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, 2002 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, 2002 - 7,946,882 SHARES
FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except for share data)
June 30, March 31,
2002 2002
---------------- -----------------
(Unaudited) (Audited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,870 $ 2,497
Accounts receivable, less allowance for doubtful accounts of $1,165 and $1,112 13,115 6,932
Inventories 12,360 11,107
Income tax receivable 809 809
Prepaids and other assets 1,954 2,354
------ ------
TOTAL CURRENT ASSETS 31,108 23,699
------ ------
PROPERTY AND EQUIPMENT 6,869 6,988
------ ------
OTHER ASSETS:
Deferred income tax asset 5,700 5,700
Trademark and goodwill 3,796 3,796
Advance royalties and licenses 688 580
Software development costs 2,425 2,583
Other assets 3,968 3,956
------ ------
TOTAL OTHER ASSETS 16,577 16,615
------ ------
TOTAL ASSETS $ 54,554 $ 47,302
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 15,835 $ 11,409
Current portion of long-term liabilities - Other 120 126
------ ------
TOTAL CURRENT LIABILITIES 15,955 11,535
------ ------
LONG-TERM LIABILITIES:
Revolving credit facility 12,603 10,138
Other liabilities 1,315 1,321
------ ------
TOTAL LONG-TERM LIABILITIES 13,918 11,459
------ ------
SHAREHOLDERS' EQUITY:
Preferred stock, $2.50 par value, authorized 10,000,000 shares, 3,955 and
3,767 issued and outstanding ($3,955 and $3,767 liquidation value) 3,933 3,745
Common stock, no par value, authorized 50,000,000 shares, issued
and outstanding, 7,946,882 and 7,946,882 shares 50,029 49,978
Retained earnings (deficit) (28,286) (28,255)
Foreign currency translation adjustment (995) (1,160)
------ ------
TOTAL SHAREHOLDERS' EQUITY 24,681 24,308
------ ------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 54,554 $ 47,302
======== ========
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,
----------------------------
2002 2001
------------ ------------
SALES $ 16,517 $ 16,009
COST OF SALES 9,113 9,362
------------ ------------
GROSS MARGIN 7,404 6,647
------------ ------------
EXPENSES:
Sales and marketing 3,850 4,917
Research and development 679 970
General and administrative 2,155 2,217
------------ ------------
Total operating expenses 6,684 8,104
------------ ------------
OPERATING INCOME (LOSS) 720 (1,457)
Interest expense (176) (374)
Investment income (loss) (408) 37
Other, net 21 (163)
------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES 157 (1,957)
INCOME TAX BENEFIT - -
------------ ------------
NET INCOME (LOSS) 157 (1,957)
------------ ------------
PREFERRED STOCK DIVIDEND 188 88
------------ ------------
NET INCOME (LOSS) APPLICABLE TO
COMMON SHAREHOLDERS $ (31) $ (2,045)
============ ============
NET INCOME (LOSS) PER COMMON SHARE:
Basic $ - $ (0.26)
============ ============
Diluted $ - $ (0.26)
============ ============
WEIGHTED AVERAGE COMMON SHARES:
Basic 7,947 7,953
============ ============
Diluted 7,947 7,953
============ ============
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, 2002 7,946,882 $ 49,978 3,767 $ 3,745 $ (28,255) $ (1,160) $ 24,308
Issuance of shares and amortization of deferred
compensation expense for shares issued for services - 4 - - - - 4
Value of stock options granted - 47 47
Preferred stock dividend - - 188 188 (188)
Net income for the period - - - - 157 - 157
Foreign currency translation adjustment - - - - - 165 165
----------- ---------- -------- --------- ----------- ---------- ----------
BALANCE - JUNE 30, 2002 (unaudited) 7,946,882 $ 50,029 3,955 $ 3,933 $ (28,286) $ (995) $ 24,681
=========== ========== ======== ========= =========== ========== ==========
* Comprehensive income, i.e., net income plus the change in foreign currency balance sheet translation adjustments, totaled
$322 for the three months ended June 30, 2002.
