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 December 31, 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 February 6, 1998.
Transitional Small Business Disclosure Format:
Yes [_] No [X]
<PAGE>
MICROFRAME, INC. AND SUBSIDIARY
FORM 10-QSB
FOR THE QUARTER ENDED DECEMBER 31, 1997
PART I. FINANCIAL INFORMATION Page
- ------- --------------------- ----
Item 1. Condensed Consolidated Financial Information 2
Condensed Consolidated Balance Sheets as of December 31,
1997 and March 31, 1997 (Unaudited) 3
Condensed Consolidated Statements of Operations for the
Three and Nine Months Ended December 31, 1997
and 1996 (Unaudited) 4
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended December 31, 1997 and 1996 (Unaudited) 5
Notes to Condensed Consolidated Financial Statements (Unaudited) 6-7
Item 2. Management's Discussion and Analysis 8-10
PART II. OTHER INFORMATION
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 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>
- -------------------------------------------------------------------------------------------------------
December 31, March 31,
1997 1997
----------- -----------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 256,543 $ 539,214
Accounts receivable, less allowance for doubtful
accounts of $55,626 and $100,000 2,853,633 1,898,810
Inventory, net 1,267,372 1,030,343
Deferred tax asset 499,427 314,242
Prepaid expenses and other current assets 145,492 120,990
----------- -----------
Total current assets 5,022,467 3,903,599
Property and equipment at cost, net of Accumulated Depreciation
and Amortization of $902,222 and $738,635 305,753 343,123
Capitalized software, less accumulated amortization
of $955,233 and $812,257 352,509 315,568
Goodwill, less accumulated amortization of $24,293 and $16,230 77,317 85,380
Security deposits 37,139 34,703
----------- -----------
Total assets $ 5,795,185 $ 4,682,373
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Currnt Portion of Long-trem Debt $ 21,850 $ 42,266
Accounts payable 981,954 361,537
Accrued payroll and related liabilities 114,196 280,512
Deferred income 515,482 268,518
Other current liabilities 383,092 255,346
----------- -----------
Total current liabilities 2,016,574 1,208,179
----------- -----------
Deferred tax liabilities 205,852 173,077
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
December 31, 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 (2,660,737) (2,942,948)
----------- -----------
3,557,554 3,274,719
Less - Treasury stock, 400 shares, at cost (4,000) (4,000)
----------- -----------
Total stockholders' equity 3,553,554 3,270,719
----------- -----------
Total liabilities and stockholders' equity $ 5,795,185 $ 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 Nine Months Ended
December 31, December 31,
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Gross Sales 3,029,164 7,038,915
Less: Allowance for Doubtful Accounts 22,373 30,895
----------- ----------- ----------- -----------
Net sales $ 3,051,537 $ 1,826,698 $ 7,069,810 $ 5,264,210
Cost of sales 1,366,641 762,434 3,153,739 2,016,324
----------- ----------- ----------- -----------
Gross Margin 1,684,896 1,064,264 3,916,071 3,247,886
Research and development expenses 254,796 236,701 722,144 664,711
Selling, general and administrative expenses 1,213,739 781,852 3,075,161 2,464,871
----------- ----------- ----------- -----------
Income from operations 216,361 45,711 118,766 118,304
Interest income 5,448 6,520 14,652 27,620
Interest expense (980) (1,881) (3,617) (22,749)
----------- ----------- ----------- -----------
Income before income tax provision(benefit) 220,829 50,350 129,801 123,175
Income tax provision (benefit) (144,690) (152,410)
----------- ----------- ----------- -----------
Net income $ 365,519 $ 50,350 $ 282,211 $ 123,175
=========== =========== =========== ===========
Per share data
Basic $ 0.08 $ 0.01 $ 0.06 $ 0.03
=========== =========== =========== ===========
Diluted $ 0.07 $ 0.01 $ 0.06 $ 0.02
=========== =========== =========== ===========
Weighted average number of common shares outstandin 4,839,303 4,820,642 4,839,110 4,697,257
----------- ----------- ----------- -----------
Weighted average number of common shares outstandin 5,046,671 5,159,399 5,117,278 4,985,909
----------- ----------- ----------- -----------
</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>
Nine Months Ended
December 31,
1997 1996
----------- -----------
<S> <C> <C>
Cash flows from operating activities
Net income (loss) $ 282,211 $ 123,175
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 314,626 272,273
Provision for bad debts (44,374) 49,751
Provision for inventory obsolescence 0 35,000
