U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
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QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
Commission File No. 0-21852
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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 Registrant's telephone number)
----------------------------------
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 July 31, 1997 the Registrant had outstanding 19,583,378 shares of
common stock $0.001 par value.
Transitional small business disclosure form: YES __ NO X
<PAGE>
FRANKLIN OPHTHALMIC INSTRUMENTS CO., INC.
FORM 10-QSB
FOR THE QUARTER ENDED JUNE 30, 1997
INDEX
PART I............................................................... 1
Item 1. Condensed Financial Statements..............................2
Condensed Balance Sheets............................................2
Condensed Statement of Operations...................................4
Condensed Statements of Cash Flows................................. 5
Notes to Condensed Financial Statements............................ 6
Item 2. Management's Discussion and Analysis or Plan of Operation.. 10
PART
II....................................................................15
Item 1. Legal Proceedings...........................................15
Item 2. Changes in Securities.......................................15
Item 3. Defaults Upon Senior Securities.............................15
Item 4. Submission of Matters to a Vote of Security Holders.........15
Item 5. Other Information and Subsequent Events.....................15
Item 6. Exhibits and Reports on Form 8-K............................15
Signatures............................................................16
PART I
Item 1. Financial Statements.
The following financial statements of Franklin Ophthalmic
Instruments Co., Inc. (the "Company") are included herein and are
unaudited, but in the opinion of management, include all adjustments
necessary for fair presentation of the Company's financial condition as
of June 30, 1997 and results of operations and cash flows for the three
and nine months ended June 30, 1996 and June 30, 1997, respectively:
(a) Condensed Balance Sheets
(b) Condensed Statements of Operations
(c) Condensed Statements of Cash Flows
(d) Notes to Condensed Financial Statements
<PAGE>
FRANKLIN OPHTHALMIC INSTRUMENTS CO., INC.
CONDENSED BALANCE SHEETS
(Unaudited)
ASSETS
<TABLE>
June 30, September 30,
1997 1996
---------- ------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ - $ -
Accounts receivable, less
allowance for doubtful
accounts of $25,135 and $40,135 1,182,748 720,277
Inventory, less valuation
allowance of $100,000 1,726,759 1,356,057
Prepaid expenses and other assets 159,541 19,027
---------- ----------
Total current assets 3,069,048 2,095,361
---------- ----------
Property and equipment, at cost:
Furniture and equipment 633,636 605,638
Automobiles and trucks 119,193 119,193
Leasehold improvements 118,366 109,408
---------- ----------
Property and equipment, at cost: 871,195 834,239
Less: Accumulated depreciation
and amortization 680,309 618,394
---------- ----------
Total property and equipment 190,886 215,845
---------- ----------
Other assets:
Deposits 13,903 13,935
Intangible assets, net of accumulated
amortization of $867,577 and $706,623 2,111,317 2,272,271
--------- ---------
Total other assets 2,125,220 2,286,206
--------- ---------
Total assets $5,385,154 $4,597,412
========= =========
</TABLE>
The accompanying notes are an
integral part of these statements.
<PAGE>
FRANKLIN OPHTHALMIC INSTRUMENTS CO., INC.
CONDENSED BALANCE SHEETS
(Continued)
(Unaudited)
<TABLE>
June 30, September 30,
1997 1996
--------- -------------
<S> <C> <C>
Current liabilities:
Bank overdrafts $ 160,897 $ 55,597
Current portion of long-term debt 63,676 567,395
Accounts payable 1,125,057 1,180,475
Notes payable to bank 1,573,191 4,375,304
Current portion of capitalized
lease obligations 14,346 16,125
Deposits 259,717 429,844
Accrued liabilities 278,446 859,279
Notes payable to related parties - 215,188
---------- ---------
Total current liabilities 3,475,330 7,699,207
---------- ---------
Long-term debt:
Long-term debt, less current portion 127,642 93,722
Capitalized lease obligations,
less current portion 21,811 30,695
---------- ---------
Total long-term debt 149,453 124,417
---------- ---------
Total liabilities 3,624,783 7,823,624
---------- ---------
Stockholders' equity (deficit):
Common stock: $0.001 par value;
authorized 25,000,000 shares;
19,583,378 and 9,544,810
Shares issued and outstanding
at June 30, 1997 and
September 30, 1996 19,582 9,545
Additional paid-in capital 11,119,838 8,868,577
Accumulated deficit (9,379,049) (12,104,334)
---------- -----------
Total stockholders'
equity (deficit) 1,760,371 (3,226,212)
---------- -----------
Total liabilities and
stockholders' equity(deficit) $5,385,154 $4,597,412
========== ===========
</TABLE>
The accompanying notes are an
integral part of these statements.
