<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 MARCH 31, 1997
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 April 30, 1997 the Registrant had outstanding 17,681,611 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 MARCH 31, 1997
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 March 31, 1997 and results of
operations and cash flows for the three and six months ended March 31, 1996 and
March 31, 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
MARCH 31, SEPTEMBER 30,
1997 1996
---------- ------------
Current Assets:
Cash and cash equivalents $ - $ -
Accounts receivable, less allowance for doubtful
accounts of $26,740 and $40,135 1,075,639 720,277
Inventory, less valuation allowance of $100,000 1,418,191 1,356,057
Prepaid expenses and other assets 100,637 19,027
---------- ----------
Total current assets 2,594,467 2,095,361
---------- ----------
Property and equipment, at cost:
Furniture and equipment 616,287 605,638
Automobiles and trucks 119,193 119,193
Leasehold improvements 114,816 109,408
---------- ----------
Property and equipment, at cost: 850,295 834,239
Less: Accumulated depreciation and amortization 659,671 618,394
---------- ----------
Total property and equipment 190,625 215,845
---------- ----------
Other assets:
Deposits 5,487 13,935
Intangible assets, net of accumulated amortization
of $815,801 and $706,623 2,163,093 2,272,271
---------- ----------
Total other assets 2,168,581 2,286,206
---------- ----------
Total assets $4,953,672 $4,597,412
---------- ----------
---------- ----------
THE ACCOMPANYING NOTES ARE AN
INTEGRAL PART OF THESE STATEMENTS.
<PAGE>
FRANKLIN OPHTHALMIC INSTRUMENTS CO., INC.
CONDENSED BALANCE SHEETS
(CONTINUED)
(UNAUDITED)
MARCH 31, SEPTEMBER 30,
1997 1996
---------- -------------
Current liabilities:
Bank overdrafts $ 162,829 $ 55,597
Current portion of long-term debt 87,309 567,395
Accounts payable 1,003,005 1,180,475
Notes payable to bank 1,648,761 4,375,304
Current portion of capitalized lease obligations 18,459 16,125
Deposits 266,500 429,844
Accrued liabilities 413,654 859,279
Notes payable to related parties - 215,188
------------ ------------
Total current liabilities 3,600,515 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 3,749,969 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
March 31, 1997 and September 30, 1996 16,682 9,545
Additional paid-in capital 10,568,241 8,868,577
Accumulated deficit (9,381,220) (12,104,334)
------------ ------------
Total stockholders' equity (deficit) 1,203,703 (3,226,212)
------------ ------------
Total liabilities and stockholders'
equity (deficit) $ 4,953,672 $ 4,597,412
------------ ------------
------------ ------------
THE ACCOMPANYING NOTES ARE AN
INTEGRAL PART OF THESE STATEMENTS.
<PAGE>
FRANKLIN OPHTHALMIC INSTRUMENTS CO., INC.
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(UNAUDITED)
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
MARCH 31, MARCH 31,
-------------------------- --------------------------
1996 1997 1996 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales $ 2,197,045 $ 2,227,429 $ 4,572,728 $ 4,533,757
Cost of Sales 1,682,263 1,602,306 3,516,939 3,321,496
----------- ------------ ----------- ------------
Gross profit $ 514,782 $ 625,123 $ 1,055,789 $ 1,212,261
Less:
Selling, general and
adminstrative expenses 617,451 594,100 1,317,523 1,143,194
Amortization and depreciation 108,293 75,227 213,794 150,454
----------- ------------ ----------- ------------
Income (loss) from operations (210,962) (44,204) (475,528) (81,387)
----------- ------------ ----------- ------------
Other income (expenses):
Interest income 45 - 45 -
Interest expense (170,053) (10,288) (325,152) (82,012)
Other income (expense) - - - -
----------- ------------ ----------- ------------
Other income (expense), net (170,008) (10,288) (325,107) (82,012)
----------- ------------ ----------- ------------
Net income (loss) before
extraordinary item $ (380,970) $ (54,482) $ (800,635) $ (163,399)
Extraordinary item, gain from
debt restructuring $ - $ - $ - $ 2,886,513
----------- ------------ ----------- ------------
Net income (loss) $ (380,970) $ (54,482) $ (800,635) $ 2,723,114
----------- ------------ ----------- ------------
----------- ------------ ----------- ------------
Loss per common share:
Net income (loss) before
extraordinary item) $ (0.05) $ (0.00) $ (0.10) $ (0.01)
----------- ------------ ----------- ------------
----------- ------------ ----------- ------------
Net income (loss) $ (0.05) $ (0.00) $ (0.10) $ 0.19
----------- ------------ ----------- ------------
----------- ------------ ----------- ------------
Weighted average number of
common shares outstanding 7,672,525 16,681,611 7,670,463 14,518,711
----------- ------------ ----------- ------------
----------- ------------ ----------- ------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN
INTEGRAL PART OF THESE STATEMENTS.
<PAGE>
FRANKLIN OPHTHALMIC INSTRUMENTS CO., INC.
CONDENSED STATEMENT OF CASH FLOWS
(UNAUDITED)
FOR THE SIX MONTHS ENDED
MARCH 31,
--------------------------
1996 1997
---- ----
Cash flows from operating activities:
Net loss $ (800,635) $ 2,723,114
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation 51,491 41,277
Amortization 162,303 109,178
Gain from debt restructuring - (2,886,513)
Changes in current assets and liabilities:
Accounts receivable 454,531 (355,362)
Inventory 437,606 (62,134)
Prepaid expenses (74,588) (81,610)
Other assets - 8,448
Deposits (136,048) (163,344)
Accounts payable, trade and accrued
liabilities 35,879 (68,937)
---------- -----------
Net cash used in operating activities 130,539 (735,883)
---------- -----------
Cash flows from investing activities:
Acquisition of equipment (1,727) (16,056)
---------- -----------
Net cash used in investing activities (1,727) (16,056)
---------- -----------
Cash flows from financing activities:
Net change in bank overdrafts (188,427) 107,232
Increase (decrease) in capital leases (12,408) (6,550)
Net change in borrowings under line of credit - (151,239)
Net proceeds from issuance of common stock 12,375 907,662
Increase (decrease) in long-term debt (37,673) (105,166)
Proceeds from issuance of promissory notes to
related parties 97,321 -
---------- -----------
Net cash provided by financing activities $ (128,812) $ 751,939
---------- -----------
Net decrease in cash and cash equivalents $ - $ -
Cash and cash equivalents at beginning of year $ - $ -
---------- -----------
Cash and cash equivalents at end of year $ - $ -
---------- -----------
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 Condensed Financial Statements included elsewhere herein. In addition,
the Company raised $1,200,250 in the first quarter of fiscal 1997 and $400,000
in April and May of fiscal 1997 from the private placements of equity. 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.
<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 infusions that it has
received from private placements during the quarter ended December 31, 1996 and
in April and May of 1997; (iii) the increase in trade credit which the Company
has received upon the aforementioned debt restructuring; (iv) the expansion of
the Company's marketing efforts and sales territory expansion; and (v) and if
the Company is able to refinance the Company's debt when it comes due, 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. Finally, there is no
assurance that the Company will be able to refinance its outstanding debt
when its comes due.
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.
<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, among
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.
The maturity date on the Company's line of credit with Silicon Valley
Bank expires on July 31, 1997. The Company is currently in negotiations with
Silicon to extend the line of credit.
At March 31, 1997, the Company owed $1,648,761 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
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
<PAGE>
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.
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, as amended
May 8, 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 grants 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 under the following conditions:
(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 provides 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 warrant. At May 9, 1997, Prinz had purchased 2,000,000 of the
shares of Common Stock and been granted warrants to purchase 400,000 additional
shares of Common Stock. See Item 2 of Part II. The period during which Prinz
may purchase the balance of the shares offered in the Investment Agreement
expires May 30, 1997. The Investment Agreement also provided for the
appointment of John Prinz to the Board of Directors of the Company.
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 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.
The amount raised in the private placement met the $1 million capital-
raising requirement under the Company's agreement with Silicon Valley Bank
("Silicon") which provided for the restructuring of the Company's indebtedness
to Silicon. See Notes 2 and 3 to the Financial Statements. 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.
<PAGE>
As a result of the aforementioned debt restructuring during the
quarter ended December 31, 1996, the Company was able to continue to take
advantage of increased cash flow and process orders during the quarter ended
March 31, 1997 such that the Company was able to achieve a profit before
interest, amortization and depreciation in the amount of $31,023 for the
quarter ended March 31, 1997 as compared to a loss of $102,669 for the prior
year. For the six months ended March 31, 1997, the Company reported earnings
before interest, amortization and depreciation of $69,067 versus a loss of
$261,734 for the prior year.
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, 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 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 and $400,000 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 $3,000,000 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.
The Company believes that with (i) the completion of the above
mentioned restructuring of its debt; (ii) the equity infusion of $1,600,250 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 a continuous increase in trade credit that would increase
relative to increases in sales; and
<PAGE>
(iv) the expansion of the Company's marketing efforts and sales territory
expansion which already contributed to an increase in sales of $29,884 for the
quarter ended March 31, 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 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. Finally, there is no
assurance that the Company will be able to refinance its outstanding debt when
it comes due.
RESULTS OF OPERATIONS
Sales increased by $30,384 to $2,227,429 for the quarter ended
March 31, 1997 from $2,197,045 for the quarter ended March 31, 1996. The
Company attributes the modest 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 six months ended March 31, 1997,
sales decreased by $38,971 to $4,533,757 from $4,572,728 for the six months
ended March 31, 1996. The Company attributes a lack of working capital during
the beginning of the six months ended March 31, 1997 for the modest decrease.
The Company's gross margin on sales increased by $110,341 to $625,123
for the quarter ended March 31, 1997 from $514,782 for the quarter ended
March 31, 1996. Gross margin as a percentage of sales increased to 28% for the
quarter ended March 31, 1997 from 23.5% from the prior year's quarter. The
Company's gross margin on sales increased by $156,472 to $1,212,261 for the six
months ended March 31, 1997 from $1,055,789 for the six months ended March 31,
1996. Gross margin as a percentage of sales increased to 26.5% for the six
months ended March 31, 1997 from 23.1% for the six months ended March 31, 1996.
The Company attributes the increase in gross margin as a percentage of sales to
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 also allowed the Company to take
advantage of better purchasing opportunities of product.
Selling, general and administrative ("SG&A") expenses decreased from
$617,451 for the quarter ended March 31, 1996 to $594,100 for the quarter ended
March 31, 1997. As a percentage of sales, SG&A expenses were 26.7% for the
three months ended March 31, 1997, compared to 28.1% for the quarter ended
March 31, 1996. For the six months ended March 31, 1996 and 1997, SG&A expenses
decreased by $174,329 from $1,317,523 to $1,143,194 respectively. 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.
Amortization and depreciation expense decreased from $108,293 for the
quarter ended March 31, 1996 to $75,227 for the quarter ended March 31, 1997.
For the six months ended March 31, 1996 and 1997, amortization decreased from
$213,794 to $150,454. The decrease is primarily attributable to the elimination
of amortization expense that the Company incurred during fiscal 1996 pertaining
to the acquisition of certain software rights.
