UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended March 31, 2003
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 incorporation or organization) |
(I.R.S. Employer 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 ¨
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. ¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2) Yes ¨ No x
As of June 20, 2003 7,946,282 shares of common stock of the registrant were outstanding and the aggregate market value of common stock held by non-affiliates was approximately $17,500,000.
The registrant’s Proxy Statement for its 2003 annual meeting of shareholders is hereby incorporated by reference into Part III of this Form 10-K.
FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED
INDEX TO ANNUAL REPORT ON FORM 10-K FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION
YEAR ENDED MARCH 31, 2003
ITEMS IN FORM 10-K
| PAGE | ||||
| 1 | ||||
| ITEM 1. |
BUSINESS | 1 | ||
| ITEM 2. |
PROPERTIES | 10 | ||
| ITEM 3. |
LEGAL PROCEEDINGS | 10 | ||
| ITEM 4. |
SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS | 10 | ||
| ITEM 5. |
MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS | 10 | ||
| ITEM 6. |
SELECTED FINANCIAL DATA | 11 | ||
| ITEM 7. |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 12 | ||
| ITEM 7A. |
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | 18 | ||
| ITEM 8. |
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA | 19 | ||
| ITEM 9. |
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE | 37 | ||
| 38 | ||||
| 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 AND RELATED STOCKHOLDER MATTERS | 39 | ||
| ITEM 13. |
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS | 40 | ||
| ITEM 14. |
CONTROLS AND PROCEDURES | 40 | ||
| 41 | ||||
| ITEM 16. |
EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K | 41 | ||
| 43 | ||||
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This 2003 Annual Report on Form 10-K contains statements which constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Those statements include statements regarding the intent and belief or current expectations of Franklin and its management team. Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those projected in the forward-looking statements. Such risks and uncertainties include, among other things, the timely availability and acceptance of new electronic books, organizers, and other electronic 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 herein, and from time-to-time, in Franklin’s other reports filed with the Securities and Exchange Commission. Franklin undertakes no obligation to publicly update any forward-looking statements for any reason, even if new information becomes available or other events occur in the future.
Franklin Electronic Publishers, Incorporated (“Franklin” or the “Company”) designs, develops, publishes and distributes electronic information on handheld portable devices, memory media, and via internet downloads.
The Company believes it is the world’s largest designer, developer and publisher of handheld electronic reference books, having sold more than twenty-nine million units since 1986. The Company’s electronic books are battery-powered devices that incorporate the text of a reference work, general literature, or other databases and permit the user to read selected portions on a display screen. The Company owns or has licenses to publish and/or distribute, either directly or through third parties, in electronic format more than eight thousand titles, consisting of approximately 200 core reference titles including monolingual and bilingual dictionaries (such as Merriam-Webster’s Collegiate® Dictionary), the Holy Bible, encyclopedias (such as the Britannica® Concise Encyclopedia), entertainment-oriented and educational publications, medical publications (such as the Physicians’ Desk Reference®), and general literature.
The Company marketed its first electronic book, the Spelling Ace®, in 1986. The Company believes that the Spelling Ace was one of the first electronic books marketed in the United States. Beginning in 1987, Franklin began marketing increasingly sophisticated electronic versions of thesauruses and dictionaries and, in 1989, the Holy Bible.
In 1996, the Company acquired certain assets of the ROLODEX® Electronics product line and the associated trademark license. Under this license, the Company acquired the right to build and market databanks and organizers under the ROLODEX® Electronics mark. During the year ended March 31, 2002, the Company recorded a non-cash charge of approximately $11.1 million for the impairment of the value of the ROLODEX® Electronics Trademark.
In 1999, the Company introduced at retail an eBook produced by a third party for downloading content from the Internet. The product introduction initiated the Company’s strategy of providing content for downloading from the Internet for all handheld products. In 2001, the Company introduced at retail its eBookMan product, a handheld electronic multimedia eBook device (“eBookMan”) for downloading multimedia content from the Internet.
