U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
----------------------------------
QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 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 ___ NO X
As of September 30, 1999 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 DECEMBER 31, 1988
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............................................................. 11
Item 1. Legal Proceedings..................................... 11
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.......................................................... 13
<PAGE>
PART I
Item 1. Financial Statements.
The following financial statements of Franklin Ophthalmic
Instruments Co., Inc. (the "Company") are included herein and are
unaudited, but in the opinion of management include all adjustments
necessary for fair presentation of the Company's financial condition as
of December 31, 1998 and results of operations and cash flows for the
three months ended December 31, 1997 and December 31, 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, December 31,
1998 1998
---------- ----------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ - $ -
Accounts receivable, less allowance
for doubtful accounts of $23,438 1,198,578 1,620,624
Inventory, less valuation
allowance of $85,000 1,798,301 2,184,594
Prepaid expenses and other assets 181,512 130,949
---------- ----------
Total current assets 3,178,391 3,936,167
---------- ----------
Property and equipment, at cost:
Furniture and equipment 326,698 326,698
Automobiles and trucks 42,093 42,093
Leasehold improvements 35,121 35,121
---------- ----------
Property and equipment, at cost: 403,912 403,912
Less: Accumulated depreciation
and amortization 200,672 223,039
---------- ----------
Total property and equipment 203,240 180,873
---------- ----------
Other assets:
Deposits 13,903 13,903
---------- ----------
Total other assets 13,903 13,903
---------- ----------
Total assets $ 3,395,534 $ 4,130,944
========== ==========
The accompanying notes are an
integral part of these statements.
-1-
</TABLE>
<PAGE>
<TABLE>
FRANKLIN OPHTHALMIC INSTRUMENTS CO., INC.
BALANCE SHEETS
(Unaudited)
(Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
September 30, December 31,
1998 1998
---------- ----------
<S> <C> <C>
Current liabilities:
Bank overdrafts $ 115,035 $ 349,772
Bank line of credit 2,111,506 2,199,009
Current portion of long-term debt 268,397 251,750
Accounts payable 1,670,921 1,982,826
Current portion of capitalized
lease obligations 46,757 32,886
Deposits 238,929 360,440
Accrued liabilities 389,101 418,721
---------- ----------
Total current liabilities 4,840,646 5,595,405
---------- ----------
Long-term debt:
Long-term debt, less current portion 65,853 75,000
---------- ----------
Total long-term debt 65,853 75,000
---------- ----------
Total liabilities 4,906,499 5,670,405
---------- ----------
Stockholders' equity (deficit):
Common stock: $0.001 par value;
authorized 25,000,000 shares;
19,583,378 shares issued and
outstanding at September 30,
1998 and December 31, 1998 19,583 19,583
Additional paid-in capital 11,022,940 11,022,940
Accumulated deficit (12,553,488) (12,581,984)
---------- ----------
Total stockholders' equity (deficit) (1,510,965) (1,539,461)
---------- ----------
Total liabilities and
stockholders' equity (deficit) $ 3,395,534 $ 4,130,944
========== ==========
The accompanying notes are an
integral part of these statements.
-2-
</TABLE>
<PAGE>
<TABLE>
FRANKLIN OPHTHALMIC INSTRUMENTS CO., INC.
STATEMENTS OF OPERATIONS
(Unaudited)
For the three months ended
December 31,
------------------------------
1997 1998
(as restated-
See Note 2)
---------- ----------
<S> <C> <C>
Sales $ 2,613,026 $ 3,375,199
Cost of Sales 1,879,286 2,628,982
---------- ----------
Gross profit 733,740 746,217
Less:
Selling, general and administrative
expenses 671,683 675,715
Amortization and depreciation 65,402 22,366
---------- ----------
Income (loss) from operations (3,345) 48,136
Other income (expenses):
Interest income
Interest expense (55,012) (76,632)
Other income (expense)
---------- ----------
Other income (expense), net (55,012) (76,632)
---------- ----------
Net income (loss) $ (58,357) $ (28,496)
========== ==========
Income (loss) per common share:
Net income ( loss) $ (0.00) $ (0.00)
========== ==========
Weighted average number of
common shares outstanding 19,583,378 19,583,378
========== ==========
The accompanying notes are an
integral part of these statements.
-3-
</TABLE>
<PAGE>
<TABLE>
FRANKLIN OPHTHALMIC INSTRUMENTS CO., INC.
