As filed with the Securities and Exchange Commission on August 19, 1996
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------------
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996
Commission File No. 0-21852
----------------------------------
FRANKLIN OPHTHALMIC INSTRUMENTS CO., INC.
(Exact name of small business issuer as specified in its charter)
Delaware 94-3123210
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
1265 Naperville Drive, Romeoville, Illinois 60446 (630) 759-7666
(Address and telephone number of registrant's principal executive offices)
----------------------------------
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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 |_|
As of August 12, 1996 the Registrant had outstanding 8,210,026 shares of common
stock.
<PAGE>
FRANKLIN OPHTHALMIC INSTRUMENTS CO., INC..
FORM 10-QSB
FOR THE QUARTER ENDED JUNE 30, 1996
INDEX
PART I..................................................................... 1
Item 1. Financial Statements......................................... 1
Condensed Consolidated Balance Sheet......................... 1
Condensed Consolidated Statement of Operations............... 3
Condensed Consolidated Statements of Cash Flows.............. 4
Notes to Condensed Consolidated Financial Statements......... 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 10
PART II................................................................... 14
Item 1. Legal Proceedings........................................... 14
Item 2. Changes in Securities....................................... 14
Item 3. Defaults Upon Senior Securities............................. 14
Item 4. Submission of Matters to a Vote of Security Holders......... 14
Item 5. Other Information and Subsequent Events..................... 15
Item 6. Exhibits and Reports on Form 8-K............................ 15
Signatures................................................................ 16
<PAGE>
FRANKLIN OPHTHALMIC INSTRUMENTS CO., INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
<TABLE>
<CAPTION>
June 30, September 30,
1996 1995
------------------- -------------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ - $ -
Accounts receivable, less allowance for doubtful
accounts of $203,751 and $349,136, respectively
465,274 995,665
Inventory, less valuation allowance of $150,000 1,609,498 2,545,940
Prepaid expenses and other assets 110,016 28,296
------------------- -------------------
Total current assets 2,184,788 3,569,901
------------------- -------------------
Property and equipment, at cost:
Furniture and equipment
601,034 599,307
Automobiles and trucks
119,193 119,193
Leasehold improvements
109,560 109,408
------------------- -------------------
829,787 827,908
Less: Accumulated depreciation and amortization
592,279 515,042
------------------- -------------------
Total property and equipment
237,508 312,866
------------------- -------------------
Other assets:
Deposits
28,298 28,298
Intangible assets, net of accumulated amortization of
$625,473 and $382,019 2,353,421 2,596,875
------------------- -------------------
Total other assets 2,381,719 2,625,173
------------------- -------------------
Total assets $ 4,804,015 $ 6,507,940
=================== ===================
</TABLE>
The accompanying notes are an
integral part of these statements.
1
<PAGE>
FRANKLIN OPHTHALMIC INSTRUMENTS CO., INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Continued)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
June 30, September 30,
1996 1995
-------------------- -------------------
<S> <C> <C>
Current liabilities:
Bank overdrafts $ 100,913 $ 251,078
Current portion of long-term debt 296,358 324,660
Accounts payable 1,707,600 2,070,526
Notes payable to bank 4,375,304 4,396,126
Current portion of capitalized lease obligations 18,111 14,687
Deposits 8,274 24,243
Accrued liabilities 764,030 666,346
Notes payable to related parties 180,000 207,679
------- -------
Total current liabilities 7,450,590 7,955,345
---------------- ----------------
Long-term debt:
Long-term debt, less current portion 365,187 378,128
Capitalized lease obligations, less current portion 34,943 53,186
---------------- ---------------
Total long-term debt 400,130 431,314
---------------- ---------------
Total liabilities 7,850,720 8,386,659
---------------- ---------------
Stockholders' equity (deficit):
Common stock: $0.001 par value; authorized
25,000,000 shares; 7,672,525 and 7,656,025
shares issued and outstanding at
June 30, 1996 and September 30, 1995 7,673 7,656
Additional paid-in capital 8,252,378 8,240,020
Accumulated deficit (11,306,756) (10,126,395)
---------------- --------------
Total stockholders' equity (deficit) (3,046,705) (1,878,719)
---------------- --------------
Total liabilities and stockholders' equity (deficit) $ 4,804,015 $ 6,507,940
================= ================
</TABLE>
The accompanying notes are an
integral part of these statements.
2
<PAGE>
FRANKLIN OPHTHALMIC INSTRUMENTS CO., INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
June 30, June 30,
----------------------------------- ----------------------------------
1995 1996 1995 1996
---- ---- ---- ----
(as restated-
See Note 2)
<S> <C> <C> <C> <C>
Sales $ 2,650,486 $ 1,854,685 $ 10,803,486 $ 6,427,413
Less:
Cost of Sales $ 2,076,159 1,404,056 8,711,233 4,920,995
Selling, general and
administrative expenses 992,884 655,002 3,630,626 2,186,319
Inventory loss -- -- 770,033 --
Restructuring charge expense -- -- 230,525 --
---------- ----------- ----------- ----------
Income (loss) from operations (418,557) (204,373) (2,538,931) (679,901)
---------- ----------- ----------- ----------
Other income (expenses):
Interest income -- 7 7,471 52
Interest expense (205,876) (175,360) (485,889) (500,512)
Other income (expense) (5,343) -- 14,907 --
---------- ----------- ----------- ---------
Other income (expense), net (211,219) (175,353) (463,511) (500,460)
---------- ----------- ----------- ---------
Net income (loss) $ (629,776) $ (379,726) $ (3,002,442) $(1,180,361)
========== =========== =========== ===========
Loss per common share:
Net Loss (0.09) (0.05) (0.62) (0.15)
========== ========== =========== ===========
Weighted average number of
common shares outstanding 6,717,975 7,672,525 4,845,348 7,671,150
=========== ========== =========== ===========
</TABLE>
The accompanying notes are an
integral part of these statements.
