<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, 1999 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, 1999 - 7,832,955 SHARES
<PAGE>
FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
June 30, March 31,
1999 1999
-------- ----------
ASSETS
------
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 8,754 $ 12,870
Investments in limited partnerships - 6,045
Accounts receivable, less allowance for doubtful accounts of $1,019 and $928 16,893 17,225
Inventories 25,377 23,934
Income tax receivable 3,354 3,601
Prepaids and other assets 2,716 3,201
-------- --------
TOTAL CURRENT ASSETS 57,094 66,876
-------- --------
PROPERTY AND EQUIPMENT 9,014 9,094
-------- --------
OTHER ASSETS:
Deferred income tax asset 5,700 5,700
Trademark, less accumulated amortization of $1,069 and $972 14,478 14,576
Advance royalties and licenses 1,552 1,580
Software development costs 5,215 5,338
Other assets 4,184 4,156
-------- --------
TOTAL OTHER ASSETS 31,129 31,350
-------- --------
TOTAL ASSETS $ 97,237 $107,320
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 23,883 $ 19,136
Notes payable 34,000 40,000
Mortgage note payable 3,408 3,479
Current portion of long-term liabilities - Other 130 119
-------- --------
TOTAL CURRENT LIABILITIES 61,421 62,734
-------- --------
LONG-TERM LIABILITIES
Other liabilities 1,548 1,541
-------- --------
TOTAL LONG-TERM LIABILITIES 1,548 1,541
-------- --------
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, 7,832,955 and 7,832,955 shares 48,785 48,784
Retained earnings (deficit) (13,549) (4,942)
Foreign currency translation adjustment (968) (797)
-------- --------
TOTAL SHAREHOLDERS' EQUITY 34,268 43,045
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 97,237 $107,320
======== ========
</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
June 30,
------------------------------
1999 1998
-------------- ------------
<S> <C> <C>
SALES $ 19,746 $ 21,041
COST OF SALES 15,043 11,616
-------------- ------------
GROSS PROFIT 4,703 9,425
-------------- ------------
EXPENSES:
Sales and marketing 6,703 5,827
Research and development 1,446 1,248
General and administrative 4,275 2,577
-------------- ------------
Total operating expenses 12,424 9,652
-------------- ------------
OPERATING LOSS (7,721) (227)
Interest expense (885) (872)
Interest and investment income 121 355
Other, net (122) (360)
-------------- ------------
LOSS BEFORE INCOME TAXES (8,607) (1,104)
INCOME TAX BENEFIT - (420)
-------------- ------------
NET LOSS $ (8,607) $ (684)
============== ============
NET LOSS PER SHARE:
Basic $ (1.10) $ (0.08)
============== ============
Diluted $ (1.10) $ (0.08)
============== ============
WEIGHTED AVERAGE SHARES:
Basic 7,833 8,072
============== ============
Diluted 7,833 8,147
============== ============
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
Accumulated
Common Stock Other Total
-------------------------- Retained Comprehensive Shareholders'
Shares Amount Earnings Income * Equity
-------------- ---------- ---------- --------------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE - MARCH 31, 1999 7,832,955 48,784 (4,942) (797) 43,045
Issuance of shares and amortization of deferred - 1 - - 1
compensation expense for shares issued for services
(unearned portion $7)
Loss for the period - - (8,607) - (8,607)
Foreign currency translation adjustment - - - (171) (171)
-------------- ---------- ----------- ------------- ----------
BALANCE - JUNE 30, 1999 7,832,955 $ 48,785 $ (13,549) $ (968) $ 34,268
============== ========== =========== ============= ==========
</TABLE>
* Comprehensive income, i.e., net income (loss), plus, or less, other
comprehensive income, totaled $(8,778) for the three months ended June 30, 1999.
