<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 June 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
JUNE 30, 1997 - 8,067,783 SHARES
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FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
June 30, March 31,
1997 1997
-------- ---------
<S> <C> <C>
ASSETS
------
Current Assets:
Cash and cash equivalents $ 36,373 $ 45,040
Accounts receivable, less allowance for doubtful accounts
of $846 and $839 10,830 9,806
Inventories 32,589 30,617
Deferred income tax asset 1,955 2,122
Prepaids and other assets 3,236 3,145
-------- --------
Total Current Assets 84,983 90,730
-------- --------
Property and Equipment 11,151 11,211
Trademark, less accumulated amortization of $292 15,256 15,353
Other Assets 17,092 13,761
-------- --------
Total Assets $128,482 $131,055
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts payable and accrued expenses $10,624 $ 12,650
Current portion of mortgage note payable 284 284
-------- --------
Total Current Liabilities 10,908 12,934
-------- --------
Long-Term Liabilities:
Notes payable 40,000 40,000
Mortgage note payable 3,692 3,763
Other liabilities 784 755
-------- --------
Total Long-Term Liabilities 44,476 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 8,067,783 and 8,060,133 shares 50,357 50,235
Retained earnings 23,400 23,820
Foreign currency translation adjustment (659) (452)
-------- --------
Total Shareholders' Equity 73,098 73,603
-------- --------
Total Liabilities and Shareholders' Equity $128,482 $131,055
======== ========
</TABLE>
See notes to consolidated financial statements.
2
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FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Sales $ 16,614 $ 15,071
Cost of Sales 9,322 7,936
--------- ---------
Gross Profit 7,292 7,135
--------- ---------
Expenses:
Sales and marketing 3,925 2,810
Research and development 1,501 1,379
General and administrative 2,266 1,949
Interest expense 841 10
Interest and investment income (564) (46)
--------- ---------
Total expenses 7,969 6,102
--------- ---------
Income (Loss) Before Income Taxes (677) 1,033
Income Tax (Benefit) Provision (257) 393
--------- ---------
Net Income (Loss) $ (420) $ 640
========= =========
Net Income (Loss) Per Share:
Primary $ (.05) $ .08
========= =========
Fully diluted $ (.05) $ .08
========= =========
Weighted Average Common Shares and
Common Equivalents:
Primary 8,109 8,214
========= =========
Fully diluted 8,109 8,215
========= =========
</TABLE>
See notes to consolidated financial statements.
3
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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 10,000 80 -- -- 80
Issuance of shares and
amortization of deferred
compensation expense for
shares issued for services
net of forfeitures
(unearned portion $219) (2,350) 42 -- -- 42
Loss for the period -- -- (420) -- (420)
Foreign currency translation
adjustment -- -- -- (207) (207)
--------- ------- ------- ----- -------
Balance--June 30, 1997 8,067,783 $50,357 $23,400 $(659) $73,098
========= ======= ======= ===== =======
</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
June 30,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) $ (420) $ 640
Adjustments To Reconcile Net Income (Loss) To Net
Cash Provided By Operating Activities:
Depreciation and amortization 1,445 1,058
Provision for losses on accounts receivable 7 10
Loss on disposal of property and equipment 9 7
Deferred income tax benefit 167 (460)
Source (use) of cash from change in operating assets
and liabilities excluding the effects of acquisi-
tion:
Accounts receivable (1,031) 1,241
Inventories (1,972) (6,318)
Prepaids and other assets (91) (527)
Accounts payable and accrued expenses (2,026) (1,303)
--------- ---------
Net Cash Used In Operating Activities (3,912) (5,652)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (753) (548)
Proceeds from sale of property and equipment 63 52
Change in other assets (3,896) (819)
Acquisition of Systech GmbH, net of cash acquired -- (171)
--------- ---------
Net Cash Used In Investing Activities (4,586) (1,486)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from mortgage -- 4,260
Principal payments of mortgage (71) --
Proceeds from issuance of common shares 80 120
Other liabilities 29 25
--------- ---------
Net Cash Provided By Financing Activities 38 4,405
Effect Of Exchange Rate Changes On Cash (207) (190)
--------- ---------
Decrease In Cash And Cash Equivalents (8,667) (2,923)
Cash And Cash Equivalents At Beginning Of Period 45,040 10,827
--------- ---------
Cash And Cash Equivalents At End Of Period $ 36,373 $ 7,904
========= =========
Schedule Of Non-Cash Financing Activities:
Purchase and retirement of treasury shares received
under employee stock option plan and warrants exer-
cised $ -- $ 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 June 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
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1997 AS COMPARED WITH JUNE 30, 1996:
Net Sales
Sales of $16,614,000 for the quarter ended June 30, 1997 were 10% higher than
sales of $15,071,000 for the same quarter one year earlier. The sales increase
is attributed to higher sales of electronic books in the domestic consumer
market and sales of the Company's new ROLODEX(R) Electronics line of personal
information management products offset in part by lower sales by the company's
foreign subsidiaries. Royalties from technology licenses decreased as a
percentage of sales from 3% to 2%.
