<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
---------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-11616
FRANKLIN TELECOMMUNICATIONS CORP.
(Exact Name of Registrant as Specified in its Charter)
---------------
California 95-3733534
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
733 Lakefield Road, Westlake Village, California 91361
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (805) 373-8688
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
Title of each class Name of each exchange
------------------- ---------------------
<S> <C>
Common stock, American Stock Exchange
without par value
</TABLE>
Securities registered pursuant to Section 12(g) of the Act: None
---------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes[ X] No [ ]
Indicate the number of shares outstanding of each of the issuer's class of
common stock, as of the latest practicable date:
<TABLE>
<CAPTION>
TITLE OF EACH CLASS OF COMMON STOCK OUTSTANDING AT NOVEMBER 5, 1999
- ----------------------------------- -------------------------------
<S> <C>
Common Stock, no par value 28,258,258
</TABLE>
<PAGE> 2
Index
Franklin Telecommunications Corp.
<TABLE>
<S> <C>
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets -
September 30, 1999 (Unaudited) and June 30, 1999
Consolidated Statements of Operations (Unaudited) -
Three months ended September 30, 1999 and 1998
Consolidated Statements of Cash Flows (Unaudited) -
Three months ended September 30, 1999 and 1998
Notes to Consolidated Financial Statements (Unaudited)
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
</TABLE>
<PAGE> 3
Item 1. Financial Statements
FRANKLIN TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 1999 (UNAUDITED) AND JUNE 30, 1999
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1999 1999
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents ........................................ $ 1,185,000 $ 1,637,000
Accounts receivable, less allowance for doubtful accounts of
$1,412,000 (unaudited) and $106,000, respectively .............. 1,429,000 2,610,000
Other receivables ................................................ 88,000 137,000
Current portion of note receivable ............................. 150,000 150,000
Inventories (Note 2) ............................................. 1,739,000 1,674,000
Prepaid expenses ................................................. 94,000 81,000
------------ ------------
Total current assets ........................................... 4,685,000 6,289,000
------------ ------------
Property and equipment
Machinery and equipment .......................................... 1,772,000 1,681,000
Furniture and fixtures ........................................... 256,000 256,000
Computers and software ........................................... 1,075,000 1,029,000
------------ ------------
3,103,000 2,966,000
Less accumulated depreciation .................................... 927,000 802,000
------------ ------------
Total property and equipment ................................... 2,176,000 2,164,000
------------ ------------
Note receivable, net of current portion ............................ 160,000 160,000
Other assets ....................................................... 854,000 822,000
------------ ------------
Total assets ................................................... $ 7,875,000 $ 9,435,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt (majority due to a related
party) ........................................................ $ 24,000 $ 24,000
Accounts payable ................................................. 559,000 1,027,000
Accrued liabilities (Note 3) ..................................... 1,712,000 1,883,000
------------ ------------
Total current liabilities ...................................... 2,295,000 2,934,000
Long-term debt, (majority due to a related party) net of
current portion ................................................. 762,000 762,000
------------ ------------
Total liabilities .............................................. 3,057,000 3,696,000
------------ ------------
Contingencies (Note 4)
Shareholders' equity
Preferred stock, no par value 10,000,000 shares authorized,
Convertible Series C -0- (unaudited) and -0- shares issued
and outstanding ............................................... -0- -0-
Common stock, no par value 90,000,000 shares authorized
28,161,904 (unaudited) and 25,796,726 shares issued and
outstanding ................................................... 23,742,000 21,628,000
Common stock committed, no par value 10,000 (unaudited) and
10,000 shares committed but not yet issued .................... 6,000 6,000
Accumulated deficit .............................................. (18,930,000) (15,895,000)
------------ ------------
Total shareholders' equity ..................................... 4,818,000 5,739,000
------------ ------------
Total liabilities and shareholders' equity ..................... $ 7,875,000 $ 9,435,000
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 4
FRANKLIN TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
-------------------------------
1999 1998
------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Sales
Product .................................... $ 305,000 $ 672,000
Telephone and Internet services ............ 470,000 261,000
------------ ------------
Total sales ............................ 775,000 933,000
------------ ------------
Cost of sales
Product .................................... 269,000 278,000
Telephone and Internet services ............ 413,000 185,000
------------ ------------
Total cost of sales .................... 682,000 463,000
------------ ------------
Gross profit ................................... 93,000 470,000
------------ ------------
Operating expenses
Research and development expenses .......... 474,000 418,000
Selling, general, and administrative
Expenses ................................. 2,639,000 1,192,000
------------ ------------
Total operating expenses ............... 3,113,000 1,610,000
------------ ------------
Loss from operations ........................... (3,020,000) (1,140,000)