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,
-------------------------
1999 1998
---------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET LOSS $ (8,607) $ (684)
ADJUSTMENTS TO RECONCILE NET LOSS
TO NET CASH PROVIDED BY OPERATING ACTIVITIES
Depreciation and amortization 1,398 1,488
Provision for losses on accounts receivable 798 12
Provision for inventory revaluation 1,550 -
Deferred income taxes - (420)
Source (use) of cash from change in operating assets and liabilities:
Accounts receivable (465) (668)
Inventories (2,993) (9,545)
Prepaids and other assets 731 313
Accounts payable and accrued expenses 4,749 3,116
Other, net 52 -
---------- -----------
NET CASH USED IN OPERATING ACTIVITIES (2,787) (6,388)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (555) (445)
Software development costs (375) (525)
Redemption of investments in limited partnerships 6,045 -
Change in other assets (208) (1,353)
---------- -----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 4,907 (2,323)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payment of Senior Note (6,000) -
Principal payments of mortgage (71) (71)
Proceeds from issuance of common shares - 174
Purchase of Company common shares - (979)
Other liabilities 7 (104)
---------- -----------
NET CASH USED IN FINANCING ACTIVITIES (6,064) (980)
EFFECT OF EXCHANGE RATE CHANGES ON CASH (172) 30
---------- -----------
DECREASE IN CASH AND CASH EQUIVALENTS (4,116) (9,661)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 12,870 33,923
---------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 8,754 $ 24,262
========== ===========
</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, 1999.
The financial statements for the periods ended June 30, 1999 and 1998 are
unaudited and include all adjustments 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.
NOTES PAYABLE
The Company is in default on certain financial covenants of the agreements
pursuant to which its Senior Notes were issued pertaining to EBITDA coverage of
interest expense and fixed charges and requiring a minimum consolidated net
worth of $52.5 million. All payments of interest and principal on the Senior
Notes have been paid when due. The Company is presently in discussions with the
Noteholders to obtain waivers of the defaults and to restructure the agreements
to permit the Company to operate under the agreements going forward. Although
the Noteholders have the right to accelerate the payment of principal under the
Senior Notes, the Noteholders have, to date, forborne from doing so. As a result
of the ongoing negotiations, the Senior Notes have been classified as short-term
liabilities.
OPERATIONS
The Company adopted FAS No. 131, "Disclosure about Segments of an Enterprise and
Related Information", at March 31, 1999. FAS No. 131 establishes annual and
interim reporting standards for an enterprise's operating segments and related
disclosures about its products, services, geographic areas and major customers.
Under FAS No. 131, the Company's operations are treated as one operating segment
as it only reports profit and loss information on an aggregate basis to the
chief operating decision maker of the Company. Information about the Company's
product sales and major customers are as follows:
6
<PAGE>
FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OPERATIONS - Continued
June 30,
-----------------------
Product Sales 1999 1998
- ----------------------------- --------- ----------
Reference $13,789 $15,481
Rolodex 2,107 2,708
REX 2,933 2,393
Rocket eBook 597 -
Other 320 459
- ----------------------------- --------- ----------
Total Sales $19,746 $21,041
============================= ========= ==========
Approximate foreign sources of revenues including export sales were as follows:
June 30,
-----------------------
Product Sales 1999 1998
- ----------------------------- --------- ----------
Europe $ 7,566 $ 5,784
Other International 1,246 1,511
For the three months ended June 30, 1999 and 1998, no customer accounted for
more than 10% of the Company's revenues.
RECLASSIFICATIONS
Certain foreign currency losses for prior years have been reclassified from Cost
of Sales to Other, net for comparative purposes.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
===============================================================================
RESULTS OF OPERATIONS
Three months ended June 30, 1999 as compared with three months ended June 30,
1998:
Net Sales
Sales of $19,746,000 for the quarter ended June 30, 1999 were 6% lower than
sales of $21,041,000 for the same quarter one year earlier. The sales decrease
is attributed to lower sales of the Company's reference line, which decreased
from $15,481,000 to $13,789,000, and lower sales of the ROLODEX Electronics
line, which decreased from $2,708,000 to $2,107,000, offset in part by sales of
approximately $600,000 of the Franklin Rocket eBook (which began to ship in the
June quarter) and an increase in sales of the REX product line from $2,393,000
to $2,933,000. The decrease in sales of the reference and ROLODEX Electronics
product lines is attributed to the anticipation by the Company's retailers of
the release in late June 1999 of upgraded product lines. The Company is
currently evaluating its strategies with respect to the REX and Rocket eBook
product lines. Sales by the Company's subsidiary, Voice Powered Technology
International, Inc. ("VPTI") decreased from $459,000 to $320,000.
