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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED COMMISSION FILE NUMBER
MARCH 31, 1996 0-14841
FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED
(EXACT NAME OF THE REGISTRANT AS SPECIFIED IN ITS CHARTER)
PENNSYLVANIA 22-2476703
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
ONE FRANKLIN PLAZA, BURLINGTON, NEW JERSEY 08016-4907
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(609) 386-2500
(REGISTRANT'S TELEPHONE NUMBER)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, NO PAR VALUE
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. [X]
As of June 4, 1996, approximately 7,888,000 shares of common stock of the
registrant were outstanding and the aggregate market value of common stock
held by non-affiliates was approximately $154,000,000.
The registrant's Proxy Statement for its 1996 annual meeting of stockholders
is hereby incorporated by reference into Part III of this Form 10-K.
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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, 1996
ITEMS IN FORM 10-K
PAGE
----
PART I
Item 1. BUSINESS....................................................... 1
Item 2. PROPERTIES..................................................... 10
Item 3. LEGAL PROCEEDINGS.............................................. 10
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............ 10
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS....................................................... 11
Item 6. SELECTED FINANCIAL DATA........................................ 12
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS......................................... 13
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................... 17
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.......................................... 31
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............. 31
Item 11. EXECUTIVE COMPENSATION......................................... 31
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. 31
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................. 31
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-
K............................................................. 31
Signatures............................................................... 33
PART I
ITEM 1. BUSINESS
Franklin Electronic Publishers, Incorporated ("Franklin" or the "Company")
believes it is the world's largest designer, developer and publisher of
electronic books, having sold more than twelve million units since 1986. The
Company's electronic books are hand-held, 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 hand-held 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 and Betty Crocker's Cookbook), educational publications and medical
publications (such as the Physicians' Desk Reference).
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 book versions of
thesauruses and dictionaries and, in 1989, the Holy Bible. Franklin's early
lines of electronic books were marketed exclusively in a dedicated format,
with each unit containing one built-in title.
In 1992, the Company developed a more flexible platform, the Digital Book
System(R) product. Instead of having built-in titles, the Digital Book System
contained slots into which users could insert separate titles contained in
integrated-circuit read-only memory ("IC-ROM") cartridges. Franklin began
marketing its library of reference works in the IC-ROM card format to
customers of this flexible platform and is still actively marketing its
medical publications in this format.
In January 1995, the Company introduced its flagship BOOKMAN(R) product
line. Each BOOKMAN unit is a platform that contains a built-in database of one
of the Company's more popular titles, such as a general purpose dictionary, a
version of the Bible or an encyclopedia, and permits simultaneous access from
the platform to a maximum of two additional reference works contained in
razor-blade sized IC-ROM cartridges inserted into slots on the back of the
unit. The Company now markets many of its electronic books in the IC-ROM
cartridge format for insertion into the cartridge slots on the BOOKMAN
platform. With the introduction and expansion of the BOOKMAN line, the Company
has derived, and expects to continue to derive, an increasing proportion of
its revenues from the sale of IC-ROM cartridges, which generally have higher
gross profit margins than the Company's dedicated 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 Global Position
The Company believes that it has a dominant market share in electronic book
publishing in the United States, the United Kingdom, Canada and Australia and
the leading market position in France.
The Company has licensed from publishers the electronic hand-held rights to
more than 200 titles and actively seeks to add new titles. The Company
believes that it has rights to more titles than any of its competitors in the
electronic book market. The Company has obtained such licenses from a variety
of publishers, including, among others, Bertelsmann Lexicon Verlag
("Bertelsmann"), the Columbia University Press, Hachette S.A. ("Hachette"),
Harper/Collins Publishers Ltd. ("Harper/Collins"), Little, Brown and Co.,
Inc., McGraw-Hill, Inc. ("McGraw-Hill"), Merriam-Webster, Inc. ("Merriam-
Webster"), the Oxford University Press, Simon & Schuster Consumer Group
("Simon & Schuster") and the American Medical Association.
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The Company markets its products through a broad array of distribution
channels. In the United States alone, Franklin's books are sold in over 30,000
retail establishments, including Radio Shack, Wal-Mart, K-mart, Service
Merchandise, Office Max and Staples.
Technological Leadership and New Product Development
The Company believes its ability to compress data and to design systems
that permit quick and efficient information retrieval has enabled it to maintain
a strong market position. Additionally, Franklin's expertise in IC-ROM
technology allows it to store more data in smaller, less expensive memory chips,
thereby reducing the overall cost and size of its products while retaining the
capacity for rapid retrieval of compressed data in a low power, low cost
environment.
The Company commits substantial resources to technological innovation and
product development. Since the introduction of the Spelling Ace in 1986, the
Company has developed and introduced a substantial number of variations of its
platforms, introduced its titles in new interchangeable cartridge format, and
adapted certain personal computer application software programs to its
platforms.
The Company implements cost reduction programs for hardware platforms on
which its books are published, including custom designs of very large scale
integrated circuits ("VLSI"s). This permits the Company to offer cost-reduced
platforms at increasingly lower prices while maintaining its gross margins.
New BOOKMAN Products
The Company believes that BOOKMAN products have the potential to set an
industry standard for hand-held electronic publishing. The advantages of the
card format are flexibility of interchangeable databases incorporated in
IC-ROM cards and the ability to update information contained in the IC-ROM
cards. Additionally, the card format has economies that are important for
smaller IC-ROM card production runs which enable the Company to publish
profitable electronic versions of books that do not have mass market appeal,
such as commercial, technical or proprietary publications commissioned by third
parties.
Brand Name Recognition and Reputation for Quality
The Company's books enjoy a reputation for quality that results from their
content, hardware design and easy-to-use applications. Franklin's products
have won several awards including the Electronics Industries Association's
Consumer Electronics Group Design and Engineering Award and the French Sippa
d'Or Trophy.
BUSINESS STRATEGY
The Company's strategy is to leverage its leading market position with new
products and to expand further internationally. The principal elements of
Franklin's strategy are as follows:
Popularizing BOOKMAN Products
The Company's sales and marketing emphasis will be on generating mass
market interest in BOOKMAN products in order to achieve the Company's goal of
making the BOOKMAN platform the industry standard for hand-held electronic book
publishing. As part of this emphasis, the Company recently began television
advertising campaigns on national and religious cable networks and on spot TV,
as well as a print advertising campaign.
Product Expansion in BOOKMAN Format
The Company intends to increase significantly the number of titles
available for the BOOKMAN format by introducing new titles and by converting
titles from its current library to the built-in BOOKMAN unit and IC-ROM
cartridges for the BOOKMAN platform. A number of these titles will be aimed at
international and certain special markets, including educational, medical and
industrial markets. A substantial portion of the Company's
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research and development expenditures will be used for the development of new
titles on IC-ROM cartridges for the BOOKMAN platform.
In addition, the Company plans to expand the applications for its BOOKMAN
products by entering into joint ventures with developers of software and
hardware products. In September 1995, Franklin launched Pocket Quicken, a
mobile financial tracking product introduced jointly with Intuit, Inc. The
Company has also reached agreements with Starfish Software to develop that
company's Sidekick (organizer) application for use on a BOOKMAN unit and with
Davidson & Associates to develop that company's Math Blaster diskette-based
programs for use on a BOOKMAN unit. In an initial effort to license BOOKMAN
product-related technology to other consumer electronic manufacturers,
Franklin has entered into an agreement with Brother International Corporation
whereby certain of Brother's word processors are being manufactured with slots
which will accept BOOKMAN IC-ROM cards and will access and display information
contained therein.
International Expansion
Historically, the Company's international sales were made exclusively
through a network of independent distributors. Commencing in 1992, the Company
began to market its products directly in selected international markets by
establishing wholly-owned, local subsidiaries. The Company's United Kingdom
subsidiary, established in 1992, markets and distributes British English
versions of its books in the United Kingdom; its French and Canadian
subsidiaries, which commenced operations in 1994, and its German and
Australian subsidiaries, which commenced operations in 1995, market and
distribute books from the Company's existing library of titles as well as new
books developed for those markets. The Company has recently commenced direct
operations through a subsidiary in Mexico, and has announced plans to commence
operations through subsidiaries in Columbia and Argentina in 1996. The Company
intends to expand the number of countries in which it markets and anticipates
that its international sales will continue to grow as a percentage of total
sales.
Product Development for Special Markets
In addition to distributing its books to a broad range of consumers through
catalogs and department, specialty, chain and discount stores, the Company
also attempts to market to specific industries and market segments. The
Company has formed separate divisions to market its books in the medical and
educational markets. Franklin has successfully produced digital book versions
of product catalogs for the Allen-Bradley Company, a division of Rockwell, an
electronic index for windshield wiper replacement blades for Pylon
Manufacturing Corp., a subsidiary of MascoTech, Inc., a custom electronic
index to the Encyclopedie Bordas, a French encyclopedia published by Societe
Generale, and bilingual learners' dictionaries in Arabic and Hebrew.
PROCESS OF PUBLISHING ELECTRONIC BOOKS
The process of publishing electronic books 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 book
normally commences with the Company's acquisition of rights to a reference
work or database which it has identified for one or more proposed books. The
Company generally licenses the use of such reference works or databases for
IC-ROM electronic book format.
