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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter ended September 30, 2002 Commission File No. 0-14841
FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED
(Exact name of Registrant as specified in its charter)
Pennsylvania 22-2476703
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Franklin Plaza, Burlington, New Jersey 08016-4907
(Address of principal executive office)
Registrant's telephone number (609) 386-2500
Indicate by check mark whether Registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that Registrant was required
to file such reports) and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No ___
---
COMMON STOCK OUTSTANDING AS OF
SEPTEMBER 30, 2002 - 7,946,782 SHARES
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
September 30, March 31,
2002 2002
--------------- ----------------
(Unaudited) (Audited)
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 4,544 $ 2,497
Accounts receivable, less allowance for doubtful accounts of $1,227 and $1,112 13,728 6,932
Inventories 15,582 11,107
Income tax receivable - 809
Prepaids and other assets 2,068 2,354
--------------- ----------------
TOTAL CURRENT ASSETS 35,922 23,699
--------------- ----------------
PROPERTY AND EQUIPMENT 6,786 6,988
--------------- ----------------
OTHER ASSETS:
Deferred income tax asset 5,700 5,700
Trademark and goodwill 3,796 3,796
Advance royalties and licenses 606 580
Software development costs 2,278 2,583
Other assets 3,893 3,956
--------------- ----------------
TOTAL OTHER ASSETS 16,273 16,615
--------------- ----------------
TOTAL ASSETS $ 58,981 $ 47,302
=============== ================
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 15,966 $ 11,409
Current portion of long-term liabilities - Other 35 35
--------------- ----------------
TOTAL CURRENT LIABILITIES 16,001 11,444
--------------- ----------------
LONG-TERM LIABILITIES:
Revolving credit facility 14,381 10,138
Other liabilities 1,403 1,412
--------------- ----------------
TOTAL LONG-TERM LIABILITIES 15,784 11,550
--------------- ----------------
SHAREHOLDERS' EQUITY:
Preferred stock, $2.50 par value, authorized 10,000,000 shares, 3,955 and
3,767 issued and outstanding ($3,955 and $3,767 liquidation value) 3,933 3,745
Common stock, no par value, authorized 50,000,000 shares, issued
and outstanding, 7,946,782 and 7,946,882 shares 50,022 49,978
Retained earnings (deficit) (25,727) (28,255)
Foreign currency translation adjustment (1,032) (1,160)
--------------- ----------------
TOTAL SHAREHOLDERS' EQUITY 27,196 24,308
--------------- ----------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 58,981 $ 47,302
=============== ================
See notes to consolidated financial statements.
2
FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except for per share data)
(unaudited)
Three Months Ended Six Months Ended
September 30, September 30,
-------------------------- ---------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
SALES $ 21,054 $ 18,714 $ 37,571 $ 34,723
COST OF SALES 11,401 12,085 20,671 21,577
WRITE-DOWN ON EBOOKMAN INVENTORY - 2,898 - 2,898
----------- ----------- ----------- -----------
TOTAL COST OF SALES 11,401 14,983 20,671 24,475
----------- ----------- ----------- -----------
GROSS MARGIN 9,653 3,731 16,900 10,248
----------- ----------- ----------- -----------
EXPENSES:
Sales and marketing 4,691 5,912 8,797 11,048
Research and development 714 1,151 1,543 2,258
General and administrative 1,820 1,818 3,412 3,549
----------- ----------- ----------- -----------
Total operating expenses 7,225 8,881 13,752 16,855
----------- ----------- ----------- -----------
OPERATING INCOME (LOSS) 2,428 (5,150) 3,148 (6,607)
Interest expense (227) (441) (403) (815)
Interest and investment income 223 (197) (185) (160)
Other, net 135 (87) 156 (250)
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES 2,559 (5,875) 2,716 (7,832)
INCOME TAX PROVISION (BENEFIT) - - - -
----------- ----------- ----------- -----------
NET INCOME (LOSS) 2,559 (5,875) 2,716 (7,832)
----------- ----------- ----------- -----------
PREFERRED STOCK DIVIDEND - - 188 88
NET INCOME (LOSS) APPLICABLE TO
COMMON SHAREHOLDERS $ 2,559 $ (5,875) $ 2,528 $ (7,920)
=========== =========== =========== ===========
NET INCOME (LOSS) PER COMMON SHARE:
Basic $ 0.32 $ (0.74) $ 0.32 $ (1.00)
=========== =========== =========== ===========
Diluted $ 0.32 $ (0.74) $ 0.32 $ (1.00)
=========== =========== =========== ===========
WEIGHTED AVERAGE COMMON SHARES:
Basic 7,947 7,948 7,947 7,951
=========== =========== =========== ===========
Diluted 7,958 7,948 8,007 7,951
=========== =========== =========== ===========
See notes to consolidated financial statements.
