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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter ended June 30, 2001 Commission File No. 0-14841
FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED
(Exact name of registrant as specified in its charter)
Pennsylvania 22-2476703
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Franklin Plaza, Burlington, New Jersey 08016-4907
(Address of principal executive office)
Registrant's telephone number (609) 386-2500
Indicate by check mark whether Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that Registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ___
COMMON STOCK OUTSTANDING AS OF
JUNE 30, 2001 - 7,949,082 SHARES
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FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
June 30, March 31,
2001 2001
-------- --------
(Unaudited) (Audited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,571 $ 2,835
Accounts receivable, less allowance for doubtful accounts of $1,095 and $1,161 10,109 12,094
Preferred stock subscriptions receivable -- 3,500
Inventories 23,109 20,879
Income tax receivable 568 568
Prepaids and other assets 2,481 2,798
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TOTAL CURRENT ASSETS 39,838 42,674
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PROPERTY AND EQUIPMENT 7,544 7,651
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OTHER ASSETS:
Deferred income tax asset 5,700 5,700
Trademark, less accumulated amortization of $1,846 and $1,749 13,701 13,798
Advance royalties and licenses 1,247 1,341
Software development costs 6,547 5,878
Other assets 2,871 2,986
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TOTAL OTHER ASSETS 30,066 29,703
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TOTAL ASSETS $ 77,448 $ 80,028
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 13,473 $ 13,647
Notes payable 2,000 2,000
Current portion of long-term liabilities - Other 406 156
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TOTAL CURRENT LIABILITIES 15,879 15,803
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LONG-TERM LIABILITIES
Notes payable 8,329 8,329
Revolving credit facility 2,735 4,064
Other liabilities 2,009 1,554
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TOTAL LONG-TERM LIABILITIES 13,073 13,947
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SHAREHOLDERS' EQUITY:
Preferred stock, $2.50 par value, authorized 10,000,000 shares 3,500
issued and outstanding 3,500 --
Preferred stock subscribed -- 3,500
Common stock, no par value, authorized 50,000,000 shares, issued
and outstanding, 7,949,082 and 7,952,882 shares 49,803 49,658
Retained earnings (deficit) (3,309) (1,352)
Foreign currency translation adjustment (1,498) (1,528)
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TOTAL SHAREHOLDERS' EQUITY 48,496 50,278
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 77,448 $ 80,028
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See notes to consolidated financial statements
2
FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except for per share data)
(unaudited)
Three Months Ended
June 30,
--------------------
2001 2000
-------- --------
SALES $ 16,009 $ 17,052
COST OF SALES 9,362 9,592
-------- --------
GROSS MARGIN 6,647 7,460
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EXPENSES:
Sales and marketing 4,853 3,331
Research and development 970 767
General and administrative 2,281 2,324
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Total operating expenses 8,104 6,422
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OPERATING INCOME (LOSS) (1,457) 1,038
Interest expense (374) (404)
Interest and investment income 37 88
Other, net (163) (289)
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INCOME (LOSS) BEFORE INCOME TAXES (1,957) 433
INCOME TAX BENEFIT -- --
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NET INCOME (LOSS) (1,957) 433
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PREFERRED STOCK DIVIDEND 88 --
NET INCOME (LOSS) APPLICABLE TO
COMMON STOCK $ (2,045) $ 433
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NET INCOME (LOSS) PER COMMON SHARE:
Basic $ (0.26) $ 0.05
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Diluted $ (0.26) $ 0.05
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WEIGHTED AVERAGE COMMON SHARES:
Basic 7,953 7,914
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Diluted 7,953 8,146
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See notes to consolidated financial statements
3
FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(in thousands, except for share data)
Accumulated
Common Stock Preferred Stock Other Total
--------------------- --------------------- Retained Comprehensive Shareholders'
Shares Amount Shares Amount Earnings Income * Equity
--------- --------- --------- --------- --------- --------- ---------
BALANCE - MARCH 31, 2001 7,952,882 $ 49,658 3,500 $ 3,500 $ (1,352) $ (1,528) $ 50,278
Issuance of shares and amortization
of deferred compensation expense for
shares issued for services
(unearned portion $21) (3,800) 5 -- -- -- -- 5
Value of stock options granted -- 140 140
Loss for the period -- -- -- -- (1,957) -- (1,957)
Foreign currency translation adjustment -- -- -- -- -- 30 30
--------- --------- --------- --------- --------- --------- ---------
BALANCE - JUNE 30, 2001 (unaudited) 7,949,082 $ 49,803 3,500 $ 3,500 $ (3,309) $ (1,498) $ 48,496
========= ========= ========= ========= ========= ========= =========
* Comprehensive income, i.e., net income (loss), plus, or less, other
comprehensive income, totaled ($1,927) for the three months ended June 30, 2001.
