<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, 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
SEPTEMBER 30, 2000- 7,923,815 SHARES
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FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
September 30, March 31,
2000 2000
---- ----
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 2,823 $ 6,899
Accounts receivable, less allowance for doubtful accounts of $955 and $850 15,102 10,889
Inventories 18,517 13,735
Income tax receivable 568 568
Prepaids and other assets 1,532 918
--------- --------
TOTAL CURRENT ASSETS 38,542 33,009
--------- --------
PROPERTY AND EQUIPMENT 7,561 7,797
--------- --------
OTHER ASSETS:
Deferred income tax asset 5,700 5,700
Trademark, less accumulated amortization of $1,555 and $1,360 13,993 14,187
Advance royalties and licenses 1,306 1,266
Software development costs 4,943 4,482
Other assets 3,314 3,619
--------- --------
TOTAL OTHER ASSETS 29,256 29,254
--------- --------
TOTAL ASSETS $ 75,359 $70,060
========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 13,691 $ 10,076
Notes payable 2,000 2,000
Current portion of long-term liabilities - Other 156 156
--------- --------
TOTAL CURRENT LIABILITIES 15,847 12,232
--------- --------
LONG-TERM LIABILITIES
Notes payable 10,239 10,150
Revolving credit facility 1,330
Other liabilities 1,485 1,540
--------- --------
TOTAL LONG-TERM LIABILITIES 13,054 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, 7,923,815 and 7,914,940 shares 49,212 49,138
Retained earnings (deficit) (1,625) (2,266)
Foreign currency translation adjustment (1,129) (734)
--------- --------
TOTAL SHAREHOLDERS' EQUITY 46,458 46,138
--------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 75,359 $ 70,060
========= ========
</TABLE>
See notes to consolidated financial statements.
2
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FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except for per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
-------------------------------- -------------------------------
2000 1999 2000 1999
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
SALES $ 20,376 $ 30,273 $ 37,299 $ 50,019
COST OF SALES 11,699 19,686 21,291 34,729
-------------- -------------- -------------- --------------
GROSS MARGIN 8,677 10,587 16,008 15,290
-------------- -------------- -------------- --------------
EXPENSES:
Sales and marketing 4,081 4,965 7,283 11,668
Research and development 1,226 902 1,993 2,348
General and administrative 2,447 2,146 4,771 6,421
-------------- -------------- -------------- --------------
Total operating expenses 7,754 8,013 14,047 20,437
-------------- -------------- -------------- --------------
OPERATING INCOME (LOSS) 923 2,574 1,961 (5,147)
Interest expense (410) (913) (814) (1,798)
Interest and investment income 54 95 142 216
Other, net (359) (80) (648) (202)
Gain on sale of REX - 8,072 - 8,072
-------------- -------------- -------------- --------------
INCOME (LOSS) BEFORE INCOME TAXES 208 9,748 641 1,141
INCOME TAX PROVISION (BENEFIT) - - - -
-------------- -------------- -------------- --------------
NET INCOME $ 208 $ 9,748 $ 641 $ 1,141
============== ============== ============== ==============
NET INCOME PER SHARE:
Basic $ 0.03 $ 1.24 $ 0.08 $ 0.15
============== ============== ============== ==============
Diluted $ 0.02 $ 1.24 $ 0.08 $ 0.14
============== ============== ============== ==============
WEIGHTED AVERAGE SHARES:
Basic 7,916 7,847 7,915 7,840
============== ============== ============== ==============
Diluted 8,541 7,872 8,352 7,878
============== ============== ============== ==============
</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, 2000 7,914,940 $ 49,138 $ (2,266) $ (734) $ 46,138
Issuance of common shares under employee
stock option plan 8,875 46 - - 46
Issuance of shares and amortization of
deferred compensation expense for shares
issued for services (unearned portion $37) - 28 - - 28
Income for the period - - 641 - 641
Foreign currency translation adjustment - - - (395) (395)
------------ ----------- --------------- ------------------ ----------------
BALANCE - SEPTEMBER 30, 2000 (unaudited) 7,923,815 $ 49,212 $ (1,625) $ (1,129) $ 46,458
============ =========== =============== ================== ================
</TABLE>
* Comprehensive income, i.e., net income (loss), plus, or less, other
comprehensive income, totaled $246 for the six months ended September 30, 2000.
