SECURITIES AND EXCHANGE COMMISSISION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1998
[ ] TRANSITION REPORT UNDER SECTION 13
OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 0-21852
FRANKLIN OPHTHALMIC INSTRUMENTS CO., INC.
(Name of small business issuer 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 telephone number of principal executive offices)
Securities registered pursuant to Section 12(b) of the Exchange Act: None.
Securities registered to Section 12(g) of the Exchange Act: Common
Stock, $0.001 par value; Redeemable Common Stock Purchase Warrants;
and Units, each Unit consisting of one share of Common Stock, $0.001
par value, and one Redeemable Common Stock Purchase Warrant.
Check whether the issuer: (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past twelve
months (or for such 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
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure
will be contained, to the best of Registrant's knowledge, in
definitive proxy or information statements incorporated by reference
in Part III of this Form 10-KSB or any amendment to this Form 10-KSB.
The Registrant's revenues for the fiscal year ended September 30,
1998 totaled $10,603,378.
As of July 27, 1999, the aggregate market value of the voting stock
held by non-affiliates of the Registrant (assuming for this purpose
that only directors, officers and stockholders holding 5% or more of
the Common Stock, of the Registrant are affiliates of the Registrant),
based on the average of the closing bid and asked prices on that
date, was approximately $589,888.
As of July 27, 1999, there were 19,580,878 shares of Common Stock
outstanding.
Documents incorporated by reference: None
Transitional Small Business Disclosure Format: Yes No X
<PAGE>
INDEX TO FORM 10-KSB
of
FRANKLIN OPHTHALMIC INSTRUMENTS CO., INC. Page
----
PART I
ITEM 1. DESCRIPTION OF BUSINESS 1
ITEM 2. DESCRIPTION OF PROPERTY 7
ITEM 3. LEGAL PROCEEDINGS 8
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS 8
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED
STOCKHOLDERS MATTERS 8
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 10
ITEM 7. FINANCIAL STATEMENTS F-1
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE 15
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A)
OF THE EXCHANGE ACT 15
ITEM 10. EXECUTIVE COMPENSATION 18
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT 21
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 23
ITEM 13. EXHIBITS, LISTS AND REPORT ON FORM 8-K 25
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
The Business
Franklin Ophthalmic Instruments Co., Inc., a Delaware corporation
(the "Company"), sells and services high-quality examination
instruments and equipment used in examination rooms of
ophthalmologists, optometrists, medical organizations and clinics.
The Company currently distributes over 2,000 products from over 40
manufacturers.
The Industry
According to the National Eye Institute, an estimated 80 million
Americans have potentially blinding eye diseases, and 1.1 million
people in the U.S. are legally blind. Approximately 12 million people
in the U.S. have some degree of visual impairment that cannot be
corrected by glasses, and more than 100 million people in the U.S.
need corrective lenses to see properly. In 1981, the economic impact
of visual disorders and disabilities was approximately $14.1 billion
per year. By 1995, this figure was estimated to have risen to more
than $38.4 billion in direct costs and another $16.1 billion in
indirect costs each year. (National Eye Institute Web Site
www.nei.nih.gov)
Based upon information provided by Optometry Today in 1998,
publishers of an industry trade publication, there are over
50,000 ophthalmologists and optometrists in the United States
engaging in general practice and a variety of sub-specialties,
including retina and vitreous, glaucoma, neuro, ocularplastics,
pediatric, cataract, cornea and refractive surgery. Practitioners
provide services through private individual practices, private
group practices, private multi-specialty clinics, hospitals,
universities and governmental agencies.
The suppliers of products and services within the ophthalmic
industry fall into the following categories: (i) ophthalmic diagnostic
equipment firms (the category in which the Company is in); (ii)
optical (glasses, frames and contact lenses) manufacturing/fabricating
and distribution firms; (iii) surgical manufacturing and distribution
firms; and (iv) pharmaceutical manufacturing and distribution firms.
Many firms in the industry do business in more than one of the above
categories.
<PAGE>
A majority of the Company's sales are comprised of products that
can be characterized as "capital purchases," and users strongly
scrutinize each instrument according to its price and operational
efficiency. Customers often do not expect to pay list price. In
addition, many of the products are very durable, making for a long
replacement cycle. Users also take advantage of refurbished units.
Despite the foregoing, the Company believes that growth in the
marketplace will result from innovations in equipment development and
the aging of the population in the United States. According to a
report by Frost & Sullivan, a firm specializing in research studies on
the medical marketplace, the ophthalmic diagnostic marketplace is
expected to grow at an annualized rate between 5 and 10% per year
through the year 2000. The projected growth is expected as a result
of clinical acceptance of new technologies and such technologies
becoming more affordably priced. In addition,end users that have been
postponing purchases of traditional equipment are expected to
replace existing devices with the latest technology during the period
of projected growth. (Source: U.S. Ophthalmic Diagnostic Equipment
Markets, Frost and Sullivan, 1994.). A study by Foster Higgins
National Survey of Employer-Sponsored Health Plans (presented in the
November 1997 issue of the Vision Council of America
Planner)predicts that the number of Americans over the age of 65
will grow from 33 million to nearly 80 million by the year 2050.
The Company believes that such aging of the population will create
not only a need for additional diagnostic equipment, but also for
diagnostic equipment that allows the practitioner to more
efficiently see a greater volume of patients.
None of the data sources cited in this section is associated
with the Company.
Principal Products and Services
Chairs and Stands. A mandatory component of any ophthalmic
examination room is the chair in which the patient will sit and/or
lie while being examined. There are several types of chairs, which may
adjust automatically or manually to allow for several patient
positions for different examinations or surgical procedures.
Instrument stands provide for one or an array of examination
instruments to be available to the examiner at the patient
examination chair through use of counterbalanced articulating arms.
The Company distributes chairs and instrument stands manufactured by
Reliance Medical Products ("Reliance") and Marco Ophthalmic Inc.
("Marco Ophthalmic").
Ophthalmic Workstations. The ophthalmic workstation primarily
consists of a station allowing for the adaptation of certain
instrumentation and for the control of electrical functions
(illumination and instrument controls) in an examination room. The
Company currently is a systems integrator of such workstations and
customizes the material for such products to meet the specifications
of the ophthalmic practitioner.
<PAGE>
Slit Lamps. A slit lamp is used for examinations of all
portions of the eye. It projects a slit of light onto the eye itself
(slit illumination), which can then be viewed at variable
magnifications and illuminations. Although the slit lamp is
primarily utilized by ophthalmic practitioners, many hospitals are
also equipped with slit lamps. The slit lamp can be expanded by
adding photographic adaptations and/or digital applications through
the use of video or digital cameras, which allow the user to receive
hard copy information or transmit data through phone lines. The
Company sells slit lamps manufactured by Haag-Streit Service, Inc.
("Haag-Streit"), Marco Ophthalmic, Nikon Inc. Instrument Group
("Nikon") and Reichert Ophthalmic Instruments, a division of Leica
Inc. ("Reichert/Leica").
Refractors. A refractor, also known as a phoroptor, is used for
exact diagnosis of a person's "refraction acuity." The refractor
determines exactly how well a person sees without glasses and what
prescription lenses are required to correct that person's vision. A
refractor can be categorized as manual (an instrument where lenses
are manually adjusted to the patient's needs) or automated (an
instrument utilizing micro-processor technology and infrared light to
determine a person's refractive error). As automated refractors
become more approachable in price and continue to allow for increased
efficiencies in diagnosing refractive error, there is a gradual
tendency to up-grade to automated technology. In addition, automated
refractors provide for hard copy print-outs of refractive
measurements and/or provide the ability for the practitioner to
transfer refractive measurements to computers through networking.
The Company sells manual phoroptors manufactured by Reichert/Leica
and Marco Ophthalmic, and automated refractors manufactured by Canon
U.S.A., Inc. ("Canon") and Nikon.
Retinal/Fundus Cameras. A retinal or fundus camera is an
instrument with optical components that allows the user to capture
images primarily through the posterior portion of the eye utilizing
various fields of view and magnifications. Retinal cameras are
classified as either mydriatic or non-mydriatic. The non-mydriatic
type is utilized without dilation of the patient's pupil and is
primarily used for general diagnostic purposes. Mydriatic cameras
are used in conjunction with a fluid which causes full dilation of
the pupil and allows for larger fields of view for the observation of
problems, including tissue degeneration and vein enlargement and/or
hemorrhages. Mydriatic cameras offer versatile photographic
applications, including external and color fundus photography,
fluorescein photography and stereo photography. Images are acquired
from retinal/fundus cameras by using film (35mm or Polaroid film),
video and/or digital cameras. The Company sells retinal/fundus
cameras manufactured by Canon and Nikon.
Tonometers. The tonometer measures intra-ocular pressure, a
measure for the incidence of glaucoma. Tonometers are either manual
or automated (utilizing micro-processor technology). The Company
distributes manual tonometers manufactured by Clement-Clarke, Inc.,
Haag-Streit and Nikon. The Company distributes automated tonometers
manufactured by Keeler Instruments, Reichert/Leica and Mentor
Corporation ("Mentor").
<PAGE>
Keratometers. A keratometer measures the curvature of a
patient's cornea. Keratometers are either manual or automated.
Automated keratometers utilize micro-processor technology and allow
for hard copy print-outs of measurements and/or the transfer of
information digitally into a computer. Automated keratometers are
also available with a combined autorefraction capability (see
"Refractors"), which allows for dual functionality. The Company
distributes manual keratometers manufactured by Reichert/Leica and
Marco Ophthalmic. The Company distributes automated keratometers
manufactured by Canon and Nikon.
Lensometers. The lensometer is used to measure the curvature of
prescribed lenses in order to verify that the lens is appropriate
prior to dispensing. Lensometers may be manual or automated. Manual
lensometers require greater knowledge of the process and more time
for measurements. Automatic lensometers utilize micro-processor
technology and allow for hard copy print-outs of measurements and/or
the transfer of information digitally. The Company distributes
manual and automatic lensometers manufactured by Marco Ophthalmic,
Nikon and Reichert/Leica.
Projection Systems. The Company distributes a range of
projection systems which project acuity testing characters
(arrangements of letters, numbers and/or symbols) onto a screen in an
examination room, including projection systems of standard manual
type projectors, automated projectors which utilize micro-processor
technology and infrared controls, and projection systems utilizing
computer monitors to display the aforementioned testing characters.
The Company distributes projection systems manufactured by
Reichert/Leica and Marco Ophthalmic, and automated systems by
Reichert/Leica, Marco Ophthalmic, Mentor and Nikon.
Used and Refurbished Equipment. The Company also purchases, and
acquires through trade-in, used equipment. After the equipment is
checked and, if required, refurbished, the equipment is then re-
marketed, providing customers with a lower priced alternative to new
equipment.
Other. In addition to the above, the Company sells other items
such as hand held diagnostic instruments, diagnostic and laser
lenses, charts, disposables and parts.
Technical Service and Support. Approximately 75% of the
Company's personnel are trained to provide technical service and
support for ophthalmic instrumentation. As technology in the
ophthalmic marketplace continues to evolve, the Company believes that
its ability to provide technical service and support will result in a
competitive advantage in the marketplace.
<PAGE>
Marketing
Sales/Service Representatives. At July 20, 1999, the Company
maintained a sales and service force of 16 representatives in
locations throughout the United States. It is the sales/service
representative's responsibility to follow-up on sales leads provided
as a result of past business, marketing efforts and referrals from
manufacturers of the equipment that the Company sells. Sales and
service personnel are required to complete formal training sponsored
by ophthalmic manufacturers and the Company in order to maintain
familiarity with the latest technical developments.
