SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter ended December 31, 2000 Commission File No. -14841
FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED
(Exact name of registrant as specified in its charter)
Pennsylvania 22-2476703
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Franklin Plaza, Burlington, New Jersey 08016-4907
(Address of principal executive office) (Zip Code)
Registrant's telephone number (609) 386-2500
Indicate by check mark whether Registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceeding 12 months (or for such shorter period that Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No _______
-------
COMMON STOCK OUTSTANDING AS OF
DECEMBER 31, 2000 - 7,952,882 SHARES
FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
December 31, March 31,
2000 2000
------------ ----------
(Unaudited) (Audited)
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 2,485 $ 6,899
Accounts receivable, less allowance for doubtful accounts of $1,216 and $850 16,767 10,889
Inventories 20,668 13,735
Income tax receivable 568 568
Prepaids and other assets 1,756 918
-------- --------
TOTAL CURRENT ASSETS 42,244 33,009
-------- --------
PROPERTY AND EQUIPMENT 7,414 7,797
-------- --------
OTHER ASSETS:
Deferred income tax asset 5,700 5,700
Trademark, less accumulated amortization of $1,652 and $1,360 13,895 14,187
Advance royalties and licenses 1,240 1,266
Software development costs 5,525 4,482
Other assets 3,121 3,619
-------- --------
TOTAL OTHER ASSETS 29,481 29,254
-------- --------
TOTAL ASSETS $ 79,139 $ 70,060
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 14,365 $ 10,076
Notes payable 2,000 2,000
Current portion of long-term liabilities - Other 156 156
-------- --------
TOTAL CURRENT LIABILITIES 16,521 12,232
-------- --------
LONG-TERM LIABILITIES
Notes payable 10,239 10,150
Revolving credit facility 3,737 --
Other liabilities 1,473 1,540
-------- --------
TOTAL LONG-TERM LIABILITIES 15,449 11,690
-------- --------
SHAREHOLDERS' EQUITY:
Preferred stock, $2.50 par value, authorized 10,000,000 shares none
issued or outstanding -- --
Common stock, no par value, authorized 50,000,000 shares, issued
and outstanding, 7,952,882 and 7,914,940 shares 49,424 49,138
Retained earnings (deficit) (1,101) (2,266)
Foreign currency translation adjustment (1,154) (734)
-------- --------
TOTAL SHAREHOLDERS' EQUITY 47,169 46,138
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 79,139 $ 70,060
======== ========
See notes to consolidated financial statements.
Page 2
FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except for per share data)
(unaudited)
Three Months Ended Nine Months Ended
December 31, December 31,
-------- -------- -------- --------
2000 1999 2000 1999
-------- -------- -------- --------
SALES $ 22,278 $ 31,248 $ 59,577 $ 81,267
COST OF SALES 12,795 19,183 34,086 53,912
-------- -------- -------- --------
GROSS MARGIN 9,483 12,065 25,491 27,355
-------- -------- -------- --------
EXPENSES:
Sales and marketing 5,448 5,727 12,731 17,395
Research and development 798 946 2,791 3,294
General and administrative 2,271 2,297 7,042 8,718
-------- -------- -------- --------
Total operating expenses 8,517 8,970 22,564 29,407
-------- -------- -------- --------
OPERATING INCOME (LOSS) 966 3,095 2,927 (2,052)
Interest expense (440) (837) (1,254) (2,635)
Interest and investment income 16 89 158 305
Other, net (18) (287) (666) (489)
Gain on sale of REX -- -- -- 8,072
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES 524 2,060 1,165 3,201
INCOME TAX PROVISION -- -- -- --
-------- -------- -------- --------
NET INCOME $ 524 $ 2,060 $ 1,165 $ 3,201
======== ======== ======== ========
NET INCOME PER SHARE:
Basic $ 0.07 $ 0.26 $ 0.15 $ 0.41
======== ======== ======== ========
Diluted $ 0.06 $ 0.26 $ 0.14 $ 0.41
======== ======== ======== ========
WEIGHTED AVERAGE SHARES:
Basic 7,941 7,853 7,924 7,845
======== ======== ======== ========
Diluted 8,282 7,912 8,265 7,884
======== ======== ======== ========
See notes to consolidated financial statements.
