<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
------------
[X] AMENDMENT NO. 1 TO QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-11616
FRANKLIN TELECOMMUNICATIONS CORP.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
---------------
California 95-3733534
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
733 Lakefield Road, Westlake Village, California 91361
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (805) 373-8688
---------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's class of
common stock, as of the latest practicable date:
TITLE OF EACH CLASS OF COMMON STOCK OUTSTANDING AT OCTOBER 28, 1998
- ----------------------------------- -------------------------------
Common Stock, no par value 20,427,758
<PAGE> 2
INDEX
Franklin Telecommunications Corp.
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets -- September 30, 1998 (Unaudited)
and June 30, 1998
Consolidated Statements of Operations (Unaudited) Three months ended
September 30, 1998 and 1997
Consolidated Statements of Cash Flows (Unaudited) Three months ended
September 30, 1998 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> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
FRANKLIN TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 1998 (UNAUDITED) AND JUNE 30, 1998
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1998 1998
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents ................................ $ 3,433,000 $ 5,750,000
Accounts receivable, less allowance for doubtful accounts
of $27,000 (unaudited) and $8,000, respectively ....... 720,000 91,000
Other receivables ........................................ 113,000 107,000
Current portion of note receivable ....................... 268,000 241,000
Inventories (Note 2) ..................................... 672,000 671,000
Prepaid expenses ......................................... 152,000 555,000
------------ ------------
Total current assets ................................... 5,358,000 7,415,000
------------ ------------
Property and equipment
Machinery and equipment .................................. 1,195,000 184,000
Furniture and fixtures ................................... 168,000 168,000
Computers and software ................................... 1,028,000 997,000
------------ ------------
2,391,000 1,349,000
Less accumulated depreciation ............................ 628,000 571,000
------------ ------------
Total property and equipment ........................... 1,763,000 778,000
------------ ------------
Note receivable, net of current portion .................... 249,000 276,000
Other assets ............................................... 502,000 423,000
------------ ------------
Total assets ........................................... $ 7,872,000 $ 8,892,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt (majority due to a
related party) ......................................... $ 512,000 $ 252,000
Accounts payable ......................................... 312,000 173,000
Accrued liabilities ...................................... 939,000 1,027,000
------------ ------------
Total current liabilities .............................. 1,763,000 1,452,000
Long-term debt, (majority due to a related party) less
current portion .......................................... 144,000 404,000
------------ ------------
Total liabilities ...................................... 1,907,000 1,856,000
------------ ------------
Minority Interest .......................................... 75,000 --
Contingencies (Note 3)
Shareholders' equity
Series C Convertible Preferred stock, no par value,
10,000,000 shares authorized , 390 (unaudited) and
548 shares issued and outstanding ...................... 3,456,000 4,856,000
Common stock, no par value 90,000,000 shares authorized
19,704,200 (unaudited) and 18,344,178 shares
issued and outstanding ................................. 16,989,000 15,571,000
Common stock committed, no par value 77,336 (unaudited)
and 77,336 shares committed but not yet issued ......... 91,000 91,000
Accumulated deficit ...................................... (14,646,000) (13,482,000)
------------ ------------
Total shareholders' equity ............................. 5,890,000 7,036,000
------------ ------------
Total liabilities and shareholders' equity ............. $ 7,872,000 $ 8,892,000
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 4
FRANKLIN TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
------------------------------
1998 1997
------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Sales
Product ............................ $ 672,000 $ 76,000
Telephone and Internet services .... 261,000 168,000
------------ ------------
Total sales .................... 933,000 244,000
------------ ------------
Cost of sales
Product ............................ 278,000 97,000
Internet services .................. 185,000 137,000
------------ ------------
Total cost of sales ............ 463,000 234,000
------------ ------------
Gross profit ........................... 470,000 10,000
------------ ------------
Operating expenses
Research and development expenses .. 418,000 121,000
Selling, general, and administrative
expenses ......................... 1,192,000 849,000
------------ ------------
Total operating expenses ....... 1,610,000 970,000
------------ ------------
Loss from operations ................... (1,140,000) (960,000)
------------ ------------
