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 SEPTEMBER 30, 2001
[ ] 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 [ ] No [X]
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 12, 2002
----------------------------------- --------------------------------
Common Stock, no par value 43,809,231
Index
Franklin Telecommunications Corp.
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - September 30, 2001 (Unaudited) and June
30, 2000
Consolidated Statements of Operations (Unaudited) - Three months ended
September 30, 2001 and 2000
Consolidated Statements of Cash Flows (Unaudited) - Three months ended
September 30, 2001 and 2000
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 and Use of Proceeds
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
FRANKLIN TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2001 (UNAUDITED) AND JUNE 30, 2001
SEPTEMBER 30, JUNE 30,
2001 2001
----------- -----------
(unaudited)
ASSETS
Current Assets
Cash and Cash Equivalents $ 5,000 $ 49,000
Account Receivable, less allowance for 33,000 21,000
doubtful accounts of $0, and $122,000
Other Receivables 1,000 1,000
Inventories, less allowance for obsolescence 295,000 325,000
of $0 and $2,377,000
Prepaid Expenses 10,000 15,000
----------- -----------
Total Current Assets 344,000 411,000
----------- -----------
Property and Equipment,
Computers and software 1,230,000 1,230,000
Furniture and fixtures 882,000 882,000
Machinery and equipment 170,000 223,000
----------- -----------
2,282,000 2,335,000
Less accumulated depreciation 1,743,000 1,746,000
----------- -----------
Total Property and Equipment 539,000 589,000
----------- -----------
Licenses, Net 315,000 391,000
Other Assets 44,000 44,000
----------- -----------
Total Assets $1,242,000 $1,435,000
=========== ===========
The accompanying notes are an integral part of these financial statements.
3
FRANKLIN TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2001 (UNAUDITED) AND JUNE 30, 2001
SEPTEMBER 30, JUNE 30,
2001 2001
------------- -------------
(unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Convertible Promissory notes payable $ 141,000 $ 122,000
Current Portion of capital lease obligations 28,000 28,000
Account Payable 1,778,000 1,554,000
Accrued Liabilities 1,286,000 1,379,000
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Total Current Liabilities 3,233,000 3,083,000
Note Payable-related party 686,000 686,000
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Total Liabilities 3,919,000 3,769,000
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Contingencies
Shareholders' equity:
Preferred stock,
no par value 10,000,000 shares authorized,
Convertible Series C -0- (unaudited) and
-0- shares issued and outstanding
Common Stock,
no par value 90,000,000 shares authorized
42,846,080 (unaudited)
and 42,206,080 shares issued and outstanding 35,882,000 35,850,000
Common Stock committed,
no par value 74, 716 (unaudited) and 74,716
Shares committed but not yet issued 82,000 82,000
Options & Warrants 100,000 --
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Accumulated Deficit (38,741,000) (38,266,000)
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Total Shareholders' equity (deficit) (2,202,000) (2,334,000)
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Total Liabilities and Shareholders' equity 1,242,000 1,435,000
============= =============
The accompanying notes are an integral part of these financial statements.
4
FRANKLIN TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 (UNAUDITED)
THREE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
2001 2000
------------- -------------
(unaudited) (unaudited)
Sales:
Product $ 44,000 $ 122,000
Telephone and internet services 57,000 309,000
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Total Sales 101,000 431,000
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Cost of Sales:
Product 30,000 278,000
Telephone and internet services 150,000 348,000
Total Cost of Sales 180,000 626,000
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Gross Profit (Loss) (79,000) (195,000)
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Operating Expenses
Research and development 442,000
Selling, general and administrative 392,000 1,269,000
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Total Operating Expenses 392,000 1,711,000
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Loss from Operations (471,000) (1,906,000)
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Other Income (Expense)
Interest Income 7,000
Interest Expenses (7,000) (1,000)
Other Income (Expense) 3,000 (11,000)
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Total Other Income (Expense) (4,000) (5,000)
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Net Loss (475,000) (1,911,000)
============= =============
Basic and Diluted Net loss per common share 0.01 (0.05)
Weighted Average Common Shares
Outstanding used to compute basic
------------- -------------
Loss per common share 42,317,384 35,182,447
============= =============
The accompanying notes are an integral part of these financial statements.