------------ ------------
Other income (expense)
Interest income ............................ 8,000 60,000
Interest expense ........................... (1,000) (12,000)
Loss on disposal of property and
equipment ................................ (24,000) --
Other income ............................... 2,000 3,000
------------ ------------
Total other income ..................... (15,000) 51,000
------------ ------------
Loss before provision for income taxes and
minority interest ............................ (3,035,000) (1,089,000)
Provision for income taxes ..................... -- 1,000
------------ ------------
Loss before minority interest .................. (3,035,000) (1,090,000)
Minority interest in subsidiary ................ -- (75,000)
------------ ------------
Net loss ....................................... $ (3,035,000) $ (1,165,000)
============ ============
Basic net loss per common share ................ $ (.12) $ (.06)
============ ============
Diluted net loss per common share .............. $ (.12) $ (.06)
============ ============
Weighted average common shares
outstanding used to compute basic and
diluted net loss per common share .......... 26,503,814 18,879,224
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 5
FRANKLIN TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
1999 1998
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss .............................................. $(3,035,000) $(1,165,000)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization ..................... 203,000 57,000
Minority interest ................................. -- 75,000
Stock issued for services rendered ................ 82,000 --
Loss on disposal of property and equipment ........ 24,000 --
(Increase) decrease in
Accounts receivable ............................... 1,181,000 (629,000)
Other receivables ................................. 49,000 (6,000)
Inventories ....................................... (65,000) (1,000)
Prepaid expenses .................................. (13,000) (97,000)
Increase (decrease) in
Accounts payable .................................. (468,000) 139,000
Accrued liabilities ............................... (171,000) (88,000)
----------- -----------
Net cash used in operating activities ................. (2,213,000) (1,715,000)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment ................... (178,000) (542,000)
Disposal of property and equipment .................... 16,000 --
Other assets .......................................... (108,000) (79,000)
----------- -----------
Net cash used in investing activities ................. (270,000) (621,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of Company stock ................... 1,891,000 1,000
Proceeds from sale of minority stock in
Consolidated subsidiary ............................. 53,000 18,000
Proceeds from exercise of stock options and warrants .. 87,000 --
----------- -----------
Net cash provided by financing activities ............. 2,031,000 19,000
----------- -----------
Net decrease in cash and cash equivalents ............. (452,000) (2,317,000)
Cash and cash equivalents, beginning of the period .... 1,637,000 5,750,000
----------- -----------
Cash and cash equivalents, end of the period .......... $ 1,185,000 $ 3,433,000
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
1999 1998
----------- -----------
(unaudited) (unaudited)
Interest paid ......................................... $ -- $ --
=========== ===========
Income taxes paid ..................................... $ -- $ --
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<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,
1999. The results of operations for the three months ended September 30, 1999
are not necessarily indicative of the results that may be expected for the
fiscal year ending June 30, 2000.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Franklin Telecommunications Corp. and its wholly-owned or majority owned
subsidiaries. All significant intercompany balances and transactions have been
eliminated.
Loss Per Common Share
The Company calculates loss per common share in accordance with Statement
of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share." Basic
loss per share is computed by dividing the loss available to common shareholders
by the weighted-average number of common shares outstanding. Diluted loss per
share is computed similar to basic loss per share, except that the denominator
is increased to include the number of additional common shares that would have
been outstanding if the potential common shares had been issued and if the
additional common shares were dilutive. For the three months ended September 30,
1999, common stock equivalents have been excluded from the aforementioned
computations as their effect would be 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
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.
<PAGE> 7
NOTE 2--INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1999 1999
------------- ----------
(UNAUDITED)
<S> <C> <C>
Raw materials ............ $ 978,000 $ 980,000
Work in process .......... 170,000 510,000
Finished goods ........... 591,000 184,000
---------- ----------
Total ................ $1,739,000 $1,674,000
========== ==========
</TABLE>
NOTE 3--ACCRUED LIABILITIES
Accrued liabilities consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1999 1999
------------- ----------
(UNAUDITED)
<S> <C> <C>
Salaries and related expense ...... $ 549,000 $ 633,000
Accrued offering costs ............ 6,000 6,000
Accrued interest payable .......... 28,000 27,000
Accrued sales tax ................. 671,000 605,000
Other accrued liabilities ......... 458,000 612,000
---------- ----------
Total ..................... $1,712,000 $1,883,000
========== ==========
</TABLE>
NOTE 4--CONTINGENCIES
The Company is involved in certain legal proceedings and claims which
arise in the normal course of business. Management does not believe that the
outcome of these matters will have a material adverse effect on the Company's
consolidated financial position or results of operations.
