U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1997
OR
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ____________ to ____________
Commission File No.: 0-13117
MICROFRAME, INC.
----------------
(Exact Name of Small Business Issuer in Its Charter)
New Jersey 22-2413505
---------- ----------
(State or Other Jurisdiction of (IRS Employer Identification Number)
Incorporation or Organization)
21 Meridian Road, Edison, New Jersey 08820
------------------------------------------
(Address of Principal Executive Offices)
(732) 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 4,839,303 shares of Common Stock outstanding as of November 6, 1997.
Transitional Small Business Disclosure Format:
Yes [_] No [X]
<PAGE>
MICROFRAME, INC. AND SUBSIDIARY
FORM 10-QSB
FOR THE QUARTER ENDED SEPTEMBER 30, 1997
PART I. FINANCIAL INFORMATION Page
Item 1. Condensed Consolidated Financial Information 2
Condensed Consolidated Balance Sheets as of
September 30, 1997 and March 31, 1997 (Unaudited) 3
Condensed Consolidated Statements of Operations
for the Three and Six Months Ended September 30,
1997 and 1996 (Unaudited) 4
Condensed Consolidated Statements of Cash Flows
for the Six Months Ended September 30, 1997
and 1996 (Unaudited) 5
Notes to Condensed Consolidated Financial
Statements (Unaudited) 6-7
Item 2. Management's Discussion and Analysis or Plan of Operation 8-10
PART II. OTHER INFORMATION
Item 4. Submissions of Matters to a Vote of Security Holders 11
Item 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 13
<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 audited financial statements and the notes thereto
included in the registrant's Annual Report on Form 10-KSB for the year ended
March 31, 1997.
2
<PAGE>
MicroFrame, Inc. and Subsidiary
Condensed Consolidated Balance Sheets
(unaudited)
<TABLE>
<CAPTION>
September 30, March 31,
1997 1997
----------- -----------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 386,385 $ 539,214
Accounts receivable, less allowance for doubtful
accounts of $100,000 and $100,000 1,903,131 1,898,810
Inventory, net 1,086,630 1,030,343
Deferred tax asset 321,737 314,242
Prepaid expenses and other current assets 201,693 120,990
----------- -----------
Total current assets 3,899,576 3,903,599
Property and equipment at cost, net of Accumulated Depreciation
and Amortization of $839,013 and $738,635 315,514 343,123
Capitalized software, less accumulated amortization
of $910,223 and $812,257 307,509 315,568
Goodwill, less accumulated amortization of $20,355 and $16,230 81,255 85,380
Security deposits 36,740 34,703
----------- -----------
Total assets $ 4,640,594 $ 4,682,373
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Currnt Portion of Long-trem Debt $ 32,643 $ 42,266
Accounts payable 589,950 361,537
Accrued payroll and related liabilities 202,457 280,512
Deferred income 217,276 268,518
Other current liabilities 210,676 255,346
----------- -----------
Total current liabilities 1,253,002 1,208,179
----------- -----------
Deferred tax liabilities 172,852 173,077
Long-term debt 19,205 30,398
Committments and contingencies
Stockholders' equity
Common stock - par value $.001 per share; authorized 50,000,000 shares,
issued 4,839,703 shares and outstanding 4,839,303 shares at
September 30, 1997; issued 4,839,203 shares and
outstanding 4,838,803 shares at March 31, 1997 4,839 4,839
Preferred stock - par value $10 per share;
authorized 200,000 shares, none issued
Additional paid-in capital 6,213,452 6,212,828
Accumulated deficit (3,018,756) (2,942,948)
----------- -----------
3,199,535 3,274,719
Less - Treasury stock, 400 shares, at cost (4,000) (4,000)
----------- -----------
Total stockholders' equity 3,195,535 3,270,719
----------- -----------
Total liabilities and stockholders' equity $ 4,640,594 $ 4,682,373
=========== ===========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements
3
<PAGE>
MicroFrame, Inc. and Subsidiary
Condensed Consolidated Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
1997 1996 1997 1996
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Net sales $ 2,281,727 $ 1,661,176 $ 4,018,273 $ 3,437,511
Cost of sales 1,046,052 648,831 1,787,098 1,253,890
----------- ----------- ----------- ------------
Gross Margin 1,235,675 1,012,345 2,231,175 2,183,621