<PAGE>
FRANKLIN OPHTHALMIC INSTRUMENTS CO., INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
For the three months For the nine months
ended June 30, ended June 30,
1996 1997 1996 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Sales $ 1,854,685 $2,368,071 $6,427,413 $6,901,829
Cost of Sales 1,404,056 1,634,416 4,920,995 5,000,439
---------- ---------- ---------- ----------
Gross profit $ 450,629 $ 733,655 $1,506,418 $1,901,390
Less:
Selling, general and
administrative expenses 548,106 655,330 1,865,628 1,756,593
Amortization and
depreciation 106,896 72,414 320,691 222,869
---------- --------- --------- ---------
Income (loss) from
operations (204,373) 5,911 (679,901) (78,072)
---------- --------- -------- --------
Other income (expenses):
Interest income 7 - 52 -
Interest expense (175,360) (6,787) (500,512) (88,799)
Other income (expense) - 3,048 - 5,643
--------- -------- -------- -------
Other income
(expense), net (175,353) (3,739) (500,460) (83,156)
--------- -------- --------- -------
Net income (loss) before
extraordinary item $ (379,726) $ 2,172 $(1,180,361) $ (161,228)
Extraordinary item, gain
from debt restructuring $ - $ - $ - $2,886,513
--------- -------- ----------- ----------
Net income (loss) $ (379,726) $ 2,172 $(1,180,361) $2,725,285
========= ======== =========== ==========
Loss per common share:
Net income(loss) before
extraordinary item $ (0.05) $ 0.00 $ (0.15) $ (0.01)
Net income ( loss) $ (0.05) $ 0.00 $ (0.15) $ 0.17
Weighted average number
of common shares
outstanding 7,672,525 18,256,758 7,671,150 15,764,727
========= ========== ========= ==========
</TABLE>
The accompanying notes are an
integral part of these statements.
<PAGE>
FRANKLIN OPHTHALMIC INSTRUMENTS CO., INC.
CONDENSED STATEMENT OF CASH FLOWS
<TABLE>
(Unaudited)
For the nine months ended
June 30,
1996 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $(1,180,361) $ 2,725,285
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation 77,237 61,915
Amortization 243,454 160,954
Gain from debt restructuring - (2,886,513)
Changes in current assets and liabilities:
Accounts receivable 530,391 (462,471)
Inventory 936,442 (370,702)
Prepaid expenses (81,720) (140,514)
Other assets - 32
Deposits 81,714 (170,127)
Accounts payable, trade and
accrued liabilities (362,926) (82,092)
--------- ----------
Net cash provided by (used in)
operating activities 244,231 (1,164,233)
Cash flows from investing activities:
Acquisition of equipment (1,879) (36,956)
--------- ---------
Net cash used in investing activities (1,879) (36,956)
Cash flows from financing activities:
Net change in bank overdrafts (150,165) 105,300
Increase (decrease) in capital leases (14,818) (10,663)
Net change in borrowings under line of credit (20,822) (228,809)
Net proceeds from issuance of common stock 12,375 1,462,160
Increase (decrease) in long-term debt (41,243) (126,799)
Proceeds from issuance of promissory
notes to related parties (27,679) -
--------- ---------
Net cash provided by (used in)
financing activities $ (242,352) $ 1,201,189
--------- -----------
Net decrease in cash and cash equivalents $ - $ -
Cash and cash equivalents at beginning of year $ - $ -
----------- -----------
Cash and cash equivalents at end of year $ - $ -
=========== ==========
</TABLE>
The accompanying notes are an
integral part of these statements.
<PAGE>
FRANKLIN OPHTHALMIC INSTRUMENTS CO., INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The condensed 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 financial statements include all adjustments necessary to
present fairly the financial position, results of operations and cash
flows for the periods presented. 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 financial
statements and these notes should be read in conjunction with the
financial statements of the Company included in the Company's Annual
Report on Form 10-KSB for the year ended September 30, 1996.
The results of operations for interim periods are not necessarily
indicative of the results to be expected for a full year.
2. GOING CONCERN
The accompanying condensed 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'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, to generate positive operating cash flows, and to
refinance outstanding debt when it comes due. The reduction of
expenses can contribute to the necessary return to profitability;
however 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.
In addition, 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 reached agreements with its primary lender, Silicon
Valley Bank ("Silicon"), certain trade creditors and certain debtholders
for the restructuring of certain of the Company's outstanding debt. See
Notes 3 and 4 to the Financial Statements included elsewhere herein. In
addition, the Company raised $1,200,250 in the first quarter of fiscal
1997 and $580,000 during the quarter ended June 30, 1997 from the
private placements of equity. See Note 5 to the Financial Statements
included elsewhere herein.
<PAGE>
Management believes that with: (i) the completion of the
restructuring of its debt; (ii) the equity infusions that the Company
has received from the private placements during the quarters ended
December 31, 1996 and June 30, 1997; (iii) the increase in trade credit
which the Company has received upon the debt restructuring; and (iv) the
expansion of the Company's marketing efforts and sales territories,
which has already resulted in increased sales, the Company will be able
to continue to increase sales, which should allow the Company to
increase profitability and generate positive cash flows.
Notwithstanding management's belief, there can be no assurance that
the Company will be able to continue to increase sales levels. In
addition, in the event sales levels continue to increase, there can be
no assurance that the Company can maintain or increase profitability.
If profitability is not maintained or increased, the Company could be
forced to significantly reduce its operations in order to reduce
expenses or take other actions to resolve liquidity constraints that may
arise.
3. NOTES PAYABLE - BANK
The Company's principal credit facility has been a revolving line
of credit facility with Silicon. The line of credit, which is secured
by essentially all of the Company's assets, initially provided for
borrowings of up to $4,000,000, but was eventually increased to provide
borrowings up to $5,500,000 after the Company's acquisitions related to
Progressive Ophthalmic Instruments, Inc. and Midwest Ophthalmic
Instruments Inc. both in the fiscal year ended September 30, 1994. The
line initially provided for borrowing limits equal to the sum of (i)
80% of the amount of eligible accounts receivable; and (ii) the lesser
of $1,500,000 or 50% of the book value of eligible inventories, reduced
by trade accounts payable. The line of credit provided for the payment
of interest monthly at the rate of 1% over the bank's prime rate for
borrowings collateralized by accounts receivable and 3% over the bank's
prime rate for borrowings collateralized by inventory. The line of
credit was scheduled to mature on February 5, 1995.