STATEMENT OF CASH FLOWS
(Unaudited)
For the three months ended
December 31,
----------------------------
1997 1998
(as restated
See Note 2)
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net Income $ (58,357) $ (28,496)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation 19,251 22,366
Amortization 46,151 -
Changes in current assets and liabilities:
Accounts receivable (328,167) (422,046)
Inventory (55,229) (386,293)
Prepaid expenses 10,517 50,563
Deposits 36,103 121,511
Accounts payable, trade and
accrued liabilities 65,464 341,526
---------- ----------
Net cash used in operating activities (264,267) (300,869)
---------- ----------
Cash flows from investing activities:
Acquisition of equipment (13,682) -
---------- ----------
Net cash used in investing activities (13,682) -
---------- ----------
Cash flows from financing activities:
Net change in bank overdrafts (95,309) 234,737
Decrease in capital leases (3,173) (13,671)
Net change in borrowings under
line of credit 158,384 70,856
Increase (decrease) in long-term debt (12,534) 9,147
Proceeds from promissory note to bank 300,000 -
---------- ----------
Net cash provided by financing activities $ 347,368 $ 300,869
---------- ----------
Net decrease in cash and cash equivalents $ 69,419 $ -
Cash and cash equivalents at beginning
of period $ - $ -
---------- ----------
Cash and cash equivalents at end of period $ 69,419 $ -
========== ==========
The accompanying notes are an
integral part of these statements.
-4-
</TABLE>
<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, 1998.
The results of operations for interim periods are not necessarily
indicative of the results to be expected for a full year.
2. CORRECTION OF ERROR
During the fourth quarter of 1998, the Company recorded
adjustments related primarily to amortization of prepaid expenses,
inventory and accrued expenses, which resulted in adjustments to its
previously reported earnings for the quarter ended December 31, 1997.
The impact of these adjustments are as follows:
Net Income
As previously reported $ 26,160
Impact of adjustments $ (86,517)
---------
Adjusted Net Income (Loss) $ (58,357)
=========
Earnings Per Share As Previously Reported $ 0
=========
Adjusted Earnings (Loss) Per Share $ 0
=========
3. GOING CONCERN
The report of the Company's independent certified public
accountants contains an explanatory paragraph as to the substantial
doubts that exist concerning the Company's ability to continue as a
going concern.
<PAGE>
As discussed in Note 4, at the end of fiscal 1998, the Company was
in violation of certain loan covenants pertaining to net worth and
profitability. Subsequent to fiscal 1998, the Company became under-
collateralized according to its loan agreement with Harris Bank
("Harris") which requires loan amounts on the line of credit to be no
greater than 80% of accounts receivable and 50% of inventory (inventory
advance can be no greater than $1 million). As a result of these
matters, the Company received a notice of default from Harris. Because
of these defaults 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 is currently unable to obtain otherwise customary trade credit
and could be 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 margins to a level that will
allow it to operate profitably and generate positive cash flows, and to
refinance its bank debt. Although a reduction of expenses can
contribute to the necessary return to profitability, achieving
profitability without an increase in sales and gross profit margins
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.
To address the above issues, the Company has initiated a plan to
address profitability by emphasizing higher margin territories and
areas with immediate or short-term payback, re-focusing on higher
margin revenue sources such as technical service and used equipment
sales, and the reduction of expenses. To address emphasis on higher
margin territories and areas, the Company has eliminated unprofitable
territories. In connection with focusing on higher margin revenue
sources and the completion of the Company's computer systems
conversion, the Company has been able to re-direct technical personnel
back to emphasizing technical service and used equipment sales. As to
reduction of expenses, although the most significant reduction in
expenses will be recognized due to the reduction of costs associated
with unprofitable territories, other expense reductions should be
recognized in other operating expenses due to, amongst other things,
termination dates and/or through negotiating efficiencies.
In addition to the above, the Company has also established an
inventory reduction plan to emphasize inventory reduction by:
1) limiting the amount of purchases for stock of non-essential items;
2) highlighting current inventory for substitution of existing orders;
3) reducing and/or eliminating importing of product in which the
Company has to outlay cash up front and/or with limited credit terms;
and 4) a reduction of used equipment levels. The above inventory
reduction is intended to increase liquidity and thereby reduce the
financing of inventory that is needed to fund higher inventory levels,
and help enable the Company to get back within the collateral
parameters as set forth in its loan agreement with Harris.
