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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED
MARCH 31, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD
FROM TO
COMMISSION FILE NUMBER 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
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
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.
As of June 13, 1997, approximately 8,069,000 shares of common stock of the
registrant were outstanding and the aggregate market value of common stock
held by non-affiliates was approximately $66,630,000.
The registrant's Proxy Statement for its 1997 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, 1997
ITEMS IN FORM 10-K
PAGE
----
PART I
Item 1. BUSINESS...................................................... 1
Item 2. PROPERTIES.................................................... 12
Item 3. LEGAL PROCEEDINGS............................................. 12
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........... 12
EXECUTIVE OFFICERS OF THE REGISTRANT.......................... 13
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS...................................................... 14
Item 6. SELECTED FINANCIAL DATA....................................... 15
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.................................... 16
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................... 20
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE..................................... 36
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............ 36
Item 11. EXECUTIVE COMPENSATION........................................ 36
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................... 36
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................ 36
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K..................................................... 36
Signatures.............................................................. 38
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 fifteen 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), educational publications and medical publications (such as the
Physicians' Desk Reference). The Company has recently begun to sell a line of
personal information management electronic products, such as databanks and
organizers, under its recently licensed ROLODEX(R) Electronics trademark.
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.
In October 1996, the Company acquired certain assets of the ROLODEX(R)
Electronics product line and the associated trademark license for
approximately $16 million in cash from Insilco Corporation ("Insilco"). Under
the license, the Company acquired the right to build and market certain
electronic products under the ROLODEX(R) Electronics mark, including
databanks, organizers and telephones.
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. The
Company has licensed from publishers the electronic
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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, Liris
Interactive, the wholly-owned multimedia publisher of the French publishing
conglomerate CEP Communications ("Liris"), Bertelsmann Lexicon Verlag
("Bertelsmann"), the Columbia University Press, Harper/Collins Publishers Ltd.
("Harper/Collins"), Little, Brown and Co., Inc., McGraw-Hill, Inc., Merriam-
Webster, Inc. ("Merriam-Webster"), the Oxford University Press and Simon &
Schuster Consumer Group. The Company recently acquired exclusive rights to the
trademark ROLODEX(R) Electronics for the sale of electronic products, such as
databanks, organizers, and telephones. The Company believes that the
ROLODEX(R) mark commands a high degree of brand recognition among consumers in
the United States.
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
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. As the chart below shows, the cost of IC-ROM has
decreased steadily over the time that electronic books have been produced,
allowing the Company the ability to bring down the price of its electronic
books over time.
[GRAPH APPEARS HERE]
Retail Price of Franklin Dictionary vs. Cost of I C ROM
Calendar Years 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
Cost of 1 Megabyte of Memory 48.00 24.00 19.90 19.90 8.40 7.12 5.66 4.06 3.79 2.77 2.16
Retail Price of Franklin Dictionary 299.00 299.00 279.00 249.00 149.00 99.00 79.00 69.00 49.00 49.00 39.00
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 number of variations
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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.
The combination of cost reduction and decreasing IC-ROM prices has allowed the
Company to better compete with print versions of reference publications over
the years that electronic books have been produced.
New Rolodex(R) Electronics Products
In 1997, Franklin began to ship its new line of organizers and databanks
sold under the exclusive ROLODEX(R) Electronics brand name. The ROLODEX(R)
Electronics product line is expected to include low priced databanks, which
allow users to store and retrieve names and telephone numbers, and higher
priced and more advanced personal organizers that can interface with desktop
PC's and be expanded with BOOKMAN cartridges.
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, including
commercial and technical books and proprietary publications commissioned by
third parties.
Brand Name Recognition and Reputation for Quality
The Company believes that the proprietary BOOKMAN trademark and exclusive
ROLODEX(R) Electronics mark provide advantages in the highly competitive
domestic market for electronic reference books and personal information
management products.
The Company's electronic 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 for 1993
and 1994 and the French Sippa d'Or Trophy for 1995 and 1996. The Company
received the 1996 Transatlantic Entrepreneurial Business Award from the
British-American Chamber of Commerce. The award recognizes Franklin's
achievements in promoting trade between the United States and United Kingdom.
The Company believes that the exclusive ROLODEX(R) Electronics mark provides
an advantage in the highly competitive domestic market for personal
information management products.
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 intends to use television
advertising campaigns on cable networks and on spot TV, as well as a print
advertising campaign, using a nationally recognized spokesperson in the near
term.
Product Expansion
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
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special markets, including educational, medical and industrial markets. A
substantial portion of the Company's 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. The Company partnered with Starfish Software to develop
that company's Sidekick(R) (organizer) application for use on a BOOKMAN unit.
The acquisition of the ROLODEX(R) Electronics product line is expected to
enable Franklin to offer a broader range of hand-held electronic products,
which is expected to influence retailers to grant Franklin expanded shelf
space. The Company believes that not only does the hand-held organizer market
complement its existing businesses, but also that the potential exists for
increasing the market share for the ROLODEX(R) Electronics business given
Franklin's existing competitive strengths, such as reputation for quality and
breadth of domestic distribution, as well as the high brand awareness of the
ROLODEX(R) name in the domestic marketplace.
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 initiated sales through its
Mexican and Colombian subsidiaries in the past fiscal year and has recently
commenced direct operations through a subsidiary in Italy. The Company is in
the process of acquiring its former sales and marketing distribution company
in the Benelux countries to sell its existing line of Dutch and French
products, as well as new electronic books targeted for the Low Countries. The
Company recently signed a joint venture agreement with Kinpo Electronics, a
Taiwanese manufacturer of electronic products, to develop and sell Chinese/
English products in Asia and the rest of the world. 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
education markets. Franklin has successfully produced electronic books on an
OEM basis for third parties.
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.
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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.
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(R) line") 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 in the Spelling Ace line 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 have been 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(R) 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 text into sound) which allows the Company's products to
pronounce, in computer generated speech, relevant words contained in the
various databases. The Company also has developed and sold 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/Italian 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
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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 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 sells electronic versions of a Spanish language
Bible, the Reina Valera edition, and a German language Bible that is commonly
known as the Luther Bible.
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 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 has produced an electronic formulary for HIP/Rutgers Health Plan
and intends to develop additional products for the managed health care
business based on the model of that formulary. An electronic formulary offers
physicians in a particular healthcare group instant access to drug information
and disease management algorithms specific to that group in a hand-held unit.
The Company has begun shipping a line of BOOKMAN products for use by nurses
in the United States. The keystone of this line is a BOOKMAN platform having
the popular Nursing Diagnoses and Classifications published by the North
American Nursing Diagnosis Association, a reference text that classifies and
defines medical conditions specific to nursing. The Company is currently
shipping a BOOKMAN card containing Nursing '97 Drug Handbook published by
Springhouse Corp. Other nursing publications under license to the Company are
in development for BOOKMAN cards.
