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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended
March 31, 1999
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 Exchange Act:
NONE
Securities registered pursuant section 12(g) of the Exchange 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
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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 18, 1999, approximately 7,833,000 shares of common stock of the
registrant were outstanding and the aggregate market value of common stock held
by non-affiliates was approximately $27,329,000.
The registrant's Proxy Statement for its 1999 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, 1999
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. 38
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT................................... 38
ITEM 11. EXECUTIVE COMPENSATION............................................................... 38
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT....................... 38
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....................................... 38
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K...................... 38
Signatures......................................................................................... 40
PART I
ITEM 1. BUSINESS
Franklin Electronic Publishers, Incorporated ("Franklin" or the "Company")
designs and develops hand-held electronic information products, such as
electronic reference products and electronic organizers.
The Company believes it is the world's largest designer, developer and
publisher of hand-held electronic reference products, having sold more than
twenty one million units since 1986. The Company's electronic reference products
are 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 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/R/).
The Company marketed its first electronic reference product, the Spelling
Ace/R/, in 1986. The Company believes that the Spelling Ace was one of the first
electronic reference products marketed in the United States. Beginning in 1987,
Franklin began marketing increasingly sophisticated electronic versions of
thesauruses and dictionaries and, in 1989, the Holy Bible.
In 1995, the Company introduced its 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
cartridges inserted into slots on the back of the unit. The Company markets
many of its electronic books in the read only memory ("ROM") cartridge format
for insertion into the cartridge slots on the BOOKMAN platform.
In 1996, the Company acquired certain assets of the ROLODEX/R/ Electronics
product line and the associated trademark license. Under the license, the
Company acquired the right to build and market databanks and organizers under
the ROLODEX/R/ Electronics mark.
In 1997, the Company began shipments of its first personal computer
companion product, the REX/R/ PC Companion, a credit card-sized device that
downloads information from a personal computer ("PC"). The REX product line
provides organizer functionality at an ultra-compact size and ultra-low weight.
Contact, scheduling and other information can be downloaded from a PC to the REX
card by inserting the card into a PC card slot in a laptop computer or into a
REX cradle which plugs into the serial port of a desktop PC.
In April 1999, the Company began to sell to retailers in the United States
an electronic book under the name Franklin Rocket eBook/TM/.
The Company is currently evaluating its strategies with respect to the REX
product line. The Company questions whether it has adequate financing to
continue to bring out new models on a yearly basis and in general to properly
market the line. The Company is also evaluating its strategy with respect to
the Franklin Rocket eBook/TM/ product line. Management is disappointed with the
initial sales of the product and questions Franklin's ability to continue its
participation in this product line in light of current retail prices.
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 Share in Electronic Reference Products. Franklin is the preeminent
company in the hand-held electronic reference market, with leading positions in
the United States and certain markets internationally. The Company believes it
has dominant market share in North America, Europe and Australia, as well as a
major presence in the Middle East. Over the past thirteen years, Franklin has
sold twenty one million units worldwide and currently markets over 200
electronic reference products globally.
.Breadth and Strength of Distribution. The Company distributes its
products through 45,000 retail outlets in more than fifty countries. The
Company also uses direct channels to serve multiple markets, such as the
professional, educational and customized application markets. In the
professional market, Franklin has achieved considerable success with its
electronic format medical publications. In the educational market, the
Company's electronic books are used in over 21,000 schools in the United States.
Due to the success of its electronic Bible, the Company has also achieved
substantial sales in the religious market, with Franklin products currently
distributed to approximately 7,000 Christian-affiliated bookstores.
.Technological Leadership in Refining Information for Electronic Use.
Franklin has significant expertise in providing high quality content and
functionality through cost-effective hardware designs of electronic information
products. The Company's products combine sophisticated technology with a user-
friendly interface designed for convenient and rapid retrieval of data. In
essence, the Company sells answers, not simply information devices or large
databases. Franklin's ability to compress data and to design systems that
permit quick and intelligent information retrieval enables it to offer compact
products with high functionality. For example, the Company stores the almost
three thousand page Physicians' Desk Reference, which fills up twenty megabytes
of memory space, into the memory space of only five megabytes which also
includes sophisticated search and retrieval functionality. The Company has been
able to manufacture higher performance products at lower cost due in part to
declining prices of ROM chips. The Company's vertically integrated research and
development effort, devoted to developing both the hardware and software for its
products, also enables it quickly to utilize both superior and cost-minimizing
technologies. As a result, the cost of Franklin's products to consumers has
decreased over the years to prices approaching those of print versions of
reference publications, offering consumers added value at attractive price
points.
.Long-standing Relationships and Licenses with Many Top Publishers. The
Company has electronic rights to over 200 titles, including several versions of
English and bilingual dictionaries, Bibles, and the Physicians' Desk Reference.
The Company obtains its licenses from a variety of well-established publishers
such as Merriam-Webster, Harper/Collins, Havas and Bertelsmann. While many of
these licenses are exclusive, all are supported by long-standing relationships
with the publishers, providing Franklin with a significant competitive
advantage.
.Efficient and Cost-Effective Manufacturing Process. Franklin controls
the entire manufacturing process of its products, from design to sale, but does
not own actual manufacturing facilities. This "virtual manufacturing" model
enables the Company to produce its products in the most cost-effective manner by
allowing the Company to outsource the manufacturing and assembly functions to
third parties which meet the Company's cost and quality specifications. In this
way, the Company maintains a high degree of flexibility and adaptability in its
product sourcing operations.
BUSINESS STRATEGIES
Franklin strives to be an innovator and the world leader for providing
instant answers in hand-held platforms for people on the go. The Company's
strategy to fulfill that mission is to leverage its leading market position by
exploiting the following opportunities:
.Use of the Internet to Distribute Content. The Company intends to
publish certain reference works on its web page (franklin.com) in electronic
form for downloading to multiple platforms, including to the Company's
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hand-held electronic products. In this way, the Company expects to leverage its
expertise in refining reference data with its competitive advantages in
developing and distributing hand-held products to reach a broader installed
base.
.Consumer Driven Product Development and Marketing. While the Company
has built strong distribution for its major products, it believes that further
opportunities lie in its ability to take a more marketing driven approach to
product development. The Company believes a better understanding of its
customers will allow it to boost sales, lower costs, accelerate throughput at
retail, and lead to successful new product introductions. The Company is
investigating ways to better market its products for children and, as a
consequence, to expand its offerings in this area.
.Continuing Upgrade of Reference Products. The Company's reference
product line continues to represent the major portion of its revenue.
Dictionaries, spell correctors, and Bibles have been the Company's mainstream
consumer electronics products. Over the last year, the Company upgraded and
enhanced these products. The new product line began to ship in June 1999. The
Company intends to continue to upgrade and enhance its core products.
.Investment in Marketing. The Company believes that a major opportunity
lies in broadening consumer awareness of the hand-held electronic reference
category in order to generate mass market interest in the Company's products.
To date, the Company has engaged in limited advertising on the national or local
levels. The Company has, however, enjoyed success with its limited advertising
campaigns. The Company intends to upgrade its website, franklin.com, in order
to increase consumer awareness of its products and to open a new channel of
distribution of its products.
.Growth in Selected International Markets. The Company has had success in
selling its products directly through wholly-owned, local subsidiaries in
selected international markets, such as the United Kingdom which was established
to market and distribute British English versions of the Company's American
English products, and through distributors in other markets. Because of the
slowed growth in international sales over the past two fiscal years, the Company
has closed certain subsidiaries, such as those in Italy and Singapore, and is
concentrating its sales efforts in key markets, such as the United Kingdom,
Germany and France. The Company expects to launch its first Chinese language
products during the latter part of the 2000 fiscal year. The Company anticipates
that its international sales will continue to provide a significant portion of
its revenues.
.Exploitation of OEM Opportunities. OEM (or "Original Equipment
Manufacturer") opportunities are business agreements pursuant to which the
Company develops products for resale by its partners. The Company has such
agreements in the medical publishing and French and Spanish markets and will
seek to broaden its activities to other vertical markets. The Company believes
its OEM business can be expanded as the Company shortens the development process
for titles by continued automation of its processes and as the costs of memory,
including flash memories, which allows for just in time programming, continue to
decrease.
RISK FACTORS
The Company believes that the most significant risks to its business involve
those set forth below.
.Defaults under Note Agreements. Because of the results of operations for
the Company's 1999 fiscal year, the Company was in default of certain financial
covenants of the agreements pursuant to which its Senior Notes were issued
pertaining to EBITDA coverage of interest expense and fixed charges and
requiring a minimum consolidated net worth of $52.5 million. The Noteholders
have waived these defaults. The Company anticipated that the results of its
operations for the first quarter of its 2000 fiscal year would cause additional
financial covenant defaults. The Noteholders have given a short-term waiver of
these defaults. The Company is presently in discussions with the Noteholders to
obtain permanent waivers of the first quarter defaults and to restructure the
agreements to permit the Company to operate under the agreements going forward.
No assurance can be given that the Company will be successful in obtaining
permanent waivers or in restructuring the agreements on acceptable conditions.
As a result of the defaults, the Senior Notes have been classified as short-term
liabilities in the Company's financial statements as required by generally
accepted accounting principles.
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.Adverse Effect of Current Operating Losses. The substantial loss
experienced by the Company in fiscal year 1999, which resulted in a net decrease
in cash of approximately $15 million, together with the substantial loss
expected for the quarter ended June 30, 1999, have adversely affected the
Company's cash position. The Company's failure to negotiate a necessary
restructuring of its Note Agreements or to obtain additional or replacement
sources of financing would cause a material adverse effect on the Company's
ability to operate during fiscal year 2000.
