<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, 1998 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)
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
JUNE 30, 1998--7,993,655 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,
1998 1998
-------- ---------
<S> <C> <C>
ASSETS
------
Current Assets:
Cash and cash equivalents $ 24,262 $ 33,923
Accounts receivable, less allowance for doubtful accounts
of $915 and $903 17,352 16,684
Inventories 44,237 34,692
Deferred income tax asset 2,097 1,677
Prepaids and other assets 3,847 4,160
-------- --------
Total Current Assets 91,795 91,136
-------- --------
Property and Equipment 10,460 10,712
-------- --------
Other Assets:
Trademark, less accumulated amortization of $680 and $583 14,867 14,964
Advance royalties and licenses 6,558 5,577
Software development costs 5,421 5,360
Other assets 8,663 8,439
-------- --------
Total Other Assets 35,509 34,340
-------- --------
Total Assets $137,764 $136,188
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts payable and accrued expenses $ 19,066 $ 15,950
Current portion of long-term liabilities 403 403
-------- --------
Total Current Liabilities 19,469 16,353
-------- --------
Long-term Liabilities:
Notes payable 40,000 40,000
Mortgage note payable 3,408 3,479
Other liabilities 1,506 1,610
-------- --------
Total Long-term Liabilities 44,914 45,089
-------- --------
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 7,993,655 and 8,072,026 shares 49,778 50,489
Retained earnings 24,565 25,249
Foreign currency translation adjustment (962) (992)
-------- --------
Total Shareholders' Equity 73,381 74,746
-------- --------
Total Liabilities and Shareholders' Equity $137,764 $136,188
======== ========
</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 PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
Sales $ 21,041 $ 16,614
Cost of Sales 11,976 9,322
--------- ---------
Gross Profit 9,065 7,292
--------- ---------
Expenses:
Sales and marketing 5,827 3,925
Research and development 1,248 1,501
General and administrative 2,577 2,266
--------- ---------
Total operating expenses 9,652 7,692
--------- ---------
Operating Loss (587) (400)
Interest expense (872) (841)
Interest and investment income 355 564
--------- ---------
Loss Before Income Taxes (1,104) (677)
Income Tax (benefit) (420) (257)
--------- ---------
Net Loss $ (684) $ (420)
========= =========
Net Loss Per Share:
Loss Per Common Share $ (.08) $ (.05)
========= =========
Loss Per Common Share--Assuming Dilution $ (.08) $ (.05)
========= =========
Weighted Average Shares 8,072 8,068
========= =========
Weighted Average Shares--Assuming Dilution 8,147 8,109
========= =========
</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, 1998 8,072,026 $50,489 $25,249 $(992) $74,746
Issuance of common shares
under employee stock
option plan 15,877 174 -- -- 174
Issuance of shares and
options and amortization
of deferred compensation
expense for shares
issued for services net
of forfeitures (unearned
portion $31) (1,400) 94 -- -- 94
Adjustment of number of
shares issued related to
acquisition 5,752 -- -- -- --
Purchase and retirement of
common shares (98,600) (979) -- -- (979)
Loss for the period -- -- (684) -- (684)
Foreign currency
translation adjustment -- -- -- 30 30
--------- ------- ------- ----- -------
Balance--June 30, 1998 7,993,655 $49,778 $24,565 $(962) $73,381
========= ======= ======= ===== =======
</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,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (684) $ (420)
Adjustments To Reconcile Net Loss To Net Cash Provided
By Operating Activities:
Depreciation and amortization 1,488 1,445
Provision for losses on accounts receivable 12 7
Loss on disposal of property and equipment -- 9
Deferred income taxes (420) 167
Source (use) of cash from change in operating assets
and liabilities:
Accounts receivable (668) (1,031)
Inventories (9,545) (1,972)
Prepaids and other assets 313 (91)
Accounts payable and accrued expenses 3,116 (2,026)
--------- ---------
Net Cash Used In Operating Activities (6,388) (3,912)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (445) (753)
Proceeds from sale of property and equipment -- 63
Change in other assets (1,878) (3,896)
--------- ---------
Net Cash Used In Investing Activities (2,323) (4,586)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments of mortgage (71) (71)
Proceeds from issuance of common shares 174 80
Purchase of Company common shares (979) --
Other liabilities (104) 29
--------- ---------
Net Cash (used in) Provided By Financing Activities (980) 38
Effect Of Exchange Rate Changes On Cash 30 (207)
--------- ---------
Decrease In Cash And Cash Equivalents (9,661) (8,667)
Cash And Cash Equivalents At Beginning Of Period 33,923 45,040
--------- ---------
Cash And Cash Equivalents At End Of Period $ 24,262 $ 36,373
========= =========
</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, 1998.
The financial statements for the periods ended June 30, 1998 and 1997 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.
STOCK BUY BACK
During the quarter ended June 30, 1998, the Company purchased 98,600 shares of
its common stock in the open market at an average purchase price of $9.93 per
share under its previously announced share buy back plan. The Company may
expend up to a total of $5,000,000 under the plan authorized by the Company's
Board of Directors.
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, 1998 AS COMPARED WITH JUNE 30, 1997:
Net Sales
Sales of $21,041,000 for the quarter ended June 30, 1998 were 27% higher than
sales of $16,614,000 for the same quarter one year earlier. The sales increase
is attributed to sales of the REX(TM) PC Companion which was not sold during
the first quarter in the preceding year and increased sales of the ROLODEX(R)
Electronics line of products. Sales were augmented by $459,000 representing
sales by Voice Powered Technology International, Inc. ("VPTI") which became an
82% owned subsidiary of the Company in May 1998 when VPTI's reorganization
plan was confirmed by the U.S. Bankruptcy Court for the Central District of
California. Royalties from technology licenses remained at 2% of sales.
