-----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, BraNc4mxQdQ6q2Bw9Hp64UGEHbEVTIkj4UCDcIgqniRs+p8MU/kDD2FSnDS56onV UoUIGHbRo1yl5h2URHJfKQ== 0000950150-00-000398.txt : 20000510 0000950150-00-000398.hdr.sgml : 20000510 ACCESSION NUMBER: 0000950150-00-000398 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000509 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: 623214 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 FORM 10-Q 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, 2000 [ ] 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 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange ------------------- --------------------- Common stock, American Stock Exchange without par value Securities registered pursuant to Section 12(g) of the Act: None --------------- 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 MAY 5, 2000 - ----------------------------------- -------------------------- Common Stock, no par value 34,530,078 2 Index Franklin Telecommunications Corp. Part I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets - March 31, 2000 (Unaudited) and June 30, 1999 Consolidated Statements of Operations (Unaudited) - Three months and nine months ended March 31, 2000 and 1999 Consolidated Statements of Cash Flows (Unaudited) - Nine months ended March 31, 2000 and 1999 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, 2000 (UNAUDITED) AND JUNE 30, 1999
MARCH 31, JUNE 30, 2000 1999 ------------ ------------ (UNAUDITED) ASSETS Current assets Cash and cash equivalents .................................................................. $ 6,883,000 $ 1,637,000 Accounts receivable, less allowance for doubtful accounts of $30,000 (unaudited) and $106,000, respectively ................................................................... 201,000 2,610,000 Other receivables .......................................................................... 70,000 137,000 Current portion of note receivable ......................................................... 150,000 150,000 Inventories (Note 2) ....................................................................... 2,776,000 1,674,000 Prepaid expenses ........................................................................... 135,000 81,000 ------------ ------------ Total current assets ..................................................................... 10,215,000 6,289,000 ------------ ------------ Property and equipment Machinery and equipment .................................................................... 2,183,000 1,681,000 Furniture and fixtures ..................................................................... 274,000 256,000 Computers and software ..................................................................... 1,183,000 1,029,000 ------------ ------------ 3,640,000 2,966,000 Less accumulated depreciation .............................................................. 1,214,000 802,000 ------------ ------------ Total property and equipment ............................................................. 2,426,000 2,164,000 ------------ ------------ Note receivable, net of current portion ....................................................... -0- 160,000 Other assets ............................................................................. 823,000 822,000 ------------ ------------ Total assets ............................................................................. $ 13,464,000 $ 9,435,000 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Current portion of long-term debt, majority due to a related party ......................... $ 786,000 $ 24,000 Convertible notes payable (Note 3) ......................................................... 2,500,000 -0- Accounts payable ........................................................................... 1,196,000 1,027,000 Accrued liabilities (Note 4) ............................................................... 1,250,000 1,883,000 ------------ ------------ Total current liabilities ................................................................ 5,732,000 2,934,000 Long-term debt, (majority due to a related party) net of current portion ..................... -0- 762,000 ------------ ------------ Total liabilities ........................................................................ 5,732,000 3,696,000 ------------ ------------ Contingencies (Note 5) Shareholders' equity Preferred stock, no par value 10,000,000 shares authorized, Convertible Series C -0- (unaudited) and -0- shares issued and outstanding ........................................ -0- -0- Common stock, no par value 90,000,000 shares authorized 34,499,703 (unaudited) and 25,796,726 shares issued and outstanding ................................................. 31,402,000 21,628,000 Common stock committed, no par value -0- (unaudited) and 10,000 shares committed but not yet issued ............................................................. -0- 6,000 Accumulated deficit ........................................................................ (23,670,000) (15,895,000) ------------ ------------ Total shareholders' equity ............................................................... 7,732,000 5,739,000 ------------ ------------ Total liabilities and shareholders' equity ............................................... $ 13,464,000 $ 9,435,000 ============ ============
