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, 1998
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 May 14, 1998 the Registrant had outstanding 19,580,879 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, 1998
INDEX
PART I 1
Item 1. Financial Statements 1
Balance Sheets 1
Statement of Operations 3
Statements of Cash Flows 4
Notes to Financial Statements 5
Item 2. Management's Discussion and Analysis of Operation 8
PART II 10
Item 1. Legal Proceedings 10
Item 2. Changes in Securities 10
Item 3. Defaults Upon Senior Securities 10
Item 4. Submission of Matters to a Vote of Security Holders 11
Item 5. Other Information and Subsequent Events 11
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 12
<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, 1998 and results of operations and cash flows for the
three and six months ended March 31, 1997 and March 31, 1998,
respectively:
(a) Balance Sheets
(b) Statements of Operations
(c) Statements of Cash Flows
(d) Notes to Financial Statements
<PAGE>
FRANKLIN OPHTHALMIC INSTRUMENTS CO., INC.
BALANCE SHEETS
(Unaudited)
ASSETS
<TABLE>
September March 31,
30,
1997 1998
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ - $ -
Accounts receivable, less
allowance for doubtful
accounts of $23,438 851,574 1,280,065
Inventory, less valuation
allowance of $60,000 1,583,510 1,782,194
Prepaid expenses and other assets 170,787 307,048
--------- ---------
Total current assets 2,605,871 3,369,307
--------- ---------
Property and equipment, at cost:
Furniture and equipment 638,938 675,126
Automobiles and trucks 119,193 119,193
Leasehold improvements 121,915 121,915
--------- ---------
Property and equipment, at cost: 880,046 916,234
Less: Accumulated depreciation
and amortization 707,837 746,339
--------- ---------
Total property and equipment 172,209 169,895
--------- ---------
Other assets:
Deposits 13,903 13,903
Intangible assets, net of
accumulated amortization of
$924,978 and $1,017,280 2,053,916 1,961,614
---------- ---------
Total other assets 2,067,819 1,975,517
---------- ---------
Total assets $ 4,845,899 $ 5,514,719
=========== ===========
</TABLE>
The accompanying notes are an
integral part of these statements.
<PAGE>
FRANKLIN OPHTHALMIC INSTRUMENTS CO., INC.
BALANCE SHEETS
(Continued)
(Unaudited)
Liabilities and Equity
<TABLE>
September 30, March 31,
1997 1998
<S> <C> <C>
Current liabilities:
Bank overdrafts $ 95,309 $ 167,334
Current portion of long-term debt 157,127 182,086
Accounts payable 1,075,382 1,047,125
Notes payable to bank - -
Current portion of
capitalized lease obligations 18,314 10,634
Deposits 114,839 236,880
Accrued liabilities 259,089 197,890
--------- ---------
Total current liabilities 1,720,060 1,841,948
Long-term debt:
Notes payable to bank, long term 1,659,314 2,178,948
Capitalized lease
obligations, less current portion 12,382 12,382
--------- ---------
Total long-term debt 1,671,696 2,191,330
Total liabilities 3,391,756 4,033,278
--------- ---------
Stockholders' equity (deficit):
Common stock: $0.001 par
value; authorized
25,000,000 shares;
19,582,000 shares issued and
outstanding at
September 30, 1997 and
March 31, 1998 19,583 19,583
Additional paid-in capital 11,022,940 11,022,940
Accumulated deficit (9,588,380) (9,561,081)
----------- ----------
Total stockholders'
equity (deficit) 1,454,143 1,481,442
----------- ----------
Total liabilities and
stockholders' equity (deficit) $ 4,845,899 $ 5,514,719
=========== ===========
</TABLE>
The accompanying notes are an
integral part of these statements.
<PAGE>
FRANKLIN OPHTHALMIC INSTRUMENTS CO., INC.