Page 3
FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(in thousands, except for share data)
Accumulated
Common Stock Other Total
----------------------- Retained Comprehensive Shareholders'
Shares Amount Earnings Income * Equity
------------ -------- --------- -------- ---------
BALANCE - MARCH 31, 2000 7,914,940 $ 49,138 $ (2,266) $ (734) $ 46,138
Issuance of common shares under employee stock option plan 37,942 244 - - 244
Issuance of shares and amortization of deferred compensation
expense for shares issued for services (unearned portion $32) - 42 - - 42
Income for the period - - 1,165 - 1,165
Foreign currency translation adjustment - - - (420) (420)
--------- --------- --------- --------- ---------
BALANCE - DECEMBER 31, 2000 (unaudited) 7,952,882 $ 49,424 $ (1,101) $ (1,154) $ 47,169
========= ========= ========= ========= =========
* Comprehensive income, i.e., net income (loss), plus, or less, other
comprehensive income, totaled $745 for the nine months ended December 31, 2000.
See notes to consolidated financial statements.
Page 4
FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(unaudited)
Nine Months Ended
December 31,
-------- --------
2000 1999
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME $ 1,165 $ 3,201
ADJUSTMENTS TO RECONCILE NET INCOME TO
NET CASH PROVIDED BY OPERATING ACTIVITIES
Depreciation and amortization 3,659 4,251
Provision for losses on accounts receivable 327 1,072
Loss on disposal of property and equipment 4 60
Stock issued for services 26 -
Gain on sale of REX - (8,072)
Provision for inventory revaluation - 2,350
Source (use) of cash from change in operating assets and liabilities:
Accounts receivable (6,205) (4,333)
Inventories (6,933) 4,225
Prepaids and other assets (838) 4,466
Accounts payable and accrued expenses 4,379 (4,426)
Other, net 28 10
-------- --------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (4,388) 2,804
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (740) (1,018)
Proceeds from sale of property and equipment - 33
Software development costs (2,446) (1,125)
Proceeds form sale of REX line - 12,619
Redemption of investments in limited partnerships - 6,045
Change in other assets (334) (631)
-------- --------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (3,520) 15,923
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payment of Senior Notes - (26,000)
Proceeds from revolving credit facility 3,737 5,119
Principal payments of mortgage - (3,479)
Proceeds from issuance of common shares 244 -
Other liabilities (67) 43
-------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 3,914 (24,317)
EFFECT OF EXCHANGE RATE CHANGES ON CASH (420) (419)
-------- --------
DECREASE IN CASH AND CASH EQUIVALENTS (4,414) (6,009)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 6,899 12,870
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,485 $ 6,861
======== ========
See notes to consolidated financial statements.
Page 5
FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(in thousands)
Reference is made to the financial statements included in the Company's annual
Report (Form 10-K) filed with the Securities and Exchange Commission for the
year ended March 31, 2000.
The financial statements for the periods ended December 31, 2000 and 1999 are
unaudited and include all adjustments necessary to a fair statement of the
results of operations for the periods then ended. All such adjustments are of a
normal recurring nature. The results of the Company's operations for any interim
period are not necessarily indicative of the results of the Company's operations
for a full fiscal year.
OPERATIONS
The Company adopted FAS No. 131, "Disclosure about Segments of an Enterprise and
Related Information", at March 31, 1999. FAS No. 131 establishes annual and
interim reporting standards for an enterprise's operating segments and related
disclosures about its products, services, geographic areas and major customers.
Under FAS No. 131, the Company's operations are treated as one operating segment
as it only reports profit and loss information on an aggregate basis to the
chief operating decision maker of the Company. Information about the Company's
product sales are as follows:
Three Months Ended Nine Months Ended
-------------------------------------------------------------------------------------------
December 31, December 31,
-------------------------------------------------------------------------------------------
Product Sales 2000 1999 2000 1999
------------------------------------------------- -------------------------------------------------------------------
Reference $16,941 $23,777 $48,515 $57,132
Rolodex 5,272 6,888 10,847 15,501
REX - - - 6,194
Rocket eBook - 340 - 1,575
Other 65 243 215 865
------------------------------------------------- ------------------- ------------------ -------------------
Total Sales $22,278 $31,248 $59,577 $81,267
================================================= =================== ================== ===================
Page 6
FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(in thousands)
Approximate foreign sources of revenues including export sales were as follows:
Three Months Ended Nine Months Ended
-------------------------------------------------------------------------------------------
December 31, December 31,
-------------------------------------------------------------------------------------------
Product Sales 2000 1999 2000 1999
------------------------------------------------- -------------------------------------------------------------------
Europe $6,138 $7,039 $16,192 $22,291
Other International 3,196 2,746 5,534 5,191
For the three and nine month periods ended December 31, 2000 and 1999, no
customer accounted for more than 10% of the Company's revenues.
