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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 1-10416
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OPTICAL SYSTEMS, INC.
(Name of small business issuer in its charter)
Florida 65-0755071
(State of Incorporation) (I.R.S. Employer Identification Number)
Raritan Plaza II, Raritan Center, Fieldcrest Avenue, Edison, New Jersey, 08818
(732) 417-0023
(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,
$0.0001 par value.
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 [X] No [ ]
As of April 15, 1999 there were 6,510,320 shares of Common Stock outstanding.
Transitional Small Business Disclosure format: Yes ____ No [ X ]
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INDEX
OF
OPTICAL SYSTEMS, INC.
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1998
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Page
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (Unaudited)
Balance Sheets
Three Months Ended December 31, 1998 and September 30, 1998..................... 1
Statements of Operations
Three Months Ended December 31, 1998 and 1997................................... 2
Statements of Cash Flows
Three Months Ended December 31, 1998 and 1997................................... 3
Notes to Financial Statements...................................................4-5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS............................................5-7
PART II OTHER INFORMATION
ITEMS 1-6.................................................................................7
SIGNATURES .....................................................................................8
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PART I: FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
OPTICAL SYSTEMS, INC.
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BALANCE SHEETS
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<CAPTION>
December 31, September 30,
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1998 1998
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Unaudited Audited
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ASSETS
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Current assets:
Cash and cash equivalents $ 46,425 $ 81,765
Accounts receivable--trade, net of allowance
for doubtful accounts of $3,000 219,938 336,083
Loan receivable--officer 75,139 52,136
Prepaid expenses and other current assets 10,029 19,708
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Total current assets $ 351,531 $ 489,692
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Property and equipment:
Office furniture and equipment $ 37,066 $ 36,515
Computer hardware and software 348,027 343,966
Leasehold improvements 6,650
Vehicle 24,654 24,654
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Total cost $ 416,397 $ 405,135
Accumulated depreciation 242,651 222,401
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Total property and equipment $ 173,746 $ 182,734
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Deferred rental expense $ 24,000 $ 24,600
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Total assets $ 549,277 $ 697,026
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LIABILITIES AND STOCKHOLDERS' DEFICIENCY
- ----------------------------------------
Current liabilities:
5% convertible notes payable $ 34,715 $ 40,000
5% demand note payable 35,000 35,000
Current maturities of long-term debt 6,295 6,295
Loans payable--shareholders 34,461 34,461
Accounts payable--trade 652,030 486,120
Accrued expenses 109,251 81,437
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Total current liabilities $ 871,752 $ 683,313
Long-term debt 56,441 57,997
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Total liabilities $ 928,193 $ 741,310
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Stockholders' deficiency:
Convertible preferred stock--$.0001 par value, authorized 10,000,000 shares;
issued and outstanding 0
Common stock, $0.0001 par value authorized
50,000,000 shares; issued and outstanding - 6,186,070 and
4,372,712 shares, respectively $ 618 $ 517
Additional paid in capital 1,571,363 1,571,363
Accumulated deficit (1,950,897) (1,616,265)
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Total stockholders' deficiency $ (378,916) $ (44,284)
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Total liabilities and stockholders' deficiency $ 549,276 $ 697,026
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SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
1
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OPTICAL SYSTEMS, INC.
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STATEMENTS OF OPERATIONS
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3 Months Ended
December 31,
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1998 1997
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(Unaudited)
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Gross revenue $ 268,590 $ 274,085
Cost of revenue 86,467 144,790
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Gross profit $ 182,123 $ 129,295
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Operating expenses:
Payroll and related fringe costs $ 210,961 $ 127,481
Selling and marketing 145,961 38,884
Administrative 133,832 82,445
Depreciation 20,250 6,500
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Total operating expenses $ 511,044 $ 255,310
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Loss from operations $ (328,881) $ (126,015)
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Other income (expense):
Interest expense $ (3,161) $ (3,497)
Interest income 417 3
Miscellaneous expense (3,006) (2,827)
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Total other income (expense) $ (5,750) $ (6,321)
=========== ===========
Net loss $ (334,631) $ (132,336)
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Net loss per share $ (.059) $ (.026)
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Weighted average common shares outstanding 5,641,409 5,174,557
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SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
2
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OPTICAL SYSTEMS, INC.