Although databases are usually delivered to the Company in electronic form,
the Company thoroughly reviews and cleans the data by removing errors in
preparation for publication. This process is analogous to a traditional book
publisher proofreading a manuscript. The data must then be analyzed and
compressed to economically store it in as small an IC-ROM chip 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 which substantially reduce the time
involved in completing these tasks and aid in the more efficient development
of semi-standard software systems embedded in the electronic work.
A prototype chip containing the compressed data and interface software is
then carefully tested before IC-ROM chips are produced. To complete the
product, the chips are assembled in a hardware platform or in an IC-ROM card,
similar to a traditional book publisher printing and binding a hard copy book.
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TITLES
Franklin currently markets more than 250 electronic books which includes
books for its BOOKMAN or Digital Book System platforms or on IC-ROM cards for
the BOOKMAN and Digital Book System platforms in various categories including
thesauruses, dictionaries, bilingual dictionaries, the Bible, the Total
Baseball Encyclopedia, the Concise Columbia Encyclopedia and educational and
medical publications. Different versions of the Company's books use different
databases and provide various levels of functionality.
Dictionaries
Franklin's electronic spelling books (the "Spelling Ace") operate as phonetic
spelling error detectors and correctors, puzzle solvers, word list builders and
word finders. These books 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 of the Spelling Ace 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, and a children's version is based
on the word list from Webster's Elementary Dictionary. Several versions
directed to children and the English as a Second Language ("ESL") markets are
sold with a companion hard copy dictionary to which the electronic book serves
as an index.
The Company's electronic thesaurus line (the "Wordmaster(R)") provides
phonetic spelling features, and also acts as a thesaurus once a word is found.
For example, if a user enters the word "baffled," the thesaurus will display
eleven different synonyms, including "frustrated," "disappointed" and "foiled."
The most popular version of the Wordmaster contains over 496,000 synonyms and
77,000 thesaurus definitions for each of the more than 80,000 entry words from
Merriam-Webster's Collegiate Thesaurus.
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.
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 electronic impulses into sound) which allows the Company's
products to pronounce, in computer generated speech, relevant words contained
in the various databases. The Company is currently developing 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, Hebrew or Korean, 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 currently is developing bilingual dictionaries for
several other languages, including other language pairs that do not include
English, such as German/Russian 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.
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
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full-text word searches, the Franklin Bible is a fully automated concordance.
The Company sells the Bible on its BOOKMAN platform and on IC-ROM 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 IC-ROM card. The
Company has licensed and is in the process of producing electronic versions of
a Spanish language Bible, the Reina Valera edition, and a German language
Bible that is commonly known as the Luther Bible.
Entertainment Titles
Franklin's Total Baseball Encyclopedia provides year-by-year batting and
pitching statistics for every team and player in the National and American
Leagues from 1876 through the most recent season. The Total Baseball
Encyclopedia also provides year-by-year team batting and pitching totals, plus
complete rosters and biographical information on every player. It also has the
capacity, because of its database architecture, to create custom lists or
ratios. For example, a search for the National League pitcher who had the
lowest ratio of hits to innings pitched in the decade of the 1980's will yield
Sid Fernandez. Similarly, a search for a list arranged by number of stolen
bases of all players weighing at least 250 pounds yields two players: Frank
Howard (eight) and Joey Meyer (one). The Company is selling a version of the
Total Baseball Encyclopedia which includes statistics for the 1995 season.
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 Official Scrabble Players' Dictionary, Parker's
Wine Guide, an authoritative guide to wines and vineyards, the Bartender's
Guide, a popular book of cocktail recipes from Penguin Books, and Betty
Crocker's Cookbook.
The Concise Columbia Encyclopedia and Bartlett's Familiar Quotations
The Company has developed and markets a hand-held general usage
encyclopedia which contains the entire text of the Concise Columbia
Encyclopedia. The electronic encyclopedia allows for rapid search of the entire
text by single words, word groups or synonyms. Special features include
phonetic-based spelling correction, hypertext, bookmarks to return quickly to
often used entries, a filtering search feature that facilitates narrowing
searches by subject, region or time period, and an assortment of factual
quizzes.
The Company has developed and markets a BOOKMAN card containing the 16th
Edition of the renowned reference work Bartlett's Familiar Quotations under
license from Little, Brown & Co. The BOOKMAN version of Bartlett's Familiar
Quotations contains over 20,000 famous quotations by over 2,500 authors that
are searchable by key word, time period, or author.
International Titles
Beginning in 1987, the Company developed and produced British English
versions of its American English electronic books for international markets,
especially the United Kingdom and Australia, such as an electronic spelling
book based on a list of over 70,000 words licensed from Harper/Collins and a
children's dictionary incorporating a database from the Oxford Children's
Dictionary. The Company has similarly developed monolingual electronic books
for the French market using databases licensed from Hachette. The Company also
has developed new electronic books for sale in the German-speaking market and
a Spanish monolingual dictionary for Spain and South America. In addition, the
Company has entered into an agreement pursuant to which Bertelsmann has
granted the Company the right to publish electronic books based on a number of
Bertelsmann's books. The Company believes that it will derive a greater
portion of its revenues from international sales in fiscal 1997 and beyond
than in prior years.
Medical Publications
In 1992, the Company introduced the Digital Book System, a shirt-pocket
sized electronic book platform with two empty slots that accept
interchangeable IC-ROM cards. The Digital Book System has been successful in
the medical market and the Company sells a number of medical books for the
Digital Book System, such as the Pocket PDR containing data from the
Physicians' Desk Reference. Franklin's Digital Book library includes
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other medical titles, including the Handbook of Adverse Drug Interactions, the
Washington University Manual of Medical Therapeutics, Harrison's Principles of
Internal Medicine Companion Handbook, The Merck Manual and the Guide to
Antimicrobial Therapy. The Company also markets Franklin's SmartCoder, which
is an electronic book that contains diagnostic and procedural codes required
for medical billing and reimbursement.
The Company is producing its first offering for the nursing market in the
United States, a BOOKMAN version of the print book Nursing Diagnoses:
Definitions and Classifications, a reference text that clarifies and defines
medical conditions specific to nursing from the North American Nursing
Diagnoses Association (NANDA). The Company has licenses to develop other
nursing databases for BOOKMAN cards, such as Nursing 97 Drug Handbook from the
Springhouse Corporation. The Company has produced an electronic formulary for
HIP/Rutgers Health Plan and intends to develop additional products for the
managed care business based on the model of that formulary. An electronic
formulary offers physicians in the group instant access to drug information
and disease management algorithms in a hand-held unit.
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. The Company has under production an ESL product intended to teach
proper pronunciation of English language words. Speak English! (TM) is 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 will be able to speak into a microphone built into the
electronic book, which will record and play 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. Speak English! is expected to ship in the first
half of the Company's 1997 fiscal year. The Company has under development
additional products for the ESL marketplace, including topically-based (for
example, words used in travel or business) versions of Speak English!.
Personal Information Management Products
The Company sells BOOKMAN Pocket Quicken, a mobile financial tracking
product introduced jointly with Intuit, Inc. BOOKMAN Pocket Quicken is sold
with a connectivity package that includes Quicken Connect, a diskette-based
software program that allows the user to upload and download data between the
BOOKMAN Pocket Quicken platform and a Quicken application program running on a
desktop personal computer.
Under license from Starfish Software, Franklin is producing a line of hand-
held electronic organizers under the Sidekick label in BOOKMAN format that are
compatible with the popular Sidekick application program running on a desktop
personal computer. The products utilize flash ROM memory produced by Intel
Corporation used to store user-entered information. The BOOKMAN Sidekick line
of products allows for connectivity between the BOOKMAN platform and a
Sidekick application program running on a personal computer to provide for
upload and download functionality.
Other Imprints
The Company has lines of products targeted to sell at lower price points
under the Next Century(R) and Systech (TM) imprints. These products, which
contain a single dedicated title, include spelling correctors and thesauruses
for sale both in the domestic consumer market and in France, the United
Kingdom and Australia.
ACQUISITION OF DATABASES
The Company maintains an active program to acquire, commission or develop
internally databases that it believes are capable of being effectively adapted
to the electronic book format and that can be positioned and marketed by it in
the electronic book market. The Company also receives requests to develop
books incorporating specific databases from third-party licensors and
customers.
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.
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RESEARCH AND DEVELOPMENT
The Company has a group of approximately 100 persons that performs research
and development relating to new electronic books as well as improvements to
existing books. The group also conducts ongoing research in connection with
the development of new software for the Company's books, and with respect to
more efficient ways to compress the information contained in the databases
incorporated in the Company's electronic books into the smallest and least
costly IC-ROM chips. The Company also focuses its development efforts on
creating new hardware platforms for the Company's electronic books. For
example, the BOOKMAN and Digital Book System technologies were developed by
the Company's internal research and development group.
The Company maintains a full-time internal development group of hardware
and software engineers dedicated to the critical function of developing VLSIs
that integrate both general purpose microprocessors and custom design circuits
for electronic books. Through this extensive effort the Company is able to
reduce the cost of components for its products on an ongoing basis.
The Company regularly engages in programs to redesign its electronic book
platforms and to develop new VLSIs for its products.