Other income (expense)
Interest expense ................... (12,000) (17,000)
Interest income .................... 60,000 --
Other income ....................... 3,000 17,000
------------ ------------
Total other income ............. 51,000 --
------------ ------------
Loss before provision for income taxes
and minority interest................. (1,089,000) (960,000)
Provision for income taxes ............. 1,000 --
------------ ------------
Loss before minority interest .......... (1,090,000) (960,000)
Minority interest in subsidiary ........ (75,000) --
------------ ------------
Net loss ............................... $ (1,165,000) $ (960,000)
============ ============
Basic net loss per common share ........ $ (.06) $ (.07)
============ ============
Diluted net loss per common share ...... $ (.06) $ (.07)
============ ============
Weighted average common shares
outstanding used to compute basic
loss per common share ................ 18,879,224 13,125,318
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 5
FRANKLIN TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
----------------------------
1998 1997
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ................................ $(1,165,000) $ (960,000)
Adjustments to reconcile net loss to net
cash used in operating activities
Depreciation and amortization ....... 57,000 66,000
Provision for loss on doubtful
accounts .......................... -- 15,000
Minority interest ............... 75,000 --
(Increase) decrease in
Accounts receivable .................. (629,000) (46,000)
Other receivables .................... (6,000) --
Inventories .......................... (1,000) (9,000)
Prepaid expenses ..................... (97,000) --
Increase (decrease) in
Accounts payable ..................... 139,000 164,000
Accrued liabilities .................. (88,000) (62,000)
----------- -----------
Net cash used in operating activities ... (1,715,000) (832,000)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment ..... (542,000) (18,000)
Proceeds from notes receivable ......... -- 10,000
Other assets ............................ (79,000) (47,000)
----------- -----------
Net cash used in investing activities ... (621,000) (55,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of Company
common stock .......................... 1,000 340,000
Proceeds from sale of minority stock in
consolidated subsidiary ............... 18,000 --
Payments on capital lease obligation .... -- (9,000)
----------- -----------
Net cash provided by financing activities 19,000 331,000
----------- -----------
Net decrease in cash .................... (2,317,000)
Cash and equivalents, beginning of the
period ................................ 5,750,000 1,464,000
----------- -----------
Cash and equivalents, end of the period.. $ 3,433,000 $ 908,000
=========== ===========
</TABLE>
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES.
During the three months ended September 30, 1998, the Company completed
the following:
1. Equipment valued at $500,000 that was prepaid at June 30, 1998 was delivered
to the Company.
2. The Company issued 1,347,522 shares of common stock upon the conversion of
158 shares of its Series C preferred stock.
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 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,
1998. The results of operations for the three months ended September 30, 1998
are not necessarily indicative of the results that may be expected for the
fiscal year ending June 30, 1999.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Franklin Telecommunications Corp. and its wholly-owned or majority owned
subsidiaries. All significant intercompany balances and transactions have been
eliminated.
Minority Interest
The accompanying consolidated financial statements reflect the minority
interest's 29% ownership of FNet's net stockholders' equity on a stand alone
basis.
Loss Per Common Share
For the three month periods ended September 30, 1998 and 1997, the Company
adopted SFAS No. 128 "Earnings per Share." Basic loss per share is computed by
dividing loss available to common shareholders by the weighted-average number of
common shares outstanding. Diluted loss per share is computed similar to basic
losses per share except that the denominator is increased to include the number
of additional common shares that would have been outstanding if the potential
common shares had been issued and if the additional common shares were dilutive.
Common stock equivalents have been excluded from the aforementioned computations
as their effect would be anti-dilutive.
6
<PAGE> 7
Income Taxes
The Company accounts 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. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date. A valuation allowance is required when
it is less likely than not that the Company will be able to realize all or a
portion of its deferred tax assets.
Recently Issued Accounting Pronouncements
SFAS 130, "Reporting Comprehensive Income" issued by the Financial
Accounting Standards Board is effective for financial statements with fiscal
years beginning after December 15, 1997. Earlier application is permitted. SFAS
130 establishes standards for reporting and display of comprehensive income and
its components in a full set of general-purpose financial statements. The
Company does not expect adoption of SFAS 130 to have a material impact, if any,
on its financial position or results of operations.