During fiscal 1995, the balance outstanding under the line of
credit exceeded the amount available under the borrowing formula as
mentioned above and the Company was otherwise in default with respect to
certain provisions of the line of credit agreement. On April 1, 1995,
Silicon agreed to extend the terms of the Company's line of credit, as
generally in effect in the original agreement, through February 6, 1996
(subsequently extended to April 15, 1996), and agreed to forbear in the
exercise of its rights resulting from the Company's past defaults or
defaults in the future compliance with the financial covenants, and to
advance the Company an additional $500,000, conditioned upon the
Company's agreement to make certain scheduled reductions in both: (a)
the amount of the total borrowings outstanding; and (b) the amount by
which total borrowings exceeded the amount available under the
collateral formula. Under the extended agreement all borrowings
incurred interest, payable monthly, at the annual rate of 3% above
Silicon's prime rate, subject to reduction as the amount of the
Company's over formula borrowing decreases. In addition, the Company
agreed to modify the terms of warrants held by Silicon to purchase
44,119 shares of common stock to provide for exercise at a price of $.50
per share through March 31, 2000.
<PAGE>
In September 1996, the Company reached an agreement with Silicon
on an Amended and Restated Loan and Security Agreement (the "Amended
Agreement") pursuant to which Silicon agreed to convert approximately
$3.2 million of amounts owed to it by the Company under its line of
credit into shares of the Company's common stock at the rate of $1.52
per share. As a result of the conversion, Silicon further agreed to
extend the maturity date with respect to the remaining $1.8 million
under the line of credit to July 29, 1997. The Amended Agreement with
Silicon was conditioned on or required, among other things: (i) the
Company's receipt of at least $1 million of proceeds from the private
placement of its securities; (ii) the Company's best efforts in
converting certain amounts owed to trade suppliers into equity
securities or long-term notes; and (iii) the personal guarantees of
certain officers of the Company for an amount not to exceed an aggregate
of $200,000. The Company met the conditions of the Amended Agreement
during the quarter ended December 31, 1996 and the new line of credit
became effective in November 1996.
In connection with the restructuring of trade debt during the
quarter ended December 31, 1996: (i) $378,000 of trade debt was
converted to stock in the Company at a rate of $1.52 per share; (ii)
$100,000 was forgiven; and (iii) approximately $162,000 was converted to
promissory notes with terms of up to 24 months. The foregoing
transactions resulted in an extraordinary gain of $380,999 for the
quarter ended December 31, 1996.
As a result of the conversion of $3,172,417, the amount owed to
Silicon less the $1.8 million facility, the Company recorded an
extraordinary gain of $2,505,514 during the first quarter of fiscal
1997. The Amended Agreement provided for the Company to receive
advances against the line of credit for the lower of $1.8 million or the
amounts supported by a formula derived borrowing base. The borrowing
base is equal to the sum of (i) 80% of the amount of eligible accounts
receivable and (ii) the lesser of 50% of eligible inventories or
$1,000,000. Interest under the Amended Agreement was payable monthly at
a rate equal to 2% over Silicon's prime rate. The line of credit
provided for a maturity date of July 29, 1997.
<PAGE>
During August 1997, the Company and Silicon agreed to an extension
of the line of credit to September 30, 1997, which maturity date may be
further extended by the Company to February 28, 1997 upon payment of a
fee to Silicon and as long as the Company is not in default under the
Amended Agreement. The interest rate charged under the Revised
Agreement was increased to 3% over Silicon's prime lending rate,
increasing to 4% over Silicon's prime lending rate if the Company is
still indebted to Silicon at January 31, 1998. In addition the Revised
Agreement provides for a loan fee that is payable as follows: (i) $4,000
upon effectiveness of the Revised Agreement; (ii) $6,000 on September
30, 1997 if the Company elects to extend the maturity of the line of
credit to February 28, 1998; and (iii) $8,000 on January 1, 1998 in the
event that the Company remains indebted to Silicon at such date. The
Revised Agreement provides that the Company will be deemed to be in
default if it fails to (i) have a net profit of at least one dollar for
each of the Company's fiscal quarters, and (ii) have an operating profit
of at least one dollar for the Company's fiscal year ending September
30, 1997. For purposes of the Revised Agreement only, operating profit
shall be defined as the Company's earnings before interest, taxes,
depreciation, and amortization. While the Company has achieved the
aforementioned net and operating profit requirements as of June 30,1997,
and believes that it will continue to meet such net and operating profit
levels for the term of the Revised Agreement, there can be no assurance
that the Company will continue to do so.
At June 30, 1997, the Company owed $1,573,191 under the line of
credit.
4. SHORT TERM DEBT - RELATED PARTY
During August 1996, the Company borrowed $215,000 from an
individual under a 30-day promissory note bearing interest at 10% per
annum and a note origination fee of $6,450. In October 1996, the note
was converted to 860,000 shares of common stock in the Company as
participation in the Company's private placement offering which
commenced on October 1, 1996. In addition, warrants to purchase 430,000
shares of common stock at a price of $1.00 per share, exercisable 6-18
months after the date of issuance of such warrants, were also issued as
part of the participation in the aforementioned private placement
offering.