Direct Mail. The Company distributes a catalog as a method of
marketing the equipment and services that the Company provides. The
mailing is sent once every twelve months to approximately 40,000
ophthalmologists, optometrists and other health care practitioners
throughout the United States.
Trade Shows. The Company attends and exhibits at approximately
15 trade shows or conventions per year including regional and
national shows (including those sponsored by the American
Academy of Ophthalmology, American Academy of Optometry and Vision
Expo-East & West). The Company has recently reduced the number of
trade shows it attends in comparison to past years in response to what
the Company believes is a trend in the industry for its customers to
attend fewer of the local trade shows in favor of the larger
meetings that offer more training sessions, industry updates and
larger displays of technology.
Customers
The end-user marketplace in the United States for ophthalmic
instruments is comprised of different classifications of eye
practitioners and a diverse base of institutional private and public
health care providers. Sales of the Company are divided approximately
equally among the following classifications.
The Ophthalmologist. The ophthalmologist is a medical doctor
specializing in the diagnosis, treatment and care of the eye and
related systems. The ophthalmologist may prescribe glasses, contact
lenses and medication and perform surgical procedures.
The Optometrist. An optometrist is a licensed doctor trained in
the diagnosis of refractive errors and the diagnosis (and the
treatment in some procedures) of diseases of the eye.
Other Customers. In addition to the eye-care professionals
described above that work in individual and group practices, the
Company sells to hospitals, hospital groups, medical clinics, health
maintenance organizations, surgical centers, universities, teaching
colleges, and various state and federal agencies.
<PAGE>
History
The Company was incorporated under the laws of the State of
Delaware in November 1992 for the purpose of reincorporating Franklin
Ophthalmic Instruments Co., Inc., a California corporation ("FOI-
California") in the State of Delaware. FOI-California, was
incorporated under the laws of the State of California in September
1990. Effective January 1993, FOI-California was merged with and
into the Company, thereby effecting said reincorporation in the State
of Delaware. Unless otherwise indicated, references made hereinafter
to the Company include FOI-California.
FOI-California was incorporated for the purpose of acquiring the
ophthalmic instrument distribution division of Franklin Optical
Company ("Franklin Optical"), which was incorporated in the State of
California in 1932. Franklin Optical's primary business was
operating retail locations in California and Hawaii which dispensed
prescription eyeglasses and contact lenses. Franklin Optical also
operated an ophthalmic instrument distribution division. In June
1990 and September 1990, respectively, Franklin Optical sold its
two lines of business in separate transactions. The ophthalmic
instrument distribution division was purchased by the Company. The
retail dispensing business was sold by Franklin Optical to a third
party and continues to operate in California as Franklin Optical
Company. Franklin Optical Company is not affiliated with the
Company.
In July 1993, the Company completed its initial public offering
(the "Initial Public Offering") of 1,437,500 Units(the "Units")at an
initial offering price of $4.00 per Unit. Each Unit consisted of one
share of Common Stock and one warrant to purchase a share of
Common Stock at an exercise price of $5.00 per share through July
1998 (collectively, the "Class A Warrants"). All of the Class A
Warrants have expired unexercised.
In January 1994, the Company acquired certain of the assets and
assumed certain of the liabilities of Progressive Ophthalmic
Instruments, Inc., a Florida corporation ("POI"). In July 1994,
the Company acquired all of the issued and outstanding shares of
common stock of Midwest Ophthalmic Instruments, Inc., an Illinois
corporation ("MOI"). MOI initially operated as a wholly-owned
subsidiary and was eventually merged into the Company in March 1995.
Shortly after the acquisition, the Company relocated its operations
to Romeoville, Illinois.
Since the close of the Company's fiscal year ended September 30,
1998, management of the Company has shifted its attention, from
seeking sales growth through expansion into new territories and into
the ear nose and throat, field to a strategy of evaluating the
expansions made and attempting to maximize profitability throughout
the Company. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- Liquidity and Capital Resources
and Outlook."
<PAGE>
Competition
The distribution of ophthalmic instruments is competitive. The
Company has historically competed on the basis of price, service,
promptness of delivery, reputation and relationship with
customers. The distribution of ophthalmic instruments is currently
dominated by one large distributor which covers a majority of the
country and numerous regional owner-operated distributors (the Company
is the only publicly-held distributor) located in significant
population centers in the country. These distributors sell and
service most well-known brands of equipment in relatively small
geographical areas and often have long-established relationships
with strong loyalties from their clientele. During the fourth
quarter of fiscal 1998, Lombart Instruments, the largest ophthalmic
instruments distributor in the United States, acquired the instrument
division of Essilor Inc., which had been the industry's second largest
distributor. As a result of the above combination, the Company
believes that it is now the second largest distributor of ophthalmic
instruments in the industry.
Backlog
The Company has not experienced any significant delays due to
backlog from its suppliers during the fiscal year ended September 30,
1998.
Employees
As of July 27, 1999, the Company employed 21 full-time
employees, including 3 management personnel, 4 in accounting &
operations, and 15 sales and service representatives. The Company
considers its relationship with its employees satisfactory and is not
a party to any collective bargaining agreement.
Government Regulations
The Company has no knowledge of any governmental regulations
which materially adversely affect its business operations.
Environmental Protection Compliance
The Company has no knowledge of any federal, state or local
environmental compliance regulations which affect its business
activities. The Company has not expended any capital to comply with
environmental protection statutes, and does not anticipate that such
expenditures will be necessary in the future.
<PAGE>
ITEM 2. Description of Property
The Company maintains all executive, administrative, operational
and inventory distribution functions in a 19,000 square foot building
located in Romeoville, Illinois, a suburb of Chicago, Illinois. The
building is rented pursuant to a lease at a rate of $10,240 per month
which will expire on April 30, 2001. Subsequent to the fiscal year
ended September 30, 1998, the Company agreed to sub-lease a portion of
its facility in Romeoville to a third party for a monthly rental of
$1,791. The Company also maintains a facility in Jacksonville,
Florida which the Company subleases to a tenant. The lease and the
sublease on the facility in Florida are scheduled to expire in October
1999. The monthly rental under the lease is $5,425 and the sublease
rental is currently $4,501.
The Company owns no real estate and does not intend to invest in
real estate or interests in real estate, real estate mortgages, or
securities of or interests in persons primarily engaged in real
estate activities for the foreseeable future.
ITEM 3. 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
$75,000 for the fiscal year ended September 30, 1998.
<PAGE>
Except for such lawsuit, the Company is not aware of any
material pending or threatened litigation to which the Company is or
would be a party.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the year ended September 30, 1998, no matters were placed
before the stockholders of the Company for consideration.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's and Common Stock is quoted on the OTC Electronic
Bulletin board and are traded under the symbol FKLN. The Company
has outstanding additional warrants to purchase Common Stock which
are not publicly traded. See Note 6 to the Financial Statements
contained elsewhere herein.
The following table sets forth, for the periods indicated, the
reported high and low bid and asked price quotations for Common
Stock for the fiscal years ended September 30, 1997, and 1998.
Such quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission, and may not represent actual transactions.
Common Stock*
<TABLE>
Bid ($) Asked ($)
Period of Quote High Low High Low
--------------- ------ ---- ---- ---
<S> <C> <C> <C> <C>
Fiscal 1997:
First Quarter 1-3/8 3/8 1-5/8 7/16
Second Quarter 7/8 5/16 1 17/50
Third Quarter 11/25 1/4 47/100 27/100
Fourth Quarter 1/2 1/4 3/5 7/25
Fiscal 1998:
First Quarter 37/100 13/100 2/5 3/20
Second Quarter 8/25 3/25 7/20 1/8
Third Quarter 27/100 21/100 3/10 23/100
Fourth Quarter 11/50 3/20 6/25 4/25
Fiscal 1999:
First Quarter 9/50 7/100 9/50 7/100
Second Quarter 3/25 9/100 27/100 9/100
Third Quarter 15/100 1/20 1/5 3/50
</TABLE>
*The Class A Warrants of the Company expired in July of 1998 and
therefore no information is given with respect to the Class A Warrants
or Units, which Units were comprised of Common Stock and Class A
Warrants.
At July 27, 1999, there were 214 holders of record of Common
Stock. The foregoing is based in part upon information furnished by
Continental Stock Transfer and Trust Company, New York, New York,
the transfer agent for the Company's Common Stock.
<PAGE>
There have been no cash dividends paid in fiscal years 1997 and
1998. The Company's Agreement with Harris Trust and Savings Bank
("Harris Bank") includes a covenant prohibiting the distribution of
dividends by the Company without the consent of Harris Bank. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OR PLAN
OF OPERATION--Liquidity and Capital Resources" and Notes 2 and 3 to
the Financial Statements contained elsewhere herein.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
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.
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. The Company
also settled in June of 1998 a lawsuit initiated by FOI in December
1996, resulting in a net gain of $266,483. See Notes 4 and 11 to the
Financial Statements contained elsewhere herein.
Going Concern and Management's 1999 Plans
The report of the Company's independent certified 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 the notes to the financial statements and
elsewhere herein, 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 under its loan agreement with Harris Bank 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 and the Company's lending
rate increased from .5% to 4.5% over Harris Bank's prime lending rate.
Because of these defaults and the resulting inability to obtain
additional working capital, the Company, in some cases, 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.
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 due to 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 of
leases 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. The Company
does not believe that the above will in and of itself reduce sales.
<PAGE>
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 $1,035,026 or 10.8% from $9,568,352 in
fiscal 1997 to $10,603,378 for the year ended September 30, 1998.
Of the $1,035,026 sales increase, $708,661 occurred during the fourth
quarter of fiscal 1998 and represented an increase of 27% over the
prior year's fourth quarter. Management believes that the increase is
primarily due to the continued maturation of the Company's sales
force, the development of sales personnel within new territories
which the Company added during fiscal 1997 and 1998, an increase in
orders for medical residency programs and optometric schools, and the
elimination of one of the Company's primary competitor's during the
fourth quarter which resulted in the Company acquiring representation
in territories it was previously not in and reduced the quantity of
competitors in certain markets that the Company currently sells into.
The Company's gross margin on sales decreased from $2,675,269
for fiscal 1997 to $2,199,464 for fiscal 1998. Gross margin as a
percentage of sales decreased from 28.0% in fiscal 1997 to 20.7% in
fiscal 1998. The decrease in gross margin as a percentage of sales
for the fiscal year 1998 is primarily attributable to 1) the
increase in sales into new territories where the Company was
attempting to establish a customer base; 2) the increase of school
orders as a percentage of sales which because of volume discounts,
provided lower profit margins; 3) a reduction of used equipment sales
which are at higher profit margins; 4) the shifting of key technical
service personnel to oversee the implementation of the new computer
system which reduced service revenue; and 5) a reduction of rebate
programs sponsored by suppliers as compared to the prior year.
Selling, general and administrative ("SG&A") expenses increased
from $2,572,419 in fiscal 1997 to $2,974,058 in fiscal 1998.
The Company attributes the increase to inefficiencies related to the
transition of computer systems and expenses attributed to the
Company's expansion into new territories.
<PAGE>
Amortization and depreciation expense decreased from $307,797
for the fiscal year ended September 30, 1997 to $276,720 for the
fiscal year ended September 30, 1998. The decrease is primarily
attributable to the elimination of amortization expense related to
employment agreements from the Company's acquisition of MOI.
Due to the increasing uncertainty of realization of the goodwill
on the Company's books related to the acquisition of MOI, the Company,
deeming the value of the asset permanently impaired in accordance with
Statement of Financial Accounting Standard No. 121, "Accounting for
the Impairment of Long-Lived Assets", has taken a non-recurring charge
of $1,869,312 to write off the remaining balance of goodwill related
to MOI. This decision has been made due to recurring losses from
operations and as a result, the Company has changed its focus.