<PAGE>
In connection with the Company's primary lending facility, the
Company is currently in negotiations with Harris for a forebearance
agreement and the establishment of a plan to bring the Company back
within the lending terms of its original agreement with Harris.
Overall, the Company believes that with (i) the completion of the above
mentioned restructuring of its debt; (ii) the completion of its systems
conversion that should allow the Company to redirect focus and
personnel to increasing efficiencies in inventory and operations; and
(iii) concentrating on territorial coverage with greater returns; that
the Company should be able to address the issues that gave rise to non-
compliance with its loan agreement and address liquidity issues.
There can be no assurance that with the aforementioned
restructuring that the Company will be able to increase sales levels
that would achieve profitability which could force the Company to
significantly reduce its operations in order to reduce expenses,
refinance its bank debt or take other actions to resolve liquidity
constraints that may arise.
4. NOTES PAYABLE - BANK
Until December 30, 1997, the Company's principal credit facility
had been a revolving credit facility with Silicon. The line of
credit, which was secured by essentially all of the Company's assets,
initially provided for borrowings of up to $4,000,000, limited to (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, 1998.
The Amended Agreement with Silicon provided a line of credit to
the Company with 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) 50% of eligible inventories or
$1,000,000. The lending rate on the Amended Agreement was 2% over
Silicon's prime rate and was payable on a monthly basis.
<PAGE>
During August 1997, the Company and Silicon agreed to an
extension of the line of credit 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 Amended Agreement. The interest rate charged
under the Revised Agreement was increased to 3% over Silicon's prime
lending rate, increasing to 4% over Silicon's prime lending rate if
the Company was still indebted to Silicon at January 1, 1998. 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
on an Amended and Restated Loan and Security Agreement ("Harris
Loan Agreement") in which Harris purchased from Silicon all of
Silicon's rights, title and interest in the Company's Revised
Agreement with Silicon. The agreement provides for credit facilities
comprised of a Revolving Credit Note for an amount up to $2,200,000
("Revolving Note") and a Secured Promissory Note in the amount of
$300,000 ("Promissory Note"). The Revolving Note is 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 Note expires on March 31,
2000.
The Promissory Note provides for a loan of $300,000 in which
principal payments of $3,750 are to commence on February 1, 1998 and
continue through March 1, 2000. On March 31, 2000, a final principal
payment equal to the entire unpaid principal balance hereof, together
with any and all amounts due under the Promissory Note.
In addition, under the terms of the Harris Loan Agreement, the
Company will have the option of borrowing rates on the Revolving Note
and the Promissory Note based on either Harris Bank's Commercial
Prime Rate plus .5% or the London Interest Based Rate ("LIBOR") plus
3%. The Company was also charged a one time loan origination fee of
$15,000. The terms of the loan also include 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 $200,000.
<PAGE>
The Harris Loan Agreement includes certain financial covenants
as follows: (1) a Consolidated Adjusted Tangible Net Worth such that
the Consolidated 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 form 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 of each Fiscal year
show a fixed charge ratio, as defined, of 1.4:1 for the Company's
fiscal year ending September 30, 1998 and a ratio of 2.0:1
thereafter.
As a result of the losses incurred during fiscal 1998, the Company
was in violation of the loan covenants with Harris for 1) Net Tangible
Net Worth Increase; 2) the net book value; 3) and the fixed charge
ratio. In addition, subsequent to fiscal 1998, the Company became
under-collateralized according to the provisions of its line of credit
in which the Company is able to borrow up to an amount up to $2.2
million under collateral provisions of 80% of accounts receivable and
50% of inventory (for an amount not to exceed $1,000,000 of net
borrowing). As a result of these matters, the Company received a
notice of default from Harris subsequent to year-end. As a result of
such default, Harris Bank is charging the Company a default rate on the
credit facilities of 4% in excess of the Base Rate as from time to time
in effect. The Company is currently in negotiations with Harris for a
forebearance agreement and the establishment of a plan to bring the
Company back within the lending terms of its original agreement.
However, there can be no assurance that the Company will be successful
in its negotiations with Harris.
As a result of the violations of the credit agreement with Harris
Bank, the Company's notes payable to bank have been classified as
short-term debt at September 30, 1998.