The Company has developed products for the expanding consumer market for
medical information by publishing general medical books in the BOOKMAN format.
The Company publishes the Parents' Emergency Medical Guide and the PDR Family
Guide to Prescription Drugs.
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 1996 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.
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, and
Parker's Wine Guide, an authoritative guide to wines and vineyards.
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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,
particularly 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. Franklin has also 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. In February
1997, Liris executed an exclusive omnibus agreement with Franklin, by which
the parties will jointly develop, publish, and distribute French titles in
hand-held electronic platforms and ROM cards. Liris publishes dictionaries,
thesauruses, encyclopedias and other works under the following well known
French trademarks: Le Robert, Larousse, Nathan, Dalloz, Masson and Bouquins.
The Company entered into a joint venture agreement in May 1997 with Kinpo
Electronics, a manufacturer of electronic products in Taiwan, to develop,
manufacture and sell hand-held electronic Chinese (all dialects) monolingual,
bilingual, and multilingual reference products for China, Taiwan, Hong Kong,
and other worldwide markets. The Company believes that it will derive a
greater portion of its revenues from international sales in fiscal 1998 and
beyond than in prior years.
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 produces Speak English!(TM), 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 speaks
into a microphone built into the electronic book, which records and plays 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. The Chinese/English
product to be produced under joint venture is intended to be sold into the
worldwide ESL market of native Chinese speakers.
Personal Information Management Products
In 1996, Franklin launched the BOOKMAN Sidekick Palmtop Organizer line,
products developed under license from Starfish Software, Inc. ("Starfish").
Sidekick(R) is a best selling personal organizer software package for use in
desktop or laptop personal computers. This BOOKMAN organizer is sold with a
connectivity package that includes a diskette-based software program that
allows the user to upload and download data between the BOOKMAN platform and
an application program running on a desktop personal computer. In 1997, the
Company began to sell this line of organizers under the ROLODEX(R) Electronics
trademark.
The Company believes that not only does the hand-held organizer market
complement its existing businesses but also that there is potential to improve
the market share of the ROLODEX(R) Electronics business given Franklin's
existing competitive strengths. The ROLODEX(R) Electronics product line
includes low priced
7
databanks, which allow users to store and retrieve names and telephone
numbers, and higher priced and more advanced personal organizers that can
interface with desktop PC's and be expanded with BOOKMAN cartridges.
Speech Recognition Products
In May 1997, the Company acquired certain rights in speech recognition
technology from Voice Powered Technology International, Inc. The acquired
technology was developed for low cost, low power consumption, portable and
compact applications in which an electronic device is controlled by spoken
voice input. The technology is speaker-dependent in that a device utilizing
the technology must be trained to recognize the speech pattern of the person
controlling the device. The technology is not language dependent and
consequently can be used in products targeted to be sold throughout the
Company's chain of international sales and marketing subsidiaries and
independent distributors. Initially, the Company intends to sell in the United
States and in Europe a line of voice-controlled electronic organizers under
its ROLODEX(R) Electronics brand name utilizing the acquired technology.
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.
RESEARCH AND DEVELOPMENT
The Company has a group of approximately 100 persons that performs research
and development relating to new electronic books and personal information
management products as well as improvements to existing books and products.
The group also conducts ongoing research in connection with the development of
new software for the Company's books and products, specifically 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 platforms and ROM cards 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 has expertise in and
has licensed rights to certain text-to-speech technology ("TTS"), which allows
for the synthesis of audible voice through software. With the recent
acquisition of speech recognition technology from VPTI, the Company is
consolidating its efforts in speech-related technology into a research and
development group targeted toward application of TTS, compressed digitally-
recorded speech, voice recognition, and voice recording for use in a panoply
of small,
8
low priced, electronic products, including electronic books and personal
information management products.
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 1997, 1996 and 1995, the Company spent approximately $5.5
million, $5.5 million and $5.2 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, Taiwan, 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 quality control
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 inspection, quality control, packaging,
warehousing, and repair operations 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.
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 or by visiting
the Company's website at "http://www.franklin.com."
The Company sells through several large retail chains, including Radio
Shack, Wal-Mart, K-mart, Service Merchandise, Office Max and Staples.
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.
9
The Company indirectly benefits from general market awareness of the databases
incorporated in its books. In the 1998 fiscal year, the Company expects to
conduct a television advertising campaign for its BOOKMAN line in order to
expand brand awareness in the domestic consumer marketplace.
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 37%, 30% and 28% of the Company's sales during fiscal
1997, 1996 and 1995 respectively. Franklin's subsidiary in the United Kingdom
markets and distributes British English versions of its books in the United
Kingdom. The Company's subsidiaries in France, Canada, Germany, and Australia,
market and distribute the Company's books, including new books developed for
these markets. In 1996, the Company commenced operations in Mexico and
Colombia, and has recently begun wholly-owned subsidiary sales in Italy. In
each of these countries, the Company marketed its products through
distributors prior to direct marketing through subsidiaries. The Company
entered into a joint venture agreement in May 1997 with Kinpo Electronics, a
manufacturer of electronic products in Taiwan, to develop, manufacture and
sell hand-held electronic Chinese (all dialects) monolingual, bilingual, and
multilingual reference products for China, Taiwan, Hong Kong, and other
worldwide markets.
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.
The Company is shipping a line of BOOKMAN products targeted for use by
nurses in the United States, and is producing products for the consumer market
for medical information such as the Parents' Emergency Medical Guide and 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.
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 was the first custom publication undertaken by the Company in the
medical arena. The Company continues to pursue opportunities for custom
versions of its products.
10
PATENTS, TRADEMARKS AND COPYRIGHTS
The Company owns more than twenty-five 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)",
"Next Century(R)" and "Language Master" and has an exclusive license for the
mark ROLODEX(R) Electronics 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 competitors are Lexibook
and EuroTronics, which market French monolingual spelling correctors,
thesauruses and dictionaries in France, and Hexaglot which markets German
centric bilinguals and translators in Germany.
A number of prominent electronics manufacturers, including Sharp Electronics
Corporation, Casio, Apple Computer, Inc., Royal, Psion, U.S. Robotics, LG
Electronics 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 and personal
information management functions.
Competitive factors for electronic books 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.
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.
The Company is entering the highly competitive worldwide marketplace for
personal information management products in which its competition will be,
among others, Sharp Electronics Corporation, Casio, Royal, Psion, U.S.
Robotics, and Hewlett-Packard Company. Many competitors in this market have
greater capital, research and development, marketing and distribution
resources than the Company and there can be no assurance that the Company can
successfully compete in this market.
11
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 2%
to 3% of total revenues in recent years.