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
For the three months For the six months
ended ended
March 31, March 31,
1997 1998 1997 1998
<S> <C> <C> <C> <C>
Sales $2,227,429 $ 2,409,871 $4,533,757 $ 5,022,897
Cost of Sales 1,602,306 1,722,489 3,321,496 3,601,775
---------- ----------- ---------- -----------
Gross profit $ 625,123 $ 687,382 1,212,261 1,421,122
Less:
Selling, general
and admin.expenses 594,100 572,754 1,143,194 1,159,920
Amortization and
depreciation 75,227 65,402 150,454 130,804
------- ------ ------- -------
Income (loss) from
operations (44,204) 49,226 (81,387) 130,398
========= ======== ========= ========
Other income
(expenses):
Interest expense (10,288) (48,087) (82,012) (103,099)
Other income
(expense), net (10,288) (48,087) (82,012) (103,099)
---------- --------- --------- ----------
Net income (loss)
before $(54,492) $1,139 $(163,399) $ 27,299
Extraordinary item
Extraordinary item,
gain from debt $ - $ - $2,886,513 $ -
restructuring
----------- ---------- ---------- ---------
Net income (loss) $(54,492) $ 1,139 $2,723,114 $ 27,299
=========== ========== ========== =========
Loss per common
share:
Net income ( loss)
before $ (0.00) $ 0.00 $ (0.01) $ 0.00
Extraordinary item) ========= ========== ========= =========
Net income (loss) $ (0.00) $ 0.00 $ 0.19 $ 0.00
=========== ========== ========== ==========
Weighted average
number of common
shares outstanding 16,681,611 19,583,378 14,518,711 19,583,378
=========== ========== ========== ==========
</TABLE>
The accompanying notes are an
integral part of these statements.
<PAGE>
FRANKLIN OPHTHALMIC INSTRUMENTS CO., INC.
STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
For the six
months ended
March 31,
1997 1998
<S> <C> <C>
Cash flows from operating
activities:
Net Income $ 2,723,114 $ 27,299
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation 41,277 38,502
Amortization 109,178 92,302
Gain from debt restructuring (2,886,513) -
Changes in current assets
and liabilities:
Accounts receivable (355,362) (428,491)
Inventory (62,134) (198,684)
Prepaid expenses and
other assets (73,162) (136,263)
Deposits (163,344) 122,041
Accounts payable, trade
and accrued liabilities (68,937) (89,456)
--------- ---------
Net cash used in operating
activities (735,883) (572,750)
Cash flows from investing
activities:
Acquisition of equipment (16,056) (36,188)
Net cash used in investing
activities (16,056) (36,188)
--------- --------
Cash flows from financing
activities:
Net change in bank overdrafts 107,232 72,025
Decrease in capital leases (6,550) (7,680)
Net change in borrowings under
line of credit (151,239) 272,134
Net proceeds from issuance of
common stock 907,662 -
Increase in long term debt - 292,500
Payments of long-term debt (105,166) (20,041)
Net cash provided by ----------- ----------
financing activities $ 751,939 $ 608,938
Net decrease in cash and cash
equivalents $ - $ -
Cash and cash equivalents at
beginning of year $ - $ -
Cash and cash equivalents at end
of year $ - $ -
</TABLE>
The accompanying notes are an
integral part of these statements.
<PAGE>
FRANKLIN OPHTHALMIC INSTRUMENTS CO., INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The 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 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 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, 1997.
The results of operations for interim periods are not
necessarily indicative of the results to be expected for a full year.
2. RESTRUCTURING
During the quarter ended December 31, 1996, the Company
completed a financial and operational restructuring that began
during fiscal 1995 with the consolidation of the Company's
facilities into Romeoville, Illinois and a change in management
that included the appointment of the Company's current Chief
Executive Officer, Chief Operating Officer, and Chief Financial
Officer. During the fourth quarter of fiscal 1996, the Company
reached agreements with Silicon Valley Bank (_Silicon_), its
primary trade creditors and certain of its debtholders for
the restructuring of some of the Company's outstanding debt. In
addition, the Company was able to raise $1,200,250 and $580,000
through the private placements of equity in the first and third
quarters of fiscal 1997 respectively.