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, 2000 AND 1999 (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED MARCH 31, MARCH 31, ------------------------------- ------------------------------- 2000 1999 2000 1999 ------------ ------------ ------------ ------------ (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) Sales Product ......................................... $ 223,000 $ 3,762,000 $ 773,000 $ 5,387,000 Telephone and Internet services ................. 535,000 508,000 1,646,000 1,056,000 ------------ ------------ ------------ ------------ Total sales ............................... 758,000 4,270,000 2,419,000 6,443,000 ------------ ------------ ------------ ------------ Cost of sales Product ......................................... 225,000 1,855,000 780,000 2,642,000 Telephone and Internet services ................. 1,468,000 305,000 2,774,000 796,000 ------------ ------------ ------------ ------------ Total cost of sales ....................... 1,693,000 2,160,000 3,554,000 3,438,000 ------------ ------------ ------------ ------------ Gross profit (loss) ................................... (935,000) 2,110,000 (1,135,000) 3,005,000 ------------ ------------ ------------ ------------ Operating expenses Research and development expenses ............... 431,000 492,000 1,315,000 1,358,000 Selling, general, and administrative Expenses ..................................... 1,274,000 1,244,000 5,092,000 3,797,000 Impairment of long-lived asset .................. 160,000 -- 160,000 -- ------------ ------------ ------------ ------------ Total operating expenses .................. 1,865,000 1,736,000 6,567,000 5,155,000 ------------ ------------ ------------ ------------ Income (loss) from operations ......................... (2,800,000) 374,000 (7,702,000) (2,150,000) ------------ ------------ ------------ ------------ Other income (expense) Interest income ................................. 15,000 35,000 29,000 126,000 Interest expense ................................ (65,000) (1,000) (66,000) (26,000) Loss on disposal of property and equipment ...... -- -- (30,000) -- Other expense ................................... (17,000) (26,000) (11,000) (22,000) ------------ ------------ ------------ ------------ Total other income (expense) .............. (67,000) 8,000 (78,000) 78,000 ------------ ------------ ------------ ------------ Net income (loss) ..................................... $ (2,867,000) $ 382,000 $ (7,780,000) $ (2,072,000) ============ ============ ============ ============ Basic net income (loss) per common share .............. $ (.10) $ .02 $ (.27) $ (.10) ============ ============ ============ ============ Diluted net income (loss) per common share ............ $ (.10) $ .01 $ (.27) $ (.10) ============ ============ ============ ============ Weighted average common shares outstanding used to compute basic net income (loss) per common share.... 30,011,592 24,104,627 28,372,479 21,264,724 ============ ============ ============ ============ Weighted average common shares outstanding used to compute diluted net income (loss) per common share.. 30,011,592 25,858,081 28,372,479 21,264,724 ============ ============ ============ ============
The accompanying notes are an integral part of these financial statements. 4 5 FRANKLIN TELECOMMUNICATIONS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED MARCH 31, 2000 AND 1999 (UNAUDITED)
NINE MONTHS ENDED MARCH 31, ------------------------------- 2000 1999 (UNAUDITED) (UNAUDITED) ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES Net loss .............................................. $ (7,780,000) $ (2,072,000) Adjustments to reconcile net loss to net cash Used in operating activities Depreciation and amortization ................... 474,000 305,000 Provision for loss on obsolete inventory ........ -- 147,000 Provision for loss on doubtful accounts ......... -- 3,000 Stock issued for services rendered .............. 142,000 50,000 Loss on impairment of note receivable ........... 160,000 -- Loss on disposal of property and equipment ...... 34,000 -- Write-off of accounts receivable ................ 1,529,000 -- (Increase) decrease in Accounts receivable ............................. 12,000 (118,000) Other receivables ............................... 67,000 25,000 Inventories ..................................... (234,000) (1,726,000) Prepaid expenses ................................ (54,000) (155,000) Increase (decrease) in Accounts payable ................................ 169,000 1,686,000 Accrued liabilities ............................. (546,000) 1,455,000 ------------ ------------ Net cash used in operating activities.................. (6,027,000) (400,000) ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property and equipment ................... (735,000) (1,102,000) Repayment of notes receivable ......................... -- 207,000 Disposal of property and equipment .................... 23,000 -- Other assets .......................................... (59,000) (179,000) ------------ ------------ Net cash used in investing activities ................. (771,000) (1,074,000) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from convertible notes payable ............... 2,500,000 -- Proceeds from exercise of stock options and warrants ............................................ 13,000 -- Proceeds from sale of Company stock ................... 9,478,000 493,000 Proceeds from sale of minority stock in consolidated subsidiary ............................. 53,000 55,000 ------------ ------------ Net cash provided by financing activities ............. 12,044,000 548,000 ------------ ------------ Net increase (decrease) in cash ....................... 5,246,000 (926,000) Cash and cash equivalents, beginning of the period .... 1,637,000 5,750,000 ------------ ------------ Cash and cash equivalents, end of the period .......... $ 6,883,000 $ 4,824,000 ============ ============ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION 2000 1999 ------------ ------------ (unaudited) (unaudited) Interest paid ......................................... $ -- $ -- ============ ============ Income taxes paid ..................................... $ -- $ -- ============ ============