Research and development expenses 180,796 204,060 467,348 428,010
Selling, general and administrative expenses 966,731 779,724 1,853,922 1,683,019
----------- ----------- ----------- ------------
Income (loss) from operations 88,148 28,561 (90,095) 72,592
Interest income 3,559 10,833 9,204 21,101
Interest expense (1,213) (6,669) (2,637) (20,868)
----------- ----------- ----------- ------------
Income (loss) before income tax provision(benefit) 90,494 32,725 (83,528) 72,825
Income tax provision(benefit) 12,501 0 (7,720) 0
----------- ----------- ----------- ------------
Net income (loss) $ 77,993 $ 32,725 $ (75,808) $ 72,825
=========== =========== =========== ============
Per share data
Primary
Net income (loss) per share $ 0.02 $ 0.01 $ (0.01)$ 0.01
----------- ----------- ----------- ------------
Weighted average number of common shares outstanding 4,839,703 4,823,524 N/A 4,883,704
----------- ----------- ----------- ------------
</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>
Six Months Ended
September 30,
1997 1996
----------- -----------
<S> <C> <C>
Cash flows from operating activities
Net income (loss) $ (75,808) $ 72,825
Adjustments to reconcile net income (loss) to net cash
provided by operating activities
Depreciation and amortization 202,469 177,845
Provision for bad debts 0 31,646
Provision for inventory obsolescence 0 17,500
Deferred tax provision (7,720) 0
(Increase) decrease in
Accounts receivable (4,321) 272,310
Inventory (56,287) (157,249)
Prepaid expenses and other current assets (80,703) (45,215)
Security deposits (2,037) 90
Increase (decrease) in
Accounts payable 228,413 (140,433)
Accrued payroll and related liabilities (78,055) (50,027)
Deferred income (51,242) (11,526)
Other current liabilities (44,670) (105,080)
----------- -----------
Net cash provided by operating activities 30,039 62,686
----------- -----------
Cash flows from investing activities
Capital expenditures (72,769) (68,913)
Capitalized software (89,907) (125,831)
----------- -----------
Net cash used in investing activities (162,676) (194,744)
----------- -----------
Cash flows from financing activities
Repayments of debt (20,816) (519,081)
Issuance of common stock 624 1,331,933
----------- -----------
Net cash provided by (used in) financing activities (20,192) 812,852
----------- -----------
Net increase (decrease) in cash and cash equivalents (152,829) 680,794
Cash and cash equivalents - beginning of period 539,214 48,302
----------- -----------
Cash and cash equivalents - end of period $ 386,385 $ 729,096
=========== ===========
</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
SEPTEMBER 30, 1997
(Unaudited)
NOTE 1 - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
The condensed consolidated balance sheets as of September 30, 1997 and March 31,
1997, the condensed consolidated statements of operations for the three and six
month periods ended September 30, 1997 and 1996 and the condensed consolidated
statements of cash flows for the six 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 for the
fair presentation of the Company's financial position, results of operations and
cash flows at September 30, 1997 and 1996 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 audited financial statements and
notes thereto included in the annual report on Form 10-KSB for the year ended
March 31, 1997.
NOTE 2 - INVENTORY:
Inventory consists of the following:
September 30, 1997 March 31, 1997
----------- -----------
Raw materials $ 859,198 $ 825,583
Work in process 400,731 374,802
Finished goods 26,701 29,958
----------- -----------
1,286,630 1,230,343
Less, allowance for obsolescence (200,000) (200,000)
----------- -----------
Total $ 1,086,630 $ 1,030,343
=========== ===========
NOTE 3 - RELATED PARTY TRANSACTIONS:
In August 1997, the Company and one of its officers entered into an agreement
whereby a $20,000 advance received by the officer was converted into a demand
note payable bearing interest at the prime rate plus 1%. The note may be repaid
from time to time however the entire balance is due upon the earlier of; the
officer's cessation of employment or March 31, 1999. At September 30, 1997, this
amount is included in Prepaid expenses and other current assets.
