SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED JANUARY 30, 1994 COMMISSION FILE NO. 0-7530
OPTICAL RADIATION CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
California 95-2621568
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1300 Optical Drive, Azusa, California 91702
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code:(818) 969 3344
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
----- -----
Number of Common Shares Outstanding as of March 4, 1994:
5,878,199
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PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
OPTICAL RADIATION CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Thousands of Dollars, Except per Share Data)
Three Month Six Month
Period Ended Period Ended
January 30, January 30,
________ ________ ________ _______
1994 1993 1994 1993
-------- -------- -------- -------
Sales $36,304 $35,375 $76,743 $75,183
Less: Cost of Sales 23,893 21,577 49,521 45,889
Research & development
expenses 2,041 2,254 4,198 4,311
Selling, administration &
general expenses 10,328 10,098 21,292 21,183
-------- -------- -------- -------
Operating income 42 1,446 1,732 3,800
Interest income 281 334 582 696
Interest expense (508) (524) (1,011) (1,050)
Other, net (52) (27) 92 (238)
-------- -------- -------- -------
Income (loss) before taxes (237) 1,229 1,395 3,208
Provision (benefit) for taxes (69) 361 405 994
-------- -------- -------- -------
Net income (loss) before
cumulative effect of
accounting change (168) 868 990 2,214
Cumulative effect of
accounting change - - 1,420 -
-------- -------- -------- -------
Net income (loss) $ (168) $ 868 $ 2,410 $ 2,214
======== ======== ======== =======
Income (loss) per share
before cumulative
effect of accounting change $(0.03) $ 0.14 $ 0.17 $ 0.36
Income per share from
cumulative effect
of accounting change - - $ 0.23 -
-------- -------- -------- -------
Net income (loss) per share $(0.03) $ 0.14 $ 0.40 $ 0.36
======== ======== ======== =======
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OPTICAL RADIATION CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(Thousands of Dollars)
(Unaudited)
January 30, July 31,
1994 1993
----------- -----------
ASSETS:
Cash and equivalents $ 31,027 $ 37,191
Accounts receivable, net 23,179 23,589
Inventories 25,708 24,242
Prepaid deferred taxes 4,314 4,728
Other current assets 5,874 2,685
----------- -----------
Total current assets 90,102 92,435
Property, plant & equipment, net 34,012 34,595
Commonwealth bonds 630 631
Leases and notes receivable 1,603 2,280
Patents and licenses, net 9,335 7,350
Other assets 1,439 1,534
Goodwill 9,510 9,663
----------- -----------
Total assets $ 146,631 $ 148,488
=========== ===========
LIABILITY AND SHAREHOLDER'S EQUITY:
Current portion long-term debt $ 455 $ 455
Accounts payable 4,562 4,201
Accrued payroll and related costs 5,436 6,407
Accrued royalty and commission 1,471 1,796
Other accruals 11,249 5,274
Taxes payable 487 6,881
----------- -----------
Total current liabilities 23,660 25,014
Deferred income taxes 6,184 5,638
Long-term debt, less current portion 18,973 19,170
Other liabilities 1,245 1,738
----------- -----------
Total liabilities 50,062 51,560
Common stock 2,939 3,041
Paid-in capital 11,790 14,457
Retained earnings 81,840 79,430
----------- -----------
Total equity 96,569 96,928
----------- -----------
Total liabilities and equity $ 146,631 $ 148,488
=========== ===========
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OPTICAL RADIATION CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(Thousands of Dollars)
(Unaudited)
Six-Month Period Ended
January 30,
1994 1993
--------- ---------
Cash flow from operating activities:
Net income $ 2,410 $ 2,214
Adjustments to reconcile income
to net cash flow:
Depreciation and amortization 2,799 2,704
Cumulative effect of change
in accounting principle (1,420) -
Changes in assets and liabilities:
Accounts receivable 410 1,325
Inventories (1,466) 280
Prepaid expenses and other
current assets (3,189) (907)
Accounts payable 361 (791)
Accrued liabilities (934) (1,620)
Income tax payable (781) (592)
--------- ---------
Net cash flow from operations 1,810 2,613
Cash flow from investing activities:
Additions to property and equipment (1,717) (1,827)
Net retirement of patents,
licenses and other 771 147
Liquidation of Commonwealth Bonds 1 20
--------- ---------
Net cash flow from investing activities (945) (1,660)
Cash flow from financing activities:
Reduction in short-term debt - (60)
Reduction in capital lease
obligations and other (443) (428)
Reduction in long-term debt (197) (679)
Proceeds from exercise of stock options 35 159
Purchase of common stock (2,804) (924)
--------- ---------
Net cash flow from financing activities (3,409) (1,923)
--------- ---------
Reduction in cash and equivalents (6,164) (979)
Cash & equivalents at beginning of period 37,191 24,436
--------- ---------
Cash $ equivalents at the end of period $ 31,027 $ 23,457
========= =========
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OPTICAL RADIATION CORPORATION
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Unaudited Financial Statements
The consolidated financial statements included herein are based in part on
estimates and include such adjustments (consisting solely of normal recurring
adjustments) which management believes are necessary for a fair presentation
of the Company's financial position at January 30, 1994 and July 31, 1993, and
the results of its operations for the three-month and six-month periods ended
January 30, 1994 and 1993. The consolidated financial statements and related
notes are condensed and have been prepared in accordance with generally
accepted accounting principles applicable to interim periods; consequently,
they do not include all generally accepted accounting disclosures required for
complete annual financial statements. These consolidated statements should be
read in conjunction with the financial statements and notes thereto contained
in the Company's 1993 Annual Report.
