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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X]Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the fiscal year ended March 31, 2000
Commission File Number 0-14841
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FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED
(Exact name of the registrant as specified in its charter)
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Pennsylvania 22-2476703
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) identification No.)
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One Franklin Plaza, Burlington, New Jersey 08016-4907
(Address of principal executive offices)
(609) 386-2500
(Registrant's telephone number)
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Securities registered pursuant to Section 12(b) of the Exchange Act:
None
Securities registered pursuant Section 12(g) of the Exchange Act:
Common Stock, no par value
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Indicate by check mark whether the 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 the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
As of June 14, 2000, approximately 7,900,000 shares of common stock of the
registrant were outstanding and the aggregate market value of common stock held
by non-affiliates was approximately $41,000,000.
The registrant's Proxy Statement for its 2000 annual meeting of shareholders
is hereby incorporated by reference into Part III of this Form 10-K.
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Franklin(R)
Electronic Publishers
ANNUAL REPORT
March 31, 2000
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FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED
INDEX TO ANNUAL REPORT ON FORM 10-K FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION
YEAR ENDED MARCH 31, 2000
ITEMS IN FORM 10-K
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PART I
ITEM 1. BUSINESS...................................................... 1
ITEM 2. PROPERTIES.................................................... 11
ITEM 3. LEGAL PROCEEDINGS............................................. 11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........... 11
EXECUTIVE OFFICERS OF THE REGISTRANT.......................... 11
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS...................................................... 13
ITEM 6. SELECTED FINANCIAL DATA....................................... 14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.................................... 14
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................... 18
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE..................................... 35
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............ 36
ITEM 11. EXECUTIVE COMPENSATION........................................ 36
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................... 36
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................ 36
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K..................................................... 37
Signatures.............................................................. 38
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PART I
ITEM 1. BUSINESS
Franklin Electronic Publishers, Incorporated ("Franklin" or the "Company")
designs and develops hand-held electronic information products, such as
electronic books (sometimes known as eBooks) and electronic organizers.
The Company believes it is the world's largest designer, developer and
publisher of hand-held electronic books, having sold more than twenty-three
million units since 1986. The Company's electronic books are battery-powered
devices that incorporate the text of a reference work or database and permit
the user to read selected portions on a display screen. The Company owns or has
licenses to publish in electronic format more than 200 titles, including
monolingual and bilingual dictionaries (such as Merriam-Webster's Tenth
Collegiate Dictionary), the Bible, encyclopedias (such as the Concise Columbia
Encyclopedia), entertainment-oriented publications (such as Parker's Wine
Guide), educational publications and medical publications (such as the
Physicians' Desk Reference(R)).
The Company marketed its first electronic book, the Spelling Ace(R), in
1986. The Company believes that the Spelling Ace was one of the first
electronic books marketed in the United States. Beginning in 1987, Franklin
began marketing increasingly sophisticated electronic versions of thesauruses
and dictionaries and, in 1989, the Holy Bible.
In 1996, the Company acquired certain assets of the ROLODEX(R) Electronics
product line and the associated trademark license. Under the license, the
Company acquired the right to build and market databanks and organizers under
the ROLODEX(R) Electronics mark.
In 1999, the Company introduced at retail an electronic book produced by a
third party for downloading content on the Internet. That product introduction
initiated the Company's strategy of providing content for downloading from the
Internet for hand-held products.
The Company was incorporated in 1983 in the Commonwealth of Pennsylvania as
the successor to a business commenced in 1981. The Company's principal
executive offices are located at One Franklin Plaza, Burlington, New Jersey
08016-4907, and its telephone number is (609) 386-2500.
COMPETITIVE ADVANTAGES
The Company believes that it has the following competitive advantages:
. Strong Share in Electronic Books. Franklin is the preeminent company in the
hand-held electronic reference market, with leading positions in the United
States and certain markets internationally. The Company believes it has
dominant market share in North America, Europe and Australia, as well as a
major presence in the Middle East. Over the past thirteen years, Franklin has
sold twenty-three million units worldwide and currently markets over 200
electronic books globally.
. Breadth and Strength of Distribution. The Company distributes its products
through 45,000 retail outlets in more than fifty countries. The Company also
uses direct channels to serve multiple markets, such as the professional,
educational and customized application markets. In the professional market,
Franklin has achieved considerable success with its electronic format medical
publications. In the educational market, the Company's electronic books are
used in schools throughout the United States. Due to the success of its
electronic Bible, the Company has also achieved substantial sales in the
religious market, with Franklin products currently distributed through
Christian-affiliated bookstores.
. Technological Leadership in Refining Information for Electronic Use. Franklin
has significant expertise in providing high quality content and functionality
through cost-effective hardware designs of electronic information products.
The Company's products combine sophisticated technology with a user-friendly
interface designed for convenient and rapid retrieval of data. In essence,
the Company sells answers, not
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simply information devices or large databases. Franklin's ability to compress
data and to design systems that permit quick and intelligent information
retrieval enables it to offer compact products with high functionality. For
example, the Company stores the almost three thousand page Physicians' Desk
Reference, which fills up twenty megabytes of memory space, into the memory
space of only five megabytes, which also includes sophisticated search and
retrieval functionality. The Company has been able to manufacture higher
performance products at lower cost due in part to declining prices of ROM
chips. The Company's vertically integrated research and development effort,
devoted to developing both the hardware and software for its products, also
enables it quickly to utilize both superior and cost-minimizing technologies.
As a result, the cost of Franklin's products to consumers has decreased over
the years to prices approaching those of print versions of reference
publications, offering consumers added value at attractive price points.
. Long-standing Relationships and Licenses with Many Top Publishers. The
Company has electronic rights to over 200 titles, including several versions
of English and bilingual dictionaries, Bibles, and the Physicians' Desk
Reference. The Company obtains its licenses from a variety of well-
established publishers such as Merriam-Webster, Harper/Collins, Havas and
Bertelsmann. While many of these licenses are exclusive, all are supported
by long-standing relationships with the publishers, providing Franklin with
a significant competitive advantage.
. Efficient and Cost-Effective Manufacturing Process. Franklin controls the
entire manufacturing process of its products, from design to sale, but does
not own actual manufacturing facilities. This "virtual manufacturing" model
enables the Company to produce its products in the most cost-effective
manner by allowing the Company to outsource the manufacturing and assembly
functions to third parties which meet the Company's cost and quality
specifications. In this way, the Company maintains a high degree of
flexibility and adaptability in its product sourcing operations.
BUSINESS STRATEGIES
Franklin was the first, and strives to be the best, in electronic books.
The Company's strategy to fulfill that mission is to leverage its leading
market position by exploiting the following opportunities:
. Use of the Internet to Distribute Content. The Company has begun to publish
certain reference works on its web page (franklin.com) in electronic form
for downloading to multiple platforms, including to the Company's hand-held
electronic books. In this way, the Company expects to leverage its expertise
in refining reference data with its competitive advantages in developing and
distributing hand-held products to reach a broader installed base. The
Company is developing hardware platforms designed specifically to provide
for portable use of content delivered from the Company's website.
. Consumer Driven Product Development and Marketing. While the Company has
built strong distribution for its major products, it believes that further
opportunities lie in its ability to take a more marketing driven approach to
product development. The Company believes a better understanding of its
customers will allow it to boost sales, lower costs, accelerate throughput
at retail, and lead to successful new product introductions. The Company is
investigating ways to better market its products for children and, as a
consequence, to expand its offerings in this area.
. Continuing Upgrade of Reference Products. The Company's reference product
line continues to represent the major portion of its revenue. Dictionaries,
spell correctors, and Bibles have been the Company's mainstream consumer
electronics products. During fiscal 2000, the Company initiated shipments of
upgraded and enhanced versions of products. The Company intends to continue
to upgrade and enhance its core products.
. Investment in Marketing. The Company believes that a major opportunity lies
in broadening consumer awareness of the hand-held electronic reference
category in order to generate mass market interest in the Company's
products. To date, the Company has engaged only in limited advertising on
the national or local levels. The Company has, however, enjoyed some success
with its advertising campaigns. The Company intends to upgrade its website,
franklin.com, in order to increase consumer awareness of its products and to
open a new channel of distribution of its products.
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. Growth in Selected International Markets. The Company has had success in
selling its products directly through wholly-owned, local subsidiaries in
selected international markets, such as the United Kingdom which was
established to market and distribute British English versions of the
Company's American English products, and through distributors in other
markets. Because of the slowed growth in some international markets over the
past two fiscal years, the Company is concentrating its sales efforts in key
markets, such as the United Kingdom, Germany and France. The Company
anticipates that its international sales will continue to provide a
significant portion of its revenues.
. Exploitation of OEM Opportunities. OEM (or "Original Equipment Manufacturer")
opportunities are business agreements pursuant to which the Company develops
products for resale by its partners. The Company has such agreements in the
medical publishing and French and Spanish markets and will seek to broaden
its activities to other vertical markets. The Company believes its OEM
business can be expanded as the Company upgrades existing and develops new
open system platforms.
RISK FACTORS
The Company believes that the most significant risks to its business involve
those set forth below.
. Dependence on New Products and Titles. The Company depends to a large extent
on the introduction of successful new products and titles to generate sales
growth and replace declining revenues from certain older titles. The Company
currently has several new products and titles under development; however,
significant development efforts for a number of the Company's proposed new
products and titles will be required prior to their commercialization. A
significant delay in the introduction of a new product or title could have a
material adverse effect on the ultimate success of the product or title. In
addition, if revenues from new products and titles fail to replace declining
revenues from certain existing products and titles, the Company's operating
results and growth could be adversely affected. There can be no assurance
that new products and titles currently under development will be introduced
on schedule, that they will generate significant revenues, or that the
Company will be able to introduce additional new products and titles in the
future.
. Inventory Management. The Company's lead times are necessarily long because
of the custom nature of certain components and because most of its components
are manufactured, and its platforms are assembled, in Asia. Accordingly,
production and procurement planning are critically related to the Company's
anticipated sales volume. Any significant deviation from projected future
sales could result in material shortages or surpluses of inventory. Shortages
could cause the Company's distribution base to shrink as customers turn to
the Company's competitors. Inventory surpluses could cause cash flow and
other financial problems, which might cause the Company to liquidate
inventory. There can be no assurance that the Company's forecasts of demand
for its products will be accurate. Inaccurate forecasts, or unsuccessful
efforts by the Company to cope with surpluses or shortages, could have a
material adverse effect on the Company's business.
. Changes in Technology. In general, the computer industry, both with respect
to software and hardware, is subject to rapidly changing technology.
Accordingly, the technology underlying the Company's products may similarly
be subject to change. The introduction of products embodying new technologies
and the emergence of new industry standards could exert price pressure on the
Company's existing products or render such products unmarketable or obsolete.
The Company's ability to anticipate changes in technology and industry
standards and to develop and introduce new and enhanced products, as well as
additional applications for existing products, in each case on a timely and
cost-effective basis, will be a critical factor in the Company's ability to
grow and remain competitive. There can be no assurance that technological
changes will not materially adversely affect the Company's business.
. Competition. The consumer electronics market is highly competitive and
characterized by rapid technological advances and the regular introduction of
new products or enhancements of existing products. The Company believes it
faces various degrees of competition at different price points in the market.
Competitive factors include product quality and reliability, price,
performance, marketing and distribution
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capability, service and reputation. There can be no assurance that companies
currently in the consumer electronics market will not enter the specific
markets in which the Company currently sells its products. There can be no
assurance that other companies, currently in the consumer electronics
industry, will not enter the electronic book market. Many of such companies
have greater capital, research and development, marketing and distribution
resources than the Company. If new competitors emerge or the existing market
becomes more competitive, the Company could experience significant pressure on
prices and margins.