See notes to consolidated financial statements.
4
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FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended
September 30,
-----------------------------------
2000 1999
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME $ 641 $ 1,141
ADJUSTMENTS TO RECONCILE NET INCOME TO
NET CASH PROVIDED BY OPERATING ACTIVITIES
Depreciation and amortization 2,474 2,782
Provision for losses on accounts receivable 203 949
Loss on disposal of property and equipment 10 65
Stock issued for services 17 -
Gain on sale of REX - (8,072)
Provision for inventory revaluation - 2,350
Source (use) of cash from change in operating assets and liabilities:
Accounts receivable (4,416) (4,404)
Inventories (4,782) (3,560)
Prepaids and other assets (614) 4,264
Accounts payable and accrued expenses 3,704 851
Other, net 50 10
---------------- ----------------
NET CASH USED IN OPERATING ACTIVITIES (2,713) (3,624)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (564) (911)
Proceeds from sale of property and equipment - 28
Software development costs (1,404) (750)
Proceeds form sale of REX line - 12,619
Redemption of investments in limited partnerships - 6,045
Change in other assets (321) (411)
---------------- ----------------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (2,289) 16,620
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payment of Senior Notes - (16,000)
Proceeds from revolving credit facility 1,330 -
Principal payments of mortgage - (142)
Proceeds from issuance of common shares 46 -
Other liabilities (55) 61
---------------- ----------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 1,321 (16,081)
EFFECT OF EXCHANGE RATE CHANGES ON CASH (395) (142)
---------------- ----------------
DECREASE IN CASH AND CASH EQUIVALENTS (4,076) (3,227)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 6,899 12,870
---------------- ----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,823 $ 9,643
================ ================
</TABLE>
See notes to consolidated statements.
5
<PAGE>
FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(in thousands)
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 September 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>
Three Months Ended Six Months Ended
---------------------------------------------------------------------------------
September 30, September 30,
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Product Sales 2000 1999 2000 1999
-------------------------------------------- ------------------------------------------------------------
Reference $17,028 $20,872 $31,574 $33,355
Rolodex 3,262 6,200 5,575 8,613
REX - 2,964 - 6,194
Rocket eBook - (65) - 1,235
Other 86 302 150 622
-------------------------------------------- ----------------- ---------------- -----------------
Total Sales $20,376 $30,273 $37,299 $50,019
============================================ ================= ================ =================
</TABLE>
6
<PAGE>
FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
Approximate foreign sources of revenues including export sales were as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
--------------------------------------------------------------------------------
September 30, September 30,
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Product Sales 2000 1999 2000 1999
-------------------------------------------- -----------------------------------------------------------
Europe $4,125 $7,868 $10,054 $15,252
Other International 1,241 1,199 2,338 2,445
</TABLE>
For the three month periods ended September 30, 2000 and 1999, one customer
accounted for more than 10% of the Company's revenues. Total sales to this
customer were $2,500 and $3,600 respectively and included Reference, Rolodex
Electronics and REX product. For the six months ended September 30, 2000 and
1999 no customer accounted for more than 10% of the Company's revenues.
SALE OF REX PRODUCT LINE
On September 27, 1999 the Company realized a gain of $8,072 on the sale of its
REX product line for $13,250 and the assumption of related liabilities. The
assets sold consisted primarily of inventory with a carrying value of
approximately $5,000 and the Company's trademarks, copyrights, contract rights
and other assets used in connection with the REX business.