5. STOCKHOLDERS EQUITY
During the first quarter of fiscal 1997, the Company raised
$1,200,250 of capital through the sale of 2,400,500 Units which were
sold pursuant to a private placement of Units (each Unit consisting of
two shares of common stock and one common stock purchase warrant,
exercisable between 6-18 months after the issuance of such common stock
purchase warrant). The sale of the 2,400,500 Units exceeded the minimum
of 2,000,000 Units required pursuant to the terms of the private
placement, which was conducted by the Company on a "best efforts" basis
and provided for the sale and offer of up to a maximum of 3,200,000
Units. The amount raised in the private placement, together with the
effectiveness of personal guarantees by Messrs. M. Carroll, J. Urban and
B. Carroll, satisfied all remaining conditions with Silicon.
<PAGE>
In March of 1997, the Company's Board of Directors voted to
eliminate the annual automatic granting of options to non-employee
directors that was established under the 1993 Stock Option Rights and
Appreciation Plan.
The Company entered into an agreement on April 11, 1997, which was
amended on May 8, May 9, and May 11, 1997 (the "Investment Agreement"),
with Prinz-Franklin L.L.C., an Illinois limited liability company
("Prinz"), pursuant to which the Company agreed to sell to Prinz up to
3,000,000 shares of Common Stock at a price of $0.20 per share. The
Investment Agreement granted Prinz piggyback registration rights
with respect to the shares of Common Stock so purchased. Pursuant to
such piggy-back registration rights, any shares of Common Stock which
Prinz elects to include in a registration statement of the Company shall
be held in escrow during the effective period of such registration
statement until the following conditions are met: (i) 25% of the shares
purchased may not be sold or released from escrow until the closing
price of the Company's Common Stock is equal to or greater than $0.75
per share for five consecutive trading days; and
(ii) the remaining common stock may not be sold or released from escrow
until the closing price of the Company's Common Stock is equal to or
greater than $1.25 per share for five consecutive trading days. Such
escrow restrictions shall terminate at the earlier of the time the
common stock sold to Prinz is exempt under Rule 144 as promulgated under
the Securities Act of 1933, as amended, or one year from the date of
each purchase of the respective shares. In addition, the Investment
Agreement provided for the issuance to Prinz of warrants to purchase up
to 400,000 shares of Common Stock within a period of four years from
issuance of the applicable warrants. During the quarter ended June 30,
1997, Prinz had purchased 2,900,000 of the shares of Common Stock and
was granted warrants to purchase 400,000 additional shares of Common
Stock. See Item 2 of Part II. The Investment Agreement also provided
for the appointment of John Prinz to the Board of Directors of the
Company.
In connection with the Company's restructuring of the Silicon debt
during the quarter ended December 31, 1996, the Company agreed to issue
an additional 1,767 shares of Common Stock in August of 1997 to
reconcile the amount of interest that was accrued up to the date of the
effectiveness of the Silicon conversion in November of 1996.
<PAGE>
In accordance with anti-dilution rights of Class A Warrants that
were issued during the Company's Initial Public Offering in July 1993,
the exercise price for the Class A Warrants has been reduced from its
original level of $5.00 per share of Common Stock to $2.30 per share,
and the aggregate number of shares of Common Stock issuable upon
exercise of such warrants has been increased from 2,062,500 to
4,487,740. As a consequence of the increase in the number of shares
issuable upon the exercise of the Class A Warrants, the Company no
longer has sufficient shares of Common Stock authorized to provide for
the exercise of all of the outstanding common stock purchase warrants
and options. To remedy this situation, the Company plans at the next
annual meeting to seek stockholder approval of an amendment to the
Company's Articles of Incorporation increasing the authorized number of
shares of Common Stock. Given the substantial amount by which the
current exercise price of the Class A Warrants (which remains the
highest exercise price of all of the Company's outstanding warrants)
exceeds the share price of the Common Stock (the closing bid price of
the Company's Common Stock, as reported on the OTC Electronic Bulletin
Board as of July 28, 1997, was $0.32), the Company does not anticipate
that the Class A Warrants (which expire in July of 1998) will be
exercised prior to such meeting, if at all. However, there can be no
assurance that this will in fact be the case or that the stockholders of
the Company will approve an increase in the authorized number of shares
of Common Stock.
Item 2. Management's Discussion and Analysis or Plan of Operations
General
The following discussion contains forward-looking statements within
the meaning of the "safe-harbor" provisions of the Private Securities
Litigation Reform Act of 1995. Such statements are based on
management's current expectations and are subject to a number of factors
and uncertainties which could use actual results to differ materially
from those described in the forward-looking statements. Such factors
and uncertainties include, but are not limited to: (i) restrictive
covenants contained in the Company's bank debt documents; (ii) the
ability of the Company to refinance its line of credit with Silicon,
which expired July 29, 1997; (iii) competitive conditions in the
Company's markets; (iv) the Company's dependence on certain
manufacturers; (v) general economic conditions and conditions in the
ophthalmic industry; (vi) fluctuations in the stock market; and (vii)
the ability of the Company to retain and attract sales/service
representatives.
<PAGE>
In the first quarter of fiscal 1997, the Company completed a
financial restructuring that began during fiscal 1996. In connection
with such restructuring, the Company restructured its indebtedness to
Silicon and during November and December 1996 completed agreements with
trade creditors such that: (i) $378,000 of trade-debt was converted to
common stock at a price of $1.52 per share; (ii) $162,000 was converted
to a 24-month promissory note commencing November 15, 1996; and (iii)
$100,000 was forgiven. In addition the Company completed an equity
offering during the first quarter of fiscal 1997 in which the Company
raised $1,200,250 of capital. The capital was raised through the sale
of 2,400,500 Units which were sold pursuant to a private placement of
Units (each Unit consisting of two shares of common stock and one common
stock purchase warrant). The sale of the 2,400,500 Units exceeded the
minimum of 2,000,000 Units required pursuant to the terms of the private
placement, which was conducted by the Company on a "best efforts" basis
and provided for the sale and offer of up to a maximum of 3,200,000
Units. See Notes 2 and 3 to the Financial Statements included elsewhere
herein.