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,
---------------------------------
2002 2001
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME (LOSS) $ 157 $ (1,957)
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS)
TO NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
Depreciation and amortization 834 1,538
Provision for losses on accounts receivable 63 22
Stock issued for services 51 140
Source (use) of cash from change in operating assets and liabilities:
Accounts receivable (6,247) 2,009
Inventories (1,254) (2,229)
Prepaids and other assets 400 243
Accounts payable and accrued expenses 4,419 75
Other, net (33) 41
-------------- --------------
NET CASH USED IN OPERATING ACTIVITIES (1,610) (118)
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (145) (230)
Software development costs (294) (1,395)
Change in other assets (201) (176)
-------------- --------------
NET CASH USED IN INVESTING ACTIVITIES (640) (1,801)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from (repayments of) revolving credit facility 2,465 (1,329)
Proceeds from issuance of preferred shares - 3,500
Other liabilities (7) 454
-------------- --------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,458 2,625
-------------- --------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 165 30
-------------- --------------
INCREASE IN CASH AND CASH EQUIVALENTS 373 736
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,497 2,835
-------------- --------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,870 $ 3,571
============== ==============
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, 2002.
The financial statements for the periods ended June 30, 2002 and 2001 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
Under FAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information", 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 2002 2001
--------------------------------- ---------------- ----------------
Reference $13,964 $11,857
Rolodex 1,909 1,942
eBookMan 190 2,210
Other 454 -
--------------------------------- ---------------- ----------------
Total Sales $16,517 $16,009
================================= ================ ================
Approximate foreign sources of revenues including export sales were as follows
(in thousands):
June 30,
-------------------------------------
Product Sales 2002 2001
--------------------------------- ---------------- ----------------
Europe $2,931 $3,936
Other International 1,010 1,095
For the three-month periods ended June 30, 2002 and 2001, no customer accounted
for more than 10% of the Company's revenues.
6
FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
TRADEMARK AND GOODWILL
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No.142, "Goodwill and Other Intangible Assets." The Company adopted SFAS No.142
at the beginning of April 2002 for all goodwill and other intangible assets
recognized in the Company's statement of financial position. This standard
changes the accounting for goodwill from an amortization method to an
impairment-only approach, and introduces a new model for determining impairment
charges.
Upon initial application of SFAS No. 142 the trademark and goodwill are deemed
to have an indefinite useful life because they are expected to generate cash
flows indefinitely. Thus, the Company ceased amortizing the trademark and
goodwill on April 1, 2002.
An impairment write-down of the trademark was made as of March 31, 2002;
management believes that no further write-down of its intangible assets is
required as a result of adoption of SFAS No. 142.
The net income, earnings-per-share and amortization expense of the Company for
the period of initial application and prior period are as follows:
June 30,
-------------------------------------
2002 2001
---------------------------------------- ---------------- ----------------
Reported net income (loss) $157 $(1,957)
Add back:
Goodwill amortization - 32
Trademark amortization - 97
---------------- ----------------
Adjusted net income (loss) $157 $(1,828)
================ ================
Basic earnings per share:
Reported net income (loss) - $(0.26)
Goodwill amortization -
Trademark amortization .01
Adjusted net income (loss) - $(0.24)
Diluted earnings per share:
Reported net income (loss) - $(0.26)
Goodwill amortization -
Trademark amortization .01
Adjusted net income (loss) - $(0.24)
7
FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
RECENT ACCOUNTING PRONOUNCEMENTS
During the year 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations" and SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS No. 143 related to obligations which
generally are incurred in connection with the ownership of real property. SFAS
No. 144 superseded SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of," and the accounting and
reporting provisions of Accounting Principles Board Opinion No.30, "Reporting
the Results of Operations and Transactions," "Reporting the Effects of Disposal
of a Segment of a Business," and "Extraordinary, Unusual and Infrequently
Occurring Events and Transactions" for the disposal of a segment of a business.
