PART I
Franklin Electronic Publishers cuts 10% of U.S. Jobs – Jun 9, 2008, 2:54pm EDT Updated Jun 9, 2008, 4:52pm EDT. Franklin Electronic Publishers Inc. President and CEO Barry Lipsky said Monday. About Franklin Electronic Publishers. Franklin Electronic Publishers is the worldwide market leader in handheld eBooks, including the popular BOOKMAN® series. The company is also the exclusive producer and distributor of ROLODEX® Electronics brand of personal information management products. FCC ID application submitted by Franklin Electronic Publishers Inc for Digital Book w/computer Interface Adapter for FCC ID CK2DBS-2. Approved Frequencies, User Manuals, Photos, and Wireless Reports.
ITEM 1. BUSINESS
Franklin Electronic Publishers, Incorporated (“Franklin” or the “Company”) designs, develops, publishes and distributes electronic information on handheld devices, memory media cards, and via internet downloads.
The Company believes it is one of the world’s largest designers, developers and publishers of electronic reference books, having sold more than thirty-two million handheld devices since 1986. The Company’s handheld devices are battery-powered platforms with screen displays that incorporate the text of a reference work, such as a dictionary. The Company owns or has licenses to publish in electronic format more than one hundred 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 publications (such as The Official Scrabble ® Dictionary), and educational and medical publications. In addition, the Company owns or has licenses to distribute in electronic format either directly or through third parties, more than seventeen thousand titles, including reference works and general literature, via internet download.
The Company marketed its first handheld reference device, the Spelling Ace ® spelling corrector, in 1986. The Company believes that the Spelling Ace device 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 first handheld electronic version of the Holy Bible . In 1995 the Company introduced a line of updateable handhelds through a proprietary memory card system and in 2003 introduced a PageMark Dictionary ™ series as a companion to paper.
In 2001, the Company formed a strategic alliance with Mobipocket, SA of Paris, France, (“MobiPocket”) which had been working on a cross platform solution for 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, and enabling Franklin to leverage its content development and availability to include access to the more than 50,000,000 personal digital assistant platforms, smartphones 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.
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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 in the United States and certain international markets. The Company believes that it has significant market share in North America and Australia, as well as a major presence in Europe and the Middle East. Over the past seventeen years, Franklin has sold more than thirty-two million handheld devices 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 tens of thousands of schools throughout the United States. With the success of its electronic Holy Bible, the Company has achieved substantial sales in the spiritual market, with Franklin products currently distributed through Christian-affiliated bookstores and Radio Shack. |
| · | 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 Merriam-Webster’s Collegiate Dictionary, 11 th Edition , which fills up thirty-seven megabytes of memory space, into the memory space of only nine 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 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 100 core reference titles, including several versions of English and bilingual dictionaries, Bibles, and the Oxford Handbook of Clinical Medicine . The Company obtains its licenses from a variety of well-established publishers such as Merriam-Webster, Harper Collins, SEJER (formerly Vivendi Universal) and Ernst Klett International. These licenses 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 17,000 titles including titles from well known publishers such as St. Martin’s Press, McGraw Hill, Time Warner, Random House, Harper Collins and others. |
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BUSINESS STRATEGIES
Franklin was the first, and strives to be the best, in electronic books focusing on linguistic solutions. 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. For example, the Company’s PageMark Dictionary ™ has been well-received in the marketplace since its 2003 launch and won top honors in Personal Electronic Design at the Design and Engineering Showcase at the 2004 Consumer Electronics Show. The Company regularly conducts 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 a substantial portion of its revenue. Dictionaries, spell correctors, translators 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. 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 and on advertising in targeted local markets. |
| · | 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. The Company anticipates that its international sales will continue to provide a significant portion of its revenues as the “English Learning” market continues to expand on a global basis. |
| · | Exploitation of OEM and Licensing Opportunities. Original Equipment Manufacturer (“OEM”) opportunities are business agreements pursuant to which the Company develops products, software, and 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. |
| · | Use of the Internet to Distribute Handheld Reference Devices and Content. The Company distributes its handheld devices and e-Books on its web page (franklin.com) and other third party websites. 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. |
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 |
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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 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 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 or domestic 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. |
| · | Dependence on Key Licenses and Titles. The Company depends on licenses from a variety of well-established publishers such as Merriam-Webster, Harper Collins, SEJER, (formerly Vivendi Universal) and Ernst Klett International for the right to distribute over 100 core reference titles, including several versions of English and bilingual dictionaries, Bibles related works, and the Oxford Handbook of Clinical Medicine . If an existing license agreement covering certain of our core reference titles was terminated or not renewed, we would have to develop and introduce alternative or new titles, which could have a negative impact on our results of operations and profitability. Although we cannot |
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guarantee that we will be able to extend the terms of our existing license agreements or that we will be successful in negotiating alternative or new license agreements, our existing licenses are supported by long-standing relationships with the publishers, and to date we have been able to obtain extensions on our existing license agreements or enter into new license agreements |
| · | Dependence on Key Products. The Company derived 11%, 13%, and 12% of its consolidated revenue for the fiscal years ended March 31, 2004, 2003, and 2002, respectively, from one dictionary product under a license which expires in 2007. |
| · | 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. |
| · | 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 31% of the Company’s 2004 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. The Company maintains a program of selling Euros at current rates for future settlement in order to protect the dollar value of sales generated by foreign subsidiaries. Gains or losses on these contracts are offset primarily by the effect of the foreign exchange rate changes on the underlying transactions. |
PRODUCTS
Electronic Books Download Guardid Card Reader driver.