3
FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(in thousands, except for share data)
Preferred Accumulated
Common Stock Stock Other Total
------------------ -------------- Retained Comprehensive Shareholders'
Shares Amount Shares Amount Earnings Income * Equity
--------- ------- ------ ------ --------- ------------- -------------
BALANCE - MARCH 31, 2002 7,946,882 $49,978 3,767 $3,745 $(28,255) $ (1,160) $ 24,308
Issuance of shares and amortization of deferred
compensation expense for shares issued for service (100) 3 - - - - 3
Value of stock options granted - 41 41
Preferred stock dividend 188 188 (188) -
Income for the period - - - - 2,716 - 2,716
Foreign currency translation adjustment - - - - - 128 128
--------- ------- ------ ------ --------- ------------- -------------
BALANCE - SEPTEMBER 30, 2002 (unaudited) 7,946,782 $50,022 3,955 $3,933 $ (25,727) $ (1,032) $ 27,196
========= ======= ====== ====== ========= ============= =============
* Comprehensive income, i.e., net income (loss), plus, or less, the change in
foreign currency balance sheet translation adjustments, totaled $2,844 for the
six months ended September 30, 2002.
See notes to consolidated financial statements.
4
FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(unaudited)
Six Months Ended
September 30,
---------------------------
2002 2001
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME (LOSS) $ 2,716 $ (7,832)
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
Depreciation and amortization 1,671 3,020
Provision for losses on accounts receivable 132 59
Loss (gain) on disposal of property and equipment 3 (75)
Provisions for eBookMan inventory, assets and obligations - 4,201
Stock issued for services 45 223
Source (use) of cash from change in operating assets and liabilities:
Accounts receivable (6,928) (1,047)
Inventories (4,477) (6,594)
Prepaids and other assets 1,095 212
Accounts payable and accrued expenses 4,557 3,970
Other, net (42) (15)
---------- -----------
NET CASH USED IN OPERATING ACTIVITIES (1,228) (3,878)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (345) (590)
Proceeds from sale of property and equipment 3 254
Software development costs (366) (830)
Change in other assets (379) (2,140)
---------- -----------
NET CASH USED IN INVESTING ACTIVITIES (1,087) (3,306)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving credit facility 4,243 3,042
Proceeds from issuance of preferred shares - 3,478
Other liabilities (9) 375
---------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 4,234 6,895
EFFECT OF EXCHANGE RATE CHANGES ON CASH 128 401
---------- -----------
INCREASE IN CASH AND CASH EQUIVALENTS 2,047 112
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,497 2,835
---------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,544 $ 2,947
========== ===========
See notes to consolidated financial statements.
5
FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Reference is made to the financial statements included in the Company's Annual
Report (Form 10-K) filed with the Securities and Exchange Commission for the
year ended March 31, 2002.
The financial statements for the periods ended September 30, 2002 and 2001 are
unaudited and include all adjustments necessary to a fair presentation of the
results of operations for the periods then ended. All such adjustments are of a
normal recurring nature. The results of the Company's operations for any interim
period are not necessarily indicative of the results of the Company's operations
for a full year.
