<PAGE>
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 QUARTER PERIOD ENDED SEPTEMBER 30, 1997
[_] 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 [_] 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 DECEMBER 13, 1997
- ----------------------------------- --------------------------------
Common Stock, no par value 15,453,265
<PAGE>
Index
Franklin Telecommunications Corp.
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets (Unaudited) -
June 30, 1997 and September 30, 1997
Consolidated Statements of Operations (Unaudited) -
Three months ended September 30, 1996 and 1997
Consolidated Statements of Cash Flows (Unaudited) -
Three months ended September 30, 1996 and 1997
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
<PAGE>
Item 1. Financial Statements
FRANKLIN TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of September 30, 1997 (unaudited) and June 30, 1997
<TABLE>
<CAPTION>
September 30, June 30,
------------- ----------
1997 1997
---- ----
(unaudited)
<S> <C> <C>
ASSETS
---------------------------------------
Current assets
Cash............................................... $ 908,000 $ 1,464,000
Accounts receivable, less allowance for doubtful
accounts of $19,000 (unaudited) and $34,000,
respectively...................................... 111,000 80,000
Other receivables.................................. 189,000 199,000
Inventories (Note 2)............................... 403,000 394,000
Prepaid expenses................................... 68,000 68,000
----------- -----------
Total current assets.............................. 1,679,000 2,205,000
----------- -----------
Property and equipment
Machinery and equipment............................ 165,000 163,000
Furniture and fixtures............................. 98,000 97,000
Computers and software............................. 728,000 713,000
----------- -----------
991,000 973,000
Less accumulated depreciation...................... 442,000 406,000
----------- -----------
Total property and equipment...................... 549,000 567,000
----------- -----------
Excess of cost over fair value of net assets of
companies acquired, net of accumulated amortization
of $70,000 (unaudited), and $40,000, respectively.. 561,000 591,000
Other assets........................................ 198,000 151,000
----------- -----------
Total assets...................................... $ 2,987,000 $ 3,514,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
---------------------------------------
Current portion of obligations under capital lease
obligations....................................... $ 352,000 $ 361,000
Current portion of long-term debt (majority due to
a related party).................................. 301,000 301,000
Accounts payable................................... 339,000 175,000
Accrued liabilities................................ 497,000 559,000
----------- -----------
Total current liabilities......................... 1,489,000 1,396,000
Long-term debt, (majority due to a related party)
less current portion............................... 360,000 360,000
Other liabilities................................... 183,000 183,000
----------- -----------
Total liabilities................................. 2,032,000 1,939,000
----------- -----------
Minority Interest -- --
Contingencies (Note 3)
Shareholders' equity
Preferred stock, no par value 10,000,000 shares
authorized no shares issued and outstanding....... -- --
Common stock, no par value 90,000,000 shares
authorized 13,475,289 (unaudited) and 10,868,786
shares issued and outstanding..................... 10,569,000 9,971,000
Common stock committed, no par value 109,033
(unaudited) and 296,066 shares committed but
not yet issued.................................... 321,000 579,000
Accumulated deficit................................ (9,935,000) (8,975,000)
----------- -----------
Total shareholders' equity........................ 955,000 1,575,000
----------- -----------
Total liabilities and shareholders' equity........ $ 2,987,000 $ 3,514,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
FRANKLIN TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended September 30, 1997 and 1996 (unaudited)
<TABLE>
<CAPTION>
Three Months Ended
--------------------------
September 30,
--------------------------
1997 1996
----------- -----------
(unaudited) (unaudited)
<S> <C> <C>
Sales
Product.......................................... $ 76,000 $ 158,000
Internet services................................ 168,000 51,000
---------- ----------
Total sales................................... 244,000 209,000
---------- ----------
Cost of sales
Product.......................................... 97,000 130,000
Internet services................................ 137,000 35,000
---------- ----------
Total cost of sales........................... 234,000 165,000
---------- ----------
Gross profit....................................... 10,000 44,000
---------- ----------
Operating expenses
Research and development expenses................ 121,000 97,000
Selling, general, and administrative expenses.... 849,000 324,000
---------- ----------
Total operating expenses...................... 970,000 421,000
---------- ----------
Loss from operations............................... (960,000) (377,000)
---------- ----------
Other income (expense)
Interest expense................................. (17,000) (7,000)
