SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002
[ ] 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)
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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
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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 15, 2002
----------------------------------- ---------------------------
Common Stock, no par value 43,809,231
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Index
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Franklin Telecommunications Corp.
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets -
March 31, 2002 (Unaudited) and June 30, 2001
Consolidated Statements of Operations (Unaudited) -
Three months and nine months ended March 31, 2002 and 2001
Consolidated Statements of Cash Flows (Unaudited) -
Nine months ended March 31, 2002 and 2001
Notes to Consolidated Financial Statements (Unaudited)
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
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
2
Item 1. Financial Statements
FRANKLIN TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2002 (UNAUDITED) AND JUNE 30, 2001
MARCH 31, JUNE 30,
2002 2001
------------- -------------
(UNAUDITED)
ASSETS
Current assets
Cash and cash equivalents ............................................... $ 34,000 $ 49,000
Accounts receivable, less allowance for doubtful accounts $5,000 ........ 46,000 21,000
Other receivables ....................................................... 1,000 1,000
Note receivable (a portion due from a related party) .................... -0- -0-
Inventories (Note 2) .................................................... 235,000 325,000
Prepaid expenses ........................................................ 0 15,000
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Total current assets .................................................. 316,000 411,000
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Property and equipment
Machinery and equipment ................................................. 278,000 442,000
Furniture and fixtures .................................................. 59,000 80,000
Computers and software .................................................. 166,000 867,000
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503,000 1,389,000
Less accumulated depreciation ........................................... 64,000 800,000
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Total property and equipment .......................................... 439,000 589,000
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Licenses .................................................................. 163,000 391,000
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Other assets .............................................................. 44,000 44,000
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Total assets .......................................................... $ 962,000 $ 1,435,000
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current portion of capital lease obligations ............................ $ 28,000 $ 28,000
Convertible promissory note (due to a related party) (Note 4) ........... 398,000 122,000
Accounts payable ........................................................ 1,714,000 1,554,000
Accrued liabilities (Note 3) ............................................ 1,436,000 1,379,000
------------- -------------
Total current liabilities ............................................. 3,576,000 3,083,000
Long-term debt, (majority due to a related party) ......................... 688,000 686,000
Capital lease obligations, net of current portion ......................... -0- -0-
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Total liabilities ..................................................... 4,264000 3,769,000
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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 43,809,231
(unaudited) and 43,710,231 shares issued and outstanding .............. $ 35,907,000 35,850,000
Common stock committed, no par value 74,716 (unaudited) and 74,716 shares
committed but not yet issued .......................................... 182,000 82,000
Accumulated deficit ..................................................... (39,391,000) (38,266,000)
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Total shareholders' deficit ........................................... ($ 3,302,000) $ (2,334,000)
------------- -------------
Total liabilities and shareholders' deficit ........................... $ 962,000 $ 1,435,000
============= =============
The accompanying notes are an integral part of these financial statements.
3
FRANKLIN TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS AND NINE MONTHS ENDED MARCH 31, 2001 AND 2000 (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
2002 2001 2002 2001
------------- ------------- ------------- -------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
Sales
Product .................................. $ 0 $ 66,000 133,000 $ 379,000
Telephone and Internet services .......... 108,000 126,000 195,000 725,000
------------- ------------- ------------- -------------
Total sales ......................... 108,000 192,000 328,000 1,104,000
------------- ------------- ------------- -------------
Cost of sales
Product .................................. 0 1,064,000 60,000 1,638,000
Telephone and Internet services .......... 68,000 230,000 368,000 942,000
------------- ------------- ------------- -------------
Total cost of sales ................. 68,000 1,294,000 428,000 2,580,000
------------- ------------- ------------- -------------
Gross profit (loss) ........................... 40,000 (1,102,000) (100,000) (1,476,000)
------------- ------------- ------------- -------------
Operating expenses
Research and development expenses ........ 0 245,000 0 1,132,000
Impairment of long-lived assets .......... 0 444,000 0 444,000
Selling, general, and administrative
Expenses .............................. 303,000 605,000 1007,000 2,973,000
------------- ------------- ------------- -------------
Total operating expenses ............ 303,000 1,294,000 1007,000 4,549,000
------------- ------------- ------------- -------------
Loss from operations .......................... (263,000) (2,396,000) (1,107,000) (6,025,000)
------------- ------------- ------------- -------------
Other income (expense)
Interest income ....................... --- --- --- 15,000
Interest expense ...................... 7,000 --- 21,000 (2,000)
Gain (loss) on disposal of property and
equipment .......................... --- --- 3,000 (3,000)
Other income (expense) ................. 0 9,000 0 (1,000)
------------- ------------- ------------- -------------
Total other income (expense) ........ (7,000) 9,000 (18,000) 9,000
------------- ------------- ------------- -------------
Net loss ...................................... $ (270,000) $ (2,387,000) $ (1,125,000) $ (6,016,000)
============= ============= ============= =============
Basic and diluted loss per common share ....... $ (.01) $ (.06) $ (.03) $ (.15)
============= ============= ============= =============
Weighted average common shares
outstanding used to compute basic
and diluted loss per common share ......... 43,809,232 42,456,352 43,789,751 39,411,068
============= ============= ============= =============
The accompanying notes are an integral part of these financial statements.