3
<PAGE>
FRANKLIN OPHTHALMIC INSTRUMENTS CO., INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the nine months ended
June 30,
--------------------------------------
1995 1996
---- ----
(as restated-
See Note 2)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (3,002,442) $ (1,180,361)
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Depreciation
87,653 77,237
Amortization
135,564 243,454
Other
5,160
Changes in current assets and liabilities:
Accounts receivable 1,494,350
530,391
Inventory 1,457,121
936,442
Prepaid expenses
(58,031) (81,720)
Other assets
138 -
Accounts payable, trade and accrued liabilities
(470,242) (281,210)
------------------- -----------------
Net cash used in operating activities
(350,729) 244,232
------------------- -----------------
Cash flows from investing activities:
Proceeds from sale of equipment (as received) 21,250 -
Acquisition of equipment
(66,513) (1,879)
------------------- -----------------
Net cash used in investing activities
(45,263) (1,879)
------------------- -----------------
Cash flows from financing activities:
Increase (decrease) in bank overdrafts
(396,683) (150,165)
Increase (decrease) in borrowings under line of credit
149,696 (20,822)
Net proceeds from issuance of common stock
220,450 12,375
Increase in long-term debt
- -
Decrease in long-term debt
(35,048) (41,243)
Increase (decrease) in capital leases
(1,523) (14,818)
Repayment of debt - related party
(18,783) (27,679)
Proceeds from issuance of promissory notes-related party
200,000 -
------------------- -----------------
Net cash provided by financing activities
118,109 (242,352)
------------------- -----------------
Net decrease in cash
(277,883) -
Cash and cash equivalents at beginning of period
277,883 -
------------------- -----------------
Cash and cash equivalents at end of period
$ - $ -
------------------- -----------------
</TABLE>
The accompanying notes are an
integral part of these statements.
4
<PAGE>
FRANKLIN OPHTHALMIC INSTRUMENTS CO., INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) Basis of Presentation
The condensed consolidated financial statements include the accounts of
Franklin Ophthalmic Instruments Co., Inc. (the "Company") and its previously
wholly-owned subsidiary Midwest Ophthalmic Instruments, Inc. ("MOI") which was
merged into the Company during the second quarter of fiscal 1995. The condensed
consolidated financial statements have been prepared by the Company, without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission. In the opinion of management, the condensed consolidated financial
statements include, except as discussed in Note 2, all adjustments necessary to
present fairly the financial position, results of operations and cash flows for
the periods presented. Such adjustments consist of normal recurring accruals and
the adjustments described in Note 2. 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, although the Company believes that the
disclosures are adequate to make the information presented not misleading. The
condensed consolidated financial statements and these notes should be read in
conjunction with the consolidated financial statements of the Company included
in the Company's Annual Report on Form 10-KSB for the year ended September 30,
1995.
The results of operations for interim periods are not necessarily
indicative of the results to be expected for a full year.
(B) Significant Matters Affecting Comparability
During the year ended September 30, 1995, the Company underwent
significant structural, management and operational changes, and as a result
thereof, the operating results for the three and nine months ended June 30, 1995
lack, in several respects, comparability to the results of operations for the
three and nine months ended June 30, 1996.
Until the second quarter of fiscal 1995, the Company operated
facilities in Hayward, California and Lawrenceville, Georgia (which represented
the Company's original operations), Jacksonville, Florida (which was acquired in
January 1994 in the Company's acquisitions of certain assets of Progressive
Ophthalmic Instruments, Inc. ("POI") ) and Romeoville, Illinois (which was added
with the Company's July 1994 acquisition of MOI). During the second quarter of
fiscal 1995, the Company underwent a change in management, as further described
below, and new management decided to close all but the Romeoville, Illinois
facility.
Pursuant to an agreement, dated April 1, 1995, between the Company,
Robert A. Davis (the Company's former Chief Executive Officer, Chief Financial
Officer, and President), certain partnerships in which Mr. Davis has an
interest, Michael J. Carroll, James J. Urban and Brian M. Carroll (the
"Separation Agreement:), Mr. Davis and Mr. Dallas Talley, resigned their
positions with the Company and Messrs. Michael Carroll and James Urban were
elected to fill the vacancies on the Company's board of directors. The
Separation Agreement also provided that: (I) Mr. Davis would contribute 800,000
shares of the Common Stock back to the Company; and (ii) Mr. Davis would forgive
$200,000 owed to him by the Company. Under the Separation Agreement, the Company
agreed to indemnify Mr. Davis for and against any claims, other than for fraud
and certain types of negligence, which might be made in connection with Mr.
