FORM 10-QSB
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
Commission file number 001-10647
PRECISION OPTICS CORPORATION, INC.
- -------------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Massachusetts 04-2795294
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
22 East Broadway, Gardner, Massachusetts 01440-3338
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(Address of principal executive offices) (Zip Code)
(508) 630-1800
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(Issuer's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 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 ( )
The number of shares outstanding of issuer's common stock, par value $.01 per
share, at March 31, 1997 was 5,980,502 shares.
Transitional Small Business Disclosure Format (check one):
Yes ( ) No (X)
PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
INDEX
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Page
PART I. FINANCIAL INFORMATION:
Item 1 Consolidated Financial Statements
Consolidated Balance Sheets - 1
March 31, 1997
and June 30, 1996 (unaudited)
Consolidated Statements of Operations - 2
Quarter Ended March 31, 1997
and March 31, 1996 (unaudited)
Nine Months Ended March 31, 1997
and March 31, 1996 (unaudited)
Consolidated Statements of Cash Flows - 3
Nine Months Ended March 31, 1997
and March 31, 1996 (unaudited)
Notes to Consolidated Financial Statements 4-5
Item 2
Management's Discussion and Analysis of 6-8
Financial Condition and Results of Operations
PART II. OTHER INFORMATION
Items 1-5 Not Applicable
Item 6 Exhibits and Reports on Form 8-K 9
(a) Exhibit 99 - Important Factors Regarding Forward-Looking Statements
(b) Reports on Form 8-K - None
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PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
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ASSETS
March 31, 1997 June 30, 1996
-------------- -------------
CURRENT ASSETS
Cash and Cash Equivalents $2,241,304 $2,617,813
Accounts Receivable, Net 807,243 1,139,804
Inventories 1,865,352 1,863,694
Deferred Tax Asset 126,600 119,000
Prepaid Expenses 62,246 44,684
Refundable Income Taxes 51,420 30,276
----------- -----------
Total Current Assets 5,154,165 5,815,271
--------- ---------
PROPERTY AND EQUIPMENT 2,951,294 2,617,706
Less: Accumulated Depreciation 1,846,398 1,531,228
--------- ---------
Net Property and Equipment 1,104,896 1,086,478
--------- ---------
OTHER ASSETS 202,002 180,871
---------- ---------
TOTAL ASSETS $6,461,063 $7,082,620
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable $ 290,630 $ 829,428
Accrued Payroll 68,136 81,990
Accrued Professional Services 41,292 49,360
Accrued Profit Sharing and Bonuses 43,880 93,938
Accrued Income Taxes 28,510 35,383
Accrued Vacation 52,970 51,881
Accrued Warranty Expense 50,000 50,000
Current Portion of Capital Lease Obligation 87,767 82,678
Other Accrued Liabilities 56,097 51,638
---------- ---------
Total Current Liabilities 719,282 1,326,296
--------- ---------
CAPITAL LEASE OBLIGATION 212,470 278,949
--------- ----------
STOCKHOLDERS' EQUITY
Common Stock, $.01 par value-
Authorized -- 10,000,000 shares
Issued and Outstanding -- 5,980,502 shares 59,805 59,805
Additional Paid-in Capital 5,145,655 5,145,655
Retained Earnings 323,851 271,915
---------- ----------
Total Stockholders' Equity 5,529,311 5,477,375
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $6,461,063 $7,082,620
========= =========
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Page 1 of 9
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PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THIRD QUARTER AND NINE MONTHS ENDED
MARCH 31, 1997 AND 1996
(UNAUDITED)
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-- THIRD QUARTER -- -- NINE MONTHS --
1997 1996 1997 1996
---- ---- ---- ----
REVENUES $1,349,222 $1,873,169 $6,142,887 $5,655,124
COST OF GOODS SOLD 1,198,500 1,288,710 4,504,439 3,879,480
--------- ---------- --------- ----------
GROSS PROFIT 150,722 584,459 1,638,448 1,775,644
SELLING GENERAL and
ADMINISTRATIVE EXPENSES 533,029 524,420 1,626,843 1,552,531
----------- ---------- ---------- ----------
OPERATING INCOME (LOSS) (382,307) 60,039 11,605 223,113
INTEREST EXPENSE (6,379) (5,012) (21,281) (9,034)
INTEREST INCOME 30,008 30,800 78,862 98,884
----------- ----------- ----------- ---------
INCOME (LOSS) BEFORE TAXES (358,678) 85,827 69,186 312,963
PROVISION (BENEFIT) FOR INCOME TAXES (89,750) 21,100 17,250 76,700
----------- ------------ ------------ ------------
NET INCOME (LOSS) ($268,928) $ 64,727 $ 51,936 $ 236,263
======== =========== ========= ============
INCOME (LOSS) PER COMMON and
COMMON EQUIVALENT SHARE ($0.04) $0.01 $0.01 $0.04
===== ===== ===== =====
WEIGHTED AVERAGE COMMON and
COMMON EQUIVALENT SHARES
