-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GR107/WqWFPi/PISU7ZredOUXsJEluJBfpGBf3KIFT8UUdHmChIvOZ74+i4JCXBN /uRffO+z/gNmfsp/wbh1Yg== 0000892569-99-001187.txt : 19990430 0000892569-99-001187.hdr.sgml : 19990430 ACCESSION NUMBER: 0000892569-99-001187 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990429 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FRANKLIN TELECOMMUNICATIONS CORP CENTRAL INDEX KEY: 0000722572 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER COMMUNICATIONS EQUIPMENT [3576] IRS NUMBER: 953733534 STATE OF INCORPORATION: CA FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-14891 FILM NUMBER: 99604993 BUSINESS ADDRESS: STREET 1: 733 LAKEFIELD RD CITY: WESTLAKE VILLAGE STATE: CA ZIP: 91361 BUSINESS PHONE: 8053738688 MAIL ADDRESS: STREET 1: 733 LAKEFIELD ROAD CITY: WESTLAKE VILLAGE STATE: CA ZIP: 91361 FORMER COMPANY: FORMER CONFORMED NAME: ABM COMPUTER SYSTEMS DATE OF NAME CHANGE: 19870317 FORMER COMPANY: FORMER CONFORMED NAME: AUTOMATED BUSINESS MACHINES INC DATE OF NAME CHANGE: 19830802 10-Q 1 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q ------------ [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 0-11616 FRANKLIN TELECOMMUNICATIONS CORP. (Exact Name of Registrant as Specified in its Charter) --------------- California 95-3733534 State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 733 Lakefield Road, Westlake Village, California 91361 (Address of Principal Executive Offices) (Zip Code) Registrant's Telephone Number, Including Area Code: (805) 373-8688 --------------- 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 the number of shares outstanding of each of the issuer's class of common stock, as of the latest practicable date:
TITLE OF EACH CLASS OF COMMON STOCK OUTSTANDING AT APRIL 26, 1999 - ----------------------------------- ----------------------------- Common Stock, no par value 25,423,017
2 Index Franklin Telecommunications Corp. Part I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets - March 31, 1999 (Unaudited) and June 30, 1998 Consolidated Statements of Operations (Unaudited) Three months and nine months ended March 31, 1999 and 1998 Consolidated Statements of Cash Flows (Unaudited) Nine months ended March 31, 1999 and 1998 Notes to Consolidated Financial Statements (Unaudited) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Part II. OTHER INFORMATION Item 1. Legal Proceedings Item 2. Changes in Securities Item 3. Defaults Upon Senior Securities Item 4. Submission of Matters to a Vote of Security Holders Item 5. Other Information Item 6. Exhibits and Reports on Form 8-K 3 Item 1. Financial Statements FRANKLIN TELECOMMUNICATIONS CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 1999 (UNAUDITED) AND JUNE 30, 1998
MARCH 31, JUNE 30, 1999 1998 ------------ ------------ (UNAUDITED) ASSETS Current assets Cash and cash equivalents .................................................... $ 4,824,000 $ 5,750,000 Accounts receivable, less allowance for doubtful accounts of $11,000 (unaudited) and $8,000, respectively ....................................... 205,000 91,000 Other receivables ............................................................ 42,000 107,000 Current portion of note receivable ......................................... 95,000 241,000 Inventories (Note 2) ......................................................... 2,250,000 671,000 Prepaid expenses ............................................................. 210,000 555,000 ------------ ------------ Total current assets ....................................................... 7,626,000 7,415,000 ------------ ------------ Property and equipment Machinery and equipment ...................................................... 1,677,000 184,000 Furniture and fixtures ....................................................... 161,000 168,000 Computers and software ....................................................... 956,000 997,000 ------------ ------------ 2,794,000 1,349,000 Less accumulated depreciation ................................................ 690,000 571,000 ------------ ------------ Total property and equipment ............................................... 2,104,000 778,000 ------------ ------------ Note receivable, net of current portion ........................................ 310,000 276,000 Other assets ................................................................... 557,000 423,000 ------------ ------------ Total assets ............................................................... $ 10,597,000 $ 8,892,000 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Current portion of long-term debt (majority due to a related party) .......... $ 762,000 $ 252,000 Accounts payable ............................................................. 1,859,000 173,000 Accrued liabilities (Note 3) ................................................. 2,392,000 1,027,000 ------------ ------------ Total current liabilities .................................................. 5,013,000 1,452,000 Long-term debt, (majority due to a related party) net of current portion ...... 23,000 404,000 ------------ ------------ Total liabilities .......................................................... 5,036,000 1,856,000 ------------ ------------ Contingencies (Note 4) Shareholders' equity Preferred stock, no par value 10,000,000 shares authorized, Convertible Series C -0- (unaudited) and 548 shares issued and outstanding ................. -0- 4,856,000 Common stock, no par value 90,000,000 shares authorized 24,789,017 (unaudited) and 18,344,178 shares issued and outstanding ............... 21,109,000 15,571,000 Common stock committed, no par value 10,000 (unaudited) and 77,336 shares committed but not yet issued ............................................... 6,000 91,000 Accumulated deficit .......................................................... (15,554,000) (13,482,000) ------------ ------------ Total shareholders' equity ................................................. 5,561,000 7,036,000 ------------ ------------ Total liabilities and shareholders' equity ................................. $ 10,597,000 $ 8,892,000 ============ ============
