<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, 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
DECEMBER 31, 1996 - 8,057,233 SHARES
<PAGE>
FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
December 31, March 31,
1996 1996
------------ ---------
<S> <C> <C>
ASSETS
------
Current Assets:
Cash and cash equivalents $ 7,762 $10,827
Accounts receivable, less allowance for
doubtful accounts of $948 and $867 22,060 12,114
Inventories 33,993 34,890
Deferred income tax asset 2,182 1,723
Prepaids and other assets 3,026 2,948
-------- -------
Total Current Assets 69,023 62,502
-------- -------
Property and Equipment 11,537 11,012
Trademark, less accumulated amortization of $80 15,467 --
Other Assets 10,774 9,355
-------- -------
Total Assets $106,801 $82,869
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts payable and accrued expenses $ 16,771 $16,678
Current portion of mortgage note payable 284 --
-------- -------
Total Current Liabilities 17,055 16,678
-------- -------
Long-Term Liabilities:
Revolving line of credit 12,000 --
Mortgage note payable 3,834 --
Other liabilities 730 653
-------- -------
Total Long-Term Liabilities 16,564 653
-------- -------
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
8,057,233 and 7,861,715 shares 50,149 48,599
Retained earnings 23,509 17,165
Foreign currency translation adjustment (476) (226)
-------- -------
Total Shareholders' Equity 73,182 65,538
-------- -------
Total Liabilities and Shareholders' Equity $106,801 $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 Nine Months Ended
December 31, December 31,
-------------------- ------------------
1996 1995 1996 1995
--------- --------- -------- --------
<S> <C> <C> <C> <C>
Sales $ 31,986 $ 34,451 $ 71,288 $ 80,147
Cost of Sales 16,455 17,749 36,874 42,716
--------- --------- -------- --------
Gross Profit 15,531 16,702 34,414 37,431
--------- --------- -------- --------
Expenses:
Sales and marketing 6,047 6,380 13,161 13,365
Research and development 1,409 1,347 4,143 4,055
General and administrative 2,527 2,344 6,535 6,189
Interest expense 384 28 499 32
Interest and investment income (74) (120) (157) (439)
--------- --------- -------- --------
Total expenses 10,293 9,979 24,181 23,202
--------- --------- -------- --------
Income Before Income Taxes 5,238 6,723 10,233 14,229
Income Tax Provision 1,991 2,555 3,889 5,407
--------- --------- -------- --------
Net Income $ 3,247 $ 4,168 $ 6,344 $ 8,822
========= ========= ======== ========
Net Income Per Share:
Primary $ .40 $ .50 $ .78 $ 1.06
========= ========= ======== ========
Fully diluted $ .40 $ .50 $ .78 $ 1.06
========= ========= ======== ========
Weighted Average Common Shares and
Common Equivalents:
Primary 8,119 8,374 8,126 8,300
========= ========= ======== ========
Fully diluted 8,119 8,375 8,127 8,303
========= ========= ======== ========
</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 38,121 474 -- -- 474
Issuance of shares and
amortization of deferred
compensation expense for
shares issued for services
net of forfeitures
(unearned portion $368) 29,250 75 -- -- 75
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 op-
tion plan and warrants ex-
ercised (68,594) (1,582) -- -- (1,582)
Income tax credit--stock op-
tions -- 1,196 -- -- 1,196
Income for the period -- -- 6,344 -- 6,344
Foreign currency translation
adjustment -- -- -- (250) (250)
--------- ------- ------- ----- -------
Balance--December 31, 1996 8,057,233 $50,149 $23,509 $(476) $73,182
========= ======= ======= ===== =======
</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 Nine Months Ended
December 31, December 31,
-------------------- ------------------
1996 1995 1996 1995
--------- --------- -------- --------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVI-
TIES:
Net Income $ 3,247 $ 4,168 $ 6,344 $ 8,822
Adjustments to Reconcile Net Income
to Net Cash Provided by Operating
Activities:
Depreciation and amortization 1,328 987 3,506 2,730
Provision for losses on accounts
receivable 50 41 82 116
Loss on disposal of property and
equipment 2 21 12 96
Deferred income tax benefit 302 -- (459) 575
Source (use) of cash from change
in operating assets and liabili-
ties excluding the effects of
acquisition:
Accounts receivable (3,255) (5,856) (9,348) (12,111)
Inventories 7,383 606 1,800 (12,484)
Prepaids and other assets 1,738 7 2 64
Accounts payable and accrued ex-
penses 1,242 2,434 (176) 3,026
Other liabilities 26 -- 77 --
--------- --------- -------- --------