Davis's service as an officer or director of the Company.
5
<PAGE>
FRANKLIN OPHTHALMIC INSTRUMENTS CO., INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
(B) Significant Matters Affecting Comparability (Continued)
Subsequently, the new management of the Company decided to attempt to
restructure the Company's operations around the MOI operations acquired in July
1994. As a result, the California, Florida and Georgia facilities were closed.
A result of these substantial changes in the Company's operations is
that operating results for the nine months ended June 30, 1995 and 1996 lack
comparability. The results for the nine months ended June 30, 1995, through
March 31, 1995, primarily reflect MOI and the Company operating separately and
prior to the restructuring efforts initiated by current management during the
second quarter of fiscal 1995. Conversely, the operating results for the nine
months ended June 30, 1996 are predominated by the results of MOI's operations,
which formed the core of the Company's activities after the changes discussed
above.
(C) Intangible Assets
Intangible assets include employment contracts and goodwill, which
represents the excess of cost over fair market value of net assets acquired in
the purchase of MOI and in the acquisition of individual distributorships.
It is the Company's policy to periodically evaluate the carrying value
of its operating assets, including goodwill, and to recognize impairments when
the estimated discounted future net operating cash flows to be generated from
the use of the assets is less than their carrying value. The Company measures
impairment of goodwill by the difference between the carrying value and the
estimated discounted cash flows from the assets.
Effective July 1, 1995, the Company reduced the estimated useful life
for goodwill related to the acquisition of MOI (see Note 4) from 30 years to 15
years. This change was made to reflect management's revised estimate of the
useful life of the MOI goodwill, which was revised to reflect the significance
of certain key personnel at MOI and the rate at which the ophthalmic industry
could change.
Amortization expense charged to operations was $135,564 for the nine
months ended June 30, 1995 and $243,454 for the nine months ended June 30, 1996.
2. CORRECTION OF ERRORS
In January 1995, a special committee of the Company's board of
directors initiated an investigation into the circumstances surrounding the
timing and causes of certain inventory allowances, sales and bad debt
provisions, and goodwill provisions recorded in the fourth quarter of fiscal
1994 and the first quarter of fiscal 1995. As a result of that investigation,
the Company determined that in both fiscal 1993 and fiscal 1994, the Company:
(i) recorded sales for products not actually ordered by or shipped to customers;
(ii) recorded sales in advance of the actual shipment of the products; (iii)
failed to provide adequate allowances for slow moving or obsolete inventories;
and (iv) failed to provide adequate allowances for doubtful accounts receivable.
As a result of the above, the Company's consolidated financial statements for
the fiscal years ended 1993 and 1994, the quarter ended December 31, 1994, the
six months ended March 31, 1995, and the nine months ended June 30, 1995 were
restated to correct the aforementioned errors.
6
<PAGE>
FRANKLIN OPHTHALMIC INSTRUMENTS CO., INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
2. CORRECTION OF ERRORS (Continued)
The investigation commenced in January 1995 also attempted to determine
the specific causes, and the timing thereof, of the $2.5 million and $1.1
million inventory loss provisions recorded and reflected in the financial
statements for fiscal 1994 and the first quarter of fiscal 1995. It was
determined that the 1994 inventory write-downs and the majority of the 1995
inventory write-downs were most likely the result of the loss of inventories
caused by poor controls over inventories issued to sales representatives and the
transfer of the Company's inventories previously located in California to
Florida in connection with the transfer of its operations to that location after
the acquisition of POI. Of the $1.1 million write-down in fiscal 1995, $323,967
was determined to represent the costs of sales associated with the sales
previously recorded in fiscal 1994, and now recorded in fiscal 1995, and
accordingly that amount is now included in cost of sales. However, because of
the previously poor controls and recordkeeping, the Company was not able to
determine in the investigation the causes and timing with specificity, other
than to conclude that the $2.5 million and the remaining $770,033 losses were
properly treated as fiscal 1994 and fiscal 1995 charges, respectively.
The adjustments described above and recorded in the first quarter of
fiscal 1995 changed the amounts previously reported by the Company for the nine
months ended June 30, 1995 as follows:
(i) Charges against sales of $228,681, previously recorded against
sales in the first quarter of fiscal 1995 as the result of sales improperly
recorded in fiscal 1994, were eliminated as the result of the correction of
fiscal 1994 to remove those sales from that period.
(ii) Sales of $185,194, which had previously been recorded in the
fourth quarter of fiscal 1994, were eliminated from that period, and recorded in
the first quarter of fiscal 1995, because it was determined that the products
were not shipped until after September 30, 1994.
(iii) An additional allowance for doubtful accounts of $26,000 was
recorded in the quarter ended December 31, 1994, representing the net effect of
(a) allowances originally recorded in that period, but eliminated as the result
of the restatement of fiscal 1994; and (b) additional allowances recorded in the
first quarter of fiscal 1995 because it was determined that the net realizable
value of accounts receivable had not been properly assessed.