The Financial Accounting Standards Board issued SFAS 131, "Disclosures about
Segments of an Enterprise and Related Information," effective for fiscal years
beginning after December 15, 1997. SFAS 131 requires a company to report certain
information about its operating segments including factors used to identify the
reportable segments and types of products and services from which each
reportable segment derives its revenues. The Company does not anticipate any
material change in the manner that it reports its segment information under this
new pronouncement.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits." This statement is not
applicable to the Company.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement established accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities and is
effective for fiscal years beginning after June 15, 1999. Management believes
that SFAS No. 133 will not have an effect on the Company's financial statements.
SFAS No. 134, "Accounting for Mortgage-Backed Securities Retained after the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking
Enterprise," was issued in October 1998. This statement is not applicable to
the Company.
NOTE 2--INVENTORIES
Inventories consisted of the following:
SEPTEMBER 30, JUNE 30,
1998 1998
------------- --------
(UNAUDITED)
Raw materials.............. $155,000 $260,000
Work in process............ 178,000 164,000
Finished goods............. 339,000 247,000
-------- --------
Total.................. $672,000 $671,000
======== ========
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 that AT&T's charges
for 800 service are typically based on time utilized. The claims against the
Company were based on unjust enrichment, on the theory that the Company knew or
should have known that flat rate 800 service was unavailable. The Company
settled the matter in December 1998.
7
<PAGE> 8
NOTE 4--RECENT SALE OF EQUITY SECURITIES
During the three months ended September 30, 1998, the Company issued
1,347,522 shares of common stock upon the conversion of 158 shares of Series C
Convertible Preferred Stock. The Company did not receive any proceeds from this
conversion.
During the three months ended September 30, 1998, FNet issued 18,000 shares
upon the exercise of employee stock options, at $1.00 per share.
During the three months ended September 30, 1998, the Company issued 12,500
shares upon the exercise of employee stock options, at $.10 per share.
NOTE 5--EMPLOYEE STOCK OPTIONS
On September 17, 1998, the Company extended the period in which options
would be exercisable to five years after the last vesting date. In addition to
the extension of the exercise period, cashless exercise provisions were also
adopted.
NOTE 6--SUBSEQUENT EVENT
On October 14, 1998, the Company agreed to cancel employee stock options
and grant new stock options at the current market price for all employees. This
offer to employees was optional, at their discretion.
8
<PAGE> 9
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 IP telephony and Internet
services 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 IP telephony and Internet business, newly
introduced products, development of IP telephony service capabilities over frame
relay circuits and 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 re-focused its business over the last two years 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, 1998, the Company has begun
to generate revenues from these new business lines. Sales have been declining
for the Company's existing LAN and WAN hardware products during the previous
fiscal year, while the newly developed hardware products and IP telephony
services are just now breaking into the market. IP telephony services are now
coming to fruition with revenue beginning in August 1998. Demand for the
Company's newly introduced Tempest Data Voice Gateway hardware products ("DVG")
has yet to be firmly established. Although sales of the DVGs have been
increasing, potential customers are still 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 main hardware products consist of the DVG, D-Mark Channel
bank and Cyclone product lines. The Company's DVG provides the capability of
transmitting voice, data and fax traffic over the Internet and Frame relay
circuits. 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 Company has developed an Integrated Billing System on the Microsoft NT
BackOffice platform. This billing system coupled with the DVG systems will allow
the Company to be among the very few offering a complete "TELEPHONE COMPANY
BUSINESS IN A BOX". Management believes that this single vendor solution should
eliminate the finger pointing that most customers experience when dealing with
multiple vendor solutions. This current release of the Tempest (R) DVG offers
full analog and T1 connectivity and now supports G.711 Fax and our AMAS
(AuthenticationMappingAndSettlement) and Billing solutions.
The Company has many product enhancements and new products in development.
