<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, 2000 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, 2000 - 7,914,940 SHARES
<PAGE>
FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
June 30, March 31,
2000 2000
----------- -----------
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 5,780 $ 6,899
Accounts receivable, less allowance
for doubtful accounts of $845 and $850 14,624 10,889
Inventories 14,372 13,735
Income tax receivable 568 568
Prepaids and other assets 1,235 918
----------- -----------
TOTAL CURRENT ASSETS 36,579 33,009
----------- -----------
PROPERTY AND EQUIPMENT 7,649 7,797
----------- -----------
OTHER ASSETS:
Deferred income tax asset 5,700 5,700
Trademark, less accumulated amortization
of $1,458 and $1,360 14,090 14,187
Advance royalties and licenses 1,205 1,266
Software development costs 4,611 4,482
Other assets 3,458 3,619
----------- -----------
TOTAL OTHER ASSETS 29,064 29,254
----------- -----------
TOTAL ASSETS $ 73,292 $ 70,060
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 13,006 $ 10,076
Notes payable 2,000 2,000
Current portion of long-term
liabilities-Other 156 156
----------- -----------
TOTAL CURRENT LIABILITIES 15,162 12,232
----------- -----------
LONG-TERM LIABILITIES
Notes payable 10,150 10,150
Other liabilities 1,524 1,540
----------- -----------
TOTAL LONG-TERM LIABILITIES 11,674 11,690
----------- -----------
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,
7,914,940 and 7,914,940 shares 49,152 49,138
Retained earnings (deficit) (1,833) (2,266)
Foreign currency translation adjustment (863) (734)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 46,456 46,138
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 73,292 $ 70,060
----------- -----------
</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)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
------------------------------
2000 1999
-------- --------
<S> <C> <C>
SALES $16,923 $19,746
COST OF SALES 9,592 15,043
-------- --------
GROSS MARGIN 7,331 4,703
-------- --------
EXPENSES:
Sales and marketing 3,202 6,703
Research and development 767 1,446
General and administrative 2,324 4,275
-------- --------
Total operating expenses 6,293 12,424
-------- --------
OPERATING INCOME (LOSS) 1,038 (7,721)
Interest expense (404) (885)
Interest and investment income 88 121
Other, net (289) (122)
-------- --------
INCOME (LOSS) BEFORE INCOME TAXES 433 (8,607)
INCOME TAX BENEFIT -- --
-------- --------
NET INCOME (LOSS) $ 433 $(8,607)
======== ========
NET INCOME (LOSS) PER SHARE:
Basic $ 0.05 $ (1.10)
======== ========
Diluted $ 0.05 $ (1.10)
======== ========
WEIGHTED AVERAGE SHARES:
Basic 7,914 7,833
======== ========
Diluted 8,146 7,833
======== ========
</TABLE>
<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, 2000 .................................. 7,914,940 $ 49,138 $ (2,266) $ (734) $ 46,138
Issuance of common shares under
employee stock option plan .............................. -- -- -- -- --
Issuance of shares and amortization of deferred
compensation expense for shares issued for
services (unearned portion $42) ......................... -- 14 -- -- 14
Loss for the period ..................................... -- -- 433 -- 433
Foreign currency translation adjustment ................. -- -- -- (129) (129)
--------- --------- --------- --------- ---------
BALANCE - JUNE 30, 2000 (unaudited) ....................... 7,914,940 $ 49,152 $ (1,833) $ (863) $ 46,456
========= ========= ========= ========= =========
</TABLE>
* Comprehensive income, i.e., net income (loss), plus, or less, other
comprehensive income, totaled $304 for the three months ended June 30, 2000.
See notes to consolidated financial statements.
Page 4
<PAGE>
FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
--------------------------
2000 1999
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME (LOSS) $ 433 $ (8,607)
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS)
TO NET CASH PROVIDED BY OPERATING ACTIVITIES
Depreciation and amortization 1,283 1,398
Provision for losses on accounts receivable 44 798
Provision for inventory revaluation -- 1,550
Source (use) of cash from change in
operating assets and liabilities:
Accounts receivable (3,779) (465)
Inventories (638) (2,993)
Prepaids and other assets (328) 731
Accounts payable and accrued expenses 2,930 4,749
Other, net 9 52
--------- ---------
NET CASH USED IN OPERATING ACTIVITIES (46) (2,787)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (263) (555)
Software development costs (567) (375)
Redemption of investments in
limited partnerships -- 6,045
Change in other assets (98) (208)
--------- ---------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES (928) 4,907
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payment of Senior Note -- (6,000)
Principal payments of mortgage -- (71)
Other liabilities (16) 7
--------- ---------
NET CASH USED IN FINANCING ACTIVITIES (16) (6,064)
EFFECT OF EXCHANGE RATE CHANGES ON CASH (129) (172)
--------- ---------
DECREASE IN CASH AND CASH EQUIVALENTS (1,119) (4,116)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 6,899 12,870
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,780 $ 8,754
========= =========
</TABLE>
See notes to consolidated financial statements.
Page 5
<PAGE>
FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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, 2000.
The financial statements for the periods ended June 30, 2000 and 1999 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.