Note 2 - Income Taxes
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes" which
supersedes Accounting Principle Board Opinion No. 11 that the Company had
previously followed.
The Company has adopted SFAS No. 109 effective August 1, 1993 and recorded a
$1,420,000 increase in consolidated net income from the cumulative effect of a
change in accounting for income taxes. In addition, the Company increased the
value of patents and other intangibles of Corneal Contouring, Inc., a
subsidiary acquired in March of 1992, by $2,380,000 and increased net deferred
tax liabilities by $960,000. As a result of these items, the Company's equity
was increased by $1,420,000 as of August 1, 1993.
Note 3 - Reclassification
Certain prior year items have been reclassified to conform with the current
year presentation.
<PAGE>
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
Three Months Ended January 30, 1994
Sales were strong for most of the Company's operating units during the quarter
but a sharp decline in intraocular lens sales and the prior year divestiture
of a division caused modest comparative sales growth for the period. The
Consumer Optical Group posted a 13% increase in sales with strong revenue
gains for finished eyewear and contact lenses through Omega Optical.
Industrial product line shipments showed a 73% gain over the prior year period
with excellent results for ceramic lamps and fiber optic illuminators that are
primarily used in endoscopic medical systems. Photo exposure system sales
were also up significantly for the quarter. The Company commenced sales of
the MasterVue trademark Corneal Topography system during the quarter and while
initial sales were modest for the period, customer acceptance was very
encouraging. Offsetting these appreciable sales gains was a precipitous 46%
drop in intraocular lens revenue. This decline was attributable to a variety
of factors including the impoundment, in November, 1993 by the Food and Drug
Administration (FDA) of all one-piece IOL models in finished goods inventory
(see Item 5. Other Events to this filing). This action, in turn, caused some
customer defection and product shortages that reduced sales. Additionally,
market dynamics remained unfavorable with lower average selling prices and a
shift to foldable lens designs. Lastly, on a comparative basis, sales showed
a $1.2 million decline because the Cinema Products Division was sold last
year.
Gross profit margins fell to 34% for the current period from 39% for the
comparable prior year period or, in absolute terms, a decline of $1.4 million.
Most of the Company's operating units had stable gross profit margins for the
quarter but with two notable exceptions. The Lamp Division was able to
leverage much higher sales by spreading overhead and widening their margins.
The intraocular lens product line was just the opposite as dramatically lower
sales shrunk overhead absorption and caused a 60% drop in absolute gross
profit dollars. Another negative factor impacting gross profit was
incremental expenses associated with the FDA impoundment action.
Selling, general and administrative expenses remained unchanged for the
quarter at 28% of sales. Marketing expenses dropped slightly while
administrative expenses rose slightly. Research and development expenses
dropped approximately $.2 million to $2.0 million. The elimination of the
Cinema Products Division and reduced expenses on the MasterVue product line,
as it reaches commercialization, were primarily responsible for this drop in
R&D charges.
Interest expense was down slightly reflecting a small reduction in mortgage
debt outstanding while interest income was down because of much lower short
term interest rates.
The current period generated a pretax loss of $237,000 versus the prior year's
profit of $1,229,000. This swing in pretax results was caused by the
deterioration in the operating performance of the IOL product line. For the
second quarter, the IOL product line lost $1,233,000 as compared to a pretax
profit of $944,000 for the prior year's comparable quarter. The current
period's IOL product line loss included approximately $230,000 of expenses
relating to the FDA impoundment action.