Deferred tax provision (152,410)
(Increase) decrease in
Accounts receivable (910,449) (41,410)
Inventory (237,029) 50,733
Prepaid expenses and other current assets (24,502) (36,826)
Security deposits (2,436) 873
Increase (decrease) in
Accounts payable 620,417 (203,223)
Accrued payroll and related liabilities (166,316) (79,565)
Deferred income 246,964 (2,976)
Other current liabilities 127,746 (87,683)
----------- -----------
Net cash provided by operating activities 54,448 80,122
----------- -----------
Cash flows from investing activities
Capital expenditures (126,217) (104,560)
Capitalized software (179,917) (167,558)
----------- -----------
Net cash used in investing activities (306,134) (272,118)
----------- -----------
Cash flows from financing activities
Repayments of debt (31,609) (528,973)
Issuance of common stock 624 1,329,923
----------- -----------
Net cash provided by (used in) financing activities (30,985) 800,950
----------- -----------
Net increase (decrease) in cash and cash equivalents (282,671) 608,954
Cash and cash equivalents - beginning of period 539,214 48,302
----------- -----------
Cash and cash equivalents - end of period $ 256,543 $ 657,256
=========== ===========
</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
DECEMBER 31, 1997
(Unaudited)
Note 1 - Condensed Consolidated Financial Statements:
- -----------------------------------------------------
The condensed consolidated balance sheets as of December 31, 1997 and March 31,
1997, the condensed consolidated statements of operations for the three and nine
month periods ended December 31, 1997 and 1996 and the condensed consolidated
statements of cash flows for the nine 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 December 31, 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:
December 31, 1997 March 31, 1997
----------- -----------
Raw materials $ 733,207 $ 825,583
Work in process 734,165 374,802
Finished goods 29,958
----------- -----------
1,467,372 1,230,343
Less, allowance for obsolescence (200,000) (200,000)
----------- -----------
Total $ 1,267,372 $ 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 December 31, 1997, this
amount is included in Prepaid expenses and other current assets.
6
<PAGE>
MICROFRAME, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
DECEMBER 31, 1997
(Unaudited)
Note 4 - 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 computation 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:
<TABLE>
<CAPTION>
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
12/31/97 12/31/96 12/31/97 12/31/96
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Weighted Average # of Shares Outstanding 4,839,303 4,820,642 4,839,110 4,697,257
Incremental Shares for Common Equivalents 207,368 338,757 278,168 288,652
---------- ---------- ---------- ----------
Diluted Shares Outstanding 5,046,671 5,159,399 5,117,278 4,985,909
</TABLE>
Note 5 - Recent Pronouncements:
- -------------------------------
The Company is required 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 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 and the costs associated with, a new family of products; 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 December 31, 1997 were $3,051,537 as
compared with revenues of $1,826,698 for the same quarter of the previous fiscal
year, or an increase of approximately 67%. 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 by increased Domestic
sales and as a result of increased shipments to the European market, including
shipments under its contract with PTT Holland. Shipments to Europe were
approximately $800,000 for the three months ended December 31, 1997 compared to
$434,000 for the quarter ended December 31, 1996. The Company is aggressively
pursuing customers in this market place.
The Company's cost of goods sold increased from $762,434 for the
quarter ended December 31, 1996 to $1,366,641 for the quarter ended December 31,
1997 as a result of increased business. Cost of goods sold as a percentage of
sales increased from 41% for the previous comparable fiscal period to 44% 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 increase from $236,701
in the quarter ended December 31, 1996 to $254,796 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 55%
from $781,852 for the prior year's comparable fiscal period to $1,213,739 for
the fiscal period ended December 31, 1997, however, as a percentage of sales
decreased to approximately 39% compared to 42% in the previous quarter. 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 has begun
to see increased revenues as a result of these increased selling expenses.