.Adverse Effect of Results of Evaluations of Product Line Strategies. The
Company is currently evaluating its strategies with respect to the REX product
line and its strategy with respect to the Franklin Rocket eBook/TM/ product
line. The Company's results of operations may be adversely affected by
additional writedowns in connection with inventory or credits in connection with
price protection.
.Dependence on New Products and Titles. The Company depends to a certain
extent on the introduction of successful new products and titles to generate
sales growth and replace declining revenues from certain older titles. The
Company currently has several new products and titles under development;
however, significant development efforts for a number of the Company's proposed
new products and titles will be required prior to their commercialization. A
significant delay in the introduction of a new product or title could have a
material adverse effect on the ultimate success of the product or title. In
addition, if revenues from new products and titles fail to replace declining
revenues from certain existing products and titles, the Company's operating
results and growth could be adversely affected. There can be no assurance that
new products and titles currently under development will be introduced on
schedule, that they will generate significant revenues, or that the Company will
be able to introduce additional new products and titles in the future.
.Inventory Management. The Company's lead times are necessarily long
because of the custom nature of certain components and because most of its
components are manufactured, and its platforms are assembled, in Asia.
Accordingly, production and procurement planning are critically related to the
Company's anticipated sales volume. Any significant deviation from projected
future sales could result in material shortages or surpluses of inventory.
Shortages could cause the Company's distribution base to shrink as customers
turn to the Company's competitors. Inventory surpluses could cause cash flow
and other financial problems, which might cause the Company to liquidate
inventory. There can be no assurance that the Company's forecasts of demand for
its products will be accurate. Inaccurate forecasts, or unsuccessful efforts by
the Company to cope with surpluses or shortages, could have a material adverse
effect on the Company's business.
.Changes in Technology. In general, the computer industry, both with
respect to software and hardware, is subject to rapidly changing technology.
Accordingly, the technology underlying the Company's products may similarly be
subject to change. The introduction of products embodying new technologies and
the emergence of new industry standards could exert price pressure on the
Company's existing products or render such products unmarketable or obsolete.
The Company's ability to anticipate changes in technology and industry standards
and to develop and introduce new and enhanced products, as well as additional
applications for existing products, in each case on a timely and cost-effective
basis, will be a critical factor in the Company's ability to grow and remain
competitive. There can be no assurance that technological changes will not
materially adversely affect the Company's business.
.Competition. The consumer electronics and personal computer companion
product markets are highly competitive and characterized by rapid technological
advances and the regular introduction of new products or enhancements of
existing products. The Company believes it faces various degrees of competition
at different price points in these markets. Competitive factors include product
quality and reliability, price, performance, marketing and distribution
capability, service and reputation. There can be no assurance that companies
currently in the consumer electronics or personal computer companion product
markets will not enter the markets in which the Company currently markets its
products. There can be no assurance that other companies, currently in the
consumer electronics industry, will not enter the electronic book market. Many
of such companies have greater capital, research and development, marketing and
distribution resources than the Company. If new competitors emerge or the
existing market becomes more competitive, the Company could experience
significant pressure on prices and margins.
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.Dependence on Key Suppliers. Certain integrated circuits essential to the
functioning of the Company's products are manufactured by a relatively small
number of overseas suppliers. Missed, late or erratic deliveries of custom IC-
ROMs and other parts could materially adversely impact the timing of new product
deliveries as well as the Company's ability to meet demand for existing
products. If any one of the integrated circuit suppliers were unable to meet its
commitments to the Company on a timely basis, such failure could have a material
adverse effect on the Company's business.
.Intellectual Property Rights. The Company owns utility and design patents
in the United States and elsewhere on its electronic books. There can be no
assurance (i) that the claims allowed under any patents will be sufficiently
broad to protect the Company's technology, (ii) that the patents issued to the
Company will not be challenged, invalidated or circumvented or (iii) as to the
degree or adequacy of protection any patents or patent applications will afford.
The Company also claims proprietary rights in various technologies, know-how,
trade secrets and trademarks which relate to its principal products and
operations, none of which rights is the subject of patents or patent
applications in any jurisdiction. There can be no assurance as to the degree of
protection these rights may or will afford the Company.
.International Sales and Currency Fluctuations. The Company expects that
international sales will constitute a material portion of the Company's
business. The Company's international business is subject to various risks
common to international activities, including political and economic instability
and the need to comply with export laws, tariff regulations and regulatory
requirements. There can be no assurance that political or economic instability
in any given country or countries will not have an adverse impact on the
Company's overall operations. Because approximately 30% of the Company's sales
are made in currencies other than the U.S. dollar, the Company is subject to the
risk of fluctuation in currency values from period to period. The Company does
not enter into transactions to hedge its exposure to currency fluctuations. The
risk associated with fluctuations in currency values can be expected to increase
to the extent the Company expands its international operations.
PROCESS OF REFINING INFORMATION FOR USE IN ELECTRONIC PRODUCTS
The process of refining information for publishing electronic books or for
use in other electronic products 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 version of a reference
work normally commences with the Company's acquisition of rights to a reference
work or database which it has identified for one or more proposed products. The
Company licenses the use of such reference works or databases for appropriate
electronic use.
Even though databases are usually delivered to the Company in electronic
form, the Company thoroughly reviews and cleans the data by removing errors in
preparation for its electronic publication. This process is analogous to a
traditional book publisher proofreading a manuscript. The data must then be
analyzed and in most cases compressed to store it economically in as small a
memory 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 that 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.
The Company believes that its vertically integrated development team is unique
in the industry since it has an in-house group of employees skilled in
editorial, data preparation and computational linguistic work, not only in
English, but in a variety of languages.
For electronic reference products, a prototype chip containing the
compressed data and interface software is then carefully tested before final
chips are produced. To complete the product, the chips are assembled in a
hardware platform or in a card, similar to a traditional book publisher printing
and binding a hard copy book.
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PRODUCTS
Electronic Reference Products
Franklin currently markets more than 200 electronic reference products
in various categories, including thesauruses, dictionaries, bilingual
dictionaries, the Bible, the Concise Columbia Encyclopedia, and educational and
medical publications. Different versions of the Company's electronic reference
products use different databases and provide various levels of functionality.
Dictionaries
Franklin's electronic spelling products (the "Spelling Ace/R/" line)
operate as phonetic spelling error detectors and correctors, puzzle solvers,
word list builders and word finders. These products 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.
The Company's top-of-the-line electronic dictionary is the BOOKMAN Merriam-
Webster's Collegiate Dictionary which contains over 195,000 words and their
definitions, parts of speech, hyphenation points and different word forms
(inflections). All of the Company's electronic dictionaries provide phonetic
spelling correction and many provide thesaurus features as well. For example,
if a user enters the word "baffled," the thesaurus will display eleven different
synonyms, including "frustrated," "disappointed" and "foiled."
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 or Hebrew, 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
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 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.
Children's Products
Since 1990, the Company has successfully sold children's versions of its
reference products, such as a children's dictionary based on the word list from
Webster's Elementary Dictionary. In 1997, the Company introduced a new line of
children's products which includes the Homework Wiz electronic dictionary with a
text-to-speech voice synthesizer enabling the product to speak words and
definitions.
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
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searches, the Franklin Bible is a fully automated concordance. The Company sells
the Bible on its BOOKMAN platform and on 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 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. During the 2000 fiscal year, the
Company will market a speaking version of its King James Bible with spoken
passages recorded by Johnny Cash.
Medical Publications
The Pocket PDR/TM/ Medical Book System, comes with two card slots and a
broad range of titles. The platform uses Franklin's proprietary microprocessor
and has an 8-line screen which is particularly useful when accessing and viewing
drug information monographs. Available book cards for the Pocket PDR/TM/
Medical Book System, include the Physicians' Desk Reference, The Merck Manual,
The Washington Manual of Medical Therapeutics, The Medical Letter of Adverse
Drug Interactions, Harrison's Principles of Internal Medicine Companion
Handbook, Drug Interactions and Side Effects, The Sanford Guide to Antimicrobial
Therapy, Stedman's Medical Dictionary, and Griffin's Five-Minute Clinical
Consult.
In the 1999 fiscal year, the Company developed two international medical
titles as book cards for the Medical Book System: Martindale: The Extra
Pharmacopoeia, a best-selling medical in the United Kingdom, and the Spanish
translation of Harrison's Principles of Internal Medicine, for a pharmaceutical
company based in Spain. The Company is investigating making certain medical
titles available for downloading from its website into a variety of hand-held
platforms.
The Company expects to launch a line of BOOKMAN products for pharmacists,
initially consisting of two best-selling titles, Drug Facts & Comparisons and
The Handbook on Injectable Drugs, which are expected to ship in the summer of
1999.
Entertainment Titles
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 Total Baseball Encyclopedia, The Official Scrabble
Players' Dictionary, and Parker's Wine Guide, an authoritative guide to wines
and vineyards. The Company is investigating making certain entertainment titles
available for downloading from its website into a variety of hand-held
platforms.
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
The Company has developed and produced British English versions of its
American English electronic reference products for international markets,
particularly the United Kingdom and Australia, such as an electronic speller
based on a list of over 70,000 words licensed from Harper/Collins, a children's
dictionary incorporating databases from the Oxford Children's Dictionary, and
the Macquarie dictionary. The Company has monolingual electronic reference
products for the French market, electronic reference products for the German-
speaking market and a Spanish monolingual dictionary for Spain and South
America. The Company has omnibus agreements for publishing electronic reference
products with two major European publishers, Bertelsmann and Havas, under which
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Franklin has developed titles in hand-held electronic platforms and ROM cards.
Havas publishes dictionaries, thesauruses, encyclopedias and other works under
the following well known French trademarks: Le Robert, Larousse, Nathan, Dalloz,
Masson and Bouquins.
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 ("ESL"). The Company produces 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 Company is working toward a
Chinese/English product to be sold into the worldwide ESL market of native
Chinese speakers.