Pursuant to the agreement with Silicon, during the first
quarter of fiscal 1997 approximately $3.2 million owing to Silicon
was converted into shares of the Company's Common Stock at a
conversion rate of $1.52 per share and the remaining $1.8 million
owing to Silicon was transferred into a new credit facility. In
connection with the restructuring of trade debt during the fourth
quarter of fiscal 1996 and the first quarter of fiscal 1997: (i)
$533,000 of trade debt was converted to Common Stock in the
Company at a rate of $1.52 per share; (ii) $201,000 was forgiven;
and (iii) approximately $335,000 was converted to promissory notes
with terms of up to 24 months. The debt restructuring completed
during the quarter ended December 31, 1996 resulted in an
extraordinary gain of $2,886,513 for the quarter.
<PAGE>
3. NOTES PAYABLE - BANK
Until December 30, 1997, the Company's principal credit facility
had been a revolving credit facility with Silicon which provided
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 was equal to (i) 80% of the amount of eligible
accounts receivable and (ii) the lesser of 50% of eligible
inventories or $1,000,000. During August 1997, the Company and
Silicon agreed to an extension of the line of credit (the
agreement with Silicon as revised is referred to as the _Revised
Agreement_) to September 30, 1997, which maturity date could be
further extended by the Company to February 28, 1998 upon payment
of a fee to Silicon and as long as the Company was not in default
under the Revised Agreement. The interest rate charged under the
Revised Agreement was increased to 3% over Silicon's prime lending
rate, increasing to 4% over Silicon's prime lending rate if the
Company was still indebted to Silicon at January 1, 1998.
FRANKLIN OPHTHALMIC INSTRUMENTS CO., INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
(Continued)
In addition the Revised Agreement provided for a loan fee that
was payable as follows: (i) $4,000 upon effectiveness of the
Revised Agreement; (ii) $6,000 on September 30, 1997 if the Company
elected to extend the maturity of the line of credit to February 28,
1998; and (iii) $8,000 on January 1, 1998 in the event that the
Company remained indebted to Silicon at such date. The Revised
Agreement provided that the Company would be deemed to be in
default if it failed to (i) have a net profit of at least one dollar
for each of the Company's fiscal quarters, and (ii) have an
operating profit of at least one dollar for the Company's fiscal
year ending September 30, 1997. For purposes of the Revised
Agreement only, operating profit was defined as the Company's
earnings before interest, taxes, depreciation, and amortization.
On December 30, 1997, the Company reached agreement with Harris
Trust and Savings Bank (_Harris Bank_) of Chicago, Illinois on an
Amended and Restated Loan and Security Agreement (_Harris Loan
Agreement_) in which Harris Bank purchased from Silicon all of
Silicon's rights, title and interest in the Company's Revised
Agreement with Silicon. The Harris Loan Agreement provides for
credit facilities comprised of a revolving line of credit for an
amount up to $2,200,000 (_Revolving Line_) and a term loan in
the amount of $300,000 (_Term Loan_). The credit facilities are
secured by all of the Company's assets, and provides for a line of
credit comprised of a borrowing base 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. The Revolving
Line expires on March 31, 2000.
Under the Term Loan the Company must make principal payments of
$3,750 per month, which payments commenced on February 1, 1998 and
continue through March 1, 2000. On March 31, 2000, a final principal
payment is due equal to the entire unpaid principal balance thereof,
together with any and all other amounts due under the Term Loan.
<PAGE>
In addition, under the terms of the Harris Loan Agreement, the
Company will have the option of borrowing rates on the Revolving Line
and the Term Loan based on either Harris Bank's commercial prime
rate (8.5% at March 31, 1998) plus .5% or the London Interbank
Offered Rate plus 3%. The Company was also charged a one time loan
origination fee of $15,000. The Harris Loan Agreement includes
the personal guarantees of Messrs. Michael J. Carroll, James J.
Urban, and Brian M. Carroll, the Company's CEO, COO and CFO
respectively, for an amount not to exceed an aggregate of $200,000.
The Harris Loan Agreement also includes certain financial
covenants that the Company must meet including: (1) a consolidated
adjusted tangible net worth such that the Consolidated Adjusted
Tangible Net Worth increases (i) by $200,000 during the period from
October 1, 1997 to September 30, 1998, (ii) by $250,000 during
the period from October 1, 1998 to September 30, 1999 and (iii) by
$250,000 during the period from October 1, 1999 to September 30,
2000; (2) a net book value equal to or greater than $1,450,000 ;
and (3) during each fiscal quarter, a fixed charge ratio of 1:4:1
for the Company's fiscal year ending September 30, 1998 and a
ratio of 2.0:1 for each fiscal year thereafter.