SFAS No. 144 also amended Accounting Research Bulletin No. 51, "Consolidated
Financial Statements," to eliminate the exception to consolidation for a
subsidiary for which control is likely to be temporary. The Company believes the
adoption of these standards will have no material impact on its financial
condition, results of operations or cash flows.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
This Statement rescinds SFAS No. 4, "Reporting Gains and Losses from
Extinguishment of Debt," and an amendment of that Statement, SFAS No. 64,
"Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements." This
Statement also rescinds SFAS Statement No. 44, "Accounting for Intangible Assets
of Motor Carriers." This Statement amends SFAS No. 13, "Accounting for Leases",
to eliminate an inconsistency between the required accounting for sale-leaseback
transactions and the required accounting for certain lease modifications that
have economic effects that are similar to sale-leaseback transactions. This
Statement also amends other existing authoritative pronouncements. The Company
does not expect this Statement to have any material impact on its financial
statements.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities" (effective January 1, 2003). SFAS No. 146
replaces current accounting literature and requires the recognition of costs
associated with exit or disposal activities when they are incurred rather than
at the date of a commitment to an exit or disposal plan. The Company does not
believe the adoption of SFAS No. 146 will have a material effect on the
Company's financial statements.
SUBSEQUENT EVENTS
In August 2002 the Company agreed to sell its approximately 82% interest in
Voice Powered Technology International, Inc. to Belle Group, Ltd. for $100,000
in cash.
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.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (in thousands)
================================================================================
RESULTS OF OPERATIONS
Three months ended June 30, 2002 compared with three months ended June 30, 2001:
Net Sales
Sales of $16,517 for the quarter ended June 30, 2002, were 3% higher than sales
of $16,009 for the same quarter in the prior year. The increase is primarily
attributable to higher sales of $2,208 of reference products to U.S. consumers
and higher sales (OEM) of products produced to customer specifications of $958,
offset in part by lower worldwide sales of eBookMan(R) of $2,020 ($1,257 in the
U.S. and $761 in Europe, Mexico, and Australia) and lower reference and
ROLODEX(R) Electronics sales of $607 in Germany and $209 in other Western
European subsidiaries as a result of competitive pressures and weakening
European economies.
Gross Margin
Gross margin increased to $7,404, or 45% of sales, from $6,647, or 42% of sales,
last year as the Company's sales mix shifted to 85% of higher margin reference
products compared with 74% last year. Last year's sales included $2,210 of
eBookMan(R) sales having a gross margin of only 24%. The more favorable sales
mix resulted in approximately $500 of the increase in gross margin of $757.
Operating Expenses
Total operating expenses decreased by $1,420 to $6,684 from $8,104 last year.
Sales and marketing expense decreased by $1,067 to $3,850 (or 23% of sales) from
$4,917 (or 31% of sales) primarily because of a reduction of $1,264 of expenses
of the eBookMan product line and reduced compensation expense of $261 in the
current period, partially offset by increased market development expense of $370
and increased postage and freight of $195 in the current year. Research and
development expense declined from $970 (or 6% of sales) to $679 (or 4% of
sales). The decrease resulted from the discontinuance of any current year
research and development expenditures relating to the eBookMan product line
which amounted to $315 in the prior year. General and administrative expense was
relatively unchanged at $2,155 (or 13% of sales) compared with $2,217 (or 14% of
sales) in the prior year. Within this category a decline of $286 in compensation
expense and consulting fees was partially offset by an increase of $127 in
depreciation primarily relating to the Company's new enterprise resource system.
Interest Expense
Interest expense declined to $176 in the current period from $374 last year
because of a reduction in rates paid as all of the Company's borrowings in the
current period were under its secured financing facility with an average rate of
6% while $10,329 of prior year debt consisted of Senior Notes with a rate of
12-1/2%.
9
Investment Loss
There was an investment loss of $408 in the current period compared with income
of $37 last year because of the weakening of the U. S. dollar against European
currencies during the quarter. This weakening resulted in losses from the
Company's hedging program of selling Euros at current rates for future
settlement in order to protect the dollar value of sales generated by foreign
subsidiaries. The Company expects this loss to be offset by the receipt of
increased revenues in dollars from future European sales.