. Dependence on Key Suppliers. Certain integrated circuits essential to the
functioning of the Company's products are manufactured by a relatively small
number of overseas suppliers. Missed, late or erratic deliveries of custom
IC-ROMs and other parts could materially adversely impact the timing of new
product deliveries as well as the Company's ability to meet demand for
existing products. If any one of the integrated circuit suppliers were unable
to meet its commitments to the Company on a timely basis, such failure could
have a material adverse effect on the Company's business.
. Intellectual Property Rights. The Company owns utility and design patents in
the United States and elsewhere on its electronic books. There can be no
assurance (i) that the claims allowed under any patents will be sufficiently
broad to protect the Company's technology, (ii) that the patents issued to
the Company will not be challenged, invalidated or circumvented or (iii) as
to the degree or adequacy of protection any patents or patent applications
will afford. The Company also claims proprietary rights in various
technologies, know-how, trade secrets and trademarks which relate to its
principal products and operations, none of which rights is the subject of
patents or patent applications in any jurisdiction. There can be no assurance
as to the degree of protection these rights may or will afford the Company.
. International Sales and Currency Fluctuations. The Company expects that
international sales will constitute a material portion of the Company's
business. The Company's international business is subject to various risks
common to international activities, including political and economic
instability and the need to comply with export laws, tariff regulations and
regulatory requirements. There can be no assurance that political or economic
instability in any given country or countries will not have an adverse impact
on the Company's overall operations. Because approximately 30% of the
Company's sales are made in currencies other than the U.S. dollar, the
Company is subject to the risk of fluctuation in currency values from period
to period. The Company did not hedge its exposure to currency fluctuations in
the last two fiscal years. The risk associated with fluctuations in currency
values can be expected to increase to the extent the Company expands its
international operations.
PROCESS OF REFINING CONTENT FOR USE IN ELECTRONIC PRODUCTS
The process of refining information for publishing electronic books or for
use in other electronic products is analogous in many ways to the process of
publishing print books. For example, just as a traditional book publisher
acquires a manuscript, the development of an electronic version of a reference
work normally commences with the Company's acquisition of rights to a reference
work or database which it has identified for one or more proposed products. The
Company licenses the use of such reference works or databases for appropriate
electronic use.
Even though databases are usually delivered to the Company in electronic
form, the Company thoroughly reviews and cleans the data by removing errors in
preparation for its electronic publication. This process is analogous to a
traditional book publisher proofreading a manuscript. The data must then be
analyzed and in most cases compressed to store it economically in as small a
memory as possible and the Company must design systems to retrieve information
quickly from its compressed state. Similar to a traditional book publisher
editing a manuscript and preparing a detailed index, the Company then designs
the user interface, which permits the user of a product to locate and read the
desired data quickly and intuitively. The Company has developed proprietary
software tools, utilities, custom databases and systems that substantially
reduce the time involved in completing these tasks and aid in the more
efficient development of semi-standard software systems
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embedded in the electronic work. The Company believes that its vertically
integrated development team is unique in the industry since it has an in-house
group of employees skilled in editorial, data preparation and computational
linguistic work, not only in English, but in a variety of languages.
For certain closed system electronic books, a prototype chip containing the
compressed data and interface software is then carefully tested before final
chips are produced. To complete the product, the chips are assembled in a
hardware platform or in a card, similar to a traditional book publisher
printing and binding a hard copy book.
PRODUCTS
Electronic Books
Franklin currently markets more than 200 electronic books in various
categories, including thesauruses, dictionaries, bilingual dictionaries, the
Bible, the Concise Columbia Encyclopedia, and educational and medical
publications. Different versions of the Company's electronic reference products
use different databases and provide various levels of functionality.
Dictionaries
Franklin's electronic spelling products (the "Spelling Ace(R)" line) operate
as phonetic spelling error detectors and correctors, puzzle solvers, word list
builders and word finders. These products permit the user to obtain the correct
spelling of a word that the user does not know how to spell correctly. For
example, if the user phonetically types in "krokodyl," the book will display a
list of seven words including, as the first choice, "crocodile." The Company
markets various versions in the Spelling Ace line incorporating different
databases. The most popular version is based on a list of over 80,000 American
English words licensed to the Company by Merriam-Webster.
The Company's top-of-the-line electronic dictionary is the BOOKMAN Merriam-
Webster's Collegiate Dictionary which contains over 195,000 words and their
definitions, parts of speech, hyphenation points and different word forms
(inflections). All of the Company's electronic dictionaries provide phonetic
spelling correction and many provide thesaurus features as well. For example,
if a user enters the word "baffled," the thesaurus will display eleven
different synonyms, including "frustrated," "disappointed" and "foiled."
The Company markets versions of its dictionaries that include speech
synthesis circuitry (based on text to speech technology in which algorithms are
used to convert text into sound) which allows the Company's products to
pronounce, in computer generated speech, relevant words contained in the
various databases. The Company also has developed and sold audible products
that use digitally recorded and compressed speech, which sounds more like a
human voice.
The Company's line of products also includes bilingual dictionaries. Each
contains more than 200,000 words in both English and either Spanish, French,
German, Arabic or Hebrew, and each provides complete translations, definitions,
verb conjugations and a gender guide, and plays a variety of language learning
games to help teach the language. The Spanish/English dictionary is marketed in
versions with and without speech synthesis for both Spanish and English words.
Each of the other bilingual dictionaries is equipped with speech synthesis for
the English words. The Company currently markets a French/German dictionary and
bilingual dictionaries for several other languages, including other language
pairs that do not include English, such as German/Italian and French/Spanish.
Franklin has a speaking dictionary designed to facilitate use by blind,
visually impaired or learning disabled individuals, as well as others with
special needs. This dictionary incorporates speech technology which pronounces
every word at user adjustable volumes and speeds. In addition, this dictionary
is equipped with full audio feedback, which allows every key on the keyboard to
speak its letter or function. Other features include a keyboard with high-
contrast lettering and raised locator dots, a large high-contrast screen with
adjustable fonts and headphones.
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Children's Products
Since 1990, the Company has successfully sold children's versions of its
reference products, such as a children's dictionary based on the word list from
Webster's Elementary Dictionary. In 1997, the Company introduced a new line of
children's products which includes the Homework Wiz electronic dictionary with
a text-to-speech voice synthesizer enabling the product to speak words and
definitions.
The Bible
Franklin's electronic Holy Bible is a hand-held edition of the entire text
of the Bible, which allows for retrieval of text by searches based on single
words, word groups or synonyms. For example, a search for the words "valley"
and "shadow" will retrieve the Twenty-third Psalm. Because of its built-in
ability to conduct full-text word searches, the Franklin Bible is a fully
automated concordance. The Company sells the Bible on its BOOKMAN platform and
on cards designed for use with its BOOKMAN platform. The Company sells both the
King James and the New International versions of the Bible, as well as a
children's version of the Bible, and markets a Bible question-and-answer card.
The Company sells electronic versions of a Spanish language Bible, the Reina
Valera edition, and a German language Bible that is commonly known as the
Luther Bible. The Company sells a speaking version of its King James Bible with
spoken passages recorded by Johnny Cash.
Medical Publications
The Pocket PDR(TM) Medical Book System comes with two card slots and a broad
range of titles. The platform uses Franklin's proprietary microprocessor and
has an 8-line screen which is particularly useful when accessing and viewing
drug information monographs.. Available book cards for the Pocket PDR(TM)
Medical Book System include the Physicians' Desk Reference, The Merck Manual,
The Washington Manual of Medical Therapeutics, The Medical Letter of Adverse
Drug Interactions, Harrison's Principles of Internal Medicine Companion
Handbook, Drug Interactions and Side Effects, The Sanford Guide to
Antimicrobial Therapy, Stedman's Medical Dictionary, and Griffin's Five-Minute
Clinical Consult.
In the 2000 fiscal year, the Company began development of certain medical
titles for use in a variety of hand-held platforms. The Company has developed
and has begun to sell versions of the 2000 Physicians' Desk Reference for Palm
OS devices as a download from its website, franklin.com; as a CD-ROM for PC
installation; and as a module for the Palm OS-based Visor handheld sold by
Handspring, Inc. The Company is developing the Physicians' Desk Reference for
use in Windows CE devices and is developing other medicals titles for both Palm
OS and Windows CE applications.
Entertainment Titles
The Company sells a Crossword Puzzle Solver electronic book which provides
correct spelling for over 250,000 words and phrases from Merriam-Webster's
Official Crossword Puzzle Dictionary for use by word puzzle enthusiasts. The
Company has also produced the Total Baseball Encyclopedia, The Official
Scrabble Players' Dictionary, and Parker's Wine Guide, an authoritative guide
to wines and vineyards. The Company is investigating making certain
entertainment titles available for downloading from its website into a variety
of hand-held platforms.
International Titles
The Company has developed and produced British English versions of its
American English electronic reference products for international markets,
particularly the United Kingdom and Australia, such as an electronic speller
based on a list of over 70,000 words licensed from Harper/Collins, a children's
dictionary incorporating databases from the Oxford Children's Dictionary, and
the Macquarie dictionary. The Company has monolingual electronic reference
products for the French market, electronic reference products for the German-
speaking market and a Spanish monolingual dictionary for Spain and South
America. The Company
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has omnibus agreements for publishing electronic reference products with two
major European publishers, Bertelsmann and Havas, under which Franklin has
developed titles in hand-held electronic platforms and ROM cards. Havas
publishes dictionaries, thesauruses, encyclopedias and other works under the
following well known French trademarks: Le Robert, Larousse, Nathan, Dalloz,
Masson and Bouquins.
English as a Second Language Products
The Company has produced bilingual electronic learners' dictionaries based
on the Oxford Students' Dictionary of Current English that have English
definitions in simplified language. These learners' dictionaries are intended
to aid native Arabic, Hebrew, and Korean speakers to learn English as a second
language ("ESL"). The Company produces a hand-held electronic tutor that
utilizes digitally recorded and compressed speech technology to pronounce a
basic vocabulary of English words for the ESL student and provides
identification of words through the use of graphic images. The user speaks into
a microphone built into the electronic book, which records and plays back the
user's pronunciation of a word as well as the proper pronunciation stored in
the product, thereby allowing the user to compare the two pronunciations and
correct his or her pronunciation as appropriate. The Company plans to license
certain technology for a Chinese/English product to be sold to native Chinese
speakers.
Other Products
In 1999, the Company introduced at retail in the United States an electronic
book platform under the name Franklin Rocket eBook(TM) that was developed by a
third party which was a hand-held platform for downloading information from the
Internet through a personal computer. The Company has discontinued selling this
product.
Software Reference/Retrieval Products
The Company's subsidiary, Proximity Technology, Inc., designs linguistic
software that performs spelling error detection and correction, thesaurus and
dictionary functions in conjunction with databases of words in 20 languages and
dialects. The Company has retrieval software products, such as Friendly Finder,
a fuzzy search program for searching databases on PCs. The Company licenses
this software for use in computers of all sizes, as well as on the Internet.
The Company competes with Lernout & Hauspie in respect of these software
products.
Electronic Organizers
In 1997, the Company began to sell a line of organizers and databanks under
the ROLODEX(R) trademark which had been licensed by the Company late in 1996.
Since acquiring the ROLODEX(R) Electronics product line, the Company has
updated and improved both low priced databanks, that allow users to store and
retrieve names and telephone numbers, and higher priced and more advanced
personal organizers, that can interface with desktop PCs.
The Company believes that not only does the hand-held organizer market
complement its existing businesses but also that there is potential to improve
the market share of the ROLODEX(R) Electronics business given Franklin's
existing competitive strengths.
