NEWS: FTEL Q-Report
===================
November 9, 1998
FRANKLIN TELECOMMUNICATIONS CORP (FTEL)
Quarterly Report (SEC form 10-Q)
Management's Discussion and Analysis of Financial Condition and Results of Operations
OVERVIEW
Franklin Telecommunications Corp. (the "Company") designs, manufactures and markets high speed communications products
and subsystems. The products are marketed through original equipment manufacturers ("OEMs") and distributors, as well as
directly to end users. In addition, through its majority-owned subsidiary, FNet, the Company is a provider of IP telephony and
Internet services to businesses and individuals. The Company is a California corporation formed in 1981.
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 IP telephony and Internet business, newly introduced products,
development of IP telephony service capabilities over frame relay circuits and 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 re-focused its business over the last two years from manufacturing primarily LAN and WAN products to
providing telecommunications and Internet products and services. Beginning in the year ended June 30, 1997 and continuing in
the three months ended September 30, 1998, the Company has begun to generate revenues from these new business lines.
Sales have been declining for the Company's existing LAN and WAN hardware products during the previous fiscal year, while
the newly developed hardware products and IP telephony services are just now breaking into the market. IP telephony
services are now coming to fruition with revenue beginning in August 1998. Demand for the Company's newly introduced
Tempest Data Voice Gateway hardware products ("DVG") has yet to be firmly established. Although sales of the DVGs have
been increasing, potential customers are still in the process of evaluating the products.
FNet is in the nature of a new business venture; accordingly, it can be expected that its future operating results will be subject
to many of the risks inherent in establishing a new business enterprise. There can be no assurance, therefore, that FNet will be
able to achieve or sustain profitability in future periods or that the Company's investment of resources into it will be repaid.
The Company's main hardware products consist of the DVG, D-Mark Channel bank and Cyclone product lines. The
Company's DVG provides the capability of transmitting voice, data and fax traffic over the Internet and Frame relay circuits.
The Company's D-Mark Channel Bank terminates a digital T1 telephone line from the local telephone company and
channelizes it into 24 analog data/voice lines for either modems, faxes, or telephones. With the declining cost of T1 digital lines,
the Company believes that the D-Mark Channel Bank provides an effective, cost saving solution for companies using 10 or
more phones or modems. The Cyclone is an evolution of the D-Mark and includes modems integrated into the PC cards, thus
eliminating the need to add external modems for those applications requiring them.
The Company has developed an Integrated Billing System on the Microsoft NT BackOffice platform. This billing system
coupled with the DVG systems will allow the Company to be among the very few offering a complete "TELEPHONE
COMPANY BUSINESS IN A BOX". Management believes that this single vendor solution should eliminate the finger
pointing that most customers experience when dealing with multiple vendor solutions. This current release of the Tempest (R)
DVG offers full analog and T1 connectivity and now supports G.711 Fax and our AMAS
(AuthenticationMappingAndSettlement) and Billing solutions.
The Company has many product enhancements and new products in development. Currently, the Company is testing the Alpha
versions of E1/R2 AND E1/PRIMARY RATE ISDN Tempest product to support an aggressive entry into the international
market place. There will be field testing of T1 PRI with Caller ID authentication during the next quarter in support of domestic
market requirements. At this time the Company will also be testing its H.323 call controller and T38 real time fax, which is now
operational and in "Alpha" testing in the Company's labs. The H.323 call controller will
facilitate the Company's commitment to "Interoperability" and other emerging industry standards. The H.323 call controller will
also be used to support the Company's ability to "voice enable" websites in the explosive call center market. Additionally, the
Company is alpha testing the first release of a browser based interface to the AMAS and Billing system. This will allow
Tempest DVG users access to their individual billing records at any time, from anywhere in the world. The Company is
developing a new two/four port "modem" like DVG model that will "speak" with the existing DVG product line. The Company
is currently Alpha testing an Internet Based PBX system between the Florida, Scottsdale and Westlake Village development
centers.
As with any new line of business, there can be no assurance that the DVG, D-Mark Channel Bank, Cyclone and other newly
developed communications products will gain widespread market acceptance or be profitable. In addition, there can be no
assurance that new hardware products and services developed by others will not render the Company's hardware products
and services noncompetitive or obsolete.
RESULTS OF OPERATIONS
Three Months Ended September 30, 1998 Compared To Three Months Ended September 30, 1997
NET SALES. Net sales increased by $689,000, or 282%, from $244,000 in the three months ended September 30, 1997 to
$933,000 in the three months ended September 30, 1998. The overall increase is due to increasing sales of DVG products
and initial telephone service revenue from the Company's FNet subsidiary. Sustainable demand for newly introduced hardware
products has yet to be established, in that many customers are continuing to test and evaluate the DVG products. Revenue is
recorded when the customer completes testing and evaluation and agrees to purchase the product. The revenue mix for the
three months ended September 30, 1998 consisted of 28% telephone and Internet services revenue and 72% hardware
product sales.
GROSS PROFIT. Gross profit increased as a percentage of net sales to 50% for the three months ended September 30,
1998, from a gross profit of 4% of net sales for the corresponding period of 1997. The gross profit percentage increase can be
attributed primarily to increased sales of higher margin hardware products and the distribution of fixed overhead costs over a
larger sales base.
OPERATING EXPENSES. Operating expenses increased by $640,000, or 66%, from $970,000 in the three months ended
September 30, 1997 to $1,610,000 in the three months ended September 30, 1998. The increase is attributable to building
infrastructure for the IP telephony and Internet services and product development costs for the recently introduced hardware
products.
OTHER INCOME (EXPENSE). Interest expense decreased by $5,000, or 29%, from $17,000 in the three months ended
September 30, 1997 to $12,000 in the three months ended September 30, 1998, due primarily to a reduction in loans from an
officer of the Company. Interest income increased by $60,000, or 100%, from the three months ended September 30, 1997
to the three months ended September 30, 1998, due to interest earned on cash investments. Other income decreased by
$14,000, or 82%, from $17,000 in the three months ended September 30, 1997 to $3,000 in the three months ended
September 30, 1998, due to various non operating items.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents and net working capital totaled $3,433,000 and $3,595,000, respectively, as of September 30,
1998. The primary source of cash was net proceeds generated from equity financings. The Company has relied on sales of
new shares and the exercise of warrants and options to fund operations for an extended period of time. The Company received
$10,150,000 and $1,000 in equity financing, for the year ended June 30, 1998, and the three months ended September 30,
1998, respectively. Its subsidiary, FNet, raised $398,000 for the year ended June 30, 1998 and $18,000 for the three months
ended September 30, 1998. FNet has continued to experience losses, due to the growth nature of the Internet services
business and development of the IP Telephony business. In addition to the equity financing described above, the Company's
President has deferred portions of his compensation, and has on occasion converted debt to equity in order to preserve the
Company's cash.
The Company anticipates that its primary uses of working capital in future periods will be for acquisitions, increases in product
development, expansion of its marketing plan, development of new branch offices and funding of increases in accounts
receivable. Development of new branch offices may be achievable through acquisitions. Although the Company seeks to use its
Common Stock to make acquisitions to the extent possible, many acquisition candidates may require that all or a significant
portion of the purchase price be paid in cash.
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.
|