During December of 1996, the Company filed a complaint against
the auditing and accounting firm of Marinelli & Scott. During June
1998, a settlement was reached and the complaint was withdrawn. The
settlement resulted in a net gain of $272,180 during the fiscal year
1998. The Company also reached a tentative settlement subsequent to
fiscal 1998, with Eastman Kodak, Inc. ("Kodak") under which the
Company has a three year promissory note for $71,250 with an interest
rate of 10.5% and an initial payment of $3,750 in exchange for the
return of 102,285 shares of the Company's common stock to the
Company's treasury upon the payment in full of the promissory note.
The Company recorded an accrual of $75,000 for the fiscal year ended
September 30, 1998.
Interest Expense increased from $150,612 for fiscal 1997 to
$214,214 for fiscal 1998. The increase in interest is primarily
attributable to the prior year's interest expense with Silicon
Bank 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 $295,737 for fiscal 1997, versus
$171,518 for fiscal 1998. This decrease is primarily attributable to
the Company refinancing its credit facility and Silicon and
transferring its lending facility with Silicon Bank to Harris. The
new credit facility with Harris Bank provides for a lending rate of
.5% over the Harris prime lending rate from the 2% to 3% over
Silicon's prime lending rate that were charged during the comparable
prior periods. For fiscal 1998 the decrease is a result of the above
mentioned bank refinancing with Harris 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.
<PAGE>
Liquidity and Capital Resources
Cash flow from operations was a negative $442,817 and a
negative $1,039,368 in fiscal 1998 and 1997 respectively. The
$596,551 decrease was primarily attributed to increases in accounts
receivable, inventory and prepaid expenses to support the Company's
growth, and an increase in customer deposits and accounts payable.
The Company financed the negative cash flows with increased credit
from bank financing. See Notes 4 and 6 to the Financial Statements
included elsewhere herein.
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.
<PAGE>
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.
Outlook
For fiscal 1999, the Company intends to concentrate on improving
profitability by emphasizing territories which have the greatest
profitability and or short term prospects of profitability. In
addition, in connection with the completion of the aforementioned
conversion of computer systems, the Company has focused on operational
and financial concerns by optimizing inventory levels to improve
liquidity, reduce the financing necessary to fund inventory levels,
and allow the Company to hopefully complete it financial restructuring
with Harris.
Inflation
While inflation has not had a material effect on the Company's
operations in the past, there can be no assurance that the Company
will be able to continue to offset the effects of inflation on the
costs of its products or services through price increases to its
customers without experiencing a reduction in the demand for its
products; or that inflation will not have an overall effect on the
ophthalmic medical instruments market that would have a material
affect on the Company.
Implementation of New Accounting Standards
In June 1997, the Financial Accounting Standards Board issued
SFAS No. 130, "Reporting Comprehensive Income". The new standard
discusses how to report and display income and is effective for years
beginning after December 15, 1997. When the Company adopts this
statement, it is not expected to have a material impact on the
presentation of the Company's financial statements.
In June 1997, the Financial Accounting Standards Board issued
SFAS No. 131, "Disclosures About Segments of an Enterprise and
Related Information". This standard requires enterprises to report
information about operating segments, their products and services,
geographic areas, and major customers. This standard is effective
for years beginning after December 15, 1997. When the Company
adopts this statement, it is not expected to have a material impact
on the presentation of the Company's financial statements.
<PAGE>
Year 2000 Compliance
In response to the Year 2000 issue, the Company has 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 from 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 Annual Report on Form 10-KSB 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>
ITEM 7. Financial Statements
FRANKLIN OPHTHALMIC INSTRUMENTS CO., INC.
INDEX TO FINANCIAL STATEMENTS
Page
Report of Independent Certified Public Accountants F-2
Balance Sheets F-3
Statements of Operations F-5
Statements of Cash Flow F-6
Statements of Stockholders Equity (Deficit) F-7
Notes to the Financial Statements F-8
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
of Franklin Ophthalmic Instruments Co., Inc.
Romeoville, Illinois
We have audited the accompanying balance sheets of Franklin
Ophthalmic Instruments Co., Inc. as of September 30, 1997 and
1998 and the related statements of operations, stockholders' equity
(deficit), and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position of
Franklin Ophthalmic Instruments Co., Inc. at September 30, 1997 and
1998, and the results of their operations and their cash flows for
the years then ended in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in
Note 2 to the financial statements, the Company has suffered recurring
losses from operations and has a deficiency in stockholders' equity.
In addition, the Company has violated various covenants of its bank
credit agreement. The Company does not have the ability to pay these
debts should the lender demand payment. These factors raise
substantial doubt about the Company's ability to continue as a going
concern. Management's plans in regard to these matters are also
discussed in Note 2. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ BDO Seidman, LLP
Chicago, Illinois
January 22, 1999
F-2
<PAGE>
<TABLE>
FRANKLIN OPHTHALMIC INSTRUMENTS CO., INC.
BALANCE SHEETS
ASSETS
September September
30, 30,
1997 1998
----------- -----------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ - $ -
Accounts receivable, less allowance for
doubtful accounts of $23,438 851,574 1,198,578
Inventory, less allowance of $60,000
and $85,000 respectively 1,583,510 1,798,301
Prepaid expenses and other assets 170,787 181,512
----------- -----------
Total current assets 2,605,871 3,178,391
----------- -----------
Property and equipment, at cost:
Furniture and equipment 638,938 326,698
Automobiles and trucks 119,193 42,093
Leasehold improvements 121,915 35,121
----------- -----------
880,046 403,912
Less: Accumulated depreciation and
amortization 707,837 200,672
----------- -----------
Total net property and equipment 172,209 203,240
----------- -----------
Other assets:
Deposits 13,903 13,903
Intangible assets, net of accumulated
amortization of $924,978 2,053,916 -
----------- -----------
Total other assets 2,067,819 13,903
----------- -----------
Total assets $ 4,845,899 $ 3,395,534
=========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL
PART OF THESE FINANCIAL STATEMENTS.
F-3
</TABLE>
<PAGE>
<TABLE>
FRANKLIN OPHTHALMIC INSTRUMENTS CO., INC.
BALANCE SHEETS
(CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
September September
30, 30,
1997 1998
----------- -----------
<S> <C> <C>
Current liabilities:
Bank overdrafts $ 95,309 $ 115,035
Bank line of credit - 2,111,506
Current portion of long-term debt 157,127 268,397
Accounts payable 1,075,382 1,670,921
Current portion of capitalized
lease obligations 18,314 46,757
Deposits 114,839 238,929
Accrued liabilities 259,089 389,101
----------- -----------
Total current liabilities 1,720,060 4,840,646
----------- -----------
Long-term debt:
Long-term portion of line of
credit with bank 1,659,314 -
Long-term debt, less current portion - 65,853
Capitalized lease obligations,
less current portion 12,382 -
----------- -----------
Total long-term debt 1,671,696 65,853
----------- -----------
Total liabilities 3,391,756 4,906,499
----------- -----------
Stockholders' equity (deficit):
Common stock: $0.001 par value;
authorized 25,000,000 shares;
19,583,378 shares issued and
outstanding at September 30, 1997
and September 30, 1998 19,583 19,583
Additional paid-in capital 11,022,940 11,022,940
Accumulated deficit (9,588,380) (12,553,488)
----------- -----------
Total stockholders' equity (deficit) 1,454,143 (1,510,965)
----------- -----------
Total liabilities and
stockholders' equity (deficit) $ 4,845,899 $ 3,395,534
=========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL
PART OF THESE FINANCIAL STATEMENTS.
F-4
</TABLE>
<PAGE>
<TABLE>
FRANKLIN OPHTHALMIC INSTRUMENTS CO., INC.
STATEMENTS OF OPERATIONS
For the year ended
September 30,
1997 1998
------------- -------------
<S> <C> <C>
Sales $ 9,568,352 $ 10,603,378
Cost of sales 6,893,083 8,403,914
------------- -------------
Gross profit 2,675,269 2,199,464
Less:
Selling, general and
administrative expenses 2,572,419 2,974,058
Amortization and depreciation 307,797 276,720
Impairment of goodwill - 1,869,312
------------- -------------
Loss from operations (204,947) (2,920,626)
------------- -------------
Other income (expense):
Interest expense (150,612) (214,214)
Settlement income, net - 191,483
Loss on fixed assets - (24,139)
Other income - 2,389
------------- -------------
Other income (expense), net (150,612) (44,481)
------------- -------------
Loss before extraordinary item (355,559) (2,965,108)
Extraordinary item, gain from
debt restructuring 2,871,513 -
------------- -------------
Net income (loss) $ 2,515,954 $ (2,965,108)
============= =============
Income (loss) per common share:
Loss before extraordinary item $ (0.02)$ (0.15)
============= =============
Extraordinary item 0.17 -
------------- -------------
Net income (loss) $ 0.15 $ (0.15)
============= =============
Weighted average number of
common shares outstanding 16,719,389 19,583,378
============= =============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-5
</TABLE>
<PAGE>
<TABLE>
FRANKLIN OPHTHALMIC INSTRUMENTS CO., INC.
STATEMENT OF CASH FLOWS
For the fiscal year ended
September 30,
1997 1998
---------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 2,515,954 $ (2,965,108)
Adjustments to reconcile net
income (loss) to net cash used
in operating activities:
Depreciation 89,443 92,116
Amortization 218,354 184,604
Impairment of goodwill - 1,869,312
Loss on disposal of fixed assets - 24,138
Gain from debt restructuring (2,871,513) -
Loss on litigation - 75,000
Changes in current assets and
liabilities:
Accounts receivable (131,297) (347,004)
Inventory (227,453) (214,791)
Prepaid expenses (151,759) (10,725)
Other assets 32 -
Deposits (315,005) 124,090
Accounts payable, trade and
accrued liabilities (166,124) 725,551
---------- -----------
Net cash used in operating activities (1,039,368) (442,817)
---------- -----------
Cash flows from investing activities:
Acquisition of equipment (45,807) (147,285)
---------- -----------
Net cash used in investing activities (45,807) (147,285)
---------- -----------
Cash flows from financing activities:
Net change in bank overdrafts 39,712 19,726
(Decrease) increase in capital leases (16,124) 16,061
Net change in borrowings under
line of credit (142,686) 554,315
Net proceeds from issuance of
common stock 1,365,263 -
Decrease in long-term debt (160,990) -
---------- -----------
Net cash provided by financing activities 1,085,175 590,102
---------- -----------
Net decrease in cash and cash equivalents - -
Cash and cash equivalents at
beginning of period - -
---------- -----------
Cash and cash equivalents at
end of period $ - $ -
---------- -----------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-6
</TABLE>
<PAGE>
<TABLE>
FRANKLIN OPHTHALMIC INSTRUMENTS CO., INC.
STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIT)
Common stock
$0.001 par Total
value Additional stockholder's
Number of paid-in equity
shares Amount capital Deficit (deficit)
--------- ------ ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE,Sept.30, 1996 9,544,810 $9,545 $ 8,868,577 $(12,104,334) $(3,226,212)
Private placement-qtr.
ended 12/31/96(Note 7) 4,801,000 4,801 1,195,449 - 1,200,250
Conversion of notes
payable (Note 6) 248,684 248 61,923 - 62,171
Silicon conversion of bank
debt (Notes 3,4,7) 2,088,884 2,089 520,132 - 522,221
Private placement-quarter
ended 6/30/97 (Note 7) 2,900,000 2,900 577,100 - 580,000
Offering costs of private -
placements (200,241) (200,241)
Net Income 2,515,954 2,515,954
--------- ------ ---------- ----------- ----------
BALANCE,Sept.30,1997 19,583,378 19,583 11,022,940 (9,588,380) 1,454,143
Net loss - - - (2,965,108) (2,965,108)
--------- ------ ---------- ----------- ----------
BALANCE,Sept.30,1998 19,583,378 $19,583 $11,022,940 $(12,553,488) $(1,510,965)
========== ====== ========== =========== ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL
PART OF THESE FINANCIAL STATEMENTS.