Gross Profits
Gross profits increased by 24% to $9,065,000 from $7,292,000 last year as
sales increased. Gross profit margins varied little from year to year,
decreasing slightly from 44% last year to 43% in the current period as the
Company's product mix continued to shift from reference products toward PC
companion and organizer products.
Operating Expenses
The Company reported a loss of $684,000, or $.08 per share, as compared with a
loss of $420,000, or $.05 per share, last year primarily due to an increase in
sales and marketing expenses. Total operating expenses increased by $1,960,000
to $9,652,000 in the June 1998 quarter as compared with $7,692,000 in the same
quarter last year. Sales and marketing expenses were up by $1,902,000 from
last year's level of $3,925,000 (24% of sales) to $5,827,000 (28% of sales).
The increase in sales and marketing expenses is attributable to higher
expenditures in connection with promoting the new REX line and expenditures
for market research. Research and development expenses decreased slightly to
$1,248,000 (6% of sales) from $1,501,000 (9% of sales) in the period one year
earlier primarily due to reduced headcount in the engineering staff. The
Company expects to increase staffing levels for research and development in
the near term. General and administrative expenses increased to $2,577,000 but
fell as a percentage of sales to 12% of sales from $2,266,000 (14% of sales)
last year primarily due to expenses of new subsidiaries. Results were
negatively impacted by an increase in net interest expense of $240,000 over
last year's level primarily due to lower levels of cash available for
investments. Interest expense was $872,000 compared with $841,000 last year,
while interest income decreased to $355,000 from $564,000 last year.
CHANGES IN FINANCIAL CONDITION
Inventories increased from $34,692,000 at March 31, 1998 to $44,237,000 at the
end of the June quarter in anticipation of higher sales in the seasonally
active second and third quarters. The inventory increase is primarily
attributable to the REX line. Cash and cash equivalents decreased from
$33,923,000 at March 31, 1998 to $24,262,000 as working capital was employed
in order to support inventory build-up and in connection with the Company's
acquisition of certain
7
<PAGE>
technologies. Cash of approximately $1,000,000 was utilized during the period
as the Company purchased 98,600 shares of its common stock in the open market
in connection with its on-going stock buy back program. Accounts receivable
increased from $16,684,000 to $17,352,000 and accounts payable and accrued
expenses increased from $15,950,000 to $19,066,000.
LIQUIDITY AND CAPITAL RESOURCES
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").
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 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,
1998, there were no borrowings under the revolving line of credit. Management
believes that the proceeds of the senior note offering, cash flow from
operations, and the revolving line of credit will be adequate to provide for
the Company's liquidity and capital needs for the foreseeable future.
The Company evaluates, on a continuous basis, software enhancements and
updates based on new technologies to improve its information systems. The
Company has finished its assessment of its current systems that support the
Company's operations in conjunction with year 2000 compliance. The Company has
begun or, in certain cases, completed remediation of its existing operational
software to insure functionality and continued operations beyond the year
2000. The Company expects to complete such remediation by March 31, 1999. The
cost is estimated to be less than $500,000, of which approximately $90,000 was
expensed during the year ended March 31, 1998. The remainder is expected to be
expensed as incurred in the current fiscal year. The Company does not believe
that the failure of any customer to be year 2000 compliant would have a
material adverse effect on the financial condition of the Company. The Company
is in the process of evaluating the progress of its major suppliers toward
year 2000 compliance.
The Company has no material commitments for capital expenditures in the next
twenty-four months.
8
<PAGE>
PART II
ITEM 1. LEGAL PROCEEDINGS
In 1998, the Company was served with a class action complaint in the Superior
Court of New Jersey having warranty, negligence, and state consumer statute
claims based on an alleged defect in the "to-do list" function of the desktop
software provided with the REX PC Companion. The Company intends vigorously to
defend this class action litigation.
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,
including the class action litigation identified above, is likely,
individually or in the aggregate, to have a material adverse effect on the
financial condition 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
No reports on Form 8-K were filed by the Company during the quarter ended June
30, 1998.
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, 1998 /s/ H. Andrew Cross
- -------------- ------------------------------------------------
Date H. Andrew Cross
Chief Executive Officer and President
(Duly Authorized Officer)
AUGUST 13, 1998 /s/ Kenneth H. Lind
- -------------- ------------------------------------------------
Date Kenneth H. Lind
Senior Vice President,
(Principal Financial and Accounting Officer)
9
<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-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 24,262
<SECURITIES> 0
<RECEIVABLES> 18,267
<ALLOWANCES> 915
<INVENTORY> 44,237
<CURRENT-ASSETS> 91,795
<PP&E> 10,460
<DEPRECIATION> 0
<TOTAL-ASSETS> 137,764
<CURRENT-LIABILITIES> 19,469
<BONDS> 0
0
0
<COMMON> 49,778
<OTHER-SE> 23,603
<TOTAL-LIABILITY-AND-EQUITY> 137,764
<SALES> 21,041
<TOTAL-REVENUES> 21,041
<CGS> 11,976
<TOTAL-COSTS> 11,976
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 872
<INCOME-PRETAX> (1,104)
<INCOME-TAX> (420)
<INCOME-CONTINUING> (684)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (684)
<EPS-PRIMARY> (.08)
<EPS-DILUTED> (.08)
</TABLE>
