TELECOM—Franklin Telecommunications Looks for Merger Partner

Franklin Peters spent 20 years building the company he founded, Franklin Telecommunications Corp. in Westlake Village, nurturing the small startup into a $12 million-a-year business. Now, Peters, 63, is ready to retire and, to do so, he may need the help of Superman. Franklin has hit the skids and for Peters, its chairman, it’s all very personal. He nurtured and grew the company from a small startup in 1981 to a $12 million-a-year business. In the fiscal year that ended June 30, 2000, sales fell to $3.2 million from $11.6 million the year before, with $2.6 million in net losses. The company, whose stock closed at 15 cents a share last Friday check on Friday, down from a $3.12 high last year, is still reeling from a net loss of $1.72 million in the quarter ending Dec. 31 As a result, Peters has been prompted to seek a merger partner for his company. “I feel terrible not only for us, but for our shareholders,” said Peters. “This is not where we expected to be.” With $481,000 in total sales for the quarter, down from $886,000 for the same period last year, the company has been struggling to stay above water. Peters hopes a new partner will solidify his company’s financial footing. He says he has prospective corporate merger partners that may stave off the company’s demise. “I have three folders on my desk right now that look pretty good and we could have a decision soon,” said Peters, who hopes to retire once a new merger partner is found. Others have their doubts. Equities analyst Robert Fagin, of Bear, Stearns & Co., said the current market shakeout is impacting smaller firms like Franklin Telecom, along with its larger competitors, making the market too volatile for many potential partners. “This shake-out is going to last a while longer. It’s basically going to keep the top companies at the top, but leave a lot fewer smaller companies at the bottom,” Fagin said. He added that the telecom market is too closely tied to the slumping economy to determine how long that industry’s instability will last. A veteran executive with a history of success at a number of firms, Peters was ill at ease, but optimistic, last week talking about his company’s potential downfall should a merger partner fail to appear. While refusing to speak directly about efforts to secure a merger partner, Peters says he has received a “number of inquiries” from other companies since the company made its announcement last month. “We’re staying very positive,” he said. “We have very valuable technology and products that would go well with a suitable partner.” Its Internet-based communications equipment, allowing voice and text to be transmitted over the web and on to satellites is particularly valuable, Peters said. Analysts, covering the telecom industry that were contacted by the Business Journal, would not comment on Franklin’s future prospects. Peters knows Franklin Telecom, which employs 44 people, is just one of the many troubled firms in the Internet-based telecom market, but he hopes to see his firm survive at least one more obstacle. “I’ve been planning my retirement for five years and I’m on schedule, but I’d like to leave when we’re on top,” he said. “I’d like to see the company go on after I leave. I feel very responsible to our shareholders, many of whom have been with us for a long time.” Peters took the company that designs and manufactures land- and satellite-based communications devices public in 1986. In the 1990s, it expanded to offer Internet-based telephone service. The company began trading on the American Stock Exchange last year. Previously, it had traded on Nasdaq’s Over the Counter Bulletin Board. But trouble soon followed. The company’s sales were impacted by the loss of its contract with long distance service and Internet provider USA Talks, Inc., which had been worth $8.1 million in net revenue for Franklin in 1999. Last year, USA Talks was hit hard by a sagging tech market and an investigation by the Securities and Exchange Commission into its business practices, sending its stock plummeting and leading to the abrupt cancellation of the Franklin contract. Then it got worse. Franklin Telecom was known briefly outside of the telecom world because of its Internet-based communications equipment that kept NATO military forces in the Balkans war connected to the rest of the world. The system, called VoIP, for Voice over Internet Protocol, was developed in 1998 with 15 mobile earth stations that followed troops deployed in Bosnia. Offered under the company’s FNet subsidiary, the service allowed voice and text communications over Internet connections, using satellite linkups and earth stations between NATO forces and their families back home. But enemy forces eventually tapped into the service, costing Franklin thousands of dollars a day in fees for connection time and third-party satellite link-ups before it was discontinued last year. “We weren’t giving them enough credit that they could figure out how they could tap into it,” Peters said. “We were averaging $50,000 a month in losses when we pulled the plug on it.” Before the system was compromised, Peters said, his company was averaging about $100,000 a month in revenue from the business.