<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, 1997 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, 1997 - 8,069,743 SHARES
<PAGE>
FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
September 30, March 31,
1997 1997
------------- ---------
<S> <C> <C>
ASSETS
------
Current Assets:
Cash and cash equivalents $ 28,971 $ 45,040
Accounts receivable, less allowance for doubtful ac-
counts
of $818 and $839 18,470 9,806
Inventories 36,564 30,617
Deferred income tax asset 2,075 2,122
Prepaids and other assets 3,853 3,145
-------- --------
Total Current Assets 89,933 90,730
-------- --------
Property and Equipment 11,486 11,211
Trademark 15,159 15,353
Other Assets 17,485 13,761
-------- --------
Total Assets $134,063 $131,055
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts payable and accrued expenses $ 14,467 $ 12,650
Current portion of mortgage note payable 284 284
-------- --------
Total Current Liabilities 14,751 12,934
-------- --------
Long-Term Liabilities:
Notes payable 40,000 40,000
Mortgage note payable 3,621 3,763
Other liabilities 993 755
-------- --------
Total Long-Term Liabilities 44,614 44,518
-------- --------
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 8,069,743 and
8,060,133 shares 50,433 50,235
Retained earnings 24,907 23,820
Foreign currency translation adjustment (642) (452)
-------- --------
Total Shareholders' Equity 74,698 73,603
-------- --------
Total Liabilities and Shareholders' Equity $134,063 $131,055
======== ========
</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,
-------------------- ------------------
1997 1996 1997 1996
--------- --------- -------- --------
<S> <C> <C> <C> <C>
Sales $ 25,782 $ 24,231 $ 42,396 $ 39,302
Cost of Sales 14,150 12,483 23,472 20,419
--------- --------- -------- --------
Gross Profit 11,632 11,748 18,924 18,883
--------- --------- -------- --------
Expenses:
Sales and marketing 4,975 4,304 8,900 7,114
Research and development 1,362 1,355 2,863 2,734
General and administrative 2,486 2,059 4,752 4,008
Interest expense 846 105 1,687 115
Interest and investment income (467) (37) (1,031) (83)
--------- --------- -------- --------
Total expenses 9,202 7,786 17,171 13,888
--------- --------- -------- --------
Income Before Income Taxes 2,430 3,962 1,753 4,995
Income Tax Provision 923 1,505 666 1,898
--------- --------- -------- --------
Net Income $ 1,507 $ 2,457 $ 1,087 $ 3,097
========= ========= ======== ========
Net Income Per Share:
Primary $ .18 $ .30 $ .13 $ .38
========= ========= ======== ========
Fully Diluted $ .18 $ .30 $ .13 $ .38
========= ========= ======== ========
Weighted Average Common Shares and
Common Equivalents:
Primary 8,159 8,124 8,127 8,185
========= ========= ======== ========
Fully Diluted 8,194 8,124 8,175 8,187
========= ========= ======== ========
</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, 1997 8,060,133 $50,235 $23,820 $(452) $73,603
Issuance of common shares
under employee stock option
plan 13,960 121 -- -- 121
Issuance of shares and
amortization of deferred
compensation expense for
shares issued for services
net of forfeitures
(unearned portion $157) (4,350) 77 -- -- 77
Income for the period -- -- 1,087 -- 1,087
Foreign currency translation
adjustment -- -- -- (190) (190)
--------- ------- ------- ----- -------
Balance--September 30, 1997 8,069,743 $50,433 $24,907 $(642) $74,698
========= ======= ======= ===== =======
</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,
-------------------- ------------------
1997 1996 1997 1996
--------- --------- -------- --------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 1,507 $ 2,457 $ 1,087 $ 3,097
Adjustments To Reconcile Net Income
To Net Cash Provided By Operating
Activities:
Depreciation and amortization 1,454 1,120 2,899 2,178
Provision for losses on accounts
receivable 7 22 14 32
Loss on disposal of property and
equipment 4 3 13 10
Deferred income tax benefit (120) (301) 47 (761)
Source (use) of cash from change in
operating assets and liabilities
excluding the effects of
acquisition:
Accounts receivable (7,133) (7,334) (8,164) (6,093)
Inventories (3,018) 735 (4,990) (5,583)
Prepaids and other assets (559) (1,209) (650) (1,736)
Accounts payable and accrued
expenses 2,436 (115) 410 (1,418)
--------- --------- -------- --------
Net Cash Used In Operating
Activities (5,422) (4,622) (9,334) (10,274)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (884) (951) (1,637) (1,499)
Proceeds from sale of property and
equipment 46 3 109 55
Change in other assets (854) (665) (4,750) (1,484)
Cash paid for acquisitions, net of
cash acquired (304) -- (304) (171)
--------- --------- -------- --------
Net Cash Used In Investing
Activities (1,996) (1,613) (6,582) (3,099)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from mortgage -- -- -- 4,260
Principal payments of mortgage (71) (47) (142) (47)
Proceeds from issuance of common
shares 41 2 121 122
Proceeds from revolving credit
agreement -- 3,000 -- 3,000
Other liabilities 29 26 58 51
--------- --------- -------- --------
Net Cash Provided (Used) Financing
Activities (1) 2,981 37 7,386
Effect Of Exchange Rate Changes On
Cash 17 1 (190) (189)
--------- --------- -------- --------
Decrease In Cash And Cash Equivalents (7,402) (3,253) (16,069) (6,176)
Cash And Cash Equivalents At
Beginning Of Period 36,373 7,904 45,040 10,827
--------- --------- -------- --------
Cash And Cash Equivalents At End Of
Period $ 28,971 $ 4,651 $ 28,971 $ 4,651
========= ========= ======== ========
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, 1997.