FRANKLIN OPHTHALMIC INSTRUMENTS CO., INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
(Continued)
4. Subsequent Events
CHANGES IN THE BOARD OF DIRECTORS
During May of 1998, Linda S. Zimdars, resigned from her
position as Director and Secretary of the
Company. Michael J. Cavuoti was appointed to fill the position as a
Director and elected as Secretary. Mr. Cavuoti is currently a
beneficial owner of 12.56% of the Company's outstanding Common Stock
and has assisted the Company as a non-compensated consultant in
various matters since 1996 including the Company's financial and
operational restructuring which took place during the first quarter
of fiscal 1997. Mr. Cavuoti currently manages a 3BN index arbitrage
portfolio for the Royal Bank of Canada Dominion Securities located in
New York, New York. Prior to joining the Royal Bank of Canada
Dominion Securities, Mr. Cavuoti traded and managed index and equity
derivatives for Susquehanna Investment Group. Mr. Cavuoti holds a
Bachelors Degree in English from Harvard University.
In addition, Philip Winters, resigned from his position as a
Director of the Company in May, 1998. Mr. Winters was replaced as a
Director by James F. Forrester, an Executive Vice President and the
head of the Corporate Finance Group of Silicon Valley Bank in Santa
Clara, CA. Silicon Valley Bank currently is a beneficial owner of
10.89% of the Company's outstanding Common Stock. In addition to the
above responsibilities at Silicon, Mr. Forrester has managed its
Special Industries, Northern California Technology and Strategic
Financial Services Groups. Mr. Forrester is an alumnus of Vanderbilt
University, from which he earned a Bachelors Degree in Mathematics,
and also holds an M.B.A. from Loyola University in Maryland.
<PAGE>
The Company also increased the size of the Board of Directors by
one and appointed Philip C. Kantz to fill the vacancy. Mr. Kantz
currently is President, Chief Executive Officer and a Director
of Tab Products of Palo Alto, California. Tab Products is a $165
million public company that provides high quality information storage
and retrieval solutions to various industries. Prior to joining
Tab Products in 1997, Mr. Kantz served as President and Chief
Operating Officer of Trans Ocean Ltd., a privately held container leasing
company of which he had been a Director for five years. In addition
to the above, Mr. Kantz has also served as President of a transportation
services subsidiary for Transamerica Corporation and was also
head of big-ticket financing and merchant banking services for GE Capital.
Mr. Kantz also is a Director to the following companies: (1)
3Com Corporation, a $3.5 billion public company which sells products
and services to the computer networking market; (2) Sonic Force
L.L.C., a manufacturer of technology for construction and
transportation industries; (3) ParcPlace-Digitalk, Inc., a publicly
owned software development company which develops and markets tools
and Smalltalk application development; and (4) Mine Reclamation
Corporation, a diversified waste management company located in Palm
Springs, CA. Mr. Kantz is an alumnus of New York State Maritime
College from which he earned a Bachelors of Science Degree and
Hofstra University from which he earned an M.B.A.
Item 2. Management's Discussion and Analysis of Operations
General
During the quarter ended December 31, 1996, the Company
completed a financial and operational restructuring that began
during fiscal 1995 with the consolidation of the Company's
facilities into Romeoville, Illinois (the location of Midwest
Ophthalmic Instruments, Inc. _ a company acquired by Franklin during
July of 1994) and a change in management that included the
appointment of the Company's current CEO, COO and CFO. The
restructuring was completed when the Company: (1) completed a
private placement of 2,400,500 units comprised of two shares of
Common Stock and one common stock purchase warrant entitling the
holder to purchase one share of Common Stock at $1.00 per share
within a specified period (collectively, the 'Warrants'), for
an aggregate price of $1,200,250; (2) reached agreement with its
primary lender, Silicon, in which $3,175,104 in debt owed by the
Company to Silicon was converted into 2,088,884 shares of the
Company's Common Stock; and (3) reached agreements with certain
trade creditors pursuant to which such trade creditors: (i)
converted an aggregate of approximately $533,000 owed to them
into shares of Common Stock at a price of $1.52 per share; (ii)
forgave trade debt in the amount of approximately $201,000; and (iii)
accepted certain promissory notes (having a maturity date up to
twenty-four months from the date thereof and an applicable interest
rate of 10%) in payment of additional trade debt totaling $335,000.
