<PAGE> 1
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 March 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 1-10416
--------------
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 May 15, 1999 there were 6,510,320 shares of Common Stock outstanding.
Transitional Small Business Disclosure format: Yes [ ] No [X]
<PAGE> 2
INDEX
OF
OPTICAL SYSTEMS, INC.
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (Unaudited)
Balance Sheets
Six Months Ended March 31, 1999 and Twelve Months Ended September 30, 1998..........1
Statements of Operations
Three Months Ended March 31, 1999 and 1998..........................................2
Six Months Ended March 31, 1999 and 1998............................................2
Statements of Cash Flows
Six Months Ended March 31, 1999 and 1998............................................3
Notes to Financial Statements.......................................................4-5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS............................................5-8
PART II OTHER INFORMATION
ITEMS 1-6..................................................................................8
SIGNATURES..........................................................................................9
</TABLE>
<PAGE> 3
PART I: FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
OPTICAL SYSTEMS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, September 30,
----------- ------------
1999 1998
---- ----
Unaudited Audited
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 32,971 $ 81,765
Accounts receivable--trade, net of allowance
for doubtful accounts of $3,000 198,093 336,083
Loan receivable--officer 87,543 52,136
Prepaid expenses and other current assets 6,156 19,708
----------- -----------
Total current assets $ 324,763 $ 489,692
=========== ===========
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
----------- -----------
Total cost $ 416,397 $ 405,135
Accumulated depreciation 262,901 222,401
----------- -----------
Total property and equipment 153,496 182,734
Deferred rental expense $ 24,000 $ 24,600
----------- -----------
Total assets $ 502,259 $ 697,026
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
5% convertible notes payable $ 33,840 $ 40,000
5% demand note payable 35,000 35,000
Current maturities of long-term debt 6,295 6,295
Loans payable--shareholders 134,461 34,461
Accounts payable--trade 735,221 486,120
Accrued expenses 81,577 81,437
----------- -----------
Total current liabilities $ 1,026,394 $ 683,313
Long-term debt 55,396 57,997
----------- -----------
Total liabilities $ 1,081,790 $ 741,310
=========== ===========
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 - 6,510,320 and
4,372,712 shares, respectively $ 651 $ 517
Additional paid in capital 1,652,393 1,571,363
Accumulated deficit (2,232,575) (1,616,265)
----------- -----------
Total stockholders' deficiency $ (579,531) $ (44,284)
----------- -----------
Total liabilities and stockholders' deficiency $ 502,259 $ 697,026
=========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
1
<PAGE> 4
OPTICAL SYSTEMS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
3 Months Ended 6 Months Ended
March 31, March 31,
-------------------- ---------------------
1999 1998 1999 1998
---- ---- ---- ----
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Gross revenue $ 290,349 $ 627,714 $ 558,939 $ 901,799
Cost of revenue 71,947 257,381 158,415 402,171
--------- --------- --------- ---------
Gross profit $ 218,402 $ 370,333 $ 400,524 $ 499,628
========= ========= ========= =========
Operating expenses:
Payroll and related fringe costs $ 208,348 $ 153,397 $ 419,310 $ 280,878
Selling and marketing 101,486 104,645 247,446 143,529
Administrative 165,715 161,038 299,548 243,484
Depreciation 20,250 30,400 40,500 36,900
--------- --------- --------- ---------
Total operating expenses 495,799 449,480 1,006,804 704,791
========= ========= ========= =========
Loss from operations $(277,397) $ (79,147) $(606,280) $(205,163)
========= ========= ========= =========
Other income (expense):
Interest expense $ (3,118) $ (884) $ (6,279) $ (4,381)
Interest income 16 6 433 10
Miscellaneous expense (1,179) (4,141) (4,185) (6,969)
--------- --------- --------- ---------
Total other income (expense) (4,281) (5,019) (10,031) (11,340)
========= ========= ========= =========
Net loss $(281,678) $ (84,166) $(616,311) $(216,503)
========= ========= ========= =========
Net loss per share $ (.04) $ (.02) $ (.10) $ (.04)
========= ========= ========= =========
Weighted average common shares outstanding 6,369,812 5,174,557 6,003,598 5,174,557
========= ========= ========= =========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
2
<PAGE> 5
OPTICAL SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
6 Months Ended
March 31,
------------------------
1999 1998
---- ----
(Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(616,311) $(216,503)
--------- ---------
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation $ 40,500 $ 369,500
Financial and legal services
Interest expense
Increase (decrease) in cash resulting from
changes in current operating
assets and liabilities:
Accounts receivable 137,990 (464,421)
Loan receivable--officer (35,407) (25,818)
Prepaid expenses (10,448) (116,968)
Deferred lease payments 24,600
Accounts payable--trade 249,101 376,621
Accrued expenses 140 2,264
--------- ---------
Total adjustments $ 406,476 $ 56,128
Net cash provided by (used in)
operating activities $(209,835) $(228,272)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment $ (11,262) $ (81,674)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of 5% convertible notes payable $ (6,160) $ (20,000)
Proceeds from loan from shareholder 100,000 1,000
(Repayment) Proceeds of long-term debt (2,601) 19,968
Issuances of common stock 81,063 427,566
--------- ---------
Net cash provided by financing activities $ 172,302 $ 441,768
--------- ---------
DECREASES IN CASH AND
CASH EQUIVALENTS $ (48,794) $(62,014)
Cash and cash equivalents, beginning of period 81,765 85,927
--------- ---------
Cash and cash equivalents, end of period $ 32,971 $ 23,913
========= =========
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
<PAGE> 6
OPTICAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
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 six-month period ended March 31, 1999, 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
<PAGE> 7
LOSS PER SHARE
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.
