U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
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QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
Commission File No. 0-21852
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FRANKLIN OPHTHALMIC INSTRUMENTS CO., INC.
(Exact name of small business issuer as specified in its charter)
Delaware 94-3123210
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
1265 Naperville Drive, Romeoville, Illinois 60446, (630)759-7666
(Address and Registrant's telephone number)
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Indicate by check mark whether the Registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the Registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days.
YES X NO
As of July 31, 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 JUNE 30, 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 June 30, 1998 and results of operations and cash flows for the
three and nine months ended June 30, 1997 and June 30, 1998,
respectively:
(a) Balance Sheets
(b) Statements of Operations
(c) Statements of Cash Flows
(d) Notes to Financial Statements
<PAGE>
<TABLE>
FRANKLIN OPHTHALMIC INSTRUMENTS CO., INC.
BALANCE SHEETS
(UNAUDITED)
ASSETS
September 30, June 30,
1997 1998
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ - $ 190,507
Accounts receivable, less
allowance for doubtful
accounts of $23,438 851,574 1,149,225
Inventory, less valuation
allowance of $60,000 1,583,510 1,695,683
Prepaid expenses and other
assets 170,787 351,692
Total current assets 2,605,871 3,387,107
Property and equipment, at cost:
Furniture and equipment 638,938 768,027
Automobiles and trucks 119,193 119,193
Leasehold improvements 121,915 121,915
Property and equipment, at cost: 880,046 1,009,135
Less: Accumulated depreciation
and amortization (707,837) (773,340)
Total property and equipment 172,209 235,795
Other assets:
Deposits 13,903 13,903
Intangible assets, net of
accumulated amortization of
$924,978 and 1,063,431 2,053,916 1,915,463
Total other assets 2,067,819 1,929,366
Total assets $ 4,845,899 $ 5,552,268
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
FRANKLIN OPHTHALMIC INSTRUMENTS CO., INC.
BALANCE SHEETS
(UNAUDITED)
LIABILITIES AND EQUITY
September 30, June 30,
1997 1998
<S> <C> <C>
Current liabilities:
Bank overdrafts $ 95,309 $ -
Current portion of long-term debt 157,127 105,678
Accounts payable 1,075,382 916,647
Notes payable to bank - -
Current portion of
capitalized lease obligations 18,314 44,192
Deposits 114,839 131,145
Accrued liabilities 259,089 500,876
Total current liabilities 1,720,060 1,698,538
Long-term debt:
Long-term debt, less current
portion 1,659,314 2,153,648
Capitalized lease obligations,
less current portion 12,382 12,382
Total long-term debt 1,671,696 2,166,030
Total liabilities 3,391,756 3,864,568
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
June 30, 1998 19,583 19,583
Additional paid-in capital 11,022,940 11,022,940
Accumulated deficit (9,588,380) (9,354,823)
Total stockholders' equity
(deficit) $ 1,454,143 1,687,700
Total liabilities and $ 4,845,899 $ 5,552,268
stockholders' equity (deficit)
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
FRANKLIN OPHTHALMIC INSTRUMENTS CO., INC.
STATEMENT OF OPERATIONS
(UNADUDITED)
For the three months ended For the nine months ended
June 30, June 30,
1997 1998 1997 1998
<S> <C> <C> <C> <C>
Sales $ 2,368,071 $ 2,205,297 $ 6,901,829 $ 7,228,194
Cost of Sales 1,634,416 1,597,072 5,000,439 5,202,327
Gross profit $ 733,655 $ 608,225 $ 1,901,390 $ 2,025,867
Less:
Selling, general
and administrative
expenses 655,330 537,942 1,756,593 1,743,518
Amortization and
depreciation 72,414 73,152 222,869 203,956
Income (loss) from
operations 5,911 (2,869) (78,072) 78,393
Other income (expenses):
Interest expense (6,787) (48,581) (88,799) (147,836)
Settlement Income - 303,000 - 303,000
Other income (expense) 3,048 - 5,643 -
Other income (expense), net (3,739) 254,418 (83,156) 155,165
Net income (loss) $ 2,172 $ 51,550 $ (161,228) $ 233,557
before extraordinary item
Extraordinry item, $ - $ - 2,886,513 $ -
Net income (loss) $ 2,172 $ 251,550 $ 2,725,285 $ 233,557
Loss per common share:
Net income ( loss) $ 0.00 $ 0.01 $ (0.01) $ 0.01
before extraordinary item
Net income (loss) $ 0.00 $ 0.01 $ 0.17 $ 0.01
Weighted average
number of common shares
outstanding 18,256,758 19,583,378 15,764,727 19,583,378
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
FRANKLIN OPHTHALMIC INSTRUMENTS CO., INC.