During the quarter ended June 30, 1997, the Company raised an
additional $580,000 as a result of a private placement of equity in
which 2,900,000 shares of common stock and warrants to purchase up to
400,000 shares of Common Stock,at an exercise price of $1.00 per share,
were issued. The warrants expire as follows: (i) warrants to purchase
200,000 shares of Common Stock expire April 10, 2001, and (ii) warrants
to purchase 200,000 shares of Common Stock expire May 10, 2001.
Due to the aforementioned financial restructuring and receipt of
additional capital raised during the quarter ended June 30, 1997, the
Company was able to take advantage of increased cash flow to process
orders during the quarter ended June 30, 1997. As a result, the Company
was able to achieve an increase in sales of 27% over the prior years
quarter and report a profit.
In addition, the Company has recently increased its marketing
efforts with the distribution of a direct mail catalog to the ophthalmic
industry and the re-introduction of sales representatives in
southeastern, northeastern, north central and the Rocky Mountain markets
of the United States.
Going Concern and Management's 1997 Plans
As discussed in the notes to the financial statements and elsewhere
herein, the Company at the end of fiscal 1996 was in default under the
terms of its revolving credit facility with Silicon, which is the
Company's primary 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. As a consequence, the Company was
unable to obtain otherwise customary trade credit and was limited to
purchases of product on limited credit terms or with payment on
delivery. In certain circumstances, this also prevented the Company
from obtaining products to fill customer orders.
<PAGE>
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, to generate positive cash flows, and to
refinance outstanding debt when it comes due. The reduction of
expenses (which was begun in the last half of fiscal 1995 and continued
into fiscal 1996) can contribute to the necessary return to
profitability; however 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.
During the fourth quarter of fiscal 1996, the Company reached
agreements with Silicon, its primary trade creditors and certain of its
debtholders for the restructuring of some of the Company's outstanding
debt. In addition, the Company was able to raise $1,200,250 and
$580,000 through the private placements of equity in the first and third
quarters of fiscal 1997 respectively.
Pursuant to the agreement with Silicon, during the first quarter of
fiscal 1997 approximately $3.2 million owing to Silicon was converted
into shares of the Company's Common Stock at a conversion rate of $1.52
per share and the remaining $1.8 million owing to Silicon was
transferred into a new credit facility. In connection with the
restructuring of trade debt during the first quarter of fiscal 1997: (i)
$378,000 of trade debt was converted to stock in the Company at a rate
of $1.52 per share which resulted in an extraordinary gain of $280,999;
(ii) $100,000 was forgiven; and (iii) approximately $162,000 was
converted to promissory notes with terms of up to 24 months. The trade
debt restructuring resulted in an extraordinary gain of $380,999 for the
quarter ended December 31, 1996.
During August 1997, the Company and Silicon agreed to an extension
of the line of credit to September 30, 1997, which maturity date may be
further extended by the Company to February 28, 1997 upon payment of a
fee to Silicon and as long as the Company is not in default under the
Amended Agreement. The interest rate charged under the Revised
Agreement was increased to 3% over Silicon's prime lending rate,
increasing to 4% over Silicon's prime lending rate if the Company is
still indebted to Silicon at January 31, 1998. In addition the Revised
Agreement provides for a loan fee that is payable as follows: (i) $4,000
upon effectiveness of the Revised Agreement; (ii) $6,000 on September
30, 1997 if the Company elects to extend the maturity of the line of
credit to February 28, 1998; and (iii) $8,000 on January 1, 1998 in the
event that the Company remains indebted to Silicon at such date. The
Revised Agreement provides that the Company will be deemed to be in
default if it fails to (i) have a net profit of at least one dollar for
each of the Company's fiscal quarters, and (ii) have an operating profit
of at least one dollar for the Company's fiscal year ending September
30, 1997. For purposes of the Revised Agreement only, operating profit
shall be defined as the Company's earnings before interest, taxes,
depreciation, and amortization. While the Company has achieved the
aforementioned net and operating profit requirements as of June 30,1997,
and believes that it will continue to meet such net and operating profit
levels for the term of the Revised Agreement, there can be no assurance
that the Company will continue to do so.
<PAGE>
The Company believes that with (i) the completion of the above
mentioned restructuring of its debt; (ii) the equity infusion of
$1,780,250 that it has received during the first and third quarters of
fiscal 1997; (iii) the increase in trade credit which the Company has
received upon the aforementioned debt restructuring; and (iv) the
expansion of the Company's marketing efforts and sales territories which
already contributed to an increase in sales of $513,386 (a 27% increase)
for the quarter ended June 30, 1997 versus the prior year's quarter, the
Company will be able 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 products necessary to accept and fill customer
orders on a timely basis and allow the Company to refinance outstanding
debt when it comes due in fiscal 1997. The Company believes that
increases in sales should ultimately allow the Company to return to
profitability and generate positive cash flows.