RESULTS OF OPERATION
THREE MONTHS ENDED MARCH 31, 1999 AND MARCH 31, 1998
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 March 31, 1999 were 54% lower than the same period ended
March 31, 1998.
In September 1997 the Company made a strategic decision to allocate
resources to market products and services dedicated to the "Year 2000
Solutions". Management believes now some fifteen months later that the
Y2K market has not and probably will not develop to extent forecasted.
The Y2K services in the second quarter of 1998 created revenues of
$561,000 with only $6,000 of comparable revenues in 1999. During the
same period there was an increase in revenues from the general
consulting business of $230,000.
COST OF REVENUES
For the second quarter ended March 31, 1998, expenses associated with
the Y2K work were about $182,000 with no comparable expenditures in
1999. The general consulting business expenses increased approximately
$3,000.
5
<PAGE> 8
PAYROLL COSTS
Payroll expenses for the second quarter of fiscal 1999 increased about
$55,000 above 1998. The increase reflects the higher cost of additional
technical people (+$29,000) to complete general consulting assignments
and $26,000 for awards of common stock based on 1998 sales growth paid
in 1999.
SELLING & MARKETING
Selling and marketing expenses for the three months ended March 31,
1999, decreased 3% reflecting lower expenses due to decreased marketing
effort for Y2K business development. The decrease was partially offset
by the cost of a marketing study in 1999.
GENERAL & ADMINISTRATION
General and administration expenses for second fiscal quarter 1999
decreased 3% over 1998. Lower cost ($13,000) for professional
fees--accountants, lawyers, etc., in 1999 were offset by increased
facilities expense. The balance of the decrease of $4,000 was spread
over 19 classifications of expense.
DEPRECIATION
For the quarter ended March 1999, the increase in depreciation expense
(+$10,000) reflects the investment in fixed assets made in fiscal year
1998 of $100,000 or +33%.
INTEREST EXPENSE
For the quarter ended March 31, 1999, interest expense increased $2,800
over March 31, 1998, as the result of new loans from a minority
shareholder.
SIX MONTHS ENDED MARCH 31, 1999 COMPARED TO MARCH 31, 1998
GROSS REVENUES
For the six months ended March 31, 1999 vs. March 31, 1998, revenues
decreased 38%. A decline of $345,000 in Y2K Services revenues accounts
for virtually all the difference with only a modest loss of $3,000 in
general consulting revenues.
COST OF REVENUES
The decline in revenues for the six months ended March 31, 1999 vs.
March 31, 1998 resulted in a reduction in costs of $244,000. Y2K
Services costs were approximately $119,000 lower. General consulting
service had a decline of $129,000 in costs on approximately the same
revenues, as the 1999 business did not require expenditures for
equipment and third party software.
PAYROLL COSTS
Payroll costs for the six months ended March 31, 1999 vs. the same
period in 1998 increased $138,000, reflecting the higher costs for
technicians and enhancement to fringe benefit programs. Management
believes the enhancements were necessary to be competitive when
recruiting technicians in the current market.