The financial statements for the periods ended September 30, 1997 and 1996 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.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1997 AS COMPARED WITH SEPTEMBER 30, 1996:
Net Sales
Sales of $25,782,000 for the quarter ended September 30, 1997 were 6% higher
than sales of $24,231,000 for the same quarter one year earlier. The sales
increase is attributable to increased sales of electronic books in the
domestic consumer market and sales of personal information management products
in the new ROLODEX(R) Electronics line. The ROLODEX(R) Electronics line was
not sold in the quarter one year earlier since the Company completed the
acquisition of the trademark in October 1996. Royalties from technology
licenses increased to approximately 3% of sales from 2% of sales in the
earlier year.
Gross Profits
Gross profits decreased from $11,748,000 to $11,632,000 as a result of margins
decreasing to 45% as compared with 48% last year. In the current period, the
Company sold more lower priced reference products than in the period one year
earlier and sold the new line of ROLODEX(R) Electronics products; both types
of products generally bear lower profit margins than higher priced electronic
books. The Company had net income of $1,507,000 or $.18 per share for the
second quarter ending September 30, 1997 compared with earnings of $2,457,000
or $.30 per share last year.
Operating Expenses
Total operating expenses increased to $8,823,000 (34% of sales) in the current
quarter as compared with $7,718,000 (32% of sales) in the same quarter last
year. Sales and marketing expenses increased from $4,304,000 (18% of sales) to
$4,975,000 (19% of sales) primarily due to increased expenditures for
advertising and marketing for foreign operations. Research and development
expenses were relatively constant at $1,362,000 (5% of sales) compared with
$1,355,000 (6% of sales) last year. General and administrative expenses
increased in the present period to $2,486,000 (10% of sales) as compared with
$2,059,000 (9% of sales) last year due to increased personnel costs primarily
in connection with starting up new international subsidiaries and in
connection with the acquisition of the ROLODEX(R) Electronics line. Interest
expense increased by $741,000 in connection with interest on senior notes as
the Company completed a $40,000,000 private placement in March 1997. Interest
income increased by $430,000. Taken together, results were negatively impacted
by an increase in net interest expense of $311,000 over last year's level.
SIX MONTHS ENDED SEPTEMBER 30, 1997 AS COMPARED WITH SEPTEMBER 30, 1996:
Net Sales
Sales of $42,396,000 were 8% higher than sales of $39,302,000 for the
comparable period one year earlier. The sales increase is attributable to
higher sales of electronic books in the domestic consumer market and new sales
of ROLODEX(R) Electronics products. Royalties from technology licenses
remained constant at 2% of total sales.
7
<PAGE>
Gross Profits
Gross profits increased from $18,883,000 to $18,924,000. Gross profit margins
decreased to 45% as compared with 48% last year due to a product mix composed
of larger numbers of lower priced products and new products in the ROLODEX(R)
Electronics line. The Company reported net income of $1,087,000 or $.13 per
share for the six months ending September 30, 1997 compared with net income of
$3,097,000 or $.38 per share last year.
Operating Expenses
Total operating expenses were $16,515,000 (39% of sales) in the period up from
$13,856,000 (35% of sales) last year. Sales and marketing expenses increased
from last year's level of $7,114,000 (18% of sales) to $8,900,000 (21% of
sales). The increase in sales and marketing expenses is attributable to higher
expenditures in connection with advertising and market research, as well as
expenditures in connection with new foreign operations. Research and
development expenses were relatively constant at $2,863,000 (7% of sales) as
compared with $2,734,000 (7% of sales) in the period one year earlier. General
and administrative expenses of $4,752,000 (11% of sales) were higher than
$4,008,000 (10% of sales) due to increased personnel costs primarily in
connection with starting up new international subsidiaries and in connection
with the acquisition of the ROLODEX(R) Electronics line. Interest and
investment income increased and interest expense increased for the reasons
stated in the quarterly comparisons resulting in an increase in net interest
expense of $624,000 over last year's numbers.
