Add
FEP to Portfolio
Set Alert
Email to a
Friend
| |||
|
|
Quotes & Info
|
| FEP > SEC Filings for FEP > Form 10-Q on 14-Aug-2008 | All Recent SEC Filings |
14-Aug-2008
Quarterly Report
This 2008 Quarterly Report on Form 10-Q may contain statements which constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. 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 and other electronic products, changes in technology, the successful integration of any acquisitions, the impact of competitive electronic products, the management of inventories, dependence on key licenses, titles and products, dependence on sales to a small group of customers, dependence on third party component suppliers and manufacturers, including those that provide Franklin-specific parts, credit risk and other risks and uncertainties that may be detailed herein, and from time-to-time, in Franklin's 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.
RESULTS OF OPERATIONS
Overview
For the quarter ended June 30, 2008, net income decreased by $1,231 to a loss of $1,163 from a profit of $68 in the same period last year. The decrease is primarily due to lower sales in our U.S. consumer division partially offset by decreased operating expense of $76 as well as to one time charges totaling $718 relating to separation pay from our cost cutting initiative of $348 earlier in the 2008 quarter and an investment loss of $370 resulting from the liquidation by its sponsor of a short-term fixed income fund.
Three months ended June 30, 2008 compared with three months ended June 30, 2007:
Net Sales
Sales for the quarter ended June 30, 2008 decreased to $11,993 compared to $13,675 for the same quarter last year. Sales in our North American division decreased by $1,524 or 19% primarily due to the slowdown in consumer spending from the declining economic situation in the U.S., a decline by one customer who did not purchase from us in the current quarter and a voluntary reduction of shipments to a significant customer due to credit issues and the unavailability of credit insurance with respect to such customer.
Gross Margin
Gross margin dollars decreased by $933 to $5,864 in the current quarter from $6,797 in the prior year period with $824 attributable to lower year-over-year sales and a decrease in gross margin percentage of 1% accounting for an additional $108.
Operating Expenses
Total operating expenses decreased by $76 to $6,571 in the current quarter from
$6,647 in the same period last year. Sales and marketing expenses decreased by
$489 to $3,559 (30% of sales) from $4,048 (30% of sales) primarily due to
decreased variable marketing, advertising and freight expenses of $436.
Consulting fees increased by $77 partially offset by a decrease in shows and
exhibitions of $73. Research and development expenses increased by $56 to $980
(8% of sales) from $924 (7% of sales)
last year. The increase resulted from higher outside engineering of $93 partially offset by the reduction of personnel expense of $67. General and administrative expenses increased by $9 to $1,684 (14% of sales) from $1,675 (12% of sales) last year. The increase is due to corporate development expenses of approximately $258 to establish strategic growth initiatives and operational efficiencies and legal fees of $105 partially offset by a reduction in personnel, consulting, temporary labor and overhead allocation expense of $121, $51, $33 and $148 respectively.
In May 2008, we eliminated 10 percent of our U.S. workforce to reduce our operating expenses. These workforce reductions transitioned some U.S. based positions to our Hong Kong facility and outsourced certain others in order to increase efficiencies and bottom line profitability. The current quarter reflects a charge of $348 to cover the associated separation expenses.
Interest Income, net
In the current period net interest income decreased to $6 compared with net interest income of $44 in the prior year period. The decline is due to lower returns on interest bearing accounts as interest rates declined and the mix of investments changed year over year.
Loss on Investment
The current year expense was the result of an investment loss of $370 resulting from the liquidation by its sponsor of a short-term fixed income fund.
Other, net
Other, net was a loss of $41 for the quarter ended June 30, 2008 compared with a loss of $118 in the same period last year. For the current quarter we recorded a small gain of $1 on our program of selling euros at current rates for future settlement compared with a loss of $64 in the same quarter last year. We recorded a loss of $42 on the repatriation of funds from our foreign subsidiaries in the quarter ended June 30, 2008, compared with a loss of $54 in the same period last year.
Net Income
For the quarter ended June 30, 2008, net income decreased by $1,231 to a loss of $1,163 from a gain of $68 in the same period last year. The decrease is primarily due to lower sales in our U.S. consumer division partially offset by decreased operating expenses of $76 as well as to one time charges totaling $718 relating to separation pay from our cost cutting initiative of $348 earlier in the 2008 quarter and an investment loss of $370 resulting from the liquidation by its sponsor of a short-term fixed income fund.