Item 2. Management's Discussion and Analysis or Plan of Operations
General
During fiscal 1998, a major portion of the Company's efforts and
resources were directed towards increasing revenue and enhancing
operations. In connection with increasing revenue, the Company
continued expansion efforts which initially started during fiscal 1997
and continued into 1998 in which the Company expanded direct
territorial coverage. In addition to the expansion of ophthalmic
distribution territorial coverage, the Company also started selling
into the ear nose and throat marketplace. The increase of territorial
coverage and expansion into the ear nose and throat marketplace in most
cases entailed adding sales representatives with little or no initial
payback from the Company's investment in new territories.
As to operations, the Company acquired and implemented a new
computer system to enhance inventory control and other accounting
functions, provide for remote access of information for outside sales
and service representatives, enable the Company to take advantage of
efficiencies provided by the internet, and obtain a system that was
Year 2000 Compliant.
<PAGE>
In addition, during fiscal 1998 the Company replaced its former
credit facility with a new credit facility with Harris Trust and
Savings Bank ("Harris") which increased the Company's credit line
from $1.8 million to an amount up to $2.5 million and extended the
term of the Company's line of credit to March 31, 2000.
During the first quarter of fiscal 1999, the Company has shifted
its focus from territorial expansion to emphasizing cash flow and
profitability. As such the Company has started to withdraw from
territories where there was little or no positive return on investment.
The Company has however re-emphasized the technical service area of the
business by increasing the number of technical service personnel in
order to enhance profit margins.
Going Concern
The report of the Company's independent certified public
accountants contains an explanatory paragraph as to the substantial
doubts that exist concerning the Company's ability to continue as a
going concern.
As discussed in Notes 3 and 4, at the end of fiscal 1998, the
Company was in violation of certain loan covenants pertaining to net
worth and profitability. Subsequent to fiscal 1998, the Company became
under-collateralized according to its loan agreement with Harris Bank
("Harris") which requires loan amounts on the line of credit to be no
greater than 80% of accounts receivable and 50% of inventory (inventory
advance can be no greater than $1 million). As a result of these
matters, the Company received a notice of default from Harris. Because
of these defaults 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 is currently unable to obtain otherwise customary trade credit
and could be 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 margins to a level that will
allow it to operate profitably and generate positive cash flows, and to
refinance its bank debt. Although a reduction of expenses can
contribute to the necessary return to profitability, achieving
profitability without an increase in sales and gross profit margins
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.
<PAGE>
To address the above issues, the Company has initiated a plan to
address profitability by emphasizing higher margin territories and
areas with immediate or short-term payback, re-focusing on higher
margin revenue sources such as technical service and used equipment
sales, and the reduction of expenses. To address emphasis on higher
margin territories and areas, the Company has eliminated unprofitable
territories. In connection with focusing on higher margin revenue
sources and the completion of the Company's computer systems
conversion, the Company has been able to re-direct technical personnel
back to emphasizing technical service and used equipment sales. As to
reduction of expenses, although the most significant reduction in
expenses will be recognized due to the reduction of costs associated
with unprofitable territories, other expense reductions should be
recognized in other operating expenses due to, amongst other things,
termination dates and/or through negotiating efficiencies.
In addition to the above, the Company has also established an
inventory reduction plan to emphasize inventory reduction by:
1) limiting the amount of purchases for stock of non-essential items;
2) highlighting current inventory for substitution of existing orders;
3) reducing and/or eliminating importing of product in which the
Company has to outlay cash up front and/or with limited credit terms;
and 4) a reduction of used equipment levels. The above inventory
reduction is intended to increase liquidity and thereby reduce the
financing of inventory that is needed to fund higher inventory levels,
and help enable the Company to get back within the collateral
parameters as set forth in its loan agreement with Harris.
In connection with the Company's primary lending facility, the
Company is currently in negotiations with Harris for a forebearance
agreement and the establishment of a plan to bring the Company back
within the lending terms of its original agreement with Harris.
Overall, the Company believes that with (i) the completion of the above
mentioned restructuring of its debt; (ii) the completion of its systems
conversion that should allow the Company to redirect focus and
personnel to increasing efficiencies in inventory and operations; and
(iii) concentrating on territorial coverage with greater returns; that
the Company should be able to address the issues that gave rise to non-
compliance with its loan agreement and address liquidity issues.
There can be no assurance that with the aforementioned
restructuring that the Company will be able to increase sales levels
that would achieve profitability which could force the Company to
significantly reduce its operations in order to reduce expenses,
refinance its bank debt or take other actions to resolve liquidity
constraints that may arise.