6
<PAGE>
NOTE 4 - EARNINGS PER SHARE:
The computation of earnings per common and common equivalent shares 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. Net loss per share is
based on the number of common shares outstanding at the end of the period.
NOTE 5 - RECENT PRONOUNCEMENTS:
In fiscal 1998, the Company is required adopt the provisions of the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 128, "Earnings Per Share" ("SFAS 128"), which is effective for financial
statements for annual periods ending after December 15, 1997. SFAS 128
establishes standards for the computation, presentation and disclosure
requirements for earnings per share. The adoption of this standard is not
expected to have a material impact on the Company's earnings per share.
In fiscal 1998, the Company is require to adopt the provisions of the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 131, "Segment Reporting" ("SFAS 131"), which is effective for financial
statements for annual periods ending after December 15, 1997. SFAS 131
establishes standards for the disclosure requirements relative to operating
segments. The Company is currently evaluating the disclosure requirements of the
recently issued statement.
7
<PAGE>
Item 2. Management's Discussion and Analysis or Plan of Operation
---------------------------------------------------------
A number of statements contained in this report are forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995 that involve risks and uncertainties that could cause actual results to
differ materially from those expressed or implied in the applicable statements.
These risks and uncertainties include, but are not limited to, the recent
introduction of, and the costs associated with, a new product line; dependence
on the acceptance of this new family of products; risks related to technological
factors; potential manufacturing difficulties; dependence on third parties; a
limited customer base; and liability risks.
Results of Operations
- - ---------------------
Revenues for the quarter ended September 30, 1997 were $2,281,727 as
compared with revenues of $1,661,176 for the same quarter of the previous fiscal
year, or an increase of approximately 37%. The increase was primarily due to
increased international shipments of the Company's Sentinel 2000 product. The
Company continued to see interest in the other member of the family of SNS
products, the Manager 2000.
The Company's revenues were positively impacted as a result of
shipments to the European market, including shipments under its contract with
PTT Holland. Shipments to Europe were approximately $1,000,000 for the three
months ended September 30, 1997 compared to $165,000 for the quarter ended
September 30, 1996. The Company is aggressively pursuing customers in this
market place.
The Company's cost of goods sold increased from $648,831 for the
quarter ended September 30, 1996 to $1,046,052 for the quarter ended September
30, 1997 as a result of increased business. Cost of goods sold as a percentage
of sales increased from 39% for the previous comparable fiscal period to 45% for
this fiscal period, due to the fact that the company is still experiencing a
shift from its mature product lines to the newer Sentinel product line. The
Company continues to focus on lowering the costs related to the newer products
as they begin to mature and will eventually see the benefits from manufacturing
efficiencies.
Research and development expenses, net of capitalized software
development, remained relatively constant with a slight decrease from $204,060
in the quarter ended September 30, 1996 to $180,796 in the current fiscal
quarter. Research and development expenses as a percentage of revenues decreased
from 12% to 8%., primarily due to increased revenues in the current fiscal
period. Selling, general and administrative expenses increased approximately 23%
from $779,724 for the prior year's comparable fiscal period to $966,731 for the
fiscal period ended September 30, 1997. This increase represents lower general
and administrative costs offset by increases in the Company's selling expenses
including an increase in the number of direct sales people, as we embark on an
aggressive growth plan. The Company anticipates seeing increased revenues as a
result of these increased selling expenses in the third and fourth quarters of
this fiscal year.
The Company's income from operations increased 134% to $88,148 for
the three months ended September 30, 1997 compared to $28,561 for the same
period a year ago. Due to increased sales, the reduction in interest costs to
the Company and the provision for income tax of $12,501, the net income for the
period ended September 30, 1997 increased 138% to $77,993 compared to net income
of $32,725 for the quarter ended September 30, 1996. At March 31, 1997 the
Company had provided a partial valuation allowance against its existing deferred
tax assets. At September 30, 1997 the Company has reversed approximately $16,700
of valuation allowance relating to its net operating losses and it has recorded
a benefit for other operational temporary difference items. The expiration dates
for its net operating losses range from the years 2001 through 2011.
