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 APRIL 30, 1994 COMMISSION FILE NO. 0-7530
OPTICAL RADIATION CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
California 95-2621568
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1300 Optical Drive, Azusa, California 91702
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code:(818) 969 3344
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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
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Number of Common Shares Outstanding as of June 1, 1994:
5,894,699
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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 Nine Month
Period Ended Period Ended
April 30, April 30,
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1994 1993 1994 1993
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Sales $42,087 $42,314 $118,830 $117,497
Less: Cost of Sales 26,788 25,841 76,309 71,730
Research and development
expenses 2,404 2,618 6,602 6,929
Selling, administration and
general expenses 10,894 11,420 32,186 32,603
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Operating income 2,001 2,435 3,733 6,235
Interest income 413 564 995 1,260
Interest expense (501) (575) (1,512) (1,625)
Other, net (107) 368 (15) 130
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Income before taxes 1,806 2,792 3,201 6,000
Provision for taxes 571 685 976 1,679
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Net income before cumulative
effect of accounting change 1,235 2,107 2,225 4,321
Cumulative effect of
accounting change - - 1,420 -
------- ------ ------ ------
Net income $1,235 $2,107 $3,645 $4,321
Income per share before cumulative
effect of accounting change $0.21 $0.34 $0.37 $0.70
Income per share from cumulative effect
of accounting change - - $0.23 -
------- ------ ------ ------
Net income per share $0.21 $0.34 $0.60 $0.70
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------- ------ ------ ------
Weighted average number of
shares outstanding 6,003,000 6,171,000 6,032,000 6,188,000
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OPTICAL RADIATION CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(Thousands of Dollars)
(Unaudited)
April 30, July 31,
1994 1993
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ASSETS:
Cash and equivalents $ 29,073 $ 37,191
Accounts receivable, net 26,009 23,589
Inventories 27,649 24,242
Prepaid deferred taxes 4,314 4,728
Other current assets 6,250 2,685
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Total current assets 93,295 92,435
Property, plant & equipment, net 33,551 34,595
Commonwealth bonds 629 631
Leases and notes receivable 1,355 2,280
Patents and licenses, net 9,125 7,350
Other assets 1,521 1,534
Goodwill 9,434 9,663
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Total assets $ 148,910 $ 148,488
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LIABILITY AND SHAREHOLDER'S EQUITY:
Current portion long-term debt $ 547 $ 455
Accounts payable 5,024 4,201
Accrued payroll and related costs 6,995 6,407
Accrued royalty and commission 1,544 1,796
Other accruals 10,544 5,274
Taxes payable 218 6,881
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Total current liabilities 24,872 25,014
Deferred income taxes 6,184 5,638
Long-term debt, less current portion 18,780 19,170
Other liabilities 1,048 1,738
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Total liabilities 50,884 51,560
Common stock 2,947 3,041
Paid-in capital 12,004 14,457
Retained earnings 83,075 79,430
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Total equity 98,026 96,928
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Total liabilities and equity $ 148,910 $ 148,488
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OPTICAL RADIATION CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(Thousands of Dollars)
(Unaudited)
Nine-Month Period Ended
April 30,
1994 1993
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Cash flow from operating activities:
Net income $ 3,645 $ 4,321
Adjustments to reconcile income to net cash flow:
Depreciation and amortization 4,275 4,048
Cumulative effect of change in accounting
principle (1,420) -
Changes in assets and liabilities:
Accounts receivable (2,420) (2,565)
Inventories (3,407) 4,618
Prepaid expenses & other current assets (3,565) (292)
Accounts payable 823 (444)
Accrued liabilities (7) 694
Income tax payable (1,050) 3
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Net cash flow from operations (3,126) 10,383
Cash flow from investing activities:
Additions to property and equipment (2,479) (2,654)
Acquisitions of patents, licenses & other (58) (1,035)
Retirements of patents, licenses & other 1,004 786
Liquidation of Commonwealth Bonds 2 3,847
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Net cash flow from investing activities (1,531) 944
Cash flow from financing activities:
Increase (Decrease) in short-term debt 92 (60)
Reduction in capital lease obligations
and other (616) (658)
Reduction in long-term debt (390) (774)
Proceeds from exercise of stock options 257 312
Purchase of common stock (2,804) (2,409)
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Net cash flow from financing activities (3,461) (3,589)
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Reduction in cash and equivalents (8,118) 7,738
Cash & equivalents at beginning of period 37,191 24,436
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Cash & equivalents at the end of period $ 29,073 $ 32,174
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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 April 30, 1994 and July 31, 1993, and
the results of its operations for the three-month and nine-month periods ended
April 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.