CHANGES IN FINANCIAL CONDITION
Cash and cash equivalents decreased from $45,040,000 at March 31, 1997 to
$28,971,000, as working capital was employed in connection with increased
levels of inventory and accounts receivable as the Company enters its peak
selling season. Inventories increased from $30,617,000 at March 31, 1997 to
$36,564,000 at the end of the September quarter to support sales in the
seasonally active December quarter. Accounts receivable increased from
$9,806,000 at March 31 to $18,470,000 at September 30 as a result of higher
sales in the September quarter. The increase in other assets is attributable
to technology acquisitions during the period as well as investments in and
loans to Voice Powered Technology International, Inc. ("VPTI") totaling
approximately $1,850,000. On September 22, 1997, VPTI filed for reorganization
under Chapter 11 of the federal Bankruptcy Code. Franklin's loan to VPTI is
secured by all of the assets of VPTI. The Company believes that no loss will
be incurred by the Company in connection with the reorganization of VPTI and
no charges have been made to earnings for the September quarter in this
regard.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of liquidity during the two years ended March 31,
1996 was cash flow from operations. On March 27, 1997, the Company completed
the issuance to insurance companies of $40,000,000 in aggregate principal
amount of 7.71% senior notes in a private placement transaction and
contemporaneously entered into a new $20,000,000 revolving credit agreement
with the Chase Manhattan Bank ("Chase") and Summit Bank ("Summit"). Management
believes that the proceeds of the senior note offering, cash flow from
operations, and the new revolving line of credit will be adequate to provide
for the Company's liquidity and capital needs, including its proposed
international expansion, for the foreseeable future.
8
<PAGE>
Prior to the issuance of the senior notes and the execution of the new
revolving credit agreement, in order to accommodate seasonal inventory and
accounts receivable buildup, the Company financed its day to day operations by
drawing down advances, on an as needed basis, against its then existing credit
facility with Chase.
Borrowings against the new line of credit bear interest at the bank's prime
rate or 1% over LIBOR. The Company pays a commitment fee of 1/4 of 1% per
annum on the unused portion of the line of credit. At September 30, 1997,
there were no borrowings under the new revolving line of credit.
On October 21, 1997, the Company issued a press release announcing that Morton
E. David, its Chairman and Chief Executive Officer, had decided to leave the
Company effective February 28, 1998. The Company will incur a non-recurring
contractual expense during the third quarter of the current fiscal year of
approximately $1.5 million (net of taxes) in connection with Mr. David's
departure. The Company has engaged a search firm to identify candidates for
the position of Chief Executive Officer. On the same date, the Company also
stated that the investment banking firm of Goldman, Sachs & Co. had been
engaged to evaluate the Company's strategic alternatives.
The Company has no material commitments for capital expenditures in the next
twenty-four months.
PART II
ITEM 1. LEGAL PROCEEDINGS
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 23, 1997.
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, ten incumbent
directors were re-elected with Edward H. Cohen receiving 4,986,115 votes with
45,239 votes withheld; Morton E. David, Jerry R. Schubel and Michael R.
Strange each receiving 4,986,515 votes with 44,839 votes withheld; Bernard
Goldstein receiving 4,988,709 votes with 42,645 votes withheld; Leonard M.
Lodish receiving 4,989,109 with 42,245 votes withheld; James Meister and
Howard L. Morgan each receiving 4,989,509 votes with 41,845 votes withheld;
James H. Simons receiving 4,985,915 votes with 45,439 votes withheld; and
William H. Turner receiving 4,962,667 votes with 68,687 votes withheld.
Shareholders ratified the appointment of Feldman Radin & Co., P.C. as auditors
for the Company's 1998 fiscal year by vote of 5,018,744 for, 11,568 against,
and 1,042 abstentions.
9
<PAGE>
ITEM 5. OTHER INFORMATION
ROLODEX(R) is a registered trademark of Sterling Plastics Co., a division of
Newell Co.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBIT 10.01--Amendment to Employment Agreement between the Company and
Morton E. David dated October 9, 1997.
No reports on Form 8-K were filed by the Company during the quarter ended
September 30, 1997.