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 Speaking Collegiate Dictionary, 11 th Edition which is sold for use in BOOKMAN ® products and which contains more than 200,000 words with clear and concise definitions, as well as 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
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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. Many of the other bilingual dictionaries are 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. 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 as well as a Bible Dictionary and Bible Concordance.
Entertainment Titles
The Company sells a variety of crossword puzzle solvers in both U.S. and British English, which provide correct spelling for over 250,000 words and phrases from Merriam-Webster’s Official Crossword Puzzle Dictionary for use by word puzzle enthusiasts. In 2004, the Company began to sell a new handheld version of the Official Scrabble ® Players Dictionary. In 2005, the Company plans to sell backgammon, some casino style games, and a Jokebook to a third party OEM customer.
Seiko ® Products
In April 2003, the Company began to distribute handheld reference products in North America under the Seiko ® trademark. The Company currently distributes eight Seiko products, primarily dictionaries and translators. In June 2004, the Company entered into agreements with Seiko Instruments, Inc. (“SII”), for SII to distribute Franklin branded reference products in Asia and for the Company to distribute Seiko branded reference products in Europe and Australia. The Company and SII have also agreed to work together to establish common development architectures. The Company intends to begin distribution of those products in the European
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Community in 2005 and Australia in 2004. The agreements provide for SII to purchase from Franklin a minimum of $20,000,000 in Franklin reference products for the Japanese markets over a five year period commencing in the summer of 2005.
The agreements also provide for Franklin to continue purchasing Seiko ® reference products for distribution in North America for the five years ending March 31, 2009 with a minimum purchase guarantee of $14,000,000 during the period. For the fiscal year ended March 31, 2004, the Company purchased $2,734,000 of Seiko ® reference products .
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, Ernst Klett International and SEJER, formerly 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 trademarks: Le Robert, Larousse and Chambers.
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.
Translators
The Company has developed and sells a line of handheld two way translator devices that incorporate a comprehensive list of English words and phrases useful to the traveler, with translations for each word and phrase in one or more of the following languages: Spanish, French, German, Italian, and a variety of Eastern European and Asian languages. Translations are provided by these devices either visually on a display screen or by audible output.
Internet Enabled Content
The Company offers 17,000 titles including 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.
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 Europe, 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, 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, Brookstone, and Heartland. 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 and Licensing Efforts
The Company produces custom products for and licenses technologies to third parties. The Company has developed custom products including a speaking version of the alMawrid , an Arabic-English bilingual dictionary for sale in the Middle East and an Oxford English-Hebrew Dictionary. 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 ® ”, “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 in the United States for handheld reference books. The Company faces various degrees of competition at different price points in the United States consumer market. The Company has a leading position in the European market where its main competitors include Lexibook, Hexaglot, Casio, Sharp 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 4, 2004, the Company employed approximately 145 persons in the United States, 27 persons in Asia, and 44 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.
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Merriam-Webster’s and Collegiate are trademarks of Merriam-Webster, 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.
ITEM 2. PROPERTIES
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.
ITEM 3. LEGAL PROCEEDINGS
In October 2003, the Company settled the litigation in Belgium brought one year earlier that was based on a third party claim against its local operating subsidiary relating to the sale of certain products incorporating medical databases. The claimant had asked for injunctive relief and damages approximating 2.8 million euros. As a result of the settlement, all claims against the Company and its operating subsidiary have been released without payment of any settlement amount by the Company and the claimant has agreed to pay 14,950 euros to the Company in consideration for the Company’s provision of four quarterly updates to such medical databases.
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 MATTER TO A VOTE OF SECURITY HOLDERS
NONE
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