The Internal Revenue Service is currently examining the Company's federal
income tax returns for 1990 and 1991. The Company believes that additional
income tax expense, if any, resulting from these examinations should not have
a material adverse effect on the consolidated financial statements.
Note 3 - Reclassification
Certain prior year items have been reclassified to conform with the current
year presentation.
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations
<PAGE>
Results of Operations
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Three Months Ended April 30, 1994
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Sales increased moderately for most of the Company's operating units during
the third quarter but a sharp decline in intraocular lens ("IOL") sales and
the prior year divestiture of a division caused consolidated sales to be
essentially unchanged from the same period last year. The Consumer Optical
Group posted a 10% increase in sales with good revenue gains for finished
eyewear through the Omega Group and increased shipments of ophthalmic lenses
by the Orcolite division. The latter was driven in large part by an initial
stocking order by a foreign customer that will be mitigated in the subsequent
quarter to a lower sustaining delivery rate. The Company's Lamp division had
a strong quarter with sales up 44% but this was nearly offset by a reduction
in sales in the Electronic Products division because of the timing of photo
exposure system deliveries. The fourth quarter will have significantly higher
sales for photo exposure units. For all non-surgical operating units, sales
increased 10% to $37.2 million and represented 88% of total Company revenue.
In the Surgical Products area, sales of IOLs dropped over 40% compared to the
prior year period but did show a modest increase over the second quarter's
sales rate. This decline is attributable to several factors including the
impoundment during the second quarter by the Food and Drug Administration
("FDA") of all one-piece IOL models in finished goods inventory. The Company
was not prohibited from manufacturing replacement inventory, which was done
during the third quarter, and this accounted for some of the modest sales
growth for the current period as compared to the second quarter. Other
factors impacting the lower IOL sales were a continuing drop in domestic
average selling prices and a gradual market shift to foldable IOLs. The
Company's foldable IOL, MemoryLensr, is not yet approved for sale in the
United States and is not expected to be for at least a year. The Company's
new corneal topography system, introduced during the preceding quarter, had
modest sales gains for the current period.
Operating profits for most of the Company's units were up sharply for the
quarter but significant losses were generated by the surgical sector. The
Consumer Optical Group posted a 45% increase in operating profits for the
current period and margins improved to 9.9% from 7.5% the prior year. This
impressive increase was driven by higher sales and improved production yields
at the Orcolite division. The two industrial divisions had a near doubling of
operating profits despite weak photo exposure shipments. This resulted from
much higher lamp sales, improved margins on newer products and good expense
control. Mitigating these impressive gains were significant losses from the
surgical units. The IOL division recorded a $.6 million loss because of lower
unit sales and reduced average selling prices, however, this loss was
approximately one-half of the prior quarter's loss. Included in this
quarter's expenses was a $350 thousand charge for severance expense resulting
from the elimination of 25% of the division's position in California and
Puerto Rico and approximately $150 thousand of expenses relating to the FDA
impoundment action. In addition, inventory reserve additions of approximately
<PAGE>
$225 thousand were recorded for the quarter that, when combined with
previously provided inventory reserves, represent the Company's estimation of
the cost of re-inspecting the impounded inventory and selling these IOLs at a
discount to on hand inventory. If the impounded inventory is not released
through settlement or successful litigation with the FDA, the remaining value
of this inventory of approximately $1.4 million would have to be further
reserved, or possibly written off, in a subsequent period. The Company's two
refractive projects, the corneal topography system and CCI, had combined
losses for the quarter of almost $1.2 million up from both prior year and
prior quarter levels.
Interest expense was down for the quarter reflecting a small reduction in
mortgage debt outstanding while interest income was down because of lower
interest rates and the receipt last year of interest on a tax refund. Other
expense items for the quarter primarily relate to expenses associated with the
retaining of an investment banking firm and related legal charges. Last year
a gain of approximately $200 thousand was recorded in the quarter for
settlement on an insurance claim.