F-7
</TABLE>
<PAGE>
FRANKLIN OPHTHALMIC INSTRUMENTS CO., INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) Nature of Business
Franklin Ophthalmic Instruments Co., Inc. (the "Company"),
located in Romeoville, Illinois, is engaged in the national retail
sale of ophthalmic instruments which are marketed to doctors,
hospitals, universities and the U.S. governmental institutions through
the use of catalogs and outside sales representatives. The Company's
principal markets are located in the Midwest, Southeast and the West
Coast of the United States. The Company's operations involve
granting credit to local, regional and national medical practices,
hospitals, universities and to the military. Concentrations of credit
risk are limited by the large number of entities comprising the
Company's customer base and the geographic diversity of the Company's
customers. The Company operates under the trade name "Franklin MOI".
(B) Use of Estimates
The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
(C) Inventories
Inventories consisting of new equipment, used equipment and
parts, are valued at the lower of cost (using the first in first out
method) or market.
(D) Property and Equipment
Property and equipment are recorded at cost. Depreciation is
provided using straight line and accelerated methods over the
estimated useful lives of three to seven years. Leasehold
improvements are amortized on a straight-line basis over the lesser of
the estimated useful lives of the assets or the related lease terms.
(E) Intangible Assets
Intangible assets consist primarily of goodwill, which represent
the excess of cost over fair market value of net assets acquired
in the purchase of Midwest Ophthalmic Instruments Co., Inc. ("MOI"),
and are being amortized on the straight line method over 15 years.
<PAGE>
It is the Company's policy to periodically evaluate the carrying
value of its operating assets, including goodwill, and to recognize
impairments when the estimated future net operating cash flows to be
generated from the use of the assets are less than their carrying
value. The Company measures impairment of goodwill by the difference
between the carrying value and the estimated discounted cash flows
from the assets. In fiscal 1998, goodwill related to the purchase of
MOI was fully written off as these assets were deemed to have been
permanently impaired. See Note 12 for further discussion.
Amortization expense related to intangible assets was $218,354
for the year ended September 30,1997 and $184,604 for the year ended
September 30, 1998.
(F) Income Taxes
The Company provides for deferred taxes on the difference
between the financial reporting and tax bases of assets and
liabilities in accordance with Statement of Financial Accounting
Standards No. 109.
(G) Net Income/(Loss) per Share
In Fiscal 1998, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 128, Earnings Per Share.
Statement No. 128 replaces the previously reported primary and fully-
diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes
any dilutive effects of options and convertible securities. Diluted
earnings per share is computed similarly to fully diluted earnings per
share. All earnings per share amounts for all periods presented have
been restated to conform to the requirements of Statement No. 128.
Basic and diluted net income (loss) per share is computed by
dividing net income (loss) by the weighted average number of common
shares outstanding. Outstanding common stock options and warrants have
been excluded from the computation of earnings (loss) per share as
their effect would be anti-dilutive.
(H) Cash and Cash Equivalents
The Company considers all highly liquid investments that have
maturity of three months or less on the date of purchase to be cash
equivalents.
(I) Financial Instruments
Financial instruments which potentially subject the Company to
concentrations of risk consist principally of accounts receivable. The
accounts receivable are from numerous entities located throughout
the United States and the associated credit risks are limited. The
carrying values reflected in the balance sheet at September 30, 1998
reasonably approximate the fair values for accounts receivable and
payable.
<PAGE>
(J) Revenue Recognition
The Company recognizes revenue and the related costs when
merchandise is shipped.
(K) Advertising
Advertising costs are expensed as incurred and included in
"selling, general and administrative expenses". Advertising expenses
amounted to approximately $57,000 in fiscal 1997 and approximately
$96,000 in fiscal 1998.
(L) Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued
SFAS No. 130, "Reporting Comprehensive Income". The new standard
discusses how to report and display is effective for years beginning
after December 15, 1997. When the Company adopts this statement, it
is not expected to have a material impact on the presentation of the
Company's financial statements.
In June 1997, the Financial Accounting Standards Board issued
SFAS No. 131, "Disclosures About Segments of an Enterprise and
Related Information". This standard requires enterprises to report
information about operating segments, their products and services,
geographic areas, and major customers. This standard is effective
for years beginning after December 15, 1997. When the Company adopts
this statement, it is not expected to have a material impact on the
presentation of the Company's financial statements.
2. 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 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.
<PAGE>
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.
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.
<PAGE>
3. RESTRUCTURING
During the first quarter of the fiscal year ended September 30,
1997, the Company completed a restructuring that began during fiscal
1995 with the consolidation of the Company's facilities into
Romeoville, Illinois (the location of MOI) and a change in management
that included the appointment of the Company's current CEO, COO
and CFO. During the fourth quarter of fiscal 1996, the Company
reached agreements with Silicon Valley Bank ("Silicon"), its primary
trade creditors and certain of its debt-holders 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 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 resulted in an
extraordinary gain of $2,871,513 for the fiscal years ended 1997.
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. See Note 3 to the Financial Statements
included elsewhere herein.
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.
5. SHORT TERM DEBT - RELATED PARTY
During August of 1996, the Company borrowed $215,188 from an
individual under a 30 day promissory note bearing interest at 10% per
annum and a note origination fee of $6,450. In October, the note was
converted to 860,752 shares of common stock in the Company as
participation in the Company's Private Placement offering which
commenced on October 1, 1996. See Note 7. In addition, warrants
exercisable for $1.00 were also issued as part of the
participation in the aforementioned Private Placement offering which
warrants have expired unexercised.
<PAGE>
6. LONG-TERM DEBT
<TABLE>
Long-term debt consists of the following:
September 30,
1997 1998
--------- ---------
<S> <C> <C>
Notes Payable collateralized by automobiles
and trucks, with interest rates between
4.8% and 9.3%, principal and interest payable
monthly, due on or before September 1998 $ 4,668 $ -
10% trade creditor promissory note payable
monthly through October 1998 97,421 -
10% trade creditor promissory note payable
monthly from December 1996 through
November 1998 of which $14,567
represents amounts for deferred interest. 55,038 -
Notes Payable secured by all business assets,
Interest rate 8.25%, principal and interest
payable monthly, due on or before March 31,
2000. - 263,000
Notes Payable, secured by a stock pledge and
Security agreement, interest 10.5%, principal
and in interest payable quarterly, due on
before July 1, 2002. - 71,250
--------- ---------
Total long-term debt 157,127 334,250
Less current portion 157,127 268,397
--------- ---------
Long-term debt, less current portion $ - $ 65,853
========= =========
The aggregate amounts of long term debt mature as follows:
Year ending September 30, Amount
------------------------- -------
<C> <C>
1999 $268,397
2000 23,750
2001 23,750
2002 17,831
-------
$334,250
</TABLE>
<PAGE>
During August of 1996, the Company reached agreement with a trade
creditor in which of the $222,104 owed, $66,631 would be
converted to a 24 month promissory note with simple interest at 10%,
and the balance, $155,473 would be converted into 102,285 shares of
the Company's Common Stock (a conversion rate of $1.52 per share).
In November of 1997, the Company reached agreement with another trade
creditor in which of the $540,000 owed,$162,000 would be converted
into 248,684 shares of the Company's Common Stock(a conversion rate
of $1.52 per share). See Note 7 to the Financial Statements included
elsewhere herein.
In September 1996, in connection with the Company's debt
restructuring, the Company elected to provide a conversion rate on
certain 9% Notes from a private debt issuance during fiscal 1994,
such that the amounts outstanding under the 9% Notes could be
converted at the rate of $.25 per share (the rate at which the
Company commenced a Private Placement of Equity in the Company on
October 1, 1996). In connection with the above, $112,500 was
converted to shares of the Company's common stock at a rate of $.25
per share (the same pro rata price as sold in the Company's private
placement) during the fourth quarter of fiscal 1996.
In connection with a tentative agreement between the Company and
Eastman Kodak Company ("Kodak") reached subsequent to fiscal 1998, the
Company accrued for a three year promissory note for $71,250 and an
initial payment of $3,750 with an interest rate of 10.5% in exchange
for the return of 102,285 shares of the Company's common stock to the
Company's treasury upon the payment in full of the promissory note.
The Company believes that the interest rates on its long-term
debt are generally below the rates that would currently be available
for similar debt instruments issued by similar borrowers, and that as
a result, the market value of the Company's long-term debt is less
than the carrying amount. However, a determination of the specific
market value of the Company's long-term debt would involve excessive
costs.
7. STOCKHOLDERS' EQUITY
(A) Common Stock and Common Stock Warrant Transactions (the
"Securities Transactions").
In addition to the securities transactions described in Notes 3,
4, 5 and 6 above, the following occurred during fiscal 1997 and 1998:
During the first quarter of fiscal 1997, the Company raised
$1,200,250 of capital through the sale of 2,400,500 Units which were
sold pursuant to a private placement of Units (each Unit consisting
of two shares of common stock and one common stock purchase warrant,
exercisable between 6-18 months after the issuance of such common
stock purchase warrant). The sale of the 2,400,500 Units exceeded the
minimum of 2,000,000 Units required pursuant to the terms of the
private placement, which was conducted by the Company on a "best
efforts" basis and provided for the sale and offer of up to a maximum
of 3,200,000 Units. The amount raised in the private placement,
together with the effectiveness of personal guarantees by Messrs. M.
Carroll, J. Urban and B. Carroll, satisfied all remaining conditions
with Silicon.
<PAGE>
The Company entered into an agreement on April 11, 1997, which
was amended on May 8, May 9, and May 11, 1997 (the "Investment
Agreement"), with Prinz-Franklin L.L.C., an Illinois limited
liability company ("Prinz"), pursuant to which the Company agreed to
sell to Prinz up to 3,000,000 shares of Common Stock at a price of
$0.20 per share. The Investment Agreement granted Prinz piggyback
registration rights with respect to the shares of Common Stock so
purchased. Pursuant to such piggy-back registration rights, any
shares of Common Stock which Prinz elects to include in a
registration statement of the Company shall be held in escrow
during the effective period of such registration statement until
the following conditions are met: (i) 25% of the shares purchased
may not be sold or released from escrow until the closing price of
the Company's Common Stock is equal to or greater than $0.75 per
share for five consecutive trading days; and (ii) the remaining
common stock may not be sold or released from escrow until the
closing price of the Company's Common Stock is equal to or greater
than $1.25 per share for five consecutive trading days. Such escrow
restrictions shall terminate at the earlier of the time the common
stock sold to Prinz is exempt under Rule 144 as promulgated under
the Securities Act of 1933, as amended, or one year from the date of
each purchase of the respective shares. In addition, the
Investment Agreement provided for the issuance to Prinz of warrants to
purchase up to 400,000 shares of Common Stock at a price of $1.00
per share within a period of four years from issuance of the
applicable warrants. During the quarter ended June 30, 1997, Prinz
had purchased 2,900,000 of the shares of Common Stock for
$580,000 and was granted warrants to purchase 400,000 additional
shares of Common Stock. The Investment Agreement also provided for
the appointment of John Prinz to the Board of Directors of the
Company.