SELLING AND MARKETING
For the six months ended March 31, 1999 vs. March 31, 1998, selling and
marketing expenses increased $104,000. Of this increase, $24,000 was
incurred for a marketing study and $80,000 in winding down the
company's Y2K Services programs.
6
<PAGE> 9
GENERAL AND ADMINISTRATION
For the six months ended March 31, 1999 vs. March 31, 1998, general and
administrative costs increased $56,000 primarily as the result of
higher professional fees and facilities cost.
INTEREST EXPENSE
Interest expenses for the six months ended March 31, 1999 were $6,200
vs. $4,300 in 1998. The increase is attributed to the interest expense
on new loans from a shareholder.
LIQUIDITY AND CAPITAL RESOURCES (SEE SUBSEQUENT EVENTS)
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.
Additionally, a minority shareholder of the Company has committed to
provide financing to the Company.
The Company has experienced late vendor payments and is currently
looking to extend terms. On March 22, 1999, Romac International, a
successor to Source Services corporation filed a civil action in the
Superior Court of New Jersey claiming Optical Systems, Inc. has
defaulted on a debt owed to Romac for services rendered by Romac in
1998 and that $139,067.83 plus interest, costs of suit and legal fees
remains past due and unpaid. The company has filed an appropriate
response with the Superior Court.
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.
The Company expects to continue to recognize losses during 1999 due to
its operating performance unless the acquisitions described below are
successful. 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.
SUBSEQUENT EVENTS
The Company has evaluated new strategies to direct its growth as the
Y2K market did not develop to the extent forecasted. As part of the
Company's new design, it signed a letter of intent on April 14, 1999,
to acquire CSSC, Inc. and Coordinated Systems and Services Corp., two
privately held companies. The transaction is scheduled to close on or
before May 31, 1999, subject to due diligence procedures.
CSSC, Inc. is a developer of computer systems presently marketed to the
publishing industry and provides related maintenance and customized
computer services. Coordinated Systems and Services Corp., a related
company, operates a distribution facility marketing fulfillment
services to CSSC, Inc.'s customers. The combined revenues for the two
companies for calendar 1998 were $18.4 million and the companies were
$465,000 profitable.
7
<PAGE> 10
The Company is planning to fund these acquisitions with a collateral
loan of approximately $3,000,000 from a commercial lender. Several
lenders have submitted loan proposals.
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 1 LEGAL PROCEEDINGS
The Company has experienced late vendor payments and is currently looking to
extend terms. On March 22, 1999, Romac International, a successor to Source
Services corporation filed a civil action in the Superior Court of New Jersey
claiming Optical Systems, Inc. has defaulted on a debt owed to Romac for
services rendered by Romac in 1998 and that $139,067.83 plus interest, costs of
suit and legal fees remains past due and unpaid. The company has filed an
appropriate response with the Superior Court.
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 March 31, 1999.
8
<PAGE> 11
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: May 14, 1999 BY: /s/ Warren R. Zimmerman
----------------------------
Warren R. Zimmerman
President/CEO
BY: /s/ John F. Carlson
----------------------------
John F. Carlson
Vice President/CFO
9
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM UNAUDITED
FINANCIAL STATEMENTS FOR THREE MONTH PERIOD ENDED MARCH 31, 1999 AND 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS YEAR
<FISCAL-YEAR-END> SEP-30-1999 SEP-30-1998
<PERIOD-END> MAR-31-1999 MAR-31-1998
<CASH> 32,971 81,765
<SECURITIES> 0 0
<RECEIVABLES> 201,093 339,083
<ALLOWANCES> 3,000 3,000
<INVENTORY> 0 0
<CURRENT-ASSETS> 324,763 489,692
<PP&E> 416,397 405,135
<DEPRECIATION> 262,901 222,401
<TOTAL-ASSETS> 502,259 697,026
<CURRENT-LIABILITIES> 1,026,394 683,313
<BONDS> 0 0
0 0
0 101
<COMMON> 651 517
<OTHER-SE> (580,182) (44,902)
<TOTAL-LIABILITY-AND-EQUITY> 502,259 697,026
<SALES> 290,349 627,714
<TOTAL-REVENUES> 290,349 627,714
<CGS> 71,947 257,381
<TOTAL-COSTS> 496,962 453,615
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 3,118 884
<INCOME-PRETAX> (281,678) (84,166)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (281,678) (84,166)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (281,678) (84,166)
<EPS-PRIMARY> (.04) (.02)
<EPS-DILUTED> 0 0
</TABLE>