Interest expense decreased from $170,053 for the quarter ended
March 31, 1996 to $10,288 for the quarter ended March 31, 1997. For the six
months ended March 31, 1996 and 1997, interest expense decreased from $325,152
to $82,012. 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
<PAGE>
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 second quarter and the
six months ended March 31, 1997. The Company reported earnings before interest,
amortization and depreciation of $31,023 for the quarter ended March 31, 1997,
as compared to a loss of $102,669 for the prior year's quarter. For the six
months ended March 31, 1997, the Company reported earnings before interest,
amortization and depreciation of $69,067 versus a loss of $261,734 for the prior
year's six months. With the addition of interest, amortization and depreciation
expenses, the Company reported a net loss of $54,492 as compared to a net loss
of $380,970 in the prior year's quarter. As a result of a gain from debt
restructuring in the quarter ended December 31, 1996, the Company reported net
income of $2,723,114 for the six months ended March 31, 1997 versus a net loss
of $800,635 for the same period of the prior year.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow from operations was a negative $735,883 for the six
months ended March 31, 1997 versus a positive $130,539 for the same period of
the prior year. The negative operating cash flow for the six months ended
March 31, 1997 was due to increases in accounts receivable and inventory, and
the reduction of trade payables and accrued liabilities. The Company
financed the negative cash flows from the proceeds of a private placement of
securities during the quarter ended December 31, 1996.
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.
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
<PAGE>
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 March 31, 1997, the Company owed $1,648,761 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 $400,000
of capital through the sale of 2,000,000 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 on April 10, 1997 and 1,000,000 shares of Common Stock and the
Warrants on May 9, 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.
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.
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
<PAGE>
March 31, 1997.
ITEM 5. OTHER INFORMATION. NONE.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are filed herewith:
Financial Data Schedule
10.1 Investment Agreement with Prinz-Franklin L.L.C. dated
April 11, 1997.
10.2 Amendment to Investment Agreement dated May 8, 1997.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the
quarter ended March 31, 1997.
<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: May 15, 1997 By: /S/ Michael J. Carroll
----------------------
Michael J. Carroll, President
and Chief Executive Officer
<PAGE>
INVESTMENT AGREEMENT
This INVESTMENT AGREEMENT is entered into as of the _____ day of April,
1997, by and between FRANKLIN OPHTHALMIC INSTRUMENTS CO., INC., a Delaware
corporation (the "Company"), and PRINZ-FRANKLIN L.L.C., an Illinois limited
liability company ("Investor").
RECITALS
A. The Company is engaged primarily in the business of the sale and
servicing of high-quality examination instruments and equipment required to
furnish and outfit examination rooms of ophthalmologists, optometrists, medical
organizations and clinics.
B. The Company is currently a small business issuer reporting under the
Securities Exchange Act of 1934, as amended.
C. Investor and the Company desire that Investor make an equity
contribution to the Company in the aggregate amount up to $600,000 on the terms
and conditions set forth in this Agreement.
AGREEMENT
In consideration of the foregoing Recitals and the mutual promises
contained herein, and for other good and valuable consideration, the receipt and
sufficiency of which hereby are acknowledged, the parties agree as follows:
ARTICLE I
DEFINITIONS
Capitalized terms used in this Agreement shall have the following meanings
ascribed to them in this Article I:
"AGREEMENT" means this Investment Agreement, together with all Exhibits
referred to herein.
"CLOSING DATE" means the Initial Closing Date or the Second Closing Date,
as the context may require.
"COMMON STOCK" means Common Stock of the Company, $0.001 par value.
"COMPANY" has the meaning ascribed to such term in the introduction hereto.
<PAGE>
"INITIAL CLOSING DATE" means April __, 1997 or such other date as the
parties may mutually agree for the sale and issuance of shares of Common Stock
to Investor pursuant to Section 2.1(a) hereof.
"INVESTOR" has the meaning ascribed to such term in the introduction
hereto.
"REGISTRATION RIGHTS AGREEMENT" means the Registration Rights Agreement
between the Company and Investor, the form of which is attached hereto as
EXHIBIT A.
"RELATED AGREEMENTS" means the Registration Rights Agreement and the
Warrant Agreement.
"SECOND CLOSING DATE" means May __, 1997 or such other date as the parties
may mutually agree for the sale and issuance of shares of Common Stock to
Investor pursuant to Section 2.1(b) hereof.
"SEC" means the Securities and Exchange Commission.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"SHARES" means the shares of Common Stock of the Company issued and sold to
Investor pursuant to this Agreement.
"WARRANT AGREEMENT" means the Warrant Agreement pursuant to which the
Company will grant Investor the right to purchase shares of Common Stock, the
form of which is attached hereto as EXHIBIT B.
ARTICLE II
PURCHASE AND SALE OF SHARES
2.1 COMMON STOCK. Subject to the terms and conditions set forth in this
Agreement, the Company agrees to sell to Investor, and Investor agrees to
purchase from the Company, shares of Common Stock as follows:
(a) on the Initial Closing Date, 1,000,000 shares of Common Stock for
a purchase price of $0.20 per share for an aggregate purchase price of Two
Hundred Thousand Dollars ($200,000); and
(b) on the Second Closing Date, 2,000,000 shares of Common Stock for
a purchase price of $0.20 per share for an aggregate purchase price of Four
Hundred Thousand Dollars ($400,000).
2.2 REGISTRATION RIGHTS. The Shares issued pursuant to Section 2.1 shall
be subject to registration rights as provided in the Registration Rights
Agreement attached hereto as EXHIBIT A.
2
<PAGE>
2.3 RIGHTS OF FIRST REFUSAL.
(a) For a period of two (2) years from the Initial Closing Date,
Investor shall have the right of first refusal to purchase its
proportionate number of any New Securities (as defined below) that the
Company may, from time to time, propose to issue and sell after the date
hereof. For purposes hereof, Investor's "proportionate number" means the
number of New Securities proposed to be issued and sold multiplied by the
percentage of issued and outstanding shares of Common Stock and common
stock equivalents held by Investor immediately prior to such sale.
(b) As used herein, the term "New Securities" shall mean any capital
stock of the Company issued after the date hereof, whether now authorized
or not, including without limitation, Common Stock, preferred stock or any
other security which is convertible into or exchangeable for capital stock
of the Company, and proposed to be sold by the Company to investors for
cash consideration; provided, however that "New Securities" shall not
include (A) shares of Common Stock issued pursuant to this Agreement or the
Warrant Agreement, (B) Common Stock, preferred stock or any other security
issued pursuant to the acquisition of another business entity by the
Company by merger, purchase of substantially all of such other entity's
assets, or by other reorganization whereby the Company ends up owning,
directly or indirectly, more than 50% of the voting power of such entity,
(C) Common Stock, preferred stock or any other security sold pursuant to a
public distribution and (D) Common Stock issued pursuant to the exercise of
any warrants, options or convertible securities now or hereinafter
outstanding.
(c) In the event the Company proposes to undertake an issuance of New
Securities, it shall give Investor written notice of its intention to do so
at least 10 days prior to such issuance, describing the New Securities and
the price and terms upon which the Company proposes to issue the same (the
"Original Notice"). Investor may purchase such number of New Securities up
to its proportionate number of such New Securities ("Full Amount") for the
price and upon the terms specified in the Original Notice by giving written
notice to the Company no later than 5 days after the date of receipt of the
Original Notice ("Notice Date") identifying the number of New Securities
(up to the Full Amount) to be purchased.
(d) In the event Investor fails to exercise such right of first
refusal in full within said 5-day period, the Company may thereafter sell
the New Securities as to which Investor's rights were not exercised, at a
price and upon terms no more favorable to the purchasers thereof than those
specified in the Original Notice.
2.4 METHOD OF PAYMENT. Subject to the terms and conditions of this
Agreement, each payment to be made by Investor pursuant to Section 2.1 hereof
shall be by wire transfer of immediately available funds to a single account
designated by the Company.
3
<PAGE>
2.5 ISSUANCE OF WARRANTS. Subject to the terms and conditions of this
Agreement, the Company agrees to grant to Investor, on each of the Initial and
Second Closing Dates, a warrant, each of which shall be in the form of the
Warrant Agreement attached hereto as EXHIBIT B, to purchase up to Two Hundred
Thousand (200,000) shares of Common Stock of the Company, at an exercise price
of One Dollar ($1.00) per share.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
As an inducement to Investor to enter into and perform under this
Agreement, the Company represents and warrants to Investor as follows:
3.1 DUE AUTHORIZATION. Except as otherwise provided in this Agreement,
the execution and delivery by the Company of, and the performance by the Company
of its obligations under, this Agreement and the Related Agreements have been
duly and validly authorized and approved by all necessary corporate action.
Subject to the approval of the board of directors of the Company, this Agreement
and the Related Agreements shall be valid and binding obligations of the
Company, enforceable in accordance with their respective terms, subject, as to
enforcement, to bankruptcy, insolvency, reorganization and other laws of general
applicability relating to or affecting creditors' rights and to general equity
principles.
3.2 CONSENT. The execution, delivery and performance by the Company of
this Agreement and the Related Agreements will not (a) violate any statute,
indenture, mortgage, deed of trust, note agreement or other agreement or
instrument to which the Company is a party or by which it is bound, (b) conflict
with the certificate of incorporation or by-laws of the Company or (c) violate
any order, rule or regulation or any court or governmental agency or body having
jurisdiction over the Company or any of its properties.
3.3 CAPITALIZATION OF THE COMPANY. As of the date hereof, the Company has
authorized capital stock as stated in its Quarterly Report on Form 10-QSB for
the period ended December 31, 1996.
3.4 REPORTING. As of the date hereof, the Company has filed with the SEC
all reports that it is required to file with the SEC pursuant to the Exchange
Act. Except as disclosed by the Company in its periodic reports filed with the
SEC, there is no litigation nor other proceeding pending or, to the knowledge of
the Company, threatened against the Company that is likely to result,
individually or in the aggregate, in a material adverse effect on the condition,
business or assets of the Company or materially threatens the validity of this
Agreement and the Related Agreements, the offer, issuance, sale or delivery of
the Shares or any other action contemplated under this Agreement or the Related
Agreements.
3.5 COMMISSIONS. The Company has not incurred any obligation or
liability, contingent or otherwise, for brokers' commissions, finders' fees or
similar payments in connection with the transactions contemplated by this
Agreement or the Related Agreements.
4
<PAGE>
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF INVESTOR
As an inducement to the Company to enter into this Agreement, Investor
represents and warrants to the Company as follows:
4.1 LIMITED LIABILITY COMPANY STATUS. Investor is a limited liability
company duly organized, validly existing and in good standing under the laws of
the State of Illinois.
4.2 DUE AUTHORIZATION. The execution and delivery by Investor of, and the
performance by Investor of its obligations under, this Agreement and the Related
Agreements have been, or as of the Initial Closing Date will be, duly and
validly authorized and approved by all necessary company action on the part of
Investor. This Agreement and the Related Agreements are, or upon execution by
Investor, will be, valid and binding agreements of Investor, enforceable in
accordance with their respective terms, subject, as to enforcement, to
bankruptcy, insolvency, reorganization or other laws of general applicability
relating to or affecting creditors' rights and to general equity principles.