In connection with the Company's restructuring of the Silicon
debt during the quarter ended December 31, 1996, the Company agreed
to issue an additional 1,767 shares of Common Stock in August of 1997
to reconcile the amount of interest that was accrued up to the date
of the effectiveness of the Silicon conversion in November of 1996.
In accordance with anti-dilution rights of Class A Warrants that were
issued during the Company's Initial Public Offering in July 1993, the
exercise price for the Class A Warrants was reduced during fiscal
1997 from its original level of $5.00 per share of Common Stock to
$2.30 per share, and the aggregate number of shares of Common
Stock issuable upon exercise of such warrants were also increased
from 2,062,500 to 4,487,740. During July of 1998, the Class A warrants
expired unexercised.
(B) Outstanding Stock Purchase Warrants
Class A Warrants. A total of 2,062,500 Class A Warrants were issued
and outstanding at September 30, 1997. During July of fiscal 1998, all
Class A Warrants outstanding expired unexercised.
Class B and Class C Warrants. A total of 2,156,500 Class B
Warrants and 244,000 Class C Warrants were issued at September 30,
1997. During the quarter ended June 30, 1998, the B and C Warrants
expired unexercised.
<PAGE>
Other Warrants. In connection with certain modifications of the
Company's line of credit with Silicon, the provider of the Company's
line of credit facility up to December of 1997, the Company issued
44,119 warrants to Silicon exercisable on or before March 31, 2000
at a price of $0.50 per share. The Company also issued 400,000
warrants to Prinz-Franklin, L.L.C. in connection with a private
placement during the third quarter of fiscal 1997, with 200,000
exercisable on or before April 10, 2001 and 200,000 exercisable on
or before May 10, 2001 at a price of $1.00 per share. The Company
also issued 200,000 warrants to Mr. Brian M. Carroll in connection
with an employment agreement executed during May of 1998. The
warrants issued to Mr. Brian Carroll provide for an exercise price of
$.23 per share and expire during April of 2002.
The following sets forth the common stock purchase warrants
outstanding which were exercisable as of September 30, 1998:
<TABLE>
Shares Obtainable Per Share Exerciseable
on Exercise Exercise Price Through
<S> <C> <C>
44,119 $ .50 March 2000
200,000 $1.00 April 2001
200,000 $1.00 May 2001
200,000 $ .23 April 2002
</TABLE>
(C) Stock Options and Stock Appreciation Rights
In February 1993, the Company adopted the Franklin Ophthalmic
Instruments Co., Inc. 1993 Stock Option and Appreciation Rights Plan
(the "1993 Plan") which provides for the grant of options to
officers, directors, employees and consultants to purchase not more
than an aggregate of 200,000 shares of Common Stock. The 1993 Plan
provides for the grant of options intended to qualify as "incentive
stock options" under Section 422 of the Internal Revenue Code, as
amended, as well as options which do not so qualify.
With respect to qualified options, no option may be granted more
than ten years after the effective date of the 1993 Plan or exercised
more than ten years after the date of grant (five years if the
optionee owns more than ten percent of the Common Stock of the
Company). The option price may not be less than 100 percent of the
fair market value of the Common Stock on the date of the grant (110
percent if the optionee owns more than ten percent of the Common
Stock of the Company). Subject to certain limited exceptions,
options may not be exercised unless, at the time of exercise, the
optionee is in the service of the Company.
<PAGE>
The 1993 Plan was subsequently amended in December 1993 and
January 1994 to ensure compliance with federal and state securities
laws, and to permit an option holder to arrange for a "cashless
exercise" wherein an option may be exercised and the common stock
sold on the same day with a portion of the proceeds from the sale
delivered to the Company to pay the exercise price of the option.
These amendments were approved by the shareholders at the annual
shareholders' meeting held on March 11, 1994.
In December 1993, the Company's board of directors, adopted
(subject to shareholder approval which was subsequently obtained) the
Franklin Ophthalmic Instruments Inc., Inc. 1994 Combined Stock Option
and Appreciation Rights Plan (the "1994 Plan"). The 1994 Plan was
also amended to conform with state securities laws. The shareholders
approved the adoption of the 1994 Plan and its amendments at the
annual shareholders' meeting held on March 11, 1994.
The terms and conditions of the 1994 Plan are substantially
identical to those of the 1993 Plan with the following two significant
differences: (i) the number of shares of Common Stock available to
purchase through the grant of options and rights under the 1994 Plan
aggregates 330,000; and (ii) directors who are not also employees are
not eligible to participate in the 1994 Plan.
The following sets forth the activity for the 1993 Plan and the
1994 Plan for fiscal 1997 and 1998:
<TABLE>
1993 Plan 1994 Plan
Shares Exercise Price Shares Exercise Price
------- ---------- ------ ----------
<S> <C> <C> <C> <C>
Outstanding at
September 30, 1996 120,000 $ .50-4.625 67,500 $2.625-3.19
------- ---------- ------ ----------
Fiscal 1997
Granted - $ - - -
Forfeited - - 14,000 $ 3.19
Outstanding at ------- ---------- ------ ----------
September 30, 1997 120,000 $ .50-4.625 53,500 $2.625-3.19
Fiscal 1998
Granted - $ - - -
Forfeited 120,000 - 53,500 $ -
Outstanding at ------- ---------- ------ ----------
September 30, 1998 - $ - - $ -
======= ========== ====== ==========
</TABLE>
Options and warrants issued subsequent to January 1, 1996 are not
material under the provisions of SFAS No. 123.
<PAGE>
8. INCOME TAXES
The following sets forth the deferred tax assets and liabilities
resulting from temporary differences between the financial reporting
and tax bases of assets and liabilities:
<TABLE>
September 30,
1997 1998
--------- ---------
<S> <C> <C>
Deductible temporary differences
Net operating loss carry forwards $2,874,000 3,276,000
Allowance for doubtful accounts 10,000 10,000
Valuation reserve for inventory
obsolescence 24,000 34,000
Valuation allowance for deferred
tax assets (2,908,000) (3,320,000)
--------- ---------
Net deferred tax asset $ - $ -
--------- -----------
</TABLE>
As of September 30, 1998, the Company has net operating loss
carryforwards of approximately $8,200,000 which may be used to reduce
taxable income and income taxes in future years. The availability of
certain operating loss carryforwards to offset future years' taxable
income is subject to certain limitations due to changes in the
Company's ownership during the year ended September 30, 1993. The
carryforwards expire from fiscal 2008 to fiscal 2011.
<PAGE>
9. COMMITMENTS AND CAPITAL LEASE OBLIGATIONS
The Company leases office, warehouse and service facilities
under operating leases through 2001. Rent expense (net of sublease
income) was $112,696 for the year ended September 30, 1997 and
$124,343 for the year ended September 30, 1998.
Future obligations under the non-cancelable operating leases with
initial remaining terms in excess of one year at September 30, 1998
are as follows:
<TABLE>
Year Ending Minimum Minimum
September 30, Rental Payments Sublease Income Net
---- -------- -------- --------
<S> <C> <C> <C>
1999 185,955 56,907 129,048
2000 126,522 4,833 121,689
2001 70,653 - 70,653
-------- -------- --------
Total $383,130 $ 61,740 $321,390
The Company leases equipment under capital lease financing
arrangements. Amortization expense associated with the equipment
leases for the years ended September 30, 1997 and 1998 was $15,794,
and $21,655 respectively.
Future minimum capital lease payments are as follows:
Year ending September 30, Amount
------------------------- -------
<S> <C>
1999 $35,966
2000 $21,143
-------
Total before interest deduction $57,109
Less amount representing interest $10,352
-------
Capital lease obligations $46,757
=======
</TABLE>
<PAGE>
10. STATEMENT OF CASH FLOWS
<TABLE> For the year ended
September 30,
1997 1998
---- ----
<S> <C> <C>
Supplemental disclosure of cash
flow information:
Cash paid during the period for interest $ 331,569 $ 210,914
Supplemental schedule of non-cash
investing and financing activities:
Note payable issued to vendor as a
Result of litigation settlement $ - $ 75,000
Common stock issued in connection
with the conversion of debt 799,138 -
-------- --------
Total non-cash investing and
financing activities $ 799,138 $ 75,000
======== ========
</TABLE>
11. LITIGATION SETTLEMENTS
During December of 1996, the Company filed a complaint against
the auditing and accounting firm of Marinelli & Scott. During June
1998, a settlement was reached and the complaint was withdrawn. The
settlement resulted in a net gain of $266,483 during the fiscal year
1998.
In September 1998, the Company filed a judgment action against
Eastman Kodak Company ("Kodak"), regarding the responsibilities of the
parties under a settlement reached in a prior lawsuit. Kodak
responded with a counterclaim alleging breach of contract and
securities violations. The Company and Kodak reached a tentative
settlement subsequent to fiscal 1998, under which the Company has a
three year promissory note for $71,250 with an interest rate of 10.5%
and a down payment of $3,750 in exchange for the return of 102,285
shares of the Company's common stock to the Company's treasury upon
the payment in full of the promissory note. The Company recorded an
accrual of $75,000 for the settlement for the fiscal year ended
September 30, 1998.
12. INTANGIBLE ASSETS
Due to the increasing uncertainty of realization of the goodwill
on the Company's books related to the acquisition of MOI, the Company,
deeming the value of the asset permanently impaired in accordance with
Statement of Financial Accounting Standard No. 121, "Accounting for
the Impairment of Long-Lived Assets", has taken a non-recurring charge
of $1,869,312 to write off the remaining balance of goodwill related
to MOI. This decision has been made due to recurring losses from
operations and as a result, the Company has changed focus.
<PAGE>
13. EMPLOYEE BENEFIT PLAN
The Company established a profit-sharing 401(k) plan in May 1997,
for the benefit of substantially all of its employees. The plan allows
employee contributions under a deferred compensation arrangement
(401(k)). The plan provides for employer discretionary profit-sharing
contributions. There were no company contributions for the fiscal
years ended September 30, 1997 and 1998. The year end for the plan is
based on a calendar year.
14. FOURTH QUARTER ADJUSTMENTS
The Company recorded numerous year-end adjustments during the
fourth quarter of 1998 which resulted in earnings being reduced by
$2,525,632 during this period. The adjustments were primarily
attributed to the write-off of goodwill of $1,869,312 and unrecorded
liabilities of $468,636.
15. QUARTERLY FINANCIAL DATA (Unaudited)
During the fourth quarter of 1998 the Company also recorded
various yearend adjustments related primarily to amortization of
prepaid expenses, inventory and accrued expenses, which resulted in
adjustments to its previously reported earnings for the first three
quarters of 1998. The impact of these adjustments is as follows:
<TABLE>
December 31, 1997 March 31, 1997 June 30, 1998
-------- -------- ---------
<S> <C> <C> <C>
Net Income
As Previously
Reported $ 26,160 $ 1,139 $ 251,550
Impact of Fourth
Quarter Adjustments (84,517) (163,855) (187,380)
-------- -------- ---------
Adjusted Net
Income (Loss) $ (58,357) $(162,716) $ 64,170
======== ======== =========
Earnings Per Share
As Previously Reported $ 0.00 $ 0.00 $ 0.01
======== ======== =========
Adjusted Earnings
(Loss) Per Share $ 0.00 $ (0.01) $ 0.00
======== ======== =========
</TABLE>
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURES
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Directors and Executive Officers
The following table sets forth the names, ages and positions held
with respect to each director and executive officer of the Company
as of September 30, 1998:
<TABLE>
Name Age Position with the Company
------------------ --- -------------------------
<S> <C> <C>
Michael J. Carroll 59 President, Chief Executive
Officer and Director
James J. Urban 61 Senior Vice President, Chief
Operating Officer and Director
Brian M. Carroll 35 Vice-President and Chief
Financial Officer
James F. Forrester 55 Director
Philip Kantz 55 Secretary
John Prinz 38 Director
Michael J. Cavuoti 29 Director and Secretary
</TABLE>
Michael J. Carroll was appointed President of the Company
effective January 1, 1995 and in April 1995, Mr. Carroll was also
appointed Chief Executive Officer and a director of the Company. Prior
to joining the Company, Mr. Carroll, along with James J. Urban, was
a stockholder/founder of MOI, until July 1994 when all of the
outstanding capital stock of MOI was acquired by the Company. Mr.