Gross Profits
Gross profits decreased to $4,703,000 from $9,425,000 last year primarily
because of an inventory writedown and price protection in connection with the
Franklin Rocket eBook(TM) and costs in connection with the transition to the new
upgraded reference and ROLODEX Electronics products. Gross profit margins before
the writedown described above decreased from 45% to 40% from year to year
primarily as a result of the transition to the new product lines and because
sales of products in the REX and Rocket eBook lines were made at discounted
prices in order to reduce inventories.
Operating Expenses
Total operating expenses increased to $12,424,000 from $9,652,000 last year.
Sales and marketing expenses increased to $6,703,000 (34% of sales) from last
year's level of $5,827,000 (28% of sales) primarily as a result of costs in
connection with the introduction of the Franklin Rocket eBook. Research and
development expenses were relatively constant at $1,446,000 (7% of sales) as
compared with $1,248,000 (6% of sales) in the period last year. General and
administrative expenses increased to $4,275,000 (22% of sales) from $2,577,000
(12% of sales) last year primarily as a result of the restructuring charges,
which include severance costs in connection with a 15% reduction in personnel
during the quarter and the costs of closing of foreign offices. Interest expense
was $885,000 compared with $872,000 last year and interest and investment income
was down from $355,000 to $121,000. In the quarter, the Company incurred
currency losses of $122,000 as compared with currency losses of $360,000 last
year. Management effected
8
<PAGE>
a substantial restructuring during the June quarter, including the aforesaid
reduction in personnel, which is expected to impact the levels of expenses for
the last three quarters of the 2000 fiscal year.
Net Income
The Company reported a loss of $8,607,000, or $1.10 per share compared with a
loss of $684,000, or $.08 per share last year.
CHANGES IN FINANCIAL CONDITION
Inventories increased from $23,934,000 at March 31, 1999 to $25,377,000 at the
end of the June quarter in anticipation of higher sales in the seasonally active
second and third quarters. Cash and cash equivalents of $12,870,00 and
investments in limited partnerships of $6,045,000 at March 31, 1999 are compared
with cash of $8,754,000 at June 30, 1999. The Company made a principal payment
of $6,000,000 on its Senior Notes in April 1999 and redeemed the investments in
limited partnerships during the quarter. Accounts receivable decreased from
$17,225,000 to $16,893,000. Accounts payable and accrued expenses increased from
$19,136,000 to $23,883,000. Prepaids and other assets decreased from $3,201,000
to $2,716,000 primarily as a result of the receipt of inventory paid for in
advance.
LIQUIDITY AND CAPITAL RESOURCES
Because of the results of operations for the Company's 1999 fiscal year and the
June quarter of the 2000 fiscal year, the Company defaulted on certain financial
covenants of the agreements pursuant to which its Senior Notes were issued
pertaining to EBITDA coverage of interest expense and fixed charges and
requiring a minimum consolidated net worth of $52.5 million. The Noteholders
waived these defaults with respect to the 1999 fiscal year. All payments of
interest and principal on the Senior Notes have been paid when due. The Company
is presently in discussions with the Noteholders to obtain waivers of the first
quarter defaults and to restructure the agreements to permit the Company to
operate under the agreements going forward. Although the Noteholders currently
have the right to accelerate the payment of principal under the Senior Notes,
the Noteholders have, to date, forborne from doing so. As a result of the
ongoing negotiations, the Senior Notes have been classified as short-term
liabilities in the Company's financial statements as required by generally
accepted accounting principles. The Company is also negotiating with several
financial institutions to obtain a new credit facility which will provide funds
for a partial payment of the Senior Notes and to meet seasonal working capital
requirements, if necessary. Such new credit facility would require approval of
the Noteholders. No assurance can be given that the Noteholders will not
accelerate the payment of principal, that the Company will be successful in
obtaining necessary waivers or in restructuring the agreements on acceptable
conditions, or that the Company will be successful in entering into a new credit
facility.