Other income..................................... 17,000 --
---------- ----------
Total other income (expense).................. -- (7,000)
---------- ----------
Loss before minority interest and provision for
income taxes...................................... (960,000) (384,000)
Minority interest in loss of subsidiary............ -- --
---------- ----------
Loss before provision for income taxes............. (960,000) (384,000)
Provision for income taxes......................... -- --
---------- ----------
Net loss........................................... $ (960,000) $ (384,000)
========== ==========
Net loss per common share.......................... $ (.07) $ (.03)
========== ==========
Weighted average common shares outstanding......... 13,125,318 11,503,114
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
FRANKLIN TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended September 30, 1997 and 1996 (unaudited)
<TABLE>
<CAPTION>
Three Months Ended
--------------------------
September 30,
--------------------------
1997 1996
----------- -----------
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from operating activities
Net loss........................................... $ (960,000) $ (384,000)
Adjustments to reconcile net loss to net cash used
in operating activities
Depreciation and amortization.................... 66,000 12,000
Provision for loss on obsolete inventory......... -- --
Provision for loss on doubtful accounts.......... 15,000 --
Write-down of goodwill........................... -- --
Notes payable for services rendered.............. -- --
Stock issued for services rendered............... -- --
Loss on disposal of property..................... -- --
(Increase) decrease in
Accounts receivable.............................. (46,000) 26,000
Inventories...................................... (9,000) 8,000
Prepaid expenses................................. -- (20,000)
Increase (decrease) in
Accounts payable................................. 164,000 80,000
Accrued liabilities.............................. (62,000) 19,000
Accrued other liabilities........................ -- --
Other liabilities................................ -- (1,000)
---------- ----------
Net cash used in operating activities.............. (832,000) (260,000)
---------- ----------
Cash flows from investing activities
Purchases of property and equipment................ (18,000) (24,000)
Cash received (paid) in connection with business
acquisitions...................................... -- --
Issuance of notes receivable....................... -- (190,000)
Proceeds from notes receivable..................... 10,000 --
Other assets....................................... (47,000) --
Other liabilities.................................. -- --
---------- ----------
Net cash used in investing activities.............. (55,000) (214,000)
---------- ----------
Cash flows from financing activities
Payments on other liabilities...................... -- --
Proceeds from sale of Company stock................ 340,000 1,007,000
Proceeds from sale of minority stock in
consolidated subsidiary........................... -- --
Issuance of long-term debt......................... -- 100,000
Payments on long-term debt......................... -- --
Payments on capital lease obligation............... (9,000) --
---------- ----------
Net cash provided by financing activities.......... 331,000 1,107,000
---------- ----------
Net increase (decrease) in cash.................... (556,000) 633,000
Cash, beginning of the period...................... 1,464,000 166,000
---------- ----------
Cash, end of the period............................ $ 908,000 $ 799,000
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
FRANKLIN TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
For the Three Months Ended September 30, 1997 and 1996 (unaudited)
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 communications
and access and connectivity products for T-1 and X.25 wide-area networks and
provide 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, and parts of
Europe in a wide range of industries including financial services, government,
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 accouning priciples 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 financail statements included in
the Form S-1 of Franklin Telecommuncations Corp. filed with the Securities and
Exchange Commission on November 7, 1997. The results of operations for the
three months ended September 30, 1997 are not necessarily indicative of the
results that may be expected for the fiscal year ending June 30, 1998.
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.
Minority Interest
FNet, on a stand-alone basis, had a shareholders' deficit. As a result,
Franklin's investment in FNet had a negative carrying value. The increase in
capitalization of FNet resulting from the sale of 1,949,500 and 51,000 shares of
common stock for the year ended June 30, 1997 and the three months ended
September 30, 1997, respectively, to outside investors benefited Franklin in
that it reduced the negative carrying value of Franklin's investment in FNet.
Accordingly, Franklin has accounted for the change in its proportionate share of
FNet's equity resulting from the issuance of stock to outside investors as an
increase in shareholders' equity and a reduction in minority interest liability
in the consolidated financial statements.