4
FRANKLIN TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED MARCH 31, 2002 AND 2001 (UNAUDITED)
NINE MONTHS ENDED
-----------------
MARCH 31,
---------
2002 2001
------------ ------------
(UNAUDITED) (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss .......................................... ($1,125,000) $(6,016,000)
Adjustments to reconcile net loss to net cash
Used in operating activities
Depreciation and amortization ................ 378,000 565,000
Provision for loss on obsolete inventory ..... - 1,133,000
Provision for loss on doubtful accounts ...... - 38,000
Stock issued for services rendered ........... - 325,000
(Gain) loss on disposal of property and equip (3,000) (3,000)
Loss on impairment of long-lived assets ...... - 444,000
(Increase) decrease in
Accounts receivable .......................... (25,000) 20,000
Other receivables ............................ - (36,000)
Inventories .................................. 90,000 293,000
Prepaid expenses ............................. 15,000 (18,000)
Increase (decrease) in
Accounts payable ............................. 160,000 (202,000)
Accrued liabilities .......................... 59,000 (103,000)
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Net cash used in operating activities ............. (451,000) (3,560,000)
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CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment ............... - (78,000)
Sale of assets .................................... 3,000 -
------------ ------------
Net cash used in investing activities ............. 3,000 (78,000)
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CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from convertible notes payable ........... 376,000 100,000
Proceeds from exercise of stock options and
warrants ........................................ - 4,000
Proceeds from sale of common stock ................ 57,000 2,485,000
Payments on capital lease obligations ............. - (26,000)
------------ ------------
Net cash provided by financing activities ......... 433,000 2,563,000
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Net increase (decrease) in cash and equivalents ... (15,000) (1,075,000)
Cash and cash equivalents, beginning of the period 49,000 1,275,000
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Cash and cash equivalents, end of the period ...... $ 34,000 $ 200,000
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
2002 2001
----------- -----------
Interest paid ..................................... $ -0- $ 2,000
============ ============
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES.
Subsequent to the nine months ended March 31, 2002, the Company issued
850,000 shares (unaudited) of common stock for services valued at $45,000
(unaudited) and 333,000 shares for services valued at $17,000 - both for legal
fees.
The accompanying notes are an integral part of these financial statements.
5
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") See Note 5. 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,
2001. The results of operations for the nine months ended March 31, 2002 are not
necessarily indicative of the results that may be expected for the fiscal year
ending June 30, 2002. On April 5, 2002 FNet voluntarily filed a petition under
Chapter 11 of the U.S. Bankruptcy Code in order to reorganize its operations and
financial structure.
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, 2001, the Company recognized $104,000 (unaudited) as an
impairment loss related to licenses which the Company is no longer using and
$340,000 (unaudited) as an impairment loss related to FNet discontinuing its
satellite telephone network in the Balkan region.
6
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. The following potential
common shares have been excluded from the computation of diluted net loss per
share for all periods presented because the effect would have been
anti-dilutive:
For the Nine Months Ended
March 31,
---------------------------------
2002 2001
------------- ----------------
(unaudited) (unaudited)
Options outstanding under the Company's stock option plans 1,880,250 1,880,250
Options granted outside the Company's stock option plans 5,997,500 1,630,000
Convertible notes payable 398,000 833,333
Warrants issued in conjunction with convertible notes payable 2,000,000 1,000,000
Warrants issued in conjunction with various private placements 200,000 5,800,267
Warrants issued as offering costs for convertible notes payable -0- 100,000
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:
MARCH 31, JUNE 30,
2002 2001
---- ----
(UNAUDITED)
Raw materials........... -0- $ 1,360,000
Work in process....... -0- 201,000
Finished goods........... 235,000 1,141,000
-------------- ------------
Reserve for Obsolescence -0- (2,377,000)
-------------- ------------
Total.......... 235,000 $ 325,000
============== ============
7
NOTE 3--ACCRUED LIABILITIES
Accrued liabilities consisted of the following:
MARCH 31, JUNE 30,
2002 2001
---- ----
(UNAUDITED)
Salaries and related expense $ 1,083,000 $ 1,025,000
Leases 165,000 165,000
Other accrued liabilities 190,000 189,000
Total.......... $ 1,438,000 $ 1,379,000
============ ============
NOTE 4--CONVERTIBLE PROMISSORY NOTE
During the nine months ended March 31, 2002, the Company issued four
convertible promissory notes to the Company's Executive Chairman. Each note is
convertible into the Company's Common Stock. Each note bears interest at 6% per
annum.
