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 June 30, 1998
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
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(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 5,403,480 shares of Common Stock outstanding as of August 4, 1998.
Transitional Small Business Disclosure Format:
Yes No X
--- ---
<PAGE>
MICROFRAME, INC. AND SUBSIDIARY
FORM 10-QSB
FOR THE QUARTER ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page
----
<S> <C> <C>
Item 1. Condensed Consolidated Financial Information 2
Condensed Consolidated Balance Sheets as of June 30, 1998
and March 31, 1998 (Unaudited) 3
Condensed Consolidated Statements of Operations for the three
months ended June 30, 1998 and June 30, 1997 (Unaudited) 4
Condensed Consolidated Statements of Cash Flows for the three
months ended June 30, 1998 and June 30, 1997 (Unaudited) 5
Notes to Condensed Consolidated Financial Statements (Unaudited) 6-7
Item 2. Management's Discussion and Analysis 8-9
PART II. OTHER INFORMATION
Item 6. Exhibits and reports on Form 8-K 10
SIGNATURES 11
</TABLE>
<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, 1998.
2
<PAGE>
MicroFrame, Inc. and Subsidiary
Condensed Consolidated Balance Sheets
(unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
June 30, March 31,
1998 1998
ASSETS
<S> <C> <C>
Current assets
Cash and cash equivalents $ 447,186 $ 507,726
Accounts receivable, less allowance for doubtful
accounts of $126,000 and $126,000, respectively 3,578,280 2,667,319
Inventory, net 1,887,644 1,425,351
Deferred tax asset 371,822 366,137
Prepaid expenses and other current assets 186,172 153,568
---------------- ----------------
Total current assets 6,471,104 5,120,101
Property and equipment, less accumulated depreciation
of $568,687 and $971,903 458,685 421,701
Capitalized software, less accumulated amortization
of $1,106,354 and $1,054,827 433,682 396,351
Deferred tax assets, net 2,745 129,689
Goodwill, less accumulated amortization of $28,605 and $26,130 73,005 75,480
Security deposits 39,348 35,716
Other assets 293,135
---------------- ----------------
Total assets $ 7,771,704 $ 6,179,038
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Bank borrowings $ 600,000 $ 300,000
Current portion of long-term debt 18,817 30,009
Accounts payable 1,066,763 910,842
Accrued payroll and related liabilities 225,541 348,397
Deferred income 268,751 181,573
Other current liabilities 452,673 405,263
----------------
----------------
Total current liabilities 2,632,545 2,176,084
---------------- ----------------
Other liabilities 69,529 0
Committments and contingencies
Stockholders' equity
Common stock - par value $.001 per share; authorized 50,000,000 shares,
issued 5,403,480 shares and outstanding 5,403,080 shares at
June 30, 1998; issued 4,849,531 shares and outstanding 4,849,131
and subscribed 50,000 shares at March 31, 1998 5,403 4,899
Preferred stock- par value $10 per share;
authorized 200,000 shares, none issued
Additional paid-in capital 7,143,363 6,345,613
Stock subscription receivable 0 (104,000)
Accumulated deficit (2,070,494) (2,231,638)
Cumulative translation adjustment (4,642) (7,920)
---------------- ----------------
5,073,630 4,006,954
Less - Treasury stock, 400 shares, at cost (4,000) (4,000)
---------------- ----------------
Total stockholders' equity 5,069,630 4,002,954
---------------- ----------------
Total liabilities and stockholders' equity $ 7,771,704 $ 6,179,038
================ ================
</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
June 30,
--------
1998 1997
<S> <C> <C>
Net sales $ 2,963,973 $ 1,736,546
Cost of sales 1,008,005 741,046
--------------- -------------
Gross margin 1,955,968 995,500
Research and development expenses 412,967 286,552
Selling, general and administrative expenses 1,219,648 887,191
--------------- -------------
Income (loss) from operations 323,353 (178,243)
Interest income 2,336 5,645
Interest expense (8,969) (1,424)
--------------- -------------
Income (loss) before income tax provision(benefit) 316,720 (174,022)
Income tax provision(benefit) 155,576 (20,221)
--------------- --------------
Net income (loss) $ 161,144 $ (153,801)
=============== ==============
Per share data
Net income (loss) per share
Basic $ 0.03 $ (0.03)
--------------- --------------
Diluted $ 0.02 $ (0.03)
--------------- --------------
Weighted average number of common shares
outstanding basic 5,134,272 4,883,704
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Weighted average number of common shares
outstanding diluted 7,042,534 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>
Three Months Ended
June 30,
--------
1998 1997
<S> <C> <C>
Cash flows from operating activities
Net income (loss) $ 161,144 $ (153,801)
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 123,115 94,738
Provision for bad debts 9,374
Provision for inventory obsolescence 15,000