OPERATIONS
Under FAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information", the Company's operations are treated as one operating segment as
it only reports profit and loss information on an aggregate basis to the chief
operating decision maker of the Company. Information about the Company's product
sales are as follows (in thousands):
Three Months Ended Six Months Ended
--------------------------------------------------------------------------------
September 30, September 30,
--------------------------------------------------------------------------------
Product Sales 2002 2001 2002 2001
--------------------------------------------------- -----------------------------------------------------------
Reference $18,075 $ 15,469 $32,039 $ 27,092
Rolodex 1,960 4,156 3,869 6,098
eBookMan 663 (1,121) 853 1,078
Other 356 210 810 455
-------------------------------------------------- ---------------- --------------- -----------------
Total Sales $21,054 $ 18,714 $37,571 $ 34,723
================================================== ================ =============== =================
Approximate foreign sources of revenues including export sales were as follows
(in thousands):
Three Months Ended Six Months Ended
-------------------------------------------------------------------------------
September 30, September 30,
------------------------------------------------------------------------------
Product Sales 2002 2001 2002 2001
------------------------------------------- ----------------------------------------------------------
Europe $2,779 $3,922 $5,710 $7,858
Other 1,481 1,851 2,491 2,945
International
For the three-month period ended September 30, 2002 two customers accounted for
more than 10% of the Company's sales. The two customers had sales of
approximately $2,558 and $3,182. The sales of $2,558 were comprised of
reference, Rolodex Electronics and eBookMan products while the sales of $3,182
were exclusively reference products. For the three-month period ended September
30, 2001 one customer had sales of more than 10% of the Company's sales. This
customer had sales of $1,910 consisting entirely of reference products.
6
FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
OPERATIONS (continued)
For the six-month period ended September 30, 2002 two customers accounted for
more than 10% of the Company's sales. The two customers had sales of
approximately $4,092 and $3,851. The sales of $4,092 were comprised of reference
and Rolodex Electronics products while the sales of $3,851 were exclusively
reference products. For the six months ended September 30, 2001 no customer
accounted for more than 10% of the Company's revenues.
TRADEMARK AND GOODWILL
The Company adopted SFAS No.142, "Goodwill and Other Intangible Assets," at the
beginning of April 2002 for all goodwill and other intangible assets recognized
in the Company's statement of financial position. This standard changes the
accounting for goodwill from an amortization method to an impairment-only
approach, and introduces a new model for determining impairment charges.
Upon initial application of SFAS No. 142, the trademark and goodwill are deemed
to have an indefinite useful life because they are expected to generate cash
flows indefinitely. Thus, the Company ceased amortizing the trademark and
goodwill on April 1, 2002.
The net income, earning-per-shares and the amortization expenses of the Company
for the period of initial application and prior period are as follows:
Three Months Ended Six Months Ended
September 30, September 30,
-------------------------------- --------------------------------
2002 2001 2002 2001
------------------------------------- --------------- ------------- -------------- --------------
Reported net income (loss) $2,559 $(5,875) $2,716 $(7,832)
Add back:
Goodwill amortization - 29 61
Trademark amortization - 97 194
--------------- ------------- -------------- --------------
Adjusted net income (loss) $2,559 $(5,749) $2,716 $(7,577)
=============== ============= ============== ==============
Basic earnings per share:
Reported net income (loss) $ 0.32 $ (0.74) $ 0.34 $ (0.99)
Goodwill amortization - .01
Trademark amortization .01 .02
Adjusted net income (loss) $ 0.32 $ (0.72) $ 0.34 $ (0.95)
Diluted earnings per share:
Reported net income loss) $ 0.32 $ (0.74) $ 0.34 $ (0.99)
Goodwill amortization - .01
Trademark amortization .01 .02
Adjusted net income (loss) $ 0.32 $ (0.72) $ 0.34 $ (0.95)
7
FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
SALE OF VOICE POWERED TECNOLOGY
In August 2002 the Company sold its approximately 82% interest in Voice Powered
Technology International, Inc. to Belle Group, Ltd. for $100 in cash. A gain of
$100 was recorded on the sale and is included in Other, net on the statement of
operations.
EBOOKMAN PROVISIONS
During the quarter ended September 30, 2001 the Company recorded provisions
totaling $4,201 to reduce the carrying value of its eBookMan inventory and
certain related assets and provide for price protection related to the eBookMan
product.
RECENT ACCOUNTING PRONOUNCEMENTS
During the year 2001 SFAS No. 143, "Accounting for Asset Retirement Obligations"
and SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets," were issued. SFAS No. 143 related to obligations which generally are
incurred in connection with the ownership of real property. SFAS No. 144
superseded SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of," and the accounting and reporting
provisions of Accounting Principles Board Opinion No.30, "Reporting the Results
of Operations and Transactions," "Reporting the Effects of Disposal of a Segment
of a Business," and "Extraordinary, Unusual and Infrequently Occurring Events
and Transactions" for the disposal of a segment of a business. SFAS No. 144 also
amended Accounting Research Bulletin No. 51, "Consolidated Financial
Statements," to eliminate the exception to consolidation for a subsidiary for
which control is likely to be temporary. The Company believes the adoption of
these standards will have no material impact on its financial condition, results
of operations or cash flows.