Currently, the Company is testing the Alpha versions of E1/R2 AND E1/PRIMARY
RATE ISDN Tempest product to support an aggressive entry into the international
market place. There will be field testing of T1 PRI with Caller ID
authentication during the next quarter in support of domestic market
requirements. At this time the Company will also be testing its H.323 call
controller and T38 real time fax, which is now operational and in "Alpha"
testing in the Company's labs. The H.323 call controller will
9
<PAGE> 10
facilitate the Company's commitment to "Interoperability" and other emerging
industry standards. The H.323 call controller will also be used to support the
Company's ability to "voice enable" websites in the explosive call center
market. Additionally, the Company is alpha testing the first release of a
browser based interface to the AMAS and Billing system. This will allow Tempest
DVG users access to their individual billing records at any time, from anywhere
in the world. The Company is developing a new two/four port "modem" like DVG
model that will "speak" with the existing DVG product line. The Company is
currently Alpha testing an Internet Based PBX system between the Florida,
Scottsdale and Westlake Village development centers.
As with any new line of business, there can be no assurance that the DVG,
D-Mark Channel Bank, Cyclone 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, 1998 Compared To Three Months Ended
September 30, 1997
NET SALES. Net sales increased by $689,000, or 282%, from $244,000 in the
three months ended September 30, 1997 to $933,000 in the three months ended
September 30, 1998. The overall increase is due to increasing sales of DVG
products and initial telephone service revenue from the Company's FNet
subsidiary. Sustainable demand for newly introduced hardware products has yet to
be established, in that many customers are continuing to test and evaluate the
DVG products. Revenue is recorded when the customer completes testing and
evaluation and agrees to purchase the product. The revenue mix for the three
months ended September 30, 1998 consisted of 28% telephone and Internet services
revenue and 72% hardware product sales.
GROSS PROFIT. Gross profit increased as a percentage of net sales to 50%
for the three months ended September 30, 1998, from a gross profit of 4% of net
sales for the corresponding period of 1997. The gross profit percentage increase
can be attributed primarily to increased sales of higher margin hardware
products and the distribution of fixed overhead costs over a larger sales base.
OPERATING EXPENSES. Operating expenses increased by $640,000, or 66%, from
$970,000 in the three months ended September 30, 1997 to $1,610,000 in the three
months ended September 30, 1998. The increase is attributable to building
infrastructure for the IP telephony and Internet services and product
development costs for the recently introduced hardware products.
OTHER INCOME (EXPENSE). Interest expense decreased by $5,000, or 29%, from
$17,000 in the three months ended September 30, 1997 to $12,000 in the three
months ended September 30, 1998, due primarily to a reduction in loans from an
officer of the Company. Interest income increased by $60,000, or 100%, from the
three months ended September 30, 1997 to the three months ended September 30,
1998, due to interest earned on cash investments. Other income decreased by
$14,000, or 82%, from $17,000 in the three months ended September 30, 1997 to
$3,000 in the three months ended September 30, 1998, due to various non
operating items.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents and net working capital totaled $3,433,000 and
$3,595,000, respectively, as of September 30, 1998. The primary source of cash
was net proceeds generated from equity financings. The Company has relied on
sales of new shares and the exercise of warrants and options to fund operations
for an extended period of time. The Company received $10,150,000 and $1,000 in
equity financing, for the year ended June 30, 1998, and the three months ended
September 30, 1998, respectively. Its subsidiary, FNet, raised $398,000 for the
year ended June 30, 1998 and $18,000 for the three months ended September 30,
1998. FNet has continued to experience losses, due to the growth nature of the
Internet services business and development of the IP Telephony business. In
addition to the equity financing described above, the Company's President has
deferred portions of his compensation, and has on occasion converted debt to
equity in order to preserve the Company's cash.
10
<PAGE> 11
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 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 raised through private placements will be sufficient to meet
the Company's presently anticipated working capital needs for at least the next
13 months. To the extent the Company uses its cash resources for acquisitions,
the Company may be required to obtain additional funds, if available, through
borrowings or equity financings. There can be no assurance that such capital
will be available on acceptable terms. If the Company is unable to obtain
sufficient financing, it may be unable to fully implement its growth strategy.
YEAR 2000 COMPLIANCE
The "Year 2000" issue concerns the potential exposures related to the
possible automatic generation of business and financial misinformation
resulting from the application of computer programs which have been written
using two digits, rather than four, to define the applicable year of business
transactions. When the year 2000 begins, programs with such date-related logic
will not be able to distinguish between the years 1900 and 2000, potentially
causing software and hardware to fail, generating erroneous calculations or
presenting information in an unusable format.