The accompanying notes are an integral part of these financial statements. 4 FRANKLIN TELECOMMUNICATIONS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS AND NINE MONTHS ENDED MARCH 31, 1999 AND 1998 (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED MARCH 31, MARCH 31, ------------------------------- ------------------------------- 1999 1998 1999 1998 ------------ ------------ ------------ ------------ (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) Sales Product ..................................... $ 3,762,000 $ 166,000 $ 5,387,000 $ 403,000 Telephone and Internet services ............. 508,000 159,000 1,056,000 450,000 ------------ ------------ ------------ ------------ Total sales ............................ 4,270,000 325,000 6,443,000 853,000 ------------ ------------ ------------ ------------ Cost of sales Product ..................................... 1,855,000 113,000 2,642,000 254,000 Telephone and Internet services ............. 305,000 65,000 796,000 321,000 ------------ ------------ ------------ ------------ Total cost of sales .................... 2,160,000 178,000 3,438,000 575,000 ------------ ------------ ------------ ------------ Gross profit ..................................... 2,110,000 147,000 3,005,000 278,000 ------------ ------------ ------------ ------------ Operating expenses Research and development expenses ........... 492,000 511,000 1,358,000 1,017,000 Selling, general, and administrative Expenses ................................. 1,244,000 1,210,000 3,797,000 2,698,000 ------------ ------------ ------------ ------------ Total operating expenses ............... 1,736,000 1,721,000 5,155,000 3,715,000 ------------ ------------ ------------ ------------ Income (loss) from operations .................... 374,000 (1,574,000) (2,150,000) (3,437,000) ------------ ------------ ------------ ------------ Other income (expense) Interest income ............................. 35,000 101,000 126,000 167,000 Interest expense ............................ (1,000) (10,000) (26,000) (41,000) Other income ................................ (26,000) 71,000 (22,000) 71,000 ------------ ------------ ------------ ------------ Total other income ..................... 8,000 162,000 78,000 197,000 ------------ ------------ ------------ ------------ Income (loss) before provision for income taxes ................................. 382,000 (1,412,000) (2,072,000) (3,240,000) Provision for income taxes ....................... -- -- -- -- ------------ ------------ ------------ ------------ Net income (loss) ................................ $ 382,000 $ (1,412,000) $ (2,072,000) $ (3,240,000) ============ ============ ============ ============ Basic net income (loss) per common share ......... $ .02 $ (.09) $ (.10) $ (.22) ============ ============ ============ ============ Diluted net income (loss) per common share ....... $ .01 $ (.09) $ (.10) $ (.22) ============ ============ ============ ============ Weighted average common shares outstanding used to compute basic net income (loss) per common share ........... 24,104,627 16,334,147 21,264,724 15,097,788 ============ ============ ============ ============ Weighted average common shares outstanding used to compute diluted net income (loss) per common share ........... 25,858,081 16,334,147 21,264,724 15,097,788 ============ ============ ============ ============
The accompanying notes are an integral part of these financial statements. 5 FRANKLIN TELECOMMUNICATIONS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED MARCH 31, 1999 AND 1998 (UNAUDITED)
NINE MONTHS ENDED MARCH 31, ------------------------------ 1999 1998 ----------- ------------ (UNAUDITED) (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES Net loss ................................................... $(2,072,000) $ (3,240,000) Adjustments to reconcile net loss to net cash used in operating activities Depreciation and amortization ......................... 305,000 186,000 Provision for loss on obsolete inventory .............. 147,000 -- Provision for loss on doubtful accounts ............... 3,000 12,000 Stock issued for services rendered .................... 50,000 -- Gain from retirement of capital lease liability ....... -- (71,000) (Increase) decrease in Accounts receivable ................................... (118,000) (54,000) Other receivables ..................................... 25,000 -- Inventories ........................................... (1,726,000) (254,000) Prepaid expenses ...................................... (155,000) 3,000 Increase in Accounts payable ...................................... 