Personal Computer Companion Products
In September 1997, the Company began to sell the REX PC Companion line of
products, a computer companion product that downloads a user's personal
information, such as schedules, names, addresses and phone numbers, from a PC.
In September 1999, the Company sold the REX product line to Xircom, Inc.
Internet Enabled Content and Devices
In the 2000 fiscal year, the Company began to offer versions of certain
reference works, including the Physicians' Desk Reference and the Bible, from
its website, franklin.com, for downloading to handheld devices using the Palm
operating system. The Company is developing hardware platforms specifically
designed to provide for portable use of content delivered from the Company's
website.
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RESEARCH AND DEVELOPMENT AND CONTENT ACQUISITION
The Company has a group of approximately fifty persons that performs
research and development relating to new electronic information products as
well as improvements to existing products. The group also conducts ongoing
research in connection with the development of software and hardware for the
Company's products. The Company focuses its hardware development efforts on
creating new platforms.
The Company maintains a full-time internal development group of hardware and
software engineers dedicated to the critical function of developing proprietary
microprocessors and VLSIs that integrate the Company's proprietary
microprocessor or general purpose microprocessors and custom design circuits
for electronic products. Through this extensive effort the Company is able to
reduce the cost of components for its platforms and cards on an ongoing basis.
The Company regularly engages in programs to redesign its platforms and to
develop new VLSIs for its products.
The Company is currently developing products utilizing digitally recorded
and compressed speech technology. The Company has expertise in and has licensed
rights to certain text-to-speech technology ("TTS"), which allows for the
synthesis of audible voice through software, and recorded speech compression
and decompression technology.
The Company maintains a program to acquire, commission or develop internally
databases that it believes are capable of being effectively adapted to
electronic format and that can be positioned and marketed by it in the market
that it serves. The Company also receives requests to develop products
incorporating specific databases from third-party licensors and customers on an
OEM basis. The Company generally obtains a long-term license from the owner of
the database and pays the owner a recoupable advance, followed by the payment
of royalties based on sales.
MANUFACTURING
The Company arranges for the assembly of its products by placing purchase
orders with established third-party manufacturers in China, Taiwan, Malaysia
and Thailand. The Company believes that it could locate alternate manufacturers
for its products if any of its current manufacturers is unable, for any reason,
to meet the Company's needs.
The Company designs certain custom integrated circuits, which are
manufactured by third parties for use in the Company's products. Franklin also
creates the mechanical, electronic and product design for its hardware
platforms and designs and owns the tools used in the manufacture of its
products. The Company's electronic products are based on the Company's
proprietary microprocessor or general purpose microprocessors and custom-
designed ROM chips and general purpose static random access memory chips. The
Company designs VLSIs that integrate its proprietary or general purpose
microprocessors and custom-designed circuits in order to reduce the cost of the
components in its platform. In order to minimize the effect of any supplier
failing to meet the Company's needs, the Company generally attempts to source
these parts from multiple manufacturers. In those cases where the Company
chooses to use a single source for economic reasons, alternative suppliers are
generally available.
The Company utilizes its offices in Hong Kong and Tokyo to facilitate
component procurement and manufacturing. On-site quality control inspection of
electronic products is conducted by its employees in China, Malaysia and
Thailand. The Company's products are generally shipped at the Company's expense
to its facility in New Jersey, where the Company maintains inspection, quality
control, packaging, warehousing, and repair operations for distribution in the
United States, and to similar facilities in Europe and elsewhere for its
foreign operations.
SALES AND MARKETING
Franklin's products are marketed domestically through the Company's own
sales and marketing force and through independent sales representative
organizations, which are supervised by the Company's internal sales department.
8
<PAGE>
Consumer Sales
Franklin's product are sold in over 30,000 retail establishments in the
United States. These are comprised of mass market retailers, discount chains,
bookstores, independent electronic stores, department stores and catalog
companies such as The Sharper Image. Consumers can also order products
directly from Franklin by calling 1-800-BOOKMAN or by visiting the Company's
website at franklin.com. The Company sells through several large retail
chains, including Radio Shack, Wal-Mart, K-Mart, Service Merchandise, Office
Max and Staples.
Franklin commonly participates in and provides financial assistance for its
retailers' promotional efforts, such as in-store displays, catalog and general
newspaper advertisements. The Company promotes its products with
advertisements in magazines and newspapers. The Company also displays its
publications at trade shows, including the Consumer Electronics Show, and
advertises in trade magazines.
International Sales
The Company sells its products worldwide through its wholly-owned, local
subsidiaries and a network of independent distributors. Franklin's subsidiary
in the United Kingdom markets and distributes British English versions of its
products in the United Kingdom. The Company's subsidiaries in France, Canada,
Germany, the Benelux countries, Mexico, and Australia, market and distribute
the Company's products, including those specifically developed for these
markets. In each of these countries, the Company marketed its products through
distributors prior to direct marketing through subsidiaries. The Company has
closed its subsidiary in Singapore and is in the process of closing its
operations in South Africa.
Global OEM and Vertical Markets
The Company has licensed databases from respected medical publishers for
the rapid delivery of massive, complicated information in a highly portable
format for the physician in training and in practice. Selected medical
databases are being sold, or are in development, as BOOKMAN cards for the
Pocket PDR Medical Book System. Sales efforts are augmented by co-marketing
efforts with the Company's licensors of medical databases. The Company is also
launching a line of BOOKMAN book cards targeted for use by pharmacists in both
the hospital and retail settings. The Company has developed and has begun to
sell versions of the 2000 Physicians' Desk Reference for Palm OS devices as a
download from its website, franklin.com; as a CD-ROM for PC installation: and
as a module for the Palm OS-based Visor handheld sold by Handspring, Inc. The
Company is developing the Physicians' Desk Reference for use in Windows CE
devices and is developing other medicals titles for both Palm OS and Windows
CE applications.
The Company produces custom products for third parties, including revisions
of an electronic index for Plaza y Janes, a Spanish print publisher. The
Company has developed custom products including the Larousse Copiloto for a
Spanish print encyclopedia publisher as well as a speaking version of the
alMawrid, an Arabic-English bilingual dictionary for sale in the Middle East.
The Company continues to pursue opportunities for custom versions of its
products.
The Company sells electronic books directly to educators and school systems
throughout the United States. The Company's electronic books are in use in
schools throughout the United States.
PATENTS, TRADEMARKS AND COPYRIGHTS
The Company owns more than twenty United States utility and design patents
on its electronic reference products and a number of international patents on
its products. The Company actively pursues the acquisition and enforcement of
patent rights and, in furtherance thereof, maintains an ongoing program to
apply for and prosecute patent applications and to enforce its rights in
patents that issue therefrom.
9
<PAGE>
Franklin owns certain trademark rights, including "Franklin(R)",
"BOOKMAN(R)", "Spelling Ace(R)", "Wordmaster(R)", "Next Century(R)" and
"Language Master" and has an exclusive license for the mark ROLODEX(R)
Electronics in the United States and various foreign countries.
Copyrights to certain word lists incorporated in the Company's electronic
books are the property of the Company's licensors. The Company owns copyrights
in certain programs and algorithms used in, as well as the compilations of, its
electronic books.
COMPETITION
The Company is the market leader for hand-held electronic books. The
Company's main domestic competitor in the electronic book category is Seiko
Instruments USA Inc. ("Seiko"), which markets spelling correctors, thesauruses
and dictionaries. The Company faces various degrees of competition at different
price points in the consumer market. The Company's major competitor, Seiko,
focuses primarily on the modestly-priced end of the market. The Company's main
international competitors are Lexibook, which markets French monolingual
spelling correctors, thesauruses and dictionaries in France, and Hexaglot,
which markets German-centric bilinguals and translators in Germany.
Competitive factors for electronic reference products are product quality
and reliability, functionality, price, performance, speed of retrieval, quality
of underlying databases, quality of spelling correction, portability, marketing
and distribution capability, service and corporate reputation. The Company
believes it is the leader in respect of each such factor.
The Company's reference products enjoy a reputation for quality resulting
from their content, hardware design and easy-to-use applications. The Company's
reference products are characterized by their capacity to permit the user to
define the kind of information being sought and to provide information
responsive to the user's request.
Sharp Electronics, Casio, and Royal are the Company's primary competitors in
electronic organizers. Competitive factors for electronic organizers are size,
product quality and reliability, functionality, price, performance, marketing
and distribution capability and corporate reputation. The Company believes that
it competes effectively in the electronic organizer market in respect of each
of the factors.
A number of prominent electronics manufacturers, including 3Com, Sharp
Electronics Corporation, Casio, Royal, Psion, LG Electronics, Gemstar
International Group, and Hewlett-Packard Company, market palmtop personal
organizer products, personal digital assistants, electronic books, computer
peripherals, or general usage personal computers that offer varying degrees of
electronic reference capabilities and personal information management
functions. Many competitors in this market have greater capital, research and
development, marketing and distribution resources than the Company and there
can be no assurance that the Company can successfully compete in this market.
Merriam-Webster's is a trademark of Merriam-Webster, Inc.; Physicians' Desk
Reference and Pocket PDR are trademarks of Medical Economics Data, a division
of Medical Economics Company, Inc.; Palm is a trademark of Palm Inc.; Windows
is a trademark of Microsoft Corporation; Handspring and Visor are trademarks of
Handspring, Inc; ROLODEX(R) is a registered trademark of Berol Corporation, a
division of Newell Rubbermaid Inc.; and Rocket eBook is a trademark of Nuvo
Media.
EMPLOYEES
As of June 14, 2000, the Company employed approximately 190 persons in the
United States, approximately 25 persons in Asia, and approximately 70 persons
in international sales and marketing subsidiaries. None of the Company's
employees is represented by a union. The Company believes its relations with
its employees are satisfactory.
10
<PAGE>
Except for the historical information contained herein, the matters
discussed throughout this report, including, but not limited to, those that
are stated as Franklin's belief or expectation or preceded by the word
"should" are forward looking statements that involve risks to and
uncertainties in Franklin's business, including, among other things, the
timely availability and acceptance of new electronic reference products and
organizers, changes in technology, the impact of competitive electronic
products, the management of inventories, Franklin's dependence on third
party component suppliers and manufacturers, including those that provide
Franklin-specific parts, and other risks and uncertainties that may be
detailed from time to time in Franklin's reports filed with the Securities
and Exchange Commission.
ITEM 2. PROPERTIES
The Company owns a 90,000 square foot corporate headquarters in Burlington,
New Jersey. The Company believes this facility will satisfy its foreseeable
needs for office, laboratory and warehousing space.
ITEM 3. LEGAL PROCEEDINGS
The Company has entered into a settlement agreement in connection with that
action filed in the United States District Court for the Southern District of
New York by Aral Holdings, Inc., in July 1999.
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 of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS--NONE
EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Barry J. Lipsky......... 49 President and Chief Executive Officer; Director
Gregory J. Winsky....... 50 Executive Vice President, Business Development, General Counsel,
and Secretary
Arnold D. Levitt........ 63 Senior Vice President, Chief Financial Officer; Treasurer
Toni M. Tracy........... 51 Senior Vice President, Publisher Relations
Robert L. Garthwaite.... 39 Vice President, Worldwide Sales and Marketing
</TABLE>
Mr. Lipsky joined the Company as Vice President in February 1985. He was
elected Executive Vice President in 1997, was named Acting President and Chief
Operating Officer in April 1999 and President and Chief Executive Officer in
July 1999. Mr. Lipsky is a director of Voice Powered Technology International,
Inc., an approximately 82% owned subsidiary of the Company.