The Company has no material commitments for capital expenditures in the next
twenty-four months.
9
<PAGE>
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 not more than $500,000, of which approximately
$13,000 was expensed during the quarter ended June 30, 1999 and $340,000 was
expensed in prior periods. 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.
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 desktop software provided with the REX PC Companion. On
August 6, 1999, the Court signed an Order approving a settlement under
which the Company has agreed to distribute an upgraded version of the
software used with the REX (TM) PC Companion without cost to eligible
class members and to pay costs associated with the administration of
the settlement, estimated at between $100,000 and $150,000, as well as
the fees and expenses awarded to class counsel of $235,000.
In July 1999, the Company was served with a complaint in the United
States District Court for the Southern District of New York by Aral
Holdings, Inc., seeking damages of approximately $1.1 million for,
inter alia, alleged breach of contract in connection with a website
and interactive services consulting agreement, punitive damages in an
unspecified amount but alleged to be in excess of $5 million, and
injunctive relief in connection with alleged trade secret
misappropriation. The Company disputes the allegations of the
complaint and intends vigorously to defend this litigation.
The Company is subject to litigation from time to time in the ordinary
course of its business. The Company does not believe that any such
litigation, including the litigation identified above, is likely,
individually or in the aggregate, to have a material adverse effect on
the financial condition of the Company.
10
<PAGE>
ITEM 2. CHANGES IN SECURITIES - NONE
ITEM 3. DEFAULT ON SENIOR SECURITIES
The Company is in default on its Senior Notes pursuant to Sections
10.8, 10.9, and 10.10 of its Note Purchase Agreement dated March 27,
1997 pertaining to EBITDA coverage of interest expense and fixed
charges and requiring a minimum consolidated net worth of $52.5
million. All payments of interest and principal on the Senior Notes
have been paid when due. The Company is presently in discussions with
the Noteholders to obtain waivers of the defaults.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITIES HOLDERS - NONE
ITEM 5. OTHER INFORMATION
In July 1999, Arnold D. Levitt, who had been named Interim Chief
Financial Officer and Treasurer of the Company in May 1999, was elected
by the Company's Board of Directors to the office of Senior Vice
President, Chief Financial Officer, and Treasurer.
ROLODEX(R) is a registered trademark of Berol Corporation, a subsidiary
of Newell Rubbermaid, Inc. Rocket eBook(TM) is a trademark of
NuvoMedia, Inc.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Two reports on Form 8-K were filed by the Company during the quarter
ended June 30, 1999.
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, 1999 /s/ Barry J. Lipsky
- --------------- --------------------------------------------
Date Barry J. Lipsky, President and
Chief Executive Officer
(Duly Authorized Officer)
August 13, 1999 /s/ Arnold D. Levitt
- --------------- --------------------------------------------
Date Arnold D. Levitt, Senior Vice President,
Chief Financial Officer, and Treasurer
(Principal Financial and Accounting 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 AND
SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 8,754
<SECURITIES> 0
<RECEIVABLES> 17,912
<ALLOWANCES> 1,019
<INVENTORY> 25,377
<CURRENT-ASSETS> 57,094
<PP&E> 9,014
<DEPRECIATION> 11,712
<TOTAL-ASSETS> 97,237
<CURRENT-LIABILITIES> 61,421
<BONDS> 0
0
0
<COMMON> 48,785
<OTHER-SE> (14,517)
<TOTAL-LIABILITY-AND-EQUITY> 97,237
<SALES> 19,746
<TOTAL-REVENUES> 19,746
<CGS> 15,043
<TOTAL-COSTS> 15,043
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 798
<INTEREST-EXPENSE> 885
<INCOME-PRETAX> (8,607)
<INCOME-TAX> 0
<INCOME-CONTINUING> (8,607)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,607)
<EPS-BASIC> (1.10)
<EPS-DILUTED> (1.10)
</TABLE>