See notes to consolidated financial statements
4
FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(unaudited)
Three Months Ended
June 30,
------------------
2001 2000
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CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME (LOSS) $(1,957) $ 433
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS)
TO NET CASH PROVIDED BY OPERATING ACTIVITIES
Depreciation and amortization 1,538 1,283
Provision for losses on accounts receivable 22 44
Stock issued for services 140 --
Source (use) of cash from change in operating assets and liabilities:
Accounts receivable 2,009 (3,779)
Inventories (2,229) (638)
Prepaids and other assets 243 (328)
Accounts payable and accrued expenses 75 2,930
Other, net 41 9
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NET CASH USED IN OPERATING ACTIVITIES (118) (46)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (230) (263)
Software development costs (1,395) (567)
Change in other assets (176) (98)
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NET CASH USED IN INVESTING ACTIVITIES (1,801) (928)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving credit facility (1,329) --
Proceeds from issuance of preferred shares 3,500 --
Other liabilities 454 (16)
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NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 2,625 (16)
EFFECT OF EXCHANGE RATE CHANGES ON CASH 30 (129)
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INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 736 (1,119)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,835 6,899
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,571 $ 5,780
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See notes to consolidated financial statements
5
FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Reference is made to the financial statements included in the Company's annual
Report (Form 10-K) filed with the Securities and Exchange Commission for the
year ended March 31, 2001.
The financial statements for the periods ended June 30, 2001 and 2000 are
unaudited and include all adjustments necessary to a fair presentation 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 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 (in thousands):
June 30,
-------------------------------------
Product Sales 2001 2000
------------------------------------ ---------------- ----------------
Reference $11,857 $14,679
Rolodex 1,942 2,312
eBookMan 2,210 -
Other - 61
------------------------------------ ---------------- ----------------
Total Sales $16,009 $17,052
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6
FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Approximate foreign sources of revenues including export sales were as follows
(in thousands):
June 30,
-------------------------------------
Product Sales 2001 2000
------------------------------------- ---------------- ----------------
Europe $3,936 $5,929
Other International 1,095 1,098
For the three month periods ended June 30, 2001 and 2000, no customer accounted
for more than 10% of the Company's revenues.
ISSUANCE OF PREFERRED STOCK
In April 2001, Dr. James H. Simons, the Company's Chairman of the Board, paid
$3,500,000 for 3,500 shares of the Company's Series A 10% Convertible Preferred
Stock for which he had subscribed in March 2001. For additional information
regarding the Preferred Stock issue, refer to the financial statements included
in the Company's annual Report (Form 10-K) for the year ended March 31, 2001
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the FASB issued Statement of Financial Accounting Standards No.
142, "Goodwill and Other Intangible Assets" ("SFAS 142). SFAS No. 142 changes
the accounting for goodwill from an amortization method to an impairment-only
approach. The provisions of this statement are required to be applied starting
with fiscal years beginning after December 15, 2001 and applied to all goodwill
and other intangible assets recognized in its financial statements at that date.
The Company expects to adopt this standard for its fiscal year commencing April
1, 2002 and is currently evaluating the impact of SFAS 142 on its financial
results.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Three months ended June 30, 2001 compared with three months ended June 30, 2000:
Net Sales
Sales of $16,009,000 for the quarter ended June 30, 2001 were 6% lower
than sales of $17,052,000 for the same quarter one year earlier. The decline
resulted primarily from lower sales of reference products in Europe and lower
sales to OEM customers, partially offset by sales of the eBookMan(R) product
line which was launched in February 2001.
