<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, 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) (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
SEPTEMBER 30, 1998 - 7,817,955 SHARES
<PAGE>
FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
September 30, March 31,
1998 1998
--------------- --------------
<S> <C> <C>
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 9,326 $ 33,923
Investments in limited partnerships 6,000 -
Accounts receivable, less allowance for doubtful accounts
of $982 and $903 27,421 16,684
Inventories 42,676 34,692
Deferred income tax asset 2,097 1,677
Prepaids and other asset 4,572 4,160
--------- ---------
TOTAL CURRENT ASSETS 92,092 91,136
--------- ---------
PROPERTY AND EQUIPMENT 10,045 10,712
--------- ---------
OTHER ASSETS:
Trademark, less accumulated amortization of $777 and $583 14,770 14,964
Advance royalties and licenses 6,338 5,577
Software development costs 5,465 5,360
Other assets 7,948 8,439
--------- ---------
TOTAL OTHER ASSETS 34,521 34,340
--------- ---------
TOTAL ASSETS $ 136,658 $ 136,188
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 18,646 $ 15,950
Current portion of long-term liabilities 403 403
--------- ---------
TOTAL CURRENT LIABILITIES 19,049 16,353
--------- ---------
LONG-TERM LIABILITIES:
Notes payable 40,000 40,000
Mortgage note payable 3,337 3,479
Other liabilities 1,534 1,610
--------- ---------
TOTAL LONG-TERM LIABILITIES 44,871 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 7,817,955 and 8,072,026 shares 48,530 50,489
Retained earnings 24,606 25,249
Foreign currency translation adjustment (398) (992)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 72,738 74,746
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 136,658 $ 136,188
========= =========
</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,
------------------------- ---------------------
1998 1997 1998 1997
----------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
SALES $ 32,089 $ 25,782 $ 53,130 $ 42,396
COST OF SALES 20,489 14,150 32,465 23,472
----------- ---------- ---------- ---------
GROSS PROFIT 11,600 11,632 20,665 18,924
----------- ---------- ---------- ---------
EXPENSES:
Sales and marketing 6,343 4,975 12,170 8,900
Research and development 1,253 1,362 2,501 2,863
General and administrative 3,209 2,486 5,786 4,752
----------- ---------- ---------- ---------
Total operating expenses 10,805 8,823 20,457 16,515
----------- ---------- ---------- ---------
OPERATING INCOME 795 2,809 208 2,409
Interest expense (850) (846) (1,722) (1,687)
Interest and investment income 121 467 476 1,031
----------- ---------- ---------- ---------
INCOME (LOSS) BEFORE INCOME TAXES 66 2,430 (1,038) 1,753
INCOME TAX (BENEFIT) PROVISION 25 923 (395) 666
=========== =========== ========== ==========
NET INCOME (LOSS) $ 41 $ 1,507 $ (643) $ 1,087
=========== =========== ========== ==========
NET INCOME (LOSS) PER SHARE:
BASIC $ 0.01 $ 0.19 $ (0.08) $ 0.13
=========== =========== ========== ==========
DILUTED $ 0.01 $ 0.18 $ (0.08) $ 0.13
=========== =========== ========== ==========
WEIGHTED AVERAGE SHARES:
BASIC 7,966 8,068 7,930 8,068
=========== =========== ========== ==========
DILUTED 8,012 8,159 7,985 8,127
========== =========== ========== ==========
</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>
TOTAL
COMMON STOCK 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 (1,700) 199 - - 199
Adjustment of number of shares issued related
to acquisition 5,752 - - - -
Purchase and retirement of common shares (274,000) (2,332) - - (2,332)
Loss for the period - - (643) - (643)
Foreign currency translation adjustment - - - 594 594
----------- ----------- ---------- -------- ---------
BALANCE--SEPTEMBER 30, 1998 7,817,955 $ 48,530 $ 24,606 $(398) $72,738
=========== =========== ========== ======== =========
</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,
---------------------- ---------------------
1998 1997 1998 1997
-------- --------- --------- --------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME (LOSS) $ 41 $ 1,507 $ (643) $ 1,087
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET
CASH USED IN OPERATING ACTIVITIES:
Depreciation and amortization 1,578 1,454 3,066 2,899
Provision for losses on accounts receivable 67 7 79 14
Loss on disposal of property and equipment 54 4 54 13
Deferred income taxes - (120) (420) 47
Source (use) of cash from change in operating assets
and liabilities:
Accounts receivable (10,148) (7,133) (10,816) (8,164)
Inventories 1,561 (3,018) (7,984) (4,990)
Prepaids and other assets 51 (559) 364 (650)
Accounts payable and accrued expenses (420) 2,436 2,696 410
-------- --------- --------- --------
NET CASH USED IN OPERATING ACTIVITIES (7,216) (5,422) (13,604) (9,334)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (337) (884) (782) (1,637)
Proceeds from sale of property and equipment 14 46 14 109
Investments in limited partnerships (6,000) - (6,000) -
Change in other assets (565) (854) (2,443) (4,750)
Cash paid for acquisitions, net of cash acquired - (304) - (304)
-------- --------- --------- --------
NET CASH USED IN INVESTING ACTIVITIES (6,888) (1,996) (9,211) (6,582)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments of mortgage (71) (71) (142) (142)
Proceeds from issuance of common shares - 41 174 121
Purchase of Company common shares (1,353) - (2,332) -
Other liabilities 28 29 (76) 58
-------- --------- --------- --------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (1,396) (1) (2,376) 37
EFFECT OF EXCHANGE RATE CHANGES ON CASH 564 17 594 (190)
-------- --------- --------- -------
DECREASE IN CASH AND CASH EQUIVALENTS (14,936) (7,402) (24,597) (16,069)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 24,262 36,373 33,923 45,040
-------- --------- --------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 9,326 $ 28,971 $ 9,326 $ 28,971
======== ========= ========= ========
</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 September 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 six month period ended September 30, 1998, the Company purchased
274,000 shares of its common stock in the open market at an average purchase
price of $8.51 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.