The adjustments described above changed the amounts previously reported
by the Company for net loss and net loss per share for the nine months ended
June 30, 1995 as follows:
Net loss
As previously reported $3,390,317
As restated $3,002,442
Net loss per share
As previously reported $ (.69)
As restated $ (.62)
7
<PAGE>
FRANKLIN OPHTHALMIC INSTRUMENTS CO., INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
3. GOING CONCERN
The accompanying consolidated financial statements have been prepared
on the assumption that the Company will continue as a going concern and
therefore assume the realization of the Company's assets and the satisfaction of
its liabilities in the normal course of operations.
The Company is in default under the terms of its revolving credit
facility with Silicon Valley Bank ("Silicon"), which is the Company's principal
credit facility. Additionally, in part because of that default and the resulting
inability to obtain additional working capital, the Company has been unable to
make timely reductions in the amount owed to its product suppliers and, as a
consequence, is currently unable to obtain otherwise customary trade credit
terms and must purchase products on limited credit terms or with payment on
delivery.
The Company's ability to continue as a going concern is ultimately
dependent on its ability to increase sales to a level that will allow it to
operate profitably and generate positive operating cash flows. Although the
reduction of expenses, which was begun in the last half of fiscal 1995 and is
continuing in fiscal 1996, can contribute to the necessary return to
profitability, achieving profitability without an increase in sales would
require much greater levels of expense reduction and in all likelihood could
only be accomplished through significant reduction and restructuring of the
nature and scope of the Company's operations.
The Company's sales have been adversely affected by its lack of working
capital and liquidity, which has limited its marketing efforts and in certain
instances has prevented it from obtaining products to fill customer orders.
Accordingly, to increase sales the Company must first resolve its working
capital shortage.
The Company is currently in the process of negotiating the terms of a
restructuring of its outstanding debt. In connection therewith, on July 29,
1996, the Company received a proposal from Silicon pursuant which Silicon has
set forth the terms upon which Silicon would convert approximately $3 million
owing to Silicon into shares of the Company's Common Stock at a conversion rate
of $1.52 per share, and transfer the remaining $1.8 million owing to Silicon
into a new credit facility with Silicon. Silicon's proposal is conditioned on,
among other things: (i) the Company's simultaneous receipt of at least $1
million of proceeds from the private placement of its securities; (ii) the
Company's conversion of certain amounts owed to trade suppliers into equity
securities or long-term notes, and (iii) the personal guarantees of Messrs.
Michael Carroll, James Urban, and Brian Carroll for an amount not to exceed
$200,000.
The aforementioned proposal provides that the Company may borrow up to
the $1.8 million (assuming reduction of the $1.8 million currently contemplated
to be outstanding upon consummation of Silicon's proposal) based on 80% of
eligible accounts receivable and 50% of eligible inventories (not to exceed
$1,000,000). In addition, upon execution of the proposed credit facility, the
Company's interest rate on all borrowing would be reduced to 2% over Silicon's
prime lending rate. The proposal provides for a maturity date of July 29, 1997
on the new credit facility.
The Company does not have firm commitments for the equity investments
that the implementation of the Silicon proposal would require, but it has
received verbal indication of the availability of such funds. In addition,
although the Company has not yet executed definitive agreements with its trade
suppliers, the Company is negotiating the terms of the conversion of trade debt
into equity securities and/or long term notes and the Company has received
verbal indication of acceptance of proposals by the Company to certain trade
suppliers pursuant to which over $1 million of trade debt would be converted to
equity securities and/or long term notes.
8
<PAGE>
Management believes that the completion of a restructuring of its debt
financing within the parameters described above would allow it to reduce
outstanding trade debt and obtain trade credit (to date the Company has received
written and verbal assurances for additional trade credit of approximately
$300,000, conditioned upon the above restructuring). Those steps, taken
together, would, in the opinion of management, allow the Company to achieve
sales increases by reducing the limiting effects that the Company's lack of
working capital have had on marketing and the ability to obtain the products
necessary to accept and fill customer orders on a timely basis. The Company
believes that increases in sales should ultimately allow the Company to return
to profitability and generate positive cash flows.
There can be no assurance that definitive agreements for the
elimination of the outstanding debt owed to Silicon and the Company's trade
suppliers will be reached or that if such agreements are reached, they will be
upon the terms set forth above. Additionally, although it has been represented
to the Company by trade creditors that its credit would be increased upon the
restructuring described above, there can be no assurance that the Company would
in fact receive such trade credit upon the completion of such a restructuring,
or that all of these steps, if completed, will in fact allow the Company to
increase its sales. The failure of any of these steps would force the Company to
significantly reduce its operations in order to reduce expenses or take other
significant actions to resolve its liquidity constraints.
4. SHORT TERM DEBT - RELATED PARTY
In September 1995, Michael J. Carroll and James J. Urban, the Company's
President/Chief Executive Officer and Senior Vice President/Chief Operating
Officer, respectively, loaned an aggregate of $100,000 to the Company in
exchange for 90-day promissory notes. In addition, Linda Zimdars, a member of
the Company's board of directors, loaned $100,000 to the Company in exchange for
a 90-day promissory note. The note to Ms. Zimdars is personally guaranteed by
Messrs. M. Carroll and Urban. The notes bear interest at 15% per annum. In
December 1995, a payment of $10,000 was made on the note to Messrs. Carroll and
Urban and a payment of $10,000 was made on the note to Ms. Zimdars. In April
1996, the notes were amended to extend their maturity to July 1, 1996. The
Company is currently negotiating with Messrs. Carroll and Urban, and Ms. Zimdars
in which a portion or all of the amounts outstanding under the notes would be
converted into shares of the Company's Common Stock.