The Company is currently developing products utilizing digitally recorded
and compressed speech technology, which are intended to help the user learn
proper English pronunciation. The Company intends to focus its efforts
regarding these products in the ESL market.
The Company's efforts in research and development of hardware and software
focus on the Company's practice of customizing its hardware platform for use
with specific content or particular software. This allows the Company to
maximize the functionality of its products and reduce costs.
During fiscal 1996, 1995 and 1994, the Company spent approximately $5.5
million, $5.2 million and $4.2 million, respectively, on research and
development.
MANUFACTURE AND DISTRIBUTION
The Company arranges for the assembly of its books by placing purchase
orders with established third-party manufacturers in China, Malaysia,
Thailand, the Philippines and Indonesia. The Company believes that it could
locate alternate manufacturers for its books 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 electronic books.
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 books. The Company's electronic books are based on general purpose
microprocessors, general purpose static random access memory chips and custom-
designed IC-ROM chips. The Company designs VLSIs that integrate both 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 and to conduct on-site inspection by
Company personnel of electronic books. The Company's electronic books are
generally shipped at the Company's expense to its facility in New Jersey,
where the Company maintains an inspection, quality control and warehousing
operation for distribution in the United States, and to similar facilities in
Europe and elsewhere for its foreign operations.
SALES AND MARKETING
Franklin's electronic books 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.
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Consumer Sales
Franklin's books 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 BOOKMAN products
and cartridges directly from Franklin by calling 1-800-BOOKMAN.
The Company sells through several large retail chains, including Radio
Shack, Wal-Mart, K-mart, Service Merchandise, Office Max and Staples. Sales to
Radio Shack have accounted for approximately 10% and 11% of the Company's
revenues in fiscal 1995 and 1994, respectively. During fiscal 1996, no
customer accounted for more than 10% of the Company's revenues.
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 electronic books with
advertisements in magazines and newspapers and on television and radio. The
Company also displays its publications at trade shows, including the Consumer
Electronics Show, and advertises in trade magazines. The Company indirectly
benefits from general market awareness of the databases incorporated in its
books.
International Sales
The Company sells its electronic books worldwide through its wholly-owned,
local subsidiaries and a network of independent distributors. International
sales accounted for 30%, 28% and 14% of the Company's sales during fiscal
1996, 1995 and 1994, respectively. Franklin's subsidiary in the United
Kingdom, which commenced operations in August 1992, markets and distributes
British English versions of its books in the United Kingdom. The Company's
subsidiaries in France and Canada, which commenced operations in 1994, and its
subsidiaries in Germany and Australia, which commenced operations in 1995,
market and distribute the Company's books, including new books developed for
these markets. The Company has recently commenced operations through a
subsidiary in Mexico, and has announced plans to commence operations through
subsidiaries in Columbia and Argentina in the current fiscal 1997 year. In
each of these countries, the Company marketed its products through
distributors prior to direct marketing through subsidiaries.
Medical Sales
The Company's Medical Division focuses its development and sales efforts on
the Digital Book System for the medical professional market which requires the
delivery of massive, complicated information rapidly in a highly portable
format. This Division has licensed databases from respected medical publishers
for that purpose. Sales efforts of the Medical Division are augmented by co-
marketing efforts with the Company's licensors of medical databases. The
Company's Medical Division has developed products for the managed care
business, such as an electronic formulary for HIP/Rutgers Health Plan. An
electronic formulary offers physicians in the group instant access to drug
information and disease management algorithms in a hand-held unit. The
Company's SmartCoder card for the Digital Book System retrieves diagnostic and
procedural codes required for medical billing and reimbursement based on
information licensed to the Company from the American Medical Association.
The Company intends to develop a line of BOOKMAN products for use by nurses
in the United States, and is producing a BOOKMAN platform that contains
Nursing Diagnoses: Definitions and Classifications.
The Company intends to enter the expanding consumer market for medical
information by publishing general medical books in the BOOKMAN format. The
Company has already published the Parents' Emergency Medical Guide. In
addition, the Company intends to release in June 1996 the PDR Family Guide to
Prescription Drugs.
Education Sales
The Company's Franklin Learning Resources division is dedicated to the sale
of electronic books directly to educators and school systems throughout the
United States. The Company's electronic books are in use in over 20,000 United
States schools. In addition, custom curriculae are created around the books to
meet school requirements.
8
Custom Electronic Book Publishing Sales
The Company has created commercial or industrial applications of the
Digital Book System as a data delivery device for corporate information used by
employees or customers of corporations, such as an electronic index of
windshield wiper replacement blades for Pylon Manufacturing Corp. and the
PocketView Digital Book developed and recently updated for Allen-Bradley
Company. The Company produced for Societe Generale a custom electronic index to
its popular Encyclopedie Bordas and has produced three updated versions of the
index and one new product based on the encyclopedic work Memories of the
Twentieth Century. The Company's development of the electronic formulary for
HIP/Rutgers is the first custom publication undertaken by the Company in the
medical arena. The Company continues to pursue opportunities for custom versions
of its products.
PATENTS, TRADEMARKS AND COPYRIGHTS
The Company owns over twenty-one United States utility and design patents
on its electronic books 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.
Franklin owns certain trademark rights, including "Franklin(R)",
"Bookman(R)", "Spelling Ace(R)", "Wordmaster(R)", "Digital Book System(R)" and
"Next Century(R)" 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, IC-ROM-based electronic
books. The Company's main domestic competitor in the electronic book category
is Seiko Instruments USA Inc., which markets spelling correctors, thesauruses,
dictionaries and a Spanish translator. The Company believes it has 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 competitor is EuroTronics,
which markets monolingual spelling correctors, thesauruses and dictionaries in
France and Berlitz translators in Europe.
A number of prominent electronics manufacturers, including Sharp
Electronics Corporation, Casio, Apple Computer, Inc. and Hewlett-Packard
Company, market palmtop personal organizer products, personal digital assistants
or general usage personal computers that offer varying degrees of electronic
reference capabilities.
Competitive factors 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 books enjoy a reputation for quality resulting from their
content, hardware design and easy-to-use applications. The Company's books 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.
The Company is committed to the use of solid state IC-ROM technology for
its electronic books. Competitors have, in the past, introduced products based
on other technology. Certain electronic book products, such as the Sony Data
Discman, employ compact disk read only memory ("CD-ROM") technology. The Company
believes that the advantages of IC-ROM technology--absence of moving parts,
speed of retrieval of information, small size, low cost and low power
consumption--make for a preferable portable electronic book product for users.
Although IC-ROM is far more expensive per byte than CD-ROM, the Company believes
that its advantages outweigh its disadvantages in portable applications.
9
While the Company has used IC-ROM technology in its products for the past
ten years, many manufacturers have recently commenced its use in personal
digital assistants and lap-top computers. In addition, IC-ROM technology is
now being used in digital film and audio recording. The Company believes that
its experience and expertise in the use of IC-ROM technology in its electronic
book products will position it for the use of that technology in other
products as well.
SOFTWARE LICENSING
The Company 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's
subsidiary, Proximity Technology Inc., markets this software for use in
typewriters and word-processing and computer products, including CD-ROM and
internet products. The Company competes with INSO, Inc. in respect of these
software products. The Company's revenues from software licensing have been
approximately 3% of total revenues in recent years.
EMPLOYEES
As of April 30, 1996, the Company employed approximately 245 persons in the
United States and approximately 65 persons abroad. None of the Company's
employees is represented by a union. The Company believes its relations with
its employees are satisfactory.
- --------
Betty Crocker's is a trademark of General Mills, Inc.; Merriam-Webster's and
Collegiate are trademarks of Merriam-Webster, Inc.; Physicians' Desk Reference
and Pocket PDR are trademarks of Medical Economics Data, a division of Medical
Economics Company, Inc.; PocketView is a trademark of Allen-Bradley Company,
Inc.; Quicken, Quicken Connect, and Pocket Quicken are trademarks of Intuit
Inc.; Math Blaster is a trademark of Davidson & Associates, Inc.; Scrabble is
a trademark of Hasbro, Inc.; Total Baseball is a trademark of Total Baseball,
Inc.; Sidekick is a trademark of Starfish Software, Inc.
ITEM 2. PROPERTIES
Franklin has completed the construction of its new 90,000 square foot
corporate headquarters in Burlington, New Jersey. The Company believes this
new facility will satisfy its foreseeable needs for office, laboratory and
warehousing space.
ITEM 3. LEGAL PROCEEDINGS
In April 1995 Berkeley Speech Technologies ("Berkeley") filed a declaratory
judgment action in the United States District Court for the Northern District
of California to invalidate one of Franklin's registered copyrights, which
action also demands monetary damages. Franklin filed a counterclaim against
Berkeley for infringing Franklin's registered copyright and for breach of
contract. The Company believes that Berkeley's action is without merit and
intends vigorously to defend this action and prosecute its counterclaims. The
Company believes that the resolution of this matter will not have a material
adverse effect on its financial condition or results of operations.