STATEMENT OF CASH FLOWS
(UNAUDITED)
For the nine months ended
June 30,
1997 1998
[S] [C] [C]
Cash flows from operating
activities:
Net income $ 2,725,285 $ 233,557
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation 61,915 65,503
Amortization 160,954 138,453
Gain from debt restructuring (2,886,513) -
Changes in current assets
and liabilities:
Accounts receivable (462,471) (297,651)
Inventory (370,702) (112,173)
Prepaid expenses (140,514) (180,905)
Other assets 32 -
Deposits (170,127) 16,306
Accounts payable, trade
and accrued liabilities (82,092) 83,052
Net cash used in operating
activities (1,164,233) (53,858)
Cash flows from investing
activities:
Acquisition of equipment (36,956) (129,089)
Net cash used in investing
activities (36,956) (129,089)
Cash flows from financing activities:
Net change in bank overdrafts 105,300 (95,309)
Increase (decrease) in capital
leases (10,663) 25,878
Net change in borrowings under
line of credit (228,809) 494,334
Net proceeds from issuance of
common stock 1,462,160 -
Increase (decrease) in long-
term debt (126,799) (51,449)
Net cash provided by
financing activities $ 1,201,189 $ 373,454
Net increase in cash and cash
equivalents $ - $ 190,507
Cash and cash equivalents at
beginning of year $ - $ -
Cash and cash equivalents at end
of year $ - $ 190,507
The accompanying notes are an integral part of these statements.
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 borrowing base for
the Revolving Line is generally 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 credit facilities are secured by
all of the Company's assets and are personally guaranteed by 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) 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. Settlement Gain
During December of 1996, the Company 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. During
June 1998, a settlement was reached and the complaint was withdrawn. The
settlement resulted in a net gain of $303,000 during the quarter ended
June 30, 1998.
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 Note 2 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 potentially increased the Company's credit
line from $1.8 million up to $2.2 million, provided for a $300,000
term loan, 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 decreased by $162,774 to $2,205,297 for the quarter ended
June 30, 1998 from $2,368,071 for the quarter ended June 30, 1997.
For the nine months ended June 30, 1998, sales increased by $326,365
to $7,228,194 from $6,901,829 for the nine months ended June 30,
1997. Although the sales decreased by 6.8% during the three months
ended June 30, 1998, management believes that this decrease is not
indicative of sales progression during the quarter in that pending
orders (orders received by the Company by June 30, 1998 but not yet
delivered due to scheduling requests by the customer(s))increased by
approximately 135% from $403,000 for the quarter ended June 30, 1997
to $948,402 for the quarter ended June 30, 1998. The increase in
pending sales during the period is primarily due to the continued
maturation of the sales force, the development of sales personnel
within new territories which the Company added during fiscal 1997,
and an increase in orders for medical residency programs and
optometric schools.
The Company's gross margin on sales decreased by $125,430 to
$608,225 for the quarter ended June 30, 1998 from $733,655 for the
quarter ended June 30, 1997. Gross margin as a percentage of sales
decreased to 27.6% for the quarter ended June 30, 1998 from 31% for
the prior year's quarter. The primary reason for the decrease was a
manufacturer's rebate program offered during the same period last
year. During the current year, the Company is still eligible for
rebates, however the period(s) covered will be subsequent to the
current period. For the nine months ended June 30, 1998, gross
margin on sales increased by $124,477 from $1,901,390 to $2,025,867.
Gross margin as a percentage of sales increased from 27.5% to 28%
for the nine months ended June 30, 1998. The increase in gross
margin percentage for the nine 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 enabled the Company to purchase greater
quantities of product at lower costs.
Selling, general and administrative ("SG&A") expenses decreased
by $117,388 to $537,942 for the quarter ended June 30, 1998 from
$655,330 for the quarter ended June 30, 1997. As a percentage of
sales, SG&A expenses were 24.4% for the three months ended June 30,
1998, compared to 27.7% for the quarter ended June 30, 1997. For the
nine months ended June 30, 1998, SG&A expenses decreased by $13,075
from $1,756,593 to $1,743,518 for the nine months ended June 30,
1997. As a percentage of sales, SG&A expenses were 24.12% of sales
for the 9 months ended June 30, 1998 compared to 25.45% for the nine
months ended June 30, 1997. The decrease in SG&A expenses for the
three and nine months ended June 30, 1998 is primarily a result of
the reduction of costs associated with the professional fees
primarily related to an financial and organizational restructuring
that took place during fiscal 1997 and the reduction of sales
coverage in territories that produced sales below expectations.