The accompanying consolidated financial statements do not reflect a minority
interest liability as of June 30, 1997 and September 30, 1997 as FNet, on a
stand-alone basis, had a shareholders' deficit as of such dates. The
accompanying consolidated statements of operations for the three months ended
September 30, 1997 and 1996 do not reflect the minority interest's share of
FNet's losses for said periods as the related accrual would result in the
Company's recordation of a minority interest receivable.
Net Loss Per Common Share
The computation of loss per common share is based on the weighted average
number of common and common equivalent shares outstanding during the three
months ended September 30, 1997 and 1996. Common stock equivalents have been
excluded from the aforementioned computations as their effect would be anti-
dilutive.
Income Taxes
<PAGE>
The Company accounts for income taxes under the Financial Accounting
Standards Board SFAS No. 109, "Accounting for Income Taxes," SFAS 109 requires
the asset and liability method of accounting for income taxes. Under the asset
and liability method of SFAS 109, 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. Under
SFAS 109, 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
The Financial Accounting Standards Board issued SFAS 128, "Earnings Per
Share," which is effective for financial statements issued for periods ending
after December 15, 1997, including interim periods. SFAS 128 requires public
companies to present basic earnings per share and, if applicable, diluted
earnings per share instead of primary and fully-diluted earnings per share. The
Company does not believe that reporting earnings per share in accordance with
SFAS 128 will be materially different from the earnings per share previously
reported.
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.
NOTE 2--INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
September 30, June 30,
------------- --------
1997 1997
---- ----
(unaudited)
<S> <C> <C>
Raw materials.......... $217,000 $155,000
Work in process........ 148,000 152,000
Finished goods......... 38,000 87,000
-------- --------
Total............... $403,000 $394,000
======== ========
</TABLE>
NOTE 3--CONTINGENCIES
Legal Proceedings
On July 28, 1997 the Company was named as a defendant in an action brought
by AT&T Corp. ("AT&T") against Connect America, a reseller of "800" number
service, its officers and affiliates, and several Internet Service Providers,
including the Company. The action was brought in the U.S. District Court for the
Central District of California. In general, the complaint alleges that Connect
America and its officers fraudulently acquired 800 numbers from AT&T, failed to
pay for them, and resold them to the Company and the other Internet Service
Providers on a "flat rate" basis, notwithstanding the fact the AT&T's charges
for 800 service are typically based on time utilized. The claims against the
Company and the other Internet Service Providers are based on unjust enrichment,
on the theory that the Company and the other Internet Service Providers knew or
should have known that flat rate 800 service was unavailable. In addition to
injunctive relief against Connect America and its officers, the complaint seeks
damages of $7.4 million, punitive damages and attorneys' fees. The Company has
filed an answer to the complaint denying the material allegations thereof, and
plans to vigorously contest the action. There can be no assurance that the
Company will be successful in its defense of the action. Because of the large
<PAGE>
amount sought in the complaint, an adverse outcome would have a material adverse
effect on the Company's financial condition.
NOTE 4--RECENT SALE OF EQUITY SECURITIES
During September and October 1997, the Company completed two Regulation D
private placement offerings as follows:
. An offering of 333,333 units for $1,000,000. Each unit consists of one
share of the Company's common stock and one common stock warrant to
purchase one share of the Company's common stock for $5.00 per share. The
net proceeds to the Company were $1,000,000, and
. An offering of 540 units for $5,400,000. Each unit in this offering
consists of one share of the Company's Series C Convertible Preferred
Stock and one warrant to purchase one share of FNet's common stock. The
net proceeds to the Company were $4,957,500.
In November 1997, the Company issued an additional 200 units for $2,000,000.
Each unit in this offering consists of one share of the Company's Series C
Convertible Preferred Stock and one Warrant to purchase one share of FNet's
common stock. The net proceeds to the Company were $1,850,000.
During the three months ended September 30, 1997, FNet sold 51,000 shares of
its stock to outside investors at $1.00 per share. The shares sold to investors
were issued under a private offering circular pursuant to the exemption from
registration under the 1933 Act provided in Rule 505 of Regulation D. After the
issuance of these shares, Franklin's ownership percentage decreased to 67% as of
September 30, 1997.