EMPLOYEES
As of June 13, 1997, the Company employed approximately 270 persons in the
United States, approximately 23 persons in Asia, and approximately 65 persons
in international sales and marketing subsidiaries. None of the Company's
employees is represented by a union. The Company believes its relations with
its employees are satisfactory.
- --------
Merriam-Webster's is a trademark 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.; Sidekick is a trademark of Starfish Software, Inc.; and
ROLODEX(R) is a registered trademark of Sterling Plastics Co., a division of
Newell Co.
Except for the historical information contained herein, the matters
discussed in this report are forward looking statements that involve risks to
and uncertainties in Franklin's business, including, among other things, the
timely availability and acceptance of new electronic books and personal
information management products, changes in technology, the impact of
competitive electronic products, the management of inventories and growth, the
company's dependence on third party component suppliers and manufacturers,
including those that provide Franklin-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 2. PROPERTIES
In 1996, the Company 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
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 of the Company. The declaratory
judgment action filed in April 1995 by Berkeley Speech Technologies against
the Company in connection with one of Franklin's registered copyrights was
resolved in April 1997 by way of a cross licensing arrangement between the
parties related to that copyright and a stipulated dismissal with prejudice of
all claims as ordered by the United States District Court for the Northern
District of California.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS--NONE
12
EXECUTIVE OFFICERS OF THE REGISTRANT
NAME AGE POSITION
---- --- --------
Morton E. David 60 Chairman of the Board and Co-Chief Executive Officer;
Director
William H. Turner 57 President and Co-Chief Executive Officer; Director
Michael Kemp 50 Managing Director, Franklin Europe
Kenneth H. Lind 44 Vice President, Finance, and Treasurer
Barry J. Lipsky 46 Vice President, Manufacturing
Michael R. Strange 49 Executive Vice President; Director
Toni M. Tracy 48 Vice President, Publisher Relations
Gregory J. Winsky 47 Senior Vice President
Mr. David joined the Company in May 1984 as Chairman of the Board of
Directors and Chief Executive Officer. Mr. David became Co-Chief Executive
Officer upon Mr. Turner's joining the Company on October 1, 1996. 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. Turner has been President and Co-Chief Executive Officer of the Company
since October 1, 1996. Prior to joining the Company, he was Vice Chairman of
The Chase Manhattan Bank. For more than the prior thirty years, Mr. Turner
held a variety of positions at Chemical Banking Corporation prior to its
merger with Chase Manhattan Bank. Mr. Turner is a director of Standard Motor
Products, Inc. and The Park Avenue Bank, N.A.
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 to 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. In September 1996, Ms. Tracy was named
President of the Medical Division. 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.
13
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 as reported by the NYSE for the last two
fiscal years:
SALES
---------------
QUARTER ENDED HIGH LOW
------------- ------- -------
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
June 30, 1996................................................ $28 3/4 $20
September 30, 1996........................................... 20 1/8 12 5/8
December 31, 1996............................................ 14 1/2 11 3/8
March 31, 1997............................................... 13 3/8 11 3/8
The approximate number of holders of record of the common stock as of May
28, 1997 was 1,180.
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.
14
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,
---------------------------------------------
1997 1996 1995 1994 1993
-------- -------- ------- ------- -------
STATEMENT OF OPERATIONS DATA
Sales.......................... $ 88,650 $100,823 $83,273 $66,149 $65,383
Cost of Sales ................. 46,074 53,666 46,745 38,454 39,323
-------- -------- ------- ------- -------
Gross Profit .................. 42,576 47,157 36,528 27,695 26,060
-------- -------- ------- ------- -------
Expenses:
Sales and marketing.......... 17,621 17,237 12,822 10,075 10,464
Research and development..... 5,472 5,544 5,190 4,167 3,370
General and administrative... 8,534 8,125 7,185 4,905 4,264
Interest expense............. 775 36 12 442 653
Interest and investment
income....................... (560) (505) (92) (455) (226)
-------- -------- ------- ------- -------
Total expenses............. 31,842 30,437 25,117 19,134 18,525
-------- -------- ------- ------- -------
Income Before Income Taxes..... 10,734 16,720 11,411 8,561 7,535
Income Tax (Benefit) Provision. 4,079 6,354 (1,000) 471 393
-------- -------- ------- ------- -------
Net Income..................... $ 6,655 $ 10,366 $12,411 $ 8,090 $ 7,142
======== ======== ======= ======= =======
Net Income Per Share
Primary...................... $ .82 $ 1.25 $ 1.56 $ 1.06 $ .94
======== ======== ======= ======= =======
Fully diluted ............... $ .82 $ 1.25 $ 1.52 $ 1.06 $ .92
======== ======== ======= ======= =======
Pro Forma Net Income (1)
Net Income .................. $ 6,655 $ 10,366 $ 7,075 $ 5,308 $ 4,672
======== ======== ======= ======= =======
Net Income Per Share
Primary...................... $ .82 $ 1.25 $ .89 $ .69 $ .62
======== ======== ======= ======= =======
Fully diluted................ $ .82 $ 1.25 $ .87 $ .69 $ .60
======== ======== ======= ======= =======
Weighted Average Common Shares
and Common Equivalents:
Primary...................... 8,123 8,281 7,974 7,661 7,563
======== ======== ======= ======= =======
Fully diluted................ 8,124 8,284 8,154 7,662 7,747
======== ======== ======= ======= =======
AT MARCH 31,
---------------------------------------------
1997 1996 1995 1994 1993
-------- -------- ------- ------- -------
BALANCE SHEET DATA
Working Capital................ $ 77,796 $ 45,824 $38,839 $30,032 $24,190
Total Assets .................. 131,055 82,869 70,574 49,673 39,002
Long-term Debt................. 44,518 653 -- -- 3,157
Shareholders' Equity........... 73,603 65,538 53,973 39,703 29,367
- --------
(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.
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
After five consecutive years of sales increases culminating in substantial
increases in both domestic and international sales for fiscal 1995 and 1996,
the Company's revenues declined in fiscal 1997 as the domestic market for
small consumer electronics stagnated. The Company's domestic consumer sales
decreased by 21.8% in the current fiscal year. International growth slowed in
the 1997 fiscal year and only offset in part the domestic decline.
International sales growth over the period was due to the Company's increased
marketing efforts abroad, primarily in the United Kingdom, France and Canada,
and the opening of new sales and marketing wholly-owned subsidiaries in
Germany, Mexico, Colombia, and Australia.
During the last three years, the Company benefitted from improvement in the
price/performance of IC-ROM chips. Because IC-ROM chips are a significant part
of the cost of Franklin electronic books, declining semiconductor prices
allowed the Company to lower product prices significantly. Another factor
enabling the Company to reduce its electronic book prices has been the
Company's continued commitment to cost reduction. Management believes that
lower prices, in turn, led to marked increases in domestic sales in both unit
and dollar terms and the introduction of new titles and platforms contributed
significantly to the Company's sales growth during the fiscal 1995 and 1996
and ameliorated the fiscal 1997 decline.