See Notes 2 and 3 of the Financial Statements contained elsewhere
herein.
<PAGE>
In connection with the restructuring, the Company increased
sales and marketing efforts by increasing its sales representation in
locations from which the Company had previously withdrawn and
reintroducing the direct mailing of catalogs describing the products
and services provided by the Company. In addition, during the
quarter ended December 31, 1997, the Company was able to replace its
former credit facility with Silicon with a new credit facility
with Harris Trust which increased the Company's credit line
from $1.8 million up to $2.5 million and extended the term of
the Company's line of credit to March 31, 2000. See Note 3 to
the Financial Statements contained elsewhere herein.
Results of Operations
Sales increased by $182,442 to $2,409,871 for the quarter ended
March 31, 1998 from $2,227,429 for the quarter ended March 31, 1997.
For the six months ended March 31, 1998, sales increased by $489,140
to $5,022,897 from $4,533,757 for the six months ended March 31,
1997. The Company attributes the 8.2% and 10.8% increase in sales for
the three and six months ended March 31, 1998, respectively, to the
continued maturation and development of sales personnel within new
territories which the Company added during fiscal 1997.
The Company's gross margin on sales increased by $62,259 to
$687,382 for the quarter ended March 31, 1998 from $625,123 for the
quarter ended March 31, 1997. Gross margin as a percentage of sales
increased to 28.5% for the quarter ended March 31, 1998 from 28.1%
from the prior year's quarter. For the six months ended March 31,
1998, gross margin on sales increased by $208,861 from $1,212,261 to
$1,421,122.
Gross margin as a percentage of sales increased from 26.7% to 28.3%
for the six months ended March 31, 1998. The increase in gross
margin percentage for the three and six months ended March 31, 1998
is primarily attributed to the completion of the Company's financial
and operational restructuring that took place during the quarter
ended December 31, 1996 and as a result, Company has been able
purchase greater quantities of product at lower costs and obtain
certain rebate allowances from manufacturers.
Selling, general and administrative (_SG&A_) expenses decreased
by $21,346 to $572,754 for the quarter ended March 31, 1998 from
$594,100 for the quarter ended March 31, 1997. As a percentage of
sales, SG&A expenses were 23.8% for the three months ended March 31,
1998, compared to 26.7% for the quarter
ended March 31, 1997. For the six months ended March 31, 1998, SG&A
expenses increased by $16,726 to $1,159,920 from $1,143,194 for the
six months ended March 31, 1997. As a percentage of sales, SG&A
expenses were 23.1 % of sales for the six months ended March 31,1998
compared to 25.2% for the six months ended March 31, 1997. The
increase in SG&A expenses for the six months ended March 31, 1998 is
primarily a result of the costs associated with the addition of new
sales and services representatives during the latter part of fiscal
1997.
<PAGE>
Amortization and depreciation expense decreased from $75,227 for
the quarter ended March 31, 1997 to $65,402 for the quarter ended
March 31, 1998. For the six months ended March 31, 1998 compared to
the six months ended March 31, 1997, amortization and depreciation
expense decreased from $150,454 to $130,804. The decrease is
attributable to the elimination of amortization expense that the
Company incurred during fiscal 1997 pertaining to employment
contracts related to the acquisition of Midwest Ophthalmic
Instruments, Inc., which were fully amortized in fiscal 1997.
Interest expense increased from $10,288 for the quarter ended
March 31, 1997 to $48,150 for the quarter ended March 31, 1998. For
the six months ended March 31, 1998 compared to the six months ended
March 31, 1997, interest expense increased from $82,012 to 103,162.