The first note is for $19,000, and is due on July 10, 2002. The
conversion price is $0.05 per share, which was the fair market value of the
Company's common stock at the date of issuance.
The second note is for $50,000 and is due on November 7, 2002. The
conversion price is $0.05 per share, which was the fair market value of the
Company's common stock at the date of issuance
The third note is for $127,000 is due on January 17, 2003. The
conversion price is $0.04 per share, which was the fair market value of the
Company's common stock at the date of issuance.
The fourth note is for $40,000, and is due on February 25, 2003. The
conversion price is $0.04 per share, which was the fair market value of the
Company's common stock at the date of issuance. In addition, the payee will
receive a Warrant to purchase 1,000,000 shares of Common Stock of the Company
exercisable until July 15, 2003 at the price of $.04, subject to adjustment as
provided below: if the 10 day average price of the Company's Common Stock
(between April 15, 2002 and the close of business on April 25, 2002) is below
$.25 per share, the exercise price will be $.01.
During the nine months ended March 31, 2002, the Company issued a
convertible promissory note of $40,000 to a director of the Company, which is
convertible into the Company's common stock. Interest at 6% per annum and
principal are due on February 25, 2003. If the note holder elects to convert the
debt into common stock, the conversion price for each share will equal $0.04 per
share, which was the fair market value of the Company's common stock at the date
of issuance. In addition, the Payee will receive a Warrant to purchase 1,000,000
shares of Common Stock, exercisable until July 15, 2003 at the price of $.04,
subject to adjustment as provided below: if the 10 day average price of the
Company's Common Stock (between April 15, 2002 and the close of business on
April 25, 2002) is below $.25 per share, the exercise price will be $.01
NOTE 5--COMMITMENTS AND CONTINGENCIES
Company Subsidiary FNet Corp. filed chapter 11.
-----------------------------------------------
On April 5th, 2002 FNet voluntarily filed a petition under Chapter 11
of the U.S. Bankruptcy Code in order to reorganize its operations and financial
structure. Chapter 11 status enables FNet to continue to offer and provide
broadband and Internet services to its customers without interruption while
reorganizing its debt and capital structure under court supervision. This action
was taken due to several carrier's continued invoicing for canceled circuits for
a period of over 14 months. Efforts to reconcile this matter with 5 carriers
failed with 4 of them. One of these efforts was successful resulting in a
$586,000 reduction.
We believe the balance of about $1,714,000, of which $1,100,000 is
detailed below will also be settled to a near zero balance. Of this $1,714,000
in trade payables most is for FNet which we expect will reduce these payables to
a much lower level, either from reconciling the payables with the various
vendors or through the Chapter 11 proceedings.
The Company owns about 65% of FNet.
8
Service Agreement - FNet (Largest single dispute).
--------------------------------------------------
During the nine months ended March 31, 2001, FNet Corp. entered into a
five-year service agreement with a satellite service provider to operate uplink
and downlink earth stations between the United States and the Balkan region. The
estimated fee for the project is $1,236,000. As of March 31, 2001, the Company
had violated certain terms and conditions of the service agreement. As such the
agreement was canceled but calls for immediate payment of the remaining fee for
the project of approximately $1,100,000 million. FNet is currently in
negotiations to settle with the service provider for this and other payables
within the guidelines of the Chapter 11 reorganization.
Litigation
----------
The Company is not currently as of May 15, 2002 involved in any legal
proceedings except the subsidiary Chapter 11 filing.
In November 2001, NEC filed a lawsuit against the Company alleging
breach of contract for $43,000 plus fees still due on a lease for a PBX. This
action was settled in April, 2002 for $20,000.
In November 2001, two former employees filed a claim with the
California labor board, claiming certain vacation and overtime was not paid to
them. In January 2002, the labor board issued a judgment in the amount of
$79,115.. The Company, on appeal settled the case in April 2002 for $53,000. The
company's legal fees of $17,000 were paid for with 333,000 shares of FTC Stock.