Other Products
In April 1999, the Company began to sell to retailers in the United States
an electronic book under the name Franklin Rocket eBook/TM/ that was developed
by Nuvo Media, Inc. ("Nuvo Media"). The Franklin Rocket eBook/TM/ is a hand-
held platform for downloading information from the Internet through a PC.
Software Reference/Retrieval Products
The Company's subsidiary, Proximity Technology, Inc., 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 has retrieval software products, such as Friendly Finder,
a fuzzy search program for searching databases on PCs. The Company licenses
this software for use in computers of all sizes, as well as on the Internet.
The Company competes with Lernout & Hauspie in respect of these software
products.
Electronic Organizers
In 1997, the Company began to sell a line of organizers and databanks under
the ROLODEX/R/ trademark which had been licensed by the Company late in 1996.
Since acquiring the ROLODEX/R/ Electronics product line, the Company has updated
and improved both low priced databanks, that allow users to store and retrieve
names and telephone numbers, and higher priced and more advanced personal
organizers, that can interface with desktop PCs.
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.
Personal Computer Companion Products
In September 1997, the Company began to sell the REX PC Companion line of
products, its first computer companion product. The REX card is a credit card
sized organizer that downloads a user's personal information, such as schedules,
names, addresses and phone numbers, from a PC. The REX product line provides
the functionality of a Personal Data Assistant ("PDA") at an ultra-compact size
and ultra-low weight. A REX card is the size of a PCMCIA card (sometimes
referred to generically as a "PC Card") that fits into an industry standard size
PCMCIA slot. Contact, scheduling and other information can be downloaded from a
PC to the REX card by inserting the card into a PC card slot in a laptop
computer or into a REX cradle which plugs into the serial port of a desktop PC.
The REX PC Companion contains software that allows the importation of personal
information from popular software packages such as Lotus Organizer, Sidekick,
Outlook, ACT! and Microsoft Schedule+. The REX PC Companion line was developed
by the Company in a three party strategic alliance with Starfish Software, Inc.
("Starfish"), that provided software development services, and Citizen Watch
Company of Japan, that manufactures the REX hand-held product on an exclusive
basis for resale by the Company.
8
In the 1999 fiscal year, the Company expanded the REX line through improved
software functionality with the REX PRO PC companion product, which allows the
user to enter data directly on the device, rather than through the PC and
provides for synchronization directly to popular software packages.
RESEARCH AND DEVELOPMENT AND CONTENT ACQUISITION
The Company has a group of approximately 60 persons that performs research
and development relating to new electronic information products as well as
improvements to existing products. The group also conducts ongoing research in
connection with the development of software and hardware for the Company's
products. The Company focuses its hardware development efforts on creating new
platforms.
The Company maintains a full-time internal development group of hardware
and software engineers dedicated to the critical function of developing
proprietary microprocessors and VLSIs that integrate the Company's proprietary
microprocessor or general purpose microprocessors and custom design circuits for
electronic products. Through this extensive effort the Company is able to reduce
the cost of components for its platforms and cards on an ongoing basis. The
Company regularly engages in programs to redesign its platforms and to develop
new VLSIs for its products.
The Company is currently developing products utilizing digitally recorded
and compressed speech technology. 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, and recorded speech compression and
decompression technology.
The Company maintains a program to acquire, commission or develop
internally databases that it believes are capable of being effectively adapted
to electronic format and that can be positioned and marketed by it in the market
that it serves. The Company also receives requests to develop products
incorporating specific databases from third-party licensors and customers on an
OEM basis. 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.
MANUFACTURING
The Company arranges for the assembly of its products by placing purchase
orders with established third-party manufacturers in China, Taiwan, Malaysia and
Thailand. The Company believes that it could locate alternate manufacturers for
its products 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 products. 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 products. The
Company's electronic products are based on the Company's proprietary
microprocessor or general purpose microprocessors and custom-designed ROM chips
and general purpose static random access memory chips. The Company designs VLSIs
that integrate its proprietary or 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. On-site quality control inspection of
electronic products is conducted by its employees in China, Malaysia and
Thailand. The Company's products 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.
9
SALES AND MARKETING
Franklin's products 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 product 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 products directly
from Franklin by calling 1-800-BOOKMAN or by visiting the Company's website at
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 products with advertisements
in magazines and newspapers. The Company also displays its publications at
trade shows, including the Consumer Electronics Show, and advertises in trade
magazines.
International Sales
The Company sells its products worldwide through its wholly-owned, local
subsidiaries and a network of independent distributors. Franklin's subsidiary
in the United Kingdom markets and distributes British English versions of its
products in the United Kingdom. The Company's subsidiaries in France, Canada,
Germany, the Benelux countries, Mexico, and Australia, market and distribute the
Company's products, including those specifically developed for these markets.
In each of these countries, the Company marketed its products through
distributors prior to direct marketing through subsidiaries. The Company has
closed its subsidiary in Singapore and is in the process of closing its
operations in South Africa.
Global OEM and Vertical Markets
In 1999, the Company combined its medical, education and OEM operations.
The Company has licensed databases from respected medical publishers for
the rapid delivery of massive, complicated information in a highly portable
format for the physician in training and in practice. Selected medical databases
are being sold, or are in development, as BOOKMAN cards for the Pocket PDR /TM/
Medical Book System. Sales efforts are augmented by co-marketing efforts with
the Company's licensors of medical databases. The Company is also launching a
line of BOOKMAN book cards targeted for use by pharmacists in both the hospital
and retail settings.
In fiscal year 1998, the Company produced custom products for third
parties, including revisions of an electronic index for Plaza y Janes, a Spanish
print publisher, as well as a revision of the index to the Encyclopedie Bordas
on behalf of Societe Generale, a print publisher in France. The Company has
developed custom products including the Larousse Copiloto for a Spanish print
encyclopedia publisher as well as a speaking version of the alMawrid, an Arabic-
English bilingual dictionary for sale in the Middle East. The Company continues
to pursue opportunities for custom versions of its products.
The Company sells electronic books directly to educators and school systems
throughout the United States. The Company's electronic books are in use in over
20,000 schools in the United States. In addition, custom curriculae have been
created in conjunction with electronic books to meet school requirements.
PATENTS, TRADEMARKS AND COPYRIGHTS
The Company owns more than twenty-five United States utility and design
patents on its electronic reference products 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.
10
Franklin owns certain trademark rights, including "Franklin/R/", "REX/R/",
"BOOKMAN/R/", "Spelling Ace/R/", "Wordmaster/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 electronic reference
products. The Company's main domestic competitor in the electronic book
category is Seiko Instruments USA Inc. ("Seiko"), which markets spelling
correctors, thesauruses and dictionaries. The Company faces 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, which
markets French monolingual spelling correctors, thesauruses and dictionaries in
France, and Hexaglot, which markets German centric bilinguals and translators in
Germany.
Competitive factors for electronic reference products 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 reference products enjoy a reputation for quality resulting
from their content, hardware design and easy-to-use applications. The Company's
reference products 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.
Sharp Electronics, Casio, and Royal are the Company's primary competitors
in electronic organizers. Competitive factors for electronic organizers and
personal computer companion products are size, product quality and reliability,
functionality, price, performance, marketing and distribution capability and
corporate reputation. The Company believes that it competes effectively in the
electronic organizer market in respect of each of the factors.
A number of prominent electronics manufacturers, including 3Com, Sharp
Electronics Corporation, Casio, Royal, Psion, LG Electronics and Hewlett-Packard
Company, market palmtop personal organizer products, personal digital
assistants, computer peripherals, or general usage personal computers that offer
varying degrees of electronic reference capabilities and personal information
management functions. 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.
EMPLOYEES
As of June 30, 1999, the Company employed approximately 210 persons in the
United States, approximately 30 persons in Asia, and approximately 40 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.
11
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.; Starfish and Sidekick are trademarks of
Starfish Software, Inc.; Lotus is a trademark of IBM; Outlook and Schedule+ are
trademarks of Microsoft; Act! Is a trademark of Symantec; ROLODEX/R/ is a
registered trademark of Berol Corporation, a division of Newell Rubbermaid Inc.;
and Rocket eBook is a trademark of Nuvo Media.
- --------------------------------------------------------------------------------
Except for the historical information contained herein, the matters
discussed throughout this report, including, but not limited to, those that are
stated as Franklin's belief or expectation or preceded by the word "should" 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 reference products, organizers, and computer companion
products, changes in technology, the impact of competitive electronic products,
the management of inventories, Franklin'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 Franklin's reports filed with the Securities and Exchange Commission.
- --------------------------------------------------------------------------------
ITEM 2. PROPERTIES
The Company owns a 90,000 square foot corporate headquarters in Burlington,
New Jersey. The Company believes this new facility will satisfy its foreseeable
needs for office, laboratory and warehousing space.
ITEM 3. LEGAL PROCEEDINGS
In 1998, the Company was served with a class action complaint in the
Superior Court of New Jersey having warranty, negligence, and state consumer
statute claims based on an alleged defect in the "to-do list" function of the
desktop software provided with the REX PC Companion. On April 5, 1999, the
Court signed an Order of Preliminary Settlement Approval scheduling a hearing
for August 6, 1999 to consider whether the terms of a proposed settlement of
this action are fair. Under the proposed settlement, the Company has agreed to
distribute an upgraded version of the software used with the REX/TM/ PC
Companion without cost to eligible class members and to pay costs associated
with the administration of the settlement, estimated at between $100,000 and
$150,000, as well as the fees and expenses awarded to class counsel, up to
$235,000.