Net Cash Provided by (used in) Op-
erating Activities 12,063 2,408 1,840 (9,166)
CASH FLOWS FROM INVESTING ACTIVI-
TIES:
Purchase of property and equipment (730) (959) (2,229) (5,035)
Proceeds from sale of property and
equipment 5 21 60 471
Change in other assets (917) (903) (2,401) (2,366)
Acquisition of Systech GmbH, net
of cash acquired -- -- (171) --
Acquisition of Rolodex Electronics (17,355) -- (17,355) --
--------- --------- -------- --------
Net Cash Used In Investing Activi-
ties (18,997) (1,841) (22,096) (6,930)
CASH FLOWS FROM FINANCING ACTIVI-
TIES:
Proceeds from revolving line of
credit 15,767 -- 18,767 --
Proceeds from mortgage -- -- 4,260 --
Principal payments of revolving
line of credit (6,767) -- (6,767) --
Principal payments of mortgage (95) -- (142) --
Proceeds from issuance of common
shares 5 266 127 1,007
Income tax credit--stock options 1,196 -- 1,196 --
--------- --------- -------- --------
Net Cash Provided by Financing Ac-
tivities 10,106 266 17,441 1,007
Effect of Exchange Rate Changes on
Cash (61) (245) (250) 8
--------- --------- -------- --------
Increase (Decrease) in Cash and Cash
Equivalents 3,111 588 (3,065) (15,081)
Cash and Cash Equivalents at Begin-
ning of Period 4,651 5,349 10,827 21,018
--------- --------- -------- --------
Cash and Cash Equivalents at End of
Period $ 7,762 $ 5,937 $ 7,762 $ 5,937
========= ========= ======== ========
Schedule of Non-Cash Financing Ac-
tivities:
Purchase and retirement of treasury
shares received under employee
stock option plan and warrants
exercised $ -- $ 378 $ 1,582 $ 378
</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 December 31, 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.
2. ACQUISITION
On October 4, 1996, the Company acquired certain net assets, which included a
trademark license of the Rolodex(R) electronics product line from Insilco
Corporation. The Company paid approximately $16,000,000 in cash and assumed
certain commitments associated with the Rolodex electronics product line. The
purchase price exceeded the fair value of net assets acquired by $15,547,000,
which is being amortized over 40 years. 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 DECEMBER 31, 1996 AS COMPARED WITH DECEMBER 31, 1995:
Net Sales
Sales of $31,986,000 for the quarter ended December 31, 1996 were 7% lower
than sales of $34,451,000 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 and by the Company's sales of products in the Rolodex(R) Electronics
line of personal information products. The Company acquired certain assets of
the Rolodex Electronics business, including such products and a trademark
license from Insilco Corporation ("Insilco") during the quarter. Royalties
from technology licenses were approximately 1% of sales, down from 3% of sales
last year.
Gross Profits
Decreased sales primarily contributed to the decrease in gross profits from
$16,702,000 to $15,531,000. Gross profit margins remained constant at 48% from
year to year. The Company reported net income of $3,247,000 or $.40 per share
for the third quarter ending December 31, 1996, compared with earnings of
$4,168,000 or $.50 per share last year.
Operating Expenses
Total operating expenses increased to $10,293,000 (32% of sales) in the
current quarter as compared with $9,979,000 (29% of sales) in the same quarter
last year. Sales and marketing expenses decreased from $6,380,000 (19% of
sales) to $6,047,000 (19% of sales) primarily due to decreases in variable
expenses linked to sales volume. Research and development expenses were
$1,409,000 (4% of sales) as compared with $1,347,000 (4% of sales) in the
period one year earlier. General and administrative expenses increased from
$2,344,000 (7% of sales) to $2,527,000 (8% of sales) primarily because of
increased expenses of international subsidiaries, both those newly organized
and those continuing in their operations. Interest expense increased in the
quarter because the Company drew down $16,000,000 from its credit facility to
consummate the acquisition of the Rolodex Electronics business from Insilco
during the quarter. Interest expense also increased as interest was paid in
connection with the mortgage placed on the Company's headquarters facility
during the first fiscal quarter and in connection with borrowings under the
revolving credit facility to support seasonal cash requirements. Interest and
investment income decreased from $120,000 to $74,000 due to the employment of
cash for inventory and increased account receivables.
