<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 December 31, 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 preceding 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
DECEMBER 31, 1995--7,851,682 SHARES
<PAGE>
FRANKLIN ELECTRONIC PUBLISHERS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
December 31, March 31,
1995 1995
------------ ---------
<S> <C> <C>
ASSETS
------
Current Assets:
Cash and cash equivalents $ 5,937 $21,018
Accounts receivable, less allowance for doubtful
accounts of $941 and $859 21,921 9,926
Inventories 33,400 20,916
Deferred income tax asset 1,047 1,622
Prepaids and other assets 1,894 1,958
------- -------
Total Current Assets 64,199 55,440
------- -------
Property and Equipment 11,048 8,111
Goodwill, less accumulated amortization of $629 and $568 1,809 1,870
Other Assets 6,467 5,153
------- -------
Total Assets $83,523 $70,574
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts payable and accrued expenses $19,627 $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 7,851,682 and 7,710,150
shares 48,479 47,386
Retained earnings 15,621 6,799
Foreign currency translation adjustment (204) (212)
------- -------
Total Shareholders' Equity 63,896 53,973
------- -------
Total Liabilities and Shareholders' Equity $83,523 $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 Nine Months Ended
December 31, December 31,
--------------------------- ---------------------------
Pro-Forma Pro-Forma
1995 1994 1994 1995 1994 1994
------- ------- --------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Sales $34,451 $29,194 $29,194 $80,147 $65,577 $65,577
Cost of Sales 17,749 16,171 16,171 42,716 36,616 36,616
------- ------- ------- ------- ------- -------
Gross Profit 16,702 13,023 13,023 37,431 28,961 28,961
------- ------- ------- ------- ------- -------
Expenses:
Sales and marketing 6,380 4,626 4,626 13,365 9,882 9,882
Research and
development 1,347 1,275 1,275 4,055 3,586 3,586
General and
administrative 2,344 1,761 1,761 6,189 4,830 4,830
Interest (net) and
investment income (92) (50) (50) (407) (164) (164)
------- ------- ------- ------- ------- -------
9,979 7,612 7,612 23,202 18,134 18,134
------- ------- ------- ------- ------- -------
Income from Operations 6,723 5,411 5,411 14,229 10,827 10,827
Non-operating charges
to income -- -- -- -- 1,716 --
------- ------- ------- ------- ------- -------
Income Before Income
Taxes 6,723 5,411 5,411 14,229 9,111 10,827
Income Tax (Benefit)
Provision 2,555 298 2,056 5,407 (1,220) 4,114
------- ------- ------- ------- ------- -------
Net Income $ 4,168 $ 5,113 $ 3,355 $ 8,822 $10,331 $ 6,713
======= ======= ======= ======= ======= =======
Net Income Per Share:
Primary $ .50 $ .64 $ .42 $ 1.06 $ 1.32 $ .85
======= ======= ======= ======= ======= =======
Fully Diluted $ .50 $ .63 $ .42 $ 1.06 $ 1.29 $ .84
======= ======= ======= ======= ======= =======
Weighted Average Common
Shares and Common
Equivalents:
Primary 8,374 8,002 8,002 8,300 7,854 7,854
======= ======= ======= ======= ======= =======
Fully Diluted 8,375 8,068 8,068 8,303 8,027 8,027
======= ======= ======= ======= ======= =======
</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 144,408 1,335 -- -- 1,335
Issuance of shares and
amortization of deferred
compensation expense for
shares issued for services
net of forfeitures
(unearned portion $152) (1,850) 86 -- -- 86
Issuance of common shares
for warrants exercised 7,692 50 -- -- 50
Purchase and retirement of
treasury shares received
under employee stock option
plan (8,718) (378) -- -- (378)
Income for the period -- -- 8,822 -- 8,822
Foreign currency translation
adjustment -- -- -- 8 8
--------- ------- ------- ----- -------
Balance--December 31, 1995 7,851,682 $48,479 $15,621 $(204) $63,896
========= ======= ======= ===== =======
</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 Nine Months
Ended Ended
December 31, December 31,
---------------- ------------------
1995 1994 1995 1994
------- ------- -------- --------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 4,168 $ 5,113 $ 8,822 $ 10,331
Adjustments To Reconcile Net Income To
Net Cash Provided By Operating
Activities:
Depreciation and amortization 987 670 2,730 2,021
Provision for losses on accounts
receivable 41 195 116 333
Loss on disposal of property and