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, including the class action litigation identified above, is likely,
individually or in the aggregate, to have a material adverse effect on the
financial condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS-NONE
12
EXECUTIVE OFFICERS OF THE REGISTRANT
NAME AGE POSITION
- ---------------------- ----------------------- ------------------------------------------------------------------
Barry J. Lipsky 48 President and Chief Executive Officer; Director
Gregory J. Winsky 49 Executive Vice President
Arnold D. Levitt 62 Interim Chief Financial Officer; Treasurer
Mary Repke 44 Senior Vice President, Marketing
Toni M. Tracy 50 Senior Vice President, Publisher Relations
Daniel Wall 47 Senior Vice President; Chief Technology Officer
Robert Fallow 40 Managing Director, Europe, Middle East and Africa
Mr. Lipsky joined the Company as Vice President in February 1985. He was
elected Executive Vice President in 1997, was named Acting President and Chief
Operating Officer in April 1999 and President and Chief Executive Officer in
July 1999.
Mr. Winsky was elected Vice President and Secretary of the Company in June
1984, was elected Senior Vice President in January 1993 and Executive Vice
President in July 1999.
Mr. Levitt joined the Company in May 1999 as Interim Chief Financial
Officer and Treasurer. Mr. Levitt has been engaged in consulting as a chief
financial officer or senior business adviser for companies in a variety of
industries since 1996. Prior to these consulting arrangements, Mr. Levitt was
Executive Vice President and Chief Operating Officer of Wico Gaming Supply Corp.
Mr. Levitt has owned or was employed as a chief financial officer of a number of
companies and also worked in public accounting.
Ms. Repke joined the Company in September 1998 as Senior Vice President,
Marketing. From 1994 to 1998, she was Director of Marketing Consumer Business
Products Group for Sharp Electronics Corp.
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. She was elevated to Senior Vice President in 1998. 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. Wall joined the Company in March 1999 as Senior Vice President and
Chief Technology Officer. From 1993 until 1999, Mr. Wall was Vice President,
Advanced Product Planning of Telxon Corporation and Senior Vice President,
Technical Operations of Metanetics Corporation, a subsidiary of Telxon
Corporation.
Mr. Fallow joined the Company in January 1999 as Managing Director, Europe,
Middle East and Africa. From 1997 until 1999, Mr. Fallow was Group Director,
Marketing for Orange PLC in the United Kingdom and, for more than five years
prior thereto, he was Managing Director, Northern Europe for Reebok NE.
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, 1997........................................................................... 11 1/2 9 3/8
September 30, 1997...................................................................... 15 1/4 9 3/8
December 31, 1997....................................................................... 15 7/8 11 3/4
March 31, 1998.......................................................................... 14 3/16 11 3/8
June 30, 1998........................................................................... 12 7/16 9 1/8
September 30, 1998...................................................................... 9 13/16 7 3/8
December 31, 1998....................................................................... 12 11/16 7 3/4
March 31, 1999.......................................................................... 11 13/16 4 5/8
The approximate number of holders of record of the common stock as of June
17, 1999 was 935.
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,
1999 1998 1997 1996 1995
----------- ----------- ---------- ------------ -------------
STATEMENT OF OPERATIONS DATA
Sales.................................. $103,793 $100,240 $88,650 $100,823 $83,273
Cost of Sales.......................... 81,865 57,456 46,074 53,666 46,745
-------- -------- ------- -------- -------
Gross Profit........................... 21,928 42,784 42,576 47,157 36,528
-------- -------- ------- -------- -------
Expenses:
Sales and marketing................... 28,928 22,303 17,621 17,237 12,822
Research and development.............. 5,740 5,537 5,472 5,544 5,190
General and administrative............ 20,283 12,912 8,534 8,125 7,185
-------- -------- ------- -------- -------
Total operating expenses............ 54,951 40,752 31,627 30,906 25,197
-------- -------- ------- -------- -------
Operating Income (Loss)................ (33,023) 2,032 10,949 16,251 11,331
Interest expense...................... (3,554) (3,385) (775) (36) (12)
Interest and investment income........ 674 1,883 560 505 92
-------- -------- ------- -------- -------
Income (Loss) Before Income Taxes...... (35,903) 530 10,734 16,720 11,411
Income Tax (Benefit) Provision......... (5,712) (899) 4,079 6,354 (1,000)
-------- -------- ------- -------- -------
Net Income (Loss)...................... $(30,191) $ 1,429 $ 6,655 $ 10,366 $12,411
======== ======== ======= ======== =======
Net Income (Loss) Per Share:
Basic................................. $(3.81) $0.18 $0.83 $1.33 $1.64
======== ======== ======= ======== =======
Diluted............................... $(3.81) $0.18 $0.82 $1.25 $1.56
======== ======== ======= ======== =======
Weighted Average Shares:
Basic................................. 7,923 8,069 8,006 7,799 7,546
======== ======== ======= ======== =======
Diluted............................... 7,923 8,156 8,123 8,281 7,974
======== ======== ======= ======== =======
At March 31,
----------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- ------- -------
BALANCE SHEET DATA
Working Capital...................................... $ 4,142 $ 74,783 $ 77,796 $45,824 $38,839
Total Assets......................................... 107,320 136,188 131,055 82,869 70,574
Long-term Liabilities................................ 1,541 45,089 44,518 653
Shareholders' Equity................................. 43,045 74,746 73,603 65,538 53,973
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The results of the Company's operations in fiscal 1999 reflect a decline in
operating income of approximately $35 million from fiscal 1998, which was
primarily the result of an inventory writedown of $13.5 million, a writedown of
royalty advances of $6.0 million, planned increases in advertising expenditures
of $5.4 million, increased price protection of $3.9 million, the writeoff of
$2.3 million of receivables, and restructuring charges (including costs of
changes in management), of $2.4 million. Approximately half of the operating
income decline was related to the REX/R/ computer companion product line.
Revenues increased by 4% in fiscal 1999 over fiscal 1998 as increased
sales of the REX and ROLODEX/R/ Electronics lines offset a 9% decrease in
Franklin/R/ reference sales. The 4% sales increase reflected a 12% sales
increase during the first nine months of the 1999 fiscal year offset by a 26%
decrease in sales during the fourth quarter. The sales decline related to
disappointing sales of the REX product line, including $2.9 million of REX price
protection credits, and lower sales of reference products in anticipation of the
release in late June 1999 of the Company's upgraded reference product line. In
fiscal 1998, revenues had increased by 13% over fiscal 1997 as the Company
entered the computer companion market and sold new ROLODEX/R/ Electronics
organizer products. The Company expects relatively flat sales from its
electronic reference products and modest gains in its ROLODEX/R/ Electronics
organizer products in its 2000 fiscal year, and a substantial decline in sales
of its REX computer companion products.
In fiscal 1999, international sales grew 6%, while domestic sales grew 2%.
The increase in the Company's sales for fiscal 1998 was primarily attributable
to higher domestic sales, which grew 19%, while international sales were only 3%
higher. For several years prior to 1998, international growth outpaced domestic
growth.
As a result of the writedowns and price protection referred to in the
first paragraph, the gross margins for fiscal 1999 were 49% lower than in fiscal
1998. In fiscal 1998, gross margins had declined with the introduction of REX
personal computer companion and ROLODEX/R/ Electronics organizer products.
These products are sold into a more competitive marketplace and do not have the
licensed content that forms the basis for the Company's electronic reference
products. Prior to the 1998 fiscal year, the Company's gross profit margins
increased primarily due to the decline in cost of ROM chips and the Company's
cost reduction efforts (which enable the Company to lower its product prices),
and the introduction of new products which command higher gross margins.
Operating expenses increased 35% in fiscal 1999 from fiscal 1998,
primarily as a result of the planned increases in advertising and the receivable
writeoffs and restructuring charges referred to in the first paragraph.
Operating expenses in fiscal 1998 increased from fiscal 1997 both as an
absolute matter and as a percentage of sales, mainly because of increases in
sales and marketing expenses attributable to increased advertising and to
introductions of computer companion and organizer products, as well as $3.3
million in costs related to restructuring the Company. Operating expenses as a
percentage of sales had increased in fiscal 1997 primarily because sales
decreased.
The Company expects to report a substantial loss for its June 1999
quarter because of seasonally low sales, lower sales of reference and organizer
products in anticipation of the release in late June 1999 of the Company's
upgraded product lines, inventory and expense writeoffs pertaining to its Rocket
eBook/TM/ product introduced in that quarter, and severance and other charges
relating to the Company's restructuring and closing of certain foreign
subsidiaries which occurred in that quarter. The Company expects to report a
modest profit during the balance of the 2000 fiscal year, primarily as a result
of the substantial reductions made by management in operating expenses,
including a 15% reduction in personnel, as part of the first quarter
restructuring. Management's belief is based on the positive reception accorded
by its retailers to the upgraded reference and ROLODEX/R/ Electronics product
lines which began to ship in the last two weeks of June 1999.
The Company is currently evaluating its strategies with respect to the
REX product line. The Company questions whether it has adequate financing to
continue to bring out new models on a yearly basis and in general to properly
market the line. The Company is also evaluating its strategy with respect to
the Rocket eBook/TM/ product
16
line. Management is disappointed with the initial sales of the product and
questions Franklin's ability to continue its participation in this product line
in light of current retail prices.
Because of the results of operations for the Company's 1999 fiscal year,
the Company was in default of certain financial covenants of the agreements
pursuant to which its Senior Notes were issued. The Noteholders have waived
these defaults. The Company anticipated that the results of its operations for
the first quarter of its 2000 fiscal year would cause additional financial
covenant defaults. The Noteholders have given a short-term waiver of these
defaults. The Company is presently in discussions with the Noteholders to
obtain permanent waivers of the first quarter defaults and to restructure the
agreements to permit the Company to operate under the agreements going forward.
As a result of the defaults, the Senior Notes have been classified as short-term
liabilities in the Company's financial statements as required by generally
accepted accounting principles.