<PAGE>
Amortization and depreciation expense increased from $72,414 for
the quarter ended June 30, 1997 to $73,152 for the quarter ended
June 30, 1998. For the nine months ended June 30, 1998 compared to
the nine months ended June 30, 1997, amortization and depreciation
expense decreased from $222,869 to $203,958. The decrease is
for the nine month period 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 $6,787 for the quarter ended
June 30, 1997 to $48,582 for the quarter ended June 30, 1998. For
the nine months ended June 30, 1998 compared to the nine months ended
June 30, 1997, interest expense increased from $88,799 to $147,835.
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
$176,135 for the nine months ended June 30, 1997 versus $147,835
interest expense for the nine months ended June 30, 1998. This
decrease 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% to 3% over Silicon's prime
lending the that were charged during the comparable prior periods.
For the nine months ended June 30, 1998, the decrease 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
a decrease in earnings before interest, taxes, depreciation and
amortization ("EBITDA"), and extraordinary items for the quarter
ended June 30, 1998 of $70,283 versus $78,325 for the prior year's
quarter. For the nine months ended June 30, 1998, the Company
reported an EBITDA without extraordinary items of $282,349 versus
$144,797 for the prior year's nine 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,and
income from a settlement on a lawsuit of $303,000 during June of 1998,
for the quarter ended June 30, 1998, the Company reported earnings
of $251,550 versus earnings of $2,172 for the prior year's quarter.
For the nine months ended June 30, 1998, and inclusive of interest,
taxes, depreciation, amortization, and income for the aforementioned
settlement, the Company reported net income of 233,557 versus net
earnings of $2,725,285 for the prior years nine month period which
was inclusive of interest, taxes, depreciation, amortization, and an
extraordinary gain of $2,886,513 recorded in connection with debt
restructuring during the first quarter of fiscal 1997. 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. See Note 2 and 3 to the Financial
Statements contained elsewhere herein. As a result of the above,
the Company reported net earnings of $.01 per share for the three
and nine months ended June 30, 1998, versus no net earnings for the
quarter ended June 30, 1997 and net earnings per share of $.19
for the prior year's nine month period ended June 30, 1997
which included the above mentioned extraordinary gain from debt
restructuring.
Liquidity and Capital Resources
Cash flow from operations was a negative $53,858 for the nine
months ended June 30, 1998 versus a negative $1,164,233 for the prior
year's nine month period. The $1,110,375 decrease was primarily
attributed to improved profitability and a reduction of cash flow
needed to fund working capital needs. 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 June 30, 1998, the Company owed Harris Bank $1,863,398
under the Revolving Line and $290,000 under the Term Loan.
In addition, during the nine month period ended June 30, 1998,
the Company acquired approximately $120,000 worth of computer
equipment and software in order to provide for increased capacity of
its operations and to electronically link the Company's corporate
office with outside field representatives.
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, however that the Company can continue to increase or
maintain current 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.
Year 2000 Compliance
In response to the Year 2000 issue, the Company as evaluated its
accounting system and has modified existing programs and/or converted
to Year 2000 compliant software. The Company estimates that it has
expended approximately $120,000 on such modifications. In addition,
the Company has received information form its major suppliers that
such suppliers have updated their systems to comply with Year 2000.
As no single customer accounts for a material portion of the
Company's revenues, the Company has not had, and does not intend to
have discussions with its customers about their Year 2000 compliance.
Based on the foregoing, the Company believes that its business,
financial condition and results of operations will not be materially
adversely affected by the Year 2000 issue.
Forward Looking Statements
This Quarterly Report on Form 10-QSB contains forward looking
Statements within the meaning of Section 27a of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of
1934, as amended. The Company's actual results could differ
materially from those set forth in the forward looking statements
as a result of various factors, including but not limited to
consolidations and other competitive developments in the Company's
industry; the continuing effectiveness of the Company's sales efforts,
including the Company's ability to attract and retain qualified sales
representatives; the Company's ongoing ability to comply with
financial covenants under the Harris Loan Agreement; the impact of
increases in market interest rates on the Company's borrowing costs;
increases in the cost of labor or products of the Company that cannot
fully be recouped in sales prices to the Company's customers; failure
of the Company's or its suppliers' software to operate as expected in
compliance with Year 2000; and other general economic risks.