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STATEMENTS OF CASH FLOWS
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3 Months Ended
December 31,
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1998 1997
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(Unaudited)
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(334,632) $(132,336)
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Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation $ 20,250 $ 6,500
Financial and legal services
Interest expense
Increase (decrease) in cash resulting from changes in current operating
assets and liabilities:
Accounts receivable 116,145 (19,176)
Loan receivable--officer (23,003) (1,943)
Prepaid expenses 9,679 (1,075)
Deferred lease payments 600
Accounts payable--trade 165,910 43,124
Accrued expenses 27,814 28,698
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Total adjustments $ 317,395 $ 56,128
Net cash provided by (used in)
operating activities $ (17,237) $ (76,208)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment $ (11,262) $ (22,488)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of 5% convertible notes payable $ (5,205) $ (28,500)
Proceeds from loan from shareholder 1,000
(Repayment) Proceeds of long-term debt (1,556) 12,363
Issuances of common stock 60,632
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Net cash provided by financing activities $ (6,838) $ 45,495
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DECREASES IN CASH AND
CASH EQUIVALENTS $ (35,340) $ (53,201)
Cash and cash equivalents, beginning of period 81,765 85,927
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Cash and cash equivalents, end of period $ 46,425 $ 32,726
========= =========
Supplementary cash flow data:
Interest paid $ 122 $ 268
Income taxes paid -0- -0-
Non cash financing transaction:
Conversion of preferred stock into common stock 101
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
3
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OPTICAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMETS
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Item
310(b) of Regulation S-B. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for
the three-month period ended December 31, 1998, are not necessarily
indicative of the results for the year ending September 30, 1999. For
further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's annual report on Form 10-KSB
for the year ended September 30, 1998.
NOTE B - SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
- ----------------
The preparation of 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.
PROPERTY AND EQUIPMENT
- ----------------------
Property and equipment are recorded at cost. Depreciation is computed using
both straight-line and accelerated methods over the estimated service lives
which range from 5 to 7 years. Expenditures for maintenance and repairs are
charged to operations. Given the rapid technology changes and obsolescence
that is occurring with computer hardware and software, it is reasonably
possible that the Company's estimate that it will recover the carrying
amount of this equipment from future operations will change in the near
term.
With respect to costs incurred to develop software for its information
processing services, the Company's policy is to capitalize such costs only
after technological feasibility has been established. No software
development costs have been capitalized in the accompanying financial
statements.
REVENUE RECOGNITION
- -------------------
Information processing services are reported as earned when services are
performed. Sales of information processing hardware and turnkey systems are
reported as earned when systems have been delivered and accepted by the
customer.
Income from the joint venture is recognized after the services are rendered
and billed and related expenses incurred by the joint venture.
INCOME TAXES
- ------------
Provision for income taxes is based on income reported in the accompanying
financial statements.
4
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LOSS PER SHARE
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Loss per share is based on the weighted average of common shares
outstanding during the reporting periods. Shares issuable upon the
conversion of preferred stock and notes payable, exercise of warrants have
not been included since their effect would be anti-dilutive.
CASH AND CASH EQUIVALENTS
- -------------------------
For cash flow reporting purposes, cash and cash equivalents include money
market fund investments with an initial maturity of three months or less.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
- --------
OSI was formed in 1992 and the founders are the senior management today.
OSI was incorporated in the state of New Jersey in 1992 and was the
successor in a reverse merger transaction effective June 30, 1997. OSI is a
reporting company trading on OTC Bulletin Board system using the symbol
OPSY.
At the outset, OSI was conceived to market document management services
that would create the "paperless office" by substituting electronic/optical
media and directories for hard copy reports. The name Optical Systems was
chosen to communicate this marketing emphasis. Six years later, the Company
has evolved into a marketer of a broad range of IT Solutions: document
management, imaging and network support, C.O.L.D. (Computer Output to Laser
Disk), SafeCD(TM)--a data migration product, e-Commerce applications,
Internet/Intranet services, CD-ROM Service Bureau, and Year 2000 solutions.
GROSS REVENUES
- --------------
The Company is an Information Technology Solutions Provider marketing
products and services in the areas of document management, service bureau
operations, custom programming, consulting or network, Internet and
Intranet environments and identifying and remediating "Year 2000" (Y2K)
program code. The revenues from these businesses for the three months ended
December 31, 1998 were 98% for the same period ended December 31, 1997.
In September 1997 the Company made a strategic decision to allocate
resources to market products and services dedicated to the "Year 2000
Solutions". These efforts in the first quarter created revenues of
$210,000. During the same period there was a reduction in revenues from the
general consulting business of $215,000 as the result of the reallocation
of resources.
COST OF REVENUES
- ----------------
For the first quarter ended December 31, 1998, expenses associated with the
Y2K work were about $67,000 with no comparable expenditures in 1997. The
general consulting business expenses decreased about $126,000 for having
the decrease in revenues
PAYROLL COSTS
- -------------
Payroll expenses for the first quarter of fiscal 1999 increased about
$83,000 above 1997. The increase reflects the cost of additional technical
people to complete Y2K projects with no comparable assignments in 1997.
5
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SELLING & MARKETING
- -------------------
Selling and marketing expenses for the three months ended December 31,
1998, increased $107,000 primarily attributable to Y2K business
development. Marketing services costs increased $31,000. Sales and
marketing salaries accounted for the balance of $76,000 period-to-period
increase.
GENERAL & ADMINISTRATION
- ------------------------
General and administration expenses for first fiscal quarter 1999 increased
$50,000 over 1998. Of this increase $30,000 was for professional
fees--accountants, lawyers, etc.,--associated with obtaining financing and
complying with reporting requirements for public companies. The balance of
the increase $20,000 is spread over 29 classifications of expense.