OUTSTANDING 5,980,502 6,097,917 6,060,700 6,142,526
========= ========= ========= =========
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Page 2 of 9
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PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED MARCH 31, 1997 AND 1996
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(UNAUDITED)
1997 1996
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 51,936 $ 236,263
Adjustments to Reconcile Net Income to Net
Cash Provided By Operating Activities -
Depreciation and Amortization 331,200 207,984
Deferred Income Taxes (7,600) (62,100)
Changes in Assets and Liabilities-
Accounts Receivable 332,561 274,587
Inventories (1,658) (384,170)
Prepaid Expenses (17,562) (37,598)
Refundable Income Taxes (21,144) 0
Accounts Payable (538,798) 198,449
Accrued Payroll (13,854) (22,484)
Accrued Professional Services (8,068) (661)
Accrued Profit Sharing and Bonuses (50,058) (43,580)
Accrued Income Taxes (6,873) 8,622
Other Accrued Liabilities 5,548 (10,671)
----------- ---------
Net Cash Provided by
Operating Activities 55,630 364,641
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Property and Equipment (333,588) (553,442)
Increase in Other Assets (37,161) (41,931)
----------- ----------
Net Cash Used in Investing Activities (370,749) (595,373)
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of Capital Lease Obligation (61,390) (25,355)
---------- ------------
Net Cash Used in Financing Activities (61,390) (25,355)
---------- ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (376,509) (256,087)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 2,617,813 2,527,846
--------- ---------
CASH AND CASH EQUIVALENTS AT END
OF PERIOD $2,241,304 $2,271,759
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash Paid for-
Interest $ 21,281 $ 9,034
============ =============
Income Taxes $ 52,866 $ 132,825
============ ===========
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTMENT ACTIVITIES: A capital lease
obligation for manufacturing equipment totaling $299,180 was incurred by the
Company in the quarter ending March 31, 1996.
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Page 3 of 9
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PRECISION OPTICS CORPORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements include the accounts
of Precision Optics Corporation, Inc. and its wholly-owned subsidiaries.
All significant intercompany accounts and transactions have been
eliminated in consolidation.
These financial statements have been prepared by the Company, without
audit, and reflect normal recurring adjustments which, in the opinion of
management, are necessary for a fair statement of the results of the
third quarter of the Company's fiscal year 1997. These financial
statements do not include all disclosures associated with annual
financial statements and, accordingly, should be read in conjunction
with footnotes contained in the Company's financial statements for
the period ended June 30, 1996 together with the auditors' report
filed under cover of the Company's 1996 Annual Report on Form 10-KSB.
Income (loss) per common and common equivalent share is computed based on
the weighted average number of common and common equivalent shares
outstanding, where dilutive, during each period. The difference between
the average number of shares under the primary and fully diluted
calculations is immaterial, and therefore fully diluted earnings per
share has not been disclosed in the accompanying consolidated financial
statements.
2.INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or
market and consists of the following:
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March 31, 1997 June 30, 1996
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Raw Materials $1,094,913 $1,282,924
Work-In-Process 668,185 502,658
Finished Goods and Components 102,254 78,112
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Total Inventories $1,865,352 $1,863,694
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Page 4 of 9
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3. NEW ACCOUNTING STANDARD
In March 1997, the Financial Accounting Standards Board issued
SFAS No. 128, Earnings Per Share. SFAS No. 128 establishes
standards for computing and presenting earnings per share and
applies to entities with publicly held common stock or potential
common stock. This statement is effective for fiscal years
ending after December 15, 1997 and early adoption is not
permitted. When adopted, the statement will require restatement
of prior years' earnings per share. The Company will adopt this
statement for its fiscal year ended June 30, 1998. In addition, the
Company believes that the adoption of SFAS No. 128 will not have a
material effect on its financial statements.
