new products to market and to build inventory to support
international sales in new markets. Cash and cash equivalents decreased from
$10,827,000 at March 31 to $4,651,000 as working capital was employed to
support higher levels of accounts receivable and inventory. Accounts receivable
increased from $12,114,000 to $18,207,000 at September 30 as a result of higher
sales in the second quarter. Current liabilities decreased from $16,678,000
at March 31 to $15,645,000 at September 30. Having expended approximately $6.5
million from available cash flow from operations for the construction and
outfitting of its new corporate headquarters during fiscal 1995 and 1996, the
Company placed a mortgage in the principal amount of $4,260,000 on the property
in the fiscal first quarter. The Company borrowed $3,000,000 against its
revolving credit facility to finance seasonal cash requirements during the
fiscal second quarter.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of liquidity during the last three fiscal years was
cash flow from operations. Management believes that cash flow from operations
9
<PAGE>
and its bank line of credit will be adequate to provide for the Company's
liquidity and capital needs for the foreseeable future.
In order to accommodate seasonal inventory and accounts receivable buildup, the
Company may finance its day to day operations by drawing down advances, on an as
needed basis, against a $35 million revolving line of credit facility which runs
through October 1998. At September 30, 1996, the Company had borrowings of
$3,000,000 under the bank line of credit and on October 4, 1996, the Company
borrowed approximately $16,000,000 in order to purchase from Insilco Corporation
("Insilco") certain assets and a trademark license relating to the Rolodex (R)
electronics business in order to facilitate its entrance into the electronic
organizer business. The Company believes that it has sufficient borrowing
availability 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
pays a commitment fee of 1/4 of 1% per annum on the unused portion of the line
of credit. The Company has no material commitments for capital expenditures in
the next twenty-four months.
The Company's ability to generate revenues and profits is subject to certain
risks and uncertainties in its business, including, among other things, the
timely availability and acceptance of new electronic books, changes in
technology, the impact of competitive electronic products, the management of
inventories and growth, the Company's dependence on third party component
suppliers and manufacturers, including those that provide Franklin-specific
parts, and the ability of the Company to forecast customer demand for its
electronic books.
PART II
ITEM 1. LEGAL PROCEEDINGS -
In April 1995 Berkeley Speech Technologies ("Berkeley") filed a declaratory
judgment action in the United States District Court for the Northern District of
California to invalidate one of Franklin's registered copyrights, which action
also demands monetary damages. Franklin filed a counterclaim against Berkeley
for infringing Franklin's registered copyright and for breach of contract. The
10
<PAGE>
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.
The Company is subject to litigation from time to time arising in the ordinary
course of its business. The Company does not believe that any such litigation is
likely, individually or in the aggregate, to have a material adverse effect on
the financial condition or results of operations of the Company.
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 24, 1996.
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, nine incumbent
directors were re-elected with Edward H. Cohen receiving 5,415,972 votes with
59,255 votes withheld; Morton E. David and Michael R. Strange each receiving
5,409,172 votes with 66,325 votes withheld; Bernard Goldstein receiving
5,414,972 votes with 60,525 votes withheld; Leonard M. Lodish and Jerry R.
Schubel each receiving 5,423,472 votes with 52,025 votes withheld; Howard L.
Morgan and James H. Simons each receiving 5,415,172 votes with 60,325 votes
withheld; and William H. Turner receiving 5,417,472 votes, with 58,025 votes
withheld. Other matters voted upon were changes to the Company's Employee Stock
Option Plan, which matter was passed by a vote of 4,831,813 for, 601,740
against, and 13,342 abstentions; and shareholders ratified the appointment of
Feldman Radin & Co., P.C. as auditors for the Company's 1997 fiscal year by vote
of 5,363,311 for, 106,499 against, and 5,687 abstentions.
ITEM 5. OTHER INFORMATION - NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K - The Company filed a report on Form
8-K with the Securities and Exchange Commission on October 18, 1996 in
connection with its October 4, 1996 acquisition of the trademark license and
assets from Insilco referenced above.
11
<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 8, 1996 /s/ Gregory J. Winsky
- ------------------ ------------------------------------
Date Gregory J. Winsky
Senior Vice President,
General Counsel
(Duly Authorized Officer)
NOVEMBER 8, 1996 /s/ Kenneth H. Lind
- ------------------- ------------------------------------
Date Kenneth H. Lind
Vice President, Finance and
Treasurer
(Principal Financial Officer)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF FRANKLIN ELECTRONIC PUBLISHERS,
INCORPORATED 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-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 4,651
<SECURITIES> 0
<RECEIVABLES> 19,108
<ALLOWANCES> 901
<INVENTORY> 40,543
<CURRENT-ASSETS> 70,569
<PP&E> 11,151
<DEPRECIATION> 0
<TOTAL-ASSETS> 92,019
<CURRENT-LIABILITIES> 15,645
<BONDS> 0
0
0
<COMMON> 48,894
<OTHER-SE> 19,847
<TOTAL-LIABILITY-AND-EQUITY> 92,019
<SALES> 39,302
<TOTAL-REVENUES> 39,302
<CGS> 20,419
<TOTAL-COSTS> 20,419
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 115
<INCOME-PRETAX> 4,995
<INCOME-TAX> 1,898
<INCOME-CONTINUING> 3,097
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,097
<EPS-PRIMARY> .38
<EPS-DILUTED> .38
</TABLE>