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 or results of operations of the
Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS--NONE
EXECUTIVE OFFICERS OF THE REGISTRANT
NAME AGE POSITION
- ---- --- --------
Morton E. David 59 Chairman of the Board, President and Chief Executive Officer; Director
Michael Kemp 48 Managing Director, Franklin Europe
Kenneth H. Lind 43 Vice President, Finance, and Treasurer
Barry J. Lipsky 45 Vice President, Manufacturing
Michael R. Strange 48 Executive Vice President; Director
Toni M. Tracy 47 Vice President, Publisher Relations
Gregory J. Winsky 46 Senior Vice President
10
. Mr. David joined the Company in May 1984 as Chairman of the Board of
Directors and Chief Executive Officer. Mr. David was Chairman and Chief
Executive Officer of Mura Corporation, a manufacturer of portable audio
products, cordless telephones and parts for the electronic industry from
1976 to 1984 and, prior thereto, was the chief financial officer of Dynamics
Corp. of America, a diversified manufacturing company. Mr. David is a
director of Standard Motor Products Inc., a manufacturer of automotive
parts.
. Mr. Kemp joined the Company in 1992 as Managing Director of its sales and
marketing subsidiary in the United Kingdom, Franklin Electronic Publishers
(UK) Ltd. He was named Managing Director of the Company's European
Operations in 1994. From 1983-1991, he was Marketing Director of Venture
Marketing Ltd., a marketer of consumer electronics products.
. Mr. Lind joined the Company in March 1983 and was elected Controller of the
Company in May 1984, Treasurer in October 1984 and Vice President in
January 1986. From 1977 to 1983, Mr. Lind was associated with Coopers &
Lybrand.
. Mr. Lipsky joined the Company as Vice President in February 1985. From 1972
to 1985, Mr. Lipsky was Vice President of Manufacturing of Mura
Corporation.
. Mr. Strange has been an executive officer of the Company since 1984 and
Executive Vice President of the Company since 1985. From 1982 to 1983, Mr.
Strange was Vice President of Manufacturing at Metrologic Instruments, a
manufacturer of bar-code scanning equipment and, from 1979 to 1982, was the
Director of Worldwide Operations of Excide, a manufacturer of large scale
uninterruptible power supplies.
. 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. 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. Winsky was elected Vice President and Secretary of the Company in June
1984 and was elected Senior Vice President in January 1993. From 1980 to
1984, Mr. Winsky was assistant counsel for SPS Technologies, Inc., a
manufacturer of parts for the aircraft industry, and from 1978 to 1980, was
an associate at the Philadelphia law firm of Schnader, Harrison, Segal &
Lewis.
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 of the common stock as reported by the
NASDAQ National Market System from April 1994 to June 1994 and by the NYSE for
the period from June 1994 (when the Company listed the common stock on the
NYSE) to March 1996:
SALES
---------------
QUARTER ENDED HIGH LOW
------------- ------- -------
June 30, 1994................................................ $14 $11 1/4
September 30, 1994........................................... 15 1/4 10 1/2
December 31, 1994............................................ 21 1/2 15
March 31, 1995............................................... 31 3/4 20 1/4
June 30, 1995................................................ 32 25 3/8
September 30, 1995........................................... 40 1/2 25 3/4
December 31, 1995............................................ 44 1/4 26 3/4
March 31, 1996............................................... 30 5/8 22
The approximate number of holders of record of the common stock as of May
28, 1996 was 1,020.
11
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.
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.
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
YEAR ENDED MARCH 31,
--------------------------------------------
1996 1995 1994 1993 1992
-------- ------- ------- ------- -------
STATEMENT OF OPERATIONS DATA
Sales........................... $100,823 $83,273 $66,149 $65,383 $53,757
Cost of Sales................... 53,666 46,745 38,454 39,323 34,238
-------- ------- ------- ------- -------
Gross Profit.................... 47,157 36,528 27,695 26,060 19,519
-------- ------- ------- ------- -------
Expenses:
Sales and marketing........... 17,237 12,822 10,075 10,464 8,977
Research and development...... 5,544 5,190 4,167 3,370 3,063
General and administrative.... 8,125 7,185 4,905 4,264 3,787
Interest expense.............. 36 12 442 653 724
Interest and investment
income....................... (505) (92) (455) (226) (247)
-------- ------- ------- ------- -------
Total expenses.............. 30,437 25,117 19,134 18,525 16,304
-------- ------- ------- ------- -------
Income Before Income Taxes...... 16,720 11,411 8,561 7,535 3,215
Income Tax (Benefit) Provision.. 6,354 (1,000) 471 393 86
-------- ------- ------- ------- -------
Net Income...................... $ 10,366 $12,411 $ 8,090 $ 7,142 $ 3,129
======== ======= ======= ======= =======
Net Income Per Share
Primary....................... $ 1.25 $ 1.56 $ 1.06 $ .94 $ .47
======== ======= ======= ======= =======
Fully diluted................. $ 1.25 $ 1.52 $ 1.06 $ .92 $ .44
======== ======= ======= ======= =======
Pro Forma Net Income(1)
Net Income.................... $ 10,366 $ 8,139 $ 5,308 $ 4,672 $ 1,993
======== ======= ======= ======= =======
Net Income Per Share
Primary..................... $ 1.25 $ 1.02 $ .69 $ .62 $ .30
======== ======= ======= ======= =======
Fully diluted............... $ 1.25 $ 1.00 $ .69 $ .60 $ .28
======== ======= ======= ======= =======
Weighted Average Common Shares
and Common Equivalents:
Primary....................... 8,281 7,974 7,661 7,563 6,718
===== ===== ===== ===== =====
Fully diluted................. 8,284 8,154 7,662 7,747 7,050
===== ===== ===== ===== =====
AT MARCH 31,
--------------------------------------------
1996 1995 1994 1993 1992
-------- ------- ------- ------- -------
BALANCE SHEET DATA
Working Capital................. $ 45,171 $38,839 $30,032 $24,190 $20,470
Total Assets.................... 82,869 70,574 49,673 39,002 33,637
Long-term Debt.................. -- -- -- 3,157 7,091
Shareholders' Equity............ 65,538 53,973 39,703 29,367 21,325
- --------
(1) The Company recognized its remaining federal tax benefits applicable to
future years in fiscal 1995 and, as a result, the Company's earnings
beginning in fiscal 1996 are reported on a fully taxed basis. The pro
forma net income and net income per share data for each of the periods
presented reflect what such data would have been had the Company's
earnings been fully taxed (at an assumed tax rate of approximately 38%)
for such periods and exclude the impact of certain non-operating charges
of $1.7 million incurred in fiscal 1995. See notes 5, 8 and 10 to the
Consolidated Financial Statements of the Company appearing elsewhere
herein.
12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company's results of operations during the three fiscal years ended
March 31, 1996 have generally been characterized by increased sales,
particularly outside the United States. During this period, the Company has
benefitted greatly from the improvement in the price/performance of IC-ROM
chips. Because IC-ROM chips are a significant part of the cost of a Franklin
product, declining semiconductor prices have allowed the Company to lower
product prices significantly. Another factor enabling the Company to reduce
its product prices has been the Company's cost reduction program. Management
believes that lower prices, in turn, have led to marked increases in sales in
both unit and dollar terms. In addition, the introduction of new titles and
platforms has contributed significantly to the Company's sales growth during
this period. International sales have also exhibited very strong increases
over this period due to the reasons mentioned above as well as the Company's
increased marketing efforts, primarily in France, the United Kingdom, Canada
and Australia. The Company expects any sales growth in the future to be driven
primarily by the sale of new BOOKMAN units and BOOKMAN-compatible IC-ROM
cartridges, coupled with continued increased international marketing efforts.
As the Company continues to introduce new foreign language books, bilingual
electronic dictionaries and books targeted at the ESL market, management
anticipates that the Company's international sales will continue to increase
as a percentage of total sales.
Over the last three fiscal years, the Company's gross margins have
increased primarily due to the decline in cost of IC-ROM chips and the Company's
cost reduction efforts (which have enabled the Company to lower its product
prices), the introduction of new, higher-end products which command higher gross
margins and increased international sales through subsidiaries in certain
foreign markets. The Company expects any improvements in gross margin in the
future to be driven largely by shifts in the Company's revenue mix toward the
more profitable IC-ROM cartridges for its BOOKMAN products and the expansion of
its international operations.
Operating expenses (excluding the effect of certain non-operating charges),
as a percentage of sales, have remained relatively constant over the last
three fiscal years. The Company has gradually increased, and expects to
continue to increase, research and development expenditures in an effort to
maintain its recent growth rate in sales; however, the Company expects its
research and development expenses, as a percentage of sales, to remain
relatively constant in the near future. The increase in general and
administrative expenses, as a percentage of sales, is primarily attributable
to increased staff and the personnel needed to operate the Company's
international subsidiaries. The Company anticipates that, as it furthers its
strategy of popularizing BOOKMAN units, its sales and marketing expenses, as a
percentage of sales, will continue to increase.
During the 1994 and 1995 fiscal years, the Company's effective tax rate was
minimal due to the realization of net operating loss carryforwards. However,
these net operating loss carryforwards were fully utilized in fiscal 1995.
Accordingly, the Company began reporting its earnings on a fully taxed basis.
Over the next few years, the Company anticipates that it will also commence
paying foreign income taxes. For comparison purposes in the financial tables
presented herein, the Company has included pro forma net income to show what
the Company's earnings in fiscal years 1994 and 1995 would have been on a
fully taxed basis at an assumed tax rate of 38%.
