<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 MARCH 31, 2000
[ ] 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 MAY 5, 2000
- ----------------------------------- --------------------------
Common Stock, no par value 34,530,078
<PAGE> 2
Index
Franklin Telecommunications Corp.
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets -
March 31, 2000 (Unaudited) and June 30, 1999
Consolidated Statements of Operations (Unaudited) - Three months and
nine months ended March 31, 2000 and 1999
Consolidated Statements of Cash Flows (Unaudited) - Nine months ended
March 31, 2000 and 1999
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 MARCH 31, 2000 (UNAUDITED) AND JUNE 30, 1999
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
2000 1999
------------ ------------
(UNAUDITED)
ASSETS
<S> <C> <C>
Current assets
Cash and cash equivalents .................................................................. $ 6,883,000 $ 1,637,000
Accounts receivable, less allowance for doubtful accounts of $30,000 (unaudited) and
$106,000, respectively ................................................................... 201,000 2,610,000
Other receivables .......................................................................... 70,000 137,000
Current portion of note receivable ......................................................... 150,000 150,000
Inventories (Note 2) ....................................................................... 2,776,000 1,674,000
Prepaid expenses ........................................................................... 135,000 81,000
------------ ------------
Total current assets ..................................................................... 10,215,000 6,289,000
------------ ------------
Property and equipment
Machinery and equipment .................................................................... 2,183,000 1,681,000
Furniture and fixtures ..................................................................... 274,000 256,000
Computers and software ..................................................................... 1,183,000 1,029,000
------------ ------------
3,640,000 2,966,000
Less accumulated depreciation .............................................................. 1,214,000 802,000
------------ ------------
Total property and equipment ............................................................. 2,426,000 2,164,000
------------ ------------
Note receivable, net of current portion ....................................................... -0- 160,000
Other assets ............................................................................. 823,000 822,000
------------ ------------
Total assets ............................................................................. $ 13,464,000 $ 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 ........................................................................... 1,196,000 1,027,000
Accrued liabilities (Note 4) ............................................................... 1,250,000 1,883,000
------------ ------------
Total current liabilities ................................................................ 5,732,000 2,934,000
Long-term debt, (majority due to a related party) net of current portion ..................... -0- 762,000
------------ ------------
Total liabilities ........................................................................ 5,732,000 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 34,499,703 (unaudited) and
25,796,726 shares issued and outstanding ................................................. 31,402,000 21,628,000
Common stock committed, no par value -0- (unaudited) and 10,000 shares
committed but not yet issued ............................................................. -0- 6,000
Accumulated deficit ........................................................................ (23,670,000) (15,895,000)
------------ ------------
Total shareholders' equity ............................................................... 7,732,000 5,739,000
------------ ------------
Total liabilities and shareholders' equity ............................................... $ 13,464,000 $ 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 NINE MONTHS ENDED MARCH 31, 2000 AND 1999 (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
------------------------------- -------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Sales
Product ......................................... $ 223,000 $ 3,762,000 $ 773,000 $ 5,387,000
Telephone and Internet services ................. 535,000 508,000 1,646,000 1,056,000
------------ ------------ ------------ ------------
Total sales ............................... 758,000 4,270,000 2,419,000 6,443,000
------------ ------------ ------------ ------------
Cost of sales
Product ......................................... 225,000 1,855,000 780,000 2,642,000
Telephone and Internet services ................. 1,468,000 305,000 2,774,000 796,000
------------ ------------ ------------ ------------
Total cost of sales ....................... 1,693,000 2,160,000 3,554,000 3,438,000
------------ ------------ ------------ ------------
Gross profit (loss) ................................... (935,000) 2,110,000 (1,135,000) 3,005,000
------------ ------------ ------------ ------------
Operating expenses
Research and development expenses ............... 431,000 492,000 1,315,000 1,358,000
Selling, general, and administrative
Expenses ..................................... 1,274,000 1,244,000 5,092,000 3,797,000
