<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, 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
DECEMBER 31, 1997 8,068,193 SHARES
<PAGE>
FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
December 31, March
1997 31, 1997
------------ --------
<S> <C> <C>
ASSETS
------
Current Assets:
Cash and cash equivalents $ 33,051 $ 45,040
Accounts receivable, less allowance for doubtful
accounts of $856 and $839 23,292 9,806
Inventories 32,577 30,617
Deferred income tax asset 1,813 2,122
Prepaids and other assets 3,045 3,145
-------- --------
Total Current Assets 93,778 90,730
-------- --------
Property and Equipment 11,151 11,211
Trademark 15,061 15,353
Other Assets 17,578 13,761
-------- --------
Total Assets $137,568 $131,055
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts payable and accrued expenses $ 16,338 $ 12,650
Current portion of mortgage note payable 284 284
-------- --------
Total Current Liabilities 16,622 12,934
-------- --------
Long-Term Liabilities:
Notes payable 40,000 40,000
Mortgage note payable 3,550 3,763
Other liabilities 1,613 755
-------- --------
Total Long-Term Liabilities 45,163 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 8,068,193 and
8,060,133 shares 50,464 50,235
Retained earnings 26,116 23,820
Foreign currency translation adjustment (797) (452)
-------- --------
Total Shareholders' Equity 75,783 73,603
-------- --------
Total Liabilities and Shareholders' Equity $137,568 $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 Nine Months
Ended December Ended December
31, 31,
---------------- ----------------
1997 1996 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
Sales $36,016 $31,986 $78,412 $71,288
Cost of Sales 21,208 16,455 44,680 36,874
------- ------- ------- -------
Gross Profit 14,808 15,531 33,732 34,414
------- ------- ------- -------
Expenses:
Sales and marketing 7,946 6,047 16,845 13,161
Research and development 1,357 1,409 4,220 4,143
General and administrative 2,424 2,527 7,177 6,535
Non-recurring charge 2,434 -- 2,434 --
Interest expense 863 384 2,550 499
Interest and investment income (391) (74) (1,422) (157)
------- ------- ------- -------
Total expenses 14,633 10,293 31,804 24,181
------- ------- ------- -------
Income Before Income Taxes 175 5,238 1,928 10,233
Income Tax (benefit) Provision (1,034) 1,991 (368) 3,889
------- ------- ------- -------
Net Income $ 1,209 $ 3,247 $ 2,296 $ 6,344
======= ======= ======= =======
Net Income Per Share:
Earnings Per Common Share $ .15 $ .40 $ .28 $ .79
======= ======= ======= =======
Earnings Per Common Share--
Assuming Dilution $ .15 $ .40 $ .28 $ .78
======= ======= ======= =======
Weighted Average Shares 8,069 8,056 8,068 7,988
======= ======= ======= =======
Weighted Average Shares--Assuming Dilution 8,203 8,119 8,152 8,126
======= ======= ======= =======
</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 $106) (5,900) 108 -- -- 108
Income for the period -- -- 2,296 -- 2,296
Foreign currency translation
adjustment -- -- -- (345) (345)
--------- ------- ------- ----- -------
Balance--December 31, 1997 8,068,193 $50,464 $26,116 $(797) $75,783
========= ======= ======= ===== =======
</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 Nine Months Ended
Ended December 31, December 31,
------------------ -------------------
1997 1996 1997 1996
------- -------- -------- ---------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 1,209 $ 3,247 $ 2,296 $ 6,344
Adjustments To Reconcile Net Income To
Net Cash Provided By Operating
Activities:
Depreciation and amortization 1,485 1,328 4,384 3,506
Provision for losses on accounts
receivable 54 50 68 82
Loss on disposal of property and
equipment 4 2 17 12
Deferred income tax benefit 263 302 310 (459)
Source (use) of cash from change in
operating assets and liabilities
excluding the effects of
acquisition:
Accounts receivable (4,875) (3,255) (13,039) (9,348)
Inventories 3,988 7,383 (1,002) 1,800
Prepaids and other assets 808 1,738 158 2
Accounts payable and accrued expenses 1,872 1,242 2,282 (176)
------- -------- -------- --------
Net Cash Provided By (used) Operating
Activities 4,808 12,037 (4,526) 1,763
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (448) (730) (2,085) (2,229)
Proceeds from sale of property and
equipment 15 5 124 60
Change in other assets (688) (917) (5,438) (2,401)
Cash paid for acquisitions, net of
cash acquired -- (17,355) (304) (17,526)
------- -------- -------- --------
Net Cash Used In Investing Activities (1,121) (18,997) (7,703) (22,096)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from mortgage -- -- -- 4,260
Principal payments of mortgage (71) (95) (213) (142)
Proceeds from issuance of common
shares -- 5 121 127
Proceeds from revolving line of credit -- 15,767 -- 18,767
Principal payments of revolving line
of credit -- (6,767) -- (6,767)
Income tax credit--stock options -- 1,196 -- 1,196
Other liabilities 619 26 677 77
------- -------- -------- --------
Net Cash Provided By Financing
Activities 548 10,132 585 17,518
Effect Of Exchange Rate Changes On Cash (155) (61) (345) (250)
------- -------- -------- --------
Increase (decrease) In Cash And Cash
Equivalents 4,080 3,111 (11,989) (3,065)
Cash And Cash Equivalents At Beginning
Of Period 28,971 4,651 45,040 10,827
------- -------- -------- --------
Cash And Cash Equivalents At End Of
Period $33,051 $ 7,762 $ 33,051 $ 7,762
======= ======== ======== ========
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 December 31, 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.