13
RESULTS OF OPERATIONS
The following table summarizes the Company's historical results of
operations as a percentage of sales for fiscal 1996, 1995 and 1994:
(DOLLARS IN THOUSANDS)
YEAR ENDED MARCH 31,
--------------------------
1996 1995 1994
-------- ------- -------
SALES:
Domestic Sales.................................... $ 70,220 $59,597 $56,911
International Sales............................... 30,603 23,676 9,238
-------- ------- -------
Total Sales......................................... $100,823 $83,273 $66,149
======== ======= =======
AS A PERCENTAGE OF TOTAL SALES:
Domestic Sales.................................... 69.6% 71.6% 86.0%
International Sales............................... 30.4 28.4 14.0
-------- ------- -------
Total Sales....................................... 100.0% 100.0% 100.0%
Cost of Sales..................................... 53.2 56.1 58.1
-------- ------- -------
Gross Profit...................................... 46.8 43.9 41.9
-------- ------- -------
Expenses:
Sales and marketing............................. 17.1 15.4 15.2
Research and development........................ 5.5 6.2 6.3
General and administrative...................... 8.1 8.6 7.4
Interest expense................................ * * .7
Interest and investment income.................. (.5) (.1) (.7)
-------- ------- -------
Total expenses................................ 30.2 30.2 28.9
-------- ------- -------
Income Before Income Taxes........................ 16.6 13.7 12.9
Income Tax (Benefit) Provision.................... 6.3 (1.2) .7
-------- ------- -------
Net Income........................................ 10.3% 14.9% 12.2%
======== ======= =======
Pro Forma Net Income(1)........................... 10.3% 9.8% 8.0%
======== ======= =======
- --------
(1) The pro forma net income and net income per share data for each of the
periods presented reflect what such data would have been had the Company's
earnings been fully taxed (at an assumed tax rate of approximately 38%)
for such periods and exclude the impact of certain non-operating charges
of $1.7 million incurred in fiscal 1995. Without giving effect to such
non-operating charges, total expenses were approximately 28.1% of sales in
fiscal 1995. See Notes 5, 8 and 10 to the Consolidated Financial
Statements of the Company appearing elsewhere herein.
* less than 0.1%
Year Ended March 31, 1996 compared with Year Ended March 31, 1995
Sales of $100.8 million in fiscal 1996 were 21.1% higher than sales of $83.3
million in fiscal 1995. Sales in the United States increased by 17.8% from
$59.6 million to $70.2 million, due primarily to increased sales of electronic
books through the Company's consumer channels. International sales increased
by 29.3% from $23.7 million to $30.6 million, primarily due to increased sales
in France and the United Kingdom and the opening of new subsidiaries in
Germany and Australia.
Gross profit increased from 43.9% of sales ($36.5 million) in fiscal 1995 to
46.8% of sales ($47.2 million) in fiscal 1996. The increase was attributable
to sales of BOOKMAN cards and a greater proportion of higher gross margin
products made possible by the Company's cost reduction programs.
Expenses remained constant as a percent of sales; the dollar increase from
$25.1 million in fiscal 1995 to $30.4 million in fiscal 1996 is primarily due
to increased sales and marketing and administrative expenses. Sales and
marketing were up by $4.4 million from 15.4% of sales in fiscal 1995 to 17.1%
of sales in fiscal 1996 in connection with the establishment of new
subsidiaries and increased advertising. General and administrative
14
expenses increased from 8.6% of sales ($7.2 million) in fiscal 1995 to 8.1% of
sales ($8.1 million) in fiscal 1996 primarily due to the establishment of new
foreign subsidiaries. Research and development expenses were relatively
constant as a percentage of sales (decreasing slightly from 6.2% to 5.5%) even
as the Company continued to develop new cards for the BOOKMAN platform.
Year Ended March 31, 1995 compared with Year Ended March 31, 1994
Sales of $83.3 million in fiscal 1995 were 25.9% higher than sales of $66.1
million in fiscal 1994. Sales in the United States increased by 4.7% from
$56.9 million to $59.6 million, due primarily to increased sales of electronic
books through the Company's consumer channels. International sales increased
by 156.3% from $9.2 million to $23.7 million, primarily due to the opening of
new subsidiaries in France and Canada coupled with sales growth in the United
Kingdom.
Gross profit increased from 41.9% of sales ($27.7 million) in fiscal 1994 to
43.9% ($36.5 million) in fiscal 1995. The increase was attributable to the
sale of a greater proportion of higher gross margin products made possible by
the Company's cost-reduction programs.
Expenses increased from 28.9% of sales ($19.1 million) in fiscal 1994 to
30.2% in fiscal 1995 ($25.1 million) primarily due to increased sales and
marketing and general and administrative expenses. Sales and marketing
expenses were relatively constant as a percentage of sales (15.4%); the dollar
increase is attributable to the establishment of two new foreign subsidiaries
and increased advertising expenditures, particularly the expenses of
television advertising. General and administrative expenses increased from
7.4% of sales ($4.9 million) in fiscal 1994 to 8.6% ($7.2 million) in fiscal
1995, primarily due to the establishment of new foreign subsidiaries. Research
and development expenses were relatively constant as a percentage of sales
(6.2%) notwithstanding the development of new products, such as the BOOKMAN
platform, and research related to cost reduction efforts in respect of
existing products.
INFLATION AND CURRENCY TRANSACTIONS
Inflation has had no significant effect on the operations of the Company for
the three years ended March 31, 1996. 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 enters into foreign exchange forward contracts
with financial institutions to limit its exposure to losses on anticipated
cash flows resulting from fluctuations in the currency markets. Anticipated
transactions comprise sales of the Company's products in currencies other than
U.S. dollars made primarily through the Company's subsidiaries. As of March
31, 1996 and 1995, the Company had approximately $12.2 million and $14.5
million, respectively, of outstanding foreign exchange contracts in which
foreign currencies were sold. The deferred gains and losses on such contracts
were immaterial at March 31, 1996 and 1995. Such hedging has had no
significant effect on the operations of the Company for the three years ended
March 31, 1996. The duration of these anticipated hedging transactions
generally does not exceed one year.
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 revenue and
earnings fluctuations. The Company expects that the continued growth of its
international operations will mitigate in part the effects of seasonality on
its financial results.
The following table sets forth unaudited net sales for each of the Company's
last 12 fiscal quarters:
QUARTER ENDED QUARTER ENDED QUARTER ENDED QUARTER ENDED
JUNE 30 SEPTEMBER 30 DECEMBER 31 MARCH 31
------------- ------------- ------------- -------------
Fiscal 1996............. $18,619 $27,077 $34,451 $20,676
Fiscal 1995............. 15,125 21,258 29,194 17,696
Fiscal 1994............. 14,646 18,429 20,220 12,854
15
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of liquidity during the three years ended March
31, 1996 was cash flow from operations. Management believes that the cash flow
from operations and its bank line of credit will be adequate to provide for
the Company's liquidity and capital needs, including its proposed
international expansion, for the foreseeable future.
In order to accommodate seasonal inventory and accounts receivable buildup,
the Company may finance its day to day operations by drawing down advances, on
an as needed basis, against a $35 million revolving line of credit facility.
The Company's credit arrangement with its lending bank has been extended
through October 1998. At March 31, 1996, there were no borrowings under the
bank line of credit. Inventory levels, measured in both unit and dollar terms,
are anticipated to increase as the Company expands its operations overseas and
increases the number of titles marketed both domestically and internationally.
The Company believes that it has sufficient borrowing availability for
unforeseen or seasonal cash requirements. Borrowings against the line of
credit bear interest at the bank's prime rate or 1 1/2% over LIBOR. The
Company pays a commitment fee of 1/4 of 1% per annum on the unused portion of
the line of credit.
The Company expended approximately $6.5 million from available cash flow
from operations for the construction and outfitting of its new corporate
headquarters during fiscal 1995 and 1996. The Company has no material
commitments for capital expenditures in the next twenty-four months.
Net cash provided by (used in) operating activities was $(2.3) million,
$12.6 million and $8.9 million in fiscal 1996, 1995 and 1994, respectively.
The increase from fiscal 1994 to fiscal 1995 was primarily due to the increase
in net income. The decrease from fiscal 1995 to fiscal 1996 was due to
increased inventory levels (resulting from the planned production of new
products for new markets) offset by net income for the year.
Net cash used in investing activities was $9.0 million, $4.0 million and
$8.6 million in fiscal 1996, 1995 and 1994, respectively. The decrease from
fiscal 1994 to fiscal 1995 was primarily due to the sale of investment
securities, offset by the purchase of the Company's new corporate
headquarters. The increase from fiscal 1995 to fiscal 1996 was due in part to
the purchase and outfitting of the new corporate headquarters.
Net cash provided by (used in) financing activities was $1.1 million, $1.4
million and $(0.7) million in fiscal 1996, 1995 and 1994, respectively. The
increase in net cash provided by financing activities from fiscal 1994 to
fiscal 1996 was primarily due to the issuance of shares of common stock under
an employee stock option plan.
The Company recognized its remaining federal tax benefits applicable to
future years in the quarter ended June 30, 1994. Accordingly, the Company is
currently, and anticipates that it will continue to be, subject to federal
income taxes. Additionally, over the next few years, the Company anticipates
that it will commence paying foreign income taxes. Although payment of such
taxes will result in a reduction in the Company's net cash flow, management
believes that any such reduction will not have a material adverse effect on
the Company's liquidity.