1,686,000 178,000 Accrued liabilities ................................... 1,455,000 67,000 ----------- ------------ Net cash used in operating activities ...................... (400,000) (3,173,000) ----------- ------------ CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property and equipment ........................ (1,102,000) (291,000) Repayment of notes receivable .............................. 207,000 5,000 Other assets ............................................... (179,000) (273,000) ----------- ------------ Net cash used in investing activities ...................... (1,074,000) (559,000) ----------- ------------ CASH FLOWS FROM FINANCING ACTIVITIES Payments on other liabilities .............................. -- (1,000) Proceeds from sale of Company stock ........................ 493,000 10,055,000 Proceeds from sale of minority stock in consolidated subsidiary ................................. 55,000 373,000 Payments on capital lease obligation ....................... -- (290,000) ----------- ------------ Net cash provided by financing activities .................. 548,000 10,137,000 ----------- ------------ Net increase (decrease) in cash ............................ (926,000) 6,405,000 Cash and cash equivalents, beginning of the period ......... 5,750,000 1,464,000 ----------- ------------ Cash and cash equivalents, end of the period ............... $ 4,824,000 $ 7,869,000 =========== ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
1999 1998 ----------- ----------- (unaudited) (unaudited) Interest paid $ -- $ -- ==== ====== Income taxes paid $ -- $2,000 ==== ======
The accompanying notes are an integral part of these financial statements. 6 FRANKLIN TELECOMMUNICATIONS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED MARCH 31, 1999 AND 1998 (UNAUDITED) (CONTINUED) SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES. During the nine months ended March 31, 1999, the Company completed the following: - - Equipment valued at $500,000 that was prepaid at June 30, 1998 was delivered to the Company. - - The Company issued 5,543,468 shares of common stock upon the conversion of 548 shares of its Series C preferred stock. - - The Company sold equipment with a net book value of $16,000 and the trade name "Malibu Internet Services" to an individual in exchange for a note receivable of $55,000. The accompanying notes are an integral part of these financial statements. 7 FRANKLIN TELECOMMUNICATIONS CORP. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS NOTE 1--GENERAL AND SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES Business and Organization Franklin Telecommunications Corp. ("Franklin") and its subsidiaries (collectively the "Company") manufacture and distribute data and telephony communications, access and connectivity products for IP Telephony networks, T-1 and X.25 wide-area networks and provide IP Telephony and Internet services through its majority-owned subsidiary, FNet Corp. ("FNet"). FNet has had limited operations to date. The Company's customers are located predominantly in the United States, Canada, Australia, South America and parts of Europe in a wide range of industries including financial services, government, telephone services and manufacturing. Basis of Presentation The accompanying consolidated financial statements have been prepared in conformity with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all normal, recurring adjustments considered necessary for a fair presentation have been included. The financial statements should be read in conjunction with the audited financial statements included in the Company's annual report on Form 10-K for the fiscal year ended June 30, 1998. The results of operations for the three months and nine months ended March 31, 1999 are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 1999. Principles of Consolidation The accompanying consolidated financial statements include the accounts of Franklin Telecommunications Corp. and its wholly-owned or majority owned subsidiaries. All significant intercompany balances and transactions have been eliminated. Earnings (Loss) Per Common Share For the three and nine month periods ended March 31, 1999 and 1998, the Company adopted SFAS No. 128 "Earnings per Share." Basic loss per share is computed by dividing loss available to common shareholders by the weighted-average number of common shares outstanding. Diluted loss per share is computed similar to basic losses per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. For the nine months ended March 31, 1999 and the three and nine months ended March 31, 1998, common stock equivalents have been excluded from the aforementioned computations as their effect would be anti-dilutive. 8 Earnings Per Share for the three months ended March 31, 1999 is as follows:
For the Three months Ended March 31, 1999 -------------------------------------------- Income Shares Per Share (Numerator) (Denominator) Amount ----------- ------------- ---------- BASIC EPS Income available to common shareholders $382,000 24,104,627 $0.02 ===== EFFECT OF DILUTIVE SECURITIES Options 1,753,454 -------- ---------- DILUTED EPS Income available to common shareholders plus assumed conversions $382,000 25,858,081 $0.01 ======== ========== =====
