<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 DECEMBER 31, 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:
Title of each class Name of each exchange
------------------- ---------------------
Common stock, American Stock Exchange
without par value
Securities registered pursuant to Section 12(g) of the Act: None
------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes[ X] No [ ]
Indicate the number of shares outstanding of each of the issuer's class of
common stock, as of the latest practicable date:
TITLE OF EACH CLASS OF COMMON STOCK OUTSTANDING AT FEBRUARY 2, 2000
- ----------------------------------- -------------------------------
Common Stock, no par value 29,019,907
<PAGE> 2
Index
Franklin Telecommunications Corp.
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets -
December 31, 1999 (Unaudited) and June 30, 1999
Consolidated Statements of Operations (Unaudited) Three months and six
months ended December 31, 1999 and 1998
Consolidated Statements of Cash Flows (Unaudited) Six months ended
December 31, 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
<PAGE> 3
Item 1. Financial Statements
FRANKLIN TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1999 (UNAUDITED) AND JUNE 30, 1999
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1999 1999
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents .................................................. $ 1,812,000 $ 1,637,000
Accounts receivable, less allowance for doubtful accounts of $30,000
(unaudited) and $106,000, respectively ................................... 127,000 2,610,000
Other receivables .......................................................... 71,000 137,000
Current portion of note receivable ....................................... 150,000 150,000
Inventories (Note 2) ....................................................... 2,632,000 1,674,000
Prepaid expenses ........................................................... 95,000 81,000
------------ ------------
Total current assets ..................................................... 4,887,000 6,289,000
------------ ------------
Property and equipment
Machinery and equipment .................................................... 1,779,000 1,681,000
Furniture and fixtures ..................................................... 263,000 256,000
Computers and software ..................................................... 1,461,000 1,029,000
------------ ------------
3,503,000 2,966,000
Less accumulated depreciation .............................................. 1,063,000 802,000
------------ ------------
Total property and equipment ............................................. 2,440,000 2,164,000
------------ ------------
Note receivable, net of current portion ...................................... 160,000 160,000
Other assets ................................................................. 841,000 822,000
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Total assets ............................................................. $ 8,328,000 $ 9,435,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt, majority due to a related party ......... $ 786,000 $ 24,000
Convertible notes payable (Note 3) ......................................... 2,500,000 -0-
Accounts payable ........................................................... 924,000 1,027,000
Accrued liabilities (Note 4) ............................................... 1,142,000 1,883,000
------------ ------------
Total current liabilities ................................................ 5,352,000 2,934,000
Long-term debt, (majority due to a related party) net of current portion .... -0- 762,000
------------ ------------
Total liabilities ........................................................ 5,352,000 3,696,000
------------ ------------
Contingencies (Note 5)
Shareholders' equity
Preferred stock, no par value 10,000,000 shares authorized, Convertible
Series C -0- (unaudited) and -0- shares issued and outstanding ........... -0- -0-
Common stock, no par value 90,000,000 shares authorized 29,055,964
(unaudited) and 25,796,726 shares issued and outstanding ................. 23,774,000 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 ........................................................ (20,804,000) (15,895,000)
------------ ------------
Total shareholders' equity ............................................... 2,976,000 5,739,000
------------ ------------
Total liabilities and shareholders' equity ............................... $ 8,328,000 $ 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 AND SIX MONTHS ENDED DECEMBER 31, 1999 AND 1998 (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
----------------------------- -----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Sales
Product ........................................ $ 245,000 $ 953,000 $ 550,000 $ 1,625,000
Telephone and Internet services ................ 641,000 287,000 1,111,000 548,000
------------ ------------ ------------ ------------
Total sales ............................... 886,000 1,240,000 1,661,000 2,173,000
------------ ------------ ------------ ------------
Cost of sales
Product ........................................ 286,000 509,000 555,000 787,000
Telephone and Internet services ................ 893,000 306,000 1,306,000 491,000
------------ ------------ ------------ ------------
Total cost of sales ....................... 1,179,000 815,000 1,861,000 1,278,000