NOTE 5--SUBSEQUENT EVENTS
The Company's President is employed pursuant to an Employment Agreement
expiring on December 31, 1997. The Employment Agreement provides for monthly
compensation at the rate of $20,000, with annual increases of 6%. The Company's
Board of Directors has approved a new six year Employment Agreement for the
Company's President, effective January 1, 1998. The new Employment Agreement
provides for compensation at the rate of $27,000 per month, with annual
increases of 6%.
In October 1997, the Company's President exercised stock options for
1,333,695 shares of common stock at $0.10 per share.
In November 1997, an employee of the Company exercised stock options for
50,000 and 100,000 shares of common stock at $0.69 and $1.31 per share,
respectively.
<PAGE>
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 Intenet 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 recently re-focused its business from manufacturing
primarily LAN and WAN products to providing telecommunications and Internet
products and services. Beginning in the year ended June 30, 1997 and continuing
in the three months ended September 30, 1997, 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 fiscal year, while the
newly developed hardware products and Internet services were not yet ready for
market. Initial demand for the Company's newly introduced D-Mark Channel Bank,
Cyclone and Data Voice Gateway hardware product lines have yet to be
established, since many potential customers are in the process of evaluating the
products.
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.
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 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.
The Cyclone is an evolution of the D-Mark and includes modems integrated into
the PC cards, thus eliminating the need to add external modems for those
applications requiring them. The Data Voice Gateway, or DVG, is a further
evolution of the D-Mark, which adds the capability of transmitting voice traffic
over the Internet and Frame relay circuits.
Other products under development include the Tornado, which is a further
evolution of the Cyclone by providing terminal server function. The Tornado is
targeted to become the Company's point of presence ''POP in a box'' solution for
ISPs or a corporation's data center. This would permit a new or existing
Internet Service Provider or corporation to install all of the hardware required
to provide an Internet service connection.
Other features of the D-Mark series include FXO and, in the future, Ground
Start capabilities for the voice card integrated in the D-Mark systems. FXO
allows the D-Mark to extend the functions of a PBX telephone system. Ground
Start will allow access to devices (PBX trunk lines, telephones, fax machines,
etc.) that operate in this environment, thus expanding the types of devices that
the D-Mark systems can utilize. The T-1 card in the D-Mark system is also being
improved to add a MVIP interface. The MVIP interface is an open architecture
standard interface, which would permit users to customize applications and
directly connect third party hardware to the D-Mark systems.
In designing the D-Mark Channel Bank, the Company's primary target market
was Internet Service Providers. With the growth of the Internet, the Company
believes that the D-Mark Channel Bank can satisfy the requirements of Internet
Service Providers for providing analog lines for modem banks to provide service
for their dial-up accounts.
Companies such as U.S. Robotics, Texas Instruments and Cirrus Logic have
purchased the D-Mark Channel Bank for testing and engineering of the latest 56K
(X2) modem technology.
<PAGE>
These applications were not originally considered by the Company, but were
discovered by and in conjunction with purchasers of the product. Due to the
rapidly changing pace of the telecommunications industry, management believes
that the D-Mark Channel Bank will continue to be a leading edge product because
of its upgradability and flexibility. The Company also manufactures D4 T-1
Channel Banks, which are capable of terminating a telephone company T1 line
which contains 24 voice and or data circuits. This termination takes the T-1
serial port and turns it into 24 central office type telephone outlets which
will accept 24 desk phones or a PBX. As part of the channel bank the Company
also offers an 8 port station analog card (ICV-8) for the CTI market.
As with any new line of business, there can be no assurance that the D-Mark
Channel Bank, The Cyclone, DVG and other newly developed communications 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 September 30, 1997 Compared To Three Months Ended September
30, 1996
Net Sales. Net sales increased by $35,000, or 17%, from $209,000 in the
three months ended September 30, 1996 to $244,000 in the three months ended
September 30, 1997. The overall increase is due to increased Internet services
revenue, with a reduced demand for wide area network products. Initial demand
for newly introduced hardware products has yet to be established, in that most
sales to date have been to customers for testing and evaluation purposes. The
revenue mix for the three months ended September 30, 1997 consisted of 69%
Internet services revenue and 31% hardware product sales.