4.3 AUTHORITY OF INVESTOR. Investor has the power and authority to enter
into and perform its obligations under this Agreement and the Related
Agreements. Neither the execution and delivery of, nor the performance by
Investor of its obligations under, this Agreement and the Related Agreements
will conflict with or result in a material breach of any of the terms or
provisions of, or constitute a material default under, any statute, any
indenture, mortgage, deed of trust, note agreement or other agreement or
instrument to which Investor is a party, Investor's articles of organization or
operating agreement or any order, rule or regulation of any court or
governmental agency or body having jurisdiction over Investor or any of its
properties.
4.4 CONSENTS. No consent or approval is required by any person or entity
pursuant to the terms of any contract or otherwise in order to permit the
execution and delivery by Investor of this Agreement and the Related Agreements
and the performance by Investor of its obligations thereunder and the
consummation of the transactions contemplated thereby.
4.5 COMMISSIONS. Investor has not incurred any obligation or liability,
contingent or otherwise, for brokers' commissions, finders' fees or other like
payments in connection with the transactions contemplated by this Agreement or
the Related Agreements.
4.6 INVESTMENT INTENT. Investor is acquiring the securities hereunder for
its own account (except as otherwise expressly permitted in this Agreement), for
investment purposes only, and not with a view to the distribution or resale
thereof. Investor will not participate or have any direct or indirect
participation in, any such distribution. Investor will not participate in the
direct or indirect underwriting of any such distribution. Investor acknowledges
that, except as provided in this Agreement or the Related Agreements, the
Company is under no obligation to register the securities. Investor will not
resell or otherwise transfer all or any portion of the securities, or any
interest therein, except as permitted by law, including without limitation, the
5
<PAGE>
Securities Act and applicable state securities laws. Until the Shares are
registered under the Securities Act or transferred pursuant to and in compliance
with an exemption under federal and state securities laws, including Rule 144
promulgated under the Securities Act ("Rule 144"), all certificates evidencing
any of the Shares, whether upon original issuance or upon any transfer thereof,
shall bear a legend, prominently stamped or printed thereon, reading
substantially as follows: "The shares of Common Stock represented by this
certificate have not been the subject of registration under the Securities Act
of 1933 or under applicable state securities laws. Such shares of Common Stock
may not be offered for sale, sold, delivered after sale, pledged, hypothecated
or otherwise transferred in the absence of: (A) an effective registration
statement covering such shares under the Securities Act of 1933 and under
applicable state securities laws; or (B) the availability of exemption from the
registration requirements." Investor acknowledges that Rule 144 may not be
available as a basis for exemption from the registration requirements of the
Securities Act.
4.7 INVESTOR QUALIFICATIONS. Investor has such knowledge and experience
in financial and business matters to be capable of evaluating the merits and
risks of the acquisition of the securities under this Agreement. Investor will
be able to afford to lose the entire value of such investment.
4.8 AVAILABLE INFORMATION. All SEC filings and other documents, records
and books pertinent to an investment in the securities of the Company have been
made available for inspection by Investor or its representatives. Investor and
its representatives have had a reasonable opportunity to ask questions of and
receive answers from management of the Company concerning the Company and the
terms and conditions of the transactions contemplated under this Agreement and
the Related Agreements, and all information Investor and its representatives
have requested has been received.
4.9 NASDAQ OTC BULLETIN BOARD. Investor is aware that as of the date
hereof the Company's Common Stock is not trading on the NASDAQ SmallCap Market-
TM- but is quoted on the NASDAQ OTC Bulletin Board and there can be no assurance
that the Company's Common Stock will meet the listing criteria for inclusion on
the NASDAQ SmallCap Market-TM- or any other securities exchange.
ARTICLE V
COVENANTS PRIOR TO EACH CLOSING DATE
From and after the date hereof, through and including each Closing Date,
the Company and Investor covenant and agree as follows:
5.1 BEST EFFORTS. The Company and Investor agree to use their respective
reasonable best efforts and take all reasonable actions to bring about the
timely performance of this Agreement and the Related Agreements and cause the
representations and warranties set forth in this Agreement to remain true and
complete through and including each Closing Date.
6
<PAGE>
5.2 ACTION PRIOR TO CLOSING. Except as may be required by law, neither
the Company nor Investor shall take any action that would adversely affect the
Company's and Investor's ability, respectively, to execute, deliver or perform
this Agreement or the Related Agreements or that would cause any documents
delivered by the Company or Investor pursuant to the terms of this Agreement or
the Related Agreements, or any representation or warranty made by the Company or
Investor herein, not to be true in all material respects on the applicable
Closing Dates.
5.3 DUE DILIGENCE INVESTIGATION. Following the date hereof and for a
period up to and including May 2, 1997, the Company shall afford to Investor and
its authorized agents or representatives the right during normal business hours
to inspect the assets, books, personal property and real estate of the Company
and shall afford them access to the Company's officers and key management as
Investor reasonably shall deem necessary or desirable.
5.4 BANKING COMMITMENT. The Company and Investor shall use their
reasonable best efforts to obtain a commitment from a financial institution to
provide the Company a line of credit in an amount not less than $1,500,000.
The Company and Investor acknowledge and agree that the proceeds of such line of
credit are to be used to pay down the line of credit currently being provided to
the Company by Silicon Valley Bank and to provide for working capital.
5.5 DIRECTORS. Effective on the Initial Closing Date, the board of
directors of the Company shall increase the board of directors to such number as
it deems appropriate. John Prinz shall thereupon be appointed a member of the
Company's board of directors. The Company shall nominate John Prinz for
director for each shareholders meeting at which his term has expired or prior to
which he is not otherwise a director of the Company, as long as (a) Investor
holds at least five percent (5%) of the issued and outstanding shares of Common
Stock of the Company, (b) in the Company's reasonable judgment, John Prinz is
willing and able to serve in such capacity, and (c) the Second Closing has
occurred or has not occurred due to the fault of the Company. The Company shall
provide, at its cost, director and officer liability insurance coverage for John
Prinz.
5.6 ASSISTANCE OF INVESTOR. For a period of two years from the Initial
Closing Date, at the reasonable request of the board of directors of the
Company, Investor shall, as an independent contractor and upon terms agreed upon
at such time, assist the Company in communicating with the financial markets to
update market makers of the progress of the Company, establishing relationships
with broker-dealers to facilitate any future capital raising by the Company and
having its Common Stock relisted for quotation in the NASDAQ SmallCap Market-TM-
. Investor acknowledges that the Company may use other persons or entities for,
and has no obligation to permit Investor to participate in, such activities.
5.7 NO SHOP. For the period beginning on the date hereof and ending on
the earlier to occur of (i) May 2, 1997 or (ii) the termination of this
Agreement, the Company agrees that it will not enter into any agreement with a
third party with respect to an equity investment by such third party in the
Company. During such period, Investor agrees to conduct its due diligence for
the purpose of making its investment in the Company as provided herein.
7
<PAGE>
5.8 CONFIDENTIALITY. Investor agrees that at all times through and
including the last occurring Closing Date, and for a period of three years
thereafter, it and its representatives shall hold in strict confidence all
information and documents received from the Company in connection with the
transactions contemplated under this Agreement and the Related Agreements. If
the transactions herein contemplated shall not be consummated, Investor shall
continue to hold all information received form the Company in strict confidence
and shall return to the Company or destroy (as directed by the Company) all such
documents and information in written form then in Investor's or its
representatives' possession; provided, however, that Investor's obligation to
maintain confidentiality pursuant to this Section 5.8 shall not apply to any
information or documents that are public knowledge at the time furnished by the
Company or that become public knowledge thereafter through any cause other than
as a result of any act of Investor or its representatives which constitutes a
breach of this Agreement. Nothing herein shall be deemed to prohibit any
disclosure required by order of a court of competent jurisdiction or by any
applicable statute or valid regulation of a competent governmental authority.
5.9 LEGAL FEES. The Company shall bear its own costs of legal
representation, and shall pay the legal costs reasonably incurred by Investor up
to an aggregate amount of $7,000, relating to the negotiation of this Agreement
and the Related Agreements.
5.10 CONTINUATION OF COVENANTS. Those covenants set forth in Sections 5.5,
5.6 and 5.8 shall survive the last occurring Closing Date and shall continue in
accordance with such Section.
ARTICLE VI
CONDITIONS PRECEDENT TO INVESTOR'S OBLIGATIONS
6.1 OBLIGATIONS TO BE SATISFIED ON OR PRIOR TO EACH CLOSING DATE. The
obligations of Investor under this Agreement to be performed on each Closing
Date shall be subject to the satisfaction, on or prior to such Closing Date, of
the conditions set forth in this Section with respect to such Closing Date, any
of which conditions may be waived by Investor at its option:
(a) On or prior to each Closing Date, the following conditions must
be satisfied:
(i) ACCURACY OF REPRESENTATIONS AND WARRANTIES. Each of the
representations and warranties made by the Company in this Agreement
shall be true, correct and complete in all material respects on such
Closing Date as though such representations and warranties had been
made on such date.
(ii) COMPLIANCE WITH AGREEMENT. The Company shall have performed
and complied in all material respects with all of the terms,
covenants, conditions and obligations under this Agreement which are
to be performed or complied with by the Company on or before such
Closing Date.
8
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(iii) CLOSING DOCUMENTS. The Company shall have delivered
all certificates, instruments, agreements, opinions and other
documents required to be delivered by the Company on or prior to such
Closing Date pursuant to Article VIII hereof, and the form and
substance of all such certificates, instruments, opinions and other
documents delivered to Investor on such Closing Date shall be in form
reasonably satisfactory to Investor.
(b) In addition to the conditions specified in Section 6.1(a) hereof,
on or prior to the Second Closing Date, the following conditions must be
satisfied:
(i) INVESTIGATION. Investor, and its authorized agents and
representatives, shall have been afforded access as provided in
Section 5.3, and Investor shall be reasonably satisfied with the
results of such investigation.
(ii) BANKING COMMITMENT. The Company shall have obtained a
written commitment from a financial institution to provide a line of
credit in an amount and on terms consistent with those set forth in
Section 5.4 hereof.
6.2 PROCEDURE FOR FAILURE TO SATISFY CONDITIONS PRIOR TO CLOSING DATE. In
the event that any of the conditions precedent set forth in Section 6.1 have not
been satisfied as of a Closing Date, Investor shall notify the Company in
writing indicating its election, exercised in its sole discretion, to (a) waive
such condition precedent (if such condition is capable of being waived) or
(b) refuse to close. In lieu of the foregoing, Investor and the Company may
agree to consummate the transactions contemplated by this Agreement on such
additional terms as are agreed to by Investor and the Company. In the event
any condition is waived by Investor in accordance with this Section 6.2, such
condition shall be deemed waived for such Closing Date but not with respect to
any subsequent Closing Date unless otherwise specified in writing by Investor.
ARTICLE VII
CONDITIONS PRECEDENT TO THE COMPANY'S OBLIGATIONS
7.1 OBLIGATIONS TO BE SATISFIED ON OR PRIOR TO CLOSING DATE. The
obligations of the Company under this Agreement to be performed on each Closing
Date shall be subject to the satisfaction, on or prior to such Closing Date, of
the conditions set forth under this Section with respect to such Closing Date,
any of which conditions may be waived by the Company at its option:
(a) On or prior to each Closing Date, the following conditions must
be satisfied:
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(i) ACCURACY OF REPRESENTATIONS AND WARRANTIES. Each of the
representations and warranties made by Investor in this Agreement
shall be true, correct and complete in all material respects on such
Closing Date as though such representations and warranties had been
made on such date.