Impairment of long-lived asset .................. 160,000 -- 160,000 --
------------ ------------ ------------ ------------
Total operating expenses .................. 1,865,000 1,736,000 6,567,000 5,155,000
------------ ------------ ------------ ------------
Income (loss) from operations ......................... (2,800,000) 374,000 (7,702,000) (2,150,000)
------------ ------------ ------------ ------------
Other income (expense)
Interest income ................................. 15,000 35,000 29,000 126,000
Interest expense ................................ (65,000) (1,000) (66,000) (26,000)
Loss on disposal of property and equipment ...... -- -- (30,000) --
Other expense ................................... (17,000) (26,000) (11,000) (22,000)
------------ ------------ ------------ ------------
Total other income (expense) .............. (67,000) 8,000 (78,000) 78,000
------------ ------------ ------------ ------------
Net income (loss) ..................................... $ (2,867,000) $ 382,000 $ (7,780,000) $ (2,072,000)
============ ============ ============ ============
Basic net income (loss) per common share .............. $ (.10) $ .02 $ (.27) $ (.10)
============ ============ ============ ============
Diluted net income (loss) per common share ............ $ (.10) $ .01 $ (.27) $ (.10)
============ ============ ============ ============
Weighted average common shares outstanding used to
compute basic net income (loss) per common share.... 30,011,592 24,104,627 28,372,479 21,264,724
============ ============ ============ ============
Weighted average common shares outstanding used to
compute diluted net income (loss) per common share.. 30,011,592 25,858,081 28,372,479 21,264,724
============ ============ ============ ============
</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 NINE MONTHS ENDED MARCH 31, 2000 AND 1999 (UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MARCH 31,
-------------------------------
2000 1999
(UNAUDITED) (UNAUDITED)
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss .............................................. $ (7,780,000) $ (2,072,000)
Adjustments to reconcile net loss to net cash
Used in operating activities
Depreciation and amortization ................... 474,000 305,000
Provision for loss on obsolete inventory ........ -- 147,000
Provision for loss on doubtful accounts ......... -- 3,000
Stock issued for services rendered .............. 142,000 50,000
Loss on impairment of note receivable ........... 160,000 --
Loss on disposal of property and equipment ...... 34,000 --
Write-off of accounts receivable ................ 1,529,000 --
(Increase) decrease in
Accounts receivable ............................. 12,000 (118,000)
Other receivables ............................... 67,000 25,000
Inventories ..................................... (234,000) (1,726,000)
Prepaid expenses ................................ (54,000) (155,000)
Increase (decrease) in
Accounts payable ................................ 169,000 1,686,000
Accrued liabilities ............................. (546,000) 1,455,000
------------ ------------
Net cash used in operating activities.................. (6,027,000) (400,000)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment ................... (735,000) (1,102,000)
Repayment of notes receivable ......................... -- 207,000
Disposal of property and equipment .................... 23,000 --
Other assets .......................................... (59,000) (179,000)
------------ ------------
Net cash used in investing activities ................. (771,000) (1,074,000)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from convertible notes payable ............... 2,500,000 --
Proceeds from exercise of stock options and
warrants ............................................ 13,000 --
Proceeds from sale of Company stock ................... 9,478,000 493,000
Proceeds from sale of minority stock in
consolidated subsidiary ............................. 53,000 55,000
------------ ------------
Net cash provided by financing activities ............. 12,044,000 548,000
------------ ------------
Net increase (decrease) in cash ....................... 5,246,000 (926,000)
Cash and cash equivalents, beginning of the period .... 1,637,000 5,750,000
------------ ------------
Cash and cash equivalents, end of the period .......... $ 6,883,000 $ 4,824,000
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
2000 1999
------------ ------------
(unaudited) (unaudited)
Interest paid ......................................... $ -- $ --
============ ============
Income taxes paid ..................................... $ -- $ --
============ ============
</TABLE>
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
During the nine months ended March 31, 2000, the Company repossessed equipment
from a customer who was in arrears on 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 nine months ended March
31, 2000 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.
Impairment of Long-Lived Assets
The Company reviews its long-lived assets for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and used is measured by
a comparison of the carrying amount of the assets to future net cash flows
expected to be generated by the assets. If the assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount exceeds the fair value of the assets. During the nine months
ended March 31, 2000, the Company determined that certain assets under a note
receivable were impaired and recorded a loss of $160,000.
