-----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, Rz4Eg1rcma06a0XoALKQ8dP4GLRxJzDvtpyjz3cY7WtN0zA/ApnRYprFo2Mpp6+1 yotUqkI+7l+CYfOdDg+TNw== 0001019687-02-000232.txt : 20020414 0001019687-02-000232.hdr.sgml : 20020414 ACCESSION NUMBER: 0001019687-02-000232 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20020214 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: 1934 Act SEC FILE NUMBER: 001-14891 FILM NUMBER: 02546507 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 franklin_10q-093001.txt 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 SEPTEMBER 30, 2001 [ ] 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 [ ] No [X] 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 February 12, 2002 ----------------------------------- -------------------------------- Common Stock, no par value 43,809,231 Index Franklin Telecommunications Corp. Part I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets - September 30, 2001 (Unaudited) and June 30, 2000 Consolidated Statements of Operations (Unaudited) - Three months ended September 30, 2001 and 2000 Consolidated Statements of Cash Flows (Unaudited) - Three months ended September 30, 2001 and 2000 Notes to Consolidated Financial Statements (Unaudited) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk Part II. OTHER INFORMATION Item 1. Legal Proceedings Item 2. Changes in Securities and Use of Proceeds 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 2 FRANKLIN TELECOMMUNICATIONS CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 2001 (UNAUDITED) AND JUNE 30, 2001 SEPTEMBER 30, JUNE 30, 2001 2001 ----------- ----------- (unaudited) ASSETS Current Assets Cash and Cash Equivalents $ 5,000 $ 49,000 Account Receivable, less allowance for 33,000 21,000 doubtful accounts of $0, and $122,000 Other Receivables 1,000 1,000 Inventories, less allowance for obsolescence 295,000 325,000 of $0 and $2,377,000 Prepaid Expenses 10,000 15,000 ----------- ----------- Total Current Assets 344,000 411,000 ----------- ----------- Property and Equipment, Computers and software 1,230,000 1,230,000 Furniture and fixtures 882,000 882,000 Machinery and equipment 170,000 223,000 ----------- ----------- 2,282,000 2,335,000 Less accumulated depreciation 1,743,000 1,746,000 ----------- ----------- Total Property and Equipment 539,000 589,000 ----------- ----------- Licenses, Net 315,000 391,000 Other Assets 44,000 44,000 ----------- ----------- Total Assets $1,242,000 $1,435,000 =========== =========== The accompanying notes are an integral part of these financial statements. 3 FRANKLIN TELECOMMUNICATIONS CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 2001 (UNAUDITED) AND JUNE 30, 2001
SEPTEMBER 30, JUNE 30, 2001 2001 ------------- ------------- (unaudited) LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Convertible Promissory notes payable $ 141,000 $ 122,000 Current Portion of capital lease obligations 28,000 28,000 Account Payable 1,778,000 1,554,000 Accrued Liabilities 1,286,000 1,379,000 ------------- ------------- Total Current Liabilities 3,233,000 3,083,000 Note Payable-related party 686,000 686,000 ------------- ------------- Total Liabilities 3,919,000 3,769,000 ------------- ------------- Contingencies Shareholders' equity: Preferred stock, no par value 10,000,000 shares authorized, Convertible Series C -0- (unaudited) and -0- shares issued and outstanding Common Stock, no par value 90,000,000 shares authorized 42,846,080 (unaudited) and 42,206,080 shares issued and outstanding 35,882,000 35,850,000 Common Stock committed, no par value 74, 716 (unaudited) and 74,716 Shares committed but not yet issued 82,000 82,000 Options & Warrants 100,000 -- ------------- ------------- Accumulated Deficit (38,741,000) (38,266,000) ------------- ------------- Total Shareholders' equity (deficit) (2,202,000) (2,334,000) ------------- ------------- Total Liabilities and Shareholders' equity 1,242,000 1,435,000 ============= ============= The accompanying notes are an integral part of these financial statements. 4
FRANKLIN TELECOMMUNICATIONS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 (UNAUDITED) THREE MONTHS ENDED SEPTEMBER 30, ----------------------------- 2001 2000 ------------- ------------- (unaudited) (unaudited) Sales: Product $ 44,000 $ 122,000 Telephone and internet services 57,000 309,000 ------------- ------------- Total Sales 101,000 431,000 ------------- ------------- Cost of Sales: Product 30,000 278,000 Telephone and internet services 150,000 348,000 Total Cost of Sales 180,000 626,000 ------------- ------------- Gross Profit (Loss) (79,000) (195,000) ------------- ------------- Operating Expenses Research and development 442,000 Selling, general and administrative 392,000 1,269,000 ------------- ------------- Total Operating Expenses 392,000 1,711,000 ------------- ------------- Loss from Operations (471,000) (1,906,000) ------------- ------------- Other Income (Expense) Interest Income 7,000 Interest Expenses (7,000) (1,000) Other Income (Expense) 3,000 (11,000) ------------- ------------- Total Other Income (Expense) (4,000) (5,000) ------------- ------------- Net Loss (475,000) (1,911,000) ============= ============= Basic and Diluted Net loss per common share 0.01 (0.05) Weighted Average Common Shares Outstanding used to compute basic ------------- ------------- Loss per common share 42,317,384 35,182,447 ============= ============= The accompanying notes are an integral part of these financial statements. 