<PAGE>
PART II: OTHER INFORMATION
Item 1. Legal Proceedings.
During December of 1996, the Company 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. During June 1998, a settlement was reached and the complaint
was withdrawn. Pursuant to such settlement, the Company released
the accounting firm and certain individuals from any claims or
damages which were or could have been asserted in the lawsuit in
return for a payment of $500,000. The accounting firm and individuals
did not admit to any liability. 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 quarter ended June 30,
1998, 2,400,000 warrants, which were issued in connection with a private
placement of equity during 1996 expired unexercised. On July 23, 1998,
an Additional 4,487,740 warrants issued in connection with the Company's
initial public offering in July 1993, expired unexercised.
Pursuant to the extension of the employment between Mr. Brian Carroll
(the Company's Vice President and Chief Financial Officer) and the
Company, the Company has issued warrants to Mr. Carroll to purchase
200,000 shares of common stock at an exercise price of $.23 per share.
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 June 30, 1998.
Item 5. Other Information. None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following exhibits are filed herewith:
10.26 Employment Agreement dated May 15, 1998 between
the Company and Brian M. Carroll.
27 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the
quarter ended June 30, 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: August 14, 1998 By: /S/ Michael J. Carroll
Michael J. Carroll, President
and Chief Executive Officer
Mr. Michael Carroll May 15, 1998
Franklin Ophthalmic Instruments Co., Inc.
1265 Naperville Drive
Romeoville, Illinois 60446
Dear Mike,
The Executive Compensation Committee has approved the following
revisions to Brian Carroll's existing employment contract:
*Term: March 1, 1998 to March 31, 2001
*Salary: $88,000 year one
$92,000 year two
$96,000 year three
*Performance Pay Bonus Plan:
Net income bonus- In each fiscal year during the term of the
contract, commencing with fiscal 1998 (using fiscal 1997 as basis), if
the Company's net income exceeds its net income for the prior year (if
there is a net loss for the year, the basis shall be 0), the Company
shall pay to Brian M. Carroll $1,000.00 for each $20,000 increment of
such excess. Income from extraordinary items whre cash is not received
by the Company shall note be included when determining bonus
eligibility. Example: gain from debt restructuring or any other gain
where the Company does not receive cash proceeds shall not be used in
the formulas to determine bonus eligibility. Further example: if
Company achieves net income of $1,000 (includes all income other than
income derived from non-cash related extraordinary items) for fiscal
1998, employee shall receive a bonus of $5,000.00. The bonus shall be
payable to the employee upon completion of each fiscal year end audit.
Warrants:* Warrants issued at fair market value to purchase 200,000
of common stock upon Execution of contract extension.
Warrants issued at fair market value to purchase 100,000
of common stock at the Beginning of year two of the
contract extension.
Warrants issued at fair market value to purchase 100,000
of common stock at the Beginning of year three of the
contract extension.
*Warrants are to be issued when shares are available under the Company's
stock options plan and/or the Company has authorized available, and
provide an expiration date of 48 months from each issuance.
Expense Reimbursement: Education allowance for all course work, fees
etc...associated with continuing Education
and/or licenses in areas in which employee is
involved with for the Company.
Auto reimbursement of $550.00 per month.
All other business expenses as stated under
the original contract terms and at the
discretion of the Company President.
Insurance: Medical, Keyman and Disability Insurance
Coverage that the Company provides its officers.
All other terms and conditions of existing
contract are in force from the Contract
revision dates as stated above.
Sincerely,
/S/ Linda S. Zimdars
Linda S. Zimdars
Executive Compensation Committee
Employee signature agreeing to the above modification
/S/ Brian M. Carroll May 15, 1998
Brian M. Carroll
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<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 190,507
<SECURITIES> 0
<RECEIVABLES> 1,172,663
<ALLOWANCES> 23,438
<INVENTORY> 1,695,683
<CURRENT-ASSETS> 3,387,107
<PP&E> 1,009,135
<DEPRECIATION> 773,340
<TOTAL-ASSETS> 5,552,268
<CURRENT-LIABILITIES> 1,698,538
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0
0
<COMMON> 19,583
<OTHER-SE> 1,668,117
<TOTAL-LIABILITY-AND-EQUITY> 5,552,268
<SALES> 7,228,194
<TOTAL-REVENUES> 7,228,194
<CGS> 5,202,327
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<INCOME-PRETAX> 233,557
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<INCOME-CONTINUING> 233,557
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