(ii) COMPLIANCE WITH AGREEMENT. Investor shall have performed and
complied in all material respects with all of the terms, covenants,
conditions and obligations under this Agreement which are to be
performed or complied with by Investor on or before such Closing Date.
(iii) CLOSING DOCUMENTS. Investor shall have delivered all
certificates, instruments, agreements, opinions and other documents
required to be delivered by Investor on or prior to such Closing Date
pursuant to Article VIII hereof, and the form and substance of all
such certificates, instruments, opinions and other documents delivered
to the Company on such Closing Date shall be in form reasonably
satisfactory to the Company.
(iv) APPROVAL OF DIRECTORS. The transactions contemplated by
this Agreement and the Related Agreements shall have been approved by
the Company's board of directors.
7.2 PROCEDURE FOR FAILURE TO SATISFY CONDITIONS PRIOR TO CLOSING DATE. In
the event that any of the conditions set forth in Section 7.1 have not been
satisfied as of a Closing Date, the Company shall notify Investor in writing
indicating its election, exercised in its sole discretion, to (a) waive such
condition precedent (if such condition is capable of being waived) or (b) refuse
to close. In lieu of the foregoing, Investor and the Company may agree to
consummate the transactions contemplated by this Agreement on such additional
terms as are agreed to by Investor and the Company. In the event any condition
is waived by the Company in accordance with this Section 7.2, such condition
shall be deemed waived for such Closing Date but not with respect to any
subsequent Closing Date unless otherwise specified in writing by the Company.
ARTICLE VIII
CLOSINGS
8.1 TIME AND PLACE. Each closing shall take place on the respective
Closing Date at the offices of the Company's counsel located at 3500 Three First
National Plaza, Chicago, Illinois, or at such other place as the parties may
agree in writing.
8.2 CLOSING TRANSACTIONS. All documents and other instruments required to
be delivered on each Closing Date shall be regarded as having been delivered
simultaneously, shall be dated such Closing Date and no document or other
instrument shall be regarded as having been delivered until all have been
delivered.
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8.3 DELIVERIES BY THE COMPANY.
(a) On each Closing Date, the Company shall deliver or cause to be
delivered to Investor:
(i) certificates issued to the Investor representing the Shares
to be issued on such date pursuant to Section 2.1 hereof;
(ii) the opinion of the Company's counsel, dated such Closing
Date, in substantially the form attached hereto as EXHIBIT C;
(iii) a certificate, substantially in the form as attached
hereto as EXHIBIT D, from the President of the Company dated as of
such Closing Date, certifying that the representations and warranties
of the Company herein contained are true and correct on and as of such
Closing Date and that all of the conditions set forth in Article VI to
be complied with or performed by the Company by such Closing Date have
been complied with or performed in all material respects; and
(iv) such other instruments and documents as are (i) required by
any other provisions of this Agreement or (ii) reasonably necessary,
in the opinion of Investor or Investor's counsel, to effect the
performance of this Agreement by the Company.
(b) In addition to the documents specified in Section 8.3(a) hereof,
on the Initial Closing Date, the Company shall deliver to Investor the
Warrant Agreement, executed by a proper officer of the Company, exercisable
for the number of shares set forth in Section 2.5 hereof for such Closing
Date.
(c) In addition to the documents specified in Section 8.3(a) hereof,
on the Second Closing Date, the Company shall deliver to Investor:
(i) a copy of the written commitment from a financial
institution in accordance with Section 6.1(b)(ii) hereof;
(ii) the Registration Rights Agreement executed by a proper
officer of the Company; and
(iii) the Warrant Agreement, executed by a proper officer of
the Company, exercisable for the number of shares set forth in Section
2.5 hereof for such Closing Date.
8.4 DELIVERIES BY INVESTOR.
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(a) On each Closing Date, Investor shall deliver or cause to be
delivered to the Company:
(i) the opinion of Investor's counsel, dated such Closing Date,
in substantially the form attached hereto as EXHIBIT E;
(ii) a certificate, substantially in the form attached hereto as
EXHIBIT F, from the manager of Investor, dated as of such Closing
Date, certifying that the representations and warranties of Investor
herein contained are true and correct on and as of such Closing Date
and that all of the conditions set forth in Article VII to be complied
with or performed by Investor by such Closing Date have been complied
with or performed in all material respects;
(iii) funds by wire transfer in accordance with Section 2.4
hereof; and
(iv) such other instruments and documents as are (i) required by
any other provisions of this Agreement or (ii) reasonably necessary,
in the opinion of the Company or Company's counsel, to effect the
performance of this Agreement by Investor.
(b) In addition to the documents specified in Section 8.4(a) hereof,
on the Initial Closing Date, Investor shall cause to be delivered to the
Company certificate of good standing dated as of a recent date for Investor
issued by the Secretary of the State of Illinois.
ARTICLE IX
TERMINATION
9.1 TERMINATION. This Agreement may be terminated at any time (a) by
mutual consent of the Company and Investor or (b) by either party if no closing
has occurred on the Initial Closing Date.
9.2 LIABILITY ON TERMINATION. In the event of termination pursuant to
Section 9.1, neither party hereto shall have any liability hereunder of any
nature whatsoever to the other, including any liability for damages; provided,
however, that this Section 9.2 shall not preclude liability for fraud or willful
misconduct by Investor or the Company.
ARTICLE X
INDEMNIFICATION AND ARBITRATION
10.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All of the
representations, warranties, covenants and agreements made by each party in this
Agreement or in any Exhibit, certificate or document delivered by any such party
pursuant hereto or in connection with this Agreement shall survive the closing
of the transaction. Each party hereto shall be entitled to rely upon any such
representations and warranties of the other parties for a period through and
including May 2, 1998.
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10.2 INDEMNIFICATION BY THE COMPANY. The Company covenants and agrees to
indemnify and hold harmless Investor and each of its managers and members from
and against any and all liability, obligation, loss, cost or damage (including
reasonable legal and accounting fees incurred in defending or prosecuting any
claim for any such liability, loss or damage) arising out of or resulting from:
(a) The untruth or inaccuracy as of the date hereof or on any Closing
Date, except as otherwise contemplated herein, of any representation or
warranty made by the Company contained in this Agreement; and
(b) The failure by the Company to perform any covenant or condition
required to be performed or satisfied by the Company herein.
10.3 INDEMNIFICATION BY INVESTOR. Investor covenants and agrees to
indemnify and hold harmless the Company from and against any and all liability,
obligation, loss, cost or damage (including reasonable legal and accounting fees
incurred in defending or prosecuting any claim for any such liability, loss,
cost or damage) arising out of or resulting from:
(a) The untruth or inaccuracy as of the date hereof or on any Closing
Date, except as contemplated herein, of any representation or warranty made
by Investor contained in this Agreement; and
(b) the failure by Investor to perform any covenant or condition
required to be performed by Investor herein.
10.4 PROCEDURE FOR INDEMNIFICATION.
(a) If any party hereto shall claim indemnification hereunder arising
from any claim or demand of a third party, the party seeking
indemnification shall promptly notify the party from whom indemnification
is sought in writing of the basis for such claim or demand, setting forth
the nature of the claim or demand in detail. The party against whom
indemnification is sought shall have the right to compromise or, if
appropriate, defend at its own cost and through counsel of its own
choosing, any claim or demand of any third party giving rise to such claim
for indemnification. Such notice and the said opportunity to compromise or
defend, if applicable, shall be conditions precedent to any asserted
liability under this indemnity. In the event the party against whom
indemnification is sought undertakes to compromise or defend any such claim
or demand, it shall promptly notify the other party in writing of its
intention to do so and shall give the other party such security in that
regard as such other party reasonably may request. The party claiming
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indemnification shall fully cooperate with the other party and its counsel
in the defense or compromise of such claim or demand. After the assumption
of the defense by the indemnifying party, the indemnifying party shall not
be liable for any legal or other expenses subsequently incurred by the
party seeking indemnification, in connection with such defense, other than
reasonable costs of investigation, but the party seeking indemnification
may participate in such defense at its own expense. No settlement of a
third party claim or demand defended by the party seeking indemnification
shall be made without the written consent of the party from whom
indemnification is sought. The indemnifying party shall not, except with
written consent of the indemnified party, consent to the entry of a
judgment or settlement which does not include as an unconditional term
thereof, the giving by the claimant or plaintiff to the indemnified party
of an unconditional release from all liability in respect of such third
party claim or demand.
(b) If any party shall claim indemnification hereunder for any claim
other than a third party claim, the party claiming indemnification shall
promptly notify the other of the nature and amount of the claim; and
payment therefor shall be made by the party receiving such notice forthwith
upon receipt thereof.
10.5 ARBITRATION. In the event that any dispute should arise between the
parties hereto with respect to monetary damages, the controversy shall be
submitted to arbitration in accordance with the provisions of this Section 10.5.
The party demanding monetary damages shall give to the other party notice
in writing, stating with specificity the matter upon which an award is desired.
Such demand shall be settled by arbitration in Chicago, Illinois, before three
arbitrators in accordance with the Rules then obtaining of the American
Arbitration Association; provided, however, that Investor, on the one hand, and
the Company, on the other hand, as appropriate, shall each designate one
arbitrator and such designated arbitrators shall mutually agree on the
designation of a third arbitrator, except that, failing such agreement, the
third arbitrator shall be named by the American Arbitration Association. The
award of the arbitrators shall be a conclusive determination of the matter and
shall be binding upon all parties hereto, and shall not be contested by any of
them. The arbitrators shall award the prevailing party reasonable expenses and
costs including without limitation reasonable attorneys' fees.
Notwithstanding anything to the contrary herein, upon the occurrence of a
breach of a representation, warranty, covenant or other agreement hereunder by a
party hereto, which breach, in the opinion of the aggrieved party, is not
subject to remedy by the payment of monetary damages, the aggrieved party shall
be entitled to seek in a court of competent jurisdiction both monetary damages
and equitable relief including, but not limited to, the right to rescind this
Agreement, unwind the consummation of the transaction contemplated by this
Agreement and place the parties in the same respective positions they held prior
to consummation of the transaction contemplated by this Agreement.
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ARTICLE XI
MISCELLANEOUS PROVISIONS
11.1 AMENDMENT. This Agreement may be amended only by the written consent
of the Company and Investor.
11.2 SUCCESSORS AND ASSIGNS. Neither party may assign this Agreement
without the prior written consent of the other party. Unless otherwise provided
herein, this Agreement shall be binding upon and inure to the benefit of
Investor and the Company, and their respective successors and assigns.
11.3 NOTICES. All notices, demands and communications provided for herein
shall be in writing and shall be deemed to have been duly given if delivered in
person or mailed by certified or registered mail, return receipt requested,
postage prepaid, and addressed as follows:
(a) if to Investor: Prinz-Franklin L.L.C.
c/o John Prinz
One Northfield Plaza, Suite 300
570 Frontage Road
Northfield, Illinois 60093
(b) if to the Company: Franklin Ophthalmic Instruments Co., Inc.