In April 2002, SFAS No. 145 was issued. This Statement rescinds SFAS No. 4,
"Reporting Gains and Losses from Extinguishment of Debt," and an amendment of
that Statement, SFAS No. 64, "Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements." This Statement also rescinds SFAS No. 44,
"Accounting for Intangible Assets of Motor Carriers." This Statement amends SFAS
No. 13, "Accounting for Leases," to eliminate an inconsistency between the
required accounting for sale-leaseback transactions and the required accounting
for certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. This Statement also amends other existing
authoritative pronouncements. The Company does not expect this Statement to have
any material impact on its financial statements.
In July 2002, SFAS No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities" was issued effective January 1, 2003. SFAS No. 146 replaces
current accounting literature and requires the recognition of costs associated
with exit or disposal activities when they are incurred rather than at the date
of a commitment to an exit or disposal plan. The Company does not believe the
adoption of SFAS No. 146 will have a material effect on the Company's financial
statements.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior period's financial
statements to conform to the current period presentation. These
reclassifications had no effect on previously reported results of operations or
retained earnings.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (in thousands)
RESULTS OF OPERATIONS
Three months ended September 30, 2002 compared with three months ended September
30, 2001:
Net Sales
Sales of $21,054 for the quarter ended September 30, 2002, increased by $2,340
(13%) from sales of $18,714 for the same quarter in the prior year. The increase
is primarily attributable to higher sales of $1,447 of reference product to U.S.
consumers, revenue of $1,573 from the extension of a 3-year software licensing
agreement, and eBookMan sales of $663 which were $1,784 higher than last year's
eBookMan sales of $(1,121). These increases were partially offset by lower sales
of Rolodex Electronic organizers which decreased by $1,053 in the U.S., $907 in
Europe and $219 in other foreign subsidiaries.
Gross Margin
Gross margin increased to $9,653, or 46% of sales, from $3,731, or 20% of sales
in the prior year primarily because of the inclusion last year of provisions of
$4,016 (21%) for price protection and the write-down of eBookMan inventory, the
margin in the current period of $1,377 (88%) on the contract extension of
$1,573, and a more favorable sales mix in the current year with higher margin
reference products comprising 89% of core business sales compared with 79% last
year. The more favorable sales mix this year resulted in approximately $500 of
additional margin.
Operating Expenses
Current and prior year operating expenses have been restated to reflect the
allocation of certain MIS and administrative expenses to various operating
groups. This restatement had no net effect on the Company's reported net income
or loss for any period.
Total operating expenses decreased by $1,656 to $7,225 from $8,881 last year.
Sales and marketing expense decreased by $1,221 to $4,691 (or 22% of sales) from
$5,912 (or 32% of sales) primarily because of a reduction of $1,583 of expenses
for the eBookMan product line offset by increased salaries of $158, market
research expense of $121, and increased postage and freight of $138 in the
current year. Research and development expense declined by $437 from $1,151 (or
6% of sales) to $714 (or 3% of sales). The decrease resulted from the
discontinuance of any current year research and development expenditures
relating to the eBookMan product line which amounted to $698 in the prior year
offset by increased salary costs of $211. General and administrative expense was
relatively unchanged at $1,820 (or 9% of sales) compared with $1,818 (or 10% of
sales) in the prior year. Within this category a decline of $305 in compensation
expense and consulting fees was offset by an increase of $120 in depreciation
primarily relating to the Company's new enterprise resource system, and higher
legal fees of $426 reduced by a payment of $350 received to settle a patent
infringement claim.
Interest Expense
Interest expense declined to $227 in the current period from $441 last year
because of a reduction in rates paid as all of the Company's borrowings in the
current period were under its secured financing facility with an average rate of
6% while $10,404 of prior year debt consisted of Senior Notes with a rate of
12-1/2%.
Interest and Investment Income/Other, net
Interest and investment income and other, net combined for a gain of $358 for
the quarter ended September 30, 2002 compared with a loss of $284 in the same
period last year. The increase is primarily the result of interest of $234
received in the quarter on a prior year tax refund, a gain of $100 recognized on
the sale of the Company's
9
approximately 82% interest in Voice Powered Technology, Inc and losses of $227
in the prior year from the Company's hedging program of selling Euros at current
rates for future settlement in order to protect the dollar value of sales
generated by foreign subsidiaries.