The increase in interest expense is a result of the prior year's
interest expense with Silicon being offset by interest that was
accrued when the Company's bank debt with Silicon was restructured
during the first quarter of fiscal 1997. Without the interest that
was accrued at the time of the above mentioned restructuring with
Silicon, the Company's interest expense would have been approximately
$128,236 for the six months ended March 31, 1997 versus the $103,162
interest expense for the six months ended March 31, 1998. The
decrease in interest expense for the quarter ended March 31, 1998 is
primarily attributable to the Company refinancing its credit facility
from Silicon to Harris Bank. The new credit facility with Harris
Bank provides for a lending rate of .5% over the Harris Bank's prime
lending rate from the 2% and 3% rates over Silicon's prime lending
rate that were charged during the comparable periods. For the six
months ended March 31, 1998, the decrease in interest expense is a
result of the above mentioned bank refinancing with Harris Bank and
the Company's restructuring of its bank financing with Silicon in
which Silicon converted $3,175,105 of principal and interest into
2,088,884 shares of the Company's Common Stock which took place
during the quarter ended December 31, 1996. See Notes 2 and 3 to the
Financial Statements contained elsewhere herein.
As a result of the foregoing factors, the Company reported
an increase in earnings before interest, taxes, depreciation and
amortization (_EBITDA_), and extraordinary items for the quarter
ended March 31, 1998 of $114,628 versus $31,023 for the prior year's
quarter. For the six months ended March 31, 1998, the Company
reported an EBITDA without extraordinary items of $261,202 versus
$69,067 for the prior year's six month period. Although the Company
does not represent that the EBITDA is a substitute for GAAP-based
financials, the Company believes that it is a reasonable
measurement of the Company's progress given the amount of income
that is offset by amortization expense primarily associated with the
acquisition of Midwest Ophthalmic Instruments Co., Inc which took
place during the fourth quarter of fiscal 1994.
<PAGE>
With interest, taxes, depreciation and amortization included for
the quarter ended March 31, 1998, the Company reported earnings of
$1,139 versus a loss of $54,492 for the prior year's quarter. For
the six months ended March 31, 1998, and inclusive of interest,
taxes, depreciation and amortization included, and an extraordinary
gain from restructuring of $2,886,513 in the quarter ended December
31, 1996, the Company reported net earnings of $27,299 for the
quarter ended March 31, 1998 versus net earnings of $2,723,114 for
the prior year's six month period. The reduction in net earnings is
attributable to the extraordinary gain from debt restructuring of
$2,886,513 the Company recorded during the quarter ended December 31,
1996 whereas there was no extraordinary gain during the three and six
months ended March 31 1998. The improvement in net earnings
(excluding the extraordinary gain during the quarter ended December
31, 1996) from a loss of $163,399 for the six months ended March 31,
1997 to net earnings of $27,299 for the six months ended March 31,
1998 was primarily due to the Company's ability to improve
sales through the increases in sales and marketing efforts that the
Company was able to initiate upon completion of the financial and
operational restructuring that occurred during the quarter ended
December 31, 1996. See Note 2 and 3 to the Financial Statements
contained elsewhere herein. As a result of the above, the Company
reported no net earnings per share for the three and six months
ended December 31, 1998, and the three months ended March 31, 1997,
versus a net earnings per share of $.19 for the prior year's six
month period which included the above mentioned extraordinary gain.
Liquidity and Capital Resources
Cash flow from operations was a negative $572,750 for the six
months ended March 31, 1998 versus a negative $735,883 for the prior
year's six month period. The $163,133 decrease was primarily
attributed to improved profitability. The Company financed the
negative cash flows with the proceeds of private placements of
securities during the quarters ended December 31, 1996 and June 30,
1997, and the addition of new credit facilities with Harris Bank
during the quarter ended December 31, 1997. The facilities with
Harris Bank replaced a prior credit facility with Silicon. See Notes
2 and 3 to the Financial Statements contained elsewhere herein.
As of March 31, 1998, the Company owed Harris Bank $1,931,448
under the Revolving Line and $292,500 under the Term Loan.