The Company expended significant resources in connection with the development and introduction of the eBookMan product line. However, the retail market for handheld eBook readers has not developed and grown as anticipated and consequently the Company discontinued manufacturing the product. During the year ended
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March 31, 2002, the Company incurred a loss of $14.8 million from eBookMan operations, including a write down of inventory and certain other assets of $9.9 million. During the year ended March 31, 2003, the Company continued to sell eBookMan units and had remaining inventory with a carrying value of $319,000 at March 31, 2003.
In 2001, the Company formed a strategic alliance with Mobipocket, SA of Paris, France, (“MobiPocket”) which had been working on a cross platform solution of providing electronic content in a single file format to all popular portable and desktop devices and in April 2003 the Company purchased a twenty-five percent equity interest in MobiPocket. The Company believes this to be an important alliance, providing for Franklin’s own proprietary, generally lower-priced devices to access more content but also enabling Franklin to leverage its content development and availability to include access to the more than 40,000,000 personal digital assistant platforms and hundreds of millions of personal computers already in the market.
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:
| · | 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 with minimal capital invested and, due to the use of multiple factories in various Asian countries, the Company is able to maintain competitive manufacturing costs. |
| · | Strong Share in Electronic Reference Books. Franklin believes that it is the preeminent company in the handheld electronic reference market, with leading positions in the United States and key international markets. The Company believes that it has dominant market share in North America and Australia, as well as a major presence in Europe and the Middle East. Over the past sixteen years, Franklin has sold more than twenty-nine million units worldwide. |
| · | Breadth and Strength of Distribution. The Company distributes its products through approximately 45,000 retail outlets in more than fifty countries and through the internet and catalog mailings direct to customers. The Company also uses direct channels to serve multiple markets, such as the professional, educational and customized application markets. In the educational market, the Company’s electronic books are used in schools throughout the United States. With the success of its electronic Holy Bible, the Company has also achieved substantial sales in the religious market, with Franklin products currently distributed through Christian-affiliated bookstores. |
| · | Technological Leadership in eBooks. Franklin has significant expertise in providing high quality content and functionality through cost-effective hardware designs of electronic information products. The Company designs and has manufactured for its use proprietary microprocessors. The Company’s products combine sophisticated technology with a user-friendly interface designed for convenient and rapid retrieval of data. 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 memory chips. The Company’s |
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| vertically integrated research and development effort, devoted to developing both the hardware and software for its products, also enables it quickly to utilize 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 reference 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, Vivendi Universal 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. In the past several years the Company has increased the scope of its licenses to publish and/or distribute eBooks to cover over 8,000 titles which include titles from well known publishers such as St. Martin’s Press, McGraw Hill, AOL Time Warner and others. |
Business Strategies
Franklin was the first, and strives to be the best, in electronic books. The Company’s strategy to fulfill that mission is to leverage its leading market position by exploiting the following opportunities:
| · | 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 sell through at retail and lead to successful new product introductions. The Company has initiated a new product category management process to further exploit additional opportunities in its core markets including language, language learning, bible, organization and leisure. The Company conducts more consumer research to better understand its customers’ needs to be able to expand its solution-based product offerings in these markets. |
| · | Continuing Upgrade of Core Products. The Company’s core 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. 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 handheld 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 and relies heavily on cooperative advertising with its key retailers. |
| · | Growth in Selected International Markets. The Company has had success in selling its products directly through wholly-owned, local subsidiaries in selected international markets, and through distributors in other markets. Because of the slowed growth in some international markets over the past three fiscal years, the Company is concentrating its sales efforts in fewer key markets. The Company anticipates that its international sales will continue to provide a significant portion of its revenues. |
| · | Use of the Internet to Distribute Content to Handhelds. The Company distributes e-Books on its web page (franklin.com) and other third party websites in electronic form for downloading to a wide variety of leading handheld platforms, including to those using the Palm OS operating system, Microsoft Pocket PC/Windows CE operating system and Symbian operating system, as well as to the Company’s own handheld electronic books. In this way, the Company expects to leverage its expertise in refining reference data with its competitive advantages in developing and distributing handheld products to reach a broader installed base. The Company has developed Internet-enabled hardware platforms to provide for portable use of content delivered from the Company’s website and other third party websites. |
| · | Exploitation of OEM and Licensing Opportunities. Original Equipment Manufacturer (“OEM”) opportunities are business agreements pursuant to which the Company develops products, software, and |
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| technology for resale or use by its partners. The Company has such agreements in the medical publishing and international markets and will seek to broaden its activities to other markets. The Company believes its OEM business can be expanded as the Company upgrades existing and develops new open system platforms. The Company licenses its technology to preeminent companies such as Adobe Systems, MacroMedia, Ademco (a division of Honeywell), and Mobile Digital Media, a spin-off of Palm, Inc. |
Risk Factors
The Company believes that the most significant risks to its business involve those set forth below.
