U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
[_] Quarterly report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended June 30, 1996
or
[_] Transition report under Section 13 or 15(d) of the Exchange Act
For the transmission period from __________ to __________
Commission file number 0-13117
MICROFRAME, INC.
-------------------------------------------------
(Exact Name of Small Business Issuer as Specified in Its Charter)
New Jersey 22-2413505
---------- ----------
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
21 Meridian Road, Edison, New Jersey 08820
------------------------------------------
(Address of Principal Executive Offices)
(908) 494-4440
-------------------
(Issuer's Telephone Number, Including Area Code)
Check whether the issuer: (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 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
--- ---
There were 4,819,142 shares of Common Stock outstanding at August 9, 1996.
Transitional Small Business Disclosure Format:
Yes No X
--- ---
<PAGE>
MICROFRAME, INC. AND SUBSIDIARY
FORM 10-QSB
FOR THE QUARTER ENDED JUNE 30, 1996
PART I. FINANCIAL INFORMATION Page
Item 1. Condensed Consolidated Financial Information 2
Condensed Consolidated Balance Sheets as of June 30, 1996
and March 31, 1996 (Unaudited) 3
Condensed Consolidated Statements of Operations for the
three months ended June 30, 1996 and June 30,
1995 (Unaudited) 4
Condensed Consolidated Statements of Cash Flows for the
three months ended June 30, 1996 and June 30,
1995 (Unaudited) 5
Notes to Condensed Consolidated Financial Statements (Unaudited) 6-8
Item 2. Management's Discussion and Analysis or Plan of Operation 9-10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 11
Item 5. Other Information 11
Item 6. Exhibits and reports on Form 8-K 11
SIGNATURES 12
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL INFORMATION.
The condensed consolidated financial statements included herein have
been prepared by the registrant without audit pursuant to the rules and
regulations of the Securities and Exchange Commission. Although the registrant
believes that the disclosures are adequate to make the information presented not
misleading, certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. It is suggested that these condensed financial statements be read
in conjunction with the financial statements and the notes thereto included in
the registrant's latest Annual Report on Form 10-KSB.
2
<PAGE>
MicroFrame, Inc. and Subsidiary
Condensed Consolidated Balance Sheets
================================================================================
(unaudited)
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
ASSETS 1996 1996
<S> <C> <C>
Current assets
Cash and cash equivalents $ 1,263,078 $ 48,302
Accounts receivable, less allowance for doubtful
accounts of $100,000 1,172,702 1,540,561
Inventory 1,336,356 1,084,870
Prepaid expenses and other current assets 48,825 77,426
----------- -----------
Total current assets 3,820,961 2,751,159
Property and equipment at cost, net 394,570 409,866
Capitalized software, less accumulated amortization
of $684,173 and $649,332, respectively 316,398 266,319
Goodwill, less accumulated amortization of
$7,980 and $5,766 respectively 93,173 95,844
Security deposits 34,916 34,983
----------- -----------
Total assets $ 4,660,018 $ 3,558,171
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Bank borrowings $ 339,618 $ 538,754
Accounts payable 512,929 395,619
Accrued payroll and related liabilities 183,511 285,651
Deferred income 245,327 258,856
Other current liabilities 354,220 435,215
----------- -----------
Total current liabilities 1,635,605 1,914,095
----------- -----------
Committments and contingencies -- --
Long-term debt 62,566 72,833
Stockholders' equity
Common stock - par value $.001 per share;
authorized 50,000,000 shares, issued 4,819,542
shares and outstanding 4,819,142 shares at
June 30, 1996; issued 3,718,075 shares
and outstanding 3,717,675 shares at March 31, 1996 4,819 3,718
Preferred stock - par value $ 10 per share;
authorized 200,000 shares, none issued -- --
Additional paid-in capital 6,206,327 4,856,924
Accumulated deficit (3,245,299) (3,285,399)
----------- -----------
2,965,847 1,575,243
Less - Treasury stock, 400 shares, at cost (4,000) (4,000)
----------- -----------
Total stockholders' equity 2,961,847 1,571,243
----------- -----------
Total liabilities and stockholders'equity $ 4,660,018 $ 3,558,171
=========== ===========
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements
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<PAGE>
MicroFrame, Inc. and Subsidiary
Condensed Consolidated Statements of Operations
================================================================================
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
--------
1996 1995
<S> <C> <C>
Net sales $ 1,776,335 $ 1,864,342
Cost of sales 605,059 740,847
----------- -----------
Gross Margin 1,171,276 1,123,495
Research and development expenses 223,950 128,665
Selling, general and administrative expenses 903,295 958,513
----------- -----------
Income from operations 44,031 36,317
Interest income 10,268 2,818
Interest expense (14,199) --