<PAGE>
The tax rate for the quarter was 29%, unchanged from the first quarter. The
tax rate for the Company is heavily influenced by the distribution of income
between Puerto Rico and U.S. based sources. A net loss of $.2 million, equal
to $.03 per share, was generated for the quarter as compared to net income of
$.9 million, or $.14 per share, for the prior year period.
Six Months Ended January 30, 1994
The Consumer Optical Group posted a 13% sales gain for the six month period
with strong revenue gains for finished eyewear and contact lenses through the
Company's Omega Optical subsidiary. The Company's two industrial products
divisions recorded a 50% sales increase for the same period with increased
demand for xenon lamps and photo exposure systems. Nearly offsetting these
sales gains was a significant decrease in sales for intraocular lenses because
of several factors. The FDA impoundment action in November, 1993 adversely
affected shipments to customers and caused some account defection. Average
selling prices for IOL's have continued to decline which has caused gross
profit margin compression and the market is slowly shifting towards foldable
IOLs. The Company's competitive foldable IOL, MemoryLens registered
trademark, is still in clinical study. Last year, during the third quarter,
the Cinema Products division was sold which, on a comparable basis, eliminated
$3.0 million of sales for the six month period. With these sales excluded,
total sales for the period were up 6%.
Gross profit margin slipped to 36% for the first half from 39% last year.
Most of this margin erosion occurred because of lower unit shipments and lower
average selling prices for intraocular lenses. The Lamp division had
noticeably better margins on higher sales and lower unit manufacturing costs.
Selling, general and administrative expenses were stable for the six month
period at 27% to sales. Marketing expenses were down slightly while
administrative charges were up marginally. Research and development was
essentially unchanged for the comparative periods at $4.2 million. The
Company's primary research and development efforts continue to be concentrated
on the MemoryLens, the MasterVue Corneal Topography system and a mechanical
method for refractive surgery.
Interest expense was stable but interest income dropped because of sharply
lower short term interest rates. Other income and expense was favorable
reflecting the expense, last year, of an extended reporting option on an
insurance policy.
For the six-month period, pretax profit was $1.4 million compared to $3.2
million the prior year. This difference in pretax results is attributable to
a profit decline for the IOL product line. Last year, this product line
produced a pretax profit of $1.7 million as compared to a pretax loss of $1.8
million for the current six-month period.
The tax rate for the first half was 29% which is down from 31% the prior year.
The Company's tax rate is heavily influenced by the distribution of income
between Puerto Rico and U.S. based sources. Net income before the cumulative
effect for the adoption of SFAS No. 109, "Accounting for Income Taxes", was
$1.0 million as compared to $2.2 million the prior year. The adoption of SFAS
No. 109 added $1.4 million to net income for the first half.
<PAGE>
Financial Condition
Cash flow was negative by $3.7 million and $6.2 million for the second quarter
and first half, respectively. For the current quarter, the Company
repurchased 196,000 shares of its common stock during the quarter at a cost of
$2.7 million. Inventories increased by $1.9 million because of: 1) above
normal ophthalmic lens purchases at Omega because of special vendor pricing,
2) a large buildup of work-in-process inventory relating to photo exposure
systems that will ship the second half of the year, and 3) an increase of
inventory to support initial sales of the new MasterVue system. Other current
assets increased by $.7 million relating to payments made to settle product
liability claims that should be covered by an umbrella insurance carrier (see
Item 1. Litigation to this filing). Lastly, cash was used to make two
quarterly tax estimation payments to the Federal and various state taxing
authorities. Despite this heavy use of cash for the quarter, the current
ratio remained unchanged at 3.8.
Capital expenditures were $.8 million for the quarter and are projected at $4
to $5 million for the entire fiscal year.
The Company has $2.3 million in inventory that represents intraocular lenses
impounded by the FDA in their action of November, 1993 (see Item 5. Other
Events to this filing). These intraocular lenses have a five year shelf life
and represent some of the most popular intraocular lens models sold by the
Company. The Company is hopeful that this dispute with the FDA will be
resolved in a relatively short period of time. However, the Company is
building replacement inventory to service customer demands. Depending on when
the FDA releases this impounded inventory, a future loss contingency may be
required depending upon circumstances at that time.
The Company has a non-committed credit line of $5 million from its lead bank
for which it pays no fees but has no current plans to convert this to a
committed facility as it expects cash flow from operations will be sufficient
to fund ongoing business activity. The Company is not aware of any
circumstance which would adversely impact its liquidity or capital resources
in the near future.
PART II. OTHER INFORMATION
Item 1. Litigation
Through the second quarter, the Company had paid, but deferred for financial
reporting purposes, approximately $3.2 million in product liability claim
settlements and expenses relating to coverage that should be provided by
Agricultural Excess and Surplus Insurance Company ("Agricultural").
