<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, 1998 Commission file No. 0-14841
FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED
(Exact name of registrant as specified in it's 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)
(609)386-2500
(Registrant's telephone number)
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 the Registrant
was required to file such reports) and (2) has been subject filing
requirements for the past 90 days.
Yes_X_ No___
COMMON STOCK OUTSTANDING AS OF
DECEMBER 31, 1998 - 7,830,955 SHARES
<PAGE>
FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
December 31, March 31,
1998 1998
------------ ---------
ASSETS
------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 9,652 $ 33,923
Investments in limited partnerships 5,900 -
Accounts receivable, less allowance for doubtful accounts
of $1,092 and $903 29,124 16,684
Inventories 29,726 34,692
Deferred income tax asset 4,177 1,677
Prepaids and other assets 6,971 4,160
--------- ---------
TOTAL CURRENT ASSETS 85,550 91,136
--------- ---------
PROPERTY AND EQUIPMENT 10,061 10,712
--------- ---------
OTHER ASSETS:
Trademark, less accumulated amortization of $875 and $583 14,673 14,964
Advance royalties and licenses 5,140 5,577
Software development costs 5,496 5,360
Other assets 7,765 8,439
--------- ---------
TOTAL OTHER ASSETS 33,074 34,340
--------- ---------
TOTAL ASSETS $128,685 $ 136,188
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 17,679 $ 15,950
Current portion of long-term liabilities 1,403 403
--------- ---------
TOTAL CURRENT LIABILITIES 19,082 16,353
--------- ---------
LONG-TERM LIABILITIES
Notes payable 40,000 40,000
Mortgage note payable 3,266 3,479
Other liabilities 1,550 1,610
--------- ---------
TOTAL LONG-TERM LIABILITIES 44,816 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, 7,830,955 and 8,072,026 shares 48,700 50,489
Retained earnings 16,475 25,249
Foreign currency translation adjustment (388) (992)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 64,787 74,746
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 128,685 $ 136,188
========= =========
</TABLE>
See notes to consolidated financial statements.
Page 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,
------------------------- ------------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
SALES $ 34,502 $ 36,016 $ 87,632 $ 78,412
COST OF SALES BEFORE
INVENTORY WRITEDOWN 19,571 21,208 52,036 44,680
INVENTORY WRITEDOWN 11,216 - 11,216 -
-------- -------- -------- --------
GROSS PROFIT 3,715 14,808 24,380 33,732
-------- -------- -------- --------
EXPENSES:
Sales and marketing 10,688 7,946 22,858 16,845
Research and development 1,503 1,357 4,004 4,220
General and administrative 3,741 4,858 9,527 9,611
-------- -------- -------- -------
Total operating expenses 15,932 14,161 36,389 30,676
-------- -------- -------- -------
OPERATING INCOME (LOSS) (12,217) 647 (12,009) 3,056
Interest expense (856) (863) (2,578) (2,550)
Interest and investment income (loss) (41) 391 435 1,422
-------- -------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES (13,114) 175 (14,152) 1,928
INCOME TAX (BENEFIT) PROVISION (4,983) (1,034) (5,378) (368)
-------- -------- -------- --------
NET INCOME (LOSS) $ (8,131) $ 1,209 $ (8,774) $ 2,296
======== ======== ======== ========
NET INCOME (LOSS) PER SHARE:
BASIC $ (1.04) $ 0.15 $ (1.11) $ 0.28
======== ======== ======== ========
DILUTED $ (1.04) $ 0.15 $ (1.11) $ 0.28
======== ======== ======== ========
WEIGHTED AVERAGE SHARES:
BASIC 7,820 8,069 7,894 8,068
======== ======== ======== ========
DILUTED 7,820 8,203 7,894 8,152
======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
Page 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, 1998 8,072,026 $ 50,489 $ 25,249 $ (992) $ 74,746
Issuance of common shares under
employee option plan 28,877 268 - - 268
Issuance of shares and options and
amortization of deferred compensation
expense for shares issued for services
net of fortfeitures (1,700) 275 - - 275
Adjustment of number of shares
issued related to acquistion 5,752 - - -
Purchase and retirement of common
shares (274,000) (2,332) (2,332)
Loss for the period - - (8,774) - (8,774)
Foreign currency transition adjustment - - - 604 604
------------- ------------ ------------- ------------- -------------
BALANCE - DECEMBER 31, 1998 7,830,955 $ 48,700 $ 16,475 $ (388) $ 64,787
============= ============ ============= ============= =============
</TABLE>
See notes to consolidated financial statements.