Gross Profit. Gross profit decreased as a percentage of net sales to 4% for
the three months ended September 30, 1997, from a gross profit of 21% of net
sales for the corresponding period of 1996. The gross profit percentage decrease
can be attributed to increased manufacturing overhead infrastructure
expenditures, including increased numbers of personnel to support an anticipated
ramp up of sales activity.
Operating Expenses. Operating expenses increased by $549,000, or 130%, from
$421,000 in the three months ended September 30, 1996 to $970,000 in the three
months ended September 30, 1997. The increase is attributable to increased
product development costs for the recently introduced hardware products, costs
in developing the Internet services infrastructure, increased sales and
marketing efforts, and costs in enhancing the general and administrative
infrastructure to support higher sales volumes.
Other Income (Expense). Interest expense increased by $10,000, or 143%,
from $7,000 in the three months ended September 30, 1996 to $17,000 in the three
months ended September 30, 1997, due primarily to an increase in loans from an
officer of the Company and assumed lease debt from Internet Passport. Other
income increased by $17,000, or 100%, from $-0- in the three months ended
September 30, 1996 to $17,000 in the three months ended September 30, 1997, due
to various non-operating items.
Liquidity and Capital Resources
Cash and cash equivalents and net working capital totaled $908,000 and
$190,000, respectively, as of September 30, 1997 and 1996. The primary source of
cash was net proceeds generated from equity financing. 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 $114,000, $1,007,000,
$1,109,000 and $289,000 in equity financing, for the years ended June 30, 1995,
1996, and 1997, and the three months ended September 30, 1997, respectively. Its
subsidiary, FNet, raised $1,950,000 for the year ended June 30, 1997 and $51,000
for the three months ended September 30, 1997. FNet has continued to experience
losses, due to the growth nature of the Internet services 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 acquisitions, increases in product development, expansion of
its marketing plan, development of new branch offices and funding of increases
in accounts receivable. Development of new branch offices may be achievable
through acquisitions. Although the Company seeks
<PAGE>
to use its Common Stock to make acquisitions to the extent possible, many
acquisition candidates may require that all or a significant portion of the
purchase price be paid in cash.
The Company believes that existing cash and cash equivalents, cash flow from
operations, and cash being raised through private placements of securities will
be sufficient to meet the Company's presently anticipated working capital needs
for at least the next 13 months. The Company regularly evaluates various
potential acquisitions, which could require a substantial portion of the net
proceeds from the exercise of the Warrants. 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.
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On July 28, 1997 the Company was named as a defendant in an action brought
by AT&T Corp. ("AT&T") against Connect America, a reseller of "800" number
service, its officers and affiliates, and several Internet Service Providers,
including the Company. The action was brought in the U.S. District Court for the
Central District of California. In general, the complaint alleges that Connect
America and its officers fraudulently acquired 800 numbers from AT&T, failed to
pay for them, and resold them to the Company and the other Internet Service
Providers on a "flat rate" basis, notwithstanding the fact that AT&T's charges
for 800 service are typically based on time utilized. The claims against the
Company and the other Internet Service Providers are based on unjust enrichment,
on the theory that the Company and the other Internet Service Providers knew or
should have known that flat rate 800 service was unavailable. In addition to
injunctive relief against Connect America and its officers, the complaint seeks
damages of $7.4 million, punitive damages and attorneys' fees. The Company has
filed an answer to the complaint denying the material allegations thereof, and
plans to vigorously contest the action. There can be no assurance that the
Company will be successful in its defense of the action. Because of the large
amount sought in the complaint, an adverse outcome would 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
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 908,000
<SECURITIES> 0
<RECEIVABLES> 319,000
<ALLOWANCES> (19,000)
<INVENTORY> 403,000
<CURRENT-ASSETS> 1,679,000
<PP&E> 991,000
<DEPRECIATION> (442,000)
<TOTAL-ASSETS> 2,987,000
<CURRENT-LIABILITIES> 1,489,000
<BONDS> 0
0
0
<COMMON> 10,890,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 2,987,000
<SALES> 244,000
<TOTAL-REVENUES> 244,000
<CGS> 234,000
<TOTAL-COSTS> 234,000
<OTHER-EXPENSES> 953,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17,000
<INCOME-PRETAX> (960,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (960,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (960,000)
<EPS-PRIMARY> (.07)
<EPS-DILUTED> 0
</TABLE>