1. NON-RECURRING CHARGE
In October 1997, the Company announced that its Chairman and Chief Executive
Officer had decided to leave the Company effective February 28, 1998. The
Company incurred a non-recurring contractual charge during the December
quarter of the current fiscal year of $2,434,000 in connection with this
event.
2. INCOME TAXES
Income taxes for the quarter ended December 31, 1997 include a benefit of
$1,100,000 relating to the reversal of income tax accruals made in prior years
which are no longer required.
3. EARNINGS PER SHARE
Earnings per share for the nine months ended December 31, 1997 have been
stated to reflect the requirements of the newly issued Financial Accounting
Standard on Earnings per Share. In accordance with the pronouncement, the
three months and nine months ended December 31, 1996 have been restated.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 1997 AS COMPARED WITH DECEMBER 31, 1996:
Net Sales
Sales for the quarter ended December 31,1997 were the highest in any quarter
in the Company's thirteen year history as a public company. Sales of
$36,016,000 for the December 1997 quarter were 13% higher than the $31,986,000
for the December 1996 quarter primarily due to higher sales in the domestic
market including sales of new products, such as the REX(TM) PC Companion and
the Homework Wiz(TM) children's dictionary, and the Rolodex(R) Electronics
line. The ROLODEX(R) Electronics line was first sold in the quarter one year
earlier as the Company completed the acquisition of that trademark in October
1996. International sales declined slightly to $12,872,000 (36% of sales) from
$13,242,000 (41% of sales). Declines in sales by the Company's subsidiaries in
the United Kingdom and France were offset in part by increased sales at other
international subsidiaries. Royalties from technology licenses remained
constant at 1% of sales.
Gross Profits
Gross profit margins decreased from $15,531,000 (48% of sales) to $14,808,000
(41% of sales). Profit margins were adversely impacted primarily due to the
increasing percentage of revenue attributed to the sales of the new ROLODEX(R)
Electronics line which has lower margins than the Company's line of electronic
books. The Company reported net income of $1,209,000 or $.15 per share for the
third quarter ending December 31, 1997, compared with $3,247,000 or $.40 per
share last year.
Operating Expenses
During the quarter, the Company announced that its Chairman and Chief
Executive Officer had decided to leave the Company effective February 28, 1998
and in connection with his departure earnings were adversely affected by a
non-recurring contractual charge of $2,434,000. Total expenses, excluding that
non-recurring charge, increased by $1,906,000 to $12,199,000 (34% of sales) in
the current quarter as compared with $10,293,000 (32% of sales) in the same
quarter last year. Sales and marketing expenses increased from $6,047,000 (19%
of sales) to $7,946,000 (22% of sales) primarily due to advertising expenses
in connection with the REX PC Companion and the Homework Wiz children's
dictionary. Research and development expenses were down slightly from
$1,409,000 (4% of sales) to $1,357,000 (4% of sales) in the current period. As
a result of expense control, general and administrative expenses decreased
from $2,527,000 (8% of sales) to $2,424,000 (7% of sales). Interest expense
increased by $479,000 in connection with interest on senior notes as the
Company completed a $40,000,000 private placement in March 1997. Interest
income increased by $317,000 due to increased cash balances. Taken together,
results were negatively impacted by an increase in net interest expense of
$162,000 over last year's level. The period was favorably impacted by the
reversal of a $1,100,000 income tax accrual.
NINE MONTHS ENDED DECEMBER 31, 1997 AS COMPARED WITH DECEMBER 31, 1996:
Net Sales
Sales of $78,412,000 were 10% higher than sales of $71,288,000 for the
comparable period one year earlier. The sales increase is primarily
attributable to higher sales in the domestic market
7
<PAGE>
including sales of new products, such as the REX PC Companion and the Homework
Wiz children's dictionary, and the Rolodex(R) Electronics line. International
sales declined slightly to $26,282,000 (34% of sales) from $26,686,000 (37% of
sales). Declines in sales by the Company's subsidiaries in the United Kingdom
and France were offset in part by increased sales at other international
subsidiaries. Royalties from technology licenses remained constant at 2% of
total sales.