------------ ------------ ------------ ------------
Gross profit (loss) ................................. (293,000) 425,000 (200,000) 895,000
------------ ------------ ------------ ------------
Operating expenses
Research and development expenses .............. 410,000 448,000 884,000 866,000
Selling, general, and administrative
Expenses .................................... 1,179,000 1,361,000 3,818,000 2,553,000
------------ ------------ ------------ ------------
Total operating expenses .................. 1,589,000 1,809,000 4,702,000 3,419,000
------------ ------------ ------------ ------------
Loss from operations ................................ (1,882,000) (1,384,000) (4,902,000) (2,524,000)
------------ ------------ ------------ ------------
Other income (expense)
Interest income ................................ 6,000 31,000 14,000 91,000
Interest expense ............................... -- (13,000) (1,000) (25,000)
Loss on disposal of property and equipment ..... (6,000) -- (30,000) --
Other income ................................... 4,000 1,000 6,000 4,000
------------ ------------ ------------ ------------
Total other income ........................ 4,000 19,000 (11,000) 70,000
------------ ------------ ------------ ------------
Loss before provision for income taxes and
minority interest ................................. (1,878,000) (1,365,000) (4,913,000) (2,454,000)
Provision for income taxes .......................... -- -- -- 1,000
------------ ------------ ------------ ------------
Loss before minority interest
(1,878,000) (1,365,000) (4,913,000) (2,455,000)
Minority interest in subsidiary ..................... -- 75,000 -- --
------------ ------------ ------------ ------------
Net loss ............................................ $ (1,878,000) $ (1,290,000) $ (4,913,000) $ (2,455,000)
============ ============ ============ ============
Basic net loss per common share ..................... $ (.07) $ (.06) $ (.19) $ (.13)
============ ============ ============ ============
Diluted net loss per common share ................... $ (.07) $ (.06) $ (.19) $ (.13)
============ ============ ============ ============
Weighted average common shares
Outstanding used to compute basic
loss per common share ........................... 28,629,848 20,872,059 27,561,831 19,875,641
============ ============ ============ ============
</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 SIX MONTHS ENDED DECEMBER 31, 1999 AND 1998 (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31,
-----------------------------
1999 1998
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(UNAUDITED) (UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ......................................... $(4,913,000) $(2,455,000)
Adjustments to reconcile net loss to net cash
Used in operating activities
Depreciation and amortization ............... 352,000 181,000
Provision for loss on obsolete inventory .... -- 100,000
Provision for loss on doubtful accounts ..... -- 46,000
Stock issued for services rendered .......... 82,000 33,000
Loss on disposal of property and equipment 24,000 --
Write-off of accounts receivable ......... 1,529,000 --
(Increase) decrease in
Accounts receivable ......................... 86,000 (249,000)
Other receivables ........................... 66,000 24,000
Inventories ................................. (90,000) (81,000)
Prepaid expenses ............................ (14,000) (108,000)
Increase (decrease) in
Accounts payable ............................ (103,000) 269,000
Accrued liabilities ......................... (741,000) 126,000
----------- -----------
Net cash used in operating activities ............ (3,722,000) (2,114,000)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment .............. (579,000) (822,000)
Issuance of notes receivable ..................... -- (1,000)
Disposal of property and equipment ............... 16,000 --
Other assets ..................................... (104,000) (108,000)
----------- -----------
Net cash used in investing activities ............ (667,000) (931,000)
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CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from convertible notes payable .......... 2,500,000 --
Proceeds from exercise of stock options and
warrants ....................................... (69,000) --
Proceeds from sale of Company stock .............. 2,080,000 1,000
Proceeds from sale of minority stock in
consolidated subsidiary ........................ 53,000 18,000
----------- -----------
Net cash provided by financing activities ........ 4 ,564,000 19,000
----------- -----------
Net increase (decrease) in cash .................. 175,000 (3,026,000)
Cash and cash equivalents, beginning of the period 1,637,000 5,750,000
----------- -----------
Cash and cash equivalents, end of the period ..... $ 1,812,000 $ 2,724,000
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
1999 1998
----------- -----------
(UNAUDITED) (UNAUDITED)
Interest paid .................................... $ -- $ --
=========== ===========
Income taxes paid ................................ $ -- $ --
=========== ===========
</TABLE>
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
During the six months ended December 31, 1999, the Company repossessed equipment
from a customer who was in arrears on their payments for said equipment at a
cost of $868,000.