Mr. Winsky was elected Vice President and Secretary of the Company in June
1984, was elected Senior Vice President in January 1993 and Executive Vice
President in July 1999. Mr. Winsky is Chief Executive Officer of and a director
of Voice Powered Technology International, Inc.
Mr. Levitt joined the Company in May 1999 as Interim Chief Financial Officer
and Treasurer and was elected Senior Vice President, Chief Financial Officer
and Treasurer of the Company in July 1999. Mr. Levitt has been engaged in
consulting as a chief financial officer or senior business adviser for
companies in a variety of industries since 1996. Prior to these consulting
arrangements, Mr. Levitt was Executive Vice President and Chief Operating
Officer of Wico Gaming Supply Corp. Mr. Levitt has owned or was employed as a
chief financial officer of a number of companies and also worked in public
accounting. Mr. Levitt is Chief Financial Officer and a director of Voice
Powered Technology International, Inc.
11
<PAGE>
Ms. Tracy joined the Company in February 1995 as Vice President of the
Company's Medical Division and was elected Vice President, Publisher Relations
of the Company in May 1996. In September 1996, Ms. Tracy was named President of
the Medical Division. She was elevated to Senior Vice President in 1998. From
1984 until 1995, Ms. Tracy was employed by Churchill Livingstone, the medical
publishing subsidiary of Pearson plc, a British media conglomerate, in a
variety of publishing positions and last held the position of Executive Vice
President and Publisher of Churchill Livingstone International, an Anglo-
American medical publishing enterprise.
Mr. Garthwaite joined the Company in 1990 as Product Development Coordinator
and in August 1998 was named Vice President for Reference and ROLODEX(R)
Electronics Organizer Products. In December 1999, he was elected Vice President
of the Company for Worldwide Sales and Marketing.
12
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the New York Stock Exchange (the
"NYSE") under the symbol "FEP." The following table sets forth the range of the
high and low closing sales prices as reported by the NYSE for the last two
fiscal years:
<TABLE>
<CAPTION>
Sales
-------------
Quarter Ended High Low
------------- ---- ---
<S> <C> <C>
June 30, 1998.............................................. 12 7/16 9 1/8
September 30, 1998......................................... 9 13/16 7 3/8
December 31, 1998.......................................... 12 11/16 7 3/4
March 31, 1999............................................. 11 13/16 4 5/8
June 30, 1999.............................................. 7 3 11/16
September 30, 1999......................................... 5 13/16 2 5/16
December 31, 1999.......................................... 5 15/16 3 1/2
March 31, 2000............................................. 7 3/4 5 1/4
</TABLE>
The approximate number of holders of record of the common stock as of June
14, 2000 was 1,100.
The Company has not declared cash dividends on the common stock and does not
have any plans to pay any cash dividends on the common stock in the foreseeable
future. The Board of Directors of the Company anticipates that any earnings
that might be available to pay dividends on the common stock will be retained
to finance the business of the Company and its subsidiaries.
13
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following tables should be read in conjunction with the consolidated
financial statements of the Company and the notes thereto and the "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
section appearing elsewhere herein.
<TABLE>
<CAPTION>
Year Ended March 31,
----------------------------------------------
2000 1999 1998 1997 1996
------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA
Sales......................... $96,422 $103,793 $100,240 $88,650 $100,823
Cost of Sales................. 61,223 81,209 56,866 46,074 53,666
------- -------- -------- ------- --------
Gross Margin.................. 35,199 22,584 43,374 42,576 47,157
------- -------- -------- ------- --------
Expenses:
Sales and marketing......... 20,741 28,928 22,303 17,621 17,237
Research and development.... 4,215 5,740 5,537 5,472 5,544
General and administrative.. 11,746 20,283 12,912 8,534 8,125
------- -------- -------- ------- --------
Total operating expenses
......................... 36,702 54,951 40,752 31,627 30,906
------- -------- -------- ------- --------
Operating Income (Loss)....... (1,503) (32,367) 2,622 10,949 16,251
Interest expense............ (3,086) (3,554) (3,385) (775) (36)
Interest and investment
income..................... 355 674 1,883 560 505
Other, net.................. (1,162) (656) (590)
Gain on Sale of REX......... 8,072 -- -- -- --
------- -------- -------- ------- --------
Income (Loss) Before Income
Taxes........................ 2,676 (35,903) 530 10,734 16,720
Income Tax (Benefit)
Provision.................... -- (5,712) (899) 4,079 6,354
------- -------- -------- ------- --------
Net Income (Loss)............. $ 2,676 $(30,191) $ 1,429 $ 6,655 $ 10,366
======= ======== ======== ======= ========
Net Income (Loss) Per Share:
Basic....................... $ 0.34 $ (3.81) $ 0.18 $ 0.83 $ 1.33
======= ======== ======== ======= ========
Diluted..................... $ 0.34 $ (3.81) $ 0.18 $ 0.82 $ 1.25
======= ======== ======== ======= ========
Weighted Average Shares:
Basic....................... 7,861 7,923 8,069 8,006 7,799
======= ======== ======== ======= ========
Diluted..................... 7,931 7,923 8,156 8,123 8,281
======= ======== ======== ======= ========
</TABLE>
<TABLE>
<CAPTION>
At March 31,
-------------------------------------------
2000 1999 1998 1997 1996
------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Working Capital..................... $20,777 $ 4,142 $ 74,783 $ 77,796 $ 45,824
Total Assets........................ 70,060 107,320 136,188 131,055 82,869
Long-term Liabilities............... 11,690 1,541 45,089 44,518 653
Shareholders' Equity................ 46,138 43,045 74,746 73,603 65,538
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Net income for the year ended March 31, 2000 was $2.7 million, or $0.34 per
share, compared with a loss of $30.2 million, or $3.81 per share, in the prior
year. Current year net income includes a gain of $8.1 million from the
divestiture of the REX product line in September 1999. Results for the year
were negatively affected by first quarter charges of $2.6 million for price
protection and inventory writedowns in connection with the Company's sale of a
third party product, the Rocket eBook, costs of $2.3 million involved with the
transition to new upgraded product lines and a restructuring charge of $1.1
million which included severance related to a 15% reduction in personnel.
14
<PAGE>
The fiscal 1999 results reflected an operating loss of $32.4 million which
was primarily the result of an inventory writedown of $13.5 million, a
writedown of royalty advances of $6.0 million, planned increases in advertising
expenditures of $5.4 million, increased price protection of $3.9 million, a
write-off of $2.3 million of receivables, and restructuring charges (including
costs of changes in management) of $2.4 million. Approximately half of the
fiscal 1999 operating loss was related to the REX product line, which was sold
by the Company in the 2000 fiscal year.
RESULTS OF OPERATIONS
The following table summarizes the Company's historical results of
operations as a percentage of sales for fiscal 2000, 1999, and 1998:
<TABLE>
<CAPTION>
Year Ended March 31,
----------------------------
2000 1999 1998
------- -------- --------
(dollars in thousands)
<S> <C> <C> <C>
Sales:
Domestic Sales.................................. $63,419 $ 68,248 $ 66,610
International Sales............................. 33,003 35,545 33,630
------- -------- --------
Total Sales................................... $96,422 $103,793 $100,240
======= ======== ========
As a Percentage of Total Sales:
Domestic Sales.................................. 65.8% 65.8% 66.5%
International Sales............................. 34.2 34.2 33.5
------- -------- --------
Total Sales..................................... 100.0% 100.0% 100.0%
Cost of Sales................................... 63.5 78.3 56.8
Gross Margin.................................... 36.5 21.7 43.2
Expenses:
Sales and marketing........................... 21.5 27.9 22.2
Research and development...................... 4.4 5.5 5.5
General and administrative.................... 12.2 19.5 12.9
------- -------- --------
Total operating expenses...................... 38.1 52.9 40.6
------- -------- --------
Operating loss.................................. (1.6) (31.2) 2.6
Interest expense................................ (3.2) (3.4) (3.4)
Interest and investment income.................. 0.4 0.6 1.9
Other, net...................................... (1.2) (0.6) (0.6)
Gain on sale of REX............................. 8.4 -- --
------- -------- --------
Income (Loss) Before Income Taxes................. 2.8 (34.6) 0.5
Income Tax (Benefit) Provision.................... -- (5.5) (0.9)
------- -------- --------
Net Income (Loss)................................. 2.8% (29.1)% 1.4%
======= ======== ========
</TABLE>
Year Ended March 31, 2000 Compared With Year ended March 31, 1999
Sales for the year ended March 31, 2000 were $96.4 million compared with
sales of $103.8 million in the prior year. During the year ended March 31, 2000
the Company sold its REX product line, which accounted for sales of $6.1
million and $15.7 million in the years ended March 31, 2000 and 1999
respectively. Excluding sales of the REX product from both years, sales
increased approximately $2.2 million, or 2.5% over the prior year. That
increase results from an increase of $4.6 million, or 33%, in sales of ROLODEX
Electronics organizer products and sales of $1.8 million from the Rocket eBook
which was introduced and discontinued in the fiscal year ended March 31, 2000.
These increases were partially offset by sales decreases of $3.0 million, or
4%, in reference products and $1.2 million, or 56%, by Voice Powered Technology
International, Inc. ("VPTI"), the Company's 82% owned subsidiary.
15
<PAGE>
Gross margin for the year ended March 31, 2000 was $35.2 million, or 37%,
compared with $22.6 million, or 22% in the prior year. Gross margin in the
prior year was reduced by provisions for inventory obsolescence of $13.5
million. Excluding the effect of these provisions, fiscal 1999 gross margin was
$36.1 million, or 35%.
Total operating expenses decreased from $55.0 million in the twelve months
ended March 31, 1999 to $36.7 million in the year ended March 31, 2000. Sales
and marketing expense decreased by $8.2 million, or 28%, to $20.7 million. The
decrease was primarily the result of lower advertising expenditures, which fell
from $12.3 million in the 1999 fiscal year to $6.4 million in the 2000 fiscal
year. The higher advertising expenditures in the prior year were primarily
related to the support of the REX product line.
Research and development expense declined $1.5 million, or 27%, to $4.2
million for the year ended March 31, 2000. The reduction in expense was mainly
the result of reduced staffing levels which resulted from the Company-wide
personnel reduction implemented in the June 1999 quarter.
General and administrative expense decreased by $8.5 million, or 42%, to
$11.7 million for the year ended March 31, 2000. The prior year's results
included restructuring charges of $2.4 million and an accounts receivable
writedown of $2.3 million. Excluding the effect of these charges, general and
administrative expense declined $3.8 million primarily due to a $1.8 million
reduction in employment related costs as a result of the June 1999 staff
reductions and a $0.5 million reduction in expenses incurred by VPTI.
Interest expense declined from $3.6 million in the year ended March 31, 1999
to $3.1 million for the twelve months ended March 31, 2000 due to lower debt
levels during the 2000 fiscal year. Other, net consists of transaction gains
and losses that arise from exchange rate fluctuations on transactions
denominated in a currency other than the US dollar.
Because of net operating loss carryforwards, income taxes have been offset
by a reduction in the income tax valuation allowance. (See Note 12).
Year Ended March 31, 1999 Compared With Year Ended March 31, 1998
Sales of $103.8 million for the year ended March 31, 1999 were 4% higher
than sales of $100.2 million for the year ended March 31, 1999. The sales
increase is attributable to sales of REX computer companion products, which
were 54% higher than the year before, and sales of ROLODEX Electronics
products, which were 25% higher than the year before, offset in part by lower
sales of electronic reference products, down by 9% on a year to year basis.
Sales were also augmented by sales of the Company's subsidiary, VPTI. Foreign
currency fluctuations did not have a significant effect on the Company's
results of operations from year to year.