NINE MONTHS ENDED DECEMBER 31, 1996 AS COMPARED WITH DECEMBER 31, 1995:
Net Sales
Sales of $71,288,000 were 11% lower than sales of $80,147,000 for the
comparable period one year earlier. The sales decrease is attributable to
lower sales of electronic books in the domestic
7
<PAGE>
consumer market offset in part by international sales increases. Royalties
from technology licenses decreased from 3% of total sales to 2% of total
sales.
Gross Profits
Decreased sales primarily contributed to the decrease in gross profits from
$37,431,000 to $34,414,000. Gross profit margins increased from 47% last year
to 48% this year. The Company reported net income of $6,344,000 or $.78 per
share for the nine months ending December 31, 1996 compared with earnings of
$8,822,000 or $1.06 per share last year.
Operating Expenses
Total expenses increased to $24,181,000 (34% of sales) in the period from
$23,202,000 (29% of sales) last year. Sales and marketing expenses decreased
slightly from last year's level of $13,365,000 (17% of sales) to $13,161,000
(18% of sales) as sales volume decreased. Research and development expenses
were relatively constant at about 6% of sales, increasing slightly to
$4,143,000 as compared with $4,055,000 in the period one year earlier. General
and administrative expenses increased to $6,535,000 (9% of sales) from
$6,189,000 (8% of sales) for the reasons set forth in the quarterly
comparisons. Interest and investment income decreased and interest expense
increased also for the reasons stated in the quarterly comparisons.
CHANGES IN FINANCIAL CONDITION
Inventories decreased from $34,890,000 at March 31, 1996 to $33,993,000 at the
end of December as sales peaked on a seasonal basis in the Company's fiscal
third quarter. Accounts receivable increased from $12,114,000 to $22,060,000
at December 31 as a result of higher sales in the seasonally active third
quarter. Current liabilities increased slightly from $16,678,000 at March 31
to $17,055,000 at December 31 due to heightened seasonal activity. During the
quarter, the Company borrowed approximately $16,000,000 against its revolving
credit facility to finance a portion of the Rolodex Electronics acquisition,
which included a trademark license. The purchase price exceeded the fair value
of net assets acquired by $15,547,000. The Company placed a mortgage in the
principal amount of $4,260,000 on its new headquarters facility in the fiscal
first quarter. Cash and cash equivalents decreased from $10,827,000 at March
31 to $7,762,000 as approximately $7,000,000 in borrowings under the revolving
credit agreement were repaid in the December quarter to bring the loan balance
down to $12,000,000 at December 31.
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 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. On October 4, 1996, the Company had borrowed
approximately $16,000,000 under the facility in order to purchase from Insilco
certain assets and a trademark license relating to the Rolodex Electronics
business. This increased the Company's borrowings under the facility to
approximately $19,000,000 at the beginning of the third fiscal quarter. The
Company paid down approximately $7,000,000 against
8
<PAGE>
such borrowings during the quarter. At December 31, 1996, the Company had
borrowings of $12,000,000 under the bank line of credit. 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.
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.
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--NONE
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.
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
February 11 , 1997 /s/ Gregory J. Winsky
- ------------------ ------------------------------------------
Date Gregory J. Winsky
Senior Vice President,
General Counsel
(Duly Authorized Officer)
February 11 , 1997 /s/ Kenneth H. Lind
- ------------------ ------------------------------------------
Date Kenneth H. Lind
Vice President, Finance and
Treasurer
(Principal Financial 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,
INCORPORATED 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-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 7,762
<SECURITIES> 0
<RECEIVABLES> 23,008
<ALLOWANCES> 948
<INVENTORY> 33,993
<CURRENT-ASSETS> 69,023
<PP&E> 11,537
<DEPRECIATION> 0
<TOTAL-ASSETS> 106,801
<CURRENT-LIABILITIES> 17,055
<BONDS> 0
0
0
<COMMON> 50,149
<OTHER-SE> 23,033
<TOTAL-LIABILITY-AND-EQUITY> 106,801
<SALES> 71,288
<TOTAL-REVENUES> 71,288
<CGS> 36,874
<TOTAL-COSTS> 36,874
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 499
<INCOME-PRETAX> 10,233
<INCOME-TAX> 3,889
<INCOME-CONTINUING> 6,344
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,344
<EPS-PRIMARY> .78
<EPS-DILUTED> .78
</TABLE>