Carroll was Vice President and Sales Manager of MOI. Prior to the
organization of MOI in 1982, Mr. Carroll held various executive
positions in ophthalmic instrument and optical firms including Vice
President of House of Vision, Inc. (a firm in the business of
manufacturing optical products and the distribution of ophthalmic
instruments with over 150 locations and approximately 1,100
employees). During October of 1998, Mr. Carroll resigned from his
position as President, Chief Executive Officer, and Director and was
subsequently appointed to a sales position with the Company. During
June of 1999, Mr. M. Carroll was re-appointed as President and Chief
Executive Officer.
<PAGE>
James J. Urban was appointed Senior Vice President and Chief
Operating Officer effective January 1, 1995. Prior to joining the
Company, Mr. Urban, along with Mr. Michael Carroll, was
stockholder/founder of MOI, until July 1994 when all of the
outstanding capital stock of MOI was acquired by the Company. Mr.
Urban served as President of MOI from its incorporation in 1982.
Prior to the inception of MOI, Mr. Urban held various executive
positions with several ophthalmic instrument distribution companies.
During October of 1998, Mr. Urban was replaced as Chief Operating
Officer by Michael J. Ryan ("Mr. Ryan"), the Company's operation's
manager. During June of 1999, Mr. Urban was reappointed to the
position of Chief Operating Officer, upon Mr. Ryan's appointment as
the Company's Vice President of technical services.
Brian M. Carroll was appointed Vice President and Chief Financial
Officer effective April 1, 1995. Mr. Carroll was co-founder of MOI's
digital imaging division and Doctors Financial Services, Inc. ("DFS").
DFS was a finance/leasing company concentrating in the ophthalmic
industry. Mr. Carroll holds a B.A. degree in finance from Loyola
University of Chicago, an M.B.A. degree in accounting from DePaul
University and a J.D. degree from The John Marshall Law School.
Brian M. Carroll is the son of Michael J. Carroll. During October
of 1998 Mr. B. Carroll was appointed President, Chief Executive
Officer, and a Director upon the resignation of Michael J. Carroll,
in addition to his duties as Chief Financial Officer. During June of
1999, Mr. B. Carroll resigned from his position as President and Chief
Executive Officer, and was replaced by Mr. Michael Carroll whereupon
Mr. B. Carroll was re-appointed Vice President and Chief Financial
Officer.
James F. Forrester was appointed as a Director upon the
resignation of Philip Winters during May of 1998. Mr. Forrester is 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.
Michael J. Cavuoti was appointed to the position as a Director
and elected as Secretary in order to fill the vacancy when Linda S.
Zimdars resigned during May of 1998. Mr. Cavuoti is currently a
beneficial owner of 8.3% 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.
<PAGE>
Philip C. Kantz was appointed to the position of Director during May
of 1998 when the Company elected to increase the size of the Board of
Directors from five to six. Mr. Kantz currently is President and
Chief Executive Officer of Tab Products of Palo Alto, California.
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 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) Falcon Building Products, Inc., a publicly owned North
American manufacturer and distributor of highly engineered building
products for the residential and commercial construction markets; (3)
ParcPlace-Digitalk, Inc., a publicly owned software development
company which develops and markets tools and Smalltalk application
development; and (4) Mine Reclamation Corporation 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.
John Prinz became a director of the Company in May, 1997. Mr.
Prinz is controlling partner in Prinz-Franklin L.L.C. which
beneficially owns 16.5% of the Company. In addition, Mr. Prinz is the
President of Prinz and Associates, a firm specializing in the
restructuring and capitalization of private and public companies.
From 1994 through 1996, Mr. Prinz was a founder and served as
Chief Financial Officer of Cormark, a designer and manufacturer of
interactive displays. During 1995, Mr. Prinz facilitated a
reorganization of Dauphin Technologies, a manufacturer of hand-held
computers, and served as a director of such company. Between 1988
and 1995, Mr. Prinz worked in the securities business as a registered
person for a subsidiary of Raymond James Securities and as a broker
for Robert W. Baird. Mr. Prinz graduated from the University of
Nebraska with a degree in finance and received a M.B.A. from Temple
University.
Classification of the Board of Directors
To provide for continuity of management, the Board of Directors
is classified into three classes: Class I (Michael J. Carroll), Class
II (James J. Urban and John Prinz) and Class III (Michael J.
Cavuoti, James Forrester and Philip Kantz). Each member of the Board
of Directors serves for a term of three years or until a
successor has been elected and qualified. When the classified Board
was established, it was contemplated that one class of directors would
be elected at each annual meeting of stockholders. When the next
annual meeting is scheduled, appropriate arrangements will need to be
made for the election of the various classes of directors. Subsequent
to fiscal 1998, Mr. Brian M. Carroll replaced Michael J. Carroll as a
Director of the Company.
<PAGE>
Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law empowers a
corporation to indemnify its directors and officers and to purchase
insurance with respect to liability arising out of their capacity or
status as directors and officers provided that this provision shall
not eliminate or limit the liability of a director (i) for any
breach of the director's duty of loyalty to the corporation or its
stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (iii)
arising under Section 174 of the Delaware general Corporation Law, or
(iv) for any transaction from which the director derived
indemnification permitted thereunder shall not be deemed exclusive of
any other rights to which the directors and officers may be entitled
under the corporation's by-laws, any agreement, vote of shareholders
or otherwise. The Company's Certificate of Incorporation eliminates
the personal liability of directors to the fullest extent permitted
by Section 102(b)(7) of the Delaware General Corporation Law.
The effect of the foregoing is to require the Company to
indemnify the officers and directors of the Company for any claim
arising against such persons in their official capacities if such
person acted in good faith and in a manner that he reasonably
believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding,
had no reasonable cause to believe his conduct was unlawful.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers or persons
controlling the Company pursuant to the foregoing provisions, the
Company has been informed that in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.
Committees of the Board of Directors
The Board of Directors has established an Audit Committee and
a Compensation Committee. James F. Forrester and Michael J. Cavuoti
are the members of the audit committee, and John Prinz and Philip
Kantz are the members of the Compensation Committees. The Audit
Committee recommends to the Board of Directors independent public
accountants for the Company and reviews related matters. The
Executive Compensation Committee reviews and recommends the
compensation of executive officers and employees. The Compensation
Committee administers the Company's stock option plans.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), requires the Company's officers and directors,
and persons who own more than ten percent of a registered class of
the Company's equity securities, to file reports of ownership and
changes in ownership of equity securities to file reports of
the Company with the Securities and Exchange Commission (the
"Commission") and NASDAQ. Officers, directors and greater than ten
percent stockholders are required by regulation to furnish the
Company with copies of all Section 16(a) forms that they file.
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
Summary Compensation Table
The following sets forth the aggregate cash compensation paid to
the Company's Officers for services rendered to the Company during
the fiscal year indicated. None of the Company's executive officers
who served as such at the end of the last fiscal year earned in
excess of $100,000 during the fiscal years indicated.
<TABLE>
Annual Compensation Long Term Compensation
Name and Position Year Salary Bonus Compensation Awards SARS(#) Compensation
------------------ ---- ------ ---- ----------- ---- ----- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Michael J. Carroll 1998 $72,000 - $6,000 - - -
President & Chief 1997 $72,000 - $6,000 - - -
Executive Officer 1996 $66,000 - $6,000 - - -
</TABLE>
Stock Option Plans
The Company currently has two stock option plans: (i) the
Franklin Ophthalmic Instruments, Co., Inc. 1993 Stock Option and
Appreciation Rights Plan (the "1993 Stock Option Plan"); and (ii) the
Franklin Ophthalmic Instruments Co., Inc. 1994 Stock Option and
Appreciation Rights Plan (the "1994 Stock Option Plan").
The 1993 Stock Option Plan provides for the grant of options to
officers, directors (including employee and non-employee directors),
employees and consultants to purchase not more than an aggregate of
200,000 shares of Common Stock of the Company. The 1994 Stock Option
Plan is substantially similar to the 1993 Stock Option Plan except
that it provides for the grant of options to officers, directors (who
are also employees), employees and consultants to purchase not more
than an aggregate of 330,000 shares of Common Stock. The 1993 Stock
Option Plan and the 1994 Stock Option Plan (collectively the "Stock
Option Plans" ) provide for: (i) the grant of options intended to
qualify as "incentive stock options" under Section 422 of the
Internal Revenue Code of 1986, as amended; and (ii) the grant of
options which do not so qualify. In addition, stock appreciation
rights may be granted in conjunction with the grant of options
under the Stock Option Plans.
<PAGE>
Subject to Rule 16b-3 under the Exchange Act, each Stock Option
Plan shall be administered by: (i) the Board of Directors if each
member of the Board of Directors is a "disinterested `person" (as
defined under Rule 16b-3); or (ii) a committee (the "Committee") of
not less than two members of the Board of Directors, each of whom is
a "disinterested person." The Board of Directors or the Committee
generally has the authority, subject to the provisions of the Stock
Option Plans, to determine the individuals to whom and the date on
which discretionary options and rights are to be granted, the number
of shares to be subject to options and rights, the exercise price of
shares subject to options and rights, the terms of any vesting
forfeiture schedule and the other terms and provisions of options and
rights. The 1993 Stock Option Plan and the 1994 Stock Option Plan
are separately administered by the Compensation Committee comprised
of John Prinz and Philip Kantz.
While the price at which shares of Common Stock subject to an
option may be purchased shall be determined by the Board of Directors
or the Committee, as applicable, pursuant to the provisions of the
Stock Options Plans, the purchase price of shares of Common Stock
issuable upon exercise of an incentive option must not be less than
100% of the fair market value of such shares on the date such
incentive option is granted and the exercise price of a non-qualified
option shall not be less than 85% of the fair market value of the
Common Stock on the date of grant thereof.
The Board of Directors or the Committee, as applicable, may
require as a condition to the grant of any option or right, that the
grantee enter into a stock option agreement which shall require,
among other things, that with respect to any options granted to
directors or officers, at least six months must elapse from the date
such options are granted to the date on which any share of Common
Stock underlying such options are sold or any right associated with
such option is exercised, unless the Board of Directors or the
Committee, as applicable, otherwise consents in writing. No options
may be granted under the Stock Option Plans more than ten years after
the date of approval of the Stock Option Plans by the stockholders.
Options granted under the Stock Option Plans are not transferable
except upon death. Except for options granted to non-employee
directors under the non-discretionary formula, options may be
exercised only while the option holder is employed by the Company, or
in some cases, within three months of termination of employment.
Options/SAR Grants in Last Fiscal Year
None.
Aggregate Option/SAR Exercises in Last Fiscal Year and Fiscal
Year- End Option/SAR Values
None.
<PAGE>
Employment Agreements
In connection with the purchase of MOI, the Company entered into
employment agreements with Michael J. Carroll, currently President,
Chief Executive Officer and a director of the Company, James J.
Urban, currently Senior Vice President, Chief Operating Officer and a
director of the Company, and Brian M. Carroll, currently Vice
President and Chief Financial Officer. Each such employment agreement
provided for an initial term of three years ending June 29, 1997;
however, in accordance with the agreements, the terms of each
agreement were extended for a period of two years ending June 29,
1999 where upon the agreements were to be renewed on a year-to-
year basis. Such agreements also provided that Michael Carroll and
James Urban were to receive salaries of $78,000 per year and Brian
Carroll was to receive a salary of $60,000. During May of 1998, Mr.