SALE OF REX PRODUCT LINE
On September 27, 1999 the Company realized a gain of $8,072 on the sale of its
REX product line for $13,250 and the assumption of related liabilities. The
assets sold consisted primarily of inventory with a carrying value of
approximately $5,000 and the Company's trademarks, copyrights, contract rights
and other assets used in connection with the REX business.
Page 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Three months ended December 31, 2000 as compared with December 31, 1999:
Net Sales
Sales for the quarter ended December 31, 2000 were $22,278,000, a decrease of
$8,970,000 from sales of $31,248,000 in the same quarter last year. The
decrease was the result of softening demand for electronic products as the
result of the slowdown in the domestic economy. The Company's line of ROLODEX(R)
Electronics organizers remained under pressure as shelf space continues to be
reduced and price points continue to move down. The quarter-to-quarter
comparison was also adversely affected by continuing weakness in foreign
currencies and the inclusion in the prior period of revenues of $1,480,000 in
connection with the extension of a technology license. Sales by Voice Powered
Technology International, Inc. ("VPTI"), an 82% owned subsidiary of the Company,
decreased from $243,000 last year to $65,000 this year.
Gross Margin
While gross margin dollars decreased to $9,483,000 in the current year from
$12,065,000 in the prior year, gross margin percentage increased from 39% to 43%
year to year. The improved margin percentage resulted from the impact of the
lower cost of components purchased in the first six months of calendar year
2000, which affects the current quarter's gross margin because of the 60 - 90
day lead time in the purchase of components and the use of the first-in, first-
out method of accounting for inventory which results in the passage of several
months between the time the components are ordered and the time their costs are
reflected in operating results.
Operating Expenses
Total operating expenses decreased to $8,517,000 from $8,970,000 last year.
Sales and marketing expenses decreased to $5,448,000 (24% of sales) from last
year's level of $5,727,000 (18% of sales) as lower costs of $1,157,000 primarily
commissions, advertising, payroll and freight costs in the Company's core
business were partially offset by costs of $879,000 associated with the
development of the Company's new eBookMan platform. Research and development
expenses decreased by $148,000 to $798,000 (4% of sales) from $946,000 (3% of
sales) in the prior year as the Company deferred $852,000 of research and
development costs, primarily related to the development of its new eBookMan
platform, compared with a deferral of $375,000 in the prior period. General and
administrative expenses remained relatively unchanged at $2,271,000 (10% of
sales) in the current year compared with $2,297,000 (7% of sales) in the year
earlier period.
Other/Income Expense
Interest expense was $440,000 compared with $837,000 last year due to lower debt
levels. Interest and investment income was down from $89,000 to $16,000. In the
quarter, the Company incurred currency transaction losses of $18,000 compared
with $287,000 in the prior year.
Net Income
For the quarter ended December 31, 2000 the Company reported net income of
$524,000, or $.07 per share, after absorbing expenses of $1,388,000, or $.17 per
share, in connection with development of its new eBookMan product line. For the
same quarter last year the Company earned $2,060,000, or $.26 per share, which
included $1,300,000 or $.17 per share, in connection with the extension of a
technology license.
Page 8
Because of net operating loss carryforwards, no income taxes have been provided
for by the Company during the current period.
Nine months ended December 31, 2000 as compared with December 31, 1999:
Net Sales
Sales of $59,577,000 for the nine months ended December 31, 2000 were 27% lower
than sales of $81,267,000 for the same period last year. Sales were higher in
the year earlier period because of the inclusion of $7,769,000 of sales of
product lines that have since been divested or discontinued and non-recurring
revenues of $2,276,000 related to technology licenses, softening demand in the
current year for electronic products in the United States and the United
Kingdom, the impact of weakened foreign currencies, and component shortages that
impacted product deliveries during the present period. Sales by VPTI decreased
from $865,000 last year to $215,000 in the current year.
Gross Margin
While gross margin dollars decreased to $25,491,000 in the current year from
$27,355,000 in the prior year, gross margin percentage increased from 34% to 43%
year to year. Gross margin in the prior year reflected an inventory write down
and price protection costs of $2,600,000 in connection with the discontinued
Rocket eBook product and costs in connection with the transition to new upgraded
reference and ROLODEX(R) Electronics product lines which impacted the June 1999
quarter. The margin percentage in the current year also benefited from a shift
in the Company's product mix from lower margin organizer products to higher
margin reference products. The reference product line accounted for 81% of
total sales in the nine months ended December 31, 2000 compared with 70% of
total sales in the prior year.
Operating Expenses
Total operating expenses decreased to $22,564,000 from $29,407,000 last year.