| · | 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 products and 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. |
The Company expended significant resources in connection with the development and introduction of its eBookMan product line, which commenced shipping in the fourth quarter of fiscal 2001. However, the retail market for handheld eBook readers has not developed and grown as anticipated and consequently the Company discontinued manufacturing the product. During the year ended March 31, 2002, the Company incurred a loss of $14.8 million from eBookMan operations, including a write down of inventory and certain other assets of $9.9 million. During the year ended March 31, 2003, the Company continued to sell eBookMan units and had remaining inventory with a carrying value of $319,000 at March 31, 2003.
| · | 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 handheld products 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 at a loss. 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 handheld 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 |
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| 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 handheld product markets will not enter the markets in which the Company currently sells its products. There can be no assurance that other companies, currently in the consumer electronics industry, will not enter the electronic reference 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. |
| · | 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 have a material adverse impact on 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 or that third parties will not obtain patent rights that may be interposed against the Company’s products. See “Legal Proceedings.” |
| · | International Sales and Currency Fluctuations. The Company expects that international sales will continue to 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 24% 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 risk associated with fluctuations in currency values can be expected to increase to the extent the Company expands its international operations. |
Products
Electronic Books
Franklin currently markets, either directly or through third parties, more than 8,000 titles in various categories, including thesauruses, dictionaries, bilingual dictionaries, the Bible, 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®” 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 Company’s top-of-the-line electronic dictionary is Merriam-Webster’s Collegiate Dictionary which is sold for use in BOOKMAN® products and which contains 225,000 clear and precise definitions, as well as parts
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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 audio products that use digitally recorded and compressed speech, which provides for a more natural sounding 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 Holy Bible
Franklin’s electronic Holy Bible is a handheld edition of the entire text of the Holy Bible, which allows for retrieval of text by searches based on single words, word groups or synonyms. For example, a search for the words “valley” and “shadow” will retrieve the Twenty-third Psalm. Because of its built-in ability to conduct full-text word searches, the Franklin Bible is a fully automated concordance. The Company sells the Bible on its BOOKMAN platform and on cards designed for use with its BOOKMAN platform as well as other formats. The Company sells both the King James and the New International versions of the Bible.
Medical Publications
The Company develops and markets a broad range of titles for health care professionals for use on a variety of handheld platforms. The Company’s development of certain medical titles continued during the 2003 fiscal year. Many titles were developed for the Palm OS operating system, as well as for the Microsoft Windows CE operating systems. Titles are available for download at franklin.com as well as in memory card format.
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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 licensed the Official Scrabble® Players Dictionary for use in a handheld product and is investigating making certain entertainment titles available for downloading from its website into a variety of handheld platforms.
Seiko® Products
In April 2003, the Company began to distribute handheld reference products in the United States under the Seiko trademark.
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. The Company has monolingual electronic reference products for the French market and bilingual products for the German-speaking market. The Company has omnibus agreements for publishing electronic reference products with two major European publishers, Bertelsmann and Vivendi Universal, under which Franklin has developed titles in handheld electronic platforms and ROM cards. Vivendi Universal publishes dictionaries, thesauruses, encyclopedias and other works under the following well known French trademarks: Le Robert, Larousse, Nathan, Dalloz, Masson and Bouquins.