Brian M. Carroll's agreement was revised to provide, amongst other
things: 1) annual salaries of $88,000 for the first year of the
agreement, $92,000 for the second year and $96,000 for year three of
the agreement; 2) a performance pay bonus plan in each fiscal year
during the term of the contract, commencing with fiscal 1998 (using
fiscal 1997 as the basis)under which 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 zero) the Company will pay a bonus to Mr.
B. Carroll consisting of $1,000 for each $20,000 increment of such
excess; 3) a term of three years; and 4) a warrant plan which provides
the issuance of 200,000 warrants issued at fair market value to
purchase common stock upon execution of the contract revision, the
issuance of 100,000 warrants issued at fair market value to purchase
common stock at the beginning of year two of the term of the revised
contract, and the issuance of 100,000 warrants issued at fair market
value to purchase common stock at the beginning of year three of the
term of the revised contract. In connection therewith, Mr. B. Carroll
was issued 200,000 warrants to purchase the Company's common stock at
an exercise price of $.23.
During October 1998, Michael J. Carroll resigned from his
position as President, Chief Executive Officer and Director, and
subsequently accepted a sales position with the Company. In
connection with his new position with the Company, Mr. M. Carroll
signed a new three year employment agreement with the Company. During
February of 1999, Mr. M. Carroll resigned from his sales position with
the Company and in June of 1999, was re-appointed to the positions of
President and Chief Executive Officer.
All of the above agreements may be terminated by the Company for
"Just Cause" (as such term is defined in the employment agreements
including, without limitation, violations of the Company's policies
and indictment or conviction for criminal acts) or at the Company's
sole discretion (in which case severance payments must be made by
the Company equal to nine months of salary under the terminated
agreement for the agreements related to James J. Urban and Brian M.
Carroll). Consulting and Other Arrangements
<PAGE>
In September 1996, the Company extended a consulting agreement
with Marketing and Acquisition Concepts ("MAC"), of which Linda S.
Zimdars, a director of the Company until May of 1998, is a principal,
providing for payment by the Company to MAC of consulting fees in
exchange for investor relations and other marketing services. Through
mutual agreement, the consulting agreement was terminated in June
1998. During fiscal years ended September 30, 1997 and 1998 the
Company paid MAC consulting fees plus expenses of $24,250, and $23,750
respectively.
Remuneration of Directors
Since April 1, 1995, directors have not been compensated except
for expenses incurred.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
PRINCIPAL SECURITY HOLDERS
The following table sets forth, at September 30, 1998, certain
information with respect to stock ownership of (i) all persons known
by the Company to be beneficial owners of 5% or more of its
outstanding Common Stock, (ii) each of the Company's directors and
executive officers, and (iii) all directors and executive officers as
a group. Unless otherwise indicated, the beneficial owners have sole
voting and investment power over the shares of Common Stock listed
below.
<TABLE>
Name and Address of Number of Shares % of Shares of
Beneficial Owner (1) Beneficially Common Stock
Owned (2) Beneficially Owned
<S> <C> <C>
Michael J. Carroll (3) 1,531,710 (7) 7.82%
James J. Urban (4) 1,551,711 (8) 7.92%
Brian M. Carroll (3) 237,105 (9) 1.20%
Prinz-Franklin L.L.C. 3,325,000 (10) 16.51%
John Prinz (4) (5) 3,355,000 (11) 16.62%
Mickey Cavuoti (4) 1,665,000 (12) 8.49%
James F. Forrester (4)(6) 25,000 0.13%
Philip Kantz (4) 25,000 0.13%
Silicon Valley Bank 2,133,003 (13) 10.87%
All Executive
Officers & Directors
as a Group (6 Persons) 8,390,526 42.31%
</TABLE>
<PAGE>
(1) Michael J. Carroll, James J. Urban, Brian M. Carroll,
Michael Ryan, Michael J. Cavuoti, James F. Forrester, and
Philip Kantz may be contacted at 1265 Naperville Drive,
Romeoville, Illinois 60446. Prinz-Franklin L.L.C. and John
Prinz may be contacted at One Northfield Plaza, Suite
300, 570 Frontage Road, Northfield, Illinois 60093. James
Forrester can be reached care of Silicon Valley Bank.
(2) Unless otherwise noted, the Company believes that all of
such shares are owned of record by each person named
as beneficial owner and that such person has sole voting and
dispositive power with respect to the shares of Common
Stock owned by such person. Such person's percentage
ownership is determined by assuming that the options or
convertible securities that are held by such person which are
exercisable within 60 days from September 30, 1998 have
been exercised or converted, as the case may be.
(3) The named securityholder is an officer of the Company.
(4) The named securityholder is a director of the Company..
(5) The named security holder is sole manager of Prinz Franklin
L.L.C.
(6) The named securityholder is Executive Vice President of
Silicon Valley Bank
(7) Includes: (a) 51,710 shares of Common Stock issued by
the Company in connection with the acquisition of MOI; (b)
125,000 shares of Common Stock issued by the Company in
connection with the Company's execution of a forbearance
agreement with Silicon; (c) 1,100,000 shares of Common Stock
issued upon conversion of $550,000 in debt owed to the
noted stockholder in connection with the Company's
acquisition of MOI; and (d) 255,000 shares of Common Stock
issued to the noted stockholder in connection with the
conversion of certain promissory notes.
(8) Includes: (a) 71,711 shares of Common Stock issued by the
Company in connection with the acquisition of MOI; (b)
125,000 shares of Common Stock issued by the Company in
connection with the Company's execution of a forbearance
agreement with Silicon; (c) 1,100,000 shares of Common Stock
issued upon conversion of $550,000 in debt owed to the
noted stockholder in connection with the Company's
acquisition of MOI; and(d)255,000 shares of Common Stock
issued to the noted stockholder in connection with the
conversion of certain promissory notes.
(9) Includes: (a) 17,105 shares of Common Stock issued to the
noted stockholder in connection with the acquisition of
MOI; (b)20,000 shares of Common Stock; (c) 200,000 warrants
to purchase shares of Common at an exercise price of $.25.
<PAGE>
(10) Includes: 2,900,000 shares of Common Stock and 400,000
warrants to purchase Common Stock owned by Prinz-Franklin
L.L.C. over which Mr. Prinz has voting control.
(11) Includes: (a) 2,900,000 shares of Common Stock; (b) 400,000
warrants to purchase Common Stock at an exercise price of
$1.00 per share; and (c) 25,000 warrants to purchase common
stock at an exercise price of $.19.
(12) Includes: (a) 1,640,000 shares of Common Stock issued in
connection with a private placement of securities; and (b)
25,000 warrants to purchase Common Stock at an exercise price
of $.19 per share.
(13) Includes: 25,000 warrants to purchase Common Stock at
an exercise price of $.19 per share.
(14) Includes: 25,000 warrants to purchase Common Stock at an
exercise price of $.19 per share.
(15) Includes: (a) 2,088,884 shares of Common Stock issued
in conversion of debt and (b) 44,119 shares issuable
upon conversion of common stock purchase warrants exercisable
at a purchase price of $0.50 per share.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During August of 1996, the Company borrowed $215,188 from
Michael Cavuoti under a 30-day promissory note bearing interest at
10% per annum and a note origination fee of $6,450. In October, the
note was converted to 860,752 shares of common stock in the
Company as participation in the Company's Private Placement offering
which commenced on October 1, 1996. Warrants exercisable for
$1.00 were also issued as part of the participation in the
aforementioned private placement offering, however the warrants
expired unexercisable during the fourth quarter of fiscal 1998.
In April 1997, the Company entered into an agreement with Prinz-
Franklin L.L.C. pursuant to which the Company sold to Prinz shares of
Common Stock and warrants to purchase Common Stock. See Note 7 to the
Financial Statements contained elsewhere herein.
The Company will not permit loans or other transactions between
the Company and the officers, directors, principal shareholders, or
affiliates for other than bona fide business purposes or on terms
less favorable than could be obtained from third parties, unless
approved by a majority of the disinterested directors and the
independent directors, if any, of the Company.
For a discussion of the employment and consulting agreements to
which the Company is a party and payments of consulting and other
fees to executive officers of the Company, see "EXECUTIVE
COMPENSATION" and Note 3 to the Financial Statements contained
elsewhere herein.
<PAGE>
ITEM 27. EXHIBITS, LISTS AND REPORTS ON FORM 8-K.
Exhibit Number Title of Exhibit
2.1 Asset Purchase Agreement, dated January 27, 1994, by and between
Franklin Ophthalmic Instruments Co., Inc. and Progressive
Ophthalmic Instruments, Inc. filed with the Securities and
Exchange Commission (the 'Commission') on February 14, 1994(File
No. 0-21852) as an exhibit to the Company's Current Report on
Form 8-K, dated January 27, 1994, and incorporated herein by
reference.
2.2 Stock Purchase Agreement, dated June 24, 1994, by and among
Franklin Ophthalmic Instruments Co., Inc., Midwest Ophthalmic
Instruments, Inc., Michael J. Carroll and James J. Urban filed
with the Securities and Exchange Commission as an exhibit to the
Company's Current Report on 8-K, dated July 1, 1994 (File No. 0-
21852), and incorporated herein by reference.
2.3 Letter Agreement, dated June 29, 1994,by and among Franklin
Ophthalmic Instruments Co, Inc., Midwest Ophthalmic Instruments,
Inc., Michael J. Carroll and James J. Urban filed with the
Securities and Exchange Commission on July 15, 1994 as an exhibit
to the Company's Current Report on Form 8-K (File No. 0-21852)
and incorporated herein by reference.
3.1 Articles of Incorporation of Franklin Ophthalmic Instruments
Co., Inc., Delaware (Registrant) filed with the Securities and
Exchange Commission on March 10, 1993 as an exhibit to the
Company's Registration Statement on Form SB-2 (File No. 33-
59340) and incorporated herein by reference.
3.2 Articles of Incorporation of Franklin Ophthalmic Instruments Co,
Inc. (California) filed with the Securities and Exchange Commission
on March 10, 1993 as an exhibit to the Company's Registration
Statement on Form SB-2 (File No. 33-59340) and incorporated herein
by reference.
3.3 Agreement and Plan of Merger Certificate between Franklin
Ophthalmic Instruments Co., Inc.(Delaware) and Franklin Ophthalmic
Instruments Co., Inc. (California) filed with the Securities and
Exchange Commission on March 10, 1993 as an exhibit to the
Company's Registration Statement on Form SB-2(File No. 33-59340)
and incorporated herein by reference.
3.4 Bylaws of Franklin Ophthalmic Instruments Co., Inc.
(Registrant)filed with the Securities and Exchange Commission on
March 10, 1993 as an exhibit to the Company's Registration
Statement on Form SB-2 (File No. 33-59340) and incorporated
herein by reference.
3.5 Certificate of Stock Designation, Franklin Ophthalmic Instruments
Co., Inc. (Delaware) filed with the Securities and Exchange
Commission on March 10, 1993 as an exhibit to the Company's
Registration Statement on Form SB-2 (File No. 33-59340) and
incorporated herein by reference.
<PAGE>
4.1 Specimen Common Stock Certificate filed with the Securities and
Exchange Commission on June 16, 1993 as an exhibit to the
Company's Registration Statement on Form SB-2(File No 33-59340)and
incorporated herein by reference.
4.2 Form of Class A Warrant filed with the Securities and Exchange
Commission on June 16, 1993 as an exhibit to the Company's
Registration Statement on Form SB-2(File No 33-59340) and
incorporated herein by reference.