The results of operations reflect a decline in operating income of $35
million from the year ended March 31, 1998 to the year ended March 31, 1999,
which was primarily the result of an inventory writedown of $13.5 million, a
writedown of royalty advances of $6.0 million, planned increases in advertising
expenditures of $5.4 million, increased price protection of $3.9 million, the
write-off of $2.3 million of receivables including a receivable due from
Service Merchandise of $1.8 million, and restructuring charges, including costs
of changes in management, of $2.4 million. Approximately half of the operating
income decline was related to the REX product line.
Cost of sales increased from $57.5 million in fiscal 1998 to $81.9 million
in fiscal 1999, primarily as a result of the inventory writedown. General and
administrative expenses increased from $12.9 million to $20.3 primarily as a
result of the other writedowns and restructuring charges and increased
personnel costs. Sales and marketing expenses increased from $22.3 million to
$28.9 million primarily due to increased expenditures for advertising and
marketing of the REX product line. Research and development expenses were
relatively constant at $5.5 million in the 1998 fiscal year and $5.7 million in
the 1999 fiscal year. Net interest expense was $1.4 million higher than in the
1998 fiscal year. Interest expense of $3.6 million, mainly in connection with
interest paid on the Company's Senior Notes, exceeded interest income of $0.7
million from the Company's investments.
16
<PAGE>
INFLATION AND CURRENCY TRANSACTIONS
Inflation has had no significant effect on the operations of the Company
for the three years ended March 31, 2000. However, competitive pressures and
market conditions in the future may limit the Company's ability to increase
prices to compensate for general inflation or increases in prices charged by
suppliers.
The Company's operating results may be affected by fluctuations in currency
exchange rates. The Company did not enter into any hedge transactions during
the year ended March 31, 2000. In May 2000 the Company entered into several
foreign exchange forward contracts with financial institutions to limit its
exposure to currency fluctuation loss on sales made by its European
subsidiaries.
SEASONALITY
The Christmas selling season (October, November and December) and the "back
to school" season (mid-August to mid-September) are the strongest selling
periods for the Company's products. The timing of the publication of new books
may also significantly affect revenues and cause quarterly revenues and
earnings fluctuations.
The following table sets forth unaudited net sales for each of the
Company's last twelve fiscal quarters:
<TABLE>
<CAPTION>
Quarter Ended Quarter Ended Quarter ended Quarter Ended
June 30 September 30 December 31 March 31
------------- ------------- ------------- -------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Fiscal 2000............. $19,746 $30,273 $31,248 $15,155
Fiscal 1999............. 21,041 32,089 34,502 16,161
Fiscal 1998............. 16,614 25,782 36,016 21,828
</TABLE>
FUTURE INCOME TAX BENEFITS
The Company has future income tax benefits of $9.6 million which can be
utilized against future earnings. Further, as a result of the VPTI
acquisition, the Company has additional future income tax benefits of
$9.3 million which can be utilized against future earnings of VPTI. The
Company has provided an income tax valuation allowance of $13.2 million
against these tax assets. The remaining balance represents the amount that the
Company believes that it can reasonably expect to utilize in the foreseeable
future.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash, cash equivalents and short-term investments of $6.9
million at March 31, 2000 compared with $18.9 million at March 31, 1999. The
decrease of $12.0 million was primarily attributable to the principal payments
of $28.0 million on the Company's Senior Notes, and repayment of the mortgage
on the Company's headquarters facility for $3.5 million. These cash outflows
were offset in part by $12.6 million of cash received from the sale of the
Company's REX product line and $10.1 million of cash generated from
operations.
As of March 31, 2000 the Company had a balance of $12.2 million outstanding
under its Senior Notes. A principal payment of $2.0 million is due to the
noteholders on March 31, 2001. In December 1999 the Company's Senior Note
Agreement was restructured to allow the Company to continue to operate under
the Agreement without default.
In December 1999, the Company entered into a $25 million 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 March 31 2000, the
Company had no outstanding borrowings under the facility.
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.
17
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
INDEPENDENT AUDITOR'S REPORT............................................... 19
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended March 31, 2000, 1999 and 1998................................. 20
CONSOLIDATED BALANCE SHEETS
March 31, 2000 and 1999................................................... 21
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended March 31, 2000, 1999 and 1998................................. 22
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Years ended March 31, 2000, 1999 and 1998................................. 23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended March 31, 1999, 1998 and 1997................................. 24
</TABLE>
18
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Shareholders and Directors of
Franklin Electronic Publishers, Incorporated
Burlington, New Jersey 08016
We have audited the accompanying balance sheets of Franklin Electronic
Publishers, Incorporated and subsidiaries as of March 31, 2000 and March 31,
1999 and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the three years ended March 31, 2000. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Franklin Electronic
Publishers, Incorporated and subsidiaries as of March 31, 2000 and March 31,
1999, and the results of its operations and cash flows for each of the three
years ended March 31, 2000 in conformity with generally accepted accounting
principles.
Radin, Glass & Co., llp
Certified Public Accountants
New York, New York
May 12, 2000
19
<PAGE>
FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except for per share data)
<TABLE>
<CAPTION>
Year Ended March 31,
---------------------------
2000 1999 1998
------- -------- --------
<S> <C> <C> <C>
SALES.............................................. $96,422 $103,793 $100,240
COST OF SALES...................................... 61,223 81,209 56,866
------- -------- --------
GROSS MARGIN....................................... 35,199 22,584 43,374
------- -------- --------
EXPENSES:
Sales and marketing.............................. 20,741 28,928 22,303
Research and development......................... 4,215 5,740 5,537
General and administrative....................... 11,746 20,283 12,912
------- -------- --------
Total operating expenses....................... 36,702 54,951 40,752
------- -------- --------
OPERATING INCOME (LOSS)............................ (1,503) (32,367) 2,622
Interest expense................................. (3,086) (3,554) (3,385)
Interest and investment income................... 355 674 1,883
Foreign Exchange and Other, net.................. (1,162) (656) (590)
Gain on Sale of REX.............................. 8,072 -- --
------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES.................. 2,676 (35,903) 530
INCOME TAX (BENEFIT) PROVISION..................... -- (5,712) (899)
------- -------- --------
NET INCOME (LOSS).................................. $ 2,676 $(30,191) $ 1,429
======= ======== ========
NET INCOME (LOSS) PER SHARE:
Basic............................................ $ 0.34 $ (3.81) $ 0.18
======= ======== ========
Diluted.......................................... $ 0.34 $ (3.81) $ 0.18
======= ======== ========
WEIGHTED AVERAGE SHARES:
Basic............................................ 7,861 7,923 8,069
======= ======== ========
Diluted.......................................... 7,931 7,923 8,156
======= ======== ========
</TABLE>
See notes to consolidated financial statements.
20
<PAGE>
FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
March 31,
-----------------
2000 1999
------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents (Note 3)........................ $ 6,899 $ 12,870
Investments in limited partnerships (Note 3).............. -- 6,045
Accounts receivable, less allowance for doubtful accounts
of $850 and $928......................................... 10,889 17,225
Inventories (Note 4)...................................... 13,735 23,934
Income tax receivable..................................... 568 3,601
Prepaids and other assets................................. 918 3,201
------- --------
TOTAL CURRENT ASSETS.................................... 33,009 66,876
------- --------
PROPERTY AND EQUIPMENT (Note 5)............................. 7,797 9,094
------- --------
OTHER ASSETS:
Deferred income tax asset (Note 12)....................... 5,700 5,700
Trademark, less accumulated amortization of $1,360 and
$972..................................................... 14,187 14,576
Advance royalties and licenses............................ 1,266 1,580
Software development costs................................ 4,482 5,338
Other assets.............................................. 3,619 4,156
------- --------
TOTAL ASSETS............................................ $70,060 $107,320
======= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses (Note 6)............ $10,076 $ 19,136
Notes payable (Note 7).................................... 2,000 40,000
Mortgage note payable (Note 7)............................ -- 3,479
Current portion of long-term liabilities--Other........... 156 119
------- --------
TOTAL CURRENT LIABILITIES............................... 12,232 62,734
------- --------
LONG-TERM LIABILITIES (Note 7):
Notes payable............................................. 10,150 --
Other liabilities......................................... 1,540 1,541
------- --------
TOTAL LONG-TERM LIABILITIES............................. 11,690 1,541
------- --------
SHAREHOLDERS' EQUITY (Note 10):
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 7,832,955 shares... 49,138 48,784
Retained earnings (deficit)............................... (2,266) (4,942)
Foreign currency translation adjustment (Note 11)......... (734) (797)
------- --------
TOTAL SHAREHOLDERS' EQUITY.............................. 46,138 43,045
------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.............. $70,060 $107,320
======= ========
</TABLE>
See notes to consolidated financial statements.
21
<PAGE>
FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year Ended March 31,
----------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME (LOSS)................................ $ 2,676 $(30,191) $ 1,429
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET
CASH PROVIDED BY OPERATING ACTIVITIES
Depreciation and amortization.................. 6,092 6,010 5,871
Non-cash interest expense...................... 150
Provision for losses on accounts receivable.... 739 2,481 75
Provision for inventory revaluation............ 2,350 13,490 --
Write-down of carrying value of royalties &
other assets.................................. -- 6,159 --
Loss on disposal of property and equipment..... 60 299 43
Gain on sale of REX............................ (8,072) -- --
Deferred income taxes.......................... -- (1,280) 446
Source (use) of cash from change in operating
assets and liabilities:
Accounts receivable.......................... 5,597 (3,138) (6,439)
Inventories.................................. 3,074 (2,731) (3,118)
Prepaids and other assets.................... 4,694 (1,439) (838)
Accounts payable and accrued expenses........ (7,937) 3,184 1,894
Other, net..................................... 678 (45) --
-------- -------- --------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES................................. 10,101 (7,201) (637)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment............... (1,203) (1,458) (2,419)
Proceeds from sale of property and equipment..... 33 107 118
Software development costs....................... (1,500) (1,925) (2,100)
Proceeds from sale of REX line................... 12,619 -- --
Investments in limited partnerships.............. -- (6,000) --
Redemption of investments in limited
partnerships.................................... 6,045 -- --
Change in other assets........................... (842) (2,360) (5,866)
Cash paid for acquisitions, net of cash
acquired........................................ -- -- (304)
-------- -------- --------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES................................. 15,152 (11,636) (10,571)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments of mortgage................... (3,479) (284) (284)
Principal payments of Senior Notes............... (28,000) -- --
Proceeds from issuance of common shares.......... 154 274 121
Purchase of common shares........................ -- (2,332) --
Other liabilities................................ 38 (69) 794
-------- -------- --------
NET CASH (USED IN) PROVIDED BY FINANCING
ACTIVITIES................................. (31,287) (2,411) 631
EFFECT OF EXCHANGE RATE CHANGES ON CASH........... 63 195 (540)
-------- -------- --------
DECREASE IN CASH AND CASH EQUIVALENTS............. (5,971) (21,053) (11,117)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD.. 12,870 33,923 45,040
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD........ $ 6,899 $ 12,870 $ 33,923
======== ======== ========
SUPPLEMENTAL DATA:
Cash paid (received) during the year:
Income taxes................................... $ (3,077) $ (2,100) $ 851
Interest....................................... $ 3,008 $ 3,429 $ 3,377
SCHEDULE OF NON-CASH FINANCING ACTIVITIES
Purchase and retirement of treasury shares
received under employee stock option plan and
warrants exercised.............................. $ -- $ -- $ 96
</TABLE>
See notes to consolidated financial statements.