INVESTMENTS IN LIMITED PARTNERSHIPS
During the quarter ended September 30, 1998, the Company invested $6,000,000 in
two limited partnerships which plan to invest the funds to return a high yield.
The funds can be withdrawn quarterly on thirty days notice. The Company is
accounting for these investments at cost. As of September 30, 1998, the funds
reported that the underlying values were approximately $160,000 less than the
Company's cost.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998 AS COMPARED WITH SEPTEMBER 30, 1997:
Net Sales
Sales of $32,089,000 for the quarter ended September 30, 1998 were 24% higher
than sales of $25,782,000 for the same quarter one year earlier. The sales
increase is attributable to sales of PC Companion products in the REX(TM) line,
including the new REX PRO product which began to ship in September 1998, as well
as increased sales of organizers sold under the ROLODEX(R) Electronics brand and
electronic reference products. REX sales began only in September 1997. Sales
were augmented by $588,000 in 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 decreased
from 3% of sales to 1% of sales.
Gross Profits
Gross profits were flat at $11,600,000 as compared with $11,632,000 last year as
a result of margins decreasing to 36% as compared with 45% last year. In the
current period, product mix shifted from electronic reference products to REX
and ROLODEX(R) Electronics products; both types of products generally bear lower
profit margins than electronic reference products.
Operating Expenses
The Company had net income of $41,000 or $.01 per share for the second quarter
ending September 30, 1998 compared with earnings of $1,507,000 or $.18 per share
last year. The Company's results were negatively impacted by the consolidation
of the pre-tax loss of $168,000 generated by VPTI. Total operating expenses
increased by $1,982,000 to $10,805,000 in the
7
<PAGE>
current quarter as compared with $8,823,000 in the same quarter last year, but
in each year those expenses were 34% of sales. Sales and marketing expenses
increased from $4,975,000 (19% of sales) to $6,343,000 (20% of sales) due to
promotion of the REX line, an expenditure that was not made in the same period
last year, and expenditures for market development. Research and development
expenses were relatively level at $1,253,000 compared with $1,362,000 last year,
decreasing from 5% of sales to 4% of sales as sales increased. General and
administrative expenses increased in the present period to $3,209,000 (10% of
sales) as compared with $2,486,000 (10% of sales) last year due to VPTI's
expenses and severance payments. Total severance expenses in the quarter were
$664,000. Interest expense was $850,000 compared with $846,000 last year;
interest income, however, decreased by $346,000 from $467,000 last year to
$121,000 this year as a result of decreased cash and because of investment
performance.
SIX MONTHS ENDED SEPTEMBER 30, 1998 AS COMPARED WITH SEPTEMBER 30, 1997:
Net Sales
Sales of $53,130,000 were 25% higher than sales of $42,396,000 for the
comparable period one year earlier. The sales increase is attributable to
availability of the full range of products in the REX line (for which the
initial offering in the line began to ship only in September 1997) as well as
increased sales of ROLODEX(R) Electronics products and electronic reference
products. Sales were augmented by $1,048,000 representing sales by VPTI.
Royalties from technology licenses were 1% of total sales, down from 2% of total
sales last year.
Gross Profits
Gross profits increased from $18,924,000 to $20,665,000 as sales increases were
offset in part by lower product margins. The Company's gross profit margin
decreased from 45% last year to 39% due to product mix as explained in the
quarterly comparison.