Gross Profits
Gross profits increased from $7,135,000 to $7,292,000 as sales increases were
offset in part by a decrease in gross profit margins from 47% last year to
44%. In the current period, the Company sold more lower priced reference
products than in the period one year earlier and began selling ROLODEX(R)
Electronics products; both types of products generally bear lower profit
margins than higher priced electronic books.
Operating Expenses
The Company reported a loss of $420,000 or $.05 per share as compared with
earnings of $640,000 or $.08 per share last year primarily due to an increase
in expenses. Total expenses increased by $1,867,000 to $7,969,000 in the June
1997 quarter as compared with $6,102,000 in the same quarter last year. Sales
and marketing expenses were up by $1,115,000 from last year's level of
$2,810,000 (19% of sales) to $3,925,000 (24% 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 remained at 9%
of sales, increasing slightly to $1,501,000 from $1,379,000 in the period one
year earlier in connection with development efforts of new products in the
ROLODEX(R) Electronics line and the BOOKMAN(R) series. General and
administrative expenses increased by $317,000 to $2,266,000 (14% of sales)
from $1,949,000 (13% 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 expense
increased by $831,000 in connection with interest paid on senior notes as the
Company completed a $40,000,000 private placement in March 1997. Interest
income increased by $518,000. Taken together, results were negatively impacted
by an increase in net interest expense of $313,000 over last year's level.
7
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CHANGES IN FINANCIAL CONDITION
Inventories increased from $30,617,000 at March 31, 1997 to $32,589,000 at the
end of the June quarter in anticipation of higher sales in the seasonally
active second and third quarters. The inventory increase in part was required
in order to bring new ROLODEX(R) Electronics products to market and to build
inventory to support international sales in new markets, such as Italy. Cash
and cash equivalents decreased from $45,040,000 at March 31 to $36,373,000 as
working capital was employed in connection with the Company's acquisition of
certain technologies, including voice recognition technology, and in order to
support inventory build-up. Accounts receivable increased from $9,806,000 to
$10,830,000 and accounts payable and accrued expenses decreased from
$12,650,000 to $10,624,000. The increase of $3,331,000 in other assets is
attributable to the technology acquisitions referenced above.
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.
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. On October 4, 1996, the Company drew down approximately
$16,000,000 under that facility in order to purchase from Insilco Corp.
certain assets and a trademark license relating to the ROLODEX(R) Electronics
business. The Company used cash generated in its operations to pay off that
borrowing in full prior to the end of its 1997 fiscal year.
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 June 30, 1997, there
were no borrowings under the new revolving line of credit with Chase and
Summit.
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.
8
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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--ROLODEX (R) is a registered trademark of Sterling
Plastics Co., a division of Newell Co.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Company during the quarter ended June
30, 1997.
9
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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
AUGUST 13, 1997 /s/ Gregory J. Winsky
- ------------ ------------------------------------------------
Date Gregory J. Winsky
Senior Vice President,
General Counsel
(Duly Authorized Officer)
AUGUST 13, 1997 /s/ Kenneth H. Lind
- ------------ ------------------------------------------------
Date Kenneth H. Lind
Vice President, Finance and
Treasurer
(Principal Financial 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,
INCORPORATED AND SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 36,373
<SECURITIES> 0
<RECEIVABLES> 11,676
<ALLOWANCES> 846
<INVENTORY> 32,589
<CURRENT-ASSETS> 84,983
<PP&E> 11,151
<DEPRECIATION> 0
<TOTAL-ASSETS> 128,482
<CURRENT-LIABILITIES> 10,908
<BONDS> 0
0
0
<COMMON> 50,357
<OTHER-SE> 22,741
<TOTAL-LIABILITY-AND-EQUITY> 128,482
<SALES> 16,614
<TOTAL-REVENUES> 16,614
<CGS> 9,322
<TOTAL-COSTS> 9,322
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 841
<INCOME-PRETAX> (677)
<INCOME-TAX> (257)
<INCOME-CONTINUING> (420)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (420)
<EPS-PRIMARY> (.05)
<EPS-DILUTED> (.05)
</TABLE>