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES During the nine months ended March 31, 2000, the Company repossessed equipment from a customer who was in arrears on payments for said equipment at a cost of $868,000. The accompanying notes are an integral part of these financial statements. 6 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, 1999. The results of operations for the three months and nine months ended March 31, 2000 are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2000. 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. Impairment of Long-Lived Assets The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the assets to future net cash flows expected to be generated by the assets. If the assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount exceeds the fair value of the assets. During the nine months ended March 31, 2000, the Company determined that certain assets under a note receivable were impaired and recorded a loss of $160,000. Loss Per Common Share The Company calculates loss per common share in accordance with Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share." Basic loss per share is computed by dividing the loss available to common shareholders by the weighted-average number of common shares outstanding. Diluted loss per share is computed similar to basic loss 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 three months ended March 31, 2000 and for the nine months ended March 31, 2000 and 1999, common stock equivalents have been excluded from the aforementioned computations as their effect would be anti-dilutive. 7 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. NOTE 2--INVENTORIES Inventories consisted of the following:
MARCH 31, JUNE 30, 2000 1999 ---------- ---------- (UNAUDITED) Raw materials ............. $1,226,000 $ 980,000 Work in process ........... 353,000 510,000 Finished goods ............ 1,197,000 184,000 ---------- ---------- Total ............... $2,776,000 $1,674,000 ========== ==========
NOTE 3--CONVERTIBLE NOTES PAYABLE During the nine months ended March 31, 2000, the Company issued five convertible notes payable for $500,000 each to an investment company. The notes bear interest at 10% per annum, are unsecured, require quarterly interest payments on the unconverted balance, and mature on December 3, 2002. The notes are convertible into shares of the Company's common stock if the Company elects not to pay the aggregate principal amount outstanding and accrued interest by May 3, 2000. If the Company elects not to pay the notes in full, the holders may convert all or a portion of the notes into shares of common stock at any time after May 3, 2000 until maturity. Any notes outstanding at the maturity date will be converted into shares of common stock. The conversion price is the lesser of $2.50 or 92% of the three lowest per share prices of the Company's common stock during the 22 trading days prior to conversion. See Note 7, Subsequent Event. NOTE 4--ACCRUED LIABILITIES Accrued liabilities consisted of the following:
MARCH 31, JUNE 30, 2000 1999 ------------ ------------ (UNAUDITED) Salaries and related expense ........... $ 602,000 $ 633,000 Accrued interest payable, majority due to a related party ...... 92,000 27,000 Accrued sales tax ...................... -- 605,000 Other accrued liabilities .............. 556,000 618,000 ------------ ------------ Total ...................... $ 1,250,000 $ 1,883,000 ============ ============
NOTE 5--COMMITMENTS AND CONTINGENCIES The Company is involved in certain legal proceedings and claims which arise in the normal course of business. Management does not believe that the outcome of these matters will have a material adverse effect on the Company's consolidated financial position or results of operations. 8 NOTE 6--RECENT SALE OF EQUITY SECURITIES During the three months ended March 31, 2000, the Company issued 176,476 shares of common stock from the exercise of employee options, primarily on a net basis, at prices ranging from $0.44 to $1.25 per share. During the three months ended March 31, 2000, the Company issued 19,960 shares of common stock for the purchase of certain equipment valued at $33,333. During the three months ended March 31, 2000, the Company issued 285,625 shares of common stock from the exercise of warrants, primarily on a net basis, at prices ranging from $0.78 to $1.38 per share. During the three months ended March 31, 2000, the Company issued 30,000 shares of common stock for $120,000. These shares were issued with four-year warrants to purchase 30,000 shares of Fnet's (the Company's majority owned subsidiary) common stock at an exercise price of $2 per share, exercisable upon issuance. During the three months ended March 31, 2000, the Company issued 33,600 shares of common stock for $333,600. These shares were issued with four-year warrants to purchase 134,400 shares of Fnet's (the Company's majority owned subsidiary) common stock at an exercise price of $2 per share, exercisable upon issuance. During the three months ended March 31, 2000, the Company issued three-year warrants to purchase 420,000 shares of the Company's common stock at an exercise price of $1.375 per share, exercisable upon issuance. The warrants expire on August 17, 2002 and were issued for advertising services valued at $60,000. During the three months ended March 31, 2000, the Company issued 865,411 shares of common stock for net proceeds of $1,466,250. During the three months ended March 31, 2000, the Company issued 4,022,667 shares of common stock for net proceeds of $5,690,107. These shares were issued with five-year warrants, exercisable after one year, to purchase 1,005,667 shares of the Company's common stock at an exercise price of $2.50 per share. NOTE 7--SUBSEQUENT EVENT Subsequent to the three months ended March 31, 2000, the Company repaid the $2,500,000 in convertible notes described in Note 3 above. 