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 7, 1997 /s/ Gregory J. Winsky
- ------------- ------------------------------------------------
Date Gregory J. Winsky
Senior Vice President,
General Counsel
(Duly Authorized Officer)
NOVEMBER 7, 1997 /s/ Kenneth H. Lind
- ------------- ------------------------------------------------
Date Kenneth H. Lind
Vice President, Finance and
Treasurer
(Principal Financial Officer)
11
<PAGE>
Exhibit 10.01
October 9, 1997
Mr. Morton E. David
33 Stonebridge Road
Montclair, N. J. 07042
RE: Amended and Restated Employment Agreement effective as of
May 1, 1996 ("Employment Agreement")
Dear Mort:
This letter agreement, when executed by you, will amend the Employment
Agreement in the manner specified below.
1. Termination of Employment: In accordance with the resolution of the Board
-------------------------
of Directors dated August 12, 1997, Franklin has terminated your employment
without cause pursuant to Section 7B of the Employment Agreement, which
termination shall be effective on February 28, 1998.
2. Waiver: You hereby waive any rights you may have to terminate your
------
employment pursuant to Section 7C of the Employment Agreement. You also
hereby waive any rights you may have under Franklin's by-laws as a result
of, or in connection with, Franklin's implementation of a management
committee, comprised of the four current senior executive officers of
Franklin (other than you), which management committee shall run the day to
day operations of Franklin from the date hereof.
3. New Products: For two years from the date of this letter, Franklin hereby
------------
agrees to send to you two samples of each new hand-held product sold by
Franklin on or within a reasonable time after the date of first shipment of
such product to retailers. Franklin also hereby agrees to sell reasonable
numbers of its hand-held products to you at "Friends of Franklin" pricing
during the Consulting Period (as defined in the Employment Agreement).
<PAGE>
4. Post-Termination Payments: Franklin hereby agrees to issue separate checks
-------------------------
to you on a monthly basis for payments due to you on and after March 1, 1998
under Section 3 of the Employment Agreement relating to the Supplemental
Executive Retirement Plan and Section 4 of the Employment Agreement relating
to the Consulting Period.
5. Resignations: You hereby resign from each and every directorship and
------------
officership of Franklin and each of its subsidiaries or joint venture
companies, which resignations shall be effective on February 28, 1998.
6. Press Release: You hereby agree to Franklin's issuance of a press release
-------------
relating to the matters set forth herein substantially in the form attached
hereto as Exhibit A.
7. Releases: (a) You hereby release Franklin, its subsidiaries, and its and
--------
their directors, officers, employees and agents from any claims arising in
any way in connection with your employment with Franklin. Franklin hereby
releases you from any claims arising in any way in connection with your
employment with Franklin.
(b) Franklin hereby waives its right to offset any amount
claimed by Franklin as due to Franklin from you from any amount payable to
you under the Employment Agreement.
(c) Each party hereby agrees that, should any litigation be
commenced in connection with any dispute arising under the Employment
Agreement as hereby amended, the losing party to such litigation shall
reimburse the winning party's reasonable attorneys' fees in connection with
such litigation.
8. Stock Options: Notwithstanding anything to the contrary in the Employment
-------------
Agreement, Franklin hereby agrees that any employee stock options granted to
you which have not expired on the date that the Consulting Period begins
shall remain exercisable through the earlier to occur of the normal
expiration date of such options or the end of the Consulting Period.
<PAGE>
The Employment Agreement as hereby amended shall remain in full force and
effect.
If the terms set forth in this letter agreement are acceptable to you,
please sign the copy attached and return that executed copy to me no later
than the close of business on October 17, 1997.
Very truly yours,
Gregory J. Winsky
Senior Vice President
GJW/jos
ACCEPTED BY:
_____________________
Morton E. David
Date: _______________
<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-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 28,971
<SECURITIES> 0
<RECEIVABLES> 19,288
<ALLOWANCES> 818
<INVENTORY> 36,564
<CURRENT-ASSETS> 89,933
<PP&E> 11,486
<DEPRECIATION> 0
<TOTAL-ASSETS> 134,063
<CURRENT-LIABILITIES> 14,751
<BONDS> 0
0
0
<COMMON> 50,433
<OTHER-SE> 24,265
<TOTAL-LIABILITY-AND-EQUITY> 134,063
<SALES> 42,396
<TOTAL-REVENUES> 42,396
<CGS> 23,472
<TOTAL-COSTS> 23,472
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,687
<INCOME-PRETAX> 1,753
<INCOME-TAX> 666
<INCOME-CONTINUING> 1,087
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,087
<EPS-PRIMARY> .13
<EPS-DILUTED> .13
</TABLE>