Linguistic Technology
Through its Proximity Technology division, the Company designs linguistic software that performs spelling error detection and correction, thesaurus and dictionary functions in conjunction with databases of words in 20 languages and dialects. The Company licenses this software for use in computers of all sizes, as well as on the Internet.
Electronic Organizers
In 1997, the Company began to sell a line of organizers and databanks under the ROLODEX® Electronics trademark which had been licensed by the Company late in 1996. Since acquiring the ROLODEX® 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 more advanced personal organizers, that can interface with desktop PCs.
Internet Enabled Content and Devices
The Company offers versions of certain reference works from its website, franklin.com, for downloading to its own handheld devices and those using the Palm OS operating system, Pocket PC Windows CE operating system, and Symbian operating system. The Company expended significant resources in connection with the development and introduction of the eBookMan product line, which commenced shipping in the fourth quarter of fiscal 2001. See “Risk Factors.”
Research and Development
The Company has a group of approximately thirty-six persons that perform research and development relating to new electronic products as well as improvements to existing products. The Company focuses its hardware development efforts on creating new platforms.
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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 relies on its team of software engineers to develop new products and has also contracted for software development work in Russia, India and the Far East.
Manufacturing
The Company arranges for the assembly of its products by placing purchase orders with established third-party manufacturers in China, 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 office in Hong Kong to facilitate component procurement, manufacturing, and quality control. 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.
Sales and Marketing
Franklin’s products are marketed domestically through the Company’s own sales and marketing force, through independent sales representative organizations, which are supervised by the Company’s internal sales department, and through third party alliances.
Consumer Sales
Franklin’s products are sold in approximately 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. The Company mails approximately 1,700,000 print catalogs each year to consumers and educational buyers for mail order sales. 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, Staples, Wal-Mart, Office Depot, Target, Office Max, Rite Aid, and Best Buy.
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 promotes its products at trade shows, including the Consumer Electronics Show, and advertises in trade magazines and on regional television and radio.
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International Sales
The Company sells its products worldwide through its wholly-owned local subsidiaries and a network of independent distributors. Franklin has subsidiaries in the United Kingdom, France, Canada, Germany, Belgium, Mexico and Australia, that market and distribute the Company’s products, including those specifically developed for these markets.
OEM Markets
The Company produces custom products for and licenses technologies to third parties. 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 also licenses its technology to preeminent companies such as Adobe Systems, MacroMedia, Ademco (a division of Honeywell), and Mobile Digital Media, a spin-off of Palm, Inc.
Patents, Trademarks and Copyrights
The Company owns more than twenty 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.
Franklin owns certain trademark rights, including “Franklin®”, “BOOKMAN®”, “eBookMan®”, “Spelling Ace®”, “Wordmaster®”, “Next Century®” and “Language Master” and has an exclusive license for the mark ROLODEX® 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, word lists, and algorithms used in its electronic books.
Competition
The Company is the market leader for handheld reference books. The Company faces various degrees of competition at different price points in the consumer market. The Company’s main competitors in Europe are Lexibook, Hexaglot, Casio, and Seiko.
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 software 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 these factors.
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A number of prominent electronics manufacturers, including Palm, Sony, Sharp Electronics, Casio, and Royal, market palmtop personal organizer products, personal digital assistants, electronic books, 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 16, 2003, the Company employed approximately 149 persons in the United States, 26 persons in Asia, and 46 persons in international sales and marketing subsidiaries. None of the Company’s employees is represented by a union. The Company believes its relations with its employees are satisfactory.
* * *
Merriam-Webster’s and Collegiate are trademarks of Merriam-Webster, Inc.; Physicians’ Desk Reference are trademarks of Medical Economics Data, a division of Medical Economics Company, Inc.; Palm is a trademark of Palm Inc.; Windows is a trademark of Microsoft Corporation; ROLODEX® is a registered trademark of Berol Corporation, a division of Newell Rubbermaid Inc.; and Britannica is a trademark of Encyclopaedia Britannica, Inc.