1265 Naperville Drive
Romeoville, Illinois 60446
Attention: Michael Carroll, President
with a copy to: Ungaretti & Harris
3500 Three First National Plaza
Chicago, Illinois 60602
Attention: Michael J. Philippi, Esq.
or to such other addresses as may be specified by any of the parties hereto
pursuant to notice given by such party in accordance with the provisions of this
Section 11.3.
11.4 HEADINGS. All headings in this Agreement are for convenience of
reference only, shall not be deemed to constitute a part hereof, and shall not
be deemed to limit, characterize or in any way affect the provisions of this
Agreement.
11.5 PARTIAL INVALIDITY. If any provision of this Agreement shall be held
invalid or unenforceable, the remainder nevertheless shall remain in full force
and effect. If any provision is held invalid or unenforceable with respect to
particular circumstances, it nevertheless shall remain in full force and effect
in all other circumstances.
11.6 ENTIRE AGREEMENT. This Agreement together with the Exhibits referred
to herein and the Related Agreements contains the entire agreement and
understanding of the parties concerning the subject matter hereof, and no
representations, promises, agreements or understandings' written or oral, not
contained herein shall be of any force or effect, unless in writing, executed by
the parties to be bound and dated subsequent to the date hereof.
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11.7 MODIFICATIONS AND WAIVERS. No change, modification or waiver of any
provision of this Agreement shall be valid or binding unless it is in writing
dated subsequent to the date hereof and signed by the party intended to be
bound. No waiver of any breach, term or condition of this Agreement by either
party shall constitute a subsequent waiver of the same or any other breach, term
or condition except as otherwise expressly set forth herein.
11.8 COUNTERPARTS. This Agreement may be executed in counterparts, each of
which shall be deemed an original, but all of which taken together shall
constitute one and the same instrument.
11.9 GOVERNING LAW. This Agreement shall be construed under the laws of
the State of Illinois, without regard to its principles of conflict of laws.
11.10 PROSPECTIVE TRANSFERS. Notwithstanding anything to the contrary
contained herein or in the Related Agreements, the Company and Investor agree
and acknowledge that (i) Investor may assign and delegate all or any portion of
its rights and obligations arising pursuant to this Agreement and/or the Related
Agreements to a new entity that may be established by Investor or its principals
(hereinafter referred to as "Newco"), and/or any investors, members, affiliates
or principals of Investor or Newco (hereinafter referred to as the "Specified
Parties"), and (ii) Investor, Newco or their successors or assigns may sell,
assign, or otherwise transfer all or any portion of the Common Stock purchased
pursuant to this Agreement, and/or the warrants to be issued pursuant to the
Warrant Agreements (together with any Common Stock issued upon exercise thereof)
to one or more of such Specified Parties; PROVIDED, HOWEVER, that any such sale,
assignment, or transfer shall only be made in compliance with all applicable
federal and state securities laws. Subject to such compliance and
notwithstanding anything to the contrary contained herein or in the Related
Agreements, the Company agrees that it will take such actions as Investor may
reasonably request to facilitate such assignment, delegation, sale or transfer,
including without limitation issuing new stock certificates in the name of such
Specified Parties or their designees.
[SIGNATURES ON FOLLOWING PAGE]
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IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
FRANKLIN OPHTHALMIC INSTRUMENTS CO., INC.
a Delaware corporation
By: _______________________________________
Its: _______________________________________
PRINZ-FRANKLIN L.L.C., an Illinois limited liability
company
By: _______________________________________
Its: _______________________________________
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As an inducement to Investor (as defined in the foregoing Investment
Agreement) to enter into the foregoing Investment Agreement, Michael J. Carroll
and James Urban (individually, a "Selling Shareholder") hereby agree that, for a
period of two years from the Initial Closing Date (as defined in the foregoing
Investment Agreement), neither will reduce his ownership of shares of Common
Stock in Franklin Ophthalmic Instruments Co., Inc. (the "Company"), as reported
in the Form 10-QSB of the Company for the period ending December 31, 1996
("Current Holdings"), by more than 50% through a sale or series of sales to a
bona fide purchaser or purchasers (a "Purchaser") for fair value in a negotiated
transaction (i.e., other than through a brokers' transaction) unless such
Purchaser agrees to purchase at the closing of such sale a corresponding
percentage of the shares of Common Stock in the Company beneficially owned by
Investor.
Before a Selling Shareholder accepts any offer for the sale of shares of
Common Stock which would result in the aforementioned ownership reduction, he
will give written notice (the "Tag-Along Notice") to Investor which notice shall
state the purchase price, the date on or about which the sale is to be made and
such other material terms of the offer. Investor shall have the right to
participate in such sale by giving written notice to the Selling Shareholder
within 10 days after the Tag-Along Notice is sent to Investor to the effect that
it will sell to such Purchaser a percentage of its shares of Common Stock in the
Company equal to the aggregate percentage reduction in Current Holdings of such
Selling Shareholder. The purchase from Investor shall be on the terms described
in the Tag-Along Notice. If Investor declines to sell, or fails to timely
notify the Selling Shareholder, the Selling Shareholder may sell his shares on
such terms and conditions provided in the Tag-Along Notice within 90 days of the
date of the Tag-Along Notice. If such sale has not been completed with such 90-
day period, such sale may not be carried out without complying again with the
foregoing provisions.
____________________________________
Michael J. Carroll
____________________________________
James J. Urban
<PAGE>
EXHIBIT A
FRANKLIN OPHTHALMIC INSTRUMENTS CO., INC.
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement dated as of ______________, 1997 (the
"AGREEMENT") is by and between FRANKLIN OPHTHALMIC INSTRUMENTS CO., INC., a
Delaware corporation (the "COMPANY"), and PRINZ-FRANKLIN L.L.C., an Illinois
limited liability company (the "SHAREHOLDER").
RECITALS
A. The Company and the Shareholder are parties to an Investment Agreement
dated April ___, 1997 (the "INVESTMENT AGREEMENT") pursuant to which the
Shareholder agreed to acquire shares of Common Stock of the Company, $0.001 par
value per share, for an aggregate purchase price of up to $600,000.
B. It is a condition to such purchase that the parties enter into this
Agreement.
AGREEMENT
In consideration of the foregoing Recitals and the mutual promises
contained herein, the parties hereto agree as follows:
1. DEFINITIONS. Capitalized terms used herein and not otherwise defined,
shall have the following meanings:
(a) "COMMISSION" means the Securities and Exchange Commission and any
successor thereto.
(b) "COMMON STOCK" means the Common Stock of the Company, $0.001 par
value per share.
(c) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
(d) "HOLDER" means the Shareholder and any subsequent holder of
Registrable Shares to whom the rights hereunder accrue pursuant to Section
11 hereof.
(e) "REGISTRABLE SHARES" means (i) the Common Stock issued pursuant
to Subsections 2.1(a) and (b) of the Investment Agreement (aggregating
3,000,000 shares of Common Stock); and (ii) any Common Stock or other
capital stock issued (or issuable upon the conversion or exercise of any
warrant, right or other security which is issued) as a dividend or other
distribution with respect to, in exchange for or in replacement of the
shares referenced in Subsection 1(e)(i) immediately above.
(f) "RULE 144" means Rule 144 as promulgated under the Securities
Act.
<PAGE>
(g) "SECURITIES ACT" means the Securities Act of 1933, as amended,
and the rules and regulations of the Commission thereunder.
2. REGISTRATION ON REQUEST - DEMAND REGISTRATION RIGHTS.
(a) At any time during the period beginning six months from the date
hereof and ending two years from the date hereof, upon the written request
of Holder (the "DEMAND REQUEST"), the Company shall use its reasonable best
efforts to effect, as soon as practicable after receipt of the Demand
Request, the registration under the Securities Act of Registrable Shares in
the amount of and in accordance with the following:
(i) twenty-five percent (25%) of the Registrable Shares issued
to the Shareholder as long as the average asked price for the Common
Stock over the twenty trading days immediately preceding the date of
the Demand Request (the "DEMAND PERIOD") equals or exceeds seventy-
five cents ($0.75) per share and Holder agrees not to sell any of such
shares for less than such price per share; and
(ii) in addition to the Registrable Shares registered pursuant to
Subsection 2(a)(i), an additional forty-percent (40%) of the
Registrable Shares issued to the Shareholder as long as the average
asked price for the Common Stock over the Demand Period equals or
exceeds one dollar and twenty-five cents ($1.25) per share and Holder
agrees not to sell any of such shares for less than such price per
share;
provided, however, that the price restrictions in Sections 2(a)(i) and
2(a)(ii) shall not apply subsequent to the nine month anniversary of the
date hereof.
(b) Notwithstanding the foregoing, the Company shall only be
obligated to effect one demand registration under this Section 2 pursuant
to which Registrable Shares are offered. In addition, in the event that
the Company shall effect the registration of shares of Common Stock at any
time to which the Holder is entitled to include any Registrable Shares
(i) pursuant to Subsection 3(a)(i) hereof, without regard to the Holder's
ability to sell such shares at the requisite price, the Company shall have
no obligation under this Section 2 to register any Registrable Shares
unless the average asked price for the Common Stock over the Demand Period
equals or exceeds one dollar and twenty-five cents ($1.25) per share and
(ii) pursuant to Subsection 3(a)(ii), the demand registration rights
granted under this Section 2 shall be deemed to have been fulfilled and the
Company shall have no further obligations pursuant to this Section 2.
(c) If the Holder intends to distribute the Registrable Shares
covered by the Demand Request by means of an underwriting, the Holder shall
so advise the Company as a part of the Demand Request. Any registration
statement pursuant to this section may include other securities of the
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Company whether being offered or sold for the account of the Company or of
another securityholder unless the underwriter (or managing underwriter on
behalf of all of the underwriters) advises the Company in writing that, in
its opinion, the inclusion of any such shares in the subject registration
statement will materially and adversely affect the distribution of the
Registrable Shares by such underwriter.
3. INCIDENTAL REGISTRATION - PIGGY-BACK REGISTRATION RIGHTS.
(a) If (without the obligation to do so) the Company, at any time
beginning on the date hereof and ending two years from the date hereof,
proposes to register (including for this purpose a registration effected by
the Company for securityholders other than Holder) any of its securities
under the Securities Act in connection with the public offering of such
securities solely for cash (other than a registration on Form S-4, Form S-8
or any form which does not include substantially the same information as
would be required to be included in a registration statement covering the
sale of Registrable Shares or in which Registrable Shares cannot be
included pursuant to Commission rule or practice), the Company shall, each
such time, promptly give Holder written notice of such registration (the
"PIGGY-BACK NOTICE"). Upon the written request of Holder given within ten
(10) days after Holder's receipt of such Piggy-Back Notice from the
Company, the Company shall, subject to the provisions of this section, use
its best efforts to include in such registration statement filed with the
Commission under the Securities Act that number, subject to the amount
limitations herein, of Registrable Shares that Holder has requested to be
registered in accordance with the following:
(i) The Company shall include twenty-five percent (25%) of the
Registrable Shares issued to the Shareholder prior to the date of the
Piggy-Back Notice as long as Holder agrees not to sell such shares for
less than seventy-five cents ($0.75) per share.