In February 1996, the Company borrowed an additional $150,000 from
related parties under 24-day promissory notes bearing interest at the rate of 1%
per annum above the prime lending rate in effect from time to time. A loan
origination fee of 3% was also paid. Of the aggregate of $150,000, (i) $50,000
was borrowed from each of Michael Carroll and James Urban; and (ii) $50,000 was
borrowed from Linda Zimdars. In March 1996, a payment of $12,500 was made to
each of Messrs. Carroll and Urban, and in May 1996, the balance of the notes to
Messrs. Carroll and Urban were repaid. The note to Ms. Zimdars was repaid in May
1996.
5. STOCKHOLDERS EQUITY
In July 1996, pursuant to the terms of a consulting agreement, as
amended, between the Company and Tiger Eye Acquisitions L.L.C. (formerly Kalo
Acquisitions, L.L.C.), the Company issued 600,000 shares of the Company's common
stock to Tiger Eye Acquisitions, L.L.C..
6. COMMITMENTS
On May 10, 1996, the Company consolidated its facilities located in
buildings in Romeoville, Illinois. In connection with the relocation, the
Company was released from its obligations under the existing facilities lease
and entered into a new lease commencing on May 10, 1996 for a term of 60 months
with a monthly obligation of approximately $10,100.
9
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
During fiscal 1995, the Company underwent significant structural,
management and operational change, and as a result thereof, the operating
results for the nine months ended June 30, 1996 lack, in several significant
respects, comparability to the results of operations for the nine months ended
June 30, 1995.
Until the second quarter of fiscal 1995, the Company operated the
Hayward Facility, the Georgia Facility, a Jacksonville, Florida Facility (which
was added with the Company's acquisition of Progressive Ophthalmic Instruments,
Inc., previously defined as "POI") and a Romeoville, Illinois facility (which
was added with the Company's acquisition of Midwest Ophthalmic Instruments,
Inc., previously defined as "MOI"). During the second quarter of fiscal 1995,
the Company underwent a change in management, as described below, and, under new
management, decided to close all but the Romeoville facility.
Pursuant to an agreement, dated April 1, 1995, between the Company,
Robert A. Davis (the Company's former chief executive officer, chief financial
officer, and president), certain partnerships in which Mr. Davis has an interest
, and Michael J. Carroll, James J. Urban and Brian M. Carroll (the "Separation
Agreement"), Mr. Davis and Mr. Dallas Talley resigned their positions with the
Company and Messrs. Michael Carroll and James Urban were elected to fill
vacancies on the Company's board of directors (the "Board of Directors"). The
Separation Agreement also provided that: (I) Mr. Davis would contribute 800,000
shares of Common Stock back to the Company; and (ii) Mr. Davis would forgive
$200,000 owed to him by the Company. Under the Separation Agreement, the Company
agreed to indemnify Mr. Davis for any claims, other than claims for fraud and
certain types of negligence, which might be made in connection with Mr. Davis'
service as an officer or director of the Company.
In January 1995, the new management of the Company commenced its
attempt to restructure the Company's operations around the MOI operations
acquired by the Company in July 1994. As a result, the Hayward Facility, the
Jacksonville Facility and the Georgia Facility were closed. Additionally, the
Company instituted throughout its sales force compensation structures and other
policies similar to those historically used by MOI, which included: (i) the use
of sales quotas and scheduling requirements; (ii) a commission structure that
contained lower base and higher incentive components; (iii) greater
accountability for expenses and inventory; and (iv) limits on competitive
activities. As a result of these changes, approximately 50% of the Company's
prior sales representatives terminated their representation of the Company or
were dismissed. Some but not all of these representatives have been replaced
and, as a result, the Company has lost representation in certain geographic
areas or with certain accounts previously serviced by it.
It is as a result of these substantial changes in the Company's
operations, that operating results for the nine months ended June 30, 1995 and
June 30, 1996 lack comparability. The nine months ended June 30, 1995 results
primarily reflect, through March 31, 1995, MOI and the Company operating
separately and prior to the restructuring efforts initiated by current
management during the second quarter of fiscal 1995. Conversely, the operating
results for the nine months ended June 30, 1996 are predominated by the results
of MOI's operations, which formed the core of the Company's activities after the
changes discussed above.
Restatement for the nine months ended June 30, 1995
In January 1995, a special committee of the Board of Directors
initiated an investigation into the circumstances surrounding the timing and
cause of certain inventory allowances, sales and bad debt provision, and
goodwill provision recorded in the fourth quarter of fiscal 1994 and in the
first quarter of fiscal 1995. As a result of the investigation, the Company has
determined that, in both fiscal 1993 and 1994, the Company: (i) recorded sales
for products not actually ordered by or shipped to customers; (ii) recorded
sales in advance of the actual shipment of the products; (iii) failed to provide
adequate allowances for slow moving or obsolete inventories; and (iv) failed to
provide adequate allowances for doubtful accounts receivable. The financial
10
<PAGE>
statements for the fiscal years ended September 30, 1993 and 1994, the quarter
ended December 31, 1994, and the nine months ended June 30, 1995 have been
restated to correct these errors in the application of generally accepted
accounting principles. See Note 2 of Notes to Condensed Consolidated Financial
Statements.
