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 December 31, 1996
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
(Address of principal executive offices) (Zip Code)
(508) 630-1800
(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 December 31, 1996 was 5,980,502 shares.
Transitional Small Business Disclosure Format (check one):
Yes ( ) No (X)
PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION: Page
Item I Consolidated Financial Statements
Consolidated Balance Sheets - 1
December 31, 1996
and June 30, 1996 (unaudited)
Consolidated Statements of Operations - 2
Quarter Ended December 31, 1996
and December 31, 1995 (unaudited)
Six Months Ended December 31, 1996
and December 31, 1995 (unaudited)
Consolidated Statements of Cash Flows - 3
Six Months Ended December 31, 1996
and December 31, 1995 (unaudited)
Notes to Consolidated Financial Statements 4
Item 2
Management's Discussion and Analysis of 5-9
Financial Condition and Results of Operations
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 - None
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PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
December 31, 1996 June 30,1996
CURRENT ASSETS
Cash and Cash Equivalents $2,218,930 $2.617,813
Accounts Receivable, Net 1,010,605 1,139,804
Inventories 1,948,460 1,863,694
Deferred Tax Asset 165,896 119,000
Prepaid Expenses 66,089 44,684
Refundable Income Taxes 30,276 30,276
---------- ----------
Total Current Assets 5,440,256 5,815,271
--------- ---------
PROPERTY AND EQUIPMENT 2,856,870 2,617,706
Less: Accumulated Depreciation 1,728,438 1,531,228
--------- ---------
Net Property and Equipment 1,128,432 1,086,478
--------- ---------
OTHER ASSETS 190,651 180,871
---------- ----------
TOTAL ASSETS $6,759,339 $7,082,620
========== ==========
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable $ 248,503 $ 829,428
Accrued Payroll 18,775 81,990
Accrued Professional Services 43,006 49,360
Accrued Profit Sharing and Bonuses 67,464 93,938
Accrued Income Taxes 137,508 35,383
Accrued Vacation 45,967 51,881
Accrued Warranty Expense 50,000 50,000
Current Portion of Capital Lease Obligation 86,037 82,678
Other Accrued Liabilities 28,767 51,638
--------- ---------
Total Current Liabilities 726,027 1,326,296
-------- ---------
CAPITAL LEASE OBLIGATION 235,073 278,949
-------- ----------
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 592,779 271,915
--------- ---------
Total Stockholders' Equity 5,798,239 5,477,375
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $6,759,339 $7,082,620
========= =========
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3189827.01
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PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SECOND QUARTER AND SIX MONTHS ENDED
DECEMBER 31,1996 AND 1995
-- SECOND QUARTER -- -- SIX MONTHS --
1996 1995 1996 1995
---- ---- ---- ----
(UNAUDITED) (UNAUDITED (UNAUDITED) (UNAUDITED)
REVENUES $2,155,291 $1,788,168 $4,793,665 $3,781,955
COST OF GOODS SOLD 1,554,917 1,243,575 3,305,939 2,590,770
--------- --------- --------- ---------
GROSS PROFIT 600,374 544,593 1,487,726 1,191,185
SELLING, GENERAL and
ADMINISTRATIVE EXPENSES 532,078 554,769 1,093,814 1,028,111
------- ------- --------- ---------
OPERATING INCOME (LOSS) 68,296 (10,176) 393,912 163,074
INTEREST EXPENSE (6,791) (1,946) (14,902) (4,022)
INTEREST INCOME 21,937 34,225 48,854 68,084
------ ------ ------ ------
INCOME BEFORE PROVISION
FOR INCOME TAXES 83,442 22,103 427,864 227,136
PROVISION FOR INCOME TAXES 21,000 5,600 107,000 55,600
------ ----- ------- ------
NET INCOME $62,442 $16,503 $320,864 $171,536
======= ======= ======== ========
INCOME PER COMMON and
COMMON EQUIVALENT SHARE $0.01 $0.00 $0.05 $0.03
===== ===== ===== =====
WEIGHTED AVERAGE COMMON and
COMMON EQUIVALENT SHARES
OUTSTANDING 6,056,097 6,123,478 6,056,746 6,128,358
========= ========= ========= =========
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PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED
DECEMBER 31,1996 AND 1995
(UNAUDITED)
1996 1995
---------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $320,864 $171,536
Adjustments to Reconcile Net Income to Net
Cash Provided By (Used In) Operating Activities -
Depreciation and Amortization 207,266 121,286
Deferred Income Taxes (46,896) (28,400)
Changes in Assets and Liabilities-
Accounts Receivable 129,199 376,890
Inventories (84,766) (192,943)
Prepaid Expenses (21,405) (49,305)
Accounts Payable (580,925) 100,959
Accrued Payroll (63,215) (14,393)
Accrued Professional Services (6,354) (6,754)
Accrued Profit Sharing and Bonuses (26,474) (51,749)
Accrued Income Taxes 102,125 1,235
Other Accrued Liabilities (28,785) (15,728)
---------- ----------
Net Cash Provided by (Used In)
Operating Activities (99,366) 412,634
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital Expenditures (239,164) (196,295)
Increase in Other Assets (19,836) (31,860)
---------- ----------
Net Cash Used in Investing Activities (259,000) (228,155)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of Capital Lease Obligation (40,517) (14,077)
---------- -----------
Net Cash Used in Financing Activities (40,517) (14,077)
---------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (398,883) 170,402
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 2,617,813 2,527,846
--------- ---------
CASH AND CASH EQUIVALENTS AT END
OF PERIOD $2,218,930 $2,698,248
========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash Paid for-
Interest $ 14,902 $ 4,022
=========== ===========
Income Taxes $ 48,412 $ 85,412
=========== ==========
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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
second 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 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 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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December 31, 1996 June 30, 1996
----------------- -------------
Raw Materials $1,198,614 $1,282,924
Work-In-Process 668,916 502,658
Finished Goods and Components 80,930 78,112
--------- ---------
Total Inventories $1,948,460 $1,863,694
========== ==========
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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 six months ended December 31, 1996, the Company's cash and cash
equivalents decreased by approximately $399,000 to $2,219,000. The decrease in
cash and cash equivalents was due to cash used by operating activities of
approximately $99,000, capital expenditures of approximately $239,000, increase
in other assets of approximately $20,000, and repayment of debt of approximately
$41,000.