equipment 21 -- 96 --
Write down of fixed assets -- -- -- 350
Loss on sales of investment
securities, net -- -- -- 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 (5,856) (6,954) (12,111) (14,125)
Inventories 606 5,862 (12,484) (3,647)
Prepaids and other assets 7 354 64 (71)
Accounts payable and accrued expenses 2,434 (1,721) 3,026 2,218
------- ------- -------- --------
Net Cash Provided By (Used In)
Operating Activities 2,408 3,519 (9,166) (3,235)
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments (net) in investment
securities -- -- -- 4,449
Purchase of property and equipment (959) (2,356) (5,035) (3,520)
Proceeds from sale of property and
equipment 21 -- 471 --
Change in other assets (903) (310) (2,366) (1,024)
------- ------- -------- --------
Net Cash Used In Investing Activities (1,841) (2,666) (6,930) (95)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common
shares 644 222 1,385 1,013
Purchase and retirement of treasury
shares received under employee stock
option plan (378) -- (378) --
------- ------- -------- --------
Net Cash Provided By Financing
Activities 266 222 1,007 1,013
Effect Of Exchange Rate Changes On Cash (245) 134 8 22
------- ------- -------- --------
Increase (Decrease) In Cash And Cash
Equivalents 588 1,209 (15,081) (2,295)
Cash And Cash Equivalents At Beginning
Of Period 5,349 7,508 21,018 11,012
------- ------- -------- --------
Cash And Cash Equivalents At End Of
Period $ 5,937 $ 8,717 $ 5,937 $ 8,717
======= ======= ======== ========
</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 December 31, 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 third 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 Nine Months Ended
December 31, December 31,
------------------- -----------------
1995 1994 1995 1994
Reported: --------- --------- -------- --------
<S> <C> <C> <C> <C>
Income From Operations: $ 6,723 $ 5,411 $ 14,229 $ 10,827
Net Income: $ 4,168 $ 5,113 $ 8,822 $ 10,331
Net Income Per Share: $ .50 $ .63 $ 1.06 $ 1.29
- ------------------------------------------------------------------
Pro-Forma:(a)
Income From Operations: $ 6,723 $ 5,411 $ 14,229 $ 10,827
Net Income: $ 4,168 $ 3,355 $ 8,822 $ 6,713
Net Income Per Share: $ .50 $ .42 $ 1.06 $ .84
- ------------------------------------------------------------------
</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 third 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 DECEMBER 31, 1995 AS COMPARED WITH DECEMBER 31, 1994:
Net Sales
Sales of $34,451,000 for the quarter ended December 31, 1995 were 18% higher
than sales of $29,194,000 for the same quarter one year earlier. Sales of
electronic books increased by 17% to $33,336,000 (97% of sales) from
$28,432,000 (97% 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 increased
sales by foreign subsidiaries. Royalties from technology licenses increased
from 2% of sales to 3% of sales.
Gross Profits
Gross profit margins increased from 45% in the prior year's quarter to 48% as a
result of manufacturing cost efficiencies aided by sales of BOOKMAN cards that
generally carry higher margins than platforms. As gross profits increased from
$13,023,000 in fiscal 1995 to $16,702,000 in the fiscal 1996 December quarter
coupled with the increase in sales, the Company experienced a 24% increase in
earnings for the third quarter to $4,168,000, $.50 per share, as compared with
earnings of $3,355,000, $.42 per share, last year on a comparable basis.
7
<PAGE>
Operating Expenses
Total operating expenses increased to $9,979,000, or 29% of sales, in the
current quarter as compared with $7,612,000, or 26% of sales, in the same
quarter last year. Sales and marketing expenses increased from $4,626,000 (16%
of sales) to $6,380,000 (19% of sales) primarily due to the initiation of a
television advertising campaign for BOOKMAN products. Research and development
expenses increased to $1,347,000 as compared with $1,275,000 (in both cases, 4%
of sales) in the period one year earlier as the Company continued to focus its
development efforts on new products for international markets and new titles in
the BOOKMAN series. General and administrative expenses increased from
$1,761,000 (6% of sales) to $2,344,000 (7% of sales) to support expansion into
new markets, such as Germany and Australia.