We have operations in a number of foreign countries and have sales and incur expenses in various foreign currencies. As the values of these currencies fluctuate from year to year against the US dollar, our revenues, operating expenses and results of operations are impacted. For the quarter ended June 30, 2008, approximately 35% of our sales were denominated in currencies other than the US dollar. For the quarter ended June 30, 2008, our sales and gross margin benefited by approximately $543 from the year over year change in exchange rates for the various currencies (primarily the euro) in which we operate, while our operating expenses increased by approximately $224 due to the fluctuations in exchange rates. The net effect of the year over year fluctuations in exchange rates on our results of operations for the quarter ended June 30, 2008 was an increase in income of approximately $310.
Changes in Financial Condition
Accounts receivable increased by $1,788 to $7,888 at June 30, 2008 from $6,100 at March 31, 2008 primarily because of customer mix and a seasonal increase in sales of $610 during the quarter ended June 30, 2008 compared with the quarter ended March 31, 2008. Inventory increased by $1,122 to
$10,384 on June 30, 2008 from $9,262 on March 31, 2008 due to normal seasonal increases as we build inventory for the back to school and holiday selling seasons. Accounts payable and accrued expenses increased by $1,881.
Liquidity and Capital Resources
We had cash and cash equivalents of $9,444 at June 30, 2008 compared with cash and cash equivalents of $11,824 as of March 31, 2008.
On May 19, 2008, we entered into an amendment (the "Amendment") to the Revolving Credit and Security Agreement (the "Credit Agreement") with PNC Bank, National Association ("PNC") dated December 7, 2004, as amended by a First Amendment to Revolving Credit and Security Agreement dated December 29, 2005, an Amendment to Loan Documents dated December 22, 2006, an Amendment to Loan Documents dated March 30, 2007, an Amendment to Loan Documents dated as of December 7, 2007, Letter of Extension dated March 4, 2008 and Letter of Extension dated May 6, 2008.
The Amendment modifies the Credit Agreement with PNC by providing for a $20,000 revolving credit facility with sublimits of $1,000 for Letters of Credit, $500 for foreign currency borrowings and $10,000 for acquisitions by the Company (the "Loans"). Loans under the Credit Agreement are secured by all of the assets of the Company. The term of the Credit Agreement has been amended to December 7, 2010 (the "Term"). At the Company's option, Loans under the Credit Agreement will be either Domestic Rate Loans based on PNC's Base Rate with the interest rate varying from the PNC Base Rate minus 50 basis points to the PNC Base Rate plus 50 basis points or LIBOR Rate Loans with the interest rate varying from LIBOR plus 100 basis points to LIBOR plus 225 basis points in each case depending upon the ratio of the Company's Funded Debt to EBITDA and the composition of collateral provided. The Loans under the Credit Agreement are payable in full on the last day of the Term.
The Credit Agreement contains certain financial covenants and restrictions on indebtedness, business combinations and other related items. We were in compliance with all covenants of the amended Credit Agreement as of June 30, 2008. As of June 30, 2008, we had no borrowings under the Credit Agreement.
We rely primarily on our operating cash flow to support our operations. Over the last three fiscal years we generated cash flow from operations of $9,696. This operating cash flow is supplemented by our Credit Agreement to meet seasonal financing needs. We believe our cash flow from operations, available borrowing under our Credit Agreement and existing cash and short-term investment balances will be adequate to satisfy our cash needs for the next twelve months. The amount of credit available under the facility at any time is based upon a formula applied to our accounts receivable and inventory. As of June 30, 2008, we had credit available of $9,228. Our credit availability and borrowings under the facility fluctuate during the year because of the seasonal nature of our business. During the year ended March 31, 2008, maximum availability and borrowings under our Credit Agreement approximated $12,635 and $1,000, respectively. We do not have any significant capital leases and anticipate that depreciation and amortization for fiscal 2009 will exceed planned capital expenditures.
Seasonality
The "back to school" season (August to mid-September) and Christmas selling season (October, November and December) are the strongest selling periods at retail for our products.
Future Income Tax Benefits
We have income tax benefits of $16,900 which can be utilized against future earnings and have provided an income tax valuation allowance of $11,200 against these tax assets. The remaining $5,700 balance is carried as an asset on our balance sheet and is based upon our estimate of taxes that would be due and offset against our net operating loss carried forward, based upon our estimate of future earnings.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
Critical Accounting Policies and Estimates
Management's Discussion and Analysis of Financial Condition and Results of Operations is based upon our consolidated financial statements which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of these financial statements requires that we make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures. On an ongoing basis, we evaluate these estimates and judgments based on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. We annually review our financial reporting and disclosure practices and accounting policies to ensure that our financial reporting and disclosures provide accurate and transparent information relative to the current economic and business environment. There have been no changes in critical accounting policies and estimates from those enumerated in our annual report on Form 10-K for the year ended March 31, 2008.
|
|