(ii) In addition to the Registrable Shares registered pursuant to
Subsection 3(a)(i), the Company shall include up to an additional
forty-percent (40%) of the Registrable Shares issued to the
Shareholder prior to the date of the Piggy-Back Notice as long as the
average asked price for the Common Stock over the Demand Period equals
or exceeds one dollar and twenty-five cents ($1.25) per share Holder
agrees not to sell such shares for less such price;
provided, however, that the price restrictions in Sections 3(a)(i) and
3(a)(ii) shall not apply subsequent to the nine month anniversary of the
date hereof.
(b) Notwithstanding anything herein to the contrary, the Company
shall have no obligation under this Section 3 if the underwriter (or
managing underwriter on behalf of all of the underwriters) advises the
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Company in writing that, in its opinion, the inclusion of any Registrable
Shares in the subject registration statement will materially and adversely
affect the distribution of the securities by such underwriter.
(c) If the Company proposes to distribute shares of Common Stock
through an underwriting, Holder (together with the Company and any other
securityholders distributing their securities through such underwriting)
shall enter into an underwriting agreement with the underwriter (or
underwriters) selected for underwriting by the Company. If Holder
disapproves of the terms of any such underwriting, Holder may elect to
withdraw therefrom by written notice to the Company and the underwriter.
4. ADJUSTMENT TO SHARE PRICE LIMITATIONS. In any of the following
events, and in any variation or combination of the following events, appropriate
adjustments shall be made in the share price limitations set forth in
Subsections 2(a)(i), 2(a)(ii), 3(a)(i) and 3(a)(ii) hereof: (a)
recapitalization of the Company through a split-up of outstanding shares of
Common Stock or a combination of outstanding shares into a lesser number; or
(b) declaration of a dividend on the Common Stock of the Company, payable in
Common Stock or securities convertible into Common Stock.
5. REGISTRATION PROCEDURES. If and whenever the Company is required by
the provisions of this Agreement to use its reasonable best efforts to effect
the registration of any of its securities under the Securities Act, the Company
will, as soon as practicable:
(a) prepare and file with the Commission a registration statement
with respect to such Registrable Shares and use its reasonable best efforts
to cause such registration statement to become and remain effective for the
period provided in this Section 5;
(b) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in
connection therewith as may be necessary to keep such registration
statement effective and to comply with the provisions of the Securities Act
with respect to the sale or other disposition of all securities covered by
such registration statement whenever the seller or sellers of such
securities shall desire to sell or otherwise dispose of the same;
(c) furnish to Holder, or his or her duly authorized underwriter,
such number of copies of a prospectus, including copies of a preliminary
prospectus, prepared in conformity with the requirements of the Securities
Act, and such other documents as Holder may reasonably request in order to
facilitate the public sale or other disposition of the securities to be
sold by Holder;
(d) use its best efforts to register or qualify the securities
covered by such registration statement under such state securities or "blue
sky" laws of such jurisdictions as Holder shall reasonably request, and do
any and all other acts and things which may be necessary under such
securities or "blue sky" laws to enable Holder to consummate the public
sale or other disposition in such jurisdictions of the securities to be
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sold by Holder; provided, however, that the Company shall not for any such
purpose be required to consent to the general service of process in any
such jurisdiction;
(e) notify the Holder at any time when a prospectus relating to the
Registrable Shares is required to be delivered under the Securities Act, of
the happening of any event as a result of which the prospectus included in
the registration statement, as then in effect, includes an untrue statement
of a material fact or omits to state any material fact required to be
stated therein or necessary to make the statements therein not misleading
in the light of the circumstances then existing;
(f) notify Holder, promptly after the Company shall have received
notice thereof, of the time when the registration statement becomes
effective or any supplement to any prospectus forming a part of the
registration statement has been filed;
(g) notify Holder, promptly after it shall receive notice or obtain
knowledge thereof, of the issuance of any stop order by the Commission
suspending the effectiveness of such registration statement or the
initiation or threatening of any proceeding for such purpose and promptly
use reasonable efforts to prevent the issuance of any stop order or to
obtain its withdrawal if such stop order should be issued; and
(h) provide a transfer agent and registrar for all Registrable Shares
sold under the registration statement not later than the effective date of
the registration statement.
provided, however, that notwithstanding any other provision of this Agreement,
the Company shall not in any event be required to use its reasonable best
efforts to maintain the effectiveness of any such registration statement for a
period in excess of nine (9) months after the effective date thereof.
6. FURTHER ASSURANCES.
(a) It shall be a condition precedent to the obligations of the
Company to take any action pursuant hereto that Holder, having chosen to
have its Registrable Shares included for registration, shall furnish to the
Company such information regarding Holder, the Registrable Shares and the
intended method of disposition of such securities as shall be required to
effect the registration thereof. Holder shall be required to represent to
the Company that all such information which is given is complete and
accurate in all material respects. Holder shall deliver to the Company a
statement in writing from Holder that it bona fide intends to sell,
transfer or otherwise dispose of the Registrable Shares.
(b) Holder agrees that (i) it will comply with the provisions of the
Securities Act with respect to the disposition of its securities covered by
a registration statement required under this Agreement, (ii) it will
cooperate with the Company to the extent required by the Securities Act and
applicable "blue sky" or state securities laws in its efforts to file any
5
<PAGE>
registration statement required hereunder and to have it declared
effective, and (iii) upon receipt of any notice from the Company pursuant
to Subsection 5(e), Holder will forthwith discontinue disposition of
Registrable Shares until Holder receives copies of the supplemented or
amended prospectus or until it is advised in writing by the Company that
the use of the prospectus may be resumed, and has received copies of any
additional or supplemental filings that are incorporated by reference in
the prospectus.
7. RESTRICTIONS ON PUBLIC SALE. Holder agrees (except to the extent that
Holder is prohibited by applicable law from agreeing to withhold Registrable
Shares from sale), if requested in a timely notice from the underwriter in an
underwritten offering, not to effect any public sale or distribution of
securities of the Company, including a sale pursuant Rule 144 under the
Securities Act (except as part of such underwritten offering), during the 30-day
period prior to, and during the 90-day period subsequent to, the closing date of
each underwritten offering made pursuant to a registration statement.
8. EXPENSES.
(a) REGISTRATION EXPENSES. All expenses incurred by the Company in
effecting the registration provided for in this Agreement, including,
without limitation, all registration and filing fees, printing expenses,
reasonable fees and disbursements of counsel for the Company, expenses of
any audits incidental to or required by any such registration, expenses of
complying with the securities or "blue sky" laws or any state shall be paid
by the Company.
(b) SELLING EXPENSES. All underwriting discounts, underwriters'
expense allowance, and selling commissions applicable to Registrable Shares
sold by Holder, and all fees and disbursements of any special counsel of
Holder shall be borne by Holder.
9. INDEMNIFICATION. In the event that any Registrable Shares are
included in a registration statement pursuant to this Agreement:
(a) To the extent permitted by law, the Company will indemnify and
hold harmless Holder, the officers, directors and members of Holder, any
underwriter (as defined in the Securities Act) for Holder and each person,
if any, who controls Holder or underwriter within the meaning of the
Securities Act or the Exchange Act against any losses, claims, damages or
liabilities (joint or several) to which they may become subject under the
Securities Act, the Exchange Act or other federal or state law, insofar as
such losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon any of the following statements, omissions
or violations (collectively, a "VIOLATION"): (A) any untrue statement or
alleged untrue statement of a material fact contained in such registration
statement, including any preliminary prospectus or final prospectus
contained therein or any amendments or supplements thereto; (B) the
6
<PAGE>
omission or alleged omission to state therein a material fact required to
be stated therein, or necessary to make the statements therein not
misleading; or (C) any violation or alleged violation by the Company of the
Securities Act, the Exchange Act, any applicable state securities law or
any rule or regulation promulgated under the Securities Act, the Exchange
Act or any applicable state securities law; and the Company will reimburse
such specified persons for any legal or other expenses reasonably incurred
by them in connection with investigating or defending any such loss, claim,
damage, liability or action; provided however, that the indemnity agreement
contained in this subsection shall not apply to amounts paid in settlement
of any such loss, claim, damage, liability or action if such settlement is
effected without the consent of the Company (which consent shall not be
unreasonably withheld), nor shall the Company be liable in any such case
for any such loss, claim, damage, liability or action to the extent that it
arises out of or is based upon a Violation which occurs in reliance upon
and in conformity with written information furnished expressly for use in
connection with such registration by such specified persons; and further
provided however, that the Company shall not be required to indemnify any
such specified person against (A) any liability arising from any untrue or
misleading statement contained in or omission from any preliminary
prospectus if such deficiency is corrected in the final prospectus and such
final prospectus is recirculated as required by law prior to confirmation
of any sale thereunder or (B) any liability which arises out of the failure
of any such specified person to deliver a prospectus as required by the
Securities Act.
(b) To the extent permitted by law, Holder will indemnify and hold
harmless the Company, its directors, its officers, any person who controls
the Company within the meaning of the Securities Act or the Exchange Act,
any underwriter (within the meaning of the Securities Act) for the Company
and any person who controls such underwriter against any losses, claims,
damages or liabilities (joint or several) to which the Company or any such
director, officer, or underwriter or controlling person may become subject,
under the Securities Act, the Exchange Act or other federal or state law,
insofar as such losses, claims, damages or liabilities (or actions in
respect thereto) arise out of or are based upon any Violation, in each case
to the extent (and only to the extent) that such Violation occurs in
reliance upon and in conformity with written information furnished by
Holder expressly for use in connection with such registration; and Holder
will reimburse any legal or other expenses reasonably incurred by the
Company or any such director, officer, underwriter or controlling person
thereof, in connection with investigating or defending any such loss,
claim, damage, liability or action; provided however, that the indemnity
agreement contained in this subsection shall not apply to amounts paid in
settlement of any such loss, claim, damage, liability or action if such
settlement is effected without the consent of Holder (which consent shall
not be unreasonably withheld); and further provided, that notwithstanding
anything to the contrary contained in this Agreement, Holder's liability
under this Section 9 shall be limited in the aggregate to the amount of net
proceeds actually received from Holder from the sale of Registrable Shares
actually sold.
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<PAGE>
(c) Promptly after receipt by an indemnified party of notice of the
commencement of any action (including any governmental action), such
indemnified party will, if a claim in respect thereof is to be made against
any indemnifying party hereunder, notify the indemnifying party in writing
of the commencement thereof and the indemnifying party shall have the right
to participate in, and, to the extent the indemnifying party so desires,
jointly with any other indemnifying party similarly notified, to assume the
defense thereof with counsel mutually satisfactory to the parties; provided
however, that an indemnified party shall have the right to retain its own
counsel, with the fees and expenses to be paid by the indemnifying party,
if representation of such indemnified party by the counsel retained by the
indemnifying party would be inappropriate due to actual or potential
differing interests between such indemnified party and any other party
represented by such counsel in such proceeding. The failure to notify an
indemnifying party within a reasonable time of the commencement of any such
action, to the extent prejudicial to its ability to defend such action,
shall relieve such indemnifying party of any liability to the indemnified
party hereunder, but the omission so to notify the indemnifying party will
not relieve it of any liability that it may have to any indemnified party
otherwise than under this subsection.
