The Latest Word From The Spelling Ace Marker

For Franklin Electronic Publishers Inc., life has been a constant roller coaster ride. Launched as Franklin Computer Corp. in 1981, the company started by building clones of Apple Computer Inc.'s Apple II. Franklin's first hair-raising dip was a copyright infringement suit brought by Apple in 1984. By the time Franklin settled the suit and switched to the cutthroat IBM PC clone business, its finances were so precarious that it filed for Chapter 11.

Enter Morton E. David, turnaround specialist. Fresh from helping Mura Corp. become a $76 million success story in the cordless-phone market, David was hired as chairman and chief executive officer in May, 1984. Switching gears, David piloted the Mount Holly (N.J.) company into a new niche--simple handheld gadgets that would do only one task. The calculator-sized Spelling Ace came out in 1986 and was a rapid hit. Franklin sold 350,000 units that Christmas, netting a $1 million quarterly profit. Ace, however, couldn't offset losses from PCs, and Franklin didn't turn a full-year profit until 1988 (chart).

But Franklin didn't enjoy the upswing for long. In 1990, larger competitors such as Smith Corona Corp. and Texas Instruments Inc. jumped into the market, with models priced $10 below Ace. But none worked as well as the Ace, so competitors started a margin-erasing price war. In 1991, came a plunge in memory-chip prices. But instead of benefiting, Franklin got burned because it was locked into high prices from its Taiwanese manufacturer. So despite record sales of $69 million, Franklin was suddenly in need of another turnaround.

'BREAKTHROUGH.' David says he attacked costs "like an animal trapped in a steel trap." He cut staff, froze salaries, and closed all but one of Franklin's research facilities. "You have to chew that leg off if you want to survive. And baby, we chewed," he says. Franklin went from a $6 million loss in 1991 to a $3.1 million profit. Elliot S. Prince, a vice-president at Oppenheimer & Co., predicts a $6.8 million profit in fiscal 1993. Franklin stock, now about 18 a share, is up from 712 a year ago and 312 in 1991. This time, says David, the upswing will last. Technology has progressed to the point where it's possible to build a true, multifunction computer in the same size package it has been building for years. The first such machine, Franklin's $199 Digital Book System (DBS), was introduced last October. Unlike other Franklin machines (including an electronic Bible, foreign language translators, and a medical dictionary), it's programmable. The DBS is about the size of a 34-inch stack of 3-by-5 index cards and accepts two 1-by-2-inch memory cards, each holding up to 45 megabytes of information.

"This is the technological breakthrough they were looking for," says Oppenheimer's Prince. Now, he says, "there's opportunity for recurring revenue." Prince envisions, for example, an "electronic book-of-the-month club."

In the six months since DBS came out, the library has already doubled to nine titles, ranging from an Official Scrabble Dictionary to the Physicians' Desk Reference. Medical reference works have emerged as a particularly promising niche. To date, Franklin has signed up more than nine medical publishers, including McGraw-Hill Inc., publisher of BUSINESS WEEK, which plans an electronic version of Harrison's Principles of Internal Medicine. "We've got that area pretty well sewn up," says David.

For now, Franklin transfers a printed book to a DBS card and hands it back to the publisher--along with the DBS units--for marketing. To speed things up, Franklin is writing software to let publishers produce their own DBS cartridges. David says the program should be out by yearend.

Franklin's CEO also is trying to head off other types of electronic books, such as Newton, Apple's so-called personal digital assistant, due out later this year. Another competing technology: Sony Corp.'s Data Discman, which uses a variation on CD-ROM that holds about 200 megabytes per disk. There are 60 Discman titles, but the unit is bigger than DBS and, at $299 for the cheapest model, 50% more expensive.

Eventually, says David, DBS will be able to handle multimedia works that blend text, graphics, and sound. The second generation of DBS will have

a chip to reproduce speech. And David says new models will have bigger screens and communications links to conventional PCs. Before long, in fact, they may come to resemble multimedia PCs. Now, can he do all that without another dip in earnings?