Income Taxes The Company accounts for income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is required when it is less likely than not that the Company will be able to realize all or a portion of its deferred tax assets. Recently Issued Accounting Pronouncements SFAS 130, "Reporting Comprehensive Income" issued by the Financial Accounting Standards Board is effective for financial statements with fiscal years beginning after December 15, 1997. Earlier application is permitted. SFAS 130 establishes standards for reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. The Company does not expect adoption of SFAS 130 to have a material impact, if any, on its financial position or results of operations. The Financial Accounting Standards Board issued SFAS 131, "Disclosures about Segments of an Enterprise and Related Information," effective for fiscal years beginning after December 15, 1997. SFAS 131 requires a company to report certain information about its operating segments including factors used to identify the reportable segments and types of products and services from which each reportable segment derives its revenues. The Company does not anticipate any material change in the manner that it reports its segment information under this new pronouncement. In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Post Retirement Benefits." This statement is not applicable to the Company. In June 1998, The FASB issued SFAS No.133, "Accounting for Derivative Instruments and Hedging Activities." This statement established accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities and is effective for fiscal years beginning after June 15, 1999. Management believes that SFAS No. 133 will not have an effect on the Company's financial statements. SFAS No. 134, "Accounting for Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans Held by a Mortgage Banking Enterprise," was issued in October 1998. This statement is not applicable to the Company. 9 NOTE 2--INVENTORIES Inventories consisted of the following:
MARCH 31, JUNE 30, 1999 1998 ---------- -------- (UNAUDITED) Raw materials ........................................ $1,746,000 $260,000 Work in process ...................................... 279,000 164,000 Finished goods ....................................... 225,000 247,000 ---------- -------- Total ........................................... $2,250,000 $671,000 ========== ========
NOTE 3--ACCRUED LIABILITIES Accrued liabilities consisted of the following:
MARCH 31, JUNE 30, 1999 1998 ---------- ---------- (UNAUDITED) Salaries and related expense ..................................... $ 621,000 $ 421,000 Deferred revenue ................................................. 1,015,000 -- Accrued offering costs ........................................... 118,000 153,000 Accrued interest payable, primarily to a related party ........... 27,000 130,000 Accrued sales tax ................................................ 374,000 29,000 Other accrued liabilities ........................................ 237,000 294,000 ---------- ---------- Total .................................................. $2,392,000 $1,027,000 ========== ==========
NOTE 4--CONTINGENCIES Legal Proceedings On April 5, 1999, the Company's subsidiary FNet Corp. ("FNet") filed a lawsuit to rescind an employment contract and to seek damages from a former terminated employee. The employee subsequently filed a claim with the Texas Work Force Commission, requesting full compensation under the employment contract. FNet plans to vigorously contest the action. There can be no assurance that FNet will be successful in its lawsuit, or defense of the action brought by the former employee. An adverse outcome would not have a material adverse effect on the Company's financial condition. NOTE 5--RECENT SALE OF EQUITY SECURITIES During the three months ended March 31, 1999, the Company issued 2,391,728 shares of common stock upon the conversion of 223 shares of Series C Convertible Preferred Stock. The Company did not receive any proceeds from this conversion. During the three months ended March 31, 1999, the Company sold and issued 212,000 restricted shares to existing shareholders, at $.50 per share. These shares were issued under Section 4(2) of the Securities Act. During the three months ended March 31, 1999, the Company issued 147,051 shares from the exercise of employee options, at $.44 to $.70 per share. During the three months ended March 31, 1999, the Company issued 22,667 restricted shares, in lieu of salaries for an employee, at $.75 per share. During the three months ended March 31, 1999, the Company issued 401,022 shares from the exercise of warrants, at $.79 to $1.25 per share. 