The Company expects sales growth in the immediate future to be driven
primarily by the sale of personal information management products to be
produced under the recently licensed ROLODEX(R) Electronics trademark. Because
the consumer brand awareness of the ROLODEX(R) mark is not as strong in
international markets as in the United States, sales of personal information
management products are expected to increase sales in the United States and
reverse the recent trend in which Company-wide sales growth has been
attributed primarily to international sales growth. Additional sales growth
would be expected from domestic marketing initiatives geared toward increasing
brand awareness for BOOKMAN products and to increasing international sales
expected to be based in part on the opening of new markets by establishing
additional wholly-owned sales and marketing subsidiaries in other countries.
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 electronic publishing sales
should increase as a percentage of total electronic publishing sales.
Over the last three fiscal years, the Company's gross profit 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), and the introduction of new products which command higher
gross margins. The Company expects that its gross margins will be negatively
impacted by sales of personal information management products, which, not
having licensed content found in the Company's electronic books, traditionally
command lower margins in the highly competitive worldwide market for
electronic databanks and organizers. Any improvements in gross margins in the
future would need be driven by significant shifts in the Company's revenue mix
toward the more profitable IC-ROM cartridges for its BOOKMAN products.
Operating expenses as a percentage of sales remained relatively constant
over fiscal 1995 and 1996, but in fiscal 1997 such expenses increased,
primarily because sales decreased. The Company expects its research and
development expenses to remain relatively constant in the near term. The
recent 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 and to product introductions
in the ROLODEX(R) Electronics line of personal information management
products. The Company anticipates that, as it furthers its strategy of
popularizing BOOKMAN units by advertising and expanding its shelf space with
the ROLODEX(R) Electronics line, its sales and marketing expenses, as a
percentage of sales, will continue to increase.
16
Prior to the 1995 fiscal year, the Company's effective tax rate was minimal
due to the realization of net operating loss carryforwards. During the year
ended March 31, 1995, the Company recognized its remaining federal tax
benefits applicable to future years as the Company believed that at that time
it was probable that such benefits would be utilized. In subsequent fiscal
years, the Company reported its earnings on a fully taxed basis. 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
year 1995 would have been on a fully taxed basis at an assumed tax rate of
38%.
RESULTS OF OPERATIONS
The following table summarizes the Company's historical results of
operations as a percentage of sales for fiscal 1997, 1996, and 1995:
(DOLLARS IN THOUSANDS)
YEAR ENDED MARCH 31,
--------------------------
1997 1996 1995
------- -------- -------
SALES:
Domestic Sales.................................... $56,072 $ 70,220 $59,597
International Sales .............................. 32,578 30,603 23,676
------- -------- -------
Total Sales ........................................ $88,650 $100,823 $83,273
======= ======== =======
AS A PERCENTAGE OF TOTAL SALES:
Domestic Sales.................................... 63.3% 69.6% 71.6%
International Sales .............................. 36.7 30.4 28.4
------- -------- -------
Total Sales ...................................... 100.0% 100.0% 100.0%
Cost of Sales .................................... 52.0 53.2 56.1
------- -------- -------
Gross Profit ..................................... 48.0 46.8 43.9
------- -------- -------
Expenses:
Sales and marketing ............................ 19.9 17.1 15.4
Research and development ....................... 6.2 5.5 6.2
General and administrative...................... 9.6 8.1 8.6
Interest expense................................ .8 * *
Interest and investment income.................. (.6) (.5) (.1)
------- -------- -------
Total expenses ................................ 35.9 30.2 30.2
------- -------- -------
Income Before Income Taxes........................ 12.1 16.6 13.7
Income Tax (Benefit) Provision ................... 4.6 6.3 ( 1.2)
------- -------- -------
Net Income........................................ 7.5% 10.3% 14.9%
======= ======== =======
Pro Forma Net Income (1).......................... 7.5% 10.3% 8.5%
======= ======== =======
- --------
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.
* less than 0.1%
Year Ended March 31, 1997 compared with Year Ended March 31, 1996
Sales of $88.7 million for the year ended March 31, 1997 were 12.1% lower
than sales of $100.8 million one year earlier. The sales decrease is
attributable to lower sales of electronic books in the domestic consumer
market offset in part mainly by increases in sales outside of the United
States and secondarily by the Company's sales of personal information
management products in the ROLODEX(R) Electronics line. While international
17
sales increased 6.5% from year-to-year, this increase was less than in prior
years and international growth slowed in the last quarter of the 1997 fiscal
year. Because the consumer brand awareness of the ROLODEX(R) mark is not as
strong in international markets as in the United States, sales of personal
information management products are expected to increase sales in the United
States and reverse the recent trend in which Company-wide sales growth has
been attributed primarily to international sales growth. Foreign currency
fluctuations did not have a significant effect on the Company's results of
operations from year to year. Royalties from technology licensees were
approximately 2% of sales, down from 3% of sales last year.
Decreased sales primarily contributed to the decrease in gross profits from
$47.2 million in fiscal 1996 to $42.6 million in fiscal 1997. Gross profit
margins increased from 46.8% to 48.0% from year to year.
Total expenses increased to $31.8 million in the current year as compared
with $30.4 million last year. Sales and marketing expenses increased slightly
from $17.2 million (17.1% of sales) in fiscal 1996 to $17.6 million (19.9% of
sales) in fiscal 1997 as advertising increases were offset in part by
decreases in variable expenses linked to sales volume. Research and
development expenses were level over the two years at $5.5 million (5.5% of
sales in the prior year as compared with 6.2% of sales in the most recent
year). General and administrative expenses increased from $8.1 million (8.1%
of sales) in fiscal 1996 to $8.5 million (9.6% of sales) in fiscal 1997
primarily because of increased expenses of international subsidiaries, both
those newly organized and those continuing in their operations. Interest
expense increased from year to year as the Company drew down $16,000,000 from
its credit facility in October 1996 to finance the ROLODEX(R) Electronics
acquisition.
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 product 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 expenses
increased from $7.2 million (8.6% of sales) in fiscal 1995 to $8.1 million
(8.1% of sales) 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.
INFLATION AND CURRENCY TRANSACTIONS
Inflation has had no significant effect on the operations of the Company for
the three years ended March 31, 1997. 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 are comprised primarily of sales of the Company's products in
currencies other than U.S. dollars made through the Company's subsidiaries. As
of March 31, 1997 and 1996, the Company had approximately $15.9 million and
$12.2 million,
18
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, 1997 and 1996. Such hedging has had no significant
effect on the operations of the Company for the three years ended March 31,
1997. 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 revenues and
earnings fluctuations.