Net Income
The Company reported net income of $157 in the current period compared with a
net loss of $1,957 in the prior year. The increase of $2,114 in income resulted
primarily from a reduction in operating expenses of $1,420 and increased gross
margin of $757.
Changes in Financial Condition
Accounts Receivable increased by $6,183 to $13,115 on June 30 from $6,932 on
March 31 primarily because of an increase in sales of $4,264 during May and June
2002 compared with February and March 2002 and a reduction in the reserve for
returns of $836 because of normal seasonal factors. Inventory increased by
$1,253 in anticipation of higher sales in the seasonally active second and third
fiscal quarters. The increases in accounts receivable and inventory are offset
by an increase of $4,426 in accounts payable and $2,465 in the revolving credit
facility relating to the seasonal increase in purchases during May and June.
Liquidity and Capital Resources
The Company has a $25,000 secured financing facility with a commercial lender
which expires on December 7, 2004. Borrowings under the revolving credit
facility bear interest at the bank's prime rate (4.75% at June 2002) plus 3/4%,
and the real property and equipment advances under the facility in the amount of
$4,175 bear interest at the rate of prime plus 1-1/2%. The facility contains
certain financial covenants and restrictions on indebtedness, dividend payments,
business combinations, and other related items. As of June 30, 2002, no amounts
were available for payment of dividends. Borrowings are collateralized by
substantially all assets of the Company. As of June 30, 2002 the Company had an
outstanding balance of $12,603 under the facility and is in compliance with all
covenants.
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.
10
PART II
ITEM 1. LEGAL PROCEEDINGS
In April 2002, LeapFrog Enterprises, Inc. of Emeryville, California
filed an action for declaratory judgment of non-infringement of the
Company's United States Patent entitled "Word Spelling and Definition
Educational Device." Franklin's patent, issued in 1993, covers
electronic language skills teaching aid machines and systems to aid in
the teaching of language skills, such as the Company's Homework Wiz(R)
products. The Company believes that LeapFrog's filing for declaratory
judgment will have no adverse financial effect on Franklin. In April
2002, the Company filed a patent infringement claim against LeapFrog
alleging that Leapfrog's products infringe on the Company's patent. In
July 2002 the Company filed a complaint with the United States
International Trade Commission asking for an investigation and a
permanent general exclusion order against the importation into the
United States of certain LeapFrog products. In August 2002 the United
States International Trade Commission voted to institute an
investigation into whether certain products of LeapFrog violate
Franklin's patent rights.
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 -
During the second fiscal quarter the Company terminated its Sales
Representative Stock Option Plan and the Sales Representative Stock
Option Program prior to the issuance of any options thereunder.
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 -
EXHIBITS NO.
------------
3.01 -- Certificate of Incorporation of the Company (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 the
Company (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 -- Amended and Restated Statement of Rights and Preferences of Series
A 10% Convertible Preferred Stock (Incorporated by reference to the
Exhibit to the Company's Report on Form 8-K filed May 23, 2001)
3.04 -- By-laws of the Company (Incorporated by reference to Exhibit 3.02
to the Company's 1986 S-1 Registration Statement)
3.05 -- Amendment to By-laws of the Company (Incorporated by reference to
Exhibit A to the Company's Proxy Statement relating to the 1987
Annual Meeting of Shareholders)
3.06 -- Amendment to By-laws of the Company (Incorporated by reference to
Exhibit 3.05 to the Company's 1990 10-K)
99.1+ -- Certificate pursuant to 18 U.S.C. Section 1350 as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
11
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, 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, 2002 /s/ Barry J. Lipsky
----------------- --------------------
Date Barry J. Lipsky, President and
Chief Executive Officer
(Duly Authorized Officer)
August 14, 2002 /s/ Arnold D. Levitt
----------------- -----------------------------------
Date Arnold D. Levitt, Senior Vice President,
Chief Financial Officer, and Treasurer
(Principal Financial and Accounting Officer)
12