The special investigation which was commenced in January 1995 also
attempted to determine the specific causes, and the timing thereof, of the $2.5
million and $1.1 million inventory loss provisions recorded and reflected in the
financial statements for fiscal 1994 and the first quarter of 1995. It was
determined that the 1994 inventory write-downs and the majority of the 1995
inventory write-downs were most likely the result of the loss of inventories
caused by previously poor controls over inventories issued to sales
representatives and the transfer of the Hayward Facility inventories to the
Jacksonville and Georgia Facilities in connection with the transfer of its
operations to those locations after the acquisition of POI. Of the $1.1 million
write-down in the first quarter of fiscal 1995, $323,967 was determined to
represent the costs of sales associated with sales previously recorded in fiscal
1994, which had been incorrectly reversed in the first quarter of fiscal 1995,
and accordingly that amount is now included in cost of sales. However, because
of the previously poor controls and recordkeeping, the Company was not able to
determine in the investigation the causes and timing with specificity, other
than to conclude that the $2.5 million and remaining $770,033 losses were
properly treated as fiscal 1994 and fiscal 1995 charges, respectively.
Going Concern and Management's 1996 Plans
As discussed in the notes to the condensed consolidated financial
statements and elsewhere herein, the Company is in default under the terms of
its revolving credit facility with Silicon, which is the Company's principal
credit facility. Additionally, in part because of that default and the resulting
inability to obtain additional working capital, the Company has been unable to
make timely reductions in the amount owed to its product suppliers and one trade
creditor has filed a lawsuit seeking payment of outstanding amounts owed to it.
As a consequence, the Company is currently unable to obtain otherwise customary
trade credit terms and must purchase product on limited credit terms or with
payment on delivery.
The Company's ability to continue as a going concern is ultimately
dependent on its ability to increase its sales to a level that will allow it to
operate profitably and generate positive operating cash flows. Although the
reduction of expenses (which was begun in the last half of fiscal 1995 and is
continuing in fiscal 1996) can contribute to the necessary return to
profitability, achieving profitability without an increase in sales would
require much greater levels of expense reductions and in all likelihood could
only be accomplished through a significant reduction and restructuring of the
nature and scope of the Company's operations.
The Company's sales have been adversely affected by its lack of working
capital and liquidity, which has limited its marketing efforts and, in certain
instances, has prevented it from obtaining products to fill customer orders.
Accordingly, to increase sales the Company must first resolve its working
capital shortage.
The Company is currently in the process of negotiating the terms of a
restructuring of its outstanding debt. In connection therewith, on July 29,
1996, the Company received a proposal from Silicon pursuant which Silicon has
set forth the terms upon which Silicon would convert approximately $3 million
owing to Silicon into shares of the Company's Common Stock at a conversion rate
of $1.52 per share, and transfer the remaining $1.8 million owing to Silicon
into a new credit facility with Silicon. Silicon's proposal is conditioned on,
among other things: (i) the Company's simultaneous receipt of at least $1
million of proceeds from the private placement of its securities; (ii) the
Company's conversion of certain amounts owed to trade suppliers into equity
securities or long-term notes, and (iii) the personal guarantees of Messrs.
Michael Carroll, James Urban, and Brian Carroll for an amount not to exceed
$200,000.
The aforementioned proposal provides that the Company may borrow up to
the $1.8 million (assuming reduction of the $1.8 million currently contemplated
to be outstanding upon consummation of Silicon's proposal) based on 80% of
eligible accounts receivable and 50% of eligible inventories (not to exceed
$1,000,000). In addition, upon execution of the proposed credit facility, the
Company's interest rate on all
11
<PAGE>
borrowing would be reduced to 2% over Silicon's prime lending rate. The proposal
provides for a maturity date of July 29, 1997 on the new credit facility.
The Company does not have firm commitments for the equity investments
that the implementation of the Silicon proposal would require, but it has
received verbal indication of the availability of such funds. In addition,
although the Company has not yet executed definitive agreements with its trade
suppliers, the Company is negotiating the terms of the conversion of trade debt
into equity securities and/or long term notes and the Company has received
verbal indication of acceptance of proposals by the Company to certain trade
suppliers pursuant to which over $1 million of trade debt would be converted to
equity securities and/or long term notes.
Management believes that the completion of a restructuring of its debt
within the parameters described above would allow it to reduce outstanding trade
debt and obtain trade credit (to date the Company has received written and
verbal assurances for additional trade credit of approximately $300,000
conditioned upon the above restructuring). Those steps, taken together, would,
in the opinion of management, allow the Company to achieve sales increases by
reducing the limiting effects that the Company's lack of working capital have
had on marketing and the ability to obtain the products necessary to accept and
fill customer orders on a timely basis. The increases in sales should ultimately
allow the Company to return to profitability and generate positive cash flows.