8
<PAGE>
First Six Months of Fiscal 1998 Versus First Six Months Fiscal 1997
- - -------------------------------------------------------------------
Revenues for the six months ended September 30, 1997 were $4,018,273
as compared with revenues of $3,437,511 for the comparable period of the
previous fiscal year, or an increase of approximately 16%. This improvement is
due to the success of the Company's new flagship product, the Sentinel 2000,
increased shipments into the European market, and the expanding domestic
customer base.
The Company's revenues for the six months ended September 30, 1997
were positively impacted as a result of shipments to the European market,
including shipments under its contract with PTT Holland. Shipments to Europe
were approximately $1,025,000 for the six months ended September 30, 1997
compared to $368,000 for the six months ended September 30, 1996. The Company is
aggressively pursuing customers in this market place.
The Company's cost of goods sold increased to $1,787,098 for the
quarter ended September 30, 1997 compared to $1,253,890 for the quarter ended
September 30, 1996 as a result of increased shipment levels. Cost of goods sold
as a percentage of sales increased from 36% for the previous comparable fiscal
period to 44% for this fiscal period, primarily due to the increased sales
volume of the Company's newer product line. The Company expects to see increased
benefits as the products mature and by continuing to improve purchasing and
materials management systems.
Research and development expenses, net of capitalized software
development, increased from $428,010 in the six months ended September 30, 1996
to $467,348 in the current fiscal period, an increase of 9%. Research and
development expenses as a percentage of revenues remained relatively constant at
approximately 12%. Selling, general and administrative expenses increased 10%
from $1,683,019 for the prior year's comparable fiscal period to $1,853,922 for
the six months ended September 30, 1996. This increase was primarily the result
of added sales personnel in the second quarter. However as a percentage of
revenues, selling, general and administrative expenses decreased from 48% for
the previous period to 46% for the current fiscal period.
The Company's had a loss before interest and taxes of $90,095 for the
six months ended September 30, 1997 compared to income of $72,825 during the six
months ended September 30, 1996, primarily due to increased Selling expenses and
reduced margins on its newer product lines. The Company expects that benefits
will arise as a result of the increase in the sales force as well as increased
volumes and manufacturing efficiencies gained thereby as the products continue
to mature. The net loss for the period was $75,808 compared to net income of
$72,825 for the same period in 1996. At September 30, 1997 the Company has
provided a full valuation allowance against any benefits arising out of the net
loss for the period, while it has recorded partial benefits for other
operational temporary difference items. The current expiration dates for its net
operating losses range from the years 2001 through 2011. The Company's available
unused loss carryforwards and its fully provided valuation allowance against its
existing deferred tax assets allows it to record no income tax provision
currently.
Financial Condition and Capital Resources
- - -----------------------------------------
During the first six months of fiscal year 1998, the Company recorded
a net loss of approximately $76,000. Included in this loss were non-cash charges
of approximately $202,000 for depreciation and amortization. As a result, during
the first six months of fiscal year 1998, the Company's financial condition
remained relatively stable.
The Company's operations provided approximately $17,500 of cash,
which included a use of cash of approximately $55,000 to satisfy its New York
State tax settlement. The Company also utilized approximately $150,000 of cash
for capital and software-related expenditures and utilized approximately $20,000
of cash to pay down its long-term debt.
On August 30, 1997, the Company's line of credit agreement with
United National Bank of Bridgewater, New Jersey expired. The Company is
currently negotiating with several institutions including United National to
provide the Company with
9
<PAGE>
a $1,000,000 line of credit, collateralized by accounts receivable of the
Company, to finance future working capital requirements. The Company expects to
close this line in November 1997.