----------- -----------
Incomebefore income tax provision 40,100 39,135
Income tax provision -- 14,700
----------- -----------
Net income $ 40,100 $ 24,435
=========== ===========
Per sharedata
Net income per share $ 0.01 $ 0.01
----------- -----------
Weighted average number of common shares outstanding 4,883,704 3,787,800
----------- -----------
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements
-4-
<PAGE>
MicroFrame, Inc. and Subsidiary
Condensed Consolidated Statements of Cash Flows
================================================================================
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
--------
1996 1995
<S> <C> <C>
Cash flows from operating activities
Net income $ 40,100 $ 24,435
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 84,671 67,226
Provision for bad debts 17,686 20,793
Provision for inventory obsolescence 10,000 --
Deferred tax provision -- 14,700
(Increase) decrease in
Accounts receivable 350,173 (259,417)
Inventory (261,486) (127,477)
Prepaid expenses and other current assets 28,601 (20,652)
Security deposits 67 3,173
Increase (decrease) in
Accounts payable 117,310 (2,359)
Accrued payroll and related liabilities (102,140) (58,966)
Deferred income (13,529) 30,048
Other current liabilities (80,995) (7,700)
----------- -----------
Net cash provided (used) by operating activities 190,458 (316,196)
----------- -----------
Cash flows from investing activities
Capital expenditures (31,863) (25,921)
Capitalized software (84,920) (73,244)
----------- -----------
Net cash used in investing activities (116,783) (99,165)
----------- -----------
Cash flows from financing activities
Repayments of debt (209,403) --
Issuance of common stock 1,350,504 --
----------- -----------
Net cash provided by financing activities 1,141,101 --
----------- -----------
Net increase (decrease) in cash and cash equivalents 1,214,776 (415,361)
Cash and cash equivalents - beginning of period 48,302 490,261
----------- -----------
Cash and cash equivalents - end of period $ 1,263,078 $ 74,900
=========== ===========
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements
-5-
<PAGE>
MICROFRAME, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
JUNE 30, 1996
(Unaudited)
NOTE 1 - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
The condensed consolidated balance sheets as of June 30, 1996 and
March 31, 1996, the condensed consolidated statements of operations for the
three month periods ended June 30, 1996 and 1995 and the condensed consolidated
statements of cash flows for the three month periods then ended have been
prepared by the Company without audit. In the opinion of management, all
adjustments (which include only normal recurring adjustments) necessary to
present fairly the financial position, results of operations and cash flows at
June 30, 1996 and 1995 have been made.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. It is suggested that these condensed
financial statements be read in conjunction with the financial statements and
notes thereto as of March 31, 1996 and for the year then ended.
NOTE 2 - INVENTORY:
Inventory consists of the following:
June 30, 1996 March 31, 1996
------------- ----------
Raw materials $ 943,206 $ 676,120
Work in process 372,269 367,820
Finished goods 20,881 40,930
---------- ----------
Total $1,336,356 $1,084,870
========== ==========
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<PAGE>
MICROFRAME, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
JUNE 30, 1996
(Unaudited)
NOTE 3 - STOCKHOLDERS' EQUITY:
During the three months ended June 30, 1996, stockholders' equity
changed for the following items:
Net income $ 40,100
Issuance of common stock of $1,350,504
In April, 1996, the Company sold 860,000 shares of common stock to
unrelated investors, at $1.25 per share and received net proceeds of
approximately $1,050,000. In conjunction with this sale, warrants to purchase
860,000 shares of common stock with an exercise price of $1.50 and warrants to
purchase an additional 860,000 shares of common stock with an exercise price of
$2.00 were issued. These warrants expire in April, 2000.
In addition, the Company sold 241,467 shares of common stock at $1.25
per share to four current shareholders of record who held the contractual right
to maintain their share of ownership. The Company received net proceeds of
approximately $300,000. In conjunction with this sale, warrants to purchase
241,467 shares of common stock with an exercise price of $1.50 and warrants to
purchase an additional 241,467 shares of common stock with an exercise price of
$2.00 were issued. These warrants expire in April, 2000.
NOTE 4 - NET INCOME PER SHARE:
The computation of earnings per common and common equivalent share is
based upon the weighted average number of common shares outstanding during the
period plus (in periods in which they have a dilutive effect) the effect of
common stock equivalents, comprised of outstanding stock options and warrants.
Fully diluted earnings per share also reflect additional dilution related to
outstanding stock options due to the use of the market price at the end of the
period, when higher than the average price for the period.