Operating Expenses
The Company reported a net loss of $643,000, or $.08 per share, for the six
months ending
8
<PAGE>
September 30, 1998 compared with net income of $1,087,000, or $.13 per share,
last year. Results were negatively impacted by VPTI's pre-tax loss of $226,000
for the six months ended September 30, 1998. Total operating expenses were
$20,457,000 (39% of sales) in the period up from $16,515,000 (also 39% of sales)
last year. Sales and marketing expenses increased from last year's level of
$8,900,000 (21% of sales) to $12,170,000 (23% of sales). The increase in sales
and marketing expenses is attributable to higher expenditures in connection with
advertising for REX and market development and research. Research and
development expenses were $2,501,000 (5% of sales) as compared with $2,863,000
(7% of sales) in the period one year earlier. General and administrative
expenses of $5,786,000 (11% of sales) were higher than $4,752,000 (also 11% of
sales) last year due to expenses at VPTI and severance payments. Interest and
investment income decreased from $1,031,000 last year to $476,000 this year for
the reasons stated in the quarterly comparisons, and interest expense was
$1,722,000 as compared with $1,687,000 last year.
CHANGES IN FINANCIAL CONDITION
Inventories increased from $34,692,000 at March 31, 1998 to $42,676,000 at the
end of the September quarter in anticipation of higher sales in the seasonally
active third quarter. The Company expects to re-evaluate its product lines
during the quarter ending December 31, 1998 with the intention of reducing the
number of stock keeping units sold by the Company to enable management to
concentrate its sales efforts on the Company's most profitable products. This
review may result in markdowns or write-offs in the quarter ending December 31,
1998. Cash and cash equivalents decreased from $33,923,000 at March 31, 1998 to
$9,326,000 as working capital was employed in order to support inventory build-
up and increased advertising expenditures. Additionally, the Company made an
investment of $6,000,000 in limited partnerships and cash of approximately
$2,332,000 was utilized during the six month period as the Company bought back
approximately 274,000 shares of its common stock in the open market under its
stock buy back program. Accounts receivable increased from $16,684,000 to
$27,421,000 due to sales increasing in the September
9
<PAGE>
quarter and, as well, accounts payable and accrued expenses increased from
$15,950,000 to $18,646,000. Advance royalties and licenses increased by $761,000
as the Company prepaid royalties for certain products.
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 September 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
10
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$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.
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
The Annual Meeting of Shareholders of the Company was held on August
5, 1998. 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, eleven incumbent directors were re-elected with
Edward H. Cohen receiving 7,164,162 votes with 59,865 votes withheld;
H. Andrew Cross receiving 7,166,679 votes with 57,348 votes withheld;
Barry J. Lipsky receiving 7,163,179 votes with 60,848 votes withheld;
Leonard M. Lodish, Howard L. Morgan and James H. Simons each receiving
7,164,079 votes with 59,948 votes withheld; Bernard Goldstein
receiving 7,003,474 votes with 220,553 votes withheld; James Meister
receiving 7,166,909 votes with 57,118 votes withheld; Jerry R. Schubel
receiving 7,164,069 votes with 59,958 withheld; and Michael R. Strange
and William H. Turner each receiving 7,164,179 votes with 59,848 votes
withheld. The adoption of the Company's 1998 Stock Option Plan was
approved by a vote of 4,228,913 in favor, 959,307 against, and 15,796
abstentions. Shareholders ratified the appointment of Radin, Glass &
Co. as auditors for the Company's 1999 fiscal
11
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year by vote of 7,171,001 in favor, 40,376 against, and 12,650
abstentions.
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 September 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
November 13, 1998 /s/ H. Andrew Cross
- ----------------- ----------------------------------------
Date H. Andrew Cross
President and Chief Executive Officer
(Duly Authorized Officer)
NOVEMBER 13, 1998 /s/ John G. Day
- ------------------- ----------------------------------------
Date John G. Day
Senior Vice President
(Principal Financial and Accounting Officer)
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF FINANCIAL 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-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 9,326
<SECURITIES> 0
<RECEIVABLES> 28,403
<ALLOWANCES> 982
<INVENTORY> 42,676
<CURRENT-ASSETS> 92,092
<PP&E> 10,045
<DEPRECIATION> 0
<TOTAL-ASSETS> 136,658
<CURRENT-LIABILITIES> 19,049
<BONDS> 0
0
0
<COMMON> 48,530
<OTHER-SE> 24,208
<TOTAL-LIABILITY-AND-EQUITY> 136,658
<SALES> 53,130
<TOTAL-REVENUES> 53,130
<CGS> 32,465
<TOTAL-COSTS> 32,465
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,722
<INCOME-PRETAX> (1,038)
<INCOME-TAX> (395)
<INCOME-CONTINUING> (643)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (643)
<EPS-PRIMARY> (.08)
<EPS-DILUTED> (.08)
</TABLE>