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 March 31,
2000 and for the nine months ended March 31, 2000 and 1999, common stock
equivalents have been excluded from the aforementioned computations as their
effect would be anti-dilutive.
<PAGE> 7
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.
NOTE 2--INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
2000 1999
---------- ----------
(UNAUDITED)
<S> <C> <C>
Raw materials ............. $1,226,000 $ 980,000
Work in process ........... 353,000 510,000
Finished goods ............ 1,197,000 184,000
---------- ----------
Total ............... $2,776,000 $1,674,000
========== ==========
</TABLE>
NOTE 3--CONVERTIBLE NOTES PAYABLE
During the nine months ended March 31, 2000, 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. See Note 7,
Subsequent Event.
NOTE 4--ACCRUED LIABILITIES
Accrued liabilities consisted of the following:
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
2000 1999
------------ ------------
(UNAUDITED)
<S> <C> <C>
Salaries and related expense ........... $ 602,000 $ 633,000
Accrued interest payable,
majority due to a related party ...... 92,000 27,000
Accrued sales tax ...................... -- 605,000
Other accrued liabilities .............. 556,000 618,000
------------ ------------
Total ...................... $ 1,250,000 $ 1,883,000
============ ============
</TABLE>
NOTE 5--COMMITMENTS AND 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.
<PAGE> 8
NOTE 6--RECENT SALE OF EQUITY SECURITIES
During the three months ended March 31, 2000, the Company issued 176,476
shares of common stock from the exercise of employee options, primarily on a net
basis, at prices ranging from $0.44 to $1.25 per share.
During the three months ended March 31, 2000, the Company issued 19,960
shares of common stock for the purchase of certain equipment valued at $33,333.
During the three months ended March 31, 2000, the Company issued 285,625
shares of common stock from the exercise of warrants, primarily on a net basis,
at prices ranging from $0.78 to $1.38 per share.
During the three months ended March 31, 2000, the Company issued 30,000
shares of common stock for $120,000. These shares were issued with four-year
warrants to purchase 30,000 shares of Fnet's (the Company's majority owned
subsidiary) common stock at an exercise price of $2 per share, exercisable upon
issuance.
During the three months ended March 31, 2000, the Company issued 33,600
shares of common stock for $333,600. These shares were issued with four-year
warrants to purchase 134,400 shares of Fnet's (the Company's majority owned
subsidiary) common stock at an exercise price of $2 per share, exercisable upon
issuance.
During the three months ended March 31, 2000, the Company issued
three-year warrants to purchase 420,000 shares of the Company's common stock at
an exercise price of $1.375 per share, exercisable upon issuance. The warrants
expire on August 17, 2002 and were issued for advertising services valued at
$60,000.
During the three months ended March 31, 2000, the Company issued 865,411
shares of common stock for net proceeds of $1,466,250.
During the three months ended March 31, 2000, the Company issued
4,022,667 shares of common stock for net proceeds of $5,690,107. These shares
were issued with five-year warrants, exercisable after one year, to purchase
1,005,667 shares of the Company's common stock at an exercise price of $2.50 per
share.
NOTE 7--SUBSEQUENT EVENT
Subsequent to the three months ended March 31, 2000, the Company repaid
the $2,500,000 in convertible notes described in Note 3 above.
<PAGE> 9
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 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.
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.
<PAGE> 10
The Company's subsidiary FNET has been offering flat rate long distance
telephone service through third party resellers. To date, the operational cost
of the flat rate program has exceeded the revenue generated, due to the
reliance on third party carriers. FNET does not expect this operational cost
disadvantage to be fully remedied until the planned, Franklin-powered Internet
Protocol network is fully deployed. FNET is contemplating a temporary scale
back of marketing efforts for the flat rate program until the cost effective,
geographically dispersed, Internet Protocol network is completed to a level
sufficient to provide local access for the majority of flat rate long distance
subscribers.
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 March 31, 2000 Compared To Three Months Ended March 31,
1999
Net Sales. Net sales decreased by $3,512,000, or 82%, from $4,270,000 in
the three months ended March 31, 1999 to $758,000 in the three months ended
March 31, 2000. The decrease is due to a reduction of DVG hardware systems
sales, primarily to a single major customer. The revenue mix for the three
months ended March 31, 2000 consisted of 71% Telephone and Internet services
revenue and 29% hardware product sales.