-7-
<PAGE>
MICROFRAME, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
JUNE 30, 1996
(Unaudited)
NOTE 5 - CONTINGENT LIABILITIES
The Company is involved in proceedings with respect to certain sales
tax matters. Total amounts included in other current liabilities related to
these proceedings is $100,000 at June 30, 1996. In the opinion of management of
the Company, amounts accrued for assessments in connection with sales tax are
adequate and ultimate resolution of these matters will not have a material
effect on the Company's consolidated financial position, results of operations
or cash flows.
NOTE 6 - STOCK-BASED COMPENSATION
In fiscal 1997, the Company will be required to adopt the provisions
of Statement of Financial Standards No. 123, "Accounting for Stock-Based
Compensation". This Statement requires companies to estimate the fair value of
common stock, stock options, or other equity instruments ("Equity Instruments")
issued to employees using pricing models which take into account various factors
such as current price of the common stock, volatility and expected life of the
Equity Instrument. The Standard permits companies to either provide pro forma
footnote disclosure, or to adjust operating results, for the amortization of the
estimated value of the Equity Instrument over the vesting period of the Equity
Instrument. The Company has elected to account for stock options under
Accounting Principles Board Opinion No. 15 and will disclose certain pro forma
information beginning in fiscal 1997.
-8-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
This section and the financial information provided herein contain
forward looking statements that involve risks and uncertainties. The Company's
actual results may differ materially from management's expectations and the
results discussed in the forward looking statements.
RESULTS OF OPERATIONS
Revenues for the quarter ended June 30, 1996 were $1,776,335 as
compared with revenues of $1,864,342 for the same quarter of the previous fiscal
year, or a decrease of approximately 4.7 %. The fiscal quarter was highlighted
by the initial shipments of the Company's new flagship product, the Sentinel
2000. These shipments totalled over $325,000. The Sentinel 2000 represents the
first member of the new family of products, collectively referred to as Secure
Network Systems/2000, which are to be introduced in the current fiscal year
(ending March 31, 1997). This family of industry standards based products is
designed to address the growing demand for remote network management of mission
critical integrated voice and data networks. These products uniquely integrate
security management, remote access, fault management and problem
identification/resolution into a powerful suite of network management solutions
to monitor, maintain and increase the operational integrity and access to the
voice and data network.
Offsetting this successful new product introduction was a substantial
decrease in shipments to AT&T of Remote Port Security Devices (RPSDs) for their
Definity PBX customers. Revenues for the quarter ended June 30, 1996 decreased
by approximately $350,000 from the quarter ended June 30, 1995. As a result of
an "overstocked" position determined by AT&T in the quarter ended September 30,
1995, a reduction in purchase order activity was effected from that point
forward. Shipments have remained steady at a lower volume since that time and
the Company expects the current order volume to continue throughout fiscal 1997.
In fact, existing purchase orders for delivery in the quarter ending September
30, 1996 already equal the actual orders shipped in the quarter ended June 30,
1996. The remainder of the shortfall is primarily attributable to weaker than
expected sales in the European market. This weaker trend is expected to continue
through the seasonally slower quarter ending September 30, 1996 before ramping
up in the second half of fiscal 1997.
The Company's cost of goods sold decreased from $740,807 from the
quarter ended June 30, 1995 to $605,059 for the quarter ended June 30, 1996 as a
result of decreased shipment levels. However, cost of goods sold as a percentage
of sales decreased from 39.7% for the previous comparable fiscal period to 34.1%
for this fiscal period, reflecting improved systems, purchasing procedures, more
favorable pricing negotiated with vendors and a more favorable mix of products
sold. Research and development expenses, net of capitalized software
development, increased from $128,665 in the quarter ended June 30, 1995 to
$223,950 in the
-9-
<PAGE>
current fiscal quarter, an increase of 74%. Research and development expenses as
a percentage of sales increased from 6.9% to 12.6%, reflecting the increased
development activity of the Secure Network Systems/2000 set of products to be
introduced throughout the fiscal year ended March 31, 1997. Selling, general and
administrative expenses decreased 5.8% from $958,513 for the prior year's
comparable fiscal period to $903,295 for the fiscal period ending June 30, 1996.
This is a result of Management's focus on reducing administrative overhead in
order to achieve the primary mission in fiscal 1997 - returning the Company to
profitability.
The Company's Operating profit before interest and taxes increased
slightly from $36,317 during the fiscal quarter ended June 30, 1995 to $44,031
for the fiscal quarter ended June 30, 1996. Net income of $40,100 for the
current quarter ended June 30, 1996 is 64.1 % greater than the $24,435 reported
in the fiscal quarter ended June 30, 1995. The improvement between Operating
income and net income is directly related to the lack of income tax provision
required. As the Company has available unused federal and state net operating
loss carryforwards of approximately $2.4M and $1.0M, respectively, at March 31,
1996 and has fully provided a valuation allowance against its existing deferred
tax assets, it is in a position to record no income tax provision until such
time as the net operating loss carryforwards are utilized or expire. The current
expiration dates range from the years 2001 through 2011.
