<PAGE>
U.S. 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 DECEMBER 31, 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 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 January 31, 1997 the Registrant had outstanding 16,681,611 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 DECEMBER 31, 1996
INDEX
PART I .......................................................................1
Item 1. Condensed Financial Statements................................1
Condensed Balance Sheets......................................1
Condensed Statement of Operations.............................3
Condensed Statements of Cash Flows............................4
Notes to Condensed Financial Statements.......................5
Item 2. Management's Discussion and Analysis or Plan of Operation.....8
PART II......................................................................12
Item 1. Legal Proceedings............................................12
Item 2. Changes in Securities........................................12
Item 3. Defaults Upon Senior Securities..............................12
Item 4. Submission of Matters to a Vote of Security Holders..........12
Item 5. Other Information and Subsequent Events......................12
Item 6. Exhibits and Reports on Form 8-K.............................12
Signatures...................................................................14
<PAGE>
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 December 31, 1996 and results of
operations and cash flows for the three months ended December 31, 1995 and
December 31, 1996, 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>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1996
------------- -------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 20,912 $ -
Accounts receivable, less allowance for doubtful
accounts of $40,135 1,169,373 720,277
Inventory, less valuation allowance of $100,000 1,459,977 1,356,057
Prepaid expenses and other assets 62,742 19,027
------------- -------------
Total current assets 2,713,004 2,095,361
------------- -------------
Property and equipment, at cost:
Furniture and equipment 606,438 605,638
Automobiles and trucks 119,193 119,193
Leasehold improvements 110,271 109,408
------------- -------------
Property and equipment, at cost: 835,902 834,239
Less: Accumulated depreciation and amortization 639,032 618,394
------------- -------------
Total property and equipment 196,869 215,845
------------- -------------
Other assets:
Deposits 13,935 13,935
Intangible assets, net of accumulated amortization of
$761,212 and $706,623 2,217,682 2,272,271
------------- -------------
Total other assets 2,231,617 2,286,206
------------- -------------
TOTAL ASSETS $ 5,141,490 $ 4,597,412
------------- -------------
------------- -------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN
INTEGRAL PART OF THESE STATEMENTS.
1
<PAGE>
FRANKLIN OPHTHALMIC INSTRUMENTS CO., INC.
CONDENSED BALANCE SHEETS
(CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1996
-------------- --------------
<S> <C> <C>
Current liabilities:
Bank overdrafts $ - $ 55,597
Current portion of long-term debt 115,519 567,395
Accounts payable 946,397 1,180,475
Notes payable to bank 1,800,000 4,375,304
Current portion of capitalized lease obligations 17,920 16,125
Deposits 381,449 429,844
Accrued liabilities 389,739 859,279
Notes payable to related parties - 215,188
-------------- --------------
Total current liabilities 3,651,024 7,699,207
-------------- --------------
Long-term debt:
Long-term debt, less current portion 128,554 93,722
Capitalized lease obligations, less current portion 26,319 30,695
-------------- --------------
Total long-term debt 154,873 124,417
-------------- --------------
Total liabilities 3,805,897 7,823,624
-------------- --------------
Stockholders' equity (deficit):
Common stock: $0.001 par value; authorized
25,000,000 shares; 16,681,611 and 9,544,810
shares issued and outstanding at
December 31, 1996 and September 30, 1996 16,682 9,545
Additional paid-in capital 10,645,641 8,868,577
Accumulated deficit (9,326,730) (12,104,334)
-------------- --------------
Total stockholders' equity (deficit) 1,335,593 (3,226,212)
-------------- --------------
Total liabilities and stockholders' equity (deficit) $ 5,141,490 $ 4,597,412
-------------- --------------
-------------- --------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN
INTEGRAL PART OF THESE STATEMENTS.
2
<PAGE>
FRANKLIN OPHTHALMIC INSTRUMENTS CO., INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
DECEMBER 31,
---------------------------------------------
1995 1996
---- ----
<S> <C> <C>
Sales $ 2,375,683 $ 2,306,328
Cost of Sales 1,834,676 1,719,190
-------------- --------------
Gross profit $ 541,007 $ 587,138
Less:
Selling, general and administrative expenses 700,072 549,094
Amortization and depreciation 105,501 75,227
-------------- --------------
Loss from operations (264,566) (37,183)
-------------- --------------
Other income (expenses):
Interest income - -
Interest expense (155,099) (71,724)
Other income (expense) - -
-------------- --------------
Other income (expense), net (155,099) (71,724)
-------------- --------------
Net income (loss) before extraordinary item $ (419,665) $ (108,907)
Extraordinary item, gain from debt restructuring $ - $ 2,886,513
-------------- --------------
Net income (loss) $ (419,665) $ 2,777,606
-------------- --------------
-------------- --------------
Loss per common share:
Net income ( loss) before extraordinary item $ (0.05) $ (0.01)
-------------- --------------
-------------- --------------
Net income ( loss) $ (0.05) $ 0.22
-------------- --------------
-------------- --------------
Weighted average number of
Common shares outstanding 7,668,400 12,355,810
-------------- --------------
-------------- --------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN
INTEGRAL PART OF THESE STATEMENTS.