Page 4
<PAGE>
FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Nine Months
Ended
December 31,
---------------------------
1998 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME (LOSS) $ (8,774) $ 2,296
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS)
TO NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
Depreciation and amortization 4,441 4,384
Provision for losses on accounts receivable 188 68
Provision for inventory revaluation 11,216 --
Loss on disposal of property and equipment 40 17
Deferred income taxes (2,500) 310
Source (use) of cash from change in operating assets and liab
Accounts receivable (12,629) (13,039)
Inventories (4,999) (1,002)
Prepaids and other assets (2,035) 158
Accounts payable and accrued expenses 1,729 2,282
Other, net 100 -
-------- --------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (13,223) (4,526)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (1,392) (2,085)
Proceeds from sale of property and equipment 52 124
Investments in limited partnerships (6,000) -
Change in other assets (2,974) (5,438)
Cash paid for acquisitions, net of cash acquired - (304)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (10,314) (7,703)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments of mortgage (213) (213)
Proceeds from short-term borrowings 1,000 -
Proceeds from issuance of common shares 268 121
Purchase of Company common shares (2,332) -
Other liabilities (61) 677
-------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (1,338) 585
EFFECT OF EXCHANGE RATE CHANGES ON CASH 604 (345)
-------- --------
DECREASE IN CASH AND CASH EQUIVALENTS (24,271) (11,989)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 33,923 45,040
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 9,652 $ 33,051
======== ========
</TABLE>
See notes to consolidated financial statements
Page 5
<PAGE>
FRANKLIN ELECTRONIC PUBLISHER, 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 December 31, 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 period 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.
NOTES PAYABLE
Because of the operating loss in the third quarter, the Company did not meet
EBITDA covenants under the agreement by which its Notes Payable were issued and
its Credit Agreement, but the Company received waivers of such compliance that
are effective for thirty days. The Company believes that the holders of the
Notes Payable and its banks will agree to provide the Company with permanent
waivers without acceleration of the maturity dates of indebtedness if the
Company agrees to higher interest rates. The Notes Payable continue to be
classified as a long term liability on the financial statements due to the
Company's belief in this regard. In light of the Company's cash position, the
Company intends to negotiate with the holders of the Notes Payable and its
banks to restructure these agreements with a view toward limiting its interest
expense. However, no assurances can be given that the Company will be successful
in obtaining permanent waivers or in restructuring these agreements on
acceptable conditions. Management believes that restructured financing
arrangements and cash flow from operations will be adequate to provide for the
Company's liquidity and capital needs for the foreseeable future.
STOCK BUY BACK
During the nine month period ended December 31, 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 it's 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.
INVESTMENT 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 on notice prior to certain redemption dates. As of
December 31, 1998, the funds reported that the underlying values were
approximately $100,000 less than the Company's cost. This loss was recorded in
the quarter ended December 31, 1998.
Page 6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 1998 AS COMPARED WITH DECEMBER 31, 1997:
Net Sales
Sales for the quarter ended December 31, 1998 were lower by approximately
$1,500,000, or 4%, than sales for the same quarter one year earlier. The sales
decrease was attributable to lower sales of the Company's reference and
organizer product lines, which were down approximately 17% and 13%,
respectively, offset in part by approximately 60% higher sales in its REX
product line and by $748,000 in sales by Voice Powered Technology International,
Inc. ("VPTI") which became an 82% owned subsidiary of the Company in May 1998.
Gross Profits
During the quarter, the Company re-evaluated its product lines to reduce the
number of stock keeping units sold by the Company, which will permit management
to concentrate its sales efforts on the Company's most profitable products. This
review resulted in a pre-tax inventory write-off of $11,216,000 for the quarter
ending December 31, 1998. Gross profit margins for the quarter, prior to the
effect of the write-down, increased to 43% as compared with 41% last year. That
increase resulted from the product mix shift from electronic reference and
organizer products to REX Pro products.
Operating Expenses
Total operating expenses increased to 46% of sales in the current quarter as
compared with 39% of sales in the same quarter last year. All of this increase
resulted from an increase in sales and marketing expenses to 31% of sales from
22% of sales in the prior period. Most of the increase in sales and marketing
expenses was due to advertising of the REX line. Research and development
expenses were relatively level at 4% of sales. General and administrative
expenses decreased in the current period to 11% of sales as compared with 13% of
sales last year. The expenses in the prior period included a $2,434,000 non-
recurring charge related to severance. The expenses in the current period were
adversely affected primarily by accruals related to a class action litigation,
the inclusion of the operating expenses of VPTI, and the cost of certain
personnel changes. Interest expense was flat, but interest income declined as a
result of decreased cash and poor investment performance.
Page 7
<PAGE>
Net Income (Loss)
The Company had a net loss of $8,131,000, or $1.04 per share, for the third
quarter ending December 31, 1998 compared with earnings of $1,209,000, or $.15
per share, last year. The loss was primarily the result of the write-down
referenced above. The Company's results were also negatively impacted by the
pre-tax loss of $180,000 generated by VPTI.
NINE MONTHS ENDED DECEMBER 31, 1998 AS COMPARED WITH DECEMBER 31, 1997:
Net Sales
Sales for the nine months ended December 31, 1998 were higher by approximately
$9,200,000, or 12%, than sales for the comparable period one year earlier. The
sales increase in the current period was attributable to sales of a range of
products in the REX line (a 173% increase), as well as increased sales of
ROLODEX(R) Electronics products (a 23% increase), and by $1,796,000 in sales by
VPTI, offset in part by 5% lower sales of electronic reference products. The
initial offering in the REX line began to ship only in September 1997.