4.3 Form of Unit Purchase Option Certificate filed with the
Securities and Exchange on March 10, 1993 as an exhibit to the
Company's Registration Statement on Form SB-2 (File No. 33-
59340) and incorporated herein by reference.
4.4 Form of Bridge Lenders' Unit Purchase Warrant filed with the
Securities and Exchange Commission on March 10, 1993 as an
exhibit to the Company's Registration Statement on Form SB-2
(File No. 33-59340) and incorporated herein by reference.
4.5 Form of Warrant Agreement among the Company, J. Gregory and
Company, Inc. and Continental Stock Transfer and Trust Company
filed with the Securities and Exchange Commission on June 16,
1993 as an exhibit to the Company's Registration Statement on
Form SB-2 (File No. 33-59340) and incorporated herein by
reference.
4.6 Warrant issued by the Company, to Silicon Valley Bank, filed
with the Securities and Exchange Commission on May 10, 1993 as an
exhibit to the Company's Registration Statement on Form SB 2 (File
No. 33-59340) and incorporated herein by reference.
4.7 Warrant, dated January 21, 1994, issued by the Company to
Silicon Valley Bank, filed with the Securities and Exchange
Commission as an exhibit to the Company's Current Report on Form
8-K, dated January 27, 1994 (File No. 0-21852), and incorporated
herein by reference.
4.8 Warrant, dated March 31, 1994, issued by the Company to Silicon
Valley Bank, and corresponding Registration Rights Agreement,
filed with the Securities and Exchange Commission as an exhibit to
the Company's Current Report on Form 8-K, dated July 1, 1994 (File
No. 0-21852), and incorporated herein by reference.
4.9 Franklin Ophthalmic Instruments Co, Inc. 1994 Stock Option and
Appreciation Rights Plan, filed with the Securities and Exchange
Commission as an exhibit to the Company's Registration Statement on
Form S-8 (File No. 0-21852) and incorporated herein by reference.
4.10 Franklin Ophthalmic Instruments Co., Inc. 1993 Stock Option and
Appreciation Rights Plan filed with the Securities and Exchange
Commission on March 10, 1993 as an exhibit to the Company's
Registration Statement on Form SB-2 (File No. 33- 59340) and
incorporated herein by reference.
<PAGE>
4.11 Promissory Note, dated January 20, 1994, executed by
Franklin Ophthalmic Instruments Co., Inc. in favor of Silicon
Valley Bank filed with the Securities and Exchange Commission on
February 14, 1994 (File No. 0-21852) as an exhibit to the
Company's Current Report on Form 8-K, dated January 27, 1994,
and incorporated herein by reference.
4.12 Warrant to Purchase Common Stock, dated January 21, 1994, issued
by Franklin Ophthalmic Instruments, Inc. to Silicon Valley Bank and
corresponding Antidilution Agreement and Registration Rights
Agreement, filed with the Securities and Exchange Commission on
February 14, 1994 (File No. 0-21852) as an exhibit to the
Company's Current Report on Form 8-K, dated January 27, 1994,
and incorporated herein by reference.
4.13 Form of Non-Negotiable 5% Convertible Promissory Note filed with
the Securities and Exchange Commission on August 12, 1994 as an
exhibit to the Company's Post-Effective Amendment No. 1 to the
Registration Statement on Form SB-2 (File No. 33-59340) and
incorporated herein by reference.
4.14 Form of Non-Negotiable 9% Promissory Note filed with the
Securities and Exchange Commission on August 12, 1994 as an exhibit
to the Company's Post-Effective Amendment No. 1 to the Registration
Statement on Form SB-2 (File No. 33-59340) and incorporated herein
by reference.
4.15 Common Stock Purchase Warrants issued by Franklin Ophthalmic
Instruments Co., Inc. in December 1994 to each of Linda S.
Zimdars, an officer and director of the Company, and Dwayne
Podgurski, an employee of the Company filed with the Securities
and Exchange Commission as an exhibit to the Company's Annual
Report on Form 10-KSB for the fiscal year ended September 30, 1994
(File No. 0-21852) and incorporated herein by reference.
10.1 Loan documents evidencing loans and/or lines of credit
extended to the Company by Silicon Valley Bank, filed with the
Securities and Exchange Commission on March 10, 1993 as an
exhibit to the Company's Registration Statement on Form SB-2
(File No. 33-59340) and incorporated herein by reference.
10.2 Loan Modification Agreement, dated January 20, 1994, between
Franklin Ophthalmic Instruments Co., Inc. and Silicon Valley Bank
filed as an exhibit to the Company's Current Report on Form 8-K,
dated January 27, 1994, filed with the Commission on February 14,
1994 (File No. 0-21852) and incorporated herein by reference.
10.3 Loan Modification Agreement, dated March 31, 1994 between
Franklin Ophthalmic Instruments Co., Inc. and Silicon Valley Bank
filed with the Securities and Exchange Commission on July 15, 1994
as an exhibit to the Company's Form 8-K (File No. 0-21852) and
incorporated herein by reference.
<PAGE>
10.4 Form of Employment between Franklin Ophthalmic Instruments Co.,
Inc. and each of Michael J. Carroll and James J. Urban included as
an exhibit to the Stock Purchase Agreement identified in exhibit to
the Stock Purchase Agreement identified in Exhibit 2.2 above
which was filed with the Securities and Exchange Commission as
an exhibit to the Company's Current Report on Form 8 K, dated
July 1, 1994 (File No. 0-21852), and incorporated herein by
reference.
10.5 Consulting Agreement, dated December 1, 1994, between Franklin
Ophthalmic Instruments, Co., Inc. and Marketing and Acquisition
Concepts, a Wisconsin sole proprietorship of which Linda S.
Zimdars, an officer and director of the Company, is the sole
proprietor, filed with the Securities and Exchange Commission as an
exhibit to the Company's Annual Report on Form 10-KSB for the
fiscal year ended September 30, 1994(File No.0-21852) and
incorporated herein by reference.
10.6 Separation Agreement, dated April 1, 1995, by and among the
Company, Robert A. Davis, certain partnerships in which Mr. Davis
is a partner, Michael J. Carroll, and James J. Urban, filed as an
exhibit to the Company's Current Report on Form 8-K(File No. 0
21852) which was filed with the Securities and Exchange Commission
on May 3, 1995 and incorporated herein by reference.
10.7 Forms of Letters of Notice to Securityholders relating to
modification of the terms of certain of the Company's securities,
filed as an exhibit to the Company's Current Report on Form 8-K
(File No. 0-21852) which was filed with the Securities and
Exchange Commission on May 3, 1995 and incorporated herein by
reference.
10.8 Amended Loan and Forbearance Agreement, dated April 1, 1995,
between the Company and Silicon Valley Bank, filed as an exhibit to
the Company's Current Report on Form 8-K (File No. 0-21852) which
was filed with the Securities and Exchange Commission on May 3,
1995 and incorporated herein by reference.
10.9 Agreement, dated April 20, 1995, by and among the Company,
Michael J. Carroll and James J. Urban, filed as an exhibit to the
Company's Current Report on Form 8-K (File No. 0-21852) which was
filed with the Securities and Exchange Commission on May 3, 1995
and incorporated herein by reference.
10.10 Letter of Intent, dated April 27, 1995, between the Company
and Diversified Ophthalmics, Inc., filed as an exhibit to the
Company's Current Report on Form 8-K (File No. 0-21852)which was
filed with the Securities and Exchange Commission on May 3, 1995
and incorporated herein by reference.
10.11 Forms of notice dismissing the firm of Marinelli and Scott
as the Company's independent public accountants and Company's
retaining the firm of BDO Seidman, LLP to serve as its
independent public accountants, filed as an exhibit to the
Company's Amended and Restated Current Report on Form 8-K/A #1,
dated November 27, 1995, which was filed by the Company with the
Securities and Exchange Commission on December 6, 1995 (File No. 0-
21852) and is incorporated herein by reference.
<PAGE>
10.12 Form of notice dated September 4, 1996 relating to agreement
between the Company and Silicon Valley Bank, filed as an exhibit to
the Company's Current Report on Form 8-K (File No. 0-21852) which
was filed with the Securities and Exchange Commission on September
6, 1996 and incorporated herein by reference.
10.13 Form of notice dated September 4, 1996 relating to agreements
between the Company and certain trade vendors, filed as an exhibit
to the Company's Current Report on Form 8-K (File No. 0-21852)
which was filed with the Securities and Exchange Commission on
September 12, 1996 and incorporated herein by reference.
10.14 Agreement, dated August 20,1996, between the Company and Silicon
Valley Bank.
10.15 Investment Agreement, dated May 8, 1997 between the Company and
Prinz-Franklin L.L.C., filed as an exhibit to the Company's Form
10-QSB which was filed with the Securities and Exchange Commission
on May 15, 1997 and incorporated herein by reference.
10.16 Amendment to Investment Agreement, dated May 8, 1997 between
the Company and Prinz-Franklin L.L.C., filed as an exhibit to
the Company's Form 10-QSB which was filed with the Securities
and Exchange Commission on May 15, 1997 and incorporated herein by
reference.
10.17 Form of Class B Warrant dated November 25, 1996
10.18 Form of Class C Warrant dated December 30, 1996
10.19 Amendment to Investment Agreement, dated May 11, 1997 between
the Company and Prinz-Franklin L.L.C. Second Loan Modification
Agreement., dated August 14, 1997 between the Company and Silicon
Valley Bank.
10.20 Second Loan Modification Agreement, dated August 14, between the
Company and Silicon Valley Bank.
10.21 Letter from Silicon Valley Bank dated August 13, 1997 defining
default provision.
10.22 Agreement, dated September 30, 1997, among the Company, Michael
J. Carroll and James J. Urban.
10.23 Agreement dated July 1, 1992 by and between the Company and
Marco Equipment Co.
10.24 Agreement dated January 16, 1995 by and between the Company and
Haag-Streit Services, Inc. and Reliance Medical Products, Inc.
10.25 Agreement dated December 30, 1997 between the Company and Harris
Trust and Savings Bank.
10.26 Modified Employment Agreement dated May 15, 1998 between the
Company and Brian M. Carroll.
<PAGE>
10.27 Employment Agreement Between the Company and Michael J. Carroll.
27* Financial Data Schedule for fiscal year ended September 30, 1997
*Filed herewith.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Company during the fiscal
year ended September 30, 1998.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act,
the Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on July 27, 1999.
Franklin Ophthalmic Instruments Co.,Inc.
By:/s/ Michael J. Carroll
--------------------------
Michael J. Carroll, President and
Chief Executive Officer
In accordance with the Exchange Act, this report has been
signed by the following persons on behalf of the Registrant, in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ Michael J. Carroll President, Chief July 27, 1999
---------------------- Executive Officer
Michael J. Carroll
/s/ James J. Urban Executive Vice July 27, 1999
---------------------- President, Chief
James J. Urban Operating Officer
and Director
/s/ Brian M. Carroll Vice President, July 27, 1999
---------------------- Chief Financial
Brian M. Carroll Officer and Director
/s/ Michael J. Cavuoti Secretary and July 27, 1999
---------------------- Director
Michael J. Cavuoti
/s/ James Forrester Director July 27, 1999
----------------------
James Forrester
/s/ Director July 27, 1999
-------------------
Philip Kantz
/s/ Director July 27, 1999
-------------------
John Prinz
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE COMPANY'S FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED
SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
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<RECEIVABLES> 1,222,016
<ALLOWANCES> 23,438
<INVENTORY> 1,798,301
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0
0
<COMMON> 19,583
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<CGS> 8,403,914
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