NOTE 5--RECENT SALE OF EQUITY SECURITIES
During the three months ended September 30, 1999, the Company sold and
issued 1,974,563 restricted shares of common stock to existing shareholders at
prices ranging from $1.03 to $2.05 per share. These shares were issued under
Section 4(2) of the Securities Act of 1933.
During the three months ended September 30, 1999, the Company issued
253,766 shares of common stock from the exercise of employee options at prices
ranging from $0.10 to $0.44 per share.
During the three months ended September 30, 1999, the Company issued
74,716 restricted shares of common stock to an employee in lieu of salaries at a
price of $1.10 per share.
During the three months ended September 30, 1999, the Company issued
62,131 shares of common stock from the exercise of warrants at prices ranging
from $0.78 to $1.25 per share.
<PAGE> 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
OVERVIEW
Franklin Telecommunications Corp. ("Company") designs, builds and sells Internet
Telephony equipment and other high speed communications products and subsystems.
Our products are marketed through Original Equipment Manufacturers ("OEMs") and
distributors, as well as directly to end users. In addition, through our
majority-owned subsidiary, FNet Corp. ("FNet"), we provide traditional switched
network and Internet Protocol telephony services, and Internet access to
businesses and individuals. FNet has had limited operations to date. The
Company's customers are located predominantly in the United States, Canada,
South America, Asia and parts of Europe in a wide range of industries including
financial services, government, telephone services and manufacturing.
Forward-looking statements in this Management's Discussion and Analysis of
Financial Condition and Results of Operations, including statements regarding
the Company's entrance into the Telephone and Internet business, newly
introduced products, development of "VOIP" service capabilities over the
Internet, net sales, gross profit, operating expenses, other income and
expenses, liquidity and cash needs and the Company's plans and strategies are
all based on current expectations, and the Company assumes no obligation to
update this information. Numerous factors could cause actual results to differ
from those described in the forward-looking statements.
The Company's new products that have been under development for the past two
years have begun to generate substantial revenues, as compared to previous
years. Sales had been declining for the Company's existing legacy Wide Area
Network hardware products during the previous years, while the newly developed
DVG VOIP hardware products and Telephone and Internet services were not yet
ready for market.
The Company offers a suite of Internet Telephony solutions that enable business
communications over the Internet. From the small office home office (SOHO) to
the branch office and HQ operations of medium to large scale corporate America,
the Company offers a cost-effective call handling solution. From the enterprise
to the carrier market, the Company can deal with "convergence" managing the
connectivity and integration of voice, data, fax and video. Where ever possible,
the Company offers a turnkey solution that can be "owned" by its customers. When
equipment sales are not in the best interest of a particular customer's business
communications solution, the Company plans to provide that solution as a
"service" that can be leased. The Company is a leading edge supplier of Internet
Telephony solutions as a result of its flexibility in providing business
communication solutions as equipment or services on a global basis. The
Company's products and services enable connectivity and e-commerce.
The Company is both an equipment supplier and a service provider, offering
turn-key business communications solutions to both the carrier and enterprise
segments of the Internet Telephony market. The Company produces gateways,
gatekeepers and edge servers that provide advanced packet switching solutions
that significantly reduce the infrastructure costs associated with
communications networks. The Company's products are designed, developed and
manufactured by the Company.
In addition to manufactured solutions, the Company maintains a Network
Operations Center that provides both "on -net" and "off-net" connectivity for
the Company's equipment customers. The Network Operations Center interconnects
the Company's customers on a global basis. The Network Operations Center
includes Internet access facilities and a Harris Class 4 circuit switch. The
center interconnects with over eleven International Record Carriers and is
capable of completing a voice call to any phone in the world. The Company's
equipment customer is offered the opportunity to access the Harris facilities
and to interconnect with each other, using the Company to enable "settlement"
between the networks. This interconnection can be either "free" through the
Internet, or delivered through private leased lines.
In addition to the Company's circuit switched capabilities at its headquarters
facility in Westlake Village, California , the Company provides a combination of
satellite and VOIP solutions to enable telephone communications for NATO forces
throughout the Bosnia region. Some 23 earth station transponders are connected
to "telephone calling booths" linked via satellite to the US where they are
interconnected via VOIP circuits to the Harris circuit switch in the Company's
headquarters. NATO soldiers, using FNET calling cards, are able to make calls
all over the world through FNET facilities.
<PAGE> 9
As a result of the Company's expertise in network operations, the Company is
also able to provide additional assistance to its customers by offering design,
installation and network management services. The company believes that this
strategy of combining network operations and equipment design is a significant
product differentiation strategy, uniquely positioning the Company. The Company
may consider spinning off its Network Operations capability (i.e. FNET) when
sufficient volume and value have been created. Currently, more than 80% of
Company customers elect to interconnect with the Network Operations center. Much
like the Internet, the Company is growing with each additional gateway sale.