5
FRANKLIN TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 (UNAUDITED)
THREE MONTHS ENDED
SEPTEMBER 30,
---------------------------
2001 2000
------------ ------------
(unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $ (475,000) $(1,911,000)
Adjustments to reconcile net loss to net cash
Used in operating activities
Depreciation and Amortization 126,000 187,000
Provision for Loss on Obsolete Inventory 96,000
Provision for Loss on Doubtful Accounts 22,000
Stock issued for services rendered 146,000
Gain on sale of equipment (3,000) --
(Increase) decrease in
Account Receivable (12,000) 15,000
Other Receivables -- (2,000)
Inventories 30,000 33,000
Prepaid Expenses 5,000 (28,000)
Increase (Decrease) in
Account Payable 224,000 (108,000)
Accrued Liabilities 7,000 (89,000)
------------ ------------
Net Cash Used in Operating Activities (98,000) (1,639,000)
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CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of Property and Equipment (33,000)
Proceeds from sale of equipment 3,000 --
Other Assets (7,000)
------------ ------------
Net Cash Used in Investing Activities 3,000 (40,000)
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CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from Convertible Notes Payable 19,000
Proceeds from Exercise of Stock Options and Warrants 1,000
Proceeds from Sale of Company Stock 32,000 2,072,000
Payments on capital lease obligation (9,000)
------------ ------------
Net Cash Provided by Financing Activities 51,000 2,064,000
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Net Increase ( Decrease) in Cash (44,000) 385,000
Cash and Cash Equivalents, Beg of Period 49,000 1,275,000
------------ ------------
Cash and Cash Equivalents, End of Period 5,000 1,660,000
============ ============
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
THREE MONTHS ENDED
SEPTEMBER 30,
---------------------------
2001 2000
(unaudited) (unaudited)
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Interest paid - 1,300
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SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
During the three months ended September 30, 2001, the Company issued options at
or above market price to compensate employees for accrued wages or approximately
$100,000.
During the three months ended SEPTEMBER 30,2000, the Company issued 200,000
shares (unaudited) of common stock for services valued at $ 146,000 (unedited)
and for the prepayment of services to be rendered valued at $79,000 (UNAUDITED)
The accompanying notes are an integral part of these financial statements.
7
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 wide-area networks which provide IP Telephony and Internet services through
its majority-owned subsidiary, FNet Corp. ("FNet"). The Company's customers are
located predominantly in the United States, Canada and some overseas.
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 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 three months ended September 30, 2001
are not necessarily indicative of the results that may be expected for the
fiscal year ending June 30, 2002.
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 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 year ended June 30,
2001, many assets were considered impaired and the carrying amounts were reduced
significantly. During the three months ended September 30, 2001, the Company
determined that no assets were further impaired.
8
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 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 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:
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
statements carrying amounts of existing 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 portion of its deferred tax assets.
NOTE 2
Inventories consisted of the following:
September 30, June 30,
2001 2001
(unaudited)
------------ ------------
Raw materials $ 0 $ 1,360,000
Work in process 0 201,000
Finished goods 295,000 1,141,000
Reserve for obsolescence 0 (2,377,000)
------------ ------------
$ 295,000 $ 325,000
============ ============
NOTE 3 ACCRUED LIABILITIES
Accrued Liabilities consisted of the following:
Salaries and related expenses 925,000 1,025,000
Accrued legal 165,000 165,000
Other 196,000 189,000
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1,286,000 1,379,000
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NOTE 4 COMMITMENTS AND CONTINGENCIES
Litigation
The Company is involved in certain legal proceedings which arise in the normal
course of business. Management does not believe that the outcome of these
matters will have a material adverse effect on the Company's consolidated
financial position or results of operations.
NOTE 5 RECENT SALE OF EQUITY SECURITIES
During the three months ended September 30, 2001, the Company sold 32,000 units
to a current shareholder of the Company for $32,000. A unit consisted of 20
shares of common stock of the Company plus a warrant to purchase 10 shares of
commons stock for $.001, exercisable after March 25, 2002 if the ten day average
of the stock price is under $.25 per share.
The Company also received $19,000 in exchange for a convertible note from its
Executive Chairman. The note bears interest at 6% and can be converted at $.05
per share. An employee of the Company has an option to purchase 2.5M shares at
$0.05 per share is lieu of salary for the period 11 months ending 11-1-01.
Two directors of the Company have options to purchase 1.0M shares each at $0.05
per share.