7
<PAGE>
RESULTS OF OPERATIONS
Three months ended September 30, 2000 compared with September 30, 1999:
Net Sales
Sales for the quarter ended September 30, 2000 were $20,376,000 compared with
sales of $30,273,000 for the September 1999 quarter that included sales of
$2,964,000 of the REX product line that the Company divested on September 27,
1999. Sales of the Company's core reference and ROLODEX(R) Electronics products
declined $6,782,000, or 25%, to $20,290,000 from $27,072,000 in the year earlier
period because of lower European sales (resulting from weakening European
currencies and the postponement of some sales into the next quarter due to
industry-wide component shortages) and because licensing revenue in the quarter
ended September 30, 1999 benefited from the inclusion of $800,000 of revenue
relating to prior periods.
Gross Margin
While gross margin dollars decreased to $8,677,000 in the current year from
$10,587,000, in the prior year, gross margin percentage increased from 35% to
43% from year to year. The higher margin percentage resulted primarily from a
shift in the Company's sales mix to more higher margin reference products and
fewer lower margin organizers. The reference product line accounted for 84% of
total sales in the quarter ended September 30, 2000 compared with 69% of total
sales in the prior year.
Operating Expenses
Total operating expenses decreased to $7,754,000 from $8,013,000 last year.
Sales and marketing expenses decreased to $4,081,000 (20% of sales) from last
year's level of $4,965,000 (16% of sales) mainly as a result of lower variable
selling costs, such as commissions and advertising allowances, which decreased
by $634,000. These decreases were partially offset by costs of $229,000
associated with the development of the Company's new eBookMan platform.
Research and development expenses increased by $324,000 to $1,226,000 (6% of
sales) from $902,000 (3% of sales) in the prior year as a result of the
Company's investment in the development of its new eBookMan platform. General
and administrative expenses increased to $2,447,000 (12% of sales) from
$2,146,000 (7% of sales) primarily because of the adjustment of the costs of an
acquisition made in a prior period.
Other/Income Expense
Interest expense was $410,000 compared with $913,000 last year due to lower debt
levels. Interest and investment income was down from $95,000 to $54,000. In the
quarter, the Company incurred currency transaction losses in connection with its
European operations of $359,000 compared with $80,000 in the prior year.
8
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Net Income
For the quarter ended September 30, 2000 the Company reported net income of
$208,000, or $.03 per share, after absorbing expenses of $1,065,000, or $.13 per
share, in connection with development of its new eBookMan product line. For the
same quarter last year the Company earned $9,748,000, or $1.24 per share, which
included a gain of $8,072,000 or $1.03 per share, from the divestiture of its
REX product line in September 1999, as well as technology licensing income of
$700,000, or $.09 per share, that resulted from the recording of net royalties
related to prior periods.
Six months ended September 30, 2000 compared with September 30, 1999:
Net Sales
Sales of $37,299,000 for the six months ended September 30, 2000 were 25% lower
than sales of $50,019,000 for the same period last year primarily because of the
inclusion in the prior period of $6,194,000 of sales of the REX product line
which the Company divested in September 1999 and $1,235,000 of sales of the
Rocket eBook, a third party product which was discontinued in 1999. In addition,
sales declined because of weaker European currencies compared with the prior
year and a decline of approximately $3,000,000 in sales of the Company's
ROLODEX(R) Electronic products primarily due to the postponement of some sales
into the December 2000 quarter.
GROSS MARGIN
Gross margin increased to $16,008,000, or 43% of sales, in the current year from
$15,290,000, or 31% of sales, in the prior year. Gross margin in the prior year
reflected an inventory writedown and price protection costs of $2,600,000 in
connection with the discontinued Rocket eBook and costs in connection with the
transition to new upgraded reference and ROLODEX(R) Electronics product lines
which impacted the June 1999 quarter. The margin percentage in the current year
benefited from a shift in the Company's product mix from lower margin organizer
products to higher margin reference products. The reference product line
accounted for 85% of total sales in the six months ended September 30, 2000
compared with 67% of total sales in the prior year.
OPERATING EXPENSES
Total operating expenses decreased to $14,047,000 from $20,437,000 last year.
Sales and marketing expenses decreased to $7,283,000 (20% of sales) from last
year's level of $11,668,000 (23% of sales) primarily due to a decrease of
$1,200,000 in variable selling costs, reductions in advertising media expense
of $388,000 and salary expense of $300,000, and costs absorbed in the prior year
of $1,100,000 in connection with the development of the Company's website.