16
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
PAGE
----
INDEPENDENT AUDITOR'S REPORT................................................ 18
CONSOLIDATED STATEMENT OF OPERATIONS
Years ended March 31, 1996, 1995 and 1994................................. 19
CONSOLIDATED BALANCE SHEETS
March 31, 1996 and 1995................................................... 20
CONSOLIDATED STATEMENT OF CASH FLOWS
Years ended March 31, 1996, 1995 and 1994................................. 21
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Years ended March 31, 1996, 1995 and 1994................................. 22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended March 31, 1996, 1995 and 1994................................. 23
17
INDEPENDENT AUDITOR'S REPORT
Shareholders and Directors
Franklin Electronic Publishers, Incorporated
Burlington, New Jersey 08016
We have audited the accompanying balance sheet of Franklin Electronic
Publishers, Incorporated and subsidiaries as of March 31, 1996 and March 31,
1995 and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the three years ended March 31, 1996. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit 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 audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material aspects, the financial position of Franklin Electronic
Publishers, Incorporated and subsidiaries as of March 31, 1996 and March 31,
1995, and the results of its operations and cash flows for each of the three
years ended March 31, 1996 in conformity with generally accepted accounting
principles.
FELDMAN RADIN & CO., P.C.
Certified Public Accountants
New York, New York
May 10, 1996
18
FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
YEAR ENDED MARCH 31,
----------------------------
1996 1995 1994
-------- -------- --------
SALES........................................... $100,823 $ 83,273 $ 66,149
COST OF SALES................................... 53,666 46,745 38,454
-------- -------- --------
GROSS PROFIT.................................... 47,157 36,528 27,695
-------- -------- --------
EXPENSES:
Sales and marketing........................... 17,237 12,822 10,075
Research and development...................... 5,544 5,190 4,167
General and administrative.................... 8,125 7,185 4,905
Interest expense.............................. 36 12 442
Interest and investment income................ (505) (92) (455)
-------- -------- --------
Total expenses.............................. 30,437 25,117 19,134
-------- -------- --------
INCOME BEFORE INCOME TAXES...................... 16,720 11,411 8,561
INCOME TAX (BENEFIT) PROVISION.................. 6,354 (1,000) 471
-------- -------- --------
NET INCOME...................................... $ 10,366 $ 12,411 $ 8,090
======== ======== ========
NET INCOME PER SHARE:
Primary....................................... $ 1.25 $ 1.56 $ 1.06
======== ======== ========
Fully diluted................................. $ 1.25 $ 1.52 $ 1.06
======== ======== ========
WEIGHTED AVERAGE COMMON SHARES AND COMMON
EQUIVALENTS:
Primary....................................... 8,281 7,974 7,661
======== ======== ========
Fully diluted................................. 8,284 8,154 7,662
======== ======== ========
See notes to consolidated financial statements.
19
FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
MARCH 31,
----------------
1996 1995
------- -------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents (Note 3)......................... $10,827 $21,018
Accounts receivable, less allowance for doubtful accounts
of $867 and $859.......................................... 12,114 9,926
Inventories (Note 4)....................................... 34,890 20,916
Deferred income tax asset.................................. 1,723 1,622
Prepaids and other assets.................................. 2,948 1,958
------- -------
TOTAL CURRENT ASSETS..................................... 62,502 55,440
------- -------
PROPERTY AND EQUIPMENT (Note 5)............................ 11,012 8,111
GOODWILL, less accumulated amortization of $649 and $568... 1,789 1,870
OTHER ASSETS............................................... 7,566 5,153
------- -------
TOTAL ASSETS............................................... $82,869 $70,574
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses (Note 6)............. $17,331 $16,601
SHAREHOLDERS' EQUITY: (Note 9)
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 7,861,715 and 7,710,150 shares..... 48,599 47,386
Retained earnings.......................................... 17,165 6,799
Foreign currency translation adjustment (Note 11).......... (226) (212)
------- -------
TOTAL SHAREHOLDERS' EQUITY............................... 65,538 53,973
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY................... $82,869 $70,574
======= =======
See notes to consolidated financial statements.
20
FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED MARCH 31,
--------------------------
1996 1995 1994
-------- ------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME....................................... $ 10,366 $12,411 $ 8,090
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Depreciation and amortization.................. 3,790 2,748 2,411
Amortization of debt discount.................. -- -- 127
Provision for losses on accounts receivable.... 51 318 91
Loss on disposal of property and equipment..... 96 -- --
Write down of fixed assets..................... -- 350 --
Loss (gain) on sales of investment securities,
net........................................... -- 101 (26)
Revaluation of investment securities to market. -- 416 --
Deferred income tax benefit.................... (101) (1,622) --
Source (use) of cash from change in operating
assets and liabilities:
Accounts receivable.......................... (2,239) (2,127) (969)
Inventories.................................. (13,974) (6,022) (4,083)
Prepaids and other assets.................... (990) (583) (232)
Accounts payable and accrued expenses........ 730 6,631 3,492
-------- ------- -------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES...................................... (2,271) 12,621 8,901
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments (net) in investment securities..... -- 4,449 (4,940)
Purchase of property and equipment............. (5,624) (6,784) (1,248)
Proceeds from sale of property and equipment... 471 -- --
Change in other assets......................... (3,852) (1,658) (2,433)
-------- ------- -------
NET CASH USED IN INVESTING ACTIVITIES............ (9,005) (3,993) (8,621)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments of long-term debt........... -- -- (1,443)
Proceeds from issuance of common shares and
warrants...................................... 1,099 1,397 725
-------- ------- -------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES...................................... 1,099 1,397 (718)
EFFECT OF EXCHANGE RATE CHANGES ON CASH............ (14) (19) (25)
-------- ------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS... (10,191) 10,006 (463)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD... 21,018 11,012 11,475
-------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD......... $ 10,827 $21,018 $11,012
======== ======= =======
SUPPLEMENTAL DATA:
Cash paid during the year:
Income taxes................................... $ 5,152 $ 288 $ 449
Interest....................................... $ 36 $ 13 $ 419
SCHEDULE OF NON-CASH FINANCING ACTIVITIES:
Issuance of common shares through tendering of
debt to exercise warrants....................... $ -- $ -- $ 1,841
Retirement of treasury shares received under
employee stock option plan...................... $ 378 $ 1,044 $ 200
See notes to consolidated financial statements.
21
FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK RETAINED TOTAL
------------------ EARNINGS SHAREHOLDERS'
SHARES AMOUNT (DEFICIT) OTHER EQUITY
--------- ------- --------- ----- -------------
BALANCE--MARCH 31, 1993..... 6,970,294 $43,237 $(13,702) $(168) $29,367
Issuance of common shares
under employee stock
option plan.............. 148,914 925 -- -- 925
Issuance of shares and
amortization of deferred
compensation expense for
shares issued for
services (unearned
portion $148)............ 13,900 67 -- -- 67
Issuance of common shares
for warrants exercised... 323,057 1,841 -- -- 1,841
Purchase and retirement of
treasury shares received
under employee stock
option plan.............. (13,333) (200) -- -- (200)
Income for the period..... -- -- 8,090 -- 8,090
Valuation allowance for
securities available for
sale..................... -- -- -- (362) (362)
Foreign currency
translation adjustment... -- -- -- (25) (25)
--------- ------- -------- ----- -------
BALANCE--MARCH 31, 1994..... 7,442,832 45,870 (5,612) (555) 39,703
Issuance of common shares
under employee stock
option plan.............. 290,611 2,441 -- -- 2,441
Issuance of shares and
amortization of deferred
compensation expense for
shares issued for
services (unearned
portion $269)............ 11,700 119 -- -- 119
Purchase and retirement of
treasury shares received
under employee stock
option plan.............. (34,993) (1,044) -- -- (1,044)
Income for the period..... -- -- 12,411 -- 12,411
Valuation allowance for
securities available for
sale..................... -- -- -- 362 362
Foreign currency
translation adjustment... -- -- -- (19) (19)
--------- ------- -------- ----- -------
BALANCE--MARCH 31, 1995..... 7,710,150 47,386 6,799 (212) 53,973
Issuance of common shares
under employee stock
option plan.............. 154,741 1,427 -- -- 1,427
Issuance of shares and
amortization of deferred
compensation expense for
shares issued for
services (unearned
portion $118)............ (2,150) 114 -- -- 114
Issuance of common shares
for warrants exercised... 7,692 50 -- -- 50
Purchase and retirement of
treasury shares received
under employee stock
option plan.............. (8,718) (378) -- -- (378)
Income for the period..... -- -- 10,366 -- 10,366
Foreign currency
translation adjustment... -- -- -- (14) (14)
--------- ------- -------- ----- -------
BALANCE--MARCH 31, 1996..... 7,861,715 $48,599 $ 17,165 $(226) $65,538
========= ======= ======== ===== =======
See notes to consolidated financial statements.
22
FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. LINE OF BUSINESS
Franklin Electronic Publishers, Incorporated and its wholly-owned
subsidiaries (the "Company") design, develop, and publish electronic reference
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.
Goodwill:
The excess of the cost over the fair value of the net assets of purchased
businesses is recorded as goodwill and amortized on a straight-line basis,
over a 30 year period.