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations OVERVIEW Franklin Telecommunications Corp. ("Company") designs, builds and sells Internet Telephony equipment and other high speed communications products and subsystems. Our products are marketed through Original Equipment Manufacturers ("OEMs") and distributors, as well as directly to end users. In addition, through our majority-owned subsidiary, FNet Corp. ("FNet"), we provide traditional switched network and Internet Protocol telephony services, and Internet access to businesses and individuals. FNet has had limited operations to date. The Company's customers are located predominantly in the United States, Canada, South America, Asia and parts of Europe in a wide range of industries including financial services, government, telephone services and manufacturing. 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 Telephone and Internet business, newly introduced products, development of "VOIP" 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 offers a suite of Internet Telephony solutions that enable business communications over the Internet. From the small office home office (SOHO) to the branch office and HQ operations of medium to large scale corporate America, the Company offers a cost-effective call handling solution. From the enterprise to the carrier market, the Company can deal with "convergence" managing the connectivity and integration of voice, data, fax and video. Where ever possible, the Company offers a turnkey solution that can be "owned" by its customers. When equipment sales are not in the best interest of a particular customer's business communications solution, the Company plans to provide that solution as a "service" that can be leased. The Company is a leading edge supplier of Internet Telephony solutions as a result of its flexibility in providing business communication solutions as equipment or services on a global basis. The Company's products and services enable connectivity and e-commerce. The Company is both an equipment supplier and a service provider, offering turn-key business communications solutions to both the carrier and enterprise segments of the Internet Telephony market. The Company produces gateways, gatekeepers and edge servers that provide advanced packet switching solutions that significantly reduce the infrastructure costs associated with communications networks. The Company's products are designed, developed and manufactured by the Company. In addition to manufactured solutions, the Company maintains a Network Operations Center that provides both "on-net" and "off-net" connectivity for the Company's equipment customers. The Network Operations Center interconnects the Company's customers on a global basis. The Network Operations Center includes Internet access facilities and a Harris Class 4 circuit switch. The center interconnects with over eleven International Record Carriers and is capable of completing a voice call to any phone in the world. The Company's equipment customer is offered the opportunity to access the Harris facilities and to interconnect with each other, using the Company to enable "settlement" between the networks. This interconnection can be either "free" through the Internet, or delivered through private leased lines. In addition to the Company's circuit switched capabilities at its headquarters facility in Westlake Village, California , the Company provides a combination of satellite and VOIP solutions to enable telephone communications for NATO forces throughout the Bosnia region. Some 23 earth station transponders are connected to "telephone calling booths" linked via satellite to the US where they are interconnected via VOIP circuits to the Harris circuit switch in the Company's headquarters. NATO soldiers, using FNET calling cards, are able to make calls all over the world through FNET facilities. As a result of the Company's expertise in network operations, the Company is also able to provide additional assistance to its customers by offering design, installation and network management services. The company believes that this strategy of combining network operations and equipment design is a significant product differentiation strategy, uniquely positioning the Company. The Company may consider spinning off its Network Operations capability (i.e. FNET) when sufficient volume and value have been created. 