Gross Profit. Gross profit decreased as a percentage of net sales to a
loss of 123% for the three months ended March 31, 2000, from a gross profit of
49% of net sales for the corresponding period of 1999. The gross profit
percentage decrease can be attributed to both, a fixed hardware overhead spread
over a smaller hardware sales base, and high variable origination and
termination costs associated with the operation of FNet's flat rate telephone
service business.
Operating Expenses. Operating expenses increased by $129,000, or 7%, from
$1,736,000 in the three months ended March 31, 1999 to $1,865,000 in the three
months ended March 31, 2000. The increase was primarily attributable to
increased personnel costs.
Other Income (Expense). Interest income decreased by $20,000, or 57%,
from $35,000 in the three months ended March 31, 1999 to $15,000 in the three
months ended March 31, 2000, due to reduced cash balances available to earn
interest. Interest expense increased by $39,000 from $26,000 in the three months
ended March 31, 1999 to $65,000 in the three months ended March 31, 2000, due
primarily to the $2,500,000 in convertible notes payable described in Note 3 to
the financial statements. Other components of other income (expense) were
immaterial and were due to various non operating items.
Nine Months Ended March 31, 2000 Compared To Nine Months Ended March 31, 1999
Net Sales. Net sales decreased by $4,024,000, or 62%, from $6,443,000 in
the nine months ended March 31, 1999 to $2,419,000 in the nine months ended
March 31, 2000. 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 nine months ended
March 31, 2000 consisted of 68% Telephone and Internet services revenue and 32%
hardware product sales.
Gross Profit. Gross profit decreased as a percentage of net sales to a
loss of 47% for the nine months ended March 31, 2000, from a gross profit of 47%
of net sales for the corresponding period of 1999. The gross profit percentage
decrease can be attributed to both, a fixed hardware overhead spread over a
smaller hardware sales base, and high variable origination and termination costs
associated with the operation of FNet's flat rate telephone service business.
Operating Expenses. Operating expenses increased by $1,412,000, or 27%,
from $5,155,000 in the nine months ended March 31, 1999 to $6,567,000 in the
nine months ended March 31, 2000. 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.
Other Income (Expense). Interest income decreased by $97,000, or 77%,
from $126,000 in the nine months ended March 31, 1999 to $29,000 in the nine
months ended March 31, 2000, due to reduced cash balances available to earn
<PAGE> 11
interest. Interest expense increased by $44,000, or 200%, from $22,000 in the
nine months ended March 31, 1999 to $66,000 in the nine months ended March 31,
2000, due primarily to the $2,500,000 in convertible notes payable described in
Note 3 to the financial statements. 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
$6,883,000 and $4,483,000, respectively, as of March 31, 2000. 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 $11,991,000 in equity and debt financing for the
year ended June 30, 1999, and the nine months ended March 3, 2000, respectively.
Its subsidiary, FNet, raised $110,000 for the year ended June 30, 1999 and
$53,000 for the nine months ended March 31, 2000. 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, funding of FNet's operations 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.
<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: May 9, 2000
<PAGE> 14
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
27.1 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> MAR-31-2000
<CASH> 6,883,000
<SECURITIES> 0
<RECEIVABLES> 231,000
<ALLOWANCES> 30,000
<INVENTORY> 2,776,000
<CURRENT-ASSETS> 10,215,000
<PP&E> 3,640,000
<DEPRECIATION> 1,214,000
<TOTAL-ASSETS> 13,464,000
<CURRENT-LIABILITIES> 5,732,000
<BONDS> 0
0
0
<COMMON> 31,402,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 13,464,000
<SALES> 2,419,000
<TOTAL-REVENUES> 2,419,000
<CGS> 3,554,000
<TOTAL-COSTS> 3,554,000
<OTHER-EXPENSES> 4,890,000
<LOSS-PROVISION> 1,689,000
<INTEREST-EXPENSE> 66,000
<INCOME-PRETAX> (7,780,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (7,780,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,780,000)
<EPS-BASIC> (.27)
<EPS-DILUTED> (.27)
</TABLE>