Right of Return and Refurbishing Costs:
The Company initiates special programs with customers to test market
certain products, promotions or market segments. These arrangements normally
require the customer to pay for the merchandise under normal terms. The Company
defers the recognition of certain revenues from these programs.
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 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 costs related to a reduction in
prices is made at such time as the Company determines that a price reduction
will be effective.
23
FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
Software Development Costs:
The Company has capitalized software costs included in Other Assets which
totaled $3,916,000 and $2,905,000, net of accumulated amortization, at March
31, 1996 and 1995, respectively. Software costs capitalized for the fiscal
years ended March 31, 1996, 1995, and 1994 totaled $2,100,000, $1,600,000, and
$1,020,000, respectively.
Amortization included in the accompanying Consolidated Statement of
Operations for fiscal years ended March 31, 1996, 1995, and 1994 was
$1,089,000, $793,000, and $593,000, respectively.
Fair Value of Financial Instruments:
Effective March 31, 1996, the Company adopted Statement of Financial
Accounting Standards No. 107, "Disclosures About Fair Value Financial
Instrument", which requires disclosure of fair value information about
financial instruments whether or not recognized in the balance sheet. 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.
Accounting for Long-Lived Assets:
In March 1995, the Financial Account Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting For The Impairment Of
Long-Lived Assets And For Long-Lived Assets To Be Disposed Of." SFAS No. 121
requires the Company to review long-lived assets and 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. The Company plans to adopt this
policy for measuring the recoverability of its long-lived assets in fiscal
1997.
Income Taxes:
The Company utilizes the liability method of accounting for income taxes as
set forth in FASB 109, Accounting for Income Taxes. Under the liability
method, deferred taxes are determined based on the difference between the
financial statement and tax bases of assets and liabilities using enacted tax
rates in effect in the years in which the differences are expected to reverse.
Earnings Per Share:
Earnings per common share are computed by dividing net income by the
weighted average number of shares outstanding during the period adjusted for
common stock equivalents when such adjustment results in dilution of earnings
per share. The computation assumes that the outstanding stock options and
warrants were exercised and the proceeds used to purchase common shares of the
Company.
Stock Based Compensation:
The Company accounts for stock transactions in accordance with APB Opinion
No. 25, "Accounting For Stock Issued To Employees." In accordance with
Statement of Financial Accounting Standards No. 123, "Accounting For Stock-
Based Compensation," the Company intends to adopt the pro forma disclosure
requirements of Statement No. 123 in fiscal 1997.
3. CASH AND CASH EQUIVALENTS
The Company classifies as cash equivalents highly liquid investments
consisting of money market funds and treasury bills totaling $6,857,000 and
$18,877,000 at March 31, 1996 and 1995, respectively.
24
FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
4. INVENTORIES
Inventories consist of the following (in thousands):
MARCH 31,
---------------
1996 1995
------- -------
Finished products............................................ $23,949 $12,303
Parts........................................................ 10,941 8,613
------- -------
$34,890 $20,916
======= =======
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
MARCH 31,
---------------
1996 1995
------- -------
Land........................................................ $ 497 $ 728
Building and improvements................................... 5,187 620
Construction in progress.................................... -- 3,549
Furniture and equipment..................................... 5,775 3,460
Leasehold improvements...................................... 112 560
Tooling..................................................... 4,288 3,290
Computer software purchased................................. 2,048 1,649
------- -------
17,907 13,856
Accumulated depreciation.................................... 6,895 5,745
------- -------
$11,012 $ 8,111
======= =======
During the year ended March 31, 1996, the Company occupied its new 90,000
square foot corporate headquarters in New Jersey.
During the year ended March 31, 1996, the Company sold its real estate in
Florida. During the year ended March 31, 1995, the Company recorded a $525,000
provision to write down the Florida facility to estimated fair market value and
provide for relocation of the staff to New Jersey.
6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following (in
thousands):
MARCH 31,
---------------
1996 1995
------- -------
Trade accounts payable...................................... $ 8,448 $ 8,122
Accrued payroll, bonus, payroll benefits and taxes.......... 3,730 2,798
Advance payments by customers............................... 623 2,044
Accrued royalties........................................... 1,136 916
Income taxes payable........................................ 1,503 488
Accrued expenses--other..................................... 1,891 2,233
------- -------
$17,331 $16,601
======= =======
25
FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
7. LONG-TERM DEBT
The Company has a Revolving Credit Agreement with a bank which permits
borrowing up to $35,000,000. Repayment on borrowings is due on October 31,
1998. Interest on loan advances is payable at either the bank's prime rate (8
1/4% at March 31, 1996) or 1 1/2% over LIBOR. The Company also pays a
commitment fee of one quarter of one percent per annum on the unused portion
of the line of credit. The line of credit is collateralized by assets of the
Company and requires the Company to maintain minimum working capital levels
and ratios in addition to normal bank covenants. As of March 31, 1996 and
1995, there were no amounts outstanding under this credit agreement.
8. COMMITMENTS
Lease Commitments:
Rent expense under all operating leases was $792,000, $734,000 and $589,000
for the years ended March 31, 1996, 1995, and 1994, respectively. The future
minimum rental payments to be made under noncancellable operating leases,
principally for facilities, as of March 31, 1996, were as follows (in
thousands):
YEARS ENDING MARCH 31,
--------------------------------------------------------------
1997................$567 2000................$318
1998................$570 2001................$315
1999................$406
Royalty Agreements:
The Company acquires the rights to reference works and databases from
various publishers under renewable contracts of varying terms. Royalties are
based on a per unit charge or as a percentage of revenue from products
utilizing such databases.
Employment Agreement and Bonus Plan:
The Company has an employment agreement with its chief executive officer
providing for minimum annual compensation of $550,000 through March 31, 1999.
During the year ended March 31, 1995, the Company modified the employment
agreement to provide for a retirement arrangement. The accumulated retirement
cost plus certain other costs deferred in the prior agreement totaling
$775,000 was charged to income.
The Company maintains a bonus plan approved by the Board of Directors
whereby an aggregate of 8% of the Company's consolidated pretax earnings for
the year are set aside for distribution pursuant to the employment agreement
described above and to employees at the discretion of the Board.
9. 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 three years in order to receive the shares. As of March 31, 1996,
under the Plan, 12,650 shares of common stock were available for distribution
by the Board of Directors.
Employee Stock Options:
The Company's Employee Stock Option Plan authorizes the Company to grant
options to purchase shares of common stock to employees, consultants and
outside directors of the Company.
26
FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
9. SHAREHOLDERS' EQUITY--CONTINUED
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. The Plan terminates no later than April
25, 1998. 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. Shares received by the
Company as payment for options exercised were held by the employees for periods
greater than six months; therefore, no compensation was recorded by the Company.
The shares received by the Company have been retired.
During the fiscal year ended March 31, 1996, under the Plan options to
purchase 234,250 shares at $26.50 to $31.63 were granted to employees and
outside directors of the Company.
The Company offered a $.50 per share discount in November 1993 to induce
the exercise of outstanding stock purchase warrants. Warrants were exercised to
purchase 323,057 shares of common stock during the year.
Options and warrants to purchase 486,679 shares of the Company's common
stock were exercisable at prices ranging from $3.00 to $31.63 at March 31,
1996. Outstanding options expire at various dates through November 2005.
The following table summarizes the changes in options and warrants
outstanding and the related price ranges for shares of the Company's common
stock:
STOCK OPTIONS WARRANTS
------------------------- ---------------------------
SHARES OPTION PRICE SHARES WARRANT PRICE (A)
-------- --------------- -------- -----------------
Outstanding at March 31,
1993................... 729,033 $ 3.00 to 15.25 520,742 $6.50
Granted............... 178,100 12.50 to 16.25 -- --
Exercised............. (148,914) 3.00 to 8.00 (323,057) 6.50
Expired............... (19,743) 5.00 to 15.75 -- --
-------- --------
Outstanding at March 31,
1994................... 738,476 3.00 to 16.25 197,685 6.50
Granted............... 187,200 11.25 to 27.75 -- --
Exercised............. (290,611) 5.00 to 15.75 -- --
Expired............... (1,702) 5.00 to 7.00 -- --
-------- --------
Outstanding at March 31,
1995................... 633,363 3.00 to 27.75 197,685 6.50
Granted............... 234,250 26.50 to 31.63 -- --
Exercised............. (154,741) 3.75 to 19.63 (7,692) 6.50
Expired............... (64,668) 8.00 to 31.38 -- --
-------- --------
Outstanding at March 31,
1996................... 648,204 3.00 to 31.63 189,993 6.50
======== ========
(A) Before the $.50 discount described above.
10. SALE OF INVESTMENT SECURITIES
Due to market conditions, the Company reclassified its preferred stock
investments from securities available for sale to trading securities in the
quarter ended June 30, 1994 and a write down of $416,000 was charged to
income. During the year ended March 31, 1995, the Company liquidated its
portfolio of preferred stock investments.
27
FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
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.