Deferred tax provision 121,259 (20,221)
(Increase) decrease in
Accounts receivable (910,961) 236,675
Inventory (462,293) (23,649)
Prepaid expenses and other current assets (32,604) 2,939
Security deposits (3,632) 9,519
Increase (decrease) in
Accounts payable 155,921 30,246
Accrued payroll and related liabilities (122,856) (110,989)
Deferred income 87,178 (22,538)
Other current liabilities 47,410 52,605
Other liabilities 69,529
--------------------- ---------------------
Net cash (used in) provided by operating activities (766,790) 119,898
--------------------- ---------------------
Cash flows from investing activities
Capital expenditures (102,819) (40,039)
Capitalized software (88,858) (20,000)
Other assets (293,135) 0
-------------------- ---------------------
Net cash used in investing activities (484,812) (60,039)
--------------------- ---------------------
Cash flows from financing activities
Proceeds of short-term borrowings 300,000
Repayments of debt (11,192) (10,258)
Issuance of common stock 902,254
--------------------- ---------------------
Net cash provided by (used in) financing activities 1,191,062 (10,258)
--------------------- ---------------------
Net (decrease) increase in cash and cash equivalents (60,540) 49,601
Cash and cash equivalents - beginning of period 507,726 539,214
-------------------- ---------------------
Cash and cash equivalents - end of period $ 447,186 $ 588,815
===================== =====================
</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, 1998
(Unaudited)
Note 1 - Condensed Consolidated Financial Statements:
- ----------------------------------------------------
The condensed consolidated balance sheets as of June 30, 1998 and March 31,
1998, the condensed consolidated statements of operations for the three month
periods ended June 30, 1998 and 1997 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 for the fair presentation
of the Company's financial position, results of operations and cash flows at
June 30, 1998 and 1997 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, 1998.
<TABLE>
<CAPTION>
Note 2 - Inventory:
- ------------------
Inventory consists of the following:
June 30, 1998 March 31, 1998
------------- --------------
<S> <C> <C>
Raw materials $ 814,193 $ 1,003,132
Work in process 1,115,323 525,918
Finished goods 143,128 81,301
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2,072,644 1,610,351
Less, allowance for obsolescence (185,000) (185,000)
--------- ---------
Total $1,887,644 $1,425,351
========== ==========
</TABLE>
Note 3 - Earnings Per Share:
- ---------------------------
The Company has adopted the provisions of the Financial Accounting Standards
Board's Statement of Financial Accounting Standards No. 128, "Earnings Per
Share" ("SFAS 128") in the quarter ended December 31, 1997. All prior periods
presented have been restated to account for this change.
The computaion of Basic Earnings Per Share is based on the weighted average
number of common shares outstanding for the period. Diluted Earnings Per Share
is based on the weighted average number of common shares outstanding for the
period plus the dilutive effect of common stock equivalents, comprised of
outstanding stock options and warrants.
The following is a reconciliation of the denominator used in the calculation of
basic and diluted earnings per share:
6
<PAGE>
Three Months Three Months
Ended Ended
6/30/98 6/30/97
------------ -----------
Weighted Average # of Shares Outstanding 5,134,272 4,833,704
Incremental Shares for Common Equivalents 1,908,262
--------- ---------
Diluted Shares Outstanding 7,042,534 4,833,704
Note 4 - Recent Pronouncements:
- ------------------------------
In June 1997, the Financial Accounting Standards Board issued SFAS 131,
"Disclosure about Segments of an Enterprise and Related Information" which
becomes effective for financial statements for periods beginning after December
31, 1997. This Statement establishes standards for the way that public business
enterprises report information about operaing segments in annual financial
reports and requires that those enterprises report selected information about
operating segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. The adoption of this standard is not
expected to have a material impact on the Company's financial statements.
7
<PAGE>
Item 2. Management's Discussion and Analysis
------------------------------------
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 June 30, 1998 were $2,963,973 as
compared with revenues of $1,736,546 for the same quarter of the previous fiscal
year, or an increase of approximately 71 %. The increase in revenues was
primarily the result of increased business activity and as a result of the
continued acceptance of its Sentinel product line as well interest in the other
member of the family of SNS products, the Manager 2000.