5 FRANKLIN TELECOMMUNICATIONS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 (UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30, --------------------------- 2001 2000 ------------ ------------ (unaudited) (unaudited) CASH FLOWS FROM OPERATING ACTIVITIES Net Loss $ (475,000) $(1,911,000) Adjustments to reconcile net loss to net cash Used in operating activities Depreciation and Amortization 126,000 187,000 Provision for Loss on Obsolete Inventory 96,000 Provision for Loss on Doubtful Accounts 22,000 Stock issued for services rendered 146,000 Gain on sale of equipment (3,000) -- (Increase) decrease in Account Receivable (12,000) 15,000 Other Receivables -- (2,000) Inventories 30,000 33,000 Prepaid Expenses 5,000 (28,000) Increase (Decrease) in Account Payable 224,000 (108,000) Accrued Liabilities 7,000 (89,000) ------------ ------------ Net Cash Used in Operating Activities (98,000) (1,639,000) ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES Purchases of Property and Equipment (33,000) Proceeds from sale of equipment 3,000 -- Other Assets (7,000) ------------ ------------ Net Cash Used in Investing Activities 3,000 (40,000) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from Convertible Notes Payable 19,000 Proceeds from Exercise of Stock Options and Warrants 1,000 Proceeds from Sale of Company Stock 32,000 2,072,000 Payments on capital lease obligation (9,000) ------------ ------------ Net Cash Provided by Financing Activities 51,000 2,064,000 ------------ ------------ Net Increase ( Decrease) in Cash (44,000) 385,000 Cash and Cash Equivalents, Beg of Period 49,000 1,275,000 ------------ ------------ Cash and Cash Equivalents, End of Period 5,000 1,660,000 ============ ============ 6
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION THREE MONTHS ENDED SEPTEMBER 30, --------------------------- 2001 2000 (unaudited) (unaudited) ----------- ----------- Interest paid - 1,300 =========== =========== SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES During the three months ended September 30, 2001, the Company issued options at or above market price to compensate employees for accrued wages or approximately $100,000. During the three months ended SEPTEMBER 30,2000, the Company issued 200,000 shares (unaudited) of common stock for services valued at $ 146,000 (unedited) and for the prepayment of services to be rendered valued at $79,000 (UNAUDITED) 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 wide-area networks which provide IP Telephony and Internet services through its majority-owned subsidiary, FNet Corp. ("FNet"). The Company's customers are located predominantly in the United States, Canada and some overseas. 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 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, 2001. The results of operations for the three months ended September 30, 2001 are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2002. 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 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 year ended June 30, 2001, many assets were considered impaired and the carrying amounts were reduced significantly. During the three months ended September 30, 2001, the Company determined that no assets were further impaired. 8 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 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. The potential common shares have been excluded from the computation of diluted net loss per share for all periods presented because the effect would have been anti-dilutive: 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 statements carrying amounts of existing 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 portion of its deferred tax assets. NOTE 2 Inventories consisted of the following: September 30, June 30, 2001 2001 (unaudited) ------------ ------------ Raw materials $ 0 $ 1,360,000 Work in process 0 201,000 Finished goods 295,000 1,141,000 Reserve for obsolescence 0 (2,377,000) ------------ ------------ $ 295,000 $ 325,000 ============ ============ NOTE 3 ACCRUED LIABILITIES Accrued Liabilities consisted of the following: Salaries and related expenses 925,000 1,025,000 Accrued legal 165,000 165,000 Other 196,000 189,000 ---------- ---------- 1,286,000 1,379,000 9 NOTE 4 COMMITMENTS AND CONTINGENCIES Litigation The Company is involved in certain legal proceedings 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. NOTE 5 RECENT SALE OF EQUITY SECURITIES During the three months ended September 30, 2001, the Company sold 32,000 units to a current shareholder of the Company for $32,000. A unit consisted of 20 shares of common stock of the Company plus a warrant to purchase 10 shares of commons stock for $.001, exercisable after March 25, 2002 if the ten day average of the stock price is under $.25 per share. The Company also received $19,000 in exchange for a convertible note from its Executive Chairman. The note bears interest at 6% and can be converted at $.05 per share. An employee of the Company has an option to purchase 2.5M shares at $0.05 per share is lieu of salary for the period 11 months ending 11-1-01. Two directors of the Company have options to purchase 1.0M shares each at $0.05 per share. The Company has agreed to issue options to the Executive Chairman in lieu of salary. The Chairman's stated annual salary is $150,000. He will receive 2,400,000 options at $.05 per share until such time as the Company's financial position has improved. FORWARD-LOOKING STATEMENTS. Certain statements constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance, or achievements of the Company to be materially different from any future results, performance or achievements, expressed or implied by such forward-looking statements. RESULTS OF OPERATIONS Three Months Ended September 30, 2001 Compared To Three Months Ended September 30, 2000 NET SALES. Net sales decreased by 330,000, or 76%, from $431,000 in the three months ended September 30, 2000 to $101,000 in the three months ended September 30, 2000. The decrease is due both to a reduction of DVG hardware systems sales and reduced service revenue, primarily from the Balkan operation. The revenue mix for the three months ended September 30, 2001 consisted of 55% Telephone and Internet services revenue and 45% hardware product sales. GROSS PROFIT. Gross profit decreased as a percentage of net sales to a loss of 78% for the three months ended September 30, 2001, from a net sales loss of 45% for the corresponding period of 2000. The gross profit percentage decrease can be attributed to fixed hardware and service overhead expenses spread over a smaller sales base. 10 OPERATING EXPENSES. Operating expenses decreased by $1,320,000, or 77%, from $1,711,000 in the three months ended September 30, 2000 to $391,000 in the three months ended September 30, 2001. The decrease was primarily attributable to a one time bad debt expense of $1,284,000 occurring in the three month period ending September 30, 2000. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents deficit totaled $ 5,000 ), as of September 30, 2001. The sources of cash were provided primarily by issuance of equity securities, and to a lesser extent, collections of sales revenues. The Company has relied on sales of new shares and the exercise of warrants and options to supplement the funding of operations for an extended period of time. Both Franklin Telecom and FNet have continued to experience losses. The Company has not currently been able to raise sufficient capital from sales of additional shares. Audit opinions for the past two fiscal years have advised that the Company may not be able to continue as a going concern. The Company is currently in a survival mode. As of January 31, 2002 it had $23,000 of cash or cash equivalents. Current monthly cash consumption is approximately $50,000. Sales from FTC and the FNet division are approximately $25,000 per month. Management is currently deferring salary or taking options in lieu of salary. Recent non-operating cash funding has been contributed by the Company's chairman in the form of convertible debt. The Company believes that existing cash and cash equivalents and cash flow from operations will not be sufficient to meet the Company's presently anticipated working capital needs during the next twelve months and the foreseeable future. Although the Company continues the effort to raise cash through sales of existing inventory and anticipates future private placements of its securities, there is no assurance that this effort will be successful. Item 3. Quantitative and Qualitative Disclosures About Market Risk Market risk generally represents the risk that losses may occur in the values of financial instruments as a result of movements in interest rates, foreign currency exchange rates and commodity prices. The Company is exposed to changes in financial market conditions in the normal course of its business due to its use of certain financial instruments as well as transacting in various foreign currencies. Interest rate risk. At September 30, 2001, the Company's cash equivalents and short-term investments totaled approximately $5,000. Since the Company typically does not purchase fixed-income securities, its cash and cash equivalents are not subject to significant interest rate risk. The Company places substantially all of its interest bearing investments with major financial institutions and by policy limits the amount of credit exposure to any one financial institution. Additionally, the Company does not hold or issue financial instruments for trading, profit or speculative purposes. Equity Price Risk The Company does not invest in available-for-sale equity securities, and is not subject to significant equity price risk. Foreign Exchange Rate Risk The Company operates internationally and sometimes receives payments in local currencies. This can expose the Company to market risk from changes in foreign exchange rates to the extent that transactions are not denominated in the U.S. dollar. As a result the Company faces the risk that the foreign currencies may decline in value as compared to the U.S. dollar, resulting in a foreign currency translation loss. 11 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS In August 2001, NEC filed a lawsuit against the Company alleging breach of contract for $40,000 still due on a lease for a PBX. This action is still pending. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS During the three months ended September 30, 2001, the Company sold 32,000 units to a current shareholder of the Company for $32,000 in cash. A unit consisted of 20 shares of common stock of the Company plus a warrant to purchase 10 shares of commons stock for $.001, exercisable after March 25, 2002 if the ten day average of the stock price is under $.25 per share. The Company also received $19,000 in exchange for a convertible note from its Executive Chairman. The note bears interest at 6% and can be converted at $.05 per share. An employee of the Company was granted an option to purchase 2,.500,000 shares at $0.05 per share is lieu of salary for the period of eleven months ending November 1, 2001. In addition, the Company granted two directors of the Company options to purchase 1,000,000 shares each at an exercise price of $0.05 per share. The Company has agreed to issue options to its Executive Chairman in lieu of salary. The Chairman's stated annual salary is $150,000. He will receive 2,400,000 options at $.05 per share until such time as the Company's financial position has improved. The Company believes all such sales were exempt from registration under the Securities Act of 1933 by reason of Section 4(2) thereof and Regulation D thereunder. 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 (b) Reports on Form 8-K None 12 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/ MARTIN S. ALBERT ----------------------------------- Martin S. Albert Chief Executive Officer By /s/ FRANK W. PETERS ----------------------------------- Frank W. Peters Acting Chief Financial Officer Dated: February 12, 2002 13 -----END PRIVACY-ENHANCED MESSAGE-----