Page 5 of 9
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PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Important Factors Regarding Forward-Looking Statements
When used in this discussion, the words "believes", "anticipates",
"intends to", and similar expressions are intended to identify forward-looking
statements. Such statements are subject to certain risks and uncertainties which
could cause actual results to differ materially from those projected. See
"Important Factors Regarding Forward-Looking Statements" filed with the
Company's Quarterly Report on Form 10-QSB for the period ending March 31, 1996
as Exhibit 99 and incorporated herein by reference. Readers are cautioned not to
place undue reliance on these forward-looking statements which speak only as of
the date hereof. The Company undertakes no obligation to publicly release the
result of any revision to these forward-looking statements which may be made to
reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
Liquidity and Capital Resources
For the nine months ended March 31, 1997, the Company's cash and cash
equivalents decreased by approximately $376,000 to $2,241,000. The decrease in
cash and cash equivalents was due to cash provided by operating activities of
approximately $56,000, less capital expenditures of approximately $334,000,
increase in other assets of approximately $37,000, and repayment of debt of
approximately $61,000.
The Company intends to continue devoting significant resources to
internally-funded research and development spending on both new products and the
improvement of existing products. The Company also intends to devote resources
to the marketing and product support of its medical and thin film product lines,
and the development of new methods of distribution. These investments may
temporarily result in negative cash flow, but the Company anticipates that the
results of these efforts will translate into increased revenues and profits.
Furthermore, depending upon the market acceptance of the Company's
products, the Company believes that it may be obligated to acquire new
facilities, add additional manufacturing or research and development equipment,
or acquire a business that has complementary products or manufactures or sells
to the Company components, materials, supplies, or services used in the
manufacture, marketing, distribution, or servicing of the Company's new
products, as well as the Company's existing products.
The Company continues to maintain a secured line of credit of $500,000
available with a bank at 1/4% over the prime rate.
Page 6 of 9
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Results of Operations
Total revenues for the third quarter and for the nine months ended
March 31, 1997 decreased by $523,947 or 28.0% and increased by $487,763 or 8.6%,
respectively, over the same period in the prior year.
The revenue decrease over the prior year for the third quarter was due
to lower sales of medical products (down 35%), and lower sales of non-medical
products (down 22%).
The revenue increase over the prior year for the nine months ended
March 31, 1997 was due to higher sales of medical products (up 73%), partially
offset by lower sales of non-medical products (down 25%).
The increase in sales of medical products year to date was primarily
attributable to higher sales of endocouplers which increased by 88% for the nine
months ending March 31, 1997. See "Other Factors That May Affect Future Results"
for discussion of reason for lower medical products sales in the third quarter.
The reduction in non-medical sales for the third quarter and nine months was due
primarily to the previously reported discontinued sales of industrial lenses to
a significant customer. This customer accounted for 15% of the Company's
revenues for the nine months ended March 31, 1996. Future sales to this
customer, if any, are uncertain at this time.
Revenues from the Company's two largest customers were approximately
39% and 28% of total revenues for the nine months ended March 31, 1997, and
approximately 46% and 15% of total revenues for the nine months ended March 31,
1996. No other customers accounted for more than 10% of the Company's revenues
during those periods.
For the nine months ended March 31, 1997, approximately 39% of the
Company's total revenues were derived from production and development contracts
and subcontracts involving the Government and its agencies compared to
approximately 48% for the corresponding period of the prior year. The Company's
remaining Government business is substantially comprised of subcontracts with
one customer consisting of night-vision advanced development programs on a
cost-plus-fixed-fee basis extending approximately through April 1997, and two
fixed-price production subcontracts for night-vision lens systems with
deliveries scheduled approximately through February 1998. The Government may
terminate a government contract at any time, with or without cause. After
expiration of the current subcontracts, there can be no assurance that the
Government will award future contracts or subcontracts to the Company or the
customers to which it sells.