NINE MONTHS ENDED DECEMBER 31, 1995 AS COMPARED WITH DECEMBER 31, 1994:
Net Sales
Sales of $80,147,000 were 22% higher than sales of $65,577,000 for the
comparable period one year earlier. During the period, sales of electronic
books increased from $63,190,000 (96% of sales) to $77,492,000 (97% of sales).
The increase in sales of electronic books is based on the same factors
discussed with respect to quarterly results. Royalties from technology licenses
remained at 3% of total sales.
Gross Profits
Gross profits increased from $28,961,000 (44% of sales) to $37,431,000 (47% of
sales) as sales 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 $8,822,000, $1.06 per share, for the nine month period
compared with $6,713,000, $.84 per share, on a comparable basis one year
earlier.
Operating Expenses
Total expenses increased to $23,202,000 in the period from $18,134,000 last
year. Sales and marketing expenses increased by $3,483,000 from last year's
level of $9,882,000 (15% of sales) to $13,365,000 (17% of sales) due to
increased advertising expenditures and expansion into new markets, such as
Germany and Australia. Research and development expenses remained at 5% of
sales, increasing to $4,055,000 as compared with $3,586,000 in the period one
year earlier as development efforts for new products continued. General and
administrative expenses increased to $6,189,000, from $4,830,000 for the
reasons set forth in the three month comparison. Interest and investment income
increased from $164,000 to $407,000 due to the Company's higher cash position
during the period.
CHANGES IN FINANCIAL CONDITION
Inventories increased from $20,916,000 at March 31, 1995 to $33,400,000 at the
end of the third fiscal quarter due to planned inventory build-up in
anticipation of increased sales in the Christmas quarter, negatively impacted
by the sluggish consumer market in the United States and work stoppages in
France. Inventories also increased as a result of planned production of new
products for new markets. Cash and cash equivalents decreased to $5,937,000
from $21,018,000 at March 31 as cash was employed to support seasonal
8
<PAGE>
inventory build-up, accounts receivable increases and construction and
outfitting of the Company's new facility. Accounts receivable increased from
$9,926,000 at March 31 to $21,921,000 at December 31, 1995 in line with
seasonally higher third quarter sales. Current liabilities were $19,627,000 at
the end of December due to heightened seasonal activity as compared with
$16,601,000 at the end of the Company's last fiscal year.
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 credit
arrangement with its lending bank extends through October 1998. At December 31,
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 expended approximately $6.5 million from available cash flow from
operations for the construction and outfitting of its new headquarters in New
Jersey during its 1995 and 1996 fiscal years. The Company has no material
commitments for capital expenditures in the next twenty-four months.
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--NONE
ITEM 5. OTHER INFORMATION--NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K--NONE
9
<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
FEBRUARY 8, 1996 /s/ Gregory J. Winsky
Date ___________________________________________________
Gregory J. Winsky
Senior Vice President,
General Counsel
(Duly Authorized Officer)
FEBRUARY 8, 1996 /s/ Kenneth H. Lind
Date ___________________________________________________
Kenneth H. Lind
Vice President, Finance and
Treasurer
(Chief Accounting Officer)
10
<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> 9-MOS
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-START> APR-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 5,937
<SECURITIES> 0
<RECEIVABLES> 22,862
<ALLOWANCES> 941
<INVENTORY> 33,400
<CURRENT-ASSETS> 64,199
<PP&E> 11,048
<DEPRECIATION> 0
<TOTAL-ASSETS> 83,523
<CURRENT-LIABILITIES> 19,627
<BONDS> 0
0
0
<COMMON> 48,479
<OTHER-SE> 15,417
<TOTAL-LIABILITY-AND-EQUITY> 83,523
<SALES> 80,147
<TOTAL-REVENUES> 80,147
<CGS> 42,716
<TOTAL-COSTS> 42,716
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 14,229
<INCOME-TAX> 5,407
<INCOME-CONTINUING> 8,822
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,822
<EPS-PRIMARY> 1.06
<EPS-DILUTED> 1.06
</TABLE>