NOTE 6--RECENT SALE OF EQUITY SECURITIES
During the three months ended March 31, 2002, the Company did not complete any
significant common stock transactions of previously unissued common shares.
However, in April 2002 the company issued 850,000 shares of common stock for
services valued at $42,500. In addition, the company issued 333,000 shares of
common stock for services valued at $17,000, both for legal fees.
During the nine months ended March 31, 2002, (on September 14, 2001) the Company
issued 32,000 units at the price of $1.00 per unit to purchase Common Stock.
Each Unit consists of: a) Twenty shares of the Common Stock of Franklin
Telecommunications Corp., and b) a Warrant to purchase ten shares of Common
Stock at the price of $.001 exercisable after March 25, 2002 if the 10 day
average price of FCM is below $.25 per share.
During the nine months ended March 31, 2002, (on October 4, 2001) the Company
issued of 10,000, units at the price of $1.00 per unit purchase Common Stock.
Each Unit consists of: a) Twenty shares of the Common Stock of Franklin
Telecommunications Corp., and b) a Warrant to purchase ten shares of Common
Stock at the price of $.001 exercisable after March 25, 2002 if the 10 day
average price of FCM is below $.25 per share.
During the nine months ended March 31, 2002, (on October 10, 2001) the Company
issued of 5,000, units at the price of $1.00 per unit purchase Common Stock.
Each Unit consists of: a) Twenty shares of the Common Stock of Franklin
Telecommunications Corp., and b) a Warrant to purchase ten shares of Common
Stock at the price of $.001 exercisable after March 25, 2002 if the 10 day
average price of FCM is below $.25 per share.
During the nine months ended March 31, 2002, (on November 15, 2001) the Company
issued of 10,000, units at the price of $1.00 per unit purchase Common Stock.
Each Unit consists of: a) Twenty shares of the Common Stock of Franklin
Telecommunications Corp., and b) a Warrant to purchase ten shares of Common
Stock at the price of $.001 exercisable after March 25, 2002 if the 10 day
average price of FCM is below $.25 per share.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Franklin Telecommunications Corp. ("Company") designs, manufactures and sells
Internet Telephony equipment, also called Voice over Internet Protocol equipment
("VoIP") 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. The Company's customers are located throughout the
world in a wide range of industries including financial services, government,
telephone services and manufacturing.
9
The Company offers a suite of Internet Telephony solutions that enable business
communications over data networks. From the small office home office (SOHO) to
the branch office and headquarters operations of medium to large scale
corporations, the Company offers a cost-effective call handling solution. From
the enterprise to the carrier market, the Company offers converged network
solutions; 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 aims to be
a leading edge supplier of Internet Telephony solutions as a result of its
flexibility in providing on net and off net business communication solutions as
customer owned equipment or Franklin provided 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 could
interconnect the Company's customers on a global basis. The Network Operations
Center includes Internet access facilities and a Class 4 circuit switch although
it is not in use at this time. The center could interconnect with three
International Record Carriers and is capable of completing a voice call to any
phone in the world. The Company plans to offer its equipment and services to
customers who own Cisco VoIP gateways for the purpose of billing and control
management.
On April 5th, 2002 FNet, a subsidiary of the Company voluntarily filed a
petition under Chapter 11 of the U.S. Bankruptcy Code in order to reorganize its
operations and financial structure. Chapter 11 status enables FNet to continue
to offer and provide broadband and Internet services to its customers without
interruption while reorganizing its debt and capital structure under court
supervision. This action was taken due to the fact that several carriers
continued invoicing for canceled circuits for a period of over 14 months.
Efforts to reconcile these disputed amounts with 5 carriers failed with 4 of
them. One of these efforts was successful due the the efforts of our auditors
pressing the carrier for a written acknowledgement of the debt, which was
reconciled from $586,000 to $0. Of the $1,750,000 in trade payables for FNet we
expect the result will resolve these amounts to a much lower level, either from
reconciling the payables with the various vendors or through the Chapter 11
proceedings. The Company owns about 65% of Fnet.
The Company plans to restructure its finances and a seek merger or other
business combination with a company in the same general business with a good
customer base and sales capability, which could lead to greatly increased
revenue by taking advantage of the rich product and technology assets in
Franklin.
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.
As with any line of business, there can be no assurance that the 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, 2002 COMPARED TO THREE MONTHS ENDED
MARCH 31, 2001
NET SALES. Net sales decreased by $84,000, or 43%, from $192,000 in the
three months ended March 31, 2001 to $108,000 in the three months ended March
31, 2002. The decrease is due both to a reduction of DVG hardware systems sales
and reduced service revenue. The revenue for the three months ended March 31,
2002 consisted of 100% Telephone and Internet services revenue.