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 endoscope product line, 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.
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Results of Operations
Total revenues for the second quarter and for the six months ended
December 31, 1996 increased by $367,123 or 20.5% and $1,011,710 or 26.8%,
respectively, over the same period in the prior year.
The revenue increase over the prior year for the second quarter was due
to higher sales of medical products (up 99%), partially offset by lower sales of
non-medical products (down 21%).
The revenue increase over the prior year for the six months ended
December 31, 1996 was due to higher sales of medical products (up 159%),
partially offset by lower sales of non-medical products (down 26%).
The increase in sales of medical products was primarily attributable to
higher sales of endocouplers which increased by 203% for the six months ending
December 31, 1996. The reduction in non-medical sales was due primarily to
discontinued sales of industrial lenses to a significant customer. This customer
accounted for 16% of the Company's revenues for the six months ended December
31, 1995. Future sales to this customer, if any, are uncertain at this time.
Revenues from the Company's two largest customers were approximately
36% and 35% of total revenues for the six months ended December 31, 1996, and
approximately 53% and 16% of total revenues for the six months ended December
31, 1995. No other customers accounted for more than 10% of the Company's
revenues during those periods.
For the six months ended December 31, 1996, approximately 35% of the
Company's total revenues were derived from production and development contracts
and subcontracts involving the Government and its agencies compared to
approximately 50% for the corresponding period of the prior year. During the
quarter ending December 31, 1996, a Government cost-plus-fixed-fee night vision
development subcontract was partially terminated for convenience of the
Government. Revenues for the quarter ending March 31, 1997 will be reduced by
approximately $140,000, representing the terminated portion of the subcontract.
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 March
1997, and two fixed-price production subcontracts for night-vision lens systems
with deliveries scheduled approximately through September 1997. 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.
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Gross profit expressed as a percentage of revenues decreased from 30.5%
to 27.9% for the quarter, and from 31.5% to 31.0% for the six months ended
December 31, 1996, 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 lens shipments.
Selling, general and administrative expenses decreased for the second
quarter ended December 31, 1996 by $22,691 or 4.1% due primarily to lower
spending on research and development in the second quarter. Selling, general and
administrative expenses increased for the six months ended December 31, 1996 by
$65,703 or 6.4%. The increase was due primarily to higher selling and
advertising expenditures targeted at the industrial and thin films marketplace.
Interest income decreased for the second quarter and six months ended
December 31, 1996 by $12,288 and $19,230, 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 expects to aggressively pursue the development of
Wavelength Division Multiplexer (WDM) optical filters over the next few
quarters, which could adversely affect results during these periods since such
costs are recognized as they occur. Filters for 2 and 4 channel WDM's should be
produced by the end of this calendar year. WDM's are devices used in optical
communications systems.
As a result of recent fluctuations in assembly and testing activities
and with continued uncertainty in the night vision market throughout the coming
year, the Company reduced its production work force in January 1997 by six (6)
people and in February 1997 by two (2) people, about 15% of its total workforce.
Although the Company has experienced substantial growth in its sales of
endocouplers during the six months ending December 31, 1996, these increased
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 somewhat. The Company believes this lower demand is due primarily to
temporary technical problems in a customers camera system which is used with the
Company's endocouplers, and as a result, it is anticipated that third quarter
sales of endocouplers will be constrained.
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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: February 6, 1997 BY: /s/ Jack P. Dreimiller
----------------------
Jack P. Dreimiller
Senior Vice President, Finance
and Chief Financial Officer
-8-
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EXHIBIT INDEX
Exhibit Number Description
27 Financial Data Schedule
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<S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> DEC-31-1996
<CASH> 2,218,930
<SECURITIES> 0
<RECEIVABLES> 1,010,605
<ALLOWANCES> 0
<INVENTORY> 1,948,460
<CURRENT-ASSETS> 5,440,256
<PP&E> 2,856,870
<DEPRECIATION> 1,728,438
<TOTAL-ASSETS> 6,759,339
<CURRENT-LIABILITIES> 726,027
<BONDS> 321,110
0
0
<COMMON> 59,805
<OTHER-SE> 5,738,434
<TOTAL-LIABILITY-AND-EQUITY> 6,759,339
<SALES> 4,793,665
<TOTAL-REVENUES> 4,793,665
<CGS> 3,305,939
<TOTAL-COSTS> 3,305,939
<OTHER-EXPENSES> 1,093,814
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,902
<INCOME-PRETAX> 427,864
<INCOME-TAX> 107,000
<INCOME-CONTINUING> 320,864
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 320,864
<EPS-PRIMARY> .05
<EPS-DILUTED> .05
</TABLE>