Net Income
The Company reported net income of $2,559 in the current period compared with a
net loss of $5,875 in the prior year. The increase in net income resulted
primarily from the absence in the current year of losses pertaining to eBookMan
operations and inventory write-downs of $6,987 and the inclusion in the current
year of software licensing margin of $1,377.
Six months ended September 30, 2002 compared with six months ended September 30,
2001:
Net Sales
Sales of $37,571 for the six-month period ended September 30, 2002 were $2,848,
or 8% higher than sales of $34,723 in the prior year period. The increased sales
are attributable to higher sales of reference products to US consumers of
$3,655, revenue of $1,573 from the extension of a three-year software licensing
agreement and higher sales (OEM) of products produced to customer specifications
of $669. These gains were partially offset by reduced reference sales in Europe
of $593 and lower sales of Rolodex Electronics organizers which decreased by
$984 to US consumers, $1,077 in Europe and $135 in other foreign subsidiaries.
Gross Margin
Gross margin increased to $16,900, or 45% of sales, from $10,248, or 30% of
sales last year mainly because of the inclusion last year of an inventory
write-down and provisions for price protection and returns aggregating $4,016
(12% of sales) for the eBookMan product line. The current year gross margin
benefited from the extension of a three-year software licensing agreement that
had a margin of $1,377, or 88%, as well as a more favorable sales mix, with
higher margin reference products comprising 89% of sales in the current year
compared with 81% of sales last year. The more favorable sales mix this year
resulted in approximately $600 of additional margin.
Operating Expenses
Current and prior year operating expenses have been restated to reflect the
allocation of certain MIS and administrative expenses to various operating
groups. This restatement had no net effect on the Company's reported net income
or loss for any period.
Total operating expenses decreased by $3,103 to $13,752 from $16,855 in the
prior period. Sales and marketing expense decreased by $2,251 to $8,797 (or 23%
of sales) from $11,048 (or 32% of sales) last year. The decrease is attributable
to the elimination of $2,827 of expenses of the eBookMan product line, offset in
part by higher freight costs of $332 and higher market development expense of
$370 in the current year. Research and development costs declined by $715 to
$1,543 (or 4% of sales) from $2,258 (or 7% of sales) in the prior year. The
decrease resulted from the discontinuance of all research and development
expenditures relating to the eBookMan product line which amounted to $1,016 in
the prior year, partially offset by higher personnel costs of $306 in the
current year. General administrative expense declined slightly to $3,412 (or 9%
of sales) from $3,549 (or 10% of sales) last year. The decrease is a result of
reduced compensation costs of $523 and the receipt of a payment of $350 to
settle a patent infringement claim offset in part by higher bad debt provisions
of $132 and increased legal fees of $433.
Interest Expense
Interest expense decreased to $403 from $815 in the same period last year
because of a reduction in rates paid as all of the Company's borrowings in the
current period were under its secured financing facility with an average rate of
6% while $10,404 of prior year debt consisted of Senior Notes with a rate of
12-1/2%.
10
Interest and Investment Income/Other, net
Interest and investment income and other, net combined for a loss of $29 for the
six months ended September 30, 2002 compared with a loss of $410 in the same
period last year. Increased losses of $229 on the Company's hedging program were
more than offset by interest income of $234 received on a prior year tax refund
and a gain of $100 recognized on the sale of the Company's approximately 82%
interest in Voice Powered Technology, Inc., and reduced losses of $330 on the
repatriation of funds from the Company's foreign subsidiaries. The Company
maintains a program of selling Euros at current rates for future settlement in
order to protect the dollar value of sales generated by foreign subsidiaries.
The loss realized on the program is offset by higher of revenues in dollars from
European sales.
Net Income
The Company reported net income of $2,716 in the current period compared with a
net loss of $7,832 in the prior year. The increase in net income resulted
primarily from the absence in the current year of losses pertaining to eBookMan
operations and inventory write-downs of $8,291, the inclusion in the current
year of software licensing margin of $1,377 and reduced interest expense of
$412.