A pretax profit of $1.8 million was recorded for the current period which is
down from last year's results of $2.8 million. This reduction in
profitability resulted from the deterioration in IOL operating performance and
continued heavy investments in the Company's two refractive projects. The tax
rate for the current quarter was 31.6% which is up sharply from last year's
rate of 24.5%. This increase results from less profitability at the Company's
Puerto Rico subsidiary and more domestic source income which is taxed at a
higher rate than Puerto Rican source income.
Nine Months Ended April 30, 1994
- --------------------------------
The Consumer Optical Group posted a 12% sales gain for the nine month period
with strong revenue increases for finished eyewear through Omega Optical along
with higher shipments of ophthalmic lenses through the Orcolite division. The
Lamp division recorded a 54% sales increase for the period while the
Electronic Products division had only marginally higher revenue because of the
timing of photo exposure deliveries. Partially offsetting these sales gains
was a significant decrease in IOL sales which was caused by several factors.
The FDA impoundment action in November, 1993 adversely affected shipments to
customers and caused some account defection. In addition, average selling
prices have continued to decline and the market continues to gradually shift
towards foldable IOLs. The Company's competitive foldable IOL is still in
clinical trails and is not available for domestic distribution. The new
corneal topography system developed by the Company, MasterVue, commenced
deliveries during the second quarter and this added approximately $1 million
to period sales. Last year during the third quarter, the Cinema Products
division was sold which, on a comparable basis, eliminated $3.9 million of
sales for the nine month period. With these sales excluded, total Company
sales for the period were up 5%.
Operating profits advanced sharply for most of the Company's operating units
for the nine month period. The Consumer Optical Group posted a 45% increase
in operating profit which was driven by higher sales, good expense control and
production yield improvements at the Orcolite division. The Company's two
industrial divisions recorded excellent results with operating profits nearly
<PAGE>
double the comparable prior year period because of higher sales and some
product margin improvements. These operating profit increases for the
Consumer Optical Group and the industrial units aggregated almost $3 million
for the period but were mitigated by a $6 million swing in profitability for
the IOL division and two refractive surgical projects. The IOL division has
been heavily impacted by adverse industry trends that include lower prices,
intense competition and shift towards foldable IOLs. In addition, the FDA
impoundment action earlier in the fiscal year caused some loss of customers
and significant expenses relating to this matter. Also in the third quarter,
a charge for severance expenses was taken to realign the IOL division's cost
structure to reflect the lower unit sales volume and adverse industry
dynamics. The Company's two refractive development projects have incurred
costs of approximately $3 million for the period which is $1 million more than
the prior year period.
Interest expense was down slightly because of a small reduction in mortgage
debt outstanding while interest income is lower because of sharply lower short
term interest rates.
For the nine month period, pretax profit was $3.2 million compared to $6.0
million the prior year. This decrease is attributable to the Company's IOL
business and, to a lesser extent, its refractive development projects. The
tax rate for the first nine months of fiscal 1994 was 30.5% which is up from
28.0% last year. This increase is attributable to greater U.S. source income
as opposed to Puerto Rican source income. Net income before the cumulative
effect for the adoption of SFAS No. 109, "Accounting for Income Taxes", was
$2.2 million as compared to $4.3 million the prior year. The adoption of SFAS
No. 109 added $1.4 million to net income for the nine month period.
Financial Condition
- -------------------
Cash flow was negative by $2.0 million and $8.1 million for the third quarter
and nine months, respectively. For the current quarter, sales increased
approximately $6.0 million over the preceding quarter and this caused accounts
receivable to increase by $2.8 million despite a reduction in days' sales
outstanding. Inventories increased by $1.9 million for the period because of
a large buildup of work-in-process inventory relating to photo exposure
systems that will ship in the fourth quarter; an increase in ophthalmic lenses
to meet higher customer demand and an increase in IOL inventory. The latter
was to replace inventory that was impounded by the FDA in November, 1993.
Also during the third quarter, the Company made a $1.5 million payment to the
former CCI shareholders per terms of the purchase contract. Despite the heavy
use of cash for the period, the current ratio remained unchanged at 3.8.
Capital expenditures were $.8 million for the quarter and will be over $1.0
million for the fourth quarter. Capital expenditures for the year are
expected to be approximately $4.0 million.
The Company expects to receive an insurance settlement during the fourth
quarter of approximately $3.5 million which represents amounts advanced by the
Company to settle certain product liability claims. See Item 1. Litigation,
to this filing for a more complete discussion of this matter.