The following table sets forth unaudited net sales for each of the Company's
last twelve fiscal quarters:
QUARTER ENDED QUARTER ENDED QUARTER ENDED QUARTER ENDED
JUNE 30 SEPTEMBER 30 DECEMBER 31 MARCH 31
------------- ------------- ------------- -------------
Fiscal 1997............. $15,071 $24,231 $31,986 $17,362
Fiscal 1996............. 18,619 27,077 34,451 20,676
Fiscal 1995............. 15,125 21,258 29,194 17,696
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of liquidity during the two years ended March
31, 1996 was cash flow from operations. On March 27, 1997, the Company
completed the issuance to insurance companies in a private placement
transaction of $40,000,000 in aggregate principal amount of 7.71% senior notes
and contemporaneously entered into a new $20,000,000 revolving credit
agreement with the Chase Manhattan Bank ("Chase") and Summit Bank ("Summit").
Management believes that the proceeds of the senior note offering, cash flow
from operations, and the new revolving 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,
prior to the issuance of the senior notes, the Company financed its day to day
operations by drawing down advances, on an as needed basis, against its then
existing credit facility with Chase. On October 4, 1996, the Company drew down
approximately $16,000,000 under that facility in order to purchase from
Insilco certain assets and a trademark license relating to the ROLODEX(R)
Electronics business, which drawdown increased the Company's borrowings under
that facility to approximately $19,000,000 at the beginning of its third
fiscal quarter. The Company subsequently paid off such borrowings in full and,
at March 31, 1997, there were no borrowings under the new revolving line of
credit with Chase and Summit.
Borrowings against the new line of credit bear interest at the bank's prime
rate or 1% 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. In June 1996, the Company obtained a
loan of $4.3 million secured by a mortgage on its new corporate headquarters.
The Company has no material commitments for capital expenditures in the next
twenty-four months.
19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
PAGE
----
INDEPENDENT AUDITOR'S REPORT............................................... 21
CONSOLIDATED STATEMENT OF OPERATIONS
Years ended March 31, 1997, 1996 and 1995................................. 22
CONSOLIDATED BALANCE SHEETS
March 31, 1997 and 1996................................................... 23
CONSOLIDATED STATEMENT OF CASH FLOWS
Years ended March 31, 1997, 1996 and 1995................................. 24
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Years ended March 31, 1997, 1996 and 1995................................. 25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended March 31, 1997, 1996 and 1995................................. 26
20
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, 1997 and March 31,
1996 and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the three years ended March 31, 1997. 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, 1997 and March 31,
1996, and the results of its operations and cash flows for each of the three
years ended March 31, 1997 in conformity with generally accepted accounting
principles.
FELDMAN RADIN & CO., P.C.
Certified Public Accountants
New York, New York
May 16, 1997
21
FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
YEAR ENDED MARCH 31,
-----------------------------
1997 1996 1995
-------- --------- --------
SALES.......................................... $ 88,650 $ 100,823 $ 83,273
COST OF SALES.................................. 46,074 53,666 46,745
-------- --------- --------
GROSS PROFIT................................... 42,576 47,157 36,528
-------- --------- --------
EXPENSES:
Sales and marketing.......................... 17,621 17,237 12,822
Research and development..................... 5,472 5,544 5,190
General and administrative................... 8,534 8,125 7,185
Interest expense............................. 775 36 12
Interest and investment income............... (560) (505) (92)
-------- --------- --------
Total expenses............................. 31,842 30,437 25,117
-------- --------- --------
INCOME BEFORE INCOME TAXES..................... 10,734 16,720 11,411
INCOME TAX (BENEFIT) PROVISION................. 4,079 6,354 (1,000)
-------- --------- --------
NET INCOME..................................... $ 6,655 $ 10,366 $ 12,411
======== ========= ========
NET INCOME PER SHARE:
Primary...................................... $ .82 $ 1.25 $ 1.56
======== ========= ========
Fully diluted................................ $ .82 $ 1.25 $ 1.52
======== ========= ========
WEIGHTED AVERAGE COMMON SHARES AND COMMON
EQUIVALENTS:
Primary...................................... 8,123 8,281 7,974
======== ========= ========
Fully diluted................................ 8,124 8,284 8,154
======== ========= ========
See notes to consolidated financial statements.
22
FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
MARCH 31,
------------------
1997 1996
-------- --------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents (Note 3)....................... $ 45,040 $ 10,827
Accounts receivable, less allowance for doubtful accounts
of $839 and $867......................................... 9,806 12,114
Inventories (Note 4)..................................... 30,617 34,890
Deferred income tax asset ............................... 2,122 1,723
Prepaids and other assets................................ 3,145 2,948
-------- --------
TOTAL CURRENT ASSETS..................................... 90,730 62,502
-------- --------
PROPERTY AND EQUIPMENT (Note 5)............................ 11,211 11,012
TRADEMARK, less accumulated amortization of $194 (Note 9).. 15,353 --
OTHER ASSETS............................................... 13,761 9,355
-------- --------
TOTAL ASSETS............................................... $131,055 $ 82,869
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES :
Accounts payable and accrued expenses (Note 6)........... $ 12,650 $ 16,678
Current portion of mortgage note payable................. 284 --
-------- --------
TOTAL CURRENT LIABILITIES ............................... 12,934 16,678
-------- --------
LONG-TERM LIABILITIES (Note 7)............................. 44,518 653
-------- --------
SHAREHOLDERS' EQUITY: (Note 11)
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 8,060,133 and 7,861,715 shares... 50,235 48,599
Retained earnings........................................ 23,820 17,165
Foreign currency translation adjustment (Note 12)........ (452) (226)
-------- --------
TOTAL SHAREHOLDERS' EQUITY............................... 73,603 65,538
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY................. $131,055 $ 82,869
======== ========
See notes to consolidated financial statements.