10 The Company's subsidiary FNET has been offering flat rate long distance telephone service through third party resellers. To date, the operational cost of the flat rate program has exceeded the revenue generated, due to the reliance on third party carriers. FNET does not expect this operational cost disadvantage to be fully remedied until the planned, Franklin-powered Internet Protocol network is fully deployed. FNET is contemplating a temporary scale back of marketing efforts for the flat rate program until the cost effective, geographically dispersed, Internet Protocol network is completed to a level sufficient to provide local access for the majority of flat rate long distance subscribers. As with any line of business, there can be no assurance that the DVG VOIP products will gain 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, 2000 Compared To Three Months Ended March 31, 1999 Net Sales. Net sales decreased by $3,512,000, or 82%, from $4,270,000 in the three months ended March 31, 1999 to $758,000 in the three months ended March 31, 2000. The decrease is due to a reduction of DVG hardware systems sales, primarily to a single major customer. The revenue mix for the three months ended March 31, 2000 consisted of 71% Telephone and Internet services revenue and 29% hardware product sales. Gross Profit. Gross profit decreased as a percentage of net sales to a loss of 123% for the three months ended March 31, 2000, from a gross profit of 49% of net sales for the corresponding period of 1999. The gross profit percentage decrease can be attributed to both, a fixed hardware overhead spread over a smaller hardware sales base, and high variable origination and termination costs associated with the operation of FNet's flat rate telephone service business. Operating Expenses. Operating expenses increased by $129,000, or 7%, from $1,736,000 in the three months ended March 31, 1999 to $1,865,000 in the three months ended March 31, 2000. The increase was primarily attributable to increased personnel costs. Other Income (Expense). Interest income decreased by $20,000, or 57%, from $35,000 in the three months ended March 31, 1999 to $15,000 in the three months ended March 31, 2000, due to reduced cash balances available to earn interest. Interest expense increased by $39,000 from $26,000 in the three months ended March 31, 1999 to $65,000 in the three months ended March 31, 2000, due primarily to the $2,500,000 in convertible notes payable described in Note 3 to the financial statements. Other components of other income (expense) were immaterial and were due to various non operating items. Nine Months Ended March 31, 2000 Compared To Nine Months Ended March 31, 1999 Net Sales. Net sales decreased by $4,024,000, or 62%, from $6,443,000 in the nine months ended March 31, 1999 to $2,419,000 in the nine months ended March 31, 2000. The decrease is due to both a reduction in sales of DVG hardware systems to a major customer, partially offset by increasing telephone revenue from the Company's subsidiary FNet. The revenue mix for the nine months ended March 31, 2000 consisted of 68% Telephone and Internet services revenue and 32% hardware product sales. Gross Profit. Gross profit decreased as a percentage of net sales to a loss of 47% for the nine months ended March 31, 2000, from a gross profit of 47% of net sales for the corresponding period of 1999. The gross profit percentage decrease can be attributed to both, a fixed hardware overhead spread over a smaller hardware sales base, and high variable origination and termination costs associated with the operation of FNet's flat rate telephone service business. Operating Expenses. Operating expenses increased by $1,412,000, or 27%, from $5,155,000 in the nine months ended March 31, 1999 to $6,567,000 in the nine months ended March 31, 2000. The primary reason for the increase was due to a one time increase in the allowance for doubtful accounts of $1,284,000 during the quarter ended September 30, 1999 for the receivable of a major customer. The major customer's current financial condition and certain events relating to the customer, occurring subsequent to the Company's fiscal quarter ended September 30, 1999, were considered in the decision to make the reserve. Other Income (Expense). Interest income decreased by $97,000, or 77%, from $126,000 in the nine months ended March 31, 1999 to $29,000 in the nine months ended March 31, 2000, due to reduced cash balances available to earn 11 interest. Interest expense increased by $44,000, or 200%, from $22,000 in the nine months ended March 31, 1999 to $66,000 in the nine months ended March 31, 2000, due primarily to the $2,500,000 in convertible notes payable described in Note 3 to the financial statements. Other components of other income (expense) were immaterial and were due to various non operating items. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents and net working capital (deficit) totaled $6,883,000 and $4,483,000, respectively, as of March 31, 2000. The primary source of cash has been net proceeds generated from equity and debt financings. The Company has relied on sales of new shares, loan proceeds and the exercise of warrants and options to fund operations for an extended period of time. The Company received $1,011,000 and $11,991,000 in equity and debt financing for the year ended June 30, 1999, and the nine months ended March 3, 2000, respectively. Its subsidiary, FNet, raised $110,000 for the year ended June 30, 1999 and $53,000 for the nine months ended March 31, 2000. FNet has continued to experience losses due to the growth nature of the Internet services business and development of the IP Telephony business. 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, funding of FNet's operations 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. 12 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Not applicable 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 Form 8-K None 13 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: May 9, 2000 14 EXHIBIT INDEX Exhibit No. Description - ----------- ----------- 27.1 Financial Data Schedule EX-27.1 2 FINANCIAL DATA SCHEDULE
5 9-MOS JUN-30-2000 JUL-01-1999 MAR-31-2000 6,883,000 0 231,000 30,000 2,776,000 10,215,000 3,640,000 1,214,000 13,464,000 5,732,000 0 0 0 31,402,000 0 13,464,000 2,419,000 2,419,000 3,554,000 3,554,000 4,890,000 1,689,000 66,000 (7,780,000) 0 (7,780,000) 0 0 0 (7,780,000) (.27) (.27)
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