RESULTS OF OPERATIONS
The following table summarizes the Company's historical results of
operations as a percentage of sales for fiscal 1999, 1998 and 1997:
(dollars in thousands)
Year Ended March 31,
-----------------------------------------
1999 1998 1997
------------ ------------ -------------
Sales:
Domestic Sales............................................................. $ 68,248 $ 66,610 $56,072
International Sales........................................................ 35,545 33,630 32,578
-------- -------- -------
Total Sales.................................................................. $103,793 $100,240 $88,650
======== ======== =======
As a Percentage of Total Sales:
Domestic Sales............................................................. 65.8% 66.5% 63.3%
International Sales........................................................ 34.2 33.5 36.7
-------- -------- -------
Total Sales................................................................ 100.0% 100.0% 100.0%
Cost of Sales.............................................................. 78.9 57.3 52.0
Gross Profit............................................................... 21.1 42.7 48.0
Expenses:
Sales and marketing..................................................... 27.9 22.2 19.9
Research and development................................................ 5.5 5.5 6.2
General and administrative.............................................. 19.5 12.9 9.6
-------- -------- -------
Total operating expenses.............................................. 52.9 40.6 35.7
-------- -------- -------
Operating Income (Loss)...................................................... (31.8) 2.0 12.3
Interest expense........................................................... (3.4) (3.4) (0.8)
Interest and investment income............................................. 0.6 1.9 0.6
-------- -------- -------
Income (Loss) Before Income Taxes............................................ (34.6) 0.5 12.1
Income Tax (Benefit) Provision............................................... (5.5) (0.9) 4.6
-------- -------- -------
Net Income (Loss)............................................................ (29.1)% 1.4% 7.5%
======== ======== =======
Year Ended March 31, 1999 Compared With Year Ended March 31, 1998
Sales of $103.8 million for the year ended March 31, 1999 were 4% higher than
sales of $100.2 million for the earlier year. The sales increase is
attributable to sales of REX computer companion products, which were 54% higher
than the year before, and sales of ROLODEX/R/ Electronics products, which were
25% higher than the year before, offset in part by lower sales of electronic
reference products, down by 9% on a year to year basis. Sales were
17
also augmented by sales of the Company's new subsidiary, Voice Powered
Technology International, Inc. ("VPTI"). Foreign currency fluctuations did not
have a significant effect on the Company's results of operations from year to
year. Because the Company has largely withdrawn marketing efforts to support
sales of the REX product line, it anticipates a substantial decline in sales of
REX products in fiscal 2000. The Company expects relatively flat sales of its
electronic reference products and a modest increase in sales of its ROLODEX/R/
Electronics products in fiscal 2000.
The results of operations reflect a decline in operating income of
approximately $35 million from March 31, 1998 to March 31, 1999, which was
primarily the result of an inventory writedown of $13.5 million, a writedown of
royalty advances of $6.0 million, planned increases in advertising expenditures
of $5.4 million, increased price protection of $3.9 million, the write-off of
$2.3 million of receivables including a receivable due from Service Merchandise
of $1.8 million, and restructuring charges, including costs of changes in
management, of $2.4 million. Approximately half of the operating income decline
was related to the REX product line.
Cost of sales increased from $57.5 million in fiscal 1998 to $81.9 million
in fiscal 1999, primarily as a result of the inventory writedown. General and
administrative expenses increased from $12.9 million to $20.3 primarily as a
result of the other writedowns and restructuring charges and increased personnel
costs. Sales and marketing expenses increased from $22.3 million to $28.9
million primarily due to increased expenditures for advertising and marketing of
the REX product line. Research and development expenses were relatively constant
at $5.5 million last year and $5.7 million this year. Net interest expense was
$1.4 million higher than last year. Interest expense of $3.6 million, mainly in
connection with interest paid on the Company's Senior Notes, exceeded interest
income of $0.7 million from the Company's investments.
Year Ended March 31, 1998 Compared With Year Ended March 31, 1997
Sales of $100.2 million for the year ended March 31, 1998 were 13% higher
than sales of $88.7 million for the year ended March 31, 1997. The sales
increase was attributable to higher sales in the domestic consumer market,
including sales of the REX computer companion product which began in September
1997. Growth of international sales, which had outpaced domestic sales growth
over the past two years, slowed to 3% primarily due to declines in sales in the
United Kingdom and France. Foreign currency fluctuations did not have a
significant effect on the Company's results of operations from year to year.
Gross profits were unchanged at $42.8 million in fiscal 1998 compared with
$42.6 million in fiscal 1997, notwithstanding the large increase in sales.
Gross profit margins decreased from 48% in fiscal 1997 to 43% in fiscal 1998 as
a result of product mix shifting toward personal computer companion and
organizer products that bear smaller profit margins because these products are
sold into more competitive markets and do not have the content of reference
products.
Total operating expenses increased from $31.6 million to $40.8 million in
fiscal 1998. Sales and marketing expenses increased from $17.6 million to $22.3
million primarily due to increased expenditures for advertising and marketing in
both domestic and international operations. Research and development expenses
were constant at $5.5 million from year to year. General and administrative
expenses increased from $8.5 million to $12.9 million due to charges of $3.3
million, primarily related to the contractual commitment to the former Chairman
and Chief Executive Officer under his employment agreement on his departure from
the Company, the costs of restructuring foreign operations, and the costs
relating to the Company's evaluation of strategic alternatives, and increased
personnel costs primarily in connection with the start up of new international
subsidiaries and in connection with the acquisition of the ROLODEX/R/
Electronics line. Net interest expense was $1.3 million higher than the prior
year. Interest expense of $3.4 million, mainly in connection with interest paid
on the Company's Senior Notes, exceeded interest income of $1.9 million from the
Company's investments.
INFLATION AND CURRENCY TRANSACTIONS
Inflation has had no significant effect on the operations of the Company
for the three years ended March 31, 1999. 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.
18
The Company's operating results may be affected by fluctuations in currency
exchange rates. The Company does not enter into transactions to hedge its
exposure to fluctuations in the currency markets.
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:
(DOLLARS IN THOUSANDS)
Quarter Ended Quarter Ended Quarter Ended Quarter Ended
June 30 September 30 December 31 March 31
------------------- ------------------- ----------------- ---------------------
Fiscal 1999...................... $21,041 $32,089 $34,502 $16,161
Fiscal 1998...................... 16,614 25,782 36,016 21,828
Fiscal 1997...................... 15,071 24,231 31,986 17,362
FUTURE INCOME TAX BENEFITS
As a result of the losses the Company has filed for income tax refunds of
$3.6 million and has future income tax benefits of $10.7 million which can be
utilized against future earnings. Further, as a result of the VPTI acquisition,
the Company has future income tax benefits of $9.1 million which can be utilized
against future earnings of VPTI. The Company has provided an income tax
valuation allowance of $14.1 million against these tax assets. The remaining
balance represents the amount that the Company believes that it can reasonably
expect to utilize in the foreseeable future.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash, cash equivalents and short-term investments of $18.9
million at March 31, 1999 compared with $33.9 million at March 31, 1998. The
decrease of $15.0 million was primarily attributable to the net loss for the
year and to the purchase of Company common shares for $2.3 million. In April,
1999, a principal payment of $6.0 million was made on the Senior Notes.
Because of the results of operations for the Company's 1999 fiscal year,
the Company was in default of certain financial covenants of the agreements
pursuant to which its Senior Notes were issued pertaining to EBITDA coverage of
interest expense and fixed charges and requiring a minimum consolidated net
worth of $52.5 million. The Noteholders have waived these defaults. The
Company anticipated that the results of its operations for the first quarter of
its 2000 fiscal year would cause additional financial covenant defaults. The
Noteholders have given a short-term waiver of these defaults. All payments of
interest and principal on the Senior Notes have been paid when due. The Company
is presently in discussions with the Noteholders to obtain permanent waivers of
the first quarter defaults and to restructure the agreements to permit the
Company to operate under the agreements going forward. The Company is also
negotiating with several financial institutions to obtain a new credit facility
which will provide funds for a partial payment of the Senior Notes and to meet
seasonal working capital requirements, if necessary. Such new credit facility
would require approval of the Noteholders. No assurance can be given that the
Company will be successful in obtaining permanent waivers or in restructuring
the agreements on acceptable conditions or of entering into a new credit
facility. As a result of the defaults, the Senior Notes have been classified as
short-term liabilities in the Company's financial statements as required by
generally accepted accounting principles.
The Company has no material commitments for capital expenditures in the
next twenty-four months.
19
YEAR 2000 COMPLIANCE
The Company evaluates on a continuous basis software enhancements and
updates based on new technologies to improve its information systems. The
Company has finished its assessment of its current systems that support the
Company's operations in conjunction with year 2000 compliance. The Company has
substantially completed remediation of its existing operational software to
insure functionality and continued operations beyond the year 2000. The Company
expects to complete such remediation by September 30, 1999. The cost of
remediation is estimated to be approximately $500,000, of which approximately
$250,000 was expensed during the year ended March 31, 1999 and $90,000 was
expensed in the prior fiscal year. The remainder is expected to be expensed as
incurred. The Company does not believe that the failure of any customer to be
year 2000 compliant would have a material adverse effect on the financial
condition of the Company. The Company is in the process of evaluating the
progress of its major suppliers toward year 2000 compliance. The Company is
developing contingency plans in this regard.
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, 1999, 1998 and 1997................................................................. 22
CONSOLIDATED BALANCE SHEETS
March 31, 1999 and 1998................................................................................... 23
CONSOLIDATED STATEMENT OF CASH FLOWS
Years ended March 31, 1999, 1998 and 1997................................................................. 24
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Years ended March 31, 1999, 1998 and 1997................................................................. 25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended March 31, 1999, 1998 and 1997................................................................. 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, 1999 and March 31,
1998 and the related consolidated statements of operations, shareholders' equity
and cash flows for each of the three years ended March 31, 1999. 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 respects, the financial position of Franklin Electronic
Publishers, Incorporated and subsidiaries as of March 31, 1999 and March 31,
1998, and the results of its operations and cash flows for each of the three
years ended March 31, 1999 in conformity with generally accepted accounting
principles.