<PAGE>
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
On May 12, 1994, the Company reached a settlement with Agricultural Excess and
Surplus Insurance Company ("AESIC") under which AESIC agreed to: 1) reimburse
the Company for all product liability claim settlements and expenses incurred
through the settlement date (approximately $3.5 million); 2) affirm umbrella
coverage of $5.0 million; 3) reimburse the Company for all outside legal fees
incurred in litigating this matter with AESIC, and; 4) pay the Company
interest on funds advanced in claim settlements and expenses. The Company had
deferred, for financial reporting purposes, claim settlements and expenses
relating to this matter and therefore, this settlement will only impact the
Company's cash flow when received in the fourth quarter. The reimbursement
for litigation expenses and interest had previously been recognized as a
period expense as incurred. This settlement agreement resulted in a small
gain for the third quarter as these expenses were reversed. However, the
Company recorded a de minimis loss contingency reserve for future defense
costs relating to claims under the AESIC policy which approximated the gain on
settlement.
In October, 1993 the Company and 12 other manufacturers of IOL's were served
with a patent infringement lawsuit brought by Steve P. Shearing. All of the
defendants filed a motion for dismissal and, during the third quarter, the
Court granted this request. The plaintiff has filed new pleadings which the
defendants are challenging. Outside counsel has informed the Company that an
evaluation of the patent claims of Shearing are not possible at this time
because of the uncertainty of which claims, if any, the Court will allow to
remain in the lawsuit. Accordingly, the Company has concluded that a loss
contingency reserve regarding this matter is not warranted at this time.
In April, 1992 a shareholder ("Clancy") filed a derivative action against each
of the board members of the Company and one officer. During the third
quarter, a tentative settlement of this matter was reached pending board and
court approval. Under the proposed settlement, the Board agreed to retain
outside consultants if the Company proposed to develop and market a
viscoelastic product in the future. All costs of this litigation in excess of
the applicable deductible, will be borne by the Company's insurance carrier
and, if settled as proposed, the Company could recover certain costs that were
previously expensed.
Item 5. Other Events
In November, 1993 the United States Food and Drug Administration ("FDA")
impounded approximately 92,000 one-piece intraocular lenses manufactured by
the Company for alleged violations of Good Manufacturing Practices ("GMP")
guidelines. The Company has filed a claim for the return of the impounded
<PAGE>
inventory and a trial on this action is scheduled for later this year. The
Company believes this matter may be resolved before trial and has conducted
numerous discussion with the FDA in this regard. During the third quarter,
the Company recorded inventory reserve additions of approximately $225
thousand that would allow, when combined with previously provided inventory
reserves, for the impounded IOLs to be sold at a discount to existing on hand
inventory. If the impounded inventory is not released by settlement with the
FDA or upon successful litigation, the remaining value that would have to be
recorded in a future period to expense would be approximately $1.4 million.
In April, 1994 the Company received correspondence from the FDA that
challenged its designation of 21 IOL models in its annual report, as similar
to existing Premarket Approved ("PMA") IOLs and thus, exempt from the
requirement for the submission of PMA supplements. The Company believes the
FDA is in error regarding this matter but has agreed to submit the PMA
supplements for these IOL models. If the FDA ultimately concludes that the
information contained in the PMA supplements is not sufficient for all or some
of the models in question, it could force the Company to recall the models
deemed to be not PMA approved or stop all distribution of these lenses. In
aggregate, these IOL lenses account for approximately $2 million in annualized
sales.
In February, 1994 the Company announced that it has retained Donaldson, Lufkin
& Jenrette Securities Corporation ("DLJ") to advise the Board of Directors on
alternative directions for the Company that would enhance shareholder value.
On May 23, 1994, the Company stated that it had received indications of
interest from various parties for the purchase of all or a portion of the
Company and had established June 30, 1994 as the deadline for submitting
written offers. The Company stated, however, that no firm determination with
respect to any such sale had been made and that a potential sale of all or a
portion of the Company was one of a number of alternatives under
consideration.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
None
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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 6-10-94 s/ Richard D. Wood
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Richard D. Wood
Chairman of the Board and
Chief Executive Officer
Date 6-10-94 s/ Gary N. Patten
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Gary N. Patten
Vice President - Finance and
Chief Financial Officer