The Company is dependent on multiple computer servers and the third-party
computer programs running on them to provide data in support of its accounting
and engineering functions. Also, FNet's ability to route its traffic in a cost
effective manner, to deliver a material portion of its services, to properly
obtain payment for such services, and/or to maintain accurate records of its
business and operations, could be substantially impaired until such issue is
resolved. The Company's plan for year 2000 compliance includes the following
phases: (i) conducting a comprehensive inventory of the Company's internal
systems, including information technology systems and non-information technology
systems (which include switching, billing and other platforms and electrical
systems) and the systems acquired or to be acquired by the Company from third
parties, (ii) assessing and prioritizing any required changes, upgrades, or
enhancements, (iii) resolving any problems by repairing or, if appropriate,
replacing the non-compliant systems, (iv) testing all remediated systems for
Year 2000 compliance, and (v) developing contingency plans that may be employed
in the event that any system used by the Company or FNet is unexpectedly
affected by a previously unanticipated problem relating to the Year 2000.
In recognition of the potential year 2000 problem, the Company began a
program to replace any of its existing communications, engineering and
accounting software that is not year 2000 compliant with new software that is
warranted by its vendors as being year 2000 compliant. The software replacement
program has been completed, and the cost was not material.
The Company has relationships with various third parties on whom it relies
to provide goods and services necessary for the manufacture and distribution of
its products. These include suppliers and vendors. As part of its determination
of year 2000 readiness, the Company has identified material relationships with
third party vendors and is in the process of assessing the status of their
compliance through the use of informal inquiries and review of hardware and
software documentation. The Company expects this process will be complete by
the first quarter of 1999 and the cost will not be material.
The components purchased by the Company in connection with the manufacture
of its products are available through numerous independent sources. Due to the
broad diversification of these sources, the risk associated with potential
business interruptions as a result of year 2000 non-compliance by one or more
sources is not considered significant. It is anticipated that the steps the
Company has taken and is continuing to take to deal with the year 2000 problem
will reduce the risk of significant business interruptions, but there is no
assurance that this outcome will be achieved. Failure to detect and correct all
internal instances of non-compliance or the inability of third parties to
achieve timely compliance could result in the interruption of normal business
operations which could, depending on its duration, have a material adverse
effect on the Company. In particular, FNet may experience problems to the extent
that other telecommunications carriers to which the Company sends traffic for
termination are not Year 2000 compliant. FNet's ability to determine the
capacity of these third parties to address issues relating to the Year 2000
problem is necessarily limited. To the extent that a limited number of carriers
experience disruptions in service due to the Year 2000 issue, the Company
believes that it will be able to obtain service from alternate carriers.
However, the Company's ability to provide certain services to customers in
selected geographic locations may be limited. There can be no assurance that
such problems will not have a material adverse effect on the Company.
11
<PAGE> 12
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 were based on unjust enrichment, on the theory that the Company knew or
should have known that flat rate 800 service was unavailable. The Company
settled the matter in December 1998.
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
12
<PAGE> 13
SIGNATURES
Pursuant to the requirements of Section 13 of 15(d) of the Securities
Exchange Act of 1934, Registrant has duly caused this Amendment No. 1 to 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: January 20, 1999
13
<PAGE> 14
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
27.1 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 3,433,000
<SECURITIES> 0
<RECEIVABLES> 747,000
<ALLOWANCES> 27,000
<INVENTORY> 672,000
<CURRENT-ASSETS> 5,358,000
<PP&E> 2,391,000
<DEPRECIATION> 628,000
<TOTAL-ASSETS> 7,872,000
<CURRENT-LIABILITIES> 1,763,000
<BONDS> 0
3,456,000
0
<COMMON> 17,080,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 7,872,000
<SALES> 933,000
<TOTAL-REVENUES> 933,000
<CGS> 463,000
<TOTAL-COSTS> 463,000
<OTHER-EXPENSES> 1,547,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,000
<INCOME-PRETAX> (1,089,000)
<INCOME-TAX> 1,000
<INCOME-CONTINUING> (1,090,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,165,000)
<EPS-PRIMARY> (.06)
<EPS-DILUTED> (.06)
</TABLE>