Notwithstanding management's belief, there can be no assurance that
the Company will be able to continue to increase sales levels. In
addition, in the event sales levels continue to increase, there can be
no assurance that the Company can achieve the profitability levels that
may be needed. If the necessary profitability levels are not achieved,
the Company could be forced to significantly reduce its operations in
order to reduce expenses or take other actions to resolve liquidity
constraints that may arise. Although the Company has received an
extension out to September 30, 1997, which may be further extended to
February 28, 1998, on its line of credit with Silicon, there is no
assurance that the Company will be able to continue to refinance its
outstanding debt when it comes due.
Results of Operations
Sales increased by $513,386 to $2,368,071 for the quarter ended
June 30, 1997 from $1,854,685 for the quarter ended June 30, 1996. The
Company attributes the 27% increase to the recent expansion of marketing
efforts through the addition of a national direct mail catalog and the
addition of sales personnel in new territories. For the nine months
ended June 30, 1997, sales increased by $474,416 to $6,901,829 from
$6,427,413 for the nine months ended June 30, 1996.
The Company's gross margin on sales increased by $283,026 to
$733,655 for the quarter ended June 30, 1997 from $450,629 for the
quarter ended June 30, 1996. Gross margin as a percentage of sales
increased to 31% for the quarter ended June 30, 1997 from 24.3% from the
same quarter of the prior year. The Company's gross margin on sales
increased by $394,972 to $1,901,390 for the nine months ended June 30,
1997 from $1,506,418 for the nine months ended June 30, 1996. Gross
margin as a percentage of sales increased to 27.5% for the nine months
ended June 30, 1997 from 23.4% for the nine months ended June 30, 1996.
The Company attributes the increase in gross margin as a percentage of
sales to the Company taking advantage of certain manufacturer's rebate
programs as a result of the Company's increase in sales volume, and the
Company's emphasis on the sale of technical services, private-label
products and refurbished equipment, which have historically provided the
Company with greater profit margins. In addition, the capital infusion
that took place during the first quarter of fiscal 1997 has allowed the
Company to take advantage of better product purchasing opportunities.
<PAGE>
Selling, general and administrative ("SG&A") expenses increased by
$107,224 from $548,106 for the quarter ended June 30, 1996 to $655,330
for the quarter ended June 30, 1997. As a percentage of sales, SG&A
expenses were 26.8% for the three months ended June 30, 1997, compared
to 29.6% for the quarter ended June 30, 1996. For the nine months ended
June 30, 1996 and 1997, SG&A expenses decreased by $109,035 from
$1,865,628 to $1,756,593 respectively. The increase in SG&A expenses
for the quarter ended June 30, 1997 over the same quarter of the prior
year is primarily a result of marketing costs associated with
advertising and the distribution of a direct mail catalog, and the
expenses resulting from the addition of sales and service personnel in
connection with the Company's expansion into new territories.
Amortization and depreciation expense decreased from $106,896 for
the quarter ended June 30, 1996 to $72,414 for the quarter ended June
30, 1997. For the nine months ended June 30, 1996 and 1997,
amortization decreased from $320,691 to $222,869, respectively. The
decrease is primarily attributable to the elimination of amortization
and depreciation expense that the Company incurred during fiscal 1996
pertaining to the acquisition of certain software rights.
Interest expense decreased from $175,360 for the quarter ended June
30, 1996 to $6,787 for the quarter ended June 30, 1997. For the nine
months ended June 30, 1996 and 1997, interest expense decreased from
$500,512 to $88,799, respectively. The decrease in interest expense is
primarily a result of the Company's restructuring of its bank financing
with Silicon in which Silicon converted $3,172,418 of principal and
interest into 2,079,163 shares of the Company's common stock.
As a result of the above, the Company reported positive earnings
before interest, depreciation and amortization for the third quarter and
the nine months ended June 30, 1997. The Company reported earnings
before interest, amortization and depreciation of $78,325 for the
quarter ended June 30, 1997, as compared to a loss of $97,477 for the
prior year's quarter. For the nine months ended June 30, 1997, the
Company reported earnings before interest, amortization and depreciation
of $144,797 versus a loss of $359,210 for the prior year's nine months.
With the addition of interest, amortization and depreciation expenses,
the Company reported a net loss before extraordinary item of $83,156 as
compared to a net loss before extraordinary item of $500,460 in the same
quarter of the prior year. As a result of a gain from debt
restructuring in the quarter ended December 31, 1996, the Company
reported net income of $2,725,285 for the nine months ended June 30,
1997 versus a net loss of $1,180,361 for the same period of the prior
year.
Liquidity and Capital Resources
Cash flow from operations was a negative $1,164,233 for the nine
months ended June 30, 1997 versus a positive $244,231 for the same
period of the prior year. The negative operating cash flow for the nine
months ended June 30, 1997 was primarily due to increases in accounts
receivable and inventory to support the Company's growth. The Company
financed the negative cash flows with the proceeds of private placements
of securities during the quarters ended December 31, 1996 and June 30,
1997.
<PAGE>
The Company's principal credit facility is a revolving line of
credit with Silicon, which is secured by essentially all of the
Company's assets. The Company is entitled to receive advances against
the line of credit for the lower of $1.8 million or the amounts
supported by a formula derived borrowing base. The borrowing base is
equal to the sum of (i) 80% of the amount of eligible accounts
receivable and (ii) the lesser of 50% of eligible inventories or
$1,000,000. Interest under the Amended Agreement is payable monthly.
The interest rate charged was increased to 3% over Silicon's prime
lending rate upon effectiveness of the agreement, and increases to 4%
over Silicon's prime lending rate if the Company is still indebted to
Silicon at January 31, 1998. The line of credit expres February 28,
1998.