22
<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,
1997................... 8,060,133 $50,235 $ 23,820 $(452) $ 73,603
Issuance of common
shares under employee
stock option plan.... 25,960 217 -- -- 217
Issuance of shares and
amortization of
deferred compensation
expense for shares
issued for services
(unearned portion
$67)................. (7,300) 133 -- -- 133
Purchase and
retirement of
treasury shares
received under
employee stock option
plan................. (6,767) (96) -- -- (96)
Income for the
period............... -- -- 1,429 -- 1,429
Foreign currency
translation
adjustment........... -- -- -- (540) (540)
--------- ------- -------- ----- --------
BALANCE--MARCH 31,
1998................... 8,072,026 50,489 25,249 (992) 74,746
========= ======= ======== ===== ========
Issuance of common
shares under employee
stock option plan.... 29,877 274 -- -- 274
Issuance of shares and
amortization of
deferred compensation
expense for shares
issued for services
(unearned portion
$8).................. 5,052 47 -- -- 47
Value of stock options
granted.............. -- 306 -- -- 306
Purchase and
retirement of common
shares............... (274,000) (2,332) -- -- (2,332)
Loss for the period... -- -- (30,191) -- (30,191)
Foreign currency
translation
adjustment........... -- -- -- 195 195
--------- ------- -------- ----- --------
BALANCE--MARCH 31,
1999................... 7,832,955 48,784 (4,942) (797) 43,045
========= ======= ======== ===== ========
Issuance of common
shares under employee
stock option plan.... 40,259 153 -- -- 153
Issuance of shares and
amortization of
deferred compensation
expense for shares
issued for services
(unearned portion
$47)................. 19,250 16 -- -- 16
Value of stock options
granted.............. -- 75 -- -- 75
Shares issued under
banked vacation stock
plan................. 22,476 110 -- -- 110
Income for the
period............... -- -- 2,676 -- 2,676
Foreign currency
translation
adjustment........... -- -- -- 63 63
--------- ------- -------- ----- --------
BALANCE--MARCH 31,
2000................... 7,914,940 $49,138 $ (2,266) $(734) $ 46,138
========= ======= ======== ===== ========
</TABLE>
--------
* Comprehensive income, i.e., net income (loss), plus, or less, other
comprehensive income, totaled $2,739 in 2000, $(29,996) in 1999, and $889 in
1998.
See notes to consolidated financial statements.
23
<PAGE>
FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
1. LINE OF BUSINESS
Franklin Electronic Publishers, Incorporated and its wholly-owned
subsidiaries (the "Company") design, develop, publish, and distribute
electronic reference and organizer products and related software. Other
activities represent less than 10% of sales, operating income and identifiable
assets.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation:
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries, after elimination of intercompany accounts
and transactions. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Inventories:
Inventories are valued at the lower of cost or market determined by the
first-in, first-out method of accounting.
Property and Equipment:
Property and equipment are stated at cost and are depreciated using the
straight-line method over the estimated useful lives of the assets, ranging
from three to five years for furniture, equipment, tooling and computer
software purchased and 40 years for building and improvements.
Leasehold improvements are amortized over the term of the lease or the
estimated life of the improvement, whichever is shorter. When assets are sold
or retired, their cost and related accumulated depreciation are removed from
the appropriate accounts. Any gains and losses on dispositions are recorded in
current operations. Maintenance and minor repairs are charged to operations as
incurred.
Trademark and Goodwill:
Trademark and Goodwill are recorded at cost. The ROLODEX Electronics
trademark is being amortized over a 40-year period. Goodwill of purchased
businesses is being amortized over a 30-year period.
Allowance for Estimated Returns:
The Company provides an allowance for estimated returns on sales in
accordance with Statement of Financial Accounting Standard (SFAS) No. 48,
"Revenue Recognition when Right of Return Exists." The Company's sales are made
with the right of exchange for defective products within one year from the
original retail purchase. The Company provides for the cost of refurbishing
such products.
Price Protection:
The Company maintains a policy of providing price protection to its dealers
under which the Company issues credits in the event it reduces its prices.
These credits are generally computed by multiplying either the
24
<PAGE>
FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)
number of units purchased within ninety days prior to the price reduction or
the number of units on hand at retail at the time of the price reduction by the
dollar amount of the price reduction. A provision for the related reduction in
sales is made at such time as the Company determines that a price reduction
will be effective or is reasonably anticipated.
Software Development Costs:
The capitalization of such costs and the related amortization is in
accordance with SFAS No. 86. Software costs, which are capitalized after
technological feasibility is established, totaled $1,500, $1,925 and $2,100 for
the fiscal years ended March 31, 2000, 1999, and 1998 respectively.
Amortization included in the accompanying Consolidated Statement of
Operations for fiscal years ended March 31, 2000, 1999, and 1998, was $1,989,
$1,947 and $1,721, respectively.
Advertising Costs:
Advertising costs are expensed as incurred except for direct response
advertising, the costs of which are deferred and amortized over the period the
related sales are recorded.
Fair Value of Financial Instruments:
The carrying amounts reported in the balance sheet for cash, trade
receivables, accounts payable and accrued expenses approximate fair value based
on the short-term maturity of these instruments. The carrying amount of the
Company's borrowings under the Senior Notes approximates fair value.
Accounting for Long-Lived Assets:
The Company reviews long-lived assets, certain identifiable assets and any
goodwill related to those assets for impairment whenever circumstances and
situations change such that there is an indication that the carrying amounts
may not be recoverable. At March 31, 2000, the Company believes that there has
been no impairment of its long-lived assets.
Income Taxes:
The Company utilizes the liability method of accounting for income taxes as
set forth in SFAS 109, "Accounting for Income Taxes". Under the liability
method, deferred taxes are determined based on the difference between the
financial statement and tax basis of assets and liabilities using enacted tax
rates in effect in the years in which the differences are expected to reverse.
Earnings (Loss) Per Share:
On December 31, 1997, the Company adopted SFAS No. 128, "Earnings per
Share." Earnings per common share are computed by dividing income available to
common stockholders by the weighted average number of common shares outstanding
during the period. The earnings per common share, assuming dilution,
computation gives effect to all dilutive potential common shares during the
period. The computation assumes that the outstanding stock options and warrants
were exercised and that the proceeds were used to purchase common shares of the
Company.
25
<PAGE>
FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)
Stock Based Compensation:
The Company accounts for stock transactions in accordance with APB Opinion
No. 25, "Accounting For Stock Issued To Employees." Accordingly, no
compensation is recorded on the issuance of employee stock options at fair
market value.
Reclassifications:
Certain reclassifications have been made to the prior years' financial
statements to conform to the current year presentation. These reclassifications
had no effect on previously reported results of operations or retained
earnings.
3. CASH AND CASH EQUIVALENTS
The Company classifies as cash equivalents highly liquid investments with
maturities of less than ninety days totaling $5,472 and $9,026 at March 31,
2000 and 1999, respectively. The Company redeemed its investment in limited
partnerships in the first quarter of the fiscal year ended March 31, 2000.
4. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
March 31,
---------------
2000 1999
------- -------
<S> <C> <C>
Finished products............................................ $10,432 $18,278
Component parts.............................................. 3,303 5,656
------- -------
$13,735 $23,934
======= =======
</TABLE>
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
March 31,
---------------
2000 1999
------- -------
<S> <C> <C>
Land........................................................ $ 843 $ 854
Building and improvements................................... 5,661 5,660
Furniture and equipment..................................... 6,472 6,244
Tooling..................................................... 5,352 5,107
Computer software purchased................................. 2,249 1,859
------- -------
20,577 19,724
Accumulated depreciation and amortization................... 12,780 10,630
------- -------
$ 7,797 $ 9,094
======= =======
</TABLE>
26
<PAGE>
FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)
6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
<TABLE>
<CAPTION>
March 31,
---------------
2000 1999
------- -------
<S> <C> <C>
Trade accounts payable...................................... $ 4,330 $ 4,134
Accrued payroll, bonus, payroll benefits and taxes.......... 1,866 4,010
Accrued restructuring costs................................. 143 3,103
Accrued sales allowances.................................... 1,513 3,739
Accrued royalties........................................... 536 608
Accrued expenses--other..................................... 1,688 3,542
------- -------
$10,076 $19,136
======= =======
</TABLE>
7. LONG-TERM LIABILITIES
Long-term liabilities consists of the following:
<TABLE>
<CAPTION>
March 31,
---------------
2000 1999
------- -------
<S> <C> <C>
Senior Notes payable......................................... $12,150 $40,000
Mortgage note payable........................................ -- 3,479
Other........................................................ 1,696 1,660
------- -------
13,846 45,139
Less current portion......................................... 2,156 43,598
------- -------
$11,690 $ 1,541
======= =======
</TABLE>
During the year ended March 31, 1997, the Company sold $40,000 of 10-year
promissory notes (the "Senior Notes") to institutional investors. The Senior
Note Agreement contains normal financial covenants, including a restriction on
dividends and other restricted payments, subject to adjustments for earnings
and sales of common stock. The Senior Note Agreement contains a prepayment
penalty and a provision for repurchase should there be a change of control, in
addition to financial covenants.
Because of operating losses in the Company's 1999 fiscal year, the Company
was in default of certain financial covenants of the Agreement pursuant to
which the 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 default under the Senior Notes also resulted in default
under the Agreement pursuant to which the Company's headquarters facility was
mortgaged. Consequently the entire balance of the Senior Notes and mortgage
were classified as current liabilities on the Company's March 31, 1999 balance
sheet. Regardless of the non-compliance with financial covenants, the Company
made all scheduled payments of principal and interest when due.
In December 1999 the Senior Note Agreement was restructured to allow the
Company to continue to operate under the Agreement without default. Under the
amended Agreement, the Senior Notes carry an interest rate of 11% per annum and
additional interest (the Payment In Kind Portion) at a rate of 1.5% per annum
payable in cash, or in lieu of cash and at the Company's option, through the
issuance of additional Notes. Principal payments of $28,000 were made on the
Senior Notes during the year ended March 31, 2000,
27
<PAGE>
FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)
reducing the outstanding balance to $12,150 which includes $150 of additional
Notes issued in lieu of cash for of a portion of the interest due under the
amended Agreement. Principal payments of $2,000 are due on March 31 of each of
the years 2001 through 2005 with the balance of $2,150 due March 31, 2006.
The balance of the mortgage on the Company's facility in Burlington, New
Jersey was repaid during the year ended March 31, 2000.
In December 1999, the Company entered into a $25,000 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% (9% at March 31, 2000) and are
subject to certain financial covenants and restrictions on indebtedness,
dividend payments, business combinations, and other related items. As of March
31, 2000 no amounts were available for paying dividends. Borrowings are
collateralized by substantially all assets of the Company. As of March 31 2000,
the Company had no outstanding borrowings under the facility and is in
compliance with all covenants.
The maturities of long-term liabilities for the five years after March 31,
2000 are as follows:
<TABLE>
<CAPTION>
Years Ending March 31,
----------------------
<S> <C>
2001................................................................ $2,156
2002................................................................ $2,159
2003................................................................ $2,128
2004................................................................ $2,119
2005................................................................ $2,119
</TABLE>
8. ADVERTISING AND MEDIA COSTS
Advertising costs for the years ended March 31, 2000, 1999 and 1998 were
$6,412, $12,256 and $7,626, respectively. Deferrals of direct response
advertising were not material.