Research and development expenses decreased by $355,000 to $1,993,000 (5% of
sales) from $2,348,000 (5% of sales) in the prior year as a result of a
reduction in personnel in June 1999. General and administrative expenses
decreased to
9
<PAGE>
$4,771,000 from $6,421,000 last year primarily as a result of a decrease of
$760,000 in bad debt provisions and a reduction in expenses of $284,000 by the
Company's Voice Powered Technology subsidiary.
OTHER INCOME/EXPENSE
Interest expense for the six months ended September 30, 2000 was $814,000
compared with $1,798,000 last year due to lower debt levels. For the six
months, the Company incurred currency transaction losses of $648,000 compared
with $202,000 in the prior year
NET INCOME
For the six months ended September 30, 2000 the Company reported net income of
$641,000, or $.08 per share, after absorbing expenses of $1,287,000, or $.16 per
share, in connection with the development of its new eBookMan product line. For
the same period last year the Company earned $1,141,000, or $.15 per share,
which included a gain of $8,072,000 or $1.03 per share, from the divestiture of
its REX product line in September 1999 and technology licensing income of
$700,000, or $.09 per share, that resulted from net royalties related to prior
periods
CHANGES IN FINANCIAL CONDITION
Inventories increased from $13,735,000 at March 31, 2000 to $18,517,000 at the
end of the September quarter in anticipation of higher sales in the seasonally
active December quarter. The higher inventory level also reflects $1,847,000
of inventory costs relating to the Company's new eBookMan platform. Accounts
receivable increased from $10,889,000 to $15,102,000 because of seasonally
higher sales. Accounts payable and accrued expenses increased from $10,076,000
to $13,691,000 as the Company purchased inventories in anticipation of
seasonally higher sales. Cash and cash equivalents of $2,823,000 at September
30, 2000 were lower than cash of $6,899,000 at March 31, 2000 as a result of
seasonal inventory buildup.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2000, the Company had invested approximately $ 5,000,000 in
the development and marketing of its new multimedia eBook platform, eBookMan.
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. Significant shipments of eBookMan are
expected to commence during the Company's fourth fiscal quarter.
10
<PAGE>
In December 1999, the Company entered into a $25,000,000 secured financing
facility with a commercial lender. 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 September 30, 2000, the Company had outstanding borrowings of $1,330,000
under this facility. As of September 30, 2000 the Company had a balance of
$12,239,000 outstanding under its Senior Notes. A principal payment of
$2,000,000 is due under the Senior Notes 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
The Annual Meeting of Shareholders of the Company was held on July 19,
2000. 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, eight incumbent directors were re-elected with
Edward H. Cohen, Barry J. Lipsky, Leonard M. Lodish, James Meister and
James H. Simons each receiving 4,268,947 votes with 558,751 votes
withheld; Howard L. Morgan receiving 4,269,047 votes with 558,651 votes
withheld; Jerry R. Schubel receiving 4,268,347 votes with 559,351
withheld; and William H. Turner receiving 4,268,216 votes with 559,482
votes withheld. Shareholders approved the increase in the number of
shares with respect to which options may be granted under the Company's
1998 Stock Option Plan and certain other amendments thereto with
3,825,993 votes for and 993,726 votes against with 7,979 abstentions.
Shareholders ratified the appointment of Radin, Glass & Co. as auditors
for the Company's 2001 fiscal year by vote of 4,820,301 in favor, 5,047
against, and 2,350 abstentions.
11
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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.
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
November 13, 2000 /s/ Barry J. Lipsky
----------------- -------------------
Date Barry J. Lipsky, President and
Chief Executive Officer
(Duly Authorized Officer)
November 13, 2000 /s/ Arnold D. Levitt
------------------ ---------------------
Date Arnold D. Levitt, Senior Vice President,
Chief Financial Officer, and Treasurer
(Principal Financial and Accounting Officer)
12