10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations OVERVIEW Franklin Telecommunications Corp. (the "Company") designs, manufactures and markets high speed communications products and subsystems. The products are marketed through original equipment manufacturers ("OEMs") and distributors, as well as directly to end users. In addition, through its majority-owned subsidiary, FNet, the Company is a provider of Internet access and services, including Internet telephony, to businesses and individuals. The Company is a California corporation formed in 1981. Forward-looking statements in this Management's Discussion and Analysis of Financial Condition and Results of Operations, including statements regarding the Company's entrance into the Internet business, newly introduced products, development of "telephone-to-telephone" service capabilities over the Internet, net sales, gross profit, operating expenses, other income and expenses, liquidity and cash needs and the Company's plans and strategies are all based on current expectations, and the Company assumes no obligation to update this information. Numerous factors could cause actual results to differ from those described in the forward-looking statements. The Company has re-focused its business over the past two years from manufacturing primarily LAN and WAN products to providing telecommunications and Internet products and services. Beginning in the year ended June 30, 1998 and continuing in the three months and nine months ended March 31, 1999, the Company has begun to generate revenues from these new business lines. Sales had been declining for the Company's existing hardware products during the previous years, while the newly developed hardware products and Internet services were not yet ready for market. Demand for the Company's new products, including the Data Voice Gateway product lines are now coming into fruition. FNet is in the nature of a new business venture; accordingly, it can be expected that its future operating results will be subject to many of the risks inherent in establishing a new business enterprise. There can be no assurance, therefore, that FNet will be able to achieve or sustain profitability in future periods or that the Company's investment of resources into it will be repaid. FNet is now beginning to produce revenues from its international next generation IP Telephony network. The Data Voice Gateway, or DVG, has the capability of transmitting voice, video, data and fax traffic over the Internet and private Intranets. The DVG supports all of the major standards protocols and utilizes Internet Protocol packet technology. The Company has several other products under various stages of development, including the Internet PBX and Voice enabled web sites, which have at their roots DVG technology. Many of these products are scheduled to become available over the coming year. The Company has introduced an Internet PBX system. This client server solution is essentially a small 8-24 port, LAN based line interface unit that can be geographically dispersed to create large, seamless call handling plans for virtual office applications. Using both traditional circuit switched technology and the Company's own VoIP technology, the product combines the features of a small business telephone system, a router, firewall and T1 channel bank. The Company is also bundling this product with a library of Software Development Kits (SDK's) and Application Programming Interfaces (API's) and sample application code to encourage independent software development in the area of Unified Messaging, Screen POP's and other popular call center oriented solutions. The Company believes that, though these products are early in their field trials, they will ultimately become a key part of the Company's core revenue programs. The Company believes that call center market, driven by the growing demand for E-commerce solutions and integrated customer management technologies, will become a significant market segment for the Company's VoIP technology. For this reason the Company has developed a technology that enables anyone to add a "push to talk" button to their website. The Company calls it "Choose to Schmooze". The Company believes there are a number of applications for this technology. The Company's D-Mark Channel Bank terminates a digital T1 telephone line from the local telephone company and channelizes it into 24 analog data/voice lines for either modems, faxes, or telephones. With the declining cost of T1 digital 11 lines, the Company believes that the D-Mark Channel Bank provides an effective, cost saving solution for companies using 10 or more phones or modems. As with any new line of business, there can be no assurance that the Data Voice Gateway and D-Mark Channel Bank and other newly developed communications products will sustain widespread market acceptance or be profitable. In addition, there can be no assurance that new hardware products and services developed by others will not render the Company's hardware products and services noncompetitive or obsolete. RESULTS OF OPERATIONS Three Months Ended March 31, 1999 Compared To Three Months Ended March 31, 1998 Net Sales. Net sales increased by $3,945,000, or 1,214%, from $325,000 in the three months ended March 31, 1998 to $4,270,000 in the three months ended March 31, 1999. The increase is due to both increased DVG hardware systems sales and increasing telephone revenue from the Company's subsidiary FNet. The revenue mix for the three months ended March 31, 1999 consisted of 12% Telephone and Internet services revenue and 88% hardware product sales. Gross Profit. Gross profit increased as a percentage of net sales to 49% for the three months ended March 31, 1999, from a gross profit of 45% of net sales for the corresponding period of 1998. The gross profit percentage increase can be attributed to an increased percentage of higher margin hardware sales. Operating Expenses. Operating expenses increased by $15,000, or 1%, from $1,721,000 in the three months ended March 31, 1998 to $1,736,000 in the three months ended March 31, 1999. The relatively minor increase is attributable to increased general and