I found this "tidbit" on pointcast network. I apologize for the lenght of the post, however, I could not locate a URL:
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SEC 10-Q: Quarterly Report
(Management's Discussion)
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 Internet access and services, including Intenet telephony, 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 Internet business, newly introduced products, development of "telephone-to-telephone" 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 has recently re-focused its business 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, 1997, the Company has begun to generate revenues from these new business lines. Sales had been declining for the Company's existing hardware products during the previous fiscal year, while the newly developed hardware products and Internet services were not yet ready for market. Initial demand for the Company's newly introduced D-Mark Channel Bank, Cyclone and Data Voice Gateway hardware product lines have yet to be established, since many potential customers are 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 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 Data Voice Gateway, or DVG, is a further evolution of the D-Mark, which adds the capability of transmitting voice traffic over the Internet and Frame relay circuits.
Other products under development include the Tornado, which is a further evolution of the Cyclone by providing terminal server function. The Tornado is targeted to become the Company's point of presence ''POP in a box'' solution for ISPs or a corporation's data center. This would permit a new or existing Internet Service Provider or corporation to install all of the hardware required to provide an Internet service connection.
Other features of the D-Mark series include FXO and, in the future, Ground Start capabilities for the voice card integrated in the D-Mark systems. FXO allows the D-Mark to extend the functions of a PBX telephone system. Ground Start will allow access to devices (PBX trunk lines, telephones, fax machines, etc.) that operate in this environment, thus expanding the types of devices that the D-Mark systems can utilize. The T-1 card in the D-Mark system is also being improved to add a MVIP interface. The MVIP interface is an open architecture standard interface, which would permit users to customize applications and directly connect third party hardware to the D-Mark systems.
In designing the D-Mark Channel Bank, the Company's primary target market was Internet Service Providers. With the growth of the Internet, the Company believes that the D-Mark Channel Bank can satisfy the requirements of Internet Service Providers for providing analog lines for modem banks to provide service for their dial-up accounts.
Companies such as U.S. Robotics, Texas Instruments and Cirrus Logic have purchased the D-Mark Channel Bank for testing and engineering of the latest 56K (X2) modem technology.
These applications were not originally considered by the Company, but were discovered by and in conjunction with purchasers of the product. Due to the rapidly changing pace of the telecommunications industry, management believes that the D-Mark Channel Bank will continue to be a leading edge product because of its upgradability and flexibility. The Company also manufactures D4 T-1 Channel Banks, which are capable of terminating a telephone company T1 line which contains 24 voice and or data circuits. This termination takes the T-1 serial port and turns it into 24 central office type telephone outlets which will accept 24 desk phones or a PBX. As part of the channel bank the Company also offers an 8 port station analog card (ICV-8) for the CTI market.
As with any new line of business, there can be no assurance that the D-Mark Channel Bank, The Cyclone, DVG 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, 1997 Compared To Three Months Ended September 30, 1996
Net Sales. Net sales increased by $35,000, or 17%, from $209,000 in the three months ended September 30, 1996 to $244,000 in the three months ended September 30, 1997. The overall increase is due to increased Internet services revenue, with a reduced demand for wide area network products. Initial demand for newly introduced hardware products has yet to be established, in that most sales to date have been to customers for testing and evaluation purposes. The revenue mix for the three months ended September 30, 1997 consisted of 69% Internet services revenue and 31% hardware product sales.
Gross Profit. Gross profit decreased as a percentage of net sales to 4% for the three months ended September 30, 1997, from a gross profit of 21% of net sales for the corresponding period of 1996. The gross profit percentage decrease can be attributed to increased manufacturing overhead infrastructure expenditures, including increased numbers of personnel to support an anticipated ramp up of sales activity.
Operating Expenses. Operating expenses increased by $549,000, or 130%, from $421,000 in the three months ended September 30, 1996 to $970,000 in the three months ended September 30, 1997. The increase is attributable to increased product development costs for the recently introduced hardware products, costs in developing the Internet services infrastructure, increased sales and marketing efforts, and costs in enhancing the general and administrative infrastructure to support higher sales volumes.
Other Income (Expense). Interest expense increased by $10,000, or 143%, from $7,000 in the three months ended September 30, 1996 to $17,000 in the three months ended September 30, 1997, due primarily to an increase in loans from an officer of the Company and assumed lease debt from Internet Passport. Other income increased by $17,000, or 100%, from $-0- in the three months ended September 30, 1996 to $17,000 in the three months ended September 30, 1997, due to various non-operating items.
Liquidity and Capital Resources
Cash and cash equivalents and net working capital totaled $908,000 and $190,000, respectively, as of September 30, 1997 and 1996. The primary source of cash was net proceeds generated from equity financing. 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 $114,000, $1,007,000, $1,109,000 and $289,000 in equity financing, for the years ended June 30, 1995, 1996, and 1997, and the three months ended September 30, 1997, respectively. Its subsidiary, FNet, raised $1,950,000 for the year ended June 30, 1997 and $51,000 for the three months ended September 30, 1997. FNet has continued to experience losses, due to the growth nature of the Internet services 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 being raised through private placements of securities will be sufficient to meet the Company's presently anticipated working capital needs for at least the next 13 months. The Company regularly evaluates various potential acquisitions, which could require a substantial portion of the net proceeds from the exercise of the Warrants. 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.
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