The Company owns a 90,000 square foot corporate headquarters building in Burlington, New Jersey. The Company believes this facility will satisfy its foreseeable needs for office, laboratory and warehousing space.
In April 2002, LeapFrog Enterprises, Inc. (“LeapFrog”) filed an action for declaratory judgment of non-infringement of the Company’s United States Patent entitled “Word Spelling and Definition Educational Device” and the Company filed a patent infringement counterclaim against LeapFrog alleging that Leapfrog’s products infringe on that patent. In February 2003, LeapFrog and the Company agreed to dismiss with prejudice all claims and counterclaims in that patent litigation.
In October 2002, the Company was notified of a third party claim in Belgium against its local operating subsidiary relating to the sale of certain products incorporating medical databases. The claimant asks for injunctive relief and damages approximating 2.8 million euros. Two actions by the third party for injunctive relief against the Company were decided by the court in the Company’s favor. The Company disputes the allegations of the remaining claims and intends to vigorously defend any actions related thereto.
The Company is subject to other litigation from time to time arising in the ordinary course of its business. The Company does not believe that any such litigation is likely, individually or in the aggregate, to have a material adverse effect on the financial condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company’s common stock is traded on the American Stock Exchange (the “AMEX”) under the symbol “FEP.” Prior to June 18, 2001, the Company’s common stock was traded on the New York Stock Exchange (the
10
“NYSE”). The following table sets forth the range of the high and low closing sales prices as reported by the NYSE and the AMEX, as applicable, for the last two fiscal years:
| Sales | ||||
| Quarter Ended |
High |
Low | ||
| June 30, 2001 |
3.31 | 2.453 | ||
| September 30, 2001 |
2.75 | 1.093 | ||
| December 31, 2001 |
2.00 | 1.046 | ||
| March 31, 2002 |
2.75 | 1.343 | ||
| June 30, 2002 |
2.23 | 1.20 | ||
| September 30, 2002 |
1.55 | .90 | ||
| December 31, 2002 |
2.73 | 1.10 | ||
| March 31, 2003 |
2.92 | 1.63 | ||
The approximate number of holders of record of the common stock as of June 20, 2003 was 866.
The Company has not declared cash dividends on the common stock and does not have any plans to pay any cash dividends on the common stock in the foreseeable future. The Board of Directors of the Company anticipates that any earnings that might be available to pay dividends on the common stock will be retained to finance the business of the Company and its subsidiaries.
ITEM 6. SELECTED FINANCIAL DATA
The following tables should be read in conjunction with the consolidated financial statements of the Company and the notes thereto and the “Management’s Discussion and Analysis of Financial Condition and Results of Operation” section appearing elsewhere herein.
| Year Ended March 31, |
||||||||||||||||||||
| 2003 |
2002 |
2001 |
2000 |
1999 |
||||||||||||||||
| Statements of Operations Data |
||||||||||||||||||||
| Sales |
$ | 65,592 | $ | 71,025 | $ | 79,966 | $ | 97,078 | $ | 104,435 | ||||||||||
| Cost of Sales |
35,963 | 41,962 | 46,089 | 61,223 | 81,209 | |||||||||||||||
| Write-down of eBookMan Inventory |
— | 8,622 | — | — | — | |||||||||||||||
| Gross Margin |
29,629 | 20,441 | 33,877 | 35,855 | 23,226 | |||||||||||||||
| Expenses: |
||||||||||||||||||||
| Sales and marketing |
17,098 | 22,253 | 18,556 | 21,397 | 29,570 | |||||||||||||||
| Research and development |
3,385 | 4,529 | 4,537 | 4,215 | 5,740 | |||||||||||||||
| General and administrative |
7,011 | 7,170 | 7,779 | 11,746 | 20,283 | |||||||||||||||
| Trademark Impairment |
— | 11,147 | — | — | — | |||||||||||||||
| Total operating expenses |
27,494 | 45,099 | 30,872 | 37,358 | 55,593 | |||||||||||||||
| Operating Income (Loss) |
& | |||||||||||||||||||