9. COMMITMENTS
Lease Commitments:
Rent expense under all operating leases was $1,111, $1,180 and $1,110 for
the years ended March 31, 2000, 1999 and 1998, respectively. The future minimum
rental payments to be made under non-cancellable operating leases, principally
for facilities, as of March 31, 2000 were as follows:
<TABLE>
<CAPTION>
Years Ending March 31,
----------------------
<S> <C>
2001.................................................................. $560
2002.................................................................. $535
2003.................................................................. $321
2004.................................................................. $242
2005.................................................................. $224
</TABLE>
Royalty Agreements:
The Company acquires the rights to reference works and databases from
various publishers and technology companies under renewable contracts of
varying terms. Royalties and license fees are based on a per unit charge or as
a percentage of revenue from products utilizing such databases or software
licenses.
28
<PAGE>
FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)
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 is likely, individually or in the aggregate, to have a material
adverse effect on the financial condition of the Company.
10. SHAREHOLDERS' EQUITY
Restricted Stock Plan and Unearned Portion of Common Stock Issued for
Services:
The Company maintains a Restricted Stock Plan which provides for the grant
of shares of common stock for services. The shares are subject to a restriction
on transfer which requires the holder to remain employed by the Company for up
to three years in order to receive the shares. As of March 31, 2000, under the
Plan, 5,050 shares of common stock were available for distribution.
Employee Stock Options:
Under the 1998 Plan, 750,000 shares of the Company's common stock have been
reserved for issuance. The Plan authorizes the Company to grant options to
purchase shares of common stock to key employees, consultants and outside
directors of the Company.
The Plan provides for granting of options to purchase shares of common stock
at not less than the fair market value on the date of grant for incentive stock
options and at not less than 75% of the fair market value on the date of grant
for non-incentive stock options. An option may not be granted for a period in
excess of ten years from the date of grant. Options are not transferable by the
optionee other than upon death.
Under the terms of the Plan, an employee may deliver shares of the Company's
common stock as payment for options being exercised. The shares are valued at
the closing price on the date of exercise.
During the year ended March 31, 1999, the Company granted the former
President of the Company 35,000 options at a price less than the market price
of the stock on the grant date. These options are included in the computation
of weighted-average fair value of stock options granted during the year ended
March 31, 1999. The Company has also recorded the excess of market price over
option price of $306 at date of grant as compensation expense for the year
ended March 31, 1999.
Accounting for Employee Stock Options:
The Company accounts for its stock option plan under APB Opinion No. 25,
"Accounting for Stock Issued to Employees", under which no compensation expense
is recognized. In fiscal 1997, the Company adopted SFAS No. 123, "Accounting
for Stock-Based Compensation", for disclosure purposes; accordingly, no
compensation expense is recognized in the results of operations for options
granted at fair market value as required by APB Opinion No. 25.
For disclosure purposes, the fair value of each stock option grant is
estimated on the date of grant using the Black-Scholes option-pricing model
with the following weighted-average assumptions used for stock options granted
during the years ended March 31, 2000, 1999, and 1998, respectively: annual
dividends of $0.00 for all years, expected volatility of 116.0%, 55.0% and
46.6%, risk-free interest rate of 5.8%, 5.6% and 5.7% and expected life of five
years for all grants. The number of shares granted, the weighted-average
29
<PAGE>
FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)
exercise price and weighted average fair value of the stock options granted
during the years ended March 31, 2000, 1999, and 1998 was as follows:
<TABLE>
<CAPTION>
Weighted- Weighted-
Number of Average Average
Shares Granted Exercise Price Fair Value
-------------- -------------- ----------
<S> <C> <C> <C>
Year ended March 31, 1998:
Exercise price equals market
value.......................... 464,500 $11.79 $5.50
======= ====== =====
Year ended March 31, 1999:
Exercise price equals market
value.......................... 681,000 $10.24 $5.08
Exercise price less than market
value.......................... 35,000 $ 3.50 $9.91
------- ------ -----
716,000 $ 9.89 $5.32
======= ====== =====
Year ended March 31, 2000:
Exercise price equals market
value.......................... 217,000 $ 5.71 $4.75
Exercise price greater than
market value................... 489,000 $ 4.00 $2.38
Exercise price less than market
value.......................... 27,000 $ 5.69 $4.95
------- ------ -----
733,000 $ 4.57 $3.17
======= ====== =====
</TABLE>
If the Company recognized compensation cost for the employee stock option
plan in accordance with SFAS No. 123, the Company's pro-forma net income (loss)
and earnings (loss) per share would have been $1.5 million and $0.19 in 2000,
$(32.0) million and $(4.06) in 1999, and $0.1 million and $0.01 in 1998. The
SFAS No. 123 method of accounting does not apply to options granted prior to
March 31, 1995 and, accordingly, the resulting pro-forma compensation cost may
not be representative of that to be expected in future years.
The following table summarizes the changes in options outstanding and the
related price ranges for shares of the Company's common stock:
<TABLE>
<CAPTION>
Stock Options
---------------------------
Weighted Average
Shares Exercise Price
--------- ----------------
<S> <C> <C>
Outstanding at March 31, 1997.................... 857,134 $14.44
Granted........................................ 464,500 11.79
Exercised...................................... (25,960) 8.38
Expired or cancelled........................... (281,200) 15.10
---------
Outstanding at March 31, 1998.................... 1,014,474 13.21
Granted........................................ 716,000 9.89
Exercised...................................... (29,877) 9.19
Expired or cancelled........................... (110,867) 13.40
---------
Outstanding at March 31, 1999.................... 1,589,730 15.13
Granted........................................ 733,000 4.57
Exercised...................................... (40,259) 3.81
Expired or cancelled........................... (553,763) 20.24
---------
Outstanding at March 31, 2000.................... 1,728,708 9.28
=========
</TABLE>
30
<PAGE>
FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)
The following table summarizes information about stock options outstanding
at March 31, 2000:
<TABLE>
<CAPTION>
Options outstanding Options Exercisable
-------------------------------- --------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
--------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 3.00--$ 4.00 476,000 8.98 $ 3.96 20,000 $ 3.00
4.75-- 8.44 309,777 7.56 6.09 106,277 6.87
8.75-- 11.00 301,333 6.36 9.65 206,167 9.78
11.25-- 14.00 386,699 3.89 12.78 368,198 12.83
14.25-- 31.63 254,899 4.16 17.38 226,400 17.69
--------- -------
$ 3.00--$ 31.63 1,728,708 927,042
========= =======
</TABLE>
Options exercisable and the weighted average exercise price at March 31,
1999 and March 31, 1998 were 723,691 options and $13.15, and 581,590 options
and $13.69, respectively.
11. FOREIGN CURRENCY TRANSLATION
Unrealized gains and losses resulting from translating foreign subsidiaries'
assets and liabilities into U.S. dollars are deferred in an equity account on
the balance sheet until such time as the subsidiary is sold or liquidated.
As of March 31, 2000 and March 31, 1999 the Company had no outstanding
foreign exchange contracts. In May 2000 the Company entered into several
foreign exchange forward contracts with financial institutions to limit its
exposure to loss, resulting from fluctuations in the value of the Euro, on
anticipated cash flows. The anticipated cash flows are comprised of proceeds
from sales of the Company's products made through the Company's European
subsidiaries. The duration of these contracts does not exceed one year.
12. INCOME TAXES
The components of the net deferred income tax asset are the following (in
thousands):
<TABLE>
<CAPTION>
March 31,
---------------
2000 1999
------- -------
<S> <C> <C>
US loss carryforward--Franklin.............................. $ 8,150 $ 2,902
US loss carryforward--VPTI.................................. 9,284 9,100
Foreign loss carryforward................................... 237 277
Inventory valuation allowances.............................. 1,050 3,316
Other items deductible in future years--net................. 172 4,233
------- -------
18,893 19,828
Deferred income tax valuation allowance..................... 13,193 14,128
------- -------
$ 5,700 $ 5,700
======= =======
</TABLE>
31
<PAGE>
FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)
Deferred income taxes result from temporary differences between income tax
and financial reporting computed at the effective income tax rate. A valuation
allowance has been provided to reduce the deferred income tax asset to the
amount which is expected to be more likely than not to be realized.
The loss carryforward of Voice Powered Technology International, Inc.
("VPTI") can be offset against future taxable income of VPTI and of Franklin
under certain circumstances. The deferred asset relating to VPTI's loss
carryforward has been offset by a valuation allowance.
The income tax provision (credit) consists of the following:
<TABLE>
<CAPTION>
Year Ended March 31,
----------------------
2000 1999 1998
----- ------- -------
<S> <C> <C> <C>
Current
Federal........................................... -- $(3,383) $(1,289)
State............................................. -- -- (115)
Foreign........................................... -- -- 60
----- ------- -------
-- (3,383) (1,344)
===== ======= =======
Deferred
Federal........................................... -- (2,171) 321
State............................................. -- (158) 28
Foreign........................................... -- -- 96
----- ------- -------
-- (2,329) 445
----- ------- -------
Provision (benefit) for income taxes................ -- $(5,712) $ (899)
===== ======= =======
</TABLE>
The reconciliation of income taxes shown in the financial statements and
amounts computed by applying the Federal income tax rate of 35% for the years
ended March 31, 2000, 1999 and 1998 is as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended March 31,
------------------------
2000 1999 1998
------ -------- ------
<S> <C> <C> <C>
Income before income taxes........................ $2,676 $(35,903) $ 530
------ -------- ------
Computed expected tax............................. 936 (12,566) 185
Reversals of income tax accruals.................. -- -- (1,100)
State tax provision............................... -- -- 16
Change in valuation allowance..................... (936) 6,854 --
------ -------- ------
Provision (benefit) for income taxes.............. -- $ (5,712) $ (899)
====== ======== ======
</TABLE>
Effective April 1, 1997, the Company filed elections with the Internal
Revenue Service to treat most of its foreign subsidiaries as divisions of the
parent for U.S. income tax reporting.
32
<PAGE>
FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)
The loss carry forwards and expiration dates are the following:
<TABLE>
<CAPTION>
Expiration
Amounts Dates
------- ----------
<S> <C> <C>
Franklin--US.............................................. $21,000 2019
VPTI...................................................... $26,500 to 2012
Foreign................................................... $ 1,000 to 2005
</TABLE>
13. OPERATIONS
The Company adopted SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information", at March 31, 1999. SFAS 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 SFAS 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:
<TABLE>
<CAPTION>
March 31,
-------------------------
2000 1999 1998
------- -------- --------
<S> <C> <C> <C>
Product Sales
Reference........................................ $69,202 $ 72,164 $ 79,033
ROLODEX Electronics.............................. 18,348 13,778 11,055
REX.............................................. 6,143 15,673 10,152
Rocket eBook..................................... 1,764 -- --
Other............................................ 965 2,178 --
------- -------- --------
Total Sales.................................... $96,422 $103,793 $100,240
======= ======== ========
</TABLE>
Approximate foreign sources of revenues including export sales were as
follows:
<TABLE>
<CAPTION>
March 31,
-----------------------
2000 1999 1998
------- ------- -------
<S> <C> <C> <C>
Product Sales
Europe............................................. $26,247 $27,767 $26,691
Other International................................ 6,756 7,778 6,939
</TABLE>
For the fiscal years ended March 31, 2000, 1999, and 1998, no customer
accounted for more than 10% of the Company's revenues.
In September 1999 the Company sold its REX product line for $13,250 and the
assumption of related liabilities. The Company realized a gain of $8,072 on the
sale. 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.
During the year ended March 31, 2000, severance and other employee costs
relating to the change in management and costs of office closures approximating
$3,000 were charged to accrued restructuring costs.
33
<PAGE>
FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)
14. ACQUISITION OF VOICE POWERED TECHNOLOGY, INC. ("VPTI")
During the year ended March 31, 1998, the Company made approximately $2,700
of loans to and investments in Voice Powered Technology International, Inc.