Changes in Financial Condition
Accounts receivable increased by $6,796 to $13,728 on September 30, 2002 from
$6,932 on March 31 primarily because of an increase in sales of $6,140 during
August and September 2002 compared with February and March 2002. Inventory
increased by $4,475 to $15,582 in anticipation of higher sales in the seasonally
active December quarter. The increases in accounts receivable and inventory are
offset by an increase of $4,557 in accounts payable and $4,243 in the revolving
credit facility relating to the seasonal increase in purchases during September
quarter.
Liquidity and Capital Resources
The Company has a $25,000 secured financing facility with a commercial lender
which expires on December 7, 2004. Borrowings under the revolving credit
facility bear interest at the bank's prime rate (4.75% at September 30, 2002)
plus 3/4% and the real property and equipment advances under the facility in the
amount of $4,037 bear interest at the rate of prime plus 1 1/2 %. The facility
contains certain financial covenants and restrictions on indebtedness, dividend
payments, business combinations and other related items. As of September 30,
2002 no amounts were available for payment of dividends. Borrowings are
collateralized by substantially all assets of the Company. As of September 30,
2002 the Company had an outstanding balance of $14,381 under the facility and is
in compliance with all covenants.
Management believes that cash flow from operations and the secured financing
facility will be adequate to provide for the Company's liquidity and capital
needs for the foreseeable future.
The Company has no material commitments for capital expenditures in the next
twenty-four months.
Except for the historical information contained herein, the matters discussed
throughout this report, including, but not limited to, those that are stated as
the Company's belief or expectation or preceded by the word "should" are forward
looking statements that involve risks to and uncertainties in the Company's
business, including, among other things, the timely availability and acceptance
of new electronic books and organizers, changes in technology, the impact of
competitive electronic products, the management of inventories, the Company's
dependence on third party component suppliers and manufacturers, including those
that provide Company-specific parts, and other risks and uncertainties that may
be detailed from time to time in the Company's reports filed with the Securities
and Exchange Commission.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
The principal executive officer and principal financial officer have evaluated
the disclosure controls and procedures as of a date within 90 days before the
filing date of this quarterly report. Based on this evaluation, they conclude
that the disclosure controls and procedures effectively ensure that information
required to be disclosed in the Company's filings and submissions under the
Exchange Act is recorded, processed, summarized, and reported within the time
periods specified in the Securities and Exchange Commission's rules and forms.
11
(b) Changes in internal controls.
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect these controls subsequent to the
evaluation of the internal controls, including any corrective actions with
regard to significant deficiencies and material weaknesses.
PART II
ITEM 1. LEGAL PROCEEDINGS
In October 2002 the Company was notified of a third party claim in
Belgium against its local operating subsidiary relating to the sale of
certain products incorporating medical databases. The claimant asks for
injunctive relief and damages approximating 2.8 million euros. The
Company disputes the allegations of the claim and intends vigorously to
defend any action related thereto.
In October 2002, Franklin announced a settlement agreement and a patent
cross licensing agreement with Seiko Instruments, Inc. Group ("the
Group"). Franklin had filed for arbitration of disputes under certain
patent licenses previously granted by Franklin to the Group. Under the
settlement agreement, Franklin agreed to withdraw its arbitrable claims
and to release all other claims, including certain patent claims.
Franklin has received $350,000 from the Group. The parties
contemporaneously entered into a cross license agreement on their
respective U.S. patent portfolios in the field of electronic reference
products.
In April 2002, LeapFrog Enterprises, Inc. of Emeryville, California
filed an action for declaratory judgment of non-infringement of the
Company's United States Patent entitled "Word Spelling and Definition
Educational Device." Franklin's patent, issued in 1993, covers
electronic language skills teaching aid machines and systems to aid in
the teaching of language skills, such as the Company's Homework Wiz(R)
products. The Company believes that LeapFrog's filing for declaratory
judgment will have no adverse financial effect on Franklin. In April
2002, the Company filed a patent infringement claim against LeapFrog
alleging that Leapfrog's products infringe on the Company's patent. In
July 2002 the Company filed a complaint with the United States
International Trade Commission asking for an investigation and a
permanent general exclusion order against the importation into the
United States of certain LeapFrog products. In August 2002 the
Commission voted to institute an investigation into whether certain
products of LeapFrog violate Franklin's patent rights. In November
2002, Franklin filed a motion for leave to withdraw and termination of
the investigation. In the case in which the motion is granted, the
Company's patent infringement counterclaims against LeapFrog remain
pending in federal district court.