The Company has agreed to issue options to the Executive Chairman in lieu of
salary. The Chairman's stated annual salary is $150,000. He will receive
2,400,000 options at $.05 per share until such time as the Company's financial
position has improved.
FORWARD-LOOKING STATEMENTS. Certain statements constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors
which may cause the actual results, performance, or achievements of the Company
to be materially different from any future results, performance or achievements,
expressed or implied by such forward-looking statements.
RESULTS OF OPERATIONS
Three Months Ended September 30, 2001 Compared To Three Months Ended September
30, 2000
NET SALES. Net sales decreased by 330,000, or 76%, from $431,000 in the
three months ended September 30, 2000 to $101,000 in the three months ended
September 30, 2000. The decrease is due both to a reduction of DVG hardware
systems sales and reduced service revenue, primarily from the Balkan operation.
The revenue mix for the three months ended September 30, 2001 consisted of 55%
Telephone and Internet services revenue and 45% hardware product sales.
GROSS PROFIT. Gross profit decreased as a percentage of net sales to a
loss of 78% for the three months ended September 30, 2001, from a net sales loss
of 45% for the corresponding period of 2000. The gross profit percentage
decrease can be attributed to fixed hardware and service overhead expenses
spread over a smaller sales base.
10
OPERATING EXPENSES. Operating expenses decreased by $1,320,000, or 77%,
from $1,711,000 in the three months ended September 30, 2000 to $391,000 in the
three months ended September 30, 2001. The decrease was primarily attributable
to a one time bad debt expense of $1,284,000 occurring in the three month period
ending September 30, 2000.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents deficit totaled $ 5,000 ), as of September 30, 2001.
The sources of cash were provided primarily by issuance of equity securities,
and to a lesser extent, collections of sales revenues. The Company has relied on
sales of new shares and the exercise of warrants and options to supplement the
funding of operations for an extended period of time.
Both Franklin Telecom and FNet have continued to experience losses. The Company
has not currently been able to raise sufficient capital from sales of additional
shares. Audit opinions for the past two fiscal years have advised that the
Company may not be able to continue as a going concern.
The Company is currently in a survival mode. As of January 31, 2002 it had
$23,000 of cash or cash equivalents. Current monthly cash consumption is
approximately $50,000. Sales from FTC and the FNet division are approximately
$25,000 per month. Management is currently deferring salary or taking options in
lieu of salary. Recent non-operating cash funding has been contributed by the
Company's chairman in the form of convertible debt.
The Company believes that existing cash and cash equivalents and cash flow from
operations will not be sufficient to meet the Company's presently anticipated
working capital needs during the next twelve months and the foreseeable future.
Although the Company continues the effort to raise cash through sales of
existing inventory and anticipates future private placements of its securities,
there is no assurance that this effort will be successful.
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 September 30, 2001, the Company's cash equivalents and
short-term investments totaled approximately $5,000. 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.
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.
11
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In August 2001, NEC filed a lawsuit against the Company alleging breach of
contract for $40,000 still due on a lease for a PBX. This action is still
pending.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the three months ended September 30, 2001, the Company sold 32,000 units
to a current shareholder of the Company for $32,000 in cash. A unit consisted of
20 shares of common stock of the Company plus a warrant to purchase 10 shares of
commons stock for $.001, exercisable after March 25, 2002 if the ten day average
of the stock price is under $.25 per share.
The Company also received $19,000 in exchange for a convertible note from its
Executive Chairman. The note bears interest at 6% and can be converted at $.05
per share. An employee of the Company was granted an option to purchase
2,.500,000 shares at $0.05 per share is lieu of salary for the period of eleven
months ending November 1, 2001.
In addition, the Company granted two directors of the Company options to
purchase 1,000,000 shares each at an exercise price of $0.05 per share.
The Company has agreed to issue options to its Executive Chairman in lieu of
salary. The Chairman's stated annual salary is $150,000. He will receive
2,400,000 options at $.05 per share until such time as the Company's financial
position has improved.
The Company believes all such sales were exempt from registration under the
Securities Act of 1933 by reason of Section 4(2) thereof and Regulation D
thereunder.
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
(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
By /s/ FRANK W. PETERS
-----------------------------------
Frank W. Peters
Acting Chief Financial Officer
Dated: February 12, 2002
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