Results of Operations
Sales increased by $762,173 to $3,375,199 for the quarter ended
December 31, 1998 from $2,613,026 for the quarter ended December 31,
1997. The Company attributes the 29.2% increase to the recent
expansion of marketing efforts through the addition of sales personnel
in new territories, and a sale of approximately $400,000 to a large
institution.
<PAGE>
The Company's gross margin on sales increased by $30,686 to
$764,217 for the quarter ended December 31, 1998 from $733,740 for the
quarter ended December 31, 1997. Gross margin as a percentage of sales
decreased to 22.6% for the quarter ended December 31, 1998 from 28.1%
from the prior year's quarter. The increase in gross margin for the
quarter ended December 31, 1998 is primarily attributed to increases in
revenue derived from increased sales. The decrease in gross margin as
a percentage of sales is primarily due to substantially increased sales
levels into new territories where there is greater competition, the
increase as a percentage of sales to teaching institutions where volume
pricing reduces margin percentage, and a single sale of approximately
$400,000 where volume pricing was provided.
Selling, general and administrative ("SG&A") expenses increased by
$4,032 from $671,683 for the quarter ended December 31, 1997 to
$675,715 for the quarter ended December 31, 1998. As a percentage of
sales, SG&A expenses were 20% for the three months ended December 31,
1998, compared to 25.7% for the quarter ended December 31, 1997. The
decrease in SG&A expenses as a percentage of sales is primarily due to
increased sales with a similar SG&A structure.
Amortization and depreciation expense decreased from $65,402 for
the quarter ended December, 1997 to $22,366 for the quarter ended
December 31, 1998. The decrease is primarily attributable to the
elimination of amortization expense associated with goodwill that was
fully written off as these assets were deemed to have been permanently
impaired.
Interest expense increased from $55,012 for the quarter ended
December 31, 1997 to $76,632 for the quarter ended December 31, 1998.
The increase in interest expense is primarily a result of increased
borrowings to support increases in accounts receivable and inventory,
and the accrual of interest to recognize an increase in borrowing rate
as a result of the Company being in default of the terms of the
Company's line of credit with Harris Bank. See Notes 3 and 4 to the
Financial Statements contained elsewhere herein.
As a result of the foregoing factors, the Company reported a
net loss of $28, 496 for the quarter ended December 31, 1998 versus a
net loss as restated of $58,357 for the quarter ended December 31,
1997. As a result of the above, the Company reported no net earnings
per share for the quarters ended December 31, 1997 and December 31,
1998.
Liquidity and Capital Resources
Cash flow from operations was a negative $300,8690 for the
quarter ended December 31, 1998 versus a negative $264,267 for the
prior year's quarter. The $36,602 increase was primarily attributed to
increases in accounts receivable and inventory. The Company financed
the negative cash flows primarily with increases in trade payables
and bank financing.
<PAGE>
Until December 30, 1997, the Company's principal credit facility
had been a revolving credit facility with Silicon. On December 30,
1997, the Company reached agreement with Harris on an Amended and
Restated Loan and Security Agreement ("Harris Loan Agreement") in
which Harris purchased from Silicon all of Silicon's rights, title
and interest in the Company's Revised Agreement with Silicon. The
agreement provides for credit facilities comprised of a Revolving
Credit Note for an amount up to $2,200,000 ("Revolving Note") and a
Secured Promissory Note in the amount of $300,000 ("Promissory
Note"). The Revolving Note is 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 Note expires on March 31, 2000.
The Promissory Note provides for a loan of $300,000 in which
principal payments of $3,750 are to commence on February 1,1998 and
continue through March 1, 2000. On March 31, 2000, a final principal
payment equal to the entire unpaid principal balance hereof, together
with any and all amounts due under the Promissory Note.
In addition, under the terms of the Harris Loan Agreement, the
Company will have the option of borrowing rates on the Revolving Note
and the Promissory Note based on either Harris Bank's Commercial
Prime Rate plus .5% (the "Base Rate") or the London Interest Based Rate
("LIBOR") plus 3%. The Company was also charged a one time loan
origination fee of $15,000. The terms of the loan also include
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 $200,000.