The Company enters into foreign exchange forward contracts with financial
institutions to limit its exposure to loss resulting from the fluctuations in
the currency markets on anticipated cash flows associated with certain firmly
committed transactions. Anticipated transactions comprise sales of the
Company's products in currencies other than the U.S. dollar made primarily
through the Company's subsidiaries. As of March 31, 1996 and 1995, the Company
had approximately $12,200,000 and $14,500,000, respectively, of outstanding
foreign exchange contracts in which foreign currencies were sold. The deferred
gains and losses on such contracts were immaterial at March 31, 1996 and 1995.
The duration of these anticipated hedging transactions generally does not
exceed one year.
Unrealized gains and losses on foreign exchange forward contracts designated
as hedges are deferred and recognized in income in the same period as the
hedged transactions.
12. INCOME TAXES
During the year ended March 31, 1995, the Company determined that the
realization of its net operating loss carryforwards, temporary differences and
tax credit carryforwards was probable and, accordingly, recorded the tax asset
expected to be recovered in future years.
The components of the net deferred tax asset consist of the following (in
thousands):
MARCH 31,
-------------
1996 1995
------ ------
Temporary differences......................................... $1,249 $ 830
Foreign loss carryforwards.................................... 474 192
Tax credit carryforward....................................... -- 600
------ ------
Deferred tax asset............................................ $1,723 $1,622
====== ======
Temporary differences primarily represent non-deductible intercompany profit
eliminations and financial reporting allowances for uncollectibles and other
non-deductible allowances.
Undistributed earnings of affiliates intended to be reinvested indefinitely
were immaterial.
The income tax provision consists of the following (in thousands):
MARCH 31,
---------------------
1996 1995 1994
------ ------- ----
Current
Federal............................................. $5,617 $ 228 $188
State............................................... 838 394 283
------ ------- ----
6,455 622 471
------ ------- ----
Deferred
Federal............................................. 157 (1,292) --
State............................................... 24 (138) --
Foreign............................................. (282) (192) --
------ ------- ----
(101) (1,622) --
------ ------- ----
Provision for income taxes............................ $6,354 $(1,000) $471
====== ======= ====
28
FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
12. INCOME TAXES--CONTINUED
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, 1996 and 1995, and 34% for the year ended March 31, 1994, is as
follows (in thousands):
YEAR ENDED MARCH 31,
-------------------------
1996 1995 1994
------- -------- -------
Income before income taxes....................... $16,720 $ 11,411 $ 8,561
======= ======== =======
Computed expected tax............................ $ 5,852 $ 3,994 $ 2,911
Benefit provided by net operating loss
carryforward.................................... -- (3,994) (2,911)
Provision for alternative minimum tax............ -- 228 188
State tax provision.............................. 502 394 283
Tax benefit of NOL recorded...................... -- (1,622) --
------- -------- -------
Provision for income taxes....................... $ 6,354 $ (1,000) $ 471
======= ======== =======
13. OPERATIONS
The Company and its foreign operations are grouped under two geographic
areas, Europe and North America. Operating profit (loss) is net revenue less
operating costs and expenses pertaining to specific geographic areas. Products
sold by the U.S. company to the subsidiaries are accounted for based on
established sales prices between the related companies. Identifiable assets
are those assets used in the geographic area.
For the years ended March 31, 1996 and 1995, the Company's foreign
operations in Europe generated sales of $22,074,000 and $16,117,000 and
operating losses of $971,000 and $222,000, respectively. Their identifiable
assets were $15,270,000 and $9,285,000 as of March 31, 1996 and 1995,
respectively. Sales in North America and other geographic locations totaled
$78,749,000 and $67,156,000 and operating profits of $17,222,000 and
$11,553,000, respectively, for the years ended March 31, 1996 and 1995. Their
identifiable assets totaled $66,923,000 and $61,289,000 for the years ended
March 31, 1996 and 1995, respectively.
For the year ended March 31, 1994, sales by the Company's international
subsidiaries and export sales to unaffiliated customers in international
markets represented 14% of total sales. Export sales were 6% and 8% of the
Company's sales for the years ended March 31, 1996 and 1995, respectively.
One customer represented approximately 10% and 11% of sales for the fiscal
years ended March 31, 1995 and 1994, respectively. During fiscal 1996, no
customer accounted for more than 10% of the Company's revenues.
29
FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
14. SUMMARIZED QUARTERLY FINANCIAL DATA (UNAUDITED)
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
QUARTER ENDED
-----------------------------------------
JUNE 30 SEPTEMBER 30 DECEMBER 31 MARCH 31
------- ------------ ----------- --------
1996
- --------------------------------------
Net sales............................. $18,619 $27,077 $34,451 $20,676
Gross profit.......................... 8,261 12,468 16,702 9,726
Net income............................ 1,408 3,246 4,168 1,544
Net income per share:
Primary............................. 0.17 0.39 0.50 0.19
Fully diluted....................... 0.17 0.39 0.50 0.19
1995
- --------------------------------------
Net sales............................. $15,125 $21,258 $29,194 $17,696
Gross profit.......................... 6,850 9,088 13,023 7,567
Net income............................ 1,629 3,589 5,113 2,080
Net income per share:
Primary............................. 0.21 0.46 0.64 0.25
Fully diluted....................... 0.21 0.46 0.63 0.25
Pro forma net income
Net income.......................... $ 1,003 $ 2,355 $ 3,355 $ 1,426
Net income per share:
Primary........................... 0.13 0.30 0.42 0.17
Fully diluted..................... 0.13 0.30 0.42 0.17
1994
- --------------------------------------
Net sales............................. $14,646 $18,429 $20,220 $12,854
Gross profit.......................... 5,898 7,132 9,170 5,495
Net income............................ 1,262 2,255 3,495 1,078
Net income per share:
Primary............................. 0.16 0.30 0.46 0.14
Fully diluted....................... 0.16 0.30 0.46 0.14
Pro forma net income
Net income.......................... $ 828 $ 1,479 $ 2,293 $ 708
Net income per share:
Primary........................... 0.11 0.20 0.30 0.09
Fully diluted..................... 0.11 0.20 0.30 0.09
30
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE--NONE
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 1996 annual meeting of
shareholders (the "1996 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 1996 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 1996 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 1996 Proxy Statement, which is
incorporated herein by this reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
The Company did not file any reports on Form 8-K during the fourth quarter
of the fiscal year ended March 31, 1996.
Financial statements and schedules filed as a part of this report are
listed on the "Index to Financial Statements" at page 17 herein.
31
EXHIBITS
EXHIBIT NO. PAGE
----------- ----
3.01 --Certificate of Incorporation of Franklin (Incorporated by
reference to Exhibit 3.01 to the Company's 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 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)
3.05 --Amendment to By-laws of Franklin (Incorporated by
reference to Exhibit 3.05 to the Company's 1990 10-K)
3.06 --Amendment to By-laws of Franklin (Incorporated by
reference to Exhibit 3.06 to the Company's 1991 report on
Form 10-K for the year ended March 31, 1991
4.01 --Third Amended and Restated Credit Agreement and Amended
and Restated Pledge and Security Agreement, both dated as
of September 26, 1994, among Franklin and certain of its
subsidiaries and Chemical Bank (Incorporated by reference
to Exhibit 4.0 to the Company's 1995 report on Form 10-K
for the year ended March 31, 1995 (the "Company's 1995 10-
K")).
10.01** --Employment Agreement, dated as of April 1, 1994, between
Franklin and Morton E. David (Incorporated by reference to
Exhibit 10.01 to the Company's 1995 10-K).
10.02 --Standard form of Sales Representative Agreement
(Incorporated by reference to Exhibit 10.07 to the
Company's 1986 S-1 Registration Statement)
10.03** --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)
10.04** --Franklin Stock Option Plan as Amended and Restated
effective as of July 27, 1995 (Incorporated by reference
to the Company's Proxy Statement relating to the 1995
Annual Meeting of Shareholders)
11 --Statement regarding computation of per share earnings
21 --Subsidiaries of the Registrant
23 --Consent of independent auditors
- --------
** Management contract or compensatory plan or arrangement required to be
filed as an exhibit pursuant to Item 14(c) of this report.
32
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
/S/ Morton E. David
Dated: June 7, 1996 By: _________________________________
Morton E. David 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.
SIGNATURE AND TITLE DATE
------------------- ----
June 7, 1996
/s/ Morton E. David
- -------------------------------------
Morton E. David
Chairman, President, Chief Executive
Officer and Director
/s/ Edward H. Cohen June 7, 1996
- -------------------------------------
Edward H. Cohen
Director
/s/ Bernard Goldstein June 7, 1996
- -------------------------------------
Bernard Goldstein
Director
/s/ Leonard M. Lodish June 7, 1996
- -------------------------------------
Leonard M. Lodish
Director
/s/ Howard L. Morgan June 7, 1996
- -------------------------------------
Howard L. Morgan
Director
/s/ Jerry R. Schubel June 7, 1996
- -------------------------------------
Jerry R. Schubel
Director
/s/ James H. Simons June 7, 1996
- -------------------------------------
James H. Simons
Director
- -------------------------------------
Richard E. Snyder
Director
/s/ Michael R. Strange June 7, 1996
- -------------------------------------
Michael R. Strange
Director
/s/ William H. Turner June 7, 1996
- -------------------------------------
William H. Turner
Director
/s/ Kenneth H. Lind June 7, 1996
- -------------------------------------
Kenneth H. Lind
Vice President, Finance (Principal
Financial and Accounting Officer)
33