Gross Profits
The decrease in gross profits from $34,414,000 to $33,732,000 notwithstanding
the sales increase was the result of lower gross profit margins. Gross profit
margins decreased from 48% last year to 43% this year as products in the new
ROLODEX(R) Electronics line do not command margins as high as those generated
by electronic books. The Company reported net income of $2,296,000 or $.28 per
share for the nine months ending December 31, 1997 compared with earnings of
$6,344,000 or $.78 per share last year.
Operating Expenses
Results for the nine months ended December 31, 1997 were adversely affected by
increased operating expenses and the non-recurring contractual charge of
$2,434,000. Total operating expenses, excluding the non-recurring charge
identified above, increased by $5,189,000 to $29,370,000 (37% of sales) in the
period from $24,181,000 (34% of sales) last year. Sales and marketing expenses
increased by $3,684,000 from last year's level of $13,161,000 (18% of sales)
to $16,845,000 (21% of sales) primarily due to increased expenditures for
advertising and marketing in both domestic and international operations.
Research and development expenses were relatively constant at $4,220,000 as
compared with $4,143,000 in the period one year earlier. General and
administrative expenses increased by $642,000 to $7,177,000 (9% of sales) from
$6,535,000 (9% of sales) due to increased personnel cost primarily in
connection with the start up of new international subsidiaries and in
connection with the acquisition of the ROLODEX(R) Electronics line. Interest
expense increased by $2,051,000 because of the new senior notes and interest
income increased by $1,265,000 due to increased cash balances. Taken together,
results were negatively impacted by an increase in net interest expense of
$786,000 over last year's level. The period was favorably impacted by the
reversal of a $1,100,000 income tax accrual.
CHANGES IN FINANCIAL CONDITION
Cash and cash equivalents decreased from $45,040,000 at March 31, 1997 to
$33,051,000 as working capital was employed in connection with increased
levels of inventory and accounts receivable in the Company's peak selling
season. Inventories were up on a seasonal basis from $30,617,000 at March 31,
1997 to $32,577,000 at the end of the December quarter. Given the record level
of sales by the Company in the December quarter, accounts receivable increased
from $9,806,000 at March 31 to $23,292,000 at December 31. The increase in
other assets is attributable to investments in and loans to Voice Powered
Technology International, Inc. ("VPTI") of approximately $1,850,000 and
technology acquisitions during the period. In September 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 in this
regard.
8
<PAGE>
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 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.
Borrowing 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 December 31,1997, there were no
borrowings under the revolving line of credit.
In October 1997, the Company announced that its Chairman and Chief Executive
Officer had decided to leave the Company. The Company incurred a non-recurring
contractual charge during the December quarter of the current fiscal year of
$2,434,000 in connection with this event. The Company has engaged a search
firm to identify candidates for the position of Chief Executive Officer. In
February 1998, Howard L. Morgan, a director of the Company, was named interim
Chief Executive Officer and President of the Company. The Company stated in
October 1997 that the investment banking firm of Goldman, Sachs & Co. had been
engaged to evaluate the Company's strategic alternatives.
The Company evaluates on a continuous basis software enhancements and updates
based on new technologies to improve its information systems. The Company has
assessed its current systems that support the Company's operations in
conjunction with year 2000 compliance. The Company has undertaken a program to
modify its existing operational software to insure functionality and continued
operations beyond the year 2000. The cost is estimated to be less than
$500,000 and will be expensed as incurred.
The Company has no material commitments for capital expenditures in the next
twenty-four months.
9
<PAGE>
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--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
December 31, 1997.
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 13, 1998 /s/ Gregory J. Winsky
- ----------------- ------------------------------------------------
Date Gregory J. Winsky
Senior Vice President,
General Counsel
(Duly Authorized Officer)
FEBRUARY 13, 1998 /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> 9-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 33,051
<SECURITIES> 0
<RECEIVABLES> 24,148
<ALLOWANCES> 856
<INVENTORY> 32,577
<CURRENT-ASSETS> 93,778
<PP&E> 11,151
<DEPRECIATION> 0
<TOTAL-ASSETS> 137,568
<CURRENT-LIABILITIES> 16,622
<BONDS> 0
0
0
<COMMON> 50,464
<OTHER-SE> 25,319
<TOTAL-LIABILITY-AND-EQUITY> 137,568
<SALES> 78,412
<TOTAL-REVENUES> 78,412
<CGS> 44,680
<TOTAL-COSTS> 44,680
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,550
<INCOME-PRETAX> 1,928
<INCOME-TAX> (368)
<INCOME-CONTINUING> 2,296
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,296
<EPS-PRIMARY> .28
<EPS-DILUTED> .28
</TABLE>