DEPRECIATION
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For the quarter ended December 1998, the increase in depreciation expense
reflects the investment in fixed assets made in fiscal year 1998 of
$100,000 or +33%. The Company then purchased new computer equipment to
build "factory sites" to process Y2K conversions. Depreciation expense for
the first quarter ending December 1998 versus December 1997 increased
$13,750, reflection of this investment.
INTEREST EXPENSE
- ----------------
For the quarter ended December 31, 1998, interest basically equals the
amount at December 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company is seeking to raise additional capital through the sale of
common stock in the private investor market of approximately $3,000,000.
There can be no assurance that these efforts will succeed. The Company is
projecting a substantial acceleration of the Y2K business and the newly
added revenues will reduce if not eliminate the working capital deficiency.
Should the revenue growth not occur, the Company has a plan to downsize
payroll and operating costs in line with income. Consequently, the Company
believes it will have sufficient cash flow to sustain operations over the
next twelve months.
The Company's liquidity requirements include working capital needs,
interest payments and capital investments. The company intends to finance
its current operating activities with cash from operations and to finance
its capital investments with the proceeds of any private placements of its
securities.
The Company has experienced late vendor payments and is currently looking
to extend terms.
Additionally, a minority shareholder of the Company has committed to
provide financing to the Company.
The short-term and long-term liquidity of the Company is dependent upon
several factors, including availability of capital, competitive end market
forces, capital expenditures and general economic conditions. In addition,
because of the Company's current financial position, its financial
flexibility is limited.
Although the Company believes the anticipated cash for future operations
will provide sufficient liquidity for future operations, there can be no
assurance this or other possible sources will be adequate.
6
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The Company expects to continue to recognize losses during 1999 due to its
operating performance. The Company is aggressively working to expand its
customer base and services. Should the Company incur greater than
anticipated losses during 1999, the Company would have to consider
financial alternatives to enable it to adequately fund its operations and
meet all of its obligations. Such alternatives would include reorganization
or bankruptcy protection.
There can be no assurances that the Company will be able to satisfactorily
resolve all of these concerns in the near term. No assurances can be given
that the Company will not continue to experience operational difficulties,
will increase sales to its customers or that financing will be available if
required or if available, whether such financing will be on terms
satisfactory to the Company.
FORWARD-LOOKING STATEMENT CONTAINED IN THIS FORM 10-QSB RELATING TO THE ADEQUACY
OF WORKING CAPITAL ARE BASED ON CURRENT EXPECTATIONS THAT INVOLVE UNCERTAINTIES
AND RISK INCLUDING, BUT NOT LIMITED TO, MARKET CONDITIONS, THE INTRODUCTION OF
COMPETITIVE PRODUCTS, ECONOMIC CONDITIONS, AND THE TIMING OF ORDERS FOR
PRODUCTS. THE COMPANY'S ACTUAL RESULTS MAY DIFFER MATERIALLY FROM CURRENT
EXPECTATIONS. READERS ARE CAUTIONED NOT TO PUT UNDUE RELIANCE ON FORWARD-LOOKING
STATEMENTS. THE COMPANY DISCLAIMS ANY INTENT OR OBLIGATION TO UPDATE PUBLICLY
THESE FORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE
EVENTS OR OTHERWISE.
PART II. OTHER INFORMATION
ITEM 6 EXHIBITS AND REPORTS ON FORM 8 - K
(a) EXHIBITS
EXHIBIT NO. DOCUMENT
27.2 Financial Data Schedule
(b) REPORTS ON FORM 8 - K.
No reports on Form 8-K were filed during the three month period ended
December 31, 1998.
7
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
OPTICAL SYSTEMS, INC.
Date: April __, 1999 BY:
--------------------------------
Warren R. Zimmerman
President/CEO
Date: April __, 1999 BY:
--------------------------------
John F. Carlson
Vice President/CFO
8
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM UNAUDITED
FINANCIAL STATEMENTS FOR THREE MONTH PERIOD ENDED DECEMBER 31, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> DEC-31-1998
<CASH> 46,425
<SECURITIES> 0
<RECEIVABLES> 222,938
<ALLOWANCES> 3,000
<INVENTORY> 0
<CURRENT-ASSETS> 351,531
<PP&E> 416,397
<DEPRECIATION> 242,651
<TOTAL-ASSETS> 549,277
<CURRENT-LIABILITIES> 871,752
<BONDS> 56,441
0
0
<COMMON> 618
<OTHER-SE> (398,916)
<TOTAL-LIABILITY-AND-EQUITY> 549,276
<SALES> 268,590
<TOTAL-REVENUES> 268,590
<CGS> 86,467
<TOTAL-COSTS> 513,593
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,161
<INCOME-PRETAX> (334,631)
<INCOME-TAX> 0
<INCOME-CONTINUING> (334,631)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (334,361)
<EPS-PRIMARY> (.06)
<EPS-DILUTED> 0
</TABLE>