23
FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED MARCH 31,
-------------------------
1997 1996 1995
------- ------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME........................................ $ 6,655 $10,366 $12,411
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Depreciation and amortization................... 4,909 3,790 2,748
Provision for losses on accounts receivable..... 83 51 318
Loss on disposal of property and equipment...... 13 96 --
Write down of fixed assets...................... -- -- 350
Loss on sales of investment securities, net..... -- -- 101
Revaluation of investment securities to market.. -- -- 416
Deferred income tax benefit..................... (399) (101) (1,622)
Source (use) of cash from change in operating
assets and liabilities:
Accounts receivable........................... 2,905 (2,239) (2,127)
Inventories................................... 5,177 (13,974) (6,022)
Prepaids and other assets..................... (116) (990) (583)
Accounts payable and accrued expenses......... (4,298) 77 6,631
------- ------- -------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES....................................... 14,929 (2,924) 12,621
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments (net) in investment securities...... -- -- 4,449
Purchase of property and equipment.............. (2,671) (5,624) (6,784)
Proceeds from sale of property and equipment.... 107 471 --
Change in other assets.......................... (5,908) (3,852) (1,658)
Acquisition of Systech GmbH, net of cash
acquired....................................... (171) -- --
Acquisition of Rolodex(R) Electronics........... (17,355) -- --
------- ------- -------
NET CASH USED IN INVESTING ACTIVITIES............. (25,998) (9,005) (3,993)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Notes................. 40,000 -- --
Proceeds from mortgage.......................... 4,260 -- --
Principal payments of mortgage.................. (213) -- --
Other liabilities............................... 103 653 --
Proceeds from issuance of common shares and
warrants....................................... 162 1,099 1,397
Income tax credit-stock options................. 1,196 -- --
------- ------- -------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES....................................... 45,508 1,752 1,397
EFFECT OF EXCHANGE RATE CHANGES ON CASH............. (226) (14) (19)
------- ------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.... 34,213 (10,191) 10,006
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD.... 10,827 21,018 11,012
------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.......... $45,040 $10,827 $21,018
======= ======= =======
SUPPLEMENTAL DATA:
Cash paid during the year:
Income taxes.................................... $ 3,472 $ 5,152 $ 288
Interest........................................ $ 741 $ 36 $ 13
SCHEDULE OF NON-CASH FINANCING ACTIVITIES:
Retirement of treasury shares received under
employee stock option plan and warrants
exercised........................................ $ 1,582 $ 378 $ 1,044
Issuance of common shares related to acquisition
of Systech GmbH.................................. $ 152 $ -- $ --
See notes to consolidated financial statements.
24
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, 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
Issuance of common shares
under employee stock
option plan.............. 43,121 509 -- -- 509
Issuance of shares and
amortization of deferred
compensation expense for
shares issued for
services (unearned
portion $290)............ 27,150 126 -- -- 126
Issuance of common shares
for warrants exercised... 189,993 1,235 -- -- 1,235
Issuance of common shares
related to acquisition of
Systech GmbH............. 6,748 152 -- -- 152
Purchase and retirement of
treasury shares received
under employee stock
option plan and warrants
exercised................ (68,594) (1,582) -- -- (1,582)
Income tax credit--stock
options................... -- 1,196 -- -- 1,196
Income for the period..... -- -- 6,655 -- 6,655
Foreign currency
translation adjustment.... -- -- -- (226) (226)
--------- ------- ------- ----- -------
BALANCE--MARCH 31, 1997..... 8,060,133 $50,235 $23,820 $(452) $73,603
========= ======= ======= ===== =======
See notes to consolidated financial statements.
25
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 until such time as the
revenue recognition requirements of Statement of Financial Accounting Standard
(SFAS) No. 48, "Revenue Recognition when Right of Return Exists", are met.
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 or is reasonably anticipated.
26
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 $4,981,000 and $3,916,000, net of accumulated amortization, at March
31, 1997 and 1996, respectively. The capitalization of such costs and the
related amortization is in accordance with SFAS No. 86. Software costs, which
are capitalized after technological feasibility is established, totaled
$2,440,000, $2,100,000, and $1,600,000 for the fiscal years ended March 31,
1997, 1996 and 1995, respectively.
Amortization included in the accompanying Consolidated Statement of
Operations for fiscal years ended March 31, 1997, 1996 and 1995 was
$1,375,000, $1,089,000, and $793,000, respectively.
Advertising Costs:
Advertising costs are expensed as incurred except for direct response
advertising, the costs of which are deferred and amortized over the period the
related sales are recorded.
Fair Value of Financial Instruments:
Effective March 31, 1996, the Company adopted SFAS No. 107, "Disclosures
About Fair Value of Financial Instruments", that 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. The carrying
amount of the Company's borrowings under the Notes approximates fair value.
Accounting for Long-Lived Assets:
The Company reviews long-lived assets, 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. At March 31, 1997, the Company believes that there has
been no impairment of its long-lived assets.
Income Taxes:
The Company utilizes the liability method of accounting for income taxes as
set forth in SFAS 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.
Under SFAS No. 128, "Earnings per Share", the disclosure of Primary Earnings
per Share, giving effect to common stock equivalents, would no longer be
presented. For the two years ended March 31, 1997 and 1996, earnings per share
under the new Standard would be $.83 and $1.33, respectively.
Stock Based Compensation:
The Company accounts for stock transactions in accordance with APB Opinion
No. 25, "Accounting For Stock Issued To Employees." Accordingly, no
compensation is recorded on the issuance of employee stock options at fair
market value.
27
FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
3. CASH AND CASH EQUIVALENTS
The Company classifies as cash equivalents highly liquid investments with
maturities of less than ninety days totaling $42,537,000 and $6,857,000 at
March 31, 1997 and 1996, respectively. At March 31, 1997, assets of
$21,500,000 were invested in certificates of deposit at Chase Manhattan Bank
and $9,675,000 in corporate commercial paper.
4. INVENTORIES
Inventories consist of the following (in thousands):
MARCH 31,
---------------
1997 1996
------- -------
Finished products........................................... $25,698 $23,949
Parts....................................................... 4,919 10,941
------- -------
$30,617 $34,890
======= =======
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
MARCH 31,
---------------
1997 1996
------- -------
Land....................................................... $ 497 $ 497
Building and improvements.................................. 5,434 5,299
Furniture and equipment.................................... 6,562 5,775
Tooling.................................................... 5,327 4,288
Computer software purchased................................ 2,894 2,048
------- -------
20,714 17,907
Accumulated depreciation................................... 9,503 6,895
------- -------
$11,211 $11,012
======= =======
6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following (in
thousands):
MARCH 31,
---------------
1997 1996
------- -------
Trade accounts payable..................................... $ 4,496 $ 8,448
Accrued payroll, bonus, payroll benefits and taxes......... 2,955 3,077
Accrued royalties.......................................... 1,031 1,136
Accrued advertising........................................ 961 649
Advance payments by customers.............................. 656 623
Income taxes payable....................................... 1,296 1,503
Accrued expenses-other..................................... 1,255 1,242
------- -------
$12,650 $16,678
======= =======
28
FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
7. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
MARCH 31,
---------------
1997 1996
------- -------
Notes payable............................................... $40,000 $ --
Mortgage note payable....................................... 4,047 --
Other....................................................... 755 653
------- -------
44,802 653
Less current portion........................................ 284 --
------- -------
$44,518 $ 653
======= =======
On March 27, 1997 the Company sold $40,000,000 of 10-year promissory notes
(the "Notes") to institutional investors. The Notes, which mature on March 31,
2007, carry an interest rate of 7.71% per year. Principal payments are
required over seven years starting at the end of the fourth year. The Note
agreement contains normal financial covenants, including a restriction on
dividends and other restricted payments in excess of $7,500,000, subject to
adjustments for earnings and sales of common stock. The Note agreement
contains a prepayment penalty and a provision for repurchase should there be a
change of control, in addition to financial covenants.