The Company does not currently have sufficient shares of
Common Stock authorized to provide for the exercise of all of the
outstanding common stock purchase warrants and options, and therefore
will be unable to fund its operations through the sale of shares of
Common Stock or related warrants, options of convertible securities.
The Company believes that cash flow from operations, supplemented by
borrowings under the line of credit, will be sufficient to fund its
operations through the expiration of its line of credit expires. To
remedy this situation, the Company plans at the next annual meeting to
seek stockholder approval of an amendment to the Company's Articles of
Incorporation increasing the authorized number of shares of Common
Stock. There can be no assurance, however, that this will in fact be
the case or that the Company will be able to extend or refinance the
line of credit when it expires, or that the stockholders of the Company
will approve an increase in the authorized number of shares of Common
Stock.
At June 30, 1997, the Company owed $1,573,191 under the line of
credit.
PART II: OTHER INFORMATION
Item 1. Legal Proceedings.
The Company has filed a complaint against the auditing and
accounting firm of Marinelli & Scott. See Form 10-QSB of the Company
for the quarterly period ending December 31, 1996. The Company is not
aware of any other material pending or ongoing litigation to which the
Company is or would be a party.
Item 2. Changes in Securities.
During the third quarter of fiscal 1997, the Company raised
$580,000 of capital through the sale of 2,900,000 shares of Common Stock
and warrants to purchase 400,000 shares of Common Stock (the
"Warrants"). The shares and Warrants were sold in a private placement
offering to Prinz-Franklin L.L.C. an Illinois limited liability company
("Prinz"). See Note 5 to the Financial Statements. Under such private
placement, the Company sold 1,000,000 shares of Common Stock and
warrants on April 11, 1997, 1,000,000 shares of Common Stock and
warrants to purchase 200,000 on May 11, 1997, and 900,000 shares of
Common Stock on June 27, 1997. Each Warrant entitles the holder thereof
to purchase one share of Common Stock at a price of $1.00 per share for
a period of four years from the date of issuance.
<PAGE>
The private placement offering was made pursuant to Section 4 (2)
of the Securities Act of 1993, as amended. In claiming such exemption,
the Company relied upon written representations and warranties made by
Prinz.
In accordance with anti-dilution rights of Class A
Warrants that were issued during the Company's Initial Public Offering
in July 1993, the exercise price for the Class A Warrants has been
reduced from its original level of $5.00 per share of Common Stock to
$2.30 per share, and the aggregate number of shares of Common Stock
issuable upon exercise of such warrants has been increased from
2,062,500 to 4,487,740. As a consequence of the increase in the number
of shares issuable upon the exercise of the Class A Warrants, the
Company no longer has sufficient shares of Common Stock authorized to
provide for the exercise of all of the outstanding common stock purchase
warrants and options. To remedy this situation, the Company plans at
the next annual meeting to seek stockholder approval of an amendment to
the Company's Articles of Incorporation increasing the authorized number
of shares of Common Stock.
Item 3. Defaults Upon Senior Securities.
Other than as set forth elsewhere 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 quarter ended June 30, 1997.
Item 5. Other Information. None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following exhibits are filed herewith:
10 Revised Loan Agreement with Silicon Valley Bank
27 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the
quarter ended June 30, 1997.
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: August 12, 1997 By: /S/ Michael J. Carroll
Michael J. Carroll, President
and Chief Executive Officer
EXHIBIT 10
SECOND LOAN MODIFICATION AGREEMENT
This SECOND LOAN MODIFICATION AGREEMENT (this "Modification") is
entered into as of August 7, 1997, by and between FRANKLIN OPHTHALMIC
INSTRUMENTS CO., INC. ("Borrower") and SILICON VALLEY BANK ("Lender").
1. INDEBTEDNESS. Borrower is indebted to Lender pursuant to, among other
documents, an Amended and Restated Loan and Security Agreement, dated August
20, 1996, as amended by a Loan Modification agreement, dated as of April 7,
1997, and as otherwise amended from time to time (The "Loan Agreement").
As used herein, "Indebtedness" means all indebtedness owing by Borrower to
Lender. Repayment of the indebtedness is secured by the Collateral as
described in the Loan Agreement and is guaranteed by the "Guarantors"
(as defined in the Loan Agreement) pursuant to the "Guaranty" (as defined
in the Loan Agreement). As used herein, "Existing Loan Documents" means
the Loan Agreement (excluding this Modification only), the Guaranty, and
all other documents securing repayment of the Indebtedness. Unless
otherwise defined, all capitalized terms used in this Modification shall
have the meaning ascribed thereto in the Loan Agreement.
2. CHANGES.
A. The Revolving Maturity Date is hereby amended to be September 30, 1997.
Notwithstanding the foregoing, the Revolving Maturity shall be extended
to February 28, 1998 upon the written request of Borrower delivered to
Bank on or prior to September 30, 1997, provided that no such extension
shall be granted and the Revolving Maturity Date shall remain September
30, 1997 unless: (a) the $6,000.00 portion of the extension fee due and
payable by Borrower to Bank on September 30, 1997 pursuant to paragraph
2E below is timely paid, and (b) as of September 30, 1997, there does
not exist any Event of Default under and as defined in the Loan Agreement
or any default by Borrower of any obligation of Borrower contained in
this Modification.
B. Section 2.2(a) of the Loan Agreement is hereby amended to read in full
as follows:
"(a) Interest Rate. Except as set forth in Section 2.2(b), any Advance
shall bear interest, on the Average Daily Balance, at a rate equal to:
(i) three (3) percentage points above the Prime Rate through and including
December 31, 1997, and (ii) four (4) percentage points above the Prime
Rate from and after January 1, 1998."