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 and six months ended
December 31, 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 and six months
ended December 31, 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>
DECEMBER 31, JUNE 30,
1999 1999
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(UNAUDITED)
<S> <C> <C>
Raw materials ..... $1,275,000 $ 980,000
Work in process ... 131,000 510,000
Finished goods .... 1,226,000 184,000
--------- -------
Total ........ $2,632,000 $1,674,000
========== ==========
</TABLE>
NOTE 3--CONVERTIBLE NOTES PAYABLE
During the three months ended December 31, 1999, the Company issued five
convertible notes payable for $500,000 each to an investment company. The notes
bear interest at 10% per annum, are unsecured, require quarterly interest
payments on the unconverted balance, and mature on December 3, 2002. The notes
are convertible into shares of the Company's common stock if the Company elects
not to pay the aggregate principal amount outstanding and accrued interest by
May 3, 2000. If the Company elects not to pay the notes in full, the holders may
convert all or a portion of the notes into shares of common stock at any time
after May 3, 2000 until maturity. Any notes outstanding at the maturity date
will be converted into shares of common stock. The conversion price is the
lesser of $2.50 or 92% of the three lowest per share prices of the Company's
common stock during the 22 trading days prior to conversion.
NOTE 4--ACCRUED LIABILITIES
Accrued liabilities consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1999 1999
------------ ----------
(UNAUDITED)
<S> <C> <C>
Salaries and related expense .......... $ 570,000 $ 633,000
Accrued interest payable,
majority due to a related party ..... 29,000 27,000
Accrued sales tax ..................... 32,000 605,000
Other accrued liabilities ............. 511,000 618,000
---------- ----------
Total ....................... $1,142,000 $1,883,000
========== ==========
</TABLE>
NOTE 5--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 6--RECENT SALE OF EQUITY SECURITIES
During the three months ended December 31, 1999, the Company sold and
issued 9,756 restricted shares of common stock to an existing shareholder at a
price of $2.05 per share. These shares were issued under Section 4(2) of the
Securities Act of 1933.
During the three months ended December 31, 1999, the Company issued 542,624
shares of common stock on a net basis from the exercise of employee options at a
price of $0.44 per share.
During the three months ended December 31, 1999, the Company issued 275,625
shares of common stock on a net basis from the exercise of warrants at a price
of $1.38 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 December 31, 1999 Compared To Three Months Ended
December 31, 1998
Net Sales. Net sales decreased by $354,000, or 29%, from $1,240,000 in the
three months ended December 31, 1998 to $886,000 in the three months ended
December 31, 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 December 31, 1999 consisted of 72% Telephone and Internet services revenue
and 28% hardware product sales.
Gross Profit. Gross profit decreased as a percentage of net sales to a loss
of 33% for the three months ended December 31, 1999, from a gross profit of 34%
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 decreased by $220,000, or 12%, from
$1,809,000 in the three months ended December 31, 1998 to $1,589,000 in the
three months ended December 31, 1999. The decrease was primarily attributable to
reduced personnel and legal costs.
Other Income (Expense). Interest income decreased by $25,000 , or 81%, from
$31,000 in the three months ended December 31, 1998 to $6,000 in the three
months ended December 31, 1999, due to reduced cash balances available to earn
interest. Interest expense decreased by $13,000 from $13,000 in the three months
ended December 31, 1998 to $-0- in the three months ended December 31, 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.