Also in connection with the Note offering, the Company reduced its Revolving
Credit Agreement with a bank to $20,000,000. Repayment on borrowings is due on
March 31, 2000. Interest on loan advances is payable at either the bank's
prime rate (8.50% at March 31, 1997) or 1% 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 requires the Company to maintain
minimum working capital levels and ratios in addition to normal bank
covenants. As of March 31, 1997 and 1996, there were no amounts outstanding
under this credit agreement.
During the year ended March 31, 1997, the Company obtained a $4,260,000
mortgage on its new facility in Burlington, New Jersey. The mortgage carries
an interest rate of 1% over LIBOR (5.7% at March 31, 1997) and matures on June
28, 2006. The Company has the option to convert the mortgage to a fixed
interest rate.
The maturities of long-term debt for the five years after March 31, 1997 are
as follows: 1998-$284,000; 1999-$284,000; 2000-$284,000; 2001-$5,998,000;
2002-$5,998,000.
8. ADVERTISING AND MEDIA COSTS
Advertising costs for the years ended March 31, 1997, 1996 and 1995 were
$6,632,000, $6,625,000 and $4,657,000, respectively. Deferrals of direct
response advertising were not material.
The Company has sold certain products in exchange for credits entitling the
Company to purchase media placements, travel and other items. Such products
are expected to be sold so as not to compete with the Company's normal
distribution. These credits have been recorded at their estimated fair market
value, which is less than their face amount and approximates their cost to the
Company.
9. ACQUISITIONS
On October 4, 1996, the Company acquired the trademark license of the
ROLODEX(R) Electronics product line and certain other assets from Insilco
Corporation for approximately $16,000,000 cash and assumed certain commitments
associated with the ROLODEX(R) Electronics product line. The purchase price
exceeded the fair value of the net assets acquired by $15,547,000, which is
being amortized over 40 years.
29
FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
9. ACQUISITIONS--CONTINUED
In April 1996, the Company acquired Systech GmbH, a German company, for
6,748 shares of the Company's common stock, plus up to 12,752 additional
shares contingent on the performance of Systech. The acquisition has been
treated as a purchase, with the operations of Systech included in consolidated
operations from the date of acquisition. The effect on results of operations,
had Systech been acquired as of the beginning of the proceeding years, would
not have been material.
10. COMMITMENTS
Lease Commitments:
Rent expense under all operating leases was $858,000, $792,000 and $734,000
for the years ended March 31, 1997, 1996 and 1995, respectively. The future
minimum rental payments to be made under noncancellable operating leases,
principally for facilities, as of March 31, 1997 were as follows (in
thousands):
YEARS ENDING MARCH 31,
-----------------------------------------------------------------------
1998................$609 2001................$229
1999................$434 2002................$174
2000................$355
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 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.
11. 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 up to three years in order to receive the shares. As of March 31,
1997, under the Plan, 17,800 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 key employees, consultants and
outside directors of the Company.
30
FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
11. 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, 1997, under the Plan options to
purchase 376,301 shares at $11.75 to $25.50 were granted to employees and
outside directors of the Company. On August 1996, the Board of Directors
approved a program allowing a "like-value exchange" of certain options
previously awarded to employees. The Company calculated the relevant Black-
Scholes values for both the options to be exchanged and the new options and
determined the exchange ratios for each of the option grants included in the
program. The exchange ratios were set such that the new options had the same
value as the exchanged options. The net result was that the exercise price of
the new options is lower than the exercise price of the options exchanged, but
the number of shares of Common Stock underlying the options is reduced. The
term of each of the new options is the same as the remaining term of the
respective exchanged option. Optionees were given the opportunity to exchange
options previously awarded with an option price of more than $19.00 per share
for these new options. Options totaling 375,282 at option prices from $19.63
to $28.88 were exchanged for 290,575 options at $14.00.
Accounting for Employee Stock Options:
The Company accounts for its stock option plan under APB Opinion No. 25,
"Accounting for Stock Issued to Employees," under which no compensation
expense is recognized. In fiscal 1997, the Company adopted SFAS No. 123,
"Accounting for Stock-Based Compensation", for disclosure purposes;
accordingly, no compensation expense has been recognized in the results of
operations for its stock option plan as required by APB Opinion No. 25.
For disclosure purposes the fair value of each stock option grant is
estimated on the date of grant using the Black-Scholes option-pricing model
with the following weighted-average assumptions used for stock options granted
during the years ended March 31, 1997 and 1996, respectively: annual dividends
of $0.00 for both years, expected volatility of 46.6% and 43.3%, risk-free
interest rate of 6.0% and 6.5% and expected life of five years for all grants.
The weighted-average fair value of the stock options granted during the years
ended March 31, 1997 and 1996 was $9.48 and $13.33, respectively.
If the Company recognized compensation cost for the employee stock option
plan in accordance with SFAS No. 123, the Company's pro forma net income and
earnings per share would have been $5.8 million and $0.72 in 1997 and $10.1
million and $1.22 in 1996. The SFAS No. 123 method of accounting does not
apply to options granted prior to March 31, 1995 and, accordingly, the
resulting pro forma compensation cost may not be representative of that to be
expected in future years.
31
FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
11. SHAREHOLDERS' EQUITY--CONTINUED
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
------------------------ -----------------------
WEIGHTED
AVERAGE
SHARES EXERCISE PRICE SHARES WARRANT PRICE
-------- -------------- -------- -------------
Outstanding at March 31,
1994..................... 738,476 $ 9.89 197,685 $6.50
Granted................. 187,200 14.91 -- --
Exercised............... (290,611) 8.40 -- --
Expired or cancelled.... (1,702) 6.61 -- --
-------- --------
Outstanding at March 31,
1995..................... 633,363 12.07 197,685 6.50
Granted................. 234,250 28.59 -- --
Exercised............... (154,741) 9.22 (7,692) 6.50
Expired or cancelled.... (64,668) 20.54 -- --
-------- --------
Outstanding at March 31,
1996..................... 648,204 18.47 189,993 6.50
Granted................. 376,301 19.32 -- --
Exercised............... (43,121) 11.80 (189,993) 6.50
Expired or cancelled.... (39,543) 25.70 -- --
Adjustment due to "like-
value exchange"........ (84,707) -- -- --
-------- --------
Outstanding at March 31,
1997..................... 857,134 $14.44 -- --
======== ========
The following table summarizes information about stock options outstanding
at March 31, 1997:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------- --------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF NUMBER REMAINING AVERAGE NUMBER AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- --------------- ----------- ---------------- -------------- ----------- --------------
$ 3.00-$13.75........... 229,783 5.88 $ 9.28 171,612 $ 8.40
14.00- 15.75........... 314,851 8.30 14.06 78,904 14.20
16.25- 17.75........... 270,500 8.18 17.23 93,500 16.25
20.75- 31.63........... 42,000 8.39 27.66 42,000 27.66
------- -------
$ 3.00-$31.63........... 857,134 386,016
======= =======
Options exercisable and the weighted average exercise price at March 31,
1996 and March 31, 1995 were 297,486 options and $12.54, and 297,077 options
and $8.99, respectively.