(d) If the indemnifcation provided for in this Section 9 is held by a
court of competent jurisdiction to be unavailable to an indemnified party
with respect to any loss, claim, damage or liability (or actions with
respect thereof), then such indemnifying party, in lieu of indemnifying
such indemnified party hereunder, shall contribute to the amount paid or
payable by such indemnified party as a result of loss, claim, damage or
liability (or actions with respect thereof) in such proportion as is
appropriate to reflect the relative fault of the indemnifying party on the
one hand and the indemnified party on the other in connection with the
statements or omissions which resulted in such loss, claim, damage or
liability (or actions with respect thereof), as well as any other relevant
equitable considerations. The relative fault of the indemnifying party and
of the indemnified party shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact
or the omission to state a material fact relates to information supplied by
the indemnifying party or the indemnified party and the parties' relative
intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission.
10. TERMINATION OF REGISTRATION RIGHTS. Notwithstanding the foregoing
provisions of this Agreement, the rights to registration granted hereunder shall
terminate as to any particular Registrable Shares when such Registrable Shares
shall have been effectively registered under the Securities Act or otherwise
sold by Holder thereof in a public sale in accordance with applicable law and
such shares shall cease to be Registrable Shares for purposes hereof.
11. ASSIGNABILITY OF REGISTRATION RIGHTS. Subject to Section 10, the
registration rights set forth in this Agreement shall accrue to each subsequent
holder of Registrable Shares who acquires all of the Registrable Shares and such
subsequent holder shall only have such rights to the extent Shareholder would be
entitled to hereunder prior to such transfer.
8
<PAGE>
12. COMPLIANCE WITH RULE 144. With a view to making available the
benefits of certain rules and regulations of the Commission which may permit the
sale of restricted securities to the public without registration, the Company
agrees to use reasonable efforts to:
(a) make and keep public information available as those terms are
understood and defined in Rule 144;
(b) use its best efforts to file with the Commission in a timely
manner all reports and other documents required of the Company under the
Securities Act and Exchange Act; and
(c) so long as Holder owns any Registrable Shares, and is not
eligible to sell such Registrable Shares under paragraph (k) of Rule 144,
furnish to Holder upon reasonable request, a written statement by the
Company as to its compliance with the reporting requirements of Rule 144
and of the Securities Act and Exchange Act, a copy of its most recent
annual or quarterly report , and such other reports and documents so filed
as Holder may reasonably request in availing itself of any rule or
regulation of the Commission allowing Holder to sell any such securities
without registration.
13. NOTICES. All notices, requests, consents, and other communications
hereunder shall be in writing and shall be deemed to have been made when
personally delivered or three business days after sent by first class mail,
postage prepaid, to the following address or such other address as shall be
given by notice delivered hereunder: (a) to Holder, at the address of Holder as
shown on the registry books maintained by the Company or its transfer agent; and
(b) if to the Company, at 1265 Naperville Road, Romeoville, Illinois 60446,
Attention: President, with a copy by like means to Ungaretti & Harris, 3500
Three First National Plaza, Chicago, Illinois 60602, Attention: Michael J.
Philippi, Esq.
14. SEVERABILITY. Whenever possible, each provision of this Agreement
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be prohibited
by or invalid under applicable law, such provision will be ineffective only to
the extent of such prohibition or invalidity, without invalidating the remainder
of this Agreement.
15. COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
16. DESCRIPTIVE HEADINGS. The descriptive headings of this Agreement are
inserted for convenience only and do not constitute a part of this Agreement.
9
<PAGE>
17. GOVERNING LAW. The validity, meaning and effect of this Agreement
shall be determined in accordance with the laws of the State of Illinois
applicable to contracts made and to be performed in that state.
18. AMENDMENT. This Agreement may only be amended by the written consent
of the Company and Holder.<PAGE>
10
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first set forth above.
FRANKLIN OPHTHALMIC INSTRUMENTS CO., INC.,
a Delaware corporation
By: ______________________________________
Its President
PRINZ-FRANKLIN L.L.C.,
an Illinois limited liability company
By: ______________________________________
Its Manager or member
<PAGE>
NEITHER THIS WARRANT NOR THE SECURITIES UNDERLYING THIS WARRANT HAS BEEN THE
SUBJECT OF REGISTRATION UNDER THE SECURITIES ACT OF 1933 OR UNDER APPLICABLE
STATE SECURITIES LAWS. THIS WARRANT AND THE UNDERLYING SECURITIES MAY NOT BE
TRANSFERRED OR DISPOSED OF UNLESS (A) THERE IS AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE SECURITIES ACT AND THE APPLICABLE STATE SECURITIES LAWS
COVERING ANY SUCH TRANSACTION INVOLVING SAID SECURITIES OR (B) THE ISSUER
RECEIVES AN OPINION OF LEGAL COUNSEL FOR THE HOLDER OF THESE SECURITIES
STATING THAT SUCH TRANSACTION IS EXEMPT FROM REGISTRATION AND SUCH OPINION IS
IN FORM AND SUBSTANCE REASONABLY SATISFACTORY TO THE ISSUER AND IS RENDERED
BY COUNSEL REASONABLY SATISFACTORY TO THE ISSUER.
Warrant No. WA-55 Number of Shares Purchasable Upon
Issue Date: _______________ Exercise of Warrant: 200,000
Void after 5:00 p.m. Chicago time on [date four years from issuance]
COMMON STOCK PURCHASE WARRANT
OF
FRANKLIN OPHTHALMIC INSTRUMENTS CO., INC.
Franklin Ophthalmic Instruments Co., Inc. (the "Company"), a Delaware
corporation, hereby certifies that for good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, Prinz-Franklin L.L.C.,
an Illinois limited liability company, is entitled, subject to the terms set
forth in this warrant (the "Warrant"), at any time from the date hereof but in
no event later than [expiration date to be four years from the issue date], to
purchase from the Company Two Hundred Thousand (200,000) shares of common stock
of the Company, par value $.001 per share (the "Common Stock"), at an exercise
price of $1.00 per share, as adjusted from time to time pursuant to the
provisions set forth below (the "Exercise Price"). This Warrant and all rights
hereunder, to the extent such rights shall not have been exercised, shall
terminate and become null and void to the extent the holder hereof (the
"Holder") fails to exercise any portion of this Warrant prior to 5:00 p.m.,
Chicago, Illinois time, [expiration date]("Expiration Date").
1. EXERCISE OF WARRANT. This Warrant may be exercised by presentation
and surrender hereof to the Company at its principal office or at such other
address as the Company may direct in a written notice to the Holder. The
presentation and surrender of this Warrant for exercise must be accompanied by:
(a) the form of subscription which is attached hereto as Annex A (the "Form of
Subscription") duly executed with signature guaranteed; and (b) payment of the
aggregate Exercise Price for the number of shares specified in such form (up to
the maximum number of shares of Common Stock subject hereto). If this Warrant
should be exercised in part only, upon presentation and surrender of this
Warrant to the Company for cancellation, the Company shall execute and deliver a
new warrant evidencing the rights of the Holder to purchase the balance of the
<PAGE>
shares purchasable hereunder. Upon receipt of this Warrant by the Company at
its office, along with the payment of the aggregate Exercise Price, the
certificates representing the shares of Common Stock or other securities subject
to issuance upon such exercise hereof shall be issuable as soon thereafter as
practicable by the Transfer Agent of the Company; provided, however, such
certificate or certificates shall be deemed to have been issued and the Holder
shall be deemed to have become a holder of record of such shares of Common Stock
as of the date of surrender of this Warrant and payment of the aggregate
Exercise Price irrespective of the date of delivery of such certificate or
certificates for such shares of Common Stock.
2. RESERVATION OF SHARES. There shall at all times be reserved for
issuance upon exercise of this Warrant such number of shares of Common Stock as
shall be subject hereto.
3. FRACTIONAL SHARES. Notwithstanding any other provision hereof, the
Company shall not be required to issue fractional shares of Common Stock upon
the exercise of this Warrant but fractional Warrants shall be delivered,
entitling the Holder, upon surrender with other fractional Warrants aggregating
one or more full shares, to purchase such full shares.
4. EXCHANGE, TRANSFER OR ASSIGNMENT OF WARRANT. Subject to the
provisions of this section and of Section 9 below, this Warrant is exchangeable,
without expense, at the option of the Holder, upon presentation and surrender
hereof to the Company, for other warrants of different denominations entitling
the holder thereof to purchase in the aggregate the same number of shares of
Common Stock purchasable hereunder. Subject to the provisions of this section
and of Section 9 below, upon surrender of this Warrant to the Company
accompanied by: (a) the form of assignment which is attached hereto as Annex B
(the "Form of Assignment") duly executed; and (b) funds sufficient to pay any
transfer tax, the Company shall, without charge, execute and deliver a new
warrant in the name of the assignee named in the Form of Assignment and this
Warrant shall promptly be canceled.
Notwithstanding anything herein to the contrary, the Company may, without
any obligation to do so, at its option, at any time and from time to time prior
to the Expiration Date require that the Holder surrender this Warrant to the
Company in exchange for a warrant certificate in engraved or other form as may
be approved by the board of directors of the Company (the "Board of Directors")
representing this Warrant, bearing such letters, numbers or other marks of
identification or designation and such legends, summaries or endorsements
printed, lithographed or engraved thereon as the Board of Directors may deem
appropriate, having terms and conditions substantially similar to those
contained in this Warrant or which, in the reasonable judgment of the Board of
Directors, afford the Holder a net benefit when considered under the totality of
the circumstances or as may be required to comply with any law or with any rule
or regulation made pursuant thereto or with any rule or regulation of any stock
exchange on which the Warrants may be listed, or to conform to usage; it being
understood and agreed, however, that the terms and conditions of this Warrant
may be modified, amended or superseded by the Company at any time hereafter as
set forth herein. The term "Warrant" shall hereinafter be interpreted to
include any warrant into which this Warrant may be divided, exchanged or
combined, and any warrant as the same may be hereafter modified or amended from
time to time.
2
<PAGE>
5. THEFT, DESTRUCTION, LOSS OR MUTILATION OF WARRANT. Subject to the
provisions of Section 4, in the event of the theft, destruction, loss or
mutilation of this Warrant, upon receipt by the Company of evidence satisfactory
to it of such theft, destruction, loss or mutilation and, in the case of loss,
theft or destruction, of such indemnification as the Company may in its
discretion impose, and in the case of mutilation, upon surrender and
cancellation of this Warrant, the Company shall execute and deliver a new
warrant of like tenor and date.
6. RIGHTS OF THE HOLDER. Prior to the exercise of this Warrant, the
Holder shall not be entitled by virtue hereof to any rights of a stockholder in
the Company, either at law or equity. The rights of the Holder are limited to
those expressed in this Warrant and are enforceable against the Company only to
the extent set forth herein.
7. REDEMPTION. This Warrant is redeemable by the Company for $.10 per
Warrant, at any time after six (6) months, upon thirty (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 twenty (20) consecutive
trading days ending within fifteen (15) days prior to the date of the notice of
redemption.
8. ADJUSTMENTS.
(a) In any of the following events, and in any variations or
combinations of the following events, appropriate adjustments shall be made
in the number of shares issuable on exercise of this Warrant and/or the
Exercise Price, so as to maintain the proportionate interest of the Holder:
(a) recapitalization of the Company through a split-up of outstanding
shares of Common Stock or a combination of outstanding shares into a lesser
number; or (b) declaration of a dividend on the Common Stock of the
Company, payable in Common Stock or securities convertible into Common
Stock.