RADIN, GLASS & CO., LLP
Certified Public Accountants
New York, New York
June 10, 1999
21
FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except for per share data)
Year Ended March 31,
----------------------------------------------------
1999 1998 1997
---------------- ---------------- ----------------
SALES $ 103,793 $ 100,240 $ 88,650
COST OF SALES 81,865 57,456 46,074
---------------- ---------------- ----------------
GROSS PROFIT 21,928 42,784 42,576
---------------- ---------------- ----------------
EXPENSES:
Sales and marketing 28,928 22,303 17,621
Research and development 5,740 5,537 5,472
General and administrative 20,283 12,912 8,534
---------------- ---------------- ----------------
Total operating expenses 54,951 40,752 31,627
---------------- ---------------- ----------------
OPERATING INCOME (LOSS) (33,023) 2,032 10,949
Interest expense (3,554) (3,385) (775)
Interest and investment income 674 1,883 560
---------------- ---------------- ----------------
INCOME (LOSS) BEFORE INCOME TAXES (35,903) 530 10,734
INCOME TAX (BENEFIT) PROVISION (5,712) (899) 4,079
---------------- ---------------- ----------------
NET INCOME (LOSS) $ (30,191) $ 1,429 $ 6,655
=============== =============== ===============
NET INCOME (LOSS) PER SHARE:
Basic $ (3.81) $ 0.18 $ 0.83
=============== =============== ===============
Diluted $ (3.81) $ 0.18 $ 0.82
=============== =============== ===============
WEIGHTED AVERAGE SHARES:
Basic 7,923 8,069 8,006
=============== =============== ===============
Diluted 7,923 8,156 8,123
=============== =============== ===============
See notes to consolidated financial statements.
22
FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
1999 1998
----------- -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents (Notes 3 and 7) $12,870 $33,923
Investments in limited partnerships (Note 3) 6,045 -
Accounts receivable, less allowance for doubtful accounts of $928 and $903 17,225 16,684
Inventories (Note 4) 23,934 34,692
Deferred income tax asset (Note 13) - 1,677
Income tax receivable 3,601 898
Prepaids and other assets 3,201 3,262
----------- -----------
TOTAL CURRENT ASSETS 66,876 91,136
----------- -----------
PROPERTY AND EQUIPMENT (Note 5) 9,094 10,712
----------- -----------
OTHER ASSETS:
Deferred income tax asset (Note 13) 5,700 -
Trademark, less accumulated amortization of $972 and $583 (Note 9) 14,576 14,964
Advance royalties and licenses 1,580 5,577
Software development costs 5,338 5,360
Other assets 4,156 8,439
----------- -----------
TOTAL OTHER ASSETS 31,350 34,340
----------- -----------
TOTAL ASSETS $107,320 $136,188
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses (Note 6) $19,136 $ 15,950
Notes payable (Note 7) 40,000 -
Mortgage note payable (Note 7) 3,479 -
Current portion of long-term liabilities - Other 119 403
----------- -----------
TOTAL CURRENT LIABILITIES 62,734 16,353
----------- -----------
LONG-TERM LIABILITIES (Note 7)
Notes payable - 40,000
Mortgage note payable - 3,479
Other liabilities 1,541 1,610
----------- -----------
TOTAL LONG-TERM LIABILITIES 1,541 45,089
----------- -----------
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, 7,832,955 and 8,072,026 shares 48,784 50,489
Retained earnings (deficit) (4,942) 25,249
Foreign currency translation adjustment (Note 12) (797) (992)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 43,045 74,746
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $107,320 $136,188
=========== ===========
See notes to consolidated financial statements
FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
Year Ended March 31,
-------------------------------------
1999 1998 1997
-------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME (LOSS) $ (30,191) $ 1,429 $ 6,655
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS)
TO NET CASH PROVIDED BY OPERATING ACTIVITIES:
Depreciation and amortization 6,010 5,871 4,909
Provision for losses on accounts receivable 2,481 75 83
Provision for inventory revaluation 13,490 - -
Write-down of carrying value of royalties & other assets 6,159 - -
Loss on disposal of property and equipment 299 43 13
Deferred income taxes (1,280) 446 (399)
Source (use) of cash from change in operating
assets and liabilities:
Accounts receivable (3,138) (6,439) 2,905
Inventories (2,731) (3,118) 5,177
Prepaids and other assets (1,439) (838) (116)
Accounts payable and accrued expenses 3,184 1,894 (4,298)
Other, net (45) - -
-------------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (7,201) (637) 14,929
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (1,458) (2,419) (2,671)
Proceeds from sale of property and equipment 107 118 107
Software development costs (1,925) (2,100) (2,440)
Investments in limited partnerships (6,000) - -
Change in other assets (2,360) (5,866) (3,468)
Cash paid for acquisitions, net of cash acquired - (304) (17,526)
-------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (11,636) (10,571) (25,998)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Notes - - 40,000
Proceeds from mortgage - - 4,260
Principal payments of mortgage (284) (284) (213)
Proceeds from issuance of common shares 274 121 162
Income tax credit-stock options - - 1,196
Purchase of common shares (2,332) - -
Other liabilities (69) 794 103
-------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (2,411) 631 45,508
EFFECT OF EXCHANGE RATE CHANGES ON CASH 195 (540) (226)
-------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (21,053) (11,117) 34,213
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 33,923 45,040 10,827
-------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 12,870 $ 33,923 $ 45,040
=====================================
SUPPLEMENTAL DATA:
Cash paid during the year:
Income taxes $ (2,100) $ 851 $ 3,472
Interest $ 3,429 $ 3,377 $ 741
SCHEDULE OF NON-CASH FINANCING ACTIVITIES
Purchase and retirement of treasury shares received under
employee stock option plan and warrants exercised $ - $ 96 $ 1,582
Issuance of common shares related to acquisition $ - $ $ 152
See notes consolidated financial statements
24
FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(in thousands, except for share data)
Accumulated
Common Stock Other Total
------------------------- Retained Comprehensive Shareholders'
Shares Amount Earnings Income* Equity
----------- ------------ ---------- ------------- ------------
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 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
=========== ============ ========== ============= ============
Issuance of common shares under
employee stock option plan 25,960 217 - - 217
Issuance of shares and amortization
of deferred compensation expense for shares
issued for services (unearned portion $67) (7,300) 133 - - 133
Purchase and retirement of treasury
shares received under employee stock
option plan (6,767) (96) - - (96)
Income for the period - - 1,429 - 1,429
Foreign currency translation adjustment - - - (540) (540)
----------- ------------ ---------- ------------ ------------
BALANCE - MARCH 31, 1998 8,072,026 50,489 25,249 (992) 74,746
=========== ============ =========== ============ ============
Issuance of common shares under
employee stock option plan 29,877 274 - - 274
Issuance of shares and amortization
of deferred compensation expense for
shares issued for services
(unearned portion $8) 5,052 47 - - 47
Value of stock options granted - 306 - - 306
Purchase and retirement of common shares (274,000) (2,332) - - (2,332)
Loss for the period - - (30,191) - (30,191)
Foreign currency translation adjustment - - - 195 195
----------- ------------ ----------- ------------ ------------
BALANCE - MARCH 31, 1999 7,832,955 $ 48,784 $ (4,942) $ (797) $ 43,045
=========== ============ =========== ============ ============
* Comprehensive income, i.e., net income (loss), plus, or less, other
comprehensive income, totaled $(29,996) in 1999, $889 in 1998 and $6,429
in 1997.
See notes to consolidated financial statements.
25
FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
1. LINE OF BUSINESS
Franklin Electronic Publishers, Incorporated and its wholly-owned
subsidiaries (the "Company") design, develop, publish, and distribute 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.
Trademark and Goodwill:
Trademark and Goodwill are recorded at cost. The ROLODEX/R/ Electronics
trademark is being amortized over a 40-year period. Goodwill of purchased
businesses is being amortized over a 30-year period.
Right of Return and Refurbishing Costs:
The Company initiates special programs with customers, generally 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.
26
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
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 the related reduction in sales is made at such
time as the Company determines that a price reduction will be effective or is
reasonably anticipated.
Software Development Costs:
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 $1,925, $2,100 and $2,440 for
the fiscal years ended March 31, 1999, 1998, and 1997, respectively.
Amortization included in the accompanying Consolidated Statement of
Operations for fiscal years ended March 31, 1999, 1998, and 1997, was $1,947,
$1,721 and $1,375, 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:
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 Senior 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, 1999, 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 basis of assets and liabilities using enacted tax
rates in effect in the years in which the differences are expected to reverse.
Earnings (Loss) Per Share:
On December 31, 1997, the Company adopted SFAS No. 128, "Earnings per
Share." Earnings per common share are computed by dividing income available to
common stockholders by the weighted average number of common shares outstanding
during the period. The earnings per common share, assuming dilution,
computation gives effect to all dilutive potential common shares during the
period. The computation assumes that the outstanding stock options and warrants
were exercised and that the proceeds were used to purchase common shares of the
Company. The earnings per share computation for the year ended March 31, 1997
has been restated to reflect this new standard.
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
3. CASH AND CASH EQUIVALENTS
The Company classifies as cash equivalents highly liquid investments with
maturities of less than ninety days totaling $4,552 and $32,608 at March 31,
1999 and 1998, respectively. The Company redeemed its investment in limited
partnerships in the first quarter of the next fiscal year.