("VPTI"), a publicly traded company. In September 1997, VPTI filed for
reorganization under Chapter 11 of the Federal Bankruptcy Code. In May 1998,
VPTI emerged from bankruptcy, with the loans and investments converted into
common stock resulting in VPTI becoming an 82% owned subsidiary of the Company.
The acquisition of VPTI, which continues to report as a public company, has
been treated as a purchase, with the excess of cost over net assets acquired
included in deferred income taxes, which amount was offset by a valuation
allowance. The operations of VPTI have been consolidated since May 12, 1998,
the date of acquisition of control. The unaudited consolidated results of
operations, as if VPTI had been acquired at the beginning of fiscal years 1999
and 1998, are as follows:
<TABLE>
<CAPTION>
March 31,
------------------
1999 1998
-------- --------
<S> <C> <C>
Net sales................................................ $106,793 $102,324
Net loss................................................. (30,013) (2,703)
Net loss per share....................................... (3.80) (0.34)
</TABLE>
Because of the bankruptcy filing and significant reductions in operations,
the pro-forma results are not those which would have occurred if the
acquisition had been completed as of the beginning of each fiscal year. The
Company's reported results of operations for fiscal year 2000 include a full
year of VPTI's results of operations.
15. WEB SITE DEVELOPMENT COSTS
During the year ended March 31, 2000, the Company adopted EITF 00-2,
"Accounting for Web Site Development Costs". EITF 00-2 requires certain web
site development costs to be expensed and others to be capitalized. The Company
has expensed all of its web site development costs. No web site development
costs were incurred during the year ended March 31, 2000, which would be
capitalized under EITF 00-2. Any web site development costs incurred during the
year ended March 31, 1999, which might have been capitalizable, have been
charged to expense based on the restructuring that occurred at the end of that
fiscal year.
16. RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission ("SEC") released
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements" ("SAB 101") which clarifies the SEC's views on revenue recognition.
The Company is required to adopt SAB 101 in the first fiscal quarter of the
year ending March 31, 2001. The Company is currently studying the impact of SAB
101, but does not expect it will have a material impact on its financial
statements.
34
<PAGE>
FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)
17. SUMMARIZED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
Quarter Ended
------------------------------------------
March
June 30 September 30 December 31 31
------- ------------ ----------- -------
<S> <C> <C> <C> <C>
Fiscal 2000
Net sales......................... $19,746 $30,273 $31,248 $15,155
Gross profit...................... 4,703 10,587 12,065 7,844
Net income (loss)................. (8,607)A 9,748B 2,060 (525)
Net income (loss) per share:
Earnings per common share....... (1.10) 1.24 .26 (.07)
Earnings per common share--
assuming dilution.............. (1.10) 1.24 .26 (.07)
Fiscal 1999
Net sales......................... $21,041 $32,089 $34,502 $16,161
Gross profit...................... 9,424 11,877 3,777 (2,494)
Net income (loss)................. (684) 41 (8,131) (21,417)C
Net income (loss) per share:
Earnings per common share....... (0.08) 0.01 (1.04) (2.73)
Earnings per common share--
assuming dilution.............. (0.08) 0.01 (1.04) (2.73)
Fiscal 1998
Net sales......................... $16,614 $25,782 $36,016 $21,828
Gross profit...................... 7,292 11,612 14,808 9,662
Net income (loss)................. (420) 1,507 1,209 (867)
Net income (loss) per share:
Earnings per common share*...... (0.05) 0.19 0.15 (0.11)
Earnings per common share--
assuming dilution*............. (0.05) 0.18 0.15 (0.11)
</TABLE>
--------
* Reflects the adoption of SFAS No. 128 including the restatement of prior
years.
A. The loss of $8.6 million in the quarter ended June 30, 1999 includes an
inventory writedown and price protection $2.6 million in connection with the
Franklin Rocket eBook, $2.3 million in connection with the transition to the
new upgraded product lines and restructuring charges of $1.1 million, which
include severance related to a 15% reduction in personnel effected during the
June 1999 quarter and expenses related to the closing of certain of the
Company's foreign subsidiaries.
B. See Note 13.
C. The loss of $21.4 million for the quarter ended March 31, 1999 includes
inventory writedowns of $3.5 million, price protection of $2.9 million,
writedown of royalty advances of $4.7 million, write-off of $2.3 million of
receivables, and restructuring charges, including costs of changes in
management of $1.4 million. The Company did not provide for any significant tax
benefit from the fourth quarter loss.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE--NONE
35
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information called for by Item 10 is set forth under the heading "Election
of Directors" in the Company's Proxy Statement for its 2000 annual meeting of
stockholders (the "2000 Proxy Statement"), which is incorporated herein by this
reference.
ITEM 11. EXECUTIVE COMPENSATION
Information called for by Item 11 is set forth under the heading "Executive
Compensation" in the 2000 Proxy Statement, which is incorporated herein by this
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information called for by Item 12 is set forth under the heading "Security
Ownership of Certain Beneficial Owners and Management" in the 2000 Proxy
Statement, which is incorporated herein by this reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information called for by Item 13 is set forth under the heading "Certain
Relationships and Related Transactions" in the 2000 Proxy Statement, which is
incorporated herein by this reference.
36
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Financial statements and schedules filed as a part of this report are listed
on the "Index to Financial Statements" at page 18 herein. All other schedules
are omitted because (i) they are not required under the instructions, (ii) they
are inapplicable or (iii) the information is included in the financial
statements.
EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO.
-----------
<C> <S>
3.01 --Certificate of Incorporation of Franklin (Incorporated by
reference to Exhibit 3.01 to Registration Statement on Form S-
1, File No. 3-6612 (the "Company's 1986 S-1 Registration
Statement"))
3.02 --Articles of Amendment to the Certificate of Incorporation of
Franklin (Incorporated by reference to Exhibit 3.02 to the
Company's 1990 report on Form 10-K for the year ended March 31,
1990 (the "Company's 1990 10-K"))
3.03 --By-laws of Franklin (Incorporated by reference to Exhibit 3.02
to the Company's 1986 S-1 Registration Statement
3.04 --Amendment to By-laws of Franklin (Incorporated by reference to
Exhibit A to the Company's Proxy Statement relating to the 1987
Annual Meeting of Shareholders)
3.04 --Amendment to By-laws of Franklin (Incorporated by reference to
Exhibit 3.05 to the Company's 1990 10-K)
10.01 --Standard form of Sales Representative Agreement (Incorporated by
reference to Exhibit 10.07 to the Company's 1986 S-1
Registration Statement)
10.02** --Franklin Restricted Stock Plan, as amended (Incorporated by
reference to Exhibit 10.13 to the Company's report on Form 10-K
for the year ended March 31, 1987)
10.03** --Franklin Stock Option Plan as Amended and restated effective as
of July 24, 1996 (Incorporated by reference to the Company's
Proxy Statement relating to the 1996 Annual Meeting of
Shareholders)
10.04** --Franklin Stock Option Plan effective as of August 5, 1998
(Incorporated by reference to the Company's Proxy Statement
relating to the 1998 Annual Meeting of Shareholders)
10.05 --Loan and Security Agreement dated as of December 7, 1999 among
Banc of America Commercial Finance Corp., Franklin, Franklin
Electronic Publishers (Europe) Ltd., and Franklin Electronic
Publishers (Deutchland) GmbH (Incorporated by reference to the
Exhibit to the Company's Report on Form 8-K filed on December
14, 1999)
21 --Subsidiaries of the Registrant
23 --Consent of Independent Auditor
</TABLE>
--------
** Management contract or compensatory plan or arrangement required to be filed
as an exhibit to this form pursuant to Item 14(c) of this report.
37
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) 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
Dated: June 20, 2000 /s/ Barry J. Lipsky
By: _________________________________
Barry J. Lipsky
President and Chief Executive
Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Edward H. Cohen Director June 16, 2000
______________________________________
Edward H. Cohen
/s/ Barry J. Lipsky Director June 20, 2000
______________________________________
Barry J. Lipsky
Director June , 2000
______________________________________
Leonard M. Lodish
Director June , 2000
______________________________________
James Meister
Director June , 2000
______________________________________
Howard L. Morgan
/s/ Jerry R. Schubel Director June 19, 2000
______________________________________
Jerry R. Schubel
/s/ James H. Simons Director June 19, 2000
______________________________________
James H. Simons
/s/ William H. Turner Director June 20, 2000
______________________________________
William H. Turner
/s/ Arnold D. Levitt Senior Vice President, June 20, 2000
______________________________________ Chief Financial Officer
Arnold D. Levitt and Treasurer (Principal
Financial and Accounting
Officer)
</TABLE>
38
<PAGE>
SHAREHOLDER INFORMATION
Franklin's common stock is traded on the New York Stock Exchange under the
symbol "FEP".
Shareholders needing specific information or requiring an action involving
shareholder accounts, such as address change, stock transfer, or replacement of
lost securities, should write directly to our record keeping and transfer agent
at the address listed below.
STOCK TRANSFER AGENT AND REGISTRAR
Registrar & Transfer Company
10 Commerce Drive
Cranford, New Jersey 07016
FORM 10-K REPORT
The Company's 1999 Annual Report on Form 10-K, filed with the Securities and
Exchange Commission, is fully reproduced in this annual report. You may obtain
additional copies of this report by writing to the Secretary, Franklin
Electronic Publishers, Incorporated, One Franklin Plaza, Burlington, NJ 08016-
4907.
Except for the historical information contained herein, the matters discussed
throughout this report, including, but not limited to, those that are stated as
the Company's belief or expectation or preceded by the word "should", are
forward looking statements that involve risks to and uncertainties in the
Company's business, including, among other things, the timely availability and
acceptance of new electronic books and organizers, changes in technology, the
impact of competitive electronic products, the management of inventories, the
Company's dependence on third party component suppliers and manufacturers,
including those that provide Franklin-specific parts, and other risks and
uncertainties that may be detailed from time to time in the Company's reports
filed with the Securities and Exchange Commission.
DIRECTORS
James H. Simons, Chairman
Edward H. Cohen
Barry J. Lipsky
Leonard M. Lodish
James Meister
Howard L. Morgan
Jerry R. Schubel
William H. Turner
EXECUTIVE OFFICERS
Barry J. Lipsky
President and Chief Executive Officer
Gregory J. Winsky
Executive Vice President, Business Development, General Counsel, and Secretary
Arnold D. Levitt
Senior Vice President, Chief Financial Officer, and Treasurer
Toni M. Tracy
Senior Vice President, Publisher Relations and President, Medical Division
Robert L. Garthwaite
Vice President, Worldwide Sales and Marketing
INDEPENDENT AUDITORS
Radin, Glass & Co., LLP
New York, New York
OUTSIDE GENERAL COUNSEL
Rosenman & Colin
New York, New York
OPERATING EXECUTIVES
U.S. OFFICES
Michael A. Crincoli
Vice President, North American Sales
Brian K. Dougherty
Vice President, Worldwide Operations
Julius A. Egyud
Vice President, Software Development
Paul K. Kavanaugh
Vice President, Hardware Development
David B. Justice
Editor-in-Chief
Russell E. Posser
Vice President, Product Procurement
Sandra J. von Drateln
Vice President, Human Resources
INTERNATIONAL OFFICES
Josephine Cheuk
Director, Franklin Hong Kong
Russell Goldberg
General Manager, Franklin Australia
Romeo V. Grdovic
National Sales Manager, Franklin Canada
Dominique Jozeau
Managing Director, Franklin Southern Europe
Raul Quijas Padilla
General Manager, Franklin Mexico
Stephen C. Parker
Managing Director, Franklin Northern Europe
Walter Schillings
Managing Director, Franklin Central Europe
<PAGE>
Franklin(R)
Electronic Publishers