The Harris Loan Agreement includes certain financial covenants as
follows: (1) a Consolidated Adjusted Tangible Net Worth such that the
Consolidated 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 form 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 of each Fiscal year show a fixed
charge ratio, as defined, of 1.4:1 for the Company's fiscal year
ending September 30, 1998 and a ratio of 2.0:1 thereafter.
As a result of losses incurred during fiscal 1998, the Company was
in violation of the loan covenants with Harris for 1) Net Tangible Net
Worth Increase; 2) the net book value; 3) and the fixed charge ratio.
In addition, subsequent to fiscal 1998, the Company became under-
collateralized according to the provisions of its line of credit in
which the Company is able to borrow up to an amount up to $2.2 million
under collateral provisions of 80% of accounts receivable and 50% of
inventory (for an amount not to exceed $1,000,000 of net borrowing).
In connection with the under-collateralization, the Company received a
notice of default from Harris subsequent to year end. As a result of
such default, Harris Bank is charging the Company a default rate on the
credit facilities of 4% in excess of the Base Rate as from time to time
in effect. The Company is currently in negotiations with Harris for a
forebearance agreement and the establishment of a plan to bring the
Company back within the lending terms of its original agreement.
However, there can be no assurances that the Company will be successful
in its negotiations with Harris.
<PAGE>
PART II: OTHER INFORMATION
Item 1. Legal Proceedings.
On September 29, 1998 the Company filed a declaratory judgment
action against Eastman Kodak Company ("Kodak") in the U.S. District
Court for the Northern District of Illinois. The action arose out of a
dispute regarding the responsibilities of the parties under a
settlement reached in a prior lawsuit. Under the settlement of the
prior lawsuit, certain indebtedness of the Company to Kodak was
converted into restricted common stock, subject to an undertaking by
the Company to register the common stock under the Securities Act of
1933 (the "Securities Act") for resale by Kodak by a specified date.
The Company filed a registration statement covering the stock.
However, the registration statement was not declared effective and, by
reason of an amendment to Rule 144 under the Securities Act adopted
after the date of the settlement, which rendered restrictions on
Kodak's resale of the stock no longer applicable, the Company believed
that completing the registration was unnecessary. The purpose of the
declaratory judgment action was to seek confirmation that registration
is unnecessary and, therefore, that the debt need not be reinstated.
Kodak answered with a five-count amended counterclaim alleging
breach of contract and violations of the Securities and Exchange Act of
1934 and the Illinois Securities Act. Kodak's breach of contract
claims arise out of the same facts upon which the Company filed its
declaratory judgment action. Subsequent to the fiscal year ended 1998,
the Securities violation claims were dismissed. The potential
liability to the Company under the breach of contract claims totaled
approximately $155,000.
Although the Company believes that the remaining counterclaims are
without merit, the Company and Kodak reached a tentative agreement
subsequent to fiscal 1998 in which the Company would provide Kodak with
a $71,250 three year promissory note with an interest rate of 10.5%
and an initial payment of $3,750 in exchange for the eventual return of
102,285 shares of the Company's common stock to the Company's treasury.
As a result of the above, the Company has accrued $75,000 for the
fiscal year ended September 30, 1998.
Except for such lawsuit, the Company is not aware of any
material pending or threatened litigation to which the Company is or
would be a party.
Item 2. Changes in Securities. None.
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.
<PAGE>
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 December 31, 1998.
Item 5. Other Information. None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following exhibits are filed herewith:
27 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the
quarter ended December 31, 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: September 28, 1999 s/s Michael J. Carroll
Michael J. Carroll, President
and Chief Executive Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE COMPANY'S CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED DECEMBER 31, 1998 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> DEC-31-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 1,644,062
<ALLOWANCES> 23,438
<INVENTORY> 2,184,594
<CURRENT-ASSETS> 3,936,167
<PP&E> 403,912
<DEPRECIATION> 223,039
<TOTAL-ASSETS> 4,130,944
<CURRENT-LIABILITIES> 5,595,405
<BONDS> 0
0
0
<COMMON> 19,583
<OTHER-SE> (1,519,878)
<TOTAL-LIABILITY-AND-EQUITY> 4,130,944
<SALES> 3,375,199
<TOTAL-REVENUES> 0
<CGS> 2,628,982
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 76,632
<INCOME-PRETAX> (28,496)
<INCOME-TAX> 0
<INCOME-CONTINUING> (28,496)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (28,496)
<EPS-BASIC> .00
<EPS-DILUTED> .00
</TABLE>