Six Months Ended December 31, 1999 Compared To Six Months Ended
December 31, 1998
Net Sales. Net sales decreased by $512,000, or 24%, from $2,173,000 in the
six months ended December 31, 1998 to $1,661,000 in the six months ended
December 31, 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 six months
ended December 31, 1999 consisted of 67% Telephone and Internet services revenue
and 33% hardware product sales.
Gross Profit. Gross profit decreased as a percentage of net sales to a loss
of 12% for the six months ended December 31, 1999, from a gross profit of 41% 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 $1,283,000, or 38%,
from $3,419,000 in the six months ended December 31, 1998 to $4,702,000 in the
six months ended December 31, 1999. The primary reason for the increase was due
to a one time increase in the allowance for doubtful accounts of $1,284,000
during the quarter ended September 30, 1999 for the receivable of a major
customer. The major customer's current financial condition and certain events
relating to the customer, occurring subsequent to the Company's fiscal quarter
ended September 30, 1999, were considered in the decision to make the reserve.
<PAGE> 10
Other Income (Expense). Interest income decreased by $77,000 , or 85%, from
$91,000 in the six months ended December 31, 1998 to $14,000 in the six months
ended December 31, 1999, due to reduced cash balances available to earn
interest. Interest expense decreased by $24,000, or 96%, from $25,000 in the six
months ended December 31, 1998 to $1,000 in the six months ended December 31,
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 (deficit) totaled
$1,812,000 and $(465,000), respectively, as of December 31, 1999. The primary
source of cash has been net proceeds generated from equity and debt financings.
The Company has relied on sales of new shares, loan proceeds and the exercise of
warrants and options to fund operations for an extended period of time. The
Company received $1,011,000 and $2,080,000 in equity financing for the year
ended June 30, 1999, and the six months ended December 31, 1999, respectively.
Its subsidiary, FNet, raised $110,000 for the year ended June 30, 1999 and
$53,000 for the six months ended December 31, 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 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 began, 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 completed a
program to replace any of its existing communications, engineering and
accounting software that was not year 2000 compliant with new software that is
warranted by its vendors as being year 2000 compliant. The software replacement
program has been fully completed.
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 has assessed the status of their compliance through the
use of informal inquiries and review of hardware and software documentation. The
Company
<PAGE> 11
has determined that there are no material problems with third parties relating
to the Year 2000 issue and has not experienced any material problems to date.
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. To date,
the Company and FNet have not experienced any material problems with the Year
2000 issue.
<PAGE> 12
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
<PAGE> 13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934. The
registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FRANKLIN TELECOMMUNICATIONS CORP.
By /s/ FRANK W. PETERS
------------------------------------
Frank W. Peters
Chief Executive Officer
By /s/ THOMAS L. RUSSELL
------------------------------------
Thomas L. Russell
Chief Financial Officer
Dated: February 9, 2000
<PAGE> 14
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- ------------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 1,812,0000
<SECURITIES> 0
<RECEIVABLES> 157,000
<ALLOWANCES> 30,000
<INVENTORY> 2,632,000
<CURRENT-ASSETS> 4,887,000
<PP&E> 3,503,000
<DEPRECIATION> 1,063,000
<TOTAL-ASSETS> 8,328,000
<CURRENT-LIABILITIES> 5,352,000
<BONDS> 0
0
0
<COMMON> 23,780,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 8,328,000
<SALES> 1,661,000
<TOTAL-REVENUES> 1,661,000
<CGS> 1,861,000
<TOTAL-COSTS> 1,861,000
<OTHER-EXPENSES> 3,348,000
<LOSS-PROVISION> 1,364,000
<INTEREST-EXPENSE> 1,000
<INCOME-PRETAX> (4,913,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,913,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,913,000)
<EPS-BASIC> (.19)
<EPS-DILUTED> (.19)
</TABLE>