3
<PAGE>
FRANKLIN OPHTHALMIC INSTRUMENTS CO., INC.
CONDENSED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
DECEMBER 31,
-----------------------------------------
1995 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (419,665) $ 2,777,606
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation 24,350 20,638
Amortization 81,151 54,589
Gain from debt restructuring - (2,886,513)
Changes in current assets and liabilities:
Accounts receivable (106,399) (449,096)
Inventory 265,171 (103,920)
Prepaid expenses (36,371) (43,715)
Other assets (9,456) -
Deposits 29,373 (48,395)
Accounts payable, trade and accrued liabilities 50,884 (149,459)
----------------- -------------------
Net cash used in operating activities (120,962) (828,265)
----------------- -------------------
Cash flows from investing activities:
Acquisition of equipment - (1,663)
----------------- -------------------
Net cash used in investing activities - (1,663)
----------------- -------------------
Cash flows from financing activities:
Net change in bank overdrafts (133,901) (55,597)
Increase (decrease) in capital leases (2,685) (2,581)
Net change in borrowings under line of credit - -
Net proceeds from issuance of common stock 12,375 985,062
Increase (decrease) in long-term debt (8,802) (76,044)
Promissory notes converted to stock in private placement - -
Proceeds from issuance of promissory notes to related parties 253,975 -
----------------- -------------------
Net cash provided by financing activities $ 120,962 $ 850,840
----------------- -------------------
Net decrease in cash and cash equivalents $ 0 $ 20,912
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.
4
<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"), its certain trade creditors and certain debtholders for the
restructuring of certain of the Company's outstanding debt. See Notes 3 and 4
to the Condensed Financial Statements included elsewhere herein. In addition,
the Company raised $1,200,250 in new capital through the private placement of
equity in the first quarter of fiscal 1997. See note 5 to the Financial
Statements included elsewhere herein.
The restructuring agreement with Silicon provided that Silicon would
convert approximately $3,000,000 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. The
agreement with Silicon was conditioned on, 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 Silicon
agreement during the quarter ended December 31, 1996 and the new line of credit
became effective in November 1996. See note 3 to the Financial Statements
included elsewhere herein.
5
<PAGE>
FRANKLIN OPHTHALMIC INSTRUMENTS CO., INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
(Continued)
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 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. This resulted in
an extraordinary gain of $380,999 for the quarter ended December 31, 1996.
Management believes that with: (i) the completion of the above mentioned
restructuring of its debt; (ii) the equity infusion that it has received during
the quarter ended December 31, 1996; (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 territory expansion,
the Company will be able to achieve sales increases that could reduce 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 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 increase sales levels. In addition, in the event sales
levels increase, there can be no assurance that the Company can achieve
profitability. If profitability is 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.
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 (the "flat rate loan"),
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.
6
<PAGE>
FRANKLIN OPHTHALMIC INSTRUMENTS CO., INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
(Continued)
In September 1996, the Company reached an agreement with Silicon on an
Amended and Restated Loan and Security Agreement ("Amended Agreement") such that
Silicon agreed to convert approximately $3 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 1997. The agreement was conditioned on,
amongst other things, the Company's receipt of at least $1 million in cash and
the personal guarantees (for an amount not to exceed $200,000 in the aggregate)
of certain officers of the Company.
In November 1996, in connection with a private placement of equity, the
Company exceeded the $1,000,000 receipt of capital requirement and its officers
executed personal guarantees. As a result of the conversion of $3,160,327, 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 provides 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 is
payable monthly at a rate equal to 2% over Silicon's prime rate.
At December 31, 1996, the Company owed the maximum of $1.8 million 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, 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 between a period
from 6-18 months after the private offering 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
offering). 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.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
GENERAL
In connection with the Company's reorganization and financial restructuring
efforts that began during fiscal 1995 with the appointment of new management and
the subsequent consolidation of all locations into a Romeoville, Illinois
facility; the Company has recently completed financial restructuring with an
equity offering in which 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). 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 met the $1 million capital-
raising requirement under the Company's agreement with Silicon, and together
with the effectiveness of personal guarantees by Messrs. M. Carroll, J. Urban
and B. Carroll, satisfied all remaining conditions under such agreement. In
addition, the Company completed agreements with trade creditors during November
and December 1996 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.