Agricultural was the first layer products liability umbrella insurance carrier
in the year these claims were originally asserted. Agricultural has refused
to pay or reimburse the Company for expenses and claim settlements and has
sought judicial confirmation on the appropriateness of this action. The
Company believes that action by Agricultural is without merit and has filed
for Summary Judgment in addition to counter claiming against Agricultural for
bad faith. If the Company's position is not sustained by the courts, the
amounts deferred would have to be expensed in a future period.
<PAGE>
On November 24, 1993, a purported shareholder class action, titled Steiner v.
Optical Radiation Corporation, et al., was filed against the Company and two
of its officers in the United States District Court, Central District of
California. The complaint alleged that the Company failed to disclose that
FDA inspections had uncovered deficiencies in the Company's manufacturing
processes and that such non-disclosure was in violation of the Securities
Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. The complaint
sought unspecified damages for persons who purchased the Company's Common
Stock during a stated period. On February 3, 1994, the court approved a
stipulation for dismissal of this action, which admitted no liability of the
Company or its officers and did not require any payment by them.
A wholly owned subsidiary of the Company, Precision Optics, Inc., (Precision)
received a letter from the Minnesota Pollution Control Agency (MPCA), dated
February 7, 1994, designating Precision as a responsible party (RP) for the
Saint Augusta Sanitary Landfill/Engen Dump. Precision has the right to
challenge this designation and intends to do so. Precision had previously
been designated as a responsible party for this site but that designation was
rescinded based upon information furnished to MPCA. The previous designation
had to do with grinding oil for optical fabrication. The current designation
has to do with glass shavings from optical fabrication. Based upon discussion
with officials at MPCA and other long-term RP's, the Company recorded a de
minimis loss contingency reserve in the current quarter to provide for any
exposure relating to this matter.
Item 5. Other Events
On November 23, 1993, Optical Radiation Corporation (Company) was served with
a Complaint for Forfeiture filed in the United States District Court, Central
District of California, titled United States of America v. 5,082 boxes, more
or less, of intraocular lenses. This civil action was brought by United
States Food and Drug Administration ("FDA"), alleging that the Company did not
conform to four specific requirements of "Good Manufacturing Practices"
("GMP") guidelines. These alleged GMP compliance issues were noted by the FDA
during routine inspections in April and August, 1993 at the Company's facility
in Cidra, Puerto Rico. Following service of the complaint, the FDA impounded,
at the Company's Azusa facility, all one-piece intraocular lenses (IOLs) in
finished goods and in work-in-process inventories. These impounded IOLs
represented approximately one-third of finished IOL inventories and had a
carrying value of approximately $2.3 million. The action did not affect one-
piece IOLs held in customer consignment inventories nor did it seek to enjoin
the Company from manufacturing one-piece IOLs. Additionally, no recall of any
product has been requested by the FDA. This action is not based on the
clinical performance of the one-piece IOLs; but rather, is predicated on the
FDA's interpretation of GMP guidelines. The one-piece IOLs represent
approximately 50% of all IOL sales or $10 million on an annualized basis.
The Company has filed a claim for the return of the impounded inventory and is
attempting to resolve this matter with the FDA. The Company continues to
manufacture and sell one-piece IOL's since the impoundment action by the FDA.
However, the Company does not know what future actions, if any, the FDA might
<PAGE>
take with regards to this matter. Additionally, the Company does not know if
it will be successful in resolving this issue, or what timeframe will be
involved to bring this matter to conclusion. It is possible that subsequent
events could cause the Company to record a loss contingency reserve in a
future reporting period. This loss contingency reserve could encompass all or
a portion of the impounded inventory and additional items based upon future
events.
On February 17, 1994, the Company announced that it had engaged Donaldson,
Lufkin & Jenrette Securities Corporation (DLJ), a New York investment banking
firm, to advise the Board of Directors on alternative directions for the
Company that would enhance shareholder value.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) One report on Form 8-K dated December 2, 1993
was filed during the quarter. This filing describes the
impoundment by the United States Food and Drug
Administration of the Company's one-piece intraocular lens
finished goods inventory. It also describes a shareholder
class action lawsuit filed against the Company.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OPTICAL RADIATION CORPORATION
Registrant
Date 3-11-94 s/ Richard D. Wood
------------------ --------------------------------------
Richard D. Wood
Chairman of the Board and
Chief Executive Officer
Date 3-11-94 s/ Gary N. Patten
------------------ --------------------------------------
Gary N. Patten
Vice President - Finance and
Chief Financial Officer