There can be no assurance that definitive agreements for the
elimination of the outstanding debt owed to Silicon and the Company's trade
suppliers will be reached or that if such agreements are reached, they will be
upon the terms set forth above. Additionally, although it has been represented
to the Company by trade creditors that its credit would be increased upon the
restructuring described above, there can be no assurance that the Company would
in fact receive such trade credit upon the completion of such a restructuring,
or that all of these steps, if completed, will in fact allow the Company to
increase its sales. The failure of any of these steps would force the Company to
significantly reduce its operations in order to reduce expenses or take other
significant actions to resolve its liquidity constraints.
Results of Operations
Sales declined by $4,376,073 to $6,427,413 for the nine months ended
June 30, 1996 from $10,803,486 for the nine months ended June 30, 1995. The
previously discussed changes in the Company's sales operations, and the
Company's lack of working capital, were the dominant reason for the overall
decline in sales.
The Company's gross margin on sales decreased from $2,092,253 for the
nine months ended June 30, 1995 to $1,506,418 for the nine months ended June 30,
1996. Gross margin, as a percentage of sales, was 19.4% for the nine months
ended June 30, 1995 and 23.4% for the nine months ended June 30, 1996. The
increase in gross margin as a percentage of sales for the nine months ended June
30, 1996 from the percentage for the nine months ended June 30, 1995 and from
the Company's historical percentage is primarily attributable to the
predominance of MOI's operations in the operating results for the nine months
ended June 30, 1996. MOI's sales include a greater level of products it has
designed, and related technical services, and as a result have historically
generated a higher gross margin than those of the Company's other operations
prior to the integration of MOI. The Company believes that MOI's historical
gross margin levels can be maintained while efforts are made to increase sales;
however, there can be no assurance that attempts to increase sales may not
require incentive pricing that would adversely affect the gross margin
percentage.
Selling, general and administrative ("SG&A") expenses decreased from
$8,711,233 for the nine months ended June 30, 1995 to $4,920,995 for the nine
months ended June 30, 1996. As a percentage of sales, SG&A expenses were 33.6%
for the nine months ended June 30, 1995, compared to 34% for the nine months
ended June 30, 1996. The decrease in SG&A expenses is primarily a result of the
consolidation and restructuring of the Company's operations, as previously
described, and the lower level of sales. SG&A
12
<PAGE>
expenses for nine months ended June 30, 1996 included approximately $200,000 in
professional fees attributable to the audit of the Company's 1994 and 1995
fiscal years and the Company's restructuring efforts.
In connection with the closure of the Jacksonville and Georgia
Facilities, the Company recorded a restructuring charge of $430,525 during the
first quarter of fiscal 1995. The restructuring charge was subsequently reduced
in the second quarter of fiscal 1995 upon the execution of a sub-lease agreement
for the Jacksonville Facility.
Interest expense increased from $485,889 for the nine months ended June
30, 1995 to $500,458 for the nine months ended June 30, 1996. Although the
Company's debt level has decreased, the increase in interest as a percentage of
outstanding debt is a result of: (i) higher interest rates occasioned by the
increases in prime lending rates during the fiscal 1995 (ii) the increase, from
1% over the prime rate to 3% over the prime rate, in the interest rate charged
on inventory borrowings under the Company's line of credit with Silicon; (iii)
interest charged by trade creditors on outstanding past due balances; and (iv)
interest charged on short term debt to related parties. See Note 4 of the
Condensed Consolidated Financial Statements included elsewhere herein.
As a result of the above, the Company reported a loss of $1,180,361 for
the nine months ended June 30, 1996, compared to a loss, as restated, of
$3,002,442 for the nine months ended June 31, 1995.
Liquidity and Capital Resources
Cash flow from operations was $244,232 for the nine months ended June
30, 1996 and negative $350,729 for the nine months ended June 30, 1995. The
increase in operating cash flow for the nine months ended June 30, 1996 was
primarily due to decrease in the net loss, and reductions in accounts receivable
and inventory.
The Company's revolving credit facility with Silicon, which allowed
borrowing based on 80% of eligible accounts receivable and 50% of eligible
inventories (net of trade accounts payable), became overdrawn as the result of
the fourth quarter 1994 and first quarter 1995 inventory losses, which reduced
the available borrowing base. On April 1, 1995, Silicon agreed to extend (until
February 6, 1996 and then to April 15, 1996) the terms of the original revolving
credit agreement, and to forbear exercise of its rights thereunder resulting
from the Company's defaults with respect to the financial covenants, provided
that the Company made certain scheduled reductions in both the total amounts
outstanding under the facility and in the amount by which the borrowings under
the facility were in excess of the amount available under the borrowing base
formula. Silicon also agreed to make an additional advance of $550,000 (the
"flat rate loan"). The interest rate on all borrowing was reset at 3% above
Silicon's prime lending rate, subject to reduction as the amount of the
Company's over formula borrowing decreased. The Company is currently negotiating
with Silicon and has received a proposal from Silicon which would provide for
the repayment and conversion into equity securities of the Company of amounts
outstanding under the line of credit. See Note 3 of the Condensed Consolidated
Financial Statements included elsewhere herein.