The Company's income from operations increased 338% to $220,829 for
the three months ended December 31, 1997 compared to $50,350 for the same period
a year ago. Due to increased sales, the reduction in interest costs to the
Company and the benefit for income tax of $144,690, the net income for the
period ended December 31, 1997 increased 626% to $365,519 compared to net income
of $50,350 for the quarter ended December 31, 1996. At March 31, 1997 the
Company had provided a partial valuation allowance against its existing deferred
tax assets. At December 31, 1997 the Company has reversed approximately $204,000
of valuation allowance relating to its net operating losses and it has recorded
a provision for other operational temporary difference items. The expiration
dates for its net operating losses range from the years 2001 through 2011.
8
<PAGE>
First Nine Months of Fiscal 1998 Versus First Nine Months Fiscal 1997
- ---------------------------------------------------------------------
Revenues for the nine months ended December 31, 1997 were $7,069,810
as compared with revenues of $5,264,210 for the comparable period of the
previous fiscal year, or an increase of approximately 34%. 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 nine months ended December 31, 1997
were positively impacted by increased Domestic sales and as a result of
increased shipments to the European market, including shipments under its
contract with PTT Holland. Shipments to Europe were approximately $1,800,000 for
the nine months ended December 31, 1997 compared to $802,000 for the nine months
ended December 31, 1996. The Company is aggressively pursuing customers in this
market place.
The Company's cost of goods sold increased to $3,153,739 for the
quarter ended December 31, 1997 compared to $2,016,324 for the quarter ended
December 31, 1996 as a result of increased shipment levels. Cost of goods sold
as a percentage of sales increased from 38% 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 $664,711 in the nine months ended December 31, 1996
to $722,144 in the current fiscal period, an increase of 8%. Research and
development expenses as a percentage of revenues decrease slightly from
approximately 12% to 10%. Selling, general and administrative expenses increased
24% from $2,464,871 for the prior year's comparable fiscal period to $3,075,161
for the nine months ended December 31, 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 46% for
the previous period to 43% for the current fiscal period.
The Company's had income before taxes of $129,801 for the nine months
ended December 31, 1997 compared to income of $123,175 during the nine months
ended December 31, 1996, primarily due to increased sales. The Company expects
that benefits will continue to 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 income for the period was $282,211
compared to net income of $123,175 for the same period in 1996. At March 31,
1997 the Company had provided a partial valuation allowance against its existing
deferred tax assets. At December 31, 1997 the Company has reversed approximately
$220,000 of valuation allowance relating to its net operating losses and it has
recorded a provision for other operational temporary difference items. The
expiration dates for its net operating losses range from the years 2001 through
2011.
Financial Condition and Capital Resources
- -----------------------------------------
During the first nine months of fiscal year 1998, the Company
recorded net income of approximately $282,000. Included in this income were
non-cash charges of approximately $314,000 for depreciation and amortization. As
a result, during the first nine months of fiscal year 1998, the Company's
financial condition remained relatively stable.
The Company's operations provided approximately $54,500 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 $300,000 of cash
for capital and software-related expenditures and utilized approximately $30,000
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
9
<PAGE>
expired. 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.
As of February 6, 1998, the Company has not utilized 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 fiscal 1998, the Company is required 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 evaluating the disclosure requirements of the
recently issued statement.
10
<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:
-------------------
No Reports on Form 8-K were filed.
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.
Dated: February 12, 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)
12
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000754813
<NAME> MICROFRAME, INC.
<S> <C>
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> DEC-31-1997
<PERIOD-TYPE> 9-MOS
<CASH> 256,543
<SECURITIES> 0
<RECEIVABLES> 2,909,259
<ALLOWANCES> 55,626
<INVENTORY> 1,267,372
<CURRENT-ASSETS> 4,844,777
<PP&E> 1,207,975
<DEPRECIATION> (902,222)
<TOTAL-ASSETS> 5,795,185
<CURRENT-LIABILITIES> (2,016,574)
<BONDS> 0
<COMMON> 4,839
0
0
<OTHER-SE> 2,805,427
<TOTAL-LIABILITY-AND-EQUITY> 5,795,185
<SALES> 7,069,810
<TOTAL-REVENUES> 7,069,810
<CGS> 3,153,739
<TOTAL-COSTS> 6,936,392
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (3,617)
<INCOME-PRETAX> 129,801
<INCOME-TAX> (7,720)
<INCOME-CONTINUING> 137,521
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 282,211
<EPS-PRIMARY> 0.06
<EPS-DILUTED> 0.06
</TABLE>