administrative expenses. Other Income (Expense). Interest income decreased by $66,000, or 65%, from $101,000 in the three months ended March 31, 1998 to $35,000 in the three months ended March 31, 1999, due to reduced cash balances available to earn interest. Interest expense decreased by $9,000, or 90%, from $10,000 in the three months ended March 31, 1998 to $1,000 in the three months ended March 31, 1999, due primarily to a restructuring of loans from an officer of the Company to eliminate the interest features. Other income (expense) changed by $97,000, from an income of $71,000 in the three months ended March 31, 1998 to expense of $26,000 in the three months ended March 31, 1999, due to various non operating items. Nine Months Ended March 31, 1999 Compared To Nine Months Ended March 31, 1998 Net Sales. Net sales increased by $5,590,000, or 655%, from $853,000 in the nine months ended March 31, 1998 to $6,443,000 in the nine months ended March 31, 1999. The increase is due both to increased DVG hardware systems sales and increasing telephone revenue from the Company's subsidiary FNet. The revenue mix for the nine months ended March 31, 1999 consisted of 16% Telephone and Internet services revenue and 84% hardware product sales. Gross Profit. Gross profit increased as a percentage of net sales to 47% for the nine months ended March 31, 1999, from a gross profit of 33% of net sales for the corresponding period of 1998. The gross profit percentage increase can be attributed to increased sales of higher margin hardware products. Operating Expenses. Operating expenses increased by $1,440,000, or 39%, from $3,715,000 in the nine months ended March 31, 1998 to $5,155,000 in the nine months ended March 31, 1999. The increase is attributable to increased product development costs for hardware products under development, costs in developing the Internet and telephony services infrastructure, increased sales and marketing efforts, and costs in enhancing the general and administrative infrastructure. Other Income (Expense). Interest income decreased by $41,000, or 25%, from $167,000 in the nine months ended March 31, 1998 to $126,000 in the nine months ended March 31, 1999, due to reduced cash balances available to earn interest. Interest expense decreased by $15,000, or 37%, from $41,000 in the nine months ended March 31, 1998 to $26,000 in the nine months ended March 31, 1999, due primarily to a restructuring of loans from an officer of the Company 12 to eliminate the interest features. Other income decrease by $93,000 to become an expense of $22,000 in the nine months ended March 31, 1999, from income of $71,000 in the nine months ended March 31, 1998, resulting from various non operating items. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents and net working capital totaled $4,824,000 and $2,613,000, respectively, as of March 31, 1999. The primary source of cash has been net proceeds generated from equity financings. The Company has relied on sales of new shares and the exercise of warrants and options to fund operations for an extended period of time. The Company received $10,150,000 and $493,000 in equity financing, for the year ended June 30, 1998, and the nine months ended March 31, 1999, respectively. Its subsidiary, FNet, raised $398,000 for the year ended June 30, 1998 and $55,000 for the nine months ended March 31, 1999. FNet has continued to experience losses, due to the growth nature of the Internet services business and development of the IP Telephony business. In addition to the equity financing described above, the Company's President has deferred portions of his compensation, and has on occasion converted debt to equity in order to preserve the Company's cash. The Company anticipates that its primary uses of working capital in future periods will be for increases in product development, expansion of its marketing plan, development of new branch offices and funding of increases in accounts receivable. The Company believes that existing cash and cash equivalents, cash flow from operations and cash raised through private placements will be sufficient to meet the Company's presently anticipated working capital needs for at least the next 13 months. To the extent the Company uses its cash resources for acquisitions, the Company may be required to obtain additional funds, if available, through borrowings or equity financings. There can be no assurance that such capital will be available on acceptable terms. If the Company is unable to obtain sufficient financing, it may be unable to fully implement its growth strategy. YEAR 2000 COMPLIANCE The "Year 2000" issue concerns the potential exposures related to the possible automatic generation of business and financial misinformation resulting from the application of computer programs which have been written using two digits, rather than four, to define the applicable year of business transactions. When the year 2000 begins, programs with such date-related logic will not be able to distinguish between the years 1900 and 2000, potentially causing software and hardware to fail, generating erroneous calculations or presenting information in an unusable format. The Company is dependent on multiple computer servers and the third-party computer programs running on them to provide data in support of its accounting and engineering functions. Also, FNet's ability