At various times during fiscal 1995 and the nine months ended June 30,
1996, the Company was not in compliance with the limits on total borrowing or
over formula borrowing contained in the April 1, 1995 forbearance agreement with
Silicon. As of July 31, 1996, the Company's total indebtedness to Silicon of
approximately $4,800,000 million continues to exceed the limits on total
borrowings and over formula borrowings. Such delinquencies constitute events of
default. As previously discussed, the Company is currently engaged in
negotiation for the elimination of a significant amount of the debt owed to
Silicon and, to date, Silicon has chosen not to exercise its rights under these
events of default. However, there can be no assurance that a final agreement
with Silicon will be reached, and if reached, that the Company will be able to
implement the agreement. Additionally, there can be no assurance that Silicon
will continue to forbear in the exercise of its rights resulting from the
Company's defaults.
The defaults under the Silicon credit facility prevented the Company
from obtaining new credit from which to generate working capital for any
significant reductions of amounts owed to trade creditors. As a result,
13
<PAGE>
the Company continues to be delinquent with respect to its obligations to trade
creditors, including the obligations the Company had previously restructured
under payment schedules ranging from eight to twelve months. The Company's
failure to adhere to these payment schedules resulted in one of the creditors
filing a lawsuit seeking repayment of the amounts owed to it and impaired its
ability to obtain new trade credit, which, as previously discussed, adversely
affected operations by preventing the Company from obtaining the products
necessary to fulfill certain customer orders. The Company is, however, in
negotiations with certain of its trade creditors to convert outstanding
indebtedness owed to such trade creditors into equity securities and/or long
term notes and to provide for new or increased credit availability from such
trade suppliers. See Note 3 to the Condensed Consolidated Financial Statements
included elsewhere herein.
PART II: OTHER INFORMATION
Item 1. Legal Proceedings.
On April 26, 1996, the Eastman Kodak Company ("Kodak") filed a
complaint against the Company in the United States District Court for the
Northern District of Illinois, Eastern Division (Docket No. 96C 2519), alleging
default by the Company under provisions of a certain promissory note (the
"Note") and seeking to recover amounts outstanding under the Note. The Note,
dated March 7, 1996, is in the principal amount of $296,604.44 and was issued by
the Company in favor of Kodak in connection with repayment of amounts owed by
the Company to Kodak for products acquired by the Company. Interest under the
Note accrues at the rate of 11% per annum subject to increase upon default to
15% per annum. Repayment of principal and interest under the Note is payable in
installments upon the last day of each month through July 31, 1996. A portion of
the principal under the Note was repaid and reduced by the return to Kodak of
unused product. The complaint alleges that there remains outstanding $223,104.44
(exclusive of interest, fees, costs and late charges). On August 2, 1996, the
Company received acceptance of a proposal that the Company submitted to Kodak in
which Kodak would dismiss the aforementioned lawsuit, without prejudice, in
exchange for the receipt of: (i) the Company's execution of a 24 month
promissory note in favor of Kodak, with payment thereunder to start 90 days from
execution, in the amount of $66,631.33 bearing interest at 10%, and (ii) 102,285
shares of the Company's common stock. Consummation of such a settlement will not
result in a charge against operating results.
Other than set forth herein, the Company is not aware of any pending or
ongoing litigation to which the Company is or would be a party to although the
Company may be subject to legal action as a result of the delinquency of debts
owed to Silicon, certain other trade creditors and certain consultants. The
Company has been negotiating with Silicon and its other creditors to resolve
outstanding issues with such entities as to repay such debts on terms favorable
to the Company and its creditors. Other than set forth herein, the Company is
not aware of any pending or ongoing litigation to which the Company is or would
be a party.
Item 2. Changes in Securities.
There have been no changes in the securities of the Company required to
be disclosed pursuant to this item.
Item 3. Defaults Upon Senior Securities.
Other than as set forth herein, there has been no material default with
respect to any indebtedness of the Company required to be disclosed pursuant to
this item.
Item 4. Submission of Matters to a Vote of Security Holders.
There have been no matters submitted to a vote of security holders
during the nine months ended June 30, 1996.
14
<PAGE>
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
The following exhibits are filed herewith:
27 Financial Data Schedule
(b) Reports on Form 8-K.
None.
15
<PAGE>
SIGNATURES
Pursuant to 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.
FRANKLIN OPHTHALMIC INSTRUMENTS CO., INC..
Date: June 14, 1996 By: /S/ Michael J. Carroll
---------------------------
Michael J. Carroll, President
and Chief Executive Officer
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED
JUNE 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<CURRENCY> US DOLLAR
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1.00
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 669,025
<ALLOWANCES> 203,751
<INVENTORY> 1,609,498
<CURRENT-ASSETS> 2,184,788
<PP&E> 828,787
<DEPRECIATION> 592,279
<TOTAL-ASSETS> 4,804,015
<CURRENT-LIABILITIES> 7,405,590
<BONDS> 0
0
0
<COMMON> 7,673
<OTHER-SE> (3,054,378)
<TOTAL-LIABILITY-AND-EQUITY> 4,804,015
<SALES> 6,472,413
<TOTAL-REVENUES> 0
<CGS> 4,920,995
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 500,512
<INCOME-PRETAX> (1,180,361)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,180,361)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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<NET-INCOME> (1,180,361)
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