Gross profit expressed as a percentage of revenues decreased from 31.2%
to 11.2% for the quarter, and from 31.4% to 26.7% for the nine months ended
March 31, 1997, compared to the corresponding periods in the prior year. The
decrease in the gross profit percentage was due primarily to a lower proportion
of relatively high-margin industrial and medical shipments, and lower sales
volume in the current quarter.
Page 7 of 9
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Selling, general and administrative expenses increased for the third
quarter ended March 31, 1997 by $8,609 or 1.6%. Selling, general and
administrative expenses increased for the nine months ended March 31, 1997 by
$74,312 or 4.8%. The increase was due primarily to higher selling and
advertising expenditures targeted at the industrial and thin films marketplace,
and higher legal and consulting expenses.
Interest income decreased for the third quarter and nine months ended
March 31, 1997 by $792 and $20,022, respectively, due to the lower investment
base of cash equivalents.
Interest expense relates primarily to capital lease obligations
incurred in the third quarter of fiscal years 1994 and 1996.
The provision for income taxes is based on the Company's estimated
effective annual tax rate. This estimated rate is lower than the federal
statutory rate primarily due to recognition of available tax credits and future
tax deductions not previously benefited.
Other Factors That May Affect Future Results
The Company continues to aggressively pursue sales, marketing, and
technology development efforts for new optical thin films in the rapidly growing
telecommunications and semi-conductor industries, which may begin to generate
additional revenues in the last half of this calendar year. In the third
quarter, several initial orders were received for prototype thin films from six
new customers in these business areas. Development efforts on prototype
Wavelength Division Multiplexer (WDM) optical filters continue, and if
successful, filters for WDM's should be available by the end of the calendar
year, as previously announced. Results over the next few quarters could continue
to be adversely affected until these sales and development efforts begin
generating sufficient levels of revenues and profits.
Although the Company has experienced substantial growth in its sales of
endocouplers during the six months ending December 31, 1996, these sales have
been largely dependent upon a relatively new application for these instruments.
While the Company believes that prospects for continued success of the new
endocoupler application are good, recent demand for endocouplers has softened
due primarily to technical problems in a customer's product which is used with
the Company's endocouplers. Consequently, no shipments were made to this
customer during the quarter ending March 31, 1997, and none are scheduled for
the quarter ending June 30, 1997. The Company has been advised by this customer,
who accounted for 28% of the Company's revenues for the nine months ended March
31, 1997, that although the technical problems in its product have recently been
corrected, additional orders for endocouplers will be deferred until it consumes
its existing stock of endocouplers. Based on previous demand levels, the Company
believes shipments to this customer may resume in the quarter commencing July 1,
1997.
Page 8 of 9
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PART II. OTHER INFORMATION
Items 1-5 Not Applicable.
Item 6 Exhibits and Reports on Form 8-K
- ------
(a) Exhibits - Exhibit 27
(b) Reports on Form 8-K - There were no reports on
Form 8-K filed during the period covered by
this report.
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.
PRECISION OPTICS CORPORATION, INC.
DATE: May 2, 1997 BY: /S/ Jack P. Dreimiller
-----------------------
Jack P. Dreimiller
Senior Vice President, Finance
and Chief Financial Officer
Page 9 of 9
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EXHIBIT INDEX
Exhibit Number DESCRIPTION
27 FINANCIAL DATA SCHEDULE
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> MAR-31-1997
<CASH> 2,241,304
<SECURITIES> 0
<RECEIVABLES> 794,243
<ALLOWANCES> 0
<INVENTORY> 1,865,352
<CURRENT-ASSETS> 5,144,415
<PP&E> 2,951,294
<DEPRECIATION> 1,846,398
<TOTAL-ASSETS> 6,461,063
<CURRENT-LIABILITIES> 719,282
<BONDS> 300,237
0
0
<COMMON> 59,805
<OTHER-SE> 5,469,506
<TOTAL-LIABILITY-AND-EQUITY> 6,461,063
<SALES> 6,142,887
<TOTAL-REVENUES> 6,142,887
<CGS> 4,504,439
<TOTAL-COSTS> 4,504,439
<OTHER-EXPENSES> 1,626,843
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 21,281
<INCOME-PRETAX> 69,186
<INCOME-TAX> 17,250
<INCOME-CONTINUING> 51,936
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 51,936
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
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