4. INVENTORIES
Inventories consist of the following:
March 31,
--------------------------------------------
1999 1998
------------------- --------------------
Finished products $18,278 $29,528
Component parts 5,656 5,164
------------------- --------------------
$23,934 $34,692
=================== ====================
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
March 31,
--------------------------------------------
1999 1998
------------------- --------------------
Land $ 854 $ 849
Building and improvements 5,660 5,649
Furniture and equipment 6,244 5,993
Tooling 5,107 4,419
Computer software purchased 1,859 1,855
------------------- --------------------
19,724 18,765
Accumulated depreciation 10,630 8,053
------------------- --------------------
$ 9,094 $10,712
=================== ====================
6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
March 31,
--------------------------------------------
1999 1998
------------------- --------------------
Trade accounts payable $ 4,134 $ 7,164
Accrued payroll, bonus, payroll benefits and taxes 4,010 4,769
Accrued restructuring costs 3,103 400
Accrued sales allowances 3,739 462
Accrued royalties 608 1,154
Accrued expenses other 3,542 2,001
------------------- --------------------
$19,136 $15,950
=================== ====================
28
7. LONG-TERM LIABILITIES
Long-term liabilities consist of the following:
March 31,
--------------------------------------------
1999 1998
------------------- --------------------
Senior Notes payable $40,000 $40,000
Mortgage note payable 3,479 3,763
Other 1,660 1,729
------------------- --------------------
45,139 45,492
Less current portion 43,598 403
------------------- --------------------
$ 1,541 $45,089
=================== ====================
During the year ended March 31, 1997, the Company sold $40,000 of 10-year
promissory notes (the "Senior Notes") to institutional investors. Under the
agreements, the Senior Notes mature on March 31, 2007 and as of March 31, 1999
carry an interest rate of 8.96% per year. Principal payments are required over
seven years starting at the end of the fourth year. The Senior Note agreements
contain normal financial covenants, including a restriction on dividends and
other restricted payments in excess of $7,500, subject to adjustments for
earnings and sales of common stock. The Senior Note agreements contain a
prepayment penalty and a provision for repurchase should there be a change of
control, in addition to financial covenants. A principal payment of $6,000 was
made in April 1999, reducing the outstanding balance of the Senior Notes to
$34,000.
During the year ended March 31, 1997, the Company obtained a $4,260 mortgage
on its new facility in Burlington, New Jersey. The mortgage carries an interest
rate of 1% over LIBOR (4.9% at March 31, 1999) and matures on June 28, 2006. In
July, 1999 the interest rate was adjusted to 1% over the prime rate. The
Company has the option to convert the mortgage to a fixed interest rate.
Because of the results of operations for the Company's 1999 fiscal year, the
Company was in default of certain financial covenants of the agreements pursuant
to which its Senior Notes were issued pertaining to EBITDA coverage of interest
expense and fixed charges and requiring a minimum consolidated net worth of
$52.5 million. The Noteholders have waived these defaults. The Company
anticipated that the results of its operations for the first quarter of its 2000
fiscal year would cause additional financial covenant defaults. The
Noteholders have given a short-term waiver of these defaults. Any default under
the Senior Notes, would also result in default of the agreement pursuant to
which its headquarters facility is mortgaged. All payments of interest and
principal on the Senior Notes and the Mortgage have been paid when due. The
Company is presently in discussions with the Noteholders to obtain permanent
waivers of the first quarter defaults and to restructure the agreements to
permit the Company to operate under the agreements going forward.
The Company is also negotiating with several financial institutions to
obtain a new credit facility which will provide funds for a partial payment of
the Senior Notes and to meet seasonal working capital requirements, if
necessary. Such new credit facility would require approval of the Noteholders.
However, no assurances can be given that the Company will be successful in
obtaining permanent waivers or in restructuring these agreements on acceptable
conditions. The Senior Notes and the Mortgage debt have been classified as
short-term liabilities as required by generally accepted accounting principles.
The maturities of long-term liabilities under the original agreements, for
the five years after March 31, 1999 are as follows:
Years Ending March 31,
- ----------------------------------------------------------------------------------
2000 $ 403 2003 $6,117
2001 $6,117 2004 $6,117
2002 $6,117
29
8. ADVERTISING AND MEDIA COSTS
Advertising costs for the years ended March 31, 1999, 1998 and 1997 were
$12,256, $7,626 and $6,632, 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.
9. TRADEMARK
During the year ended March 31, 1997, the Company acquired the trademark
license of the ROLODEX/R/ Electronics product line and certain other assets from
Insilco Corporation. The purchase price exceeded the fair value of the net
assets acquired by $15,547, which is being amortized over 40 years.
10. COMMITMENTS
Lease Commitments:
Rent expense under all operating leases was $1,180, $1,110 and $858 for the
years ended March 31, 1999, 1998 and 1997, respectively. The future minimum
rental payments to be made under non-cancellable operating leases, principally
for facilities, as of March 31, 1999 were as follows:
Years Ending March 31,
- ----------------------------------------------------------------------------------
2000 $642 2003 $302
2001 $540 2004 $231
2002 $351
Royalty Agreements:
The Company acquires the rights to reference works and databases from various
publishers and technology companies under renewable contracts of varying terms.
Royalties and license fees are based on a per unit charge or as a percentage of
revenue from products utilizing such databases or software licenses.
Litigation:
In 1998, the Company was served with a class action complaint in the Superior
Court of New Jersey having warranty, negligence, and state consumer statute
claims based on an alleged defect in the "to-do list" function of the desktop
software provided with the REX PC Companion. On April 5, 1999, the Court signed
an Order of Preliminary Settlement Approval scheduling a hearing for August 6,
1999, to consider whether the terms of a proposed settlement of this action are
fair. Under the proposed settlement, the Company has agreed to distribute an
upgraded version of the software used with the REX PC Companion without cost to
eligible class members and to pay costs associated with the administration of
the settlement, estimated at between $100 and $150, as well as the fees and
expenses awarded to class counsel, up to $235. The Company has provided for
such costs in the financial statements.
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,
including the class action litigation identified above, is likely, individually
or in the aggregate, to have a material adverse effect on the financial
condition of the Company.
30
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, 1999, under the
Plan, 25,100 shares of common stock were available for distribution by the Board
of Directors.
Employee Stock Options:
Under the 1998 Plan, 750,000 shares of the Company's common stock have been
reserved for issuance. The Plan authorizes the Company to grant options to
purchase shares of common stock to key employees, consultants and outside
directors of the Company.
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. 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 year ended March 31, 1999, the Company granted the former President
of the Company 35,000 options at a price less than the market price of the stock
on the grant date. The weighted-average exercise price and weighted average
fair value of the options granted at less than market at March 31, 1999 was
$3.50 and $1.88. These options are included in the computation of weighted-
average fair value of stock options granted during the year ended March 31,
1999. The Company has also recorded the excess of market price over option
price of $306 at date of grant as compensation expense for the year ended March
31, 1999.
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 is recognized for options granted at fair market value 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, 1999, 1998, and 1997, respectively: annual dividends
of $0.00 for all years, expected volatility of 55.0%, 46.6% and 46.6%, risk-free
interest rate of 5.6%, 5.7% and 6.0% 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, 1999, 1998, and 1997 was $5.32, $5.50, and $9.48,
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 (loss) income and
(loss) earnings per share would have been $(32.0) million and $(4.06) in 1999,
$0.1 million and $0.01 in 1998, and $5.8 million and $0.72 in 1997. 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
11. SHAREHOLDERS' EQUITY - CONTINUED
The following table summarizes the changes in options outstanding and the
related price ranges for shares of the Company's common stock:
Stock Options
-----------------------------------------------------
Shares Weighted Average
Exercise Price
----------------------- ------------------------
Outstanding at March 31, 1996 648,204 $18.47
Granted Exercised 376,301 19.32
Exercised (43,121) 11.80
Expired or cancelled (39,543) 25.70
Adjustment due to "like-value exchange" (84,707) -
-----------------------
Outstanding at March 31, 1997 857,134 14.44
Granted Exercised 464,500 11.79
Exercised (25,960) 8.38
Expired or cancelled (281,200) 15.10
-----------------------
Outstanding at March 31, 1998 1,014,474 13.21
Granted Exercised 716,000 9.89
Exercised (29,877) 9.19
Expired or cancelled (110,867) 13.40
-----------------------
Outstanding at March 31, 1999 1,589,730 15.13
=======================
The following table summarizes information about stock options outstanding at
March 31, 1999:
Options outstanding Options Exercisable
------------------------------------------------------------------ ------------------------------------
Weighted Average Weighted Average Weighted Average
Range of Exercise Number Remaining Exercise Price Number Exercise Price
Prices Outstanding Contractual Life Exercisable
- --------------------- ------------------ ------------------------ ------------------- ------------------ -----------------
$ 3.00-$ 8.44 236,838 6.44 $ 6.41 97,923 $ 4.79
8.75- 10.13 367,002 8.91 9.33 79,188 10.13
11.00- 12.25 426,001 8.51 11.95 89,501 11.45
12.38- 14.00 278,321 6.37 13.78 253,837 13.76
14.25- 31.63 281,568 6.42 17.39 203,242 18.35
-------------- -------------
$ 3.00-$31.63 1,589,730 723,691
============== =============
Options exercisable and the weighted average exercise price at March 31, 1998
and March 31, 1997 were 581,590 options and $13.69, and 386,016 options and
$13.58, respectively.
32
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 in the past had entered 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. During the year ended March 31, 1999 the
Company discontinued such hedging transactions. As of March 31, 1999, the
Company had no outstanding foreign exchange contracts. As of March 31, 1998,
the Company had approximately $18,650, of outstanding foreign exchange contracts
for the purchase or sale of foreign currencies. The major currency exposures
hedged were the Japanese Yen, the British Pound, the French Franc, and the
German Mark. The deferred gains and losses on such contracts were immaterial at
March 31, 1998 and 1997. The duration of these hedging transactions generally
did not exceed one year. Unrealized gains and losses on foreign exchange
forward contracts designated as hedges were deferred and recognized in income in
the same period as the hedged transactions.