(b) In the event of any capital reorganization of the Company, or of
any reclassification of the Company with, or the merger of the Company
into, any other corporation or of the sale of all or substantially all of
the properties and assets of the Company to any other corporation, this
Warrant shall, after such capital reorganization, reclassification,
consolidation, merger or sale, entitle the Holder to receive upon exercise,
for the same aggregate purchase price, the number of shares of Common Stock
or other securities or property of the Company, or of the corporation
resulting from such consolidation or surviving such merger or to which such
sale shall be made, as the case may be, to which it would be entitled as a
shareholder of the Company had it exercised this Warrant to acquire shares
of Common Stock immediately prior to such capital reorganization,
reclassification, consolidation, merger or sale.
(c) Upon any adjustment pursuant to this Section 8, the Company shall
promptly thereafter cause to be given to the Holder written notice of such
adjustment in accordance with Section 10 hereof.
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<PAGE>
9. TRANSFER TO COMPLY WITH THE SECURITIES ACT AND OTHER APPLICABLE
SECURITIES LAWS. Neither this Warrant nor the shares of Common Stock (or other
securities) issuable upon exercise hereof have been the subject of registration
under the Securities Act or under state securities laws. Except as provided in
Section 4 above: neither this Warrant nor the shares of Common Stock (or other
securities) issuable upon exercise of this Warrant may be transferred, assigned,
pledged, sold or otherwise disposed of in the absence of registration under the
Securities Act and state securities laws, unless the Holder provides the Company
with an opinion of counsel in form and substance reasonably satisfactory to the
Company (together with such other representations and warranties as the Company
may reasonably request) that the Warrant or shares of Common Stock issued upon
exercise of this Warrant, as applicable, may be legally transferred without
violating the Securities Act, or any other applicable securities law and then
only against receipt of an agreement of the transferee (in form and substance
satisfactory to the Company) to comply with the provisions of this section with
respect to any resale or other disposition of such securities. The covenants set
forth herein shall survive exercise of this Warrant.
10. NOTICES. All notices, requests, consents and other communications
hereunder shall be in writing and shall be deemed to have been made when
delivered or mailed by first class mail, postage prepaid, as follows: (a) if to
the Holder, at the address of the Holder as shown on the registry books
maintained by the Company; and (b) if to the Company, at 1265 Naperville Road,
Romeoville, Illinois 60446, Attention: President, with a copy by like means to
Ungaretti & Harris, 3500 Three First National Plaza, Chicago, Illinois 60602,
Attention: Michael J. Philippi, Esq.
11. AMENDMENTS. The Company may, in its sole discretion, by supplemental
agreement or pursuant to an amended warrant certificate issued in exchange for
this Warrant make any changes or corrections to the terms and conditions hereof
which it deems appropriate in order to: (a) reduce the Exercise Price; (b)
extend the Expiration Date of this Warrant; (c) cure any ambiguity or correct
any defective or inconsistent provision or manifest mistake or error herein
contained; (d) modify such other terms and conditions hereof which modification,
in the judgment of the Board of Directors, provides, when considered under the
totality of the circumstances, a net benefit to or which, in the exercise of
such judgment, the Board of Directors determines would not be contrary to the
interests of the Holder; provided, however, that no adverse change in the number
or nature of the securities purchasable upon the exercise of this Warrant, or
the Exercise Price therefor or the redemption thereof, or the acceleration of
the Expiration Date, shall be made without the consent in writing of the Holder.
In addition, the Company may at any time hereafter enter into an agreement with
a qualified warrant agent (a "Warrant Agent") chosen by it in its sole
discretion to act on behalf of the Company in connection with the issuance,
registration, transfer and exchange, the issuance of certificates representing
the Warrants, the exercise of the Warrants and the rights of the Holders thereof
(a "Warrant Agreement").
12. AGREEMENT OF HOLDER. Holder, by acceptance hereof, consents and agrees
with the Company and any Warrant Agent that:
4
<PAGE>
(a) The Warrants are transferable only on the registry books of the
Company or the Warrant Agent by the Holder thereof in person or by his
attorney duly authorized in writing and only if the warrant certificates
representing such Warrants are surrendered at the office of the Company or
the Warrant Agent, if any, duly endorsed or accompanied by a proper
instrument of transfer satisfactory to the Company and the Warrant Agent,
if any, in their sole discretion, together with payment of any applicable
transfer taxes;
(b) The Company and any Warrant Agent may deem and treat the person
in whose name the warrant certificate is registered as the Holder and as
the absolute, true and lawful owner of the Warrants represented thereby for
all purposes, and neither the Company nor the Warrant Agent shall be
affected by any notice or knowledge to the contrary, except as otherwise
expressly provided in Section 10 hereof;
(c) Each Warrant shall be subject in all respects to the terms and
conditions set forth in any amended warrant certificate upon the issuance
thereof or in any Warrant Agreement entered into by the Company as
permitted pursuant to Section 11 hereof upon the execution thereof and, in
either such case, upon the mailing by the Company of notice of the
amendment of the terms and conditions of this Warrant. In the event of the
execution of any such Warrant Agreement, a true copy thereof shall be
promptly mailed by the Company to the Holder; and
(d) The Holder shall execute all such further instruments and
documents and take such further action as the Company may reasonably
require in order to effectuate the terms and purposes of this Warrant.
13. SEVERABILITY. The provisions of this Warrant shall be considered
severable in the event that any of such provisions are held by a court of
competent jurisdiction to be invalid, void or otherwise unenforceable. Such
invalid, void or otherwise unenforceable provisions shall be automatically
replaced by other provisions which are valid and enforceable and which are as
similar as possible in term and intent to those provisions deemed to be invalid,
void or otherwise unenforceable. Notwithstanding the foregoing, the remaining
provisions hereof shall remain enforceable to the fullest extent permitted by
law.
14. ENTIRE AGREEMENT. This Warrant is intended to and does contain and
embody the entire understanding and agreement of the Company and the Holder with
respect to the subject matter hereof and there exists no oral agreement or
understanding, express or implied, whereby the absolute, final and unconditional
character and nature of this Warrant shall be in any way invalidated,
unempowered or affected.
15. HEADINGS. The headings in this Warrant are for convenience of
reference only and are not part of this Warrant.
5
<PAGE>
16. GOVERNING LAW. This Warrant shall be governed by and construed and
interpreted in accordance with the laws of the State of Delaware without
reference to principles of conflict of laws.
IN WITNESS WHEREOF, Franklin Ophthalmic Instruments Co., Inc. has caused
this Warrant to be signed in its name and on its behalf and its corporate seal
to be affixed hereon by its duly authorized officers as of the date of issuance
first above written.
FRANKLIN OPHTHALMIC
INSTRUMENTS CO., INC.
[SEAL]
By:___________________________________
Michael J. Carroll, President
Attest:
____________________________
Linda S. Zimdars, Secretary
6
<PAGE>
Annex B to Warrant
FORM OF ASSIGNMENT
(To be executed upon transfer of Warrant)
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers to
__________________________ the right represented by the within Warrant, together
with all rights, title and interest therein, and does hereby irrevocably
constitute and appoint __________________________ attorney to transfer such
Warrant on the Warrant register of the within named Company, with full power of
substitution.
DATED: ________________, _______.
Signature:
________________________________________________
(Signature must conform in all respects to name of
holder as specified on the face of the Warrant)
Signature Guaranteed:
_______________________________________________
<PAGE>
Annex A to Warrant
FORM OF SUBSCRIPTION
(To be completed and signed only upon an exercise of the Warrant in whole or in
part)
TO: Franklin Ophthalmic Instruments Co., Inc.
The undersigned, the Holder of the attached Warrant, hereby irrevocably
elects to exercise the purchase right represented by the Warrant for, and to
purchase thereunder, _______ shares of Common Stock (as such terms are defined
in the Warrant, dated ____________, issued by Franklin Ophthalmic Instruments
Co., Inc. to _________________) (or other securities or property), and herewith
makes payment of $_______________ therefor in cash or by certified or official
bank check. The undersigned hereby requests that the Certificate(s) for such
securities be issued in the name(s) and delivered to the address(es) as follows:
Name: ___________________________________
Address: ___________________________________
Social Security Number: ___________________________________
Deliver to: ___________________________________
Address: ___________________________________
If the foregoing Subscription evidences an exercise of the Warrant to
purchase fewer than all of the shares of Common Stock (or other securities or
property) to which the undersigned is entitled under such Warrant, please issue
a new Warrant, of like tenor, for the remaining portion of the Warrant (or other
securities or property) in the name of the undersigned and deliver the same to
the address(es) as follows:
Address: _____________________________________________
DATED: ____________, _______.
___________________________________
(Name of Holder)
____________________________________
(Signature of Holder or Authorized Signatory)
Signature Guaranteed:
____________________________ __________________________________________
(Social Security or Taxpayer Identification
Number of Holder)
<PAGE>
Exhibit 10.2
John Prinz May 8, 1997
Prinz-Franklin L.L.C.
One Northfield Plaza
Northfield, Illinois 60093
Dear John,
As an addendum to the Investment Agreement Dated April 11, 1997 and all
exhibits ("Investment Agreement"), between Franklin Ophthalmic Instruments Co.,
Inc ("Franklin") and Prinz-Franklin L.L.C. ("Prinz), Franklin is willing to
provide "piggyback" registration rights on all of the common stock sold to Prinz
under the aforementioned Investment Agreement provided that: the common stock is
placed in escrow to insure the stand-still provisions in the Investment
Agreement such that: 1) 25% (750,000 shares) of the stock will not be released
and/or sold unless the closing price of Franklin's common stock is equal to or
greater than $.75 per share for five consecutive trading days; and 2) the
remaining common stock (2,250,000) will not be released and/or sold unless the
closing price is equal to or greater than $1.25 for five consecutive trading
days. The escrow restrictions shall cease at the earlier of the time the common
stock sold to Prinz shall be exempt under the provisions of Rule 144 and/or 1
year from the date of each investment of the respective stock referred to above.
In the event of a reverse split of Franklin's common stock, the
aforementioned strike prices for release shall be raised to equal the ratio of
the reverse split (example: if there is a 3:1 reverse split of the stock, the
stand-still of the 2,250,000 shall be raised from $1.25 to $3.75).
Signatures agreeing to the above,
/S/ Michael J. Carroll /S/ John Prinz
- ------------------------- ---------------
Michael J. Carroll John Prinz
Franklin Ophthalmic Instruments Co., Inc. Prinz-Franklin, L.L.C.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED
MARCH 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 1,102,379
<ALLOWANCES> 26,740
<INVENTORY> 1,418,191
<CURRENT-ASSETS> 2,594,467
<PP&E> 850,295
<DEPRECIATION> 659,671
<TOTAL-ASSETS> 4,953,672
<CURRENT-LIABILITIES> 2,594,467
<BONDS> 0
0
0
<COMMON> 16,682
<OTHER-SE> 1,220,385
<TOTAL-LIABILITY-AND-EQUITY> 4,953,672
<SALES> 4,533,757
<TOTAL-REVENUES> 0
<CGS> 3,321,496
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 163,399
<INCOME-PRETAX> 2,723,114
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,723,114
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,723,114
<EPS-PRIMARY> 0.19
<EPS-DILUTED> 0
</TABLE>