FINANCIAL CONDITION AND CAPITAL RESOURCES
During the first quarter of fiscal year 1997, the Company's financial
condition improved significantly as assets increased from $3,558,171 at March
31, 1996 to $4,660,018 at June 30, 1996, and the Company's working capital
increased from $837,064 to $2,185,356. This improvement is a direct result of
the completion of a private placement of 860,000 shares of the Company's Common
Stock for net proceeds of approximately $1,050,000. In addition, 241,467 shares
of the Company's Common Stock were issued to existing shareholders who had the
contractual right to maintain their percentage ownership in the Company. Net
proceeds of approximately $300,000 were received. Exclusive of the private
placement net proceeds of $1.35M, the Company's working capital position
remained unchanged from March 31, 1996 representing a stabilization in the
Company's working capital performance.
The Company has a credit agreement with CoreStates Bank
("CoreStates") for a credit line of $1,000,000 to finance future working capital
requirements, collateralized by accounts receivable, inventory, equipment and
all other assets of the Company, as well as a $150,000 credit facility to
finance purchases of machinery and equipment, convertible into a three-year
secured term loan when utilized. The Company borrowed $124,000 against this
facility in November, 1995, at which time this debt was converted into a
three-year term loan. As of June 30, 1996, $102,184 remained outstanding on this
loan. The Company was informed in June, 1996, that the working capital credit
line would not be renewed upon its expiration date of July 31, 1996. An
agreement with CoreStates was reached to repay the outstanding balance ($300,000
at June 30, 1996) no later than October 31, 1996 in order to facilitate an
orderly transition to a new credit facility. The Company is currently in the
final stages of establishing a working capital line with a different financial
institution.
As a result of its stabilized working capital position and the
significant cash infusion during the fiscal quarter, the Company believes that
it will have sufficient capital to meet its financial requirements for the
remainder of the fiscal year.
-10-
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Previously reported on Form 10-KSB for the fiscal year ended March
31, 1996.
ITEM 5. OTHER INFORMATION
On April 1, 1996, the Company entered into a six-month compensation
agreement with Mr. Lonnie L. Sciambi, a former executive officer and director of
the Company after not renewing its existing employment agreement with Mr.
Sciambi. The compensation agreement provides for compensation in the aggregate
sum of $100,000, as well as certain benefits during the term. In addition, Mr.
Sciambi was granted a stock option under the Company's 1994 Plan to purchase
23,196 shares of Common Stock. Mr. Sciambi resigned as a director in May 1996.
In April 1996, the Company completed the 1996 Private Placement to
accredited investors of an aggregate of 1,101,467 Units for gross proceeds of
$1,376,933.75, each Unit consisting of one share of Common Stock and one Class A
Warrant and one Class B Warrant, each of which are exercisable into one share of
Common Stock. Stephen M. Deixler, an executive officer and a director of the
Company and Stephen P. Roma, a director of the Company, who each held preemptive
rights to purchase Units in this offering, each purchased 26,665 Units at a
price of $1.25 per Unit for aggregate consideration of $33, 331.25.
Additionally, in connection with the 1996 Private Placement, Special Situations
Fund III, L.P., also the holder of preemptive rights purchased 133,621 Units at
$1.25 for aggregate consideration of $167,026.25.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: None.
(b) Reports on Form 8-K: None.
-11-
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Date: August 9, 1996
MICROFRAME, INC.
/s/ Stephen B. Gray
------------------------------
Stephen , President and
Chief Operating Officer
/s/ Mark A. Simmons
------------------------------
Mark A. Simmons, Chief Financial Officer
(Principal Financial Officer)
-12-
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000754813
<NAME> MICROFRAME, INC.
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 1,263,078
<SECURITIES> 0
<RECEIVABLES> 1,272,702
<ALLOWANCES> (100,000)
<INVENTORY> 1,336,356
<CURRENT-ASSETS> 3,820,961
<PP&E> 991,577
<DEPRECIATION> (597,007)
<TOTAL-ASSETS> 4,660,018
<CURRENT-LIABILITIES> 1,635,605
<BONDS> 0
0
0
<COMMON> 4,819
<OTHER-SE> 2,957,028
<TOTAL-LIABILITY-AND-EQUITY> 4,660,018
<SALES> 1,776,335
<TOTAL-REVENUES> 1,776,335
<CGS> 605,059
<TOTAL-COSTS> 1,732,304
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,199
<INCOME-PRETAX> 40,100
<INCOME-TAX> 0
<INCOME-CONTINUING> 40,100
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 40,100
<EPS-PRIMARY> 0.01
<EPS-DILUTED> 0.01
</TABLE>