32
FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
12. 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 are comprised primarily of
sales of the Company's products in currencies other than the U.S. dollar made
through the Company's subsidiaries. As of March 31, 1997 and 1996, the Company
had approximately $15,900,000 and $12,200,000, respectively, of outstanding
foreign exchange contracts in which foreign currencies were sold. The major
currency exposures hedged were the British Pound, the French Franc, and the
German Mark. The deferred gains and losses on such contracts were immaterial
at March 31, 1997 and 1996. The duration of these 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.
13. 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,
-------------
1997 1996
------ ------
Temporary differences......................................... $1,668 $1,249
Foreign loss carryforward..................................... 454 474
------ ------
Deferred tax asset............................................ $2,122 $1,723
====== ======
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,
-----------------------
1997 1996 1995
------ ------ -------
Current
Federal.......................................... $3,978 $5,617 $ 228
State............................................ 369 838 394
Foreign.......................................... 131 -- --
------ ------ -------
4,478 6,455 622
------ ------ -------
Deferred
Federal.......................................... (383) 157 (1,292)
State............................................ (36) 24 (138)
Foreign.......................................... 20 (282) (192)
------ ------ -------
(399) (101) (1,622)
------ ------ -------
Provision for income taxes......................... $4,079 $6,354 $(1,000)
====== ====== =======
33
FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
13. 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, 1997, 1996 and 1995 is as follows (in thousands):
MARCH 31,
-----------------------
1997 1996 1995
------- ------- -------
Income before income taxes........................ $10,734 $16,720 $11,411
======= ======= =======
Computed expected tax............................. $ 3,757 $ 5,852 $ 3,994
Benefit provided by net operating loss
carryforward...................................... -- -- (3,994)
Provision for alternative minimum tax............. -- -- 228
State tax provision............................... 322 502 394
Tax benefit of NOL recorded....................... -- -- (1,622)
------- ------- -------
Provision for income taxes........................ $ 4,079 $ 6,354 $(1,000)
======= ======= =======
14. OPERATIONS
The Company and its foreign operations have the same business environment
and operate primarily in one industry segment. 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, 1997, 1996 and 1995, the Company's foreign
operations as conducted in Europe generated sales of $24,963,000, $22,074,000
and $16,117,000, and operating profits (losses) of $214,000, ($971,000) and
($222,000), respectively. Their identifiable assets were $16,833,000,
$15,270,000 and $9,285,000 as of March 31, 1997, 1996 and 1995, respectively.
Sales in the United States, including exports to non-affiliates, totaled
$60,804,000, $76,393,000 and $65,816,000, and operating profits of
$10,505,000, $17,049,000 and $11,460,000 for the years ended March 31, 1997,
1996 and 1995, respectively. Their identifiable assets totaled $121,554,000,
$77,646,000 and $66,145,000 for the years ended March 31, 1997, 1996 and 1995,
respectively. The remaining sales, profits and assets represent other
locations, none of which is material.
For the fiscal years ended 1997 and 1996, no customer accounted for more
than 10% of the Company's revenues. One customer represented 10% of sales for
the fiscal year ended March 31, 1995.
34
FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED AND SUBSIDIARES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
15. SUMMARIZED QUARTERLY FINANCIAL DATA (UNAUDITED)
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
QUARTER ENDED
-----------------------------------------
JUNE 30 SEPTEMBER 30 DECEMBER 31 MARCH 31
------- ------------ ----------- --------
Fiscal 1997
- --------------------------------------
Net sales............................. $15,071 $24,231 $31,986 $17,362
Gross profit.......................... 7,135 11,748 15,531 8,162
Net income............................ 640 2,457 3,247 311
Net income per share:
Primary............................. 0.08 0.30 0.40 0.04
Fully diluted....................... 0.08 0.30 0.40 0.04
Fiscal 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
Fiscal 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
35
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 1997 annual meeting of
stockholders (the "1997 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 1997 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 1997 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 1997 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, 1997.
Financial statements and schedules filed as a part of this report are listed
on the "Index to Financial Statements" at page 20 herein. All other schedules
are omitted because (i) they are not required under the instructions, (ii)
they are inapplicable or (iii) the information is included in the financial
statements.
36
EXHIBITS
EXHIBIT NO.
-----------
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 1990 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 (the "Company's 1991 10-K"))
4.1 --Note Purchase Agreement dated as of March 27, 1997
4.2 --Credit Agreement dated as of March 27, 1997 among Franklin and
certain of its subsidiaries, Chase Manhattan Bank, and Summit
Bank
10.01** --Employment Agreement, dated as of May 1, 1996, between the
Company and Morton E. David.
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 24, 1996 (Incorporated by reference to the Company's
Proxy Statement relating to the 1996 Annual Meeting of
Shareholders)
10.05 --Asset Purchase Agreement between the Company and Insilco
Corporation dated as of October 4, 1996 (Incorporated by
reference to Exhibit 2 to the Company's Report on Form 8-K dated
October 18, 1996)
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 to this form pursuant to Item 14(c) of this report.
37
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE 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
Dated: June 20, 1997 By /s/ Morton E. David
-----------------------------------
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
------------------- ----
/s/ Edward H. Cohen June 20, 1997
- ------------------------------------
Edward H. Cohen
Director
/s/ Morton E. David June 20, 1997
- ------------------------------------
Morton E. David
Director
/s/ Bernard Goldstein June 20, 1997
- ------------------------------------
Bernard Goldstein
Director
/s/ Leonard M. Lodish June 20, 1997
- ------------------------------------
Leonard M. Lodish
Director
/s/ Howard L. Morgan June 20, 1997
- ------------------------------------
Howard L. Morgan
Director
/s/ Jerry R. Schubel June 20, 1997
- ------------------------------------
Jerry R. Schubel
Director
/s/ James H. Simons June 20, 1997
- ------------------------------------
James H. Simons
Director
/s/ Michael R. Strange June 20, 1997
- ------------------------------------
Michael R. Strange
Director
/s/ William H. Turner June 20, 1997
- ------------------------------------
William H. Turner
Director
/s/ Kenneth H. Lind June 20, 1997
- ------------------------------------
Kenneth H. Lind
Vice President, Finance (Principal
Financial and Accounting Officer)
38