The Company is subject to litigation from time to time in the ordinary
course of its business. The Company does not believe that any such
litigation is likely, individually or in the aggregate, to have a
material adverse effect on the financial condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
The Annual Meeting of Shareholders of the Company was held on August 2,
2002. Reference is made to the Company's Proxy Statement furnished to
shareholders in connection with the solicitation of proxies in
connection with that Annual Meeting. In connection with the annual
election of directors, eight incumbent directors were re-elected with
Edward H. Cohen receiving 7,202,701 votes with 54,822 votes withheld;
Barry Lipsky receiving 7,193,801 with 63,722 votes withheld; Leonard M.
Lodish and Jerry R. Schubel each receiving 7,195,101 votes with 62,422
votes withheld; Howard L. Morgan receiving 7,199,901 votes with 57,622
votes withheld; James Meister and James H. Simons each receiving
7,202,901votes with 54,622 votes withheld; and William H. Turner
receiving 7,202,401 votes with 55,122 votes withheld. Shareholders
ratified the appointment of Radin, Glass & Co. as auditors for the
Company's 2003 fiscal year by vote of 7,210,875 in favor, 42,198 votes
against, and 4,450 abstentions.
12
ITEM 5. OTHER INFORMATION -
ROLODEX(R) is a registered trademark of Berol Corporation, a subsidiary
of Newell Rubbermaid, Inc. Rocket eBook(TM) is a trademark of
NuvoMedia, Inc.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K -
EXHIBITS NO.
3.01 -- Certificate of Incorporation of the Company (Incorporated by
reference to Exhibit 3.01 to Registration Statement on Form S-1,
File No. 3-6612 (the "Company's 1986 S-1 Registration Statement"))
3.02 -- Articles of Amendment to the Certificate of Incorporation of the
Company (Incorporated by reference to Exhibit 3.02 to the Company's
1990 report on Form 10-K for the year ended March 31, 1990 (the
"Company's 1990 10-K"))
3.03 -- Amended and Restated Statement of Rights and Preferences of Series
A 10% Convertible Preferred Stock (Incorporated by reference to the
Exhibit to the Company's Report on Form 8-K filed May 23, 2001)
3.04 -- By-laws of the Company (Incorporated by reference to Exhibit 3.02
to the Company's 1986 S-1 Registration Statement)
3.05 -- Amendment to By-laws of the Company (Incorporated by reference to
Exhibit A to the Company's Proxy Statement relating to the 1987
Annual Meeting of Shareholders)
3.06 -- Amendment to By-laws of the Company (Incorporated by reference to
Exhibit 3.05 to the Company's 1990 10-K)
99.1+ -- Certificate pursuant to 18 U.S.C. Section 1350 as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
On September 13, 2002 the Company filed a Report on Form 8-K relating to the
extension by the Company's Proximity Technology division of its licensing
agreement with Adobe Systems, Inc.
________________________________
+ Filed herewith
13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, Registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
FRANKLIN ELECTRONIC PUBLISHERS,
INCORPORATED
Registrant
November 14, 2002 /s/ Barry J. Lipsky
- ----------------- -------------------------------
Date Barry J. Lipsky, President and
Chief Executive Officer
(Duly Authorized Officer)
November 14, 2002 /s/ Arnold D. Levitt
- ----------------- -------------------------------
Date Arnold D. Levitt, Senior Vice
President, Chief Financial
Officer, and Treasurer
(Principal Financial and
Accounting Officer)
14
CERTIFICATION
I, Barry J. Lipsky, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Franklin Electronic
Publishers, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements and other financial
information included in this quarterly report fairly present in all material
respects the financial condition, results of operations, and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"), and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002 /s/ Barry J. Lipsky
--------------------------------------
Barry J. Lipsky, President and
Chief Executive Officer
(Duly Authorized Officer)
15
CERTIFICATION
I, Arnold D. Levitt, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Franklin Electronic
Publishers, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements and other financial
information included in this quarterly report fairly present in all material
respects the financial condition, results of operations, and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"), and
c) Presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002 /s/ Arnold D. Levitt
---------------------------------------
Arnold D. Levitt, Senior Vice President
Chief Financial Officer, and Treasurer
(Principal Financial and Accounting
Officer)
16