As with any line of business, there can be no assurance that the DVG VOIP
products will gain widespread market acceptance or be profitable. In addition,
there can be no assurance that new hardware products and services developed by
others will not render the Company's hardware products and services
noncompetitive or obsolete.
RESULTS OF OPERATIONS
Three Months Ended September 30, 1999 Compared To Three Months Ended
September 30, 1998
Net Sales. Net sales decreased by $158,000, or 17%, from $933,000 in the
three months ended September 30, 1998 to $775,000 in the three months ended
September 30, 1999. The decrease is due to both a reduction in sales of DVG
hardware systems to a major customer, partially offset by increasing telephone
revenue from the Company's subsidiary FNet. The revenue mix for the three months
ended September 30, 1999 consisted of 61% Telephone and Internet services
revenue and 39% hardware product sales.
Gross Profit. Gross profit decreased as a percentage of net sales to 12% for
the three months ended September 30, 1999, from a gross profit of 50% of net
sales for the corresponding period of 1998. The gross profit percentage decrease
can be attributed to a higher ratio of lower margin service revenue and a fixed
hardware overhead spread over a smaller sales base.
Operating Expenses. Operating expenses increased by $1,503,000, or 93%, from
$1,610,000 in the three months ended September 30, 1998 to $3,113,000 in the
three months ended September 30, 1999. The primary reason for the increase was
due to a one time increase in the allowance for doubtful accounts of $1,284,000
for the receivable of a major customer. The major customer's current financial
condition and certain events relating to the customer, occurring subsequent to
the Company's fiscal quarter ended September 30, 1999, were considered in the
decision to make the reserve.
Other Income (Expense). Interest income decreased by $52,000 , or 87%, from
$60,000 in the three months ended September 30, 1998 to $8,000 in the three
months ended September 30, 1999, due to reduced cash balances available to earn
interest. Interest expense decreased by $11,000, or 92%, from $12,000 in the
three months ended September 30, 1998 to $1,000 in the three months ended
September 30, 1999, due primarily to a restructuring of loans from an officer of
the Company to eliminate the interest features. Other components of other income
(expense) were immaterial and were due to various non operating items.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents and net working capital totaled $1,185,000 and
$2,390,000, respectively, as of September 30, 1999. The primary source of cash
has been net proceeds generated from equity financings. The Company has relied
on sales of new shares and the exercise of warrants and options to fund
operations for an extended period of time. The Company received $1,011,000 and
$1,978,000 in equity financing for the year ended June 30, 1999, and the three
months ended September 30, 1999, respectively. Its subsidiary, FNet, raised
$110,000 for the year ended June 30, 1999 and $53,000 for the three months ended
September 30, 1999. FNet has continued to experience losses due to the growth
nature of the Internet services business and development of the IP Telephony
business.
The Company anticipates that its primary uses of working capital in future
periods will be for increases in product development, expansion of its marketing
plan, development of new branch offices and funding of increases in accounts
receivable.
The Company believes that existing cash and cash equivalents, cash flow from
operations and cash raised through private placements will be sufficient to meet
the Company's presently anticipated working capital needs for at least the next
13 months. To the extent the Company uses its cash resources for acquisitions,
the Company may be required to obtain additional funds, if available, through
borrowings or equity financings. There can be no assurance that such capital
<PAGE> 10
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, with the exception of software specifically to
operate the billing for the switch platform , and the cost was not material. The
switch billing software will be replaced sometime within the last calendar
quarter for approximately $70,000, which has already been accrued.
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
end 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.
<PAGE> 11
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on From 8-K
None
<PAGE> 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/ FRANK W. PETERS
--------------------------------------
Frank W. Peters
Chief Executive Officer
By /s/ THOMAS L. RUSSELL
--------------------------------------
Thomas L. Russell
Chief Financial Officer
Dated: November 15, 1999
<PAGE> 13
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 1,185,000
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<RECEIVABLES> 2,841,000
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<INVENTORY> 1,739,000
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<PP&E> 3,103,000
<DEPRECIATION> 927,000
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<BONDS> 0
0
0
<COMMON> 23,748,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 7,875,000
<SALES> 775,000
<TOTAL-REVENUES> 775,000
<CGS> 682,000
<TOTAL-COSTS> 682,000
<OTHER-EXPENSES> 1,821,000
<LOSS-PROVISION> 1,306,000
<INTEREST-EXPENSE> 1,000
<INCOME-PRETAX> (3,035,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,035,000)
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<CHANGES> 0
<NET-INCOME> (3,035,000)
<EPS-BASIC> (0.12)
<EPS-DILUTED> (0.12)
</TABLE>