Based on its current cash and working capital position, as well as
its available line of credit expected to be in place in November 1997, the
Company believes that it will have sufficient capital to meet its operational
needs over the next twelve months.
In fiscal 1998, the Company is required adopt the provisions of the
Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" ("SFAS 128"), which is effective for
financial statements for annual periods ending after December 15, 1997. SFAS 128
establishes standards for the computation, presentation and disclosure
requirements for earnings per share. The adoption of this standard is not
expected to have a material impact on the Company's earnings per share.
In fiscal 1998, the Company is require to adopt the provisions of the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 131, "Segment Reporting" ("SFAS 131"), which is effective for financial
statements for annual periods ending after December 15, 1997. SFAS 131
establishes standards for the disclosure requirements relative to operating
segments. The Company is currently evaluating the disclosure requirements of the
recently issued statement.
10
<PAGE>
PART II. Other Information
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders of the Company was held on
September 15, 1997. At such meeting the shareholders approved the
following matters:
PROPOSAL 1. Election of the following individuals as directors of the
Company for a term of one year, which constitutes the entire Board of
Directors of the Company:
Stephen M. Deixler, Stephen B. Gray, David I. Gould, Michael
Radomsky, William H. Whitney and Stephen P. Roma
PROPOSAL 2. Ratification of the Board of Directors' selection of
Coopers & Lybrand L.L.P. as the Company's independent accountants for
the fiscal year ending March 31, 1998
Set forth below are the votes for, withheld, against and abstaining
from each of the proposals listed above:
Proposal For Withheld Against Abstain
1. Stephen M. Deixler 2,750,351 12,700
Stephen B. Gray 2,758,551 4,500
David I. Gould 2,750,351 12,700
Michael Radomsky 2,750,351 12,700
William H. Whitney 2,758,551 4,500
Stephen P. Roma 2,758,351 4,700
Alexander Stark 2,758,351 4,700
2. Coopers & Lybrand 2,758,241 4,450 360
L.L.P.
ITEM 5. OTHER INFORMATION
On September 15, 1997, at the Board of Directors meeting following
the Annual Meeting of Shareholders, the Company's current officers
were re-elected for a one year term commencing as of such date. In
addition, Stephen P. Roma, David I. Gould and Stephen M. Deixler were
re-elected as members of the Company's Compensation/Stock Option
Committee, Audit Committee and Nominating Committee for a one-year
term commencing as of such date. Stephen M. Deixler, Alan Stark and
David I. Gould were re-elected to the Strategic Steering and Mergers
and Acquisitions committee for a one-year term commencing as of such
date.
11
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27. Financial Data Schedule
(b) Reports on Form 8-K:
No Reports on Form 8-K were filed.
12
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the Company has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: November 6, 1997
MICROFRAME, INC.
/s/ Stephen B. Gray
-----------------------------
Stephen B. Gray, President, Chief Executive
Officer and Chief Operating Officer
/s/ John F. McTigue
-----------------------------
John F. McTigue, Chief Financial
Officer and Treasurer (Principal Financial
Officer)
13
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000754813
<NAME> MICROFRAME, INC.
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 386,385
<SECURITIES> 0
<RECEIVABLES> 2,003,131
<ALLOWANCES> (100,000)
<INVENTORY> 1,086,630
<CURRENT-ASSETS> 3,899,576
<PP&E> 1,154,527
<DEPRECIATION> (839,013)
<TOTAL-ASSETS> 4,640,594
<CURRENT-LIABILITIES> (1,253,002)
<BONDS> 0
0
0
<COMMON> 4,839
<OTHER-SE> 3,018,756
<TOTAL-LIABILITY-AND-EQUITY> 4,640,594
<SALES> 4,018,273
<TOTAL-REVENUES> 24,018,273
<CGS> 11,787,098
<TOTAL-COSTS> 24,108,368
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (6,567)
<INCOME-PRETAX> (83,528)
<INCOME-TAX> (7,720)
<INCOME-CONTINUING> (75,808)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 75,808
<EPS-PRIMARY> (0.01)
<EPS-DILUTED> (0.01)
</TABLE>