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 are as follows:
<TABLE>
<CAPTION>
June 30,
--------------------------------------
Product Sales 2000 1999
--------------------------------------------- ----------------- -----------------
<S> <C> <C>
Reference $14,550 $13,789
Rolodex 2,312 2,107
REX - 2,933
Rocket eBook - 597
Other 61 320
--------------------------------------------- ----------------- -----------------
Total Sales $16,923 $19,746
============================================= ================= =================
</TABLE>
Page 6
<PAGE>
FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
OPERATIONS - Continued
Approximate foreign sources of revenues including export sales were as follows:
<TABLE>
<CAPTION>
June 30,
--------------------------------------
Product Sales 2000 1999
--------------------------------------------- ----------------- -----------------
<S> <C> <C>
Europe $5,929 $7,566
Other International 1,098 1,246
</TABLE>
For the three months ended June 30, 2000 and 1999, no customer accounted for
more than 10% of the Company's revenues.
Page 7
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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, 2000 compared with three months ended June 30, 1999:
Net Sales
Sales of the Company's core reference and ROLODEX(R) Electronics lines increased
6% to $16,862,000 from $15,896,000 in the prior year. Total sales of $16,923,000
for the quarter ended June 30, 2000 were 15% lower than sales of $19,746,000 for
the same quarter one year earlier. Sales in the prior period included
approximately $597,000 of the Franklin Rocket eBook(TM) (which product was
discontinued by the Company in 1999) and approximately $2,933,000 of the REX
product line. The Company divested the REX product line in September 1999.
Gross Margin
Gross margin increased to 43% from an adjusted 40% last year primarily because
of lower product costs. In the June quarter last year, actual gross margin was
24% which reflected an inventory writedown and price protection costs of
$2,600,000 in connection with the Franklin Rocket eBook(TM) and costs in
connection with the transition to the new upgraded reference and ROLODEX(R)
Electronics product lines. Last year's adjusted gross margin of 40% is before
the writedown and price protection costs.
Operating Expenses
Total operating expenses decreased from $12,424,000 last year to $6,293,000 this
year. Sales and marketing expenses decreased from$6,703,000 (34% of sales) to
$3,202,000 (19% of sales) primarily due to lower personnel expenses and
reductions in marketing costs associated with the REX and Rocket eBook product
lines which were divested and discontinued, respectively. Research and
development expenses decreased to $767,000 (5% of sales) from $1,446,000 (7% of
sales) in the period last year primarily because of lower staff levels. General
and administrative expenses decreased to $2,324,000 (14% of sales) from
$4,275,000 (22% of sales) last year as provisions for customer claims and
doubtful accounts of approximately $700,000 and provisions for the closing of
foreign offices of $375,000 were included in last year's expenses. The year to
year comparison also reflects personnel expenses which were approximately
$400,000 lower in the current year due to a staff reduction that was effected in
June 1999 and professional and consulting fees which were $275,000 lower this
year.
Other Income/Expense
Interest expense was $404,000 compared with $885,000 last year due to lower debt
levels. In the quarter, the Company incurred currency losses of $289,000
compared with currency losses of $122,000 last year.
Net Income
The Company reported net income of $433,000, or $.05 per share, compared with a
loss of $8,607,000, or $.1.10 per share, last year.
8
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CHANGES IN FINANCIAL CONDITION
Inventories increased from $13,735,000 at March 31, 2000 to $14,372,000 at the
end of the June quarter in anticipation of higher sales in the seasonally active
second and third quarters. Accounts receivable increased from $10,889,000 to
$14,624,000 because of higher sales in May and June compared with February and
March. Accounts payable and accrued expenses increased from $10,076,000 to
$13,006,000 as the Company purchased inventories in anticipation of seasonally
higher sales. Cash and cash equivalents of $5,780,000 at March 31, 2000 are
compared with cash of $6,899,000 at June 30, 2000.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2000, the Company had invested approximately $1,200,000 in the
development and marketing of its new multimedia eBook platform, eBookman(R). The
Company anticipates making additional development, marketing, and working
capital investments of approximately $6,000,000 related to eBookman during the
remainder of the 2001 fiscal year.
In December 1999, the Company entered into a $25,000,000 secured financing
facility with Banc of America Commercial Finance Corporation. The financing
facility expires on December 7, 2002. Borrowings under the facility bear
interest at the bank's prime rate plus 3/8% and are subject to certain financial
covenants and restrictions on indebtedness, dividend payments, business
combinations, and other related items. As of June 30, 2000, the Company had no
outstanding borrowings under this facility.
As of June 30, 2000 the Company had a balance of $12,150,000 outstanding under
its Senior Notes. A principal payment of $2,000,000 is due to the noteholders on
March 31, 2001.
Management believes that cash flow from operations and the secured financing
facility 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.
PART II
ITEM 1. LEGAL PROCEEDINGS
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 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
ROLODEX(R) is a registered trademark of Berol Corporation, a subsidiary
of Newell Rubbermaid, Inc. Rocket eBook is a trademark of NuvoMedia,
Inc.
9
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K - NONE
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 10, 2000 /s/ Barry J. Lipsky
--------------- -------------------------------
Date Barry J. Lipsky, President and
Chief Executive Officer
(Duly Authorized Officer)
August 10, 2000 /s/ Arnold D. Levitt
--------------- -------------------------------
Date Arnold D. Levitt, Senior Vice President,
Chief Financial Officer, and Treasurer
(Principal Financial and Accounting Officer)
10