to route its traffic in a cost effective manner, to deliver a material portion of its services, to properly obtain payment for such services, and/or to maintain accurate records of its business and operations, could be substantially impaired until such issue is resolved. The Company's plan for year 2000 compliance includes the following phases: (i) conducting a comprehensive inventory of the Company's internal systems, including information technology systems and non-information technology systems (which include switching, billing and other platforms and electrical systems) and the systems acquired or to be acquired by the Company from third parties, (ii) assessing and prioritizing any required changes, upgrades, or enhancements, (iii) resolving any problems by repairing or, if appropriate, replacing the non-compliant systems, (iv) testing all remediated systems for Year 2000 compliance, and (v) developing contingency plans that may be employed in the event that any system used by the Company or FNet is unexpectedly affected by a previously unanticipated problem relating to the Year 2000. In recognition of the potential year 2000 problem, the Company began a program to replace any of its existing communications, engineering and accounting software that is not year 2000 compliant with new software that is warranted by its vendors as being year 2000 compliant. The software replacement program has been completed, and the cost was not material. The Company has relationships with various third parties on whom it relies to provide goods and services necessary for the manufacture and distribution of its products. These include suppliers and vendors. As part of its determination of year 2000 readiness, the Company has identified material relationships with third party vendors and is in the process of assessing 13 the status of their compliance through the use of informal inquiries and review of hardware and software documentation. The Company expects this process will be complete by the first quarter of 1999 and the cost will not be material. The components purchased by the Company in connection with the manufacture of its products are available through numerous independent sources. Due to the broad diversification of these sources, the risk associated with potential business interruptions as a result of year 2000 non-compliance by one or more sources is not considered significant. It is anticipated that the steps the Company has taken and is continuing to take to deal with the year 2000 problem will reduce the risk of significant business interruptions, but there is no assurance that this outcome will be achieved. Failure to detect and correct all internal instances of non-compliance or the inability of third parties to achieve timely compliance could result in the interruption of normal business operations which could, depending on its duration, have a material adverse effect on the Company. In particular, FNet may experience problems to the extent that other telecommunications carriers to which the Company sends traffic for termination are not Year 2000 compliant. FNet's ability to determine the capacity of these third parties to address issues relating to the Year 2000 problem is necessarily limited. To the extent that a limited number of carriers experience disruptions in service due to the Year 2000 issue, the Company believes that it will be able to obtain service from alternate carriers. However, the Company's ability to provide certain services to customers in selected geographic locations may be limited. There can be no assurance that such problems will not have a material adverse effect on the Company. 14 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On April 5, 1999, the Company's subsidiary FNet Corp. ("FNet") filed a lawsuit to rescind an employment contract and to seek damages from a former terminated employee. The employee subsequently filed a claim with the Texas Work Force Commission, requesting full compensation under the employment contract. FNet plans to vigorously contest the action. There can be no assurance that FNet will be successful in its lawsuit, or defense of the action brought by the former employee. An adverse outcome would not have a material adverse effect on the Company's financial condition. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS Not applicable ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable ITEM 5. OTHER INFORMATION Not applicable ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 27.1 Financial Data Schedule (b) Reports on From 8-K None 15 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934. The registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. FRANKLIN TELECOMMUNICATIONS CORP. By /s/ FRANK W. PETERS ----------------------------------- Frank W. Peters Chief Executive Officer By /s/ THOMAS L. RUSSELL ----------------------------------- Thomas L. Russell Chief Financial Officer Dated: April 29, 1999 16 EXHIBIT INDEX
Exhibit No. Description - ----------- ----------- 27.1 Financial Data Schedule
EX-27.1 2 FINANCIAL DATA SCHEDULE.
5 3-MOS JUN-30-1999 JAN-01-1999 MAR-31-1999 4,824,000 0 216,000 11,000 2,250,000 7,626,000 2,794,000 690,000 10,597,000 5,013,000 0 0 0 21,115,000 0 10,597,000 4,270,000 4,270,000 2,160,000 2,160,000 1,727,000 0 1,000 382,000 0 382,000 0 0 0 382,000 .02 .01
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