The Company's cost of goods sold increased from $741,046 for the
quarter ended June 30, 1997 to $1,008,005 for the quarter ended June 30, 1998 as
a result of increased business activity. Cost of goods sold as a percentage of
sales decreased from 42.7% for the previous comparable fiscal period to 34.0%
for this fiscal period, due to the increased volumes, manufacturing efficiencies
and higher margin software and services sales in the quarter.
Research and development expenses, net of capitalized software
development, increased from $286,552 in the quarter ended June 30, 1997 to
$412,967 in the current fiscal quarter, an increase of 44%. This is a direct
reflection of the Company's continued increased activity related to the
development of the Secure Network Systems/2000 set of products. Research and
development expenses as a percentage of revenues decreased from 17% to 14%.
Selling, general and administrative expenses increased approximately 37% from
$887,191 for the prior year's comparable fiscal period to $1,219,648 for the
fiscal period ended June 30, 1998. This increase results primarily from the
Company's aggressive growth plan in the sales and marketing area.
The Company had income from operations of $323,383 for the period ended
June 30, 1998, compared to a loss from operations of $178,243 for the same
period a year ago. Due to the reduction in interest costs to the Company and the
effects of the income tax benefit of $20,221, the net loss for the period ended
June 30, 1997 was $153,801 compared to net income of $161,144 for the quarter
ended June 30, 1998.
8
<PAGE>
Financial Condition and Capital Resources
- -----------------------------------------
During the first quarter of fiscal year 1999, the Company recorded net
income of approximately $161,000. Included in this net income were non-cash
charges of approximately $123,000 for depreciation and amortization and $121,000
of deferred taxes. As a result and in conjunction with the following items
discussed below, during the first three months of fiscal year 1999, the
Company's cash position remained relatively stable.
The Company's operations used $767,000 of cash, primarily as a result
of an increase in accounts receivable of $910,961 for sales that occurred later
in the quarter and an increase in inventory buildup of $462,293 as the Company
prepares to ship its backlog going into the second quarter These increases were
offset by the payment of accrued payroll and related liabilities. The Company
utilized approximately $200,000 of cash for capital and software-related
expenditures and an additional $293,000 for one-time merger related costs that
have been capitalized. Proceeds from stock option and warrant exercises were
approximately $900,000 and proceeds from borrowings under the company's line of
credit were $300,000. The Company utilized approximately $10,000 of cash to pay
down its long-term debt in the first quarter.
In November 1997, the Company successfully negotiated with United
National to provide the Company with a $1,000,000 line of credit, collateralized
by accounts receivable of the Company, to finance future working capital
requirements that was due to expire on July 31, 1998. In July 1998 the bank
extended this line of credit for a period of 60 days, in anticipation of
renewal, negotiations of which are progressing. As of August 3, 1998, the
Company has utilized $600,000 under this line.
Based on its current cash and working capital position, as well as
its available line of credit, the Company believes that it will have sufficient
capital to meet its operational needs over the next twelve months.
In June 1997, the Financial Accounting Standards Board issued SFAS 131,
"Disclosure about Segments of an Enterprise and Related Information" which
becomes effective for financial statements for periods beginning after December
31, 1997. This Statement establishes standards for the way that public business
enterprises report information about operaing segments in annual financial
reports and requires that those enterprises report selected information about
operating segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. The adoption of this standard is not
expected to have a material impact on the Company's financial statements.
9
<PAGE>
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits:
--------
27. Financial Data Schedule
(b) Reports on Form 8-K:
-------------------
On May 19, 1998, the Company filed a Current Report
on Form 8-K, disclosing a press release in connection
with the execution of a letter of intent relating to
the Company's proposed acquisition of SolCom Systems
Limited.
10
<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 7, 1998
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)
-11-
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
- ---------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 447,186
<SECURITIES> 0
<RECEIVABLES> 3,578,280
<ALLOWANCES> (126,000)
<INVENTORY> 1,887,644
<CURRENT-ASSETS> 6,471,104
<PP&E> 1,027,372
<DEPRECIATION> (568,687)
<TOTAL-ASSETS> 7,771,704
<CURRENT-LIABILITIES> (2,632,545)
<BONDS> 0
5,403
0
<COMMON> 0
<OTHER-SE> 5,064,227
<TOTAL-LIABILITY-AND-EQUITY> 7,771,704
<SALES> 2,963,973
<TOTAL-REVENUES> 2,963,973
<CGS> 1,008,005
<TOTAL-COSTS> 1,632,615
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (8,969)
<INCOME-PRETAX> 316,720
<INCOME-TAX> 155,576
<INCOME-CONTINUING> 161,144
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 161,144
<EPS-PRIMARY> .03
<EPS-DILUTED> .02
</TABLE>