As a result of the aforementioned debt restructuring during the quarter
ended December 31, 1996, the Company was able to take advantage of increased
cash flow and process orders during the final month of the quarter such that the
Company was able to achieve a modest operating profit by recording a profit
before interest, amortization and depreciation in the amount of $38,044 for the
quarter ended December 31, 1996.
In addition, with the above restructuring efforts completed, 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 the southeastern and north central 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 Valley Bank, 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.
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.
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.
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 in new capital through the private
placement of equity.
8
<PAGE>
The restructuring agreement with Silicon provided that Silicon would
convert approximately $3,000,000 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. The
agreement with Silicon was conditioned on, amongst 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 Messrs. Michael Carroll, James Urban, and Brian Carroll
for an amount not to exceed an aggregate of $200,000. The Company met the
conditions of the Silicon agreement during the first quarter of fiscal 1997 and
the new line of credit became effective in November 1996. See Note 3 to the
Financial Statements included elsewhere herein.
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 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. This resulted in
an extraordinary gain of $380,999 for the quarter ended December 31, 1996.
The Company believes that with (i) the completion of the above mentioned
restructuring of its debt; (ii) the equity infusion that it has received during
the quarter ended December 31, 1996; (iii) the increase in trade credit which
the Company has received upon the aforementioned debt restructuring and a
continuous increase in trade credit that would increase relative to increases in
sales; and (iv) the expansion of the Company's marketing efforts and sales
territory expansion; 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 increase sales levels. In addition, in the event sales
levels increase, there can be no assurance that the Company can achieve
profitability. If profitability is 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.
RESULTS OF OPERATIONS
Sales declined by $69,355 to $2,306,328 for the quarter ended December 31,
1996 from $2,375,683 for the quarter ended December 31, 1995. The primary
reason for the nominal sales decrease was because of a large institutional sale
in the quarter ended December 31, 1995 and the lack of a similar sale thereof in
December 31, 1996.
The Company's gross profit on sales increased from $541,007 for the quarter
ended December 31, 1995 to $587,138 for the quarter ended December 31, 1996.
Gross profit, as a percentage of sales, increased from 22.8% for the quarter
ended December 31, 1995 to 25.5% for the quarter ended December 31, 1996. The
increase in margin as a percentage of sales for the quarter ended December 31,
1996, was primarily attributable to the Company's ability to use improved cash
flow from the previously mentioned financial restructuring in order take
advantage of certain purchasing allowances for prompt payment opportunities
during the quarter ended December 31, 1996.
Selling, general and administrative ("SG&A") expenses decreased from
$700,072 for the quarter ended December 31, 1995 to $549,094 for the quarter
ended December 31, 1996. As a percentage of sales, SG&A expenses were 29.5% for
the three months ended December 31, 1995, compared to 23.8% for the first
quarter of fiscal 1997. The decrease in SG&A expenses is primarily a result of
the Company's reduction in costs attributed to professional fees and other
expenses related to the Company's restructuring of the Company's operations.
9
<PAGE>
Amortization and depreciation expense decreased from $105,501 for the
quarter ended December 31, 1995 to $75,227 for the quarter ended December 31,
1996. The decrease is primarily attributable to the elimination of amortization
expense that the Company incurred during fiscal 1995 pertaining to the
acquisition of certain software rights.
Interest expense decreased from $155,099 for the first quarter of fiscal
1995 to $71,724 for the quarter ended December 31, 1996. The decrease in
interest expense is primarily a result of the Company's restructuring if 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, and the recognition of an extraordinary gain from
debt restructuring of $2,886,513, the Company reported net income of 2,777,606
for the quarter ended December 31, 1996 as compared to a loss of $419,665 for
the quarter ended December 31, 1995.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow from operations was a negative $120,962 for the quarter ended
December 31, 1995 and negative $828,265 for the quarter ended December 31, 1996.
The negative operating cash flow for the quarter ended December 31, 1996 was
significantly greater than the quarter ended December 31, 1995. This was
primarily due to increases in accounts receivable as a result of a substantial
concentration of sales that took place during December, 1996, increases in
inventory levels, and a decrease in accounts payable as a result of the Company
taking advantage of prompt payment discounts available for inventory purchases.