Gross Margin
Gross margin decreased to $6,647,000, or 42%, from $7,460,000, or 44%, last year
as the Company's sales mix shifted from the higher margin reference product line
to the lower margin ROLODEX(R) Electronics and eBookMan product lines. Reference
products accounted for 74% of the Company's sales in the current quarter
compared with 86% of sales last year.
Operating Expenses
Total operating expenses increased to $8,104,000 from $6,422,000 last year.
Sales and marketing expenses increased to $4,853,000 (30% of sales) from last
year's level of $3,331,000 (20% of sales) primarily as a result of costs
associated with the launch of the Company's eBookMan product line including
advertising and trade show expense, which increased to $1,994,000 from $953,000
last year, and personnel costs which increased to $1,616,000 in the current year
from $1,290,000 last year. Research and development expenses increased to
$970,000 (6% of sales) compared with $767,000 (4% of sales) in the prior year
mainly due to increased expenses related to the eBookMan product line. General
and administrative expenses were relatively unchanged at $2,281,000 (14% of
sales) compared with $2,324,000 (14% of sales) last year. Interest expense
declined to $374,000 from $404,000 in the prior year due to lower average
borrowing levels during the quarter. In the current quarter, the Company
incurred currency transaction losses of $163,000 compared with $289,000 last
year.
Net Income
The Company reported a net loss of $1,957,000, or $0.26 per share, compared with
income of $433,000, or $.05 per share last year. The loss resulted primarily
from additional expenditures in connection with the eBookMan product line in
anticipation of higher sales which did not meet projected levels.
Changes in Financial Condition
Inventories increased to $23,109,000 at end of the June quarter from $20,879,000
at March 31, 2001 in anticipation of higher sales in the seasonally active
second and third quarters. Cash and cash equivalents amounted to $3,571,000 at
June 30, 2001 compared with cash of $2,835,000 at March 31, 2001. Accounts
receivable decreased to $10,109,000 from $12,094,000 at March 31 primarily due
to the early receipt of payments from two of the Company's larger customers.
8
Liquidity and Capital Resources
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 June 30, 2001, the Company had outstanding borrowings of $2,735,000 under
this facility. As of June 30, 2001 the Company had a balance of $10,239,000
outstanding under its Senior Notes. A principal payment of $2,000,000 is due
under the Senior Notes on March 31, 2002.
In March 2001, Dr. James H. Simons, the Company's Chairman of the Board,
subscribed for 3,500 shares of the Company's Series A 10% Convertible Preferred
Stock ("Convertible Preferred Stock") in consideration for the payment of
$3,500,000. Each share of the Convertible Preferred Stock has a stated value
("Stated Value") of $1,000. The payment of $3,500,000 was received in April
2001.
Management believes that cash flow from operations and the secured financing
facility will be adequate to provide for the Company's liquidity and capital
needs for the foreseeable future. The Company has no material commitments for
capital expenditures in the next twenty-four months.
PART II
ITEM 1. LEGAL PROCEEDINGS
The Company is subject to litigation from time to time in the ordinary
course of its business. The Company does not believe that any such
litigation is likely, individually or in the aggregate, to have a
material adverse effect on the financial condition of the Company.
ITEM 2. CHANGES IN SECURITIES - NONE
ITEM 3. DEFAULT UPON SENIOR SECURITIES - NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITIES HOLDERS - NONE
ITEM 5. OTHER INFORMATION - NONE
ROLODEX(R) is a registered trademark of Berol Corporation, a subsidiary
of Newell Rubbermaid, Inc. Rocket eBook(TM) is a trademark of NuvoMedia,
Inc.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K - NONE
9
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FRANKLIN ELECTRONIC PUBLISHERS,
INCORPORATED
Registrant
August 14, 2000 /s/ Barry J. Lipsky
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Date Barry J. Lipsky, President and
Chief Executive Officer
(Duly Authorized Officer)
August 14, 2000 /s/ Arnold D. Levitt
--------------- ------------------------------
Date Arnold D. Levitt, Senior Vice President,
Chief Financial Officer, and Treasurer
(Principal Financial and Accounting Officer)
10