The Company is currently unable to raise capital through the
issuance of additional shares of Common Stock or warrants, options or
other securities exercisable for or convertible into shares of Common
Stock because of an insufficiency in the number of authorized shares
of Common Stock. While the Company does not have any immediate
plans to sell additional equity securities, the Company's board of
directors plans to submit for a vote by the stockholders of the
Company an amendment to the Certificate of Incorporation of the
Company increasing the number of authorized shares. Such an
amendment would require the affirmative vote of the holders of a
majority of the Company's outstanding shares of Common Stock.
Although the Company believes that a continued increase in sales
revenues along with the existing credit available under the Harris
Loan Agreement will be sufficient to enable the Company to fund its
operations and the expansion of its business, there can be no
assurance that the Company can continue to increase sales to such
levels that would achieve certain profitability levels which would
enable the Company to meet loan covenants as set forth in its
agreement with Harris Bank. See Note 3 to the Financial Statements
contained elsewhere herein.
<PAGE>
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. None.
Item 3. Defaults Upon Senior Securities. None
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 March 31, 1998.
Item 5. Other Information. Changes in the Board of Directors
During May of 1998, Linda S. Zimdars, resigned from her
position as Director and Secretary of the
Company. Michael J. Cavuoti was appointed to fill the position as a
Director and elected as Secretary. Mr. Cavuoti is currently a
beneficial owner of 12.56% of the Company's outstanding Common Stock
and has assisted the Company as a non-compensated consultant in
various matters since 1996 including the Company's financial and
operational restructuring which took place during the first quarter
of fiscal 1997. Mr. Cavuoti currently manages a 3BN index arbitrage
portfolio for the Royal Bank of Canada Dominion Securities located in
New York, New York. Prior to joining the Royal Bank of Canada
Dominion Securities, Mr. Cavuoti traded and managed index and equity
derivatives for Susquehanna Investment Group. Mr. Cavuoti holds a
Bachelors Degree in English from Harvard University.
In addition, Philip Winters, resigned from his position as a
Director of the Company in May, 1998. Mr. Winters was replaced as a
Director by James F. Forrester, an Executive Vice President and the
head of the Corporate Finance Group of Silicon Valley Bank in Santa
Clara, CA. Silicon Valley Bank currently is a beneficial owner of
10.89% of the Company's outstanding Common Stock. In addition to the
above responsibilities at Silicon, Mr. Forrester has managed its
Special Industries, Northern California Technology and Strategic
Financial Services Groups. Mr. Forrester is an alumnus of Vanderbilt
University, from which he earned a Bachelors Degree in Mathematics,
and also holds an M.B.A. from Loyola University in Maryland.
<PAGE>
The Company also increased the size of the Board of Directors by
one and appointed Philip C. Kantz
to fill the vacancy. Mr. Kantz currently is President, Chief
Executive Officer and a Director of Tab Products of Palo Alto,
California. Tab Products is a $165 million public company that
provides high quality information storage and retrieval solutions to
various industries. Prior to joining Tab Products in 1997, Mr. Kantz
served as President and Chief Operating Officer of Trans Ocean Ltd.,
a privately held container leasing company of which he had been a
Director for five years. In addition to the above, Mr. Kantz has
also served as President of a transportation services subsidiary for
Transamerica Corporation and was also head of big-ticket financing
and merchant banking services for GE Capital.
Mr. Kantz also is a Director to the following companies: (1)
3Com Corporation, a $3.5 billion public company which sells products
and services to the computer networking market; (2) Sonic Force
L.L.C., a manufacturer of technology for construction and
transportation industries; (3) ParcPlace-Digitalk, Inc., a publicly
owned software development company which develops and markets tools
and Smalltalk application development; and (4) Mine Reclamation
Corporation, a diversified waste management company located in Palm
Springs, CA. Mr. Kantz is an alumnus of New York State Maritime
College from which he earned a Bachelors of Science Degree and
Hofstra University from which he earned an M.B.A.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following exhibits are filed herewith: 27 Financial
Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the
quarter ended March 31, 1998.
<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 14, 1998 By: /S/ Michael J. Carroll
Michael J. Carroll, President
and Chief Executive Officer
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