Sales and marketing expenses decreased to $12,731,000 (21% of sales) from last
year's level of $17,395,000 (21% of sales) primarily due to a decrease in
packaging, promotion and variable selling costs of $2,108,000, reductions in
telephone and product support costs of $230,000 and $122,000 respectively, lower
payroll expense of $453,000 and costs absorbed in the prior year of $1,100,000
in connection with the development of the Company's website. Research and
development expenses decreased by $503,000 to $2,791,000 (5% of sales) from
$3,294,000 (4% of sales) in the prior year as the Company deferred $2,218,000 of
research and development costs, primarily related to the development of its new
eBookMan platform, compared with a deferral of $1,125,000 in the prior period.
General and administrative expenses decreased to $7,042,000 (12% of sales) from
$8,718,000 (11% of sales) last year primarily as a result of a decrease of
$659,000 in bad debt provisions and a reduction in VPTI's expenses of $337,000.
Other Income/Expense
Interest expense for the nine months ended December 31, 2000 was $1,254,000
compared with $2,635,000 last year due to lower debt levels. For the nine
months, the Company incurred currency transaction losses of $666,000 compared
with $489,000 in the prior year.
Net Income
For the nine months ended December 31, 2000 the Company had net income of
$1,165,000, or $.15 per share, after absorbing expenses of $2,675,000, or $.34
per share, in connection with the eBookMan product line. In the same period last
year the Company had earnings of $3,201,000, or $.41 per share, which included a
gain of $8,072,000, or $1.03 per share, in connection with the divestiture of
its REX product line in
Page 9
September 1999 and income of $1,300,000 in connection with the aforesaid
technology license.
Changes In Financial Condition
Inventories increased from $13,735,000 at March 31, 2000 to $20,668,000 at the
end of the December quarter reflecting $7,354,000 of inventory costs relating to
the Company's new eBookMan platform. Accounts receivable increased from
$10,889,000 to $16,767,000 because of seasonally higher sales in the December
quarter. Accounts payable and accrued expenses increased from $10,076,000 to
$14,365,000 as the Company incurred assembly and component costs related to
eBookMan. Cash and cash equivalents of $2,485,000 at December 31, 2000 were
lower than cash of $6,899,000 at March 31, 2000 as a result of the company's
investment in inventory and development costs for its new eBookMan line.
Liquidity And Capital Resources
As of December 31, 2000, the Company had invested approximately $12,692,000 in
development, marketing and inventory costs for its new multimedia eBook
platform, eBookMan. The Company anticipates making additional development,
marketing, and working capital investments of approximately $4,000,000 related
to eBookMan during the remainder of the 2001 fiscal year. Shipments of eBookMan
products to retailers commenced in February 2001.
In December 1999, the Company entered into a $25,000,000 secured financing
facility with a commercial lender. The financing facility expires on December 7,
2002. Borrowings under the facility bear interest at the bank's prime rate plus
3/8% and are subject to certain financial covenants and restrictions on
indebtedness, dividend payments, business combinations, and other related items.
As of December 31, 2000, the Company had outstanding borrowings of $3,737,000
under this facility. As of December 31, 2000 the Company had a balance of
$12,239,000 outstanding under its Senior Notes. A principal payment of
$2,000,000 is due under the Senior Notes on March 31, 2001.Management believes
that cash flow from operations and the secured financing facility will be
adequate to provide for the Company's liquidity and capital needs for the
foreseeable future. The Company has committed to the installation of a new
enterprise resource system during the next year at an approximate cost of
$2,500,000. The Company has no other material commitments for capital
expenditures in the next twenty-four months.
PART II.
ITEM 1. LEGAL PROCEEDINGS
The Company is subject to litigation from time to time arising in
the ordinary course of its business. The Company does not believe
that any such litigation, including the class action litigation
identified above, is likely, individually or in the aggregate, to
have a material adverse effect on the financial condition of the
Company.
ITEM 2. CHANGES IN SECURITIES - NONE
ITEM 3. DEFAULT UPON SENIOR SECURITIES - NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS - NONE
ITEM 5. OTHER INFORMATION - ROLODEX (R) is a registered trademark of Berol
Corporation, a subsidiary of Newel Rubbermaid Inc. Rocket eBook is a
trademark of NuvoMedia Inc.
Page 10
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FRANKLIN ELECTRONIC PUBLISHERS,
INCORPORATED
Registrant
February 13, 2000 /s/ Barry J. Lipsky
----------------- ----------------------------
Date Barry J. Lipsky
President and Chief Executive Officer
(Duly Authorized Officer)
February 13, 2000 /s/ Arnold D. Levitt
----------------- ----------------------------
Date Arnold D. Levitt
Senior Vice President
Principal Financial and Accounting Officer
(Duly Authorized Officer)
Page 11