13. INCOME TAXES
The components of the net deferred tax asset are the following:
March 31,
--------------------------------------------
1999 1998
------------------- --------------------
US loss carryforward- Franklin $ 2,902 $ -
US loss carryforward- VPTI (Note 16) 9,100 -
Foreign loss carryforwards 277 358
Inventory valuation allowances 3,316 276
Other items deductible in future years 4,233 1,043
------------------- --------------------
19,828 1,677
Deferred income tax valuation allowance 14,128 -
------------------- --------------------
$ 5,700 $1,677
=================== ====================
Deferred income taxes result from temporary differences between income tax and
financial reporting computed at the effective income tax rate. A valuation
allowance has been provided to reduce the deferred income tax asset to the
amount which is expected, more likely than not, to be realized.
The loss carryforward of Voice Powered Technology International, Inc. ("VPTI")
(Note 16) can be offset against future taxable income of VPTI and of Franklin
under certain circumstances. The deferred asset relating to VPTI's loss
carryforward has been offset by a valuation allowance.
33
13. INCOME TAXES - Continued
The income tax provision (benefit) consists of the following:
Year Ended March 31,
---------------------------------------------------------------------
1999 1998 1997
------------------- ------------------- -------------------
Current
Federal $(3,383) $(1,289) $3,978
State - (115) 369
Foreign - 60 131
------------------- ------------------- -------------------
(3,383) (1,344) 4,478
------------------- ------------------- -------------------
Deferred
Federal (2,171) 321 (383)
State (158) 28 (36)
Foreign - 96 20
------------------- ------------------- -------------------
(2,329) 445 (399)
------------------- ------------------- -------------------
Provision (benefit) for income taxes $(5,712) $ (899) $4,079
=================== =================== ===================
The 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, 1999, 1998 and 1997 is as follows:
Year Ended March 31,
----------------------------------------------------------------------
1999 1998 1997
------------------- -------------------- -------------------
Income before income taxes $(35,903) $ 530 $10,734
=================== ==================== ===================
Computed expected tax (12,566) 185 $ 3,757
Reversals of income tax accruals - (1,100) -
State tax provision - 16 322
Deferred income tax valuation allowance 6,854 - -
------------------- -------------------- -------------------
Provision (benefit) for income taxes $ (5,712) $ (899) $ 4,079
=================== ==================== ===================
Effective April 1, 1997, the Company filed elections with the Internal
Revenue Service to treat most of its foreign subsidiaries as divisions of the
parent for U.S. income tax reporting.
34
14. OPERATIONS
The Company adopted SFAS No. 131, "Disclosure about Segments of an Enterprise
and Related Information", at March 31, 1999. SFAS No. 131 establishes annual and
interim reporting standards for an enterprise's operating segments and related
disclosures about its products, services, geographic areas and major customers.
Under SFAS No. 131, the Company's operations are treated as one operating
segment as it only reports profit and loss information on an aggregate basis to
the chief operating decision maker of the Company. Information about the
Company's product sales and major customers are as follows:
March 31,
-------------------------------------------------------------------
Product Sales 1999 1998 1997
- ------------------------------------------------- ------------------- ------------------- -------------------
Reference $ 72,164 $ 79,033 $86,932
Rolodex 13,778 11,055 1,726
REX 15,673 10,152 -
Other 2,178 - -
- ------------------------------------------------- ------------------- ------------------- -------------------
Total Sales $103,793 $100,240 $88,658
================================================= =================== =================== ===================
Approximate foreign sources of revenues including export sales were as follows:
March 31,
-------------------------------------------------------------------
Product Sales 1999 1998 1997
- ------------------------------------------------- ------------------- ------------------- -------------------
Europe $27,767 $26,691 $27,644
Other International 7,778 6,939 4,733
For the fiscal years ended March 31, 1999, 1998, and 1997, no customer
accounted for more than 10% of the Company's revenues.
15. CHARGES IN FISCAL YEAR ENDED MARCH 31, 1998
Earnings for the year ended March 31, 1998 are net of charges relating to the
former Chairman and Chief Executive Officer's employment contract, the costs of
restructuring certain foreign operations, and costs relating to the Company's
evaluation of strategic alternatives. Charges totaling $2,434 of the total
charges of $3,327 were associated with the Company's contractual obligation to
the former Chairman and Chief Executive Officer. Such amounts, previously shown
separately, have been reclassified to be included in general and administrative
expense.
35
16. ACQUISITION OF VOICE POWERED TECHNOLOGY INTERNATIONAL, INC. ("VPTI")
During the year ended March 31, 1998, the Company made loans to and
investments in Voice Powered Technology International, Inc. ("VPTI"), a publicly
traded company, of approximately $2,700. In September 1997, VPTI filed for
reorganization under Chapter 11 of the Federal Bankruptcy Code. In May 1998,
VPTI emerged from bankruptcy as an 82% subsidiary of the Company.
The acquisition of VPTI, which continues to report as a public company, has
been treated as a purchase, with the excess of cost over net assets acquired
included in deferred income taxes, which amount was offset by a valuation
allowance. The operations of VPTI have been consolidated since May 12, 1998,
the date of acquisition of control. The unaudited results of operations, as if
VPTI had been acquired at the beginning of each year, are as follows:
March 31,
---------------------------------------------
1999 1998
------------------- --------------------
Net sales $106,793 $102,324
Net loss (30,013) (2,703)
Net loss per share (3.80) (0.34)
Because of the bankruptcy filing and significant reductions in operations, the
pro-forma results are not those which would have occurred if the acquisition had
been completed as of the beginning of each fiscal year.
36
17. SUMMARIZED QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarter Ended
-------------------------------------------------------------------------------------
June 30 September 30 December 31 March 31
----------------- ----------------- ----------------- -----------------
Fiscal 1999
- ---------------------------------------------
Net sales $21,041 $32,089 $34,502 $ 16,161
Gross profit 9,065 11,600 3,715 (2,452)
Net income (loss) (684) 41 (8,131) (21,417)
Net income (loss) per share:
Earnings per common share* (0.08) 0.01 (1.04) (2.73)
Earnings per common share- assuming (0.08) 0.01 (1.04) (2.73)
dilution*
Fiscal 1998
- ---------------------------------------------
Net sales $16,614 $25,782 $36,016 $ 21,828
Gross profit 7,292 11,632 14,808 9,052
Net income (loss) (420) 1,507 1,209 (867)
Net income (loss) per share:
Earnings per common share* (0.05) 0.19 0.15 (0.11)
Earnings per common share- assuming
dilution* (0.05) 0.18 0.15 (0.11)
Fiscal 1997
- ---------------------------------------------
Net sales $15,071 $24,231 $31,986 $ 17,362
Gross profit 7,135 11,748 15,531 8,162
Net income (loss) 640 2,457 3,247 311
Net income (loss) per share:
Earnings per common share* 0.08 0.31 0.40 0.04
Earnings per common share- assuming
dilution* 0.08 0.30 0.40 0.04
____________
* Reflects the adoption of SFAS No. 128 including the restatement of prior
years.
Fourth Quarter: The loss of $21.4 million for the quarter ended March 31, 1999
includes inventory writedowns of $3.5 million, price protection of $2.9 million,
writedown of royalty advances of $4.7 million, write-off of $2.3 million of
receivables and restructuring charges, including costs of changes in management
of $1.4 million. The Company did not provide for any significant tax benefit
from the fourth quarter loss.
37
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 1999 annual meeting of
stockholders (the "1999 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 1999 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 1999 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 1999 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 filed two reports on Form 8-K during the fourth quarter of the
fiscal year ended March 31, 1999.
Financial statements and schedules filed as a part of this report are
listed on the "Index to Financial Statements" at page 39 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.
38
EXHIBITS
EXHIBIT NO.
3.01 -- Certificate of Incorporation of Franklin (Incorporated by reference to Exhibit 3.01 to
Registration Statement on Form S-1, File No. 3-6612 (the "Company's 1986 S-1 Registration Statement"))
3.02 -- Articles of Amendment to the Certificate of Incorporation of 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)
3.04 -- Amendment to By-laws of Franklin (Incorporated by reference to Exhibit 3.05 to the Company's 1990
10-K)
10.01 -- Standard form of Sales Representative Agreement (Incorporated by reference to Exhibit 10.07 to the
Company's 1986 S-1 Registration Statement)
10.02** -- 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)
10.03** -- 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)
10.04** -- Franklin Stock Option Plan effective as of August 5, 1998 (Incorporated by reference to the
Company's Proxy Statement relating to the 1998 Annual Meeting of Shareholders)
21 -- Subsidiaries of the Registrant
23 -- Consent of Independent Auditor
** 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.
39
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
FRANKLIN ELECTRONIC PUBLISHERS,
INCORPORATED
Dated: July 7, 1999 By /s/ Barry J. Lipsky
-----------------------------------------
Barry J. Lipsky
President and 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 July 7, 1999
- -----------------------------
Edward H. Cohen
Director
July __, 1999
- -----------------------------
Bernard Goldstein
Director
/s/ Barry J. Lipsky July 7, 1999
- -----------------------------
Barry J. Lipsky
Director
July __, 1999
- -----------------------------
Leonard M. Lodish
Director
July __, 1999
- -----------------------------
James Meister
Director
/s/ Howard L. Morgan July 12, 1999
- -----------------------------
Howard L. Morgan
Director
/s/ Jerry R. Schubel July 8, 1999
- -----------------------------
Jerry R. Schubel
Director
/s/ James H. Simons July 9, 1999
- -----------------------------
James H. Simons
Director
July__, 1999
- -----------------------------
William H. Turner
Director
/s/ Arnold D. Levitt July 7, 1999
- -----------------------------
Arnold D. Levitt
Interim Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
40