10
GROSS PROFIT. The Company generated a gross profit of $40,000 for the
quarter ended March 31, 2002, compared to a gross loss of $1,102,000 for the
corresponding period of 2001. The improvement relates to the costs written off
in 2001 as well as the reduced costs of operating the internet system.
OPERATING EXPENSES. Operating expenses decreased by $991,000, or 76%,
from $1,294,000 in the three months ended March 31, 2001 to $303,000 in the
three months ended March 31, 2002. The decrease was primarily attributable to a
reduced number of employees.
OTHER INCOME (EXPENSE). Interest income was zero in the three months
ended March 31, 2001 and also zero in the three months ended March 31, 2002, due
to reduced cash balances available to earn interest. Interest expense increased
by $7,000, from $0 in the three months ended March 31, 2001 to $7,000 in the
three months ended March 31, 2002. Other components of other income (expense)
were immaterial and were due to various non operating items.
NINE MONTHS ENDED MARCH 31, 2002 COMPARED TO NINE MONTHS ENDED MARCH 31, 2001
NET SALES. Net sales decreased by $776,000, or 70%, from $1,104,000 in
the nine months ended March 31, 2001 to $328,000 in the nine months ended March
31, 2002. The decrease is due to a reduction of DVG hardware systems sales. The
revenue mix for the nine months ended March 31, 2002 consisted of 60% Telephone
and Internet services revenue and 40% hardware product sales.
GROSS LOSS. The Company recorded a gross loss of $100,000 more than a
90% decline from the loss on sales of $1,476,000 incurred in the nine months
ended March 31, 2001. The loss in the prior year was higher due to the write off
of almost $1,000,000 in inventory and the higher costs of operation of the
internet system.
OPERATING EXPENSES. Operating expenses decreased by $3,542,000, or 78%,
from $4,549,000 in the nine months ended March 31, 2001 to $1,007,000 in the
nine months ended March 31, 2002. The primary reason for the decrease was due to
a severe reduction in staff and facilities during the nine months ended March
31, 2002.
OTHER INCOME (EXPENSE). Interest income decreased by $15,000 from
$15,000 in the nine months ended March 31, 2001 to -0- in the nine months ended
March 31, 2002, due to reduced cash balances available to earn interest.
Interest expense increased by $6,000 from ($3,000) in the nine months ended
March 31, 2001 to $3,000 in the nine months ended March 31, 2002, due primarily
to interest rates. Other components of other income (expense) were immaterial
and were due to various non operating items.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents at March 31, 2002 were $34,000 and the
working capital deficit was over $3,000,000. The FNet segment of the Company has
declared bankruptcy in April 2002 and management is hopeful that the
restructuring will reduce the working capital deficit significantly. The Company
will need to obtain outside financing in order to continue its operations. The
Company has been able to borrow from officers and a shareholder to keep the
employees and the facility working at a minimum level of cash outlay. However,
management believes the Company will need additional outside financing to
achieve its short and mid-term capital requirements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk generally represents the risk that losses may occur in the
values of financial instruments as a result of movements in interest rates,
foreign currency exchange rates and commodity prices. The Company is exposed to
changes in financial market conditions in the normal course of its business due
to its use of certain financial instruments as well as transacting in various
foreign currencies.
INTEREST RATE RISK. At March 31, 2002, the Company's cash equivalents
and short-term investments totaled approximately $34,000. Since the Company
typically does not purchase fixed-income securities, its cash and cash
equivalents are not subject to significant interest rate risk. The Company
places substantially all of its interest bearing investments with major
financial institutions and by policy limits the amount of credit exposure to any
one financial institution. Additionally, the Company does not hold or issue
financial instruments for trading, profit or speculative purposes.
EQUITY PRICE RISK The Company does not invest in available-for-sale
equity securities, and is not subject to significant equity price risk.
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FOREIGN EXCHANGE RATE RISK The Company operates internationally and
sometimes receives payments in local currencies. This can expose the Company to
market risk from changes in foreign exchange rates to the extent that
transactions are not denominated in the U.S. dollar. As a result the Company
faces the risk that the foreign currencies may decline in value as compared to
the U.S. dollar, resulting in a foreign currency translation loss.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not involved in any material legal proceedings.
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
None
(b) Reports on Form 8-K
None
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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/ MARTIN S. ALBERT
----------------------------------
Martin S. Albert
Chief Executive Officer
Dated: May 15, 2002
By /s/ FRANK W. PETERS
----------------------------------
Frank W. Peters
Acting Chief Financial Officer
Dated: May 15, 2002
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