C. It shall constitute an Event of Default under and as defined in the Loan
Agreement if Borrower fails to: (i) have a net profit of at least one
dollar ($1.00) for each of Borrower's fiscal quarters, commencing with
the fiscal quarter ending June 30, 1997, and (ii) have an operating profit
of at least one dollar ($1.00) for Borrower's fiscal year ending September
30, 1997.
D. Simultaneously with its execution of this Modification, Borrower shall
deliver to Bank either: (i) One Thousand Seven Hundred Sixty-Seven (1,767)
additional Exchange Shares, or (ii) the sum of Two Thousand Six Hundred
Eighty-Six and 82/100 Dollars ($2,686.82), representing payment of the
interest due and payable by Borrower on account of the Indebtedness as set
forth in that certain Letter from Bank to Borrower of December 30, 1996.
<PAGE>
E. Borrower shall pay to Bank, as and for a non-refundable extension fee:
(i) Four Thousand and 00/100 Dollars ($4,000.00) simultaneously with
Borrower's execution of this Modification, (ii) Six Thousand and 00/100
Dollars ($6,000.00) on September 30, 1997, in the event that Borrower
elects to extend the Revolving Maturity Date to February 28, 1998, as
provided in paragraph 2A above, and (iii) Eight Thousand and 00/100
Dollars ($8,000.00) on January 1, 1998, in the event that there is any
Indebtedness outstanding as of January 1, 1998.
3. NO DEFENSES. Borrower (and each guarantor and pledgor signing below)
agrees that it has no defenses against the obligations to pay any amounts
under the Indebtedness.
4. CONTINUING VALIDITY. Borrower (and each guarantor and pledgor signing
below) understands and agrees that in entering into this Modification,
Lender is relying upon Borrower's representations, warranties, and
agreements, as set forth in the Existing Loan Documents. Except as
expressly modified pursuant to this Modification, the terms of the
Existing Loan Documents remain unchanged and in full force and effect.
Lender's agreement to modify the Loan Agreement pursuant to this
Modification in no way shall obligate Lender to make any future
modifications to the Loan Agreement or the Indebtedness. Nothing in
this Modification shall constitute a satisfaction of the Indebtedness.
It is the intention of Lender and Borrower to retain as liable parties
all makers and endorsers of Existing Loan Documents, unless the party is
expressly released by Lender in writing. No maker, endorser, or guarantor
will be released by virtue of this Modification. The terms of this
paragraph apply not only to this Modification, but also to all subsequent
loan modification agreements.
This Modification is executed as of the date first written above.
BORROWER: LENDER:
FRANKLIN OPHTHALMIC SILICON VALLEY BANK
INSTRUMENTS CO., INC.
/S/ /S/
By: Michael J. Carroll By: Mark Cadieux
Name: Michael J. Carroll Name: Mark Cadieux
Title: President & CEO Title: Vice President
The undersigned hereby each consent to the modifications to the Loan
Agreement made pursuant to this Modification, hereby ratify all the
provisions of the Guaranty and confirm that all provisions of that document
are in full force and effect.
<PAGE>
GUARANTOR: /S/
___________________________
MICHAEL J. CARROLL
Dated: August 14, 1997
GUARANTOR: /S/
___________________________
BRIAN CARROLL
Dated: August 14, 1997
GUARANTOR: /S/
___________________________
JAMES URBAN
Dated: August 14, 1997
Silicon Valley Bank
3003 Tasman Drive
Santa Clara, CA 95054-1191
August 13, 1997
Mr. Brian Carroll
Vice President & Chief Financial Officer
Franklin Ophthalmic Instruments Co., Inc.
1265 Naperville Drive
Romeoville, IL 60441
RE: Second Loan Modification Agreement
Dear Brian:
Pursuant to your request, and with regard to that certain Second Loan
Modification Agreement dated as of August 7, 1997 (this "Modification"),
by and between Franklin Ophthalmic Instruments Co., Inc. ("Borrower") and
Silicon Valley Bank ("Bank"), paragraph 2(C) is hereby amended to read, in
its entirety, as follows:
- It shall constitute an Event of Default under and as defined in the Loan
Agreement if Borrower fails to have a net profit of at least one dollar
($1.00) for each of Borrower's fiscal quarters, commencing with the fiscal
quarter ending June 30, 1997, except that, with regard to Borrower's fiscal
quarter ending September 30, 1997, no Event of Default shall be deemed to
have occurred so long as (i) Borrower has an Operating Profit of at least
one dollar ($1.00) for that fiscal quarter, and (ii) Borrower has a net
profit of at least one dollar ($1.00) for the fiscal year ending September
30, 1997. For purposes of this Modification only, the term "Operating
Profit" shall be defined as Borrower's earnings before interest, taxes,
depreciation, and amortization.
<PAGE>
If Borrower and Guarantors are in agreement with the above amendment,
please so indicate by executing this letter below and returning the original
to my attention.
Sincerely, Acknowledged and Agreed To:
Franklin Ophthalmic Instruments, Co., Inc.
/S/
Mark C. Cadieux By: /S/
Vice President Title: President & CEO
Date: August 14, 1997
cc: L. Lopez
Guarantors:
S/ Date:August 14, 1997
______________
Michael J. Carroll
/S/ Date:August 14, 1997
_______________
Brian Carroll
/S/ Date:August 14, 1997
________________
James Urban
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