Gross Profits
Gross profit margins for the nine month period, prior to the effect of the
$11,216,000 pre-tax inventory write-down referenced above, decreased from 43%
last year to 41% in the current nine month period primarily due to shifting
product mix and price protection credits and, to a lesser extent, foreign
exchange losses.
Operating Expenses
Total operating expenses increased to 42% of sales in the current period from
39% of sales last year. All of this increase resulted from an increase in sales
and marketing expenses to 26% of sales in the current period from 21% of sales
in the prior period. Most of the increase in sales and marketing expenses was
due to advertising of the REX line. Research and development expenses were
relatively level at 5% of sales. General and administrative expenses were
relatively flat being 12% of sales in the prior period and 11% of sales in the
current period. Interest expense was also flat, but interest and investment
income declined as a result of decreased cash and poor investment performance.
Net Income (Loss)
Primarily because of the inventory write-down, the Company reported a net loss
of $8,774,000, or $1.11 per share, for the nine months ending December 31, 1998
compared with net income of $2,296,000, or $.28 per share, last year. Results
were also negatively impacted by VPTI's pre-tax loss of $406,000 for the nine
months ended December 31, 1998.
Page 8
<PAGE>
NET INCOME (LOSS)
CHANGES IN FINANCIAL CONDITION
Inventories at December 31, 1998 declined by approximately $5,000,000 from March
31, 1998, primarily as a result of the inventory writedown referenced above,
offset in part by an increase in inventory of REX Pro products. Cash, cash
equivalents, and investments decreased by approximately $18,400,00 as working
capital was employed to fund seasonally higher levels of accounts receivable and
agreed upon extensions of receivable terms, as well as the Company's expenditure
of $2,332,000 to purchase approximately $274,000 shares of its common stock in
the open market under its stock buy back program. The increases in deferred
income taxes and prepaids result primarily from anticipated tax benefits and tax
refunds, respectively, from the operating loss during the nine month period.
Page 9
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's long term debt is primarily comprised of its 7.71% senior notes in
the aggregate principal amount of $40,000,000 due March 31, 2007 (the "Notes
Payable"). The Company has available a $20,000,000 revolving credit agreement
with the Chase Manhattan Bank and Summit Bank (the "Credit Agreement").
Borrowings against the line of credit under the Credit Agreement 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,
1998, borrowings under the revolving line of credit were $1,000,000 and a
standby letter of credit for approximately $3,500,000 was outstanding under the
Credit Agreement.
Because of the operating loss in the third quarter, the Company did not meet
EBITDA covenants under the agreement by which the Notes Payable were issued and
the Credit Agreement, but the Company received waivers of such compliance that
are effective for thirty days. The Company believes that the holders of the
Notes Payable and its banks will agree to provide the Company with permanent
waivers without acceleration of the maturity dates of indebtedness if the
Company agrees to higher interest rates. The Notes Payable continue to be
classified as a long term liability on the financial statements due to the
Company's belief in this regard. In light of the Company's cash position, the
Company intends to negotiate with the holders of the Notes Payable and its
banks to restructure these agreements with a view toward limiting its interest
expense. However, no assurances can be given that the Company will be successful
in obtaining permanent waivers or in restructuring these agreements on
acceptable conditions. Management believes that restructured financing
arrangements and cash flow from operations will be adequate to provide for the
Company's liquidity and capital needs for the foreseeable future.
The Company has no material commitments for capital expenditures in the next
twenty-four months.
Year 2000 Compliance
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
substantially 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 September 30, 1999. The cost of
remediation is estimated to be approximately $500,000, of which approximately
$230,000 was expensed during the nine months ended December 31, 1998 and $90,000
was expensed in the prior fiscal year. The remainder is expected to be expensed
as incurred. 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 is
developing contingency plans in this regard.
Page 10
<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 - 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, 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
February 16, 1999 /s/ H. Andrew Cross
- ----------------- ---------------------
Date H. Andrew Cross
President and Chief Executive Officer
(Duly Authorized Officer)
Page 11
<PAGE>
FEBRUARY 16, 1999 /s/ John G. Day
- ----------------- -------------------
Date John G. Day
Senior Vice President
(Principal Financial and Accounting Officer)
Page 12
<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
STATMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 9,652
<SECURITIES> 0
<RECEIVABLES> 30,216
<ALLOWANCES> 1,092
<INVENTORY> 29,726
<CURRENT-ASSETS> 85,550
<PP&E> 10,061
<DEPRECIATION> 0
<TOTAL-ASSETS> 128,685
<CURRENT-LIABILITIES> 19,082
<BONDS> 0
0
0
<COMMON> 48,700
<OTHER-SE> 16,475
<TOTAL-LIABILITY-AND-EQUITY> 128,685
<SALES> 87,632
<TOTAL-REVENUES> 87,632
<CGS> 63,252
<TOTAL-COSTS> 63,252
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,578
<INCOME-PRETAX> (14,152)
<INCOME-TAX> (5,378)
<INCOME-CONTINUING> (8,774)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,774)
<EPS-PRIMARY> (1.11)
<EPS-DILUTED> (1.11)
</TABLE>