The Company financed the negative operating cash flows for the quarter ended
December 31, 1996 from the proceeds of a private placement of securities. See
Note 5 to the Financial Statements included elsewhere herein.
The Company's principal credit facility has been a revolving 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 for borrowings of up to $5,500,000 after
the Company's acquisitions related to Progressive Ophthalmic Instruments, Inc.
and Midwest Ophthalmic Instruments Inc. in fiscal 1994. The line of credit
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 originally 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 described 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).
In connection therewith, Silicon 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
(the "flat rate loan"), 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 bore 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 to purchase 44,119 shares of common stock to provide for
exercise at a price of $.50 per share through March 31, 2000.
Throughout fiscal 1996, the Company continued to be in default of the
provisions in the credit agreement with Silicon. At September 30, 1996,
principal of $4,375,304 and accrued interest of $443,394 were outstanding under
the line of credit.
10
<PAGE>
In September 1996, the Company reached an agreement with Silicon on an
Amended and Restated Loan and Security Agreement ("Amended Agreement") such that
Silicon agreed to convert approximately $3 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 1997. The agreement was conditioned on,
amongst other things, the Company's receipt of at least $1 million in cash and
the personal guarantees (for an amount not to exceed $200,000 in the aggregate)
of certain officers of the Company.
In November 1996, in connection with a private placement of equity, the
Company exceeded the $1,000,000 receipt of capital requirement and its officers
executed personal guarantees. As a result of the conversion of $3,160,327, 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 provides 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 is
payable monthly at a rate equal to 2% over Silicon's prime rate.
At December 31, 1996, the Company owed the maximum of $1.8 million under
the line of credit.
11
<PAGE>
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On December 5, 1996, the Company filed a complaint against the auditing and
accounting firm of Marinelli & Scott (the Company's predecessor auditing and
accounting firm) in the United States District Court for the Northern District
of Illinois, Eastern Division (Docket No. 96C 7982), alleging professional
malpractice/negligence arising in connection with auditing and accounting
services performed by Marinelli & Scott. The Company is seeking damages in
excess of $50,000. Other than as set forth herein, the Company is not aware of
any material pending or ongoing litigation to which the Company is or would be a
party.
ITEM 2. CHANGES IN SECURITIES.
During the quarter ended December 31, 1996, the Company raised $1,200,250
of capital through the sale of 2,400,500 Units which were sold pursuant to a
private placement offering. Under such private placement, the Company sold
2,156,500 Units on November 20, 1996 and 134,000 Units on December 30, 1996.
Each Unit consisted of two shares of common stock, $0.001 par value, and one
common stock purchase warrant (the "Warrants"). 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 one year commencing six months from the date of the
warrant. Each Warrant is redeemable by the Company for $0.10 per Warrant, at
any time after September 30, 1997, upon 30 days prior written notice, if the
closing price or bid price of the common stock, as reported by the principal
exchange on which the common stock is then traded, the OTC Electronic Bulletin
Board or the National Quotation Bureau Incorporated, as the case may be, equals
or exceeds $3.00 per share for 20 consecutive trading days ending within 15 days
prior to the date of the notice of redemption. The company may in its sole
discretion extend the exercise date of the Warrants or reduce the exercise
price.
The private placement offering was made to accredited and unaccredited
investors pursuant to Rule 506 of Regulation D promulgated under the Securities
Act of 1933, as amended. In claiming such exemption, the Company relied upon
representations and warranties in the subscription agreements obtained from the
investors under the private placement.
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 three months ended December 31, 1996.
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
No reports on Form 8-K were filed by the Company during the quarter
ended December 31, 1996.
12
<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: February 14, 1997 By: /S/ Michael J. Carroll
-------------------------------
Michael J. Carroll, President
and Chief Executive Officer
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE QUARTER ENDED
DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 1,209,508
<ALLOWANCES> 40,135
<INVENTORY> 1,459,977
<CURRENT-ASSETS> 2,713,004
<PP&E> 835,902
<DEPRECIATION> 639,032
<TOTAL-ASSETS> 5,141,490
<CURRENT-LIABILITIES> 3,651,024
<BONDS> 0
0
0
<COMMON> 16,682
<OTHER-SE> 1,318,911
<TOTAL-LIABILITY-AND-EQUITY> 5,141,490
<SALES> 2,306,328
<TOTAL-REVENUES> 2,306,328
<CGS> 1,719,190
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 71,724
<INCOME-PRETAX> 2,777,606
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,777,606
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,777,606
<EPS-PRIMARY> .22
<EPS-DILUTED> 0
</TABLE>
