SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended June 30, 1997
Commission File Number 001-10647
PRECISION OPTICS CORPORATION, INC.
(Name of small business issuer in its charter)
MASSACHUSETTS 04-279-5294
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
22 EAST BROADWAY
GARDNER, MASSACHUSETTS 01440
(Address of principal executive offices) (Zip Code)
Issuer's telephone number is (508) 630-1800
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
COMMON STOCK, $.01 PAR VALUE BOSTON STOCK EXCHANGE, INC.
Securities registered pursuant to Section 12(g) of the Act: None
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15 of the Exchange Act 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
Check if no disclosure of delinquent filers to Item 405 of Regulation
S-B is contained in this form, and no disclosure will be contained, to the best
of registrant's knowledge, in definitive proxy or information statements in-
corporated by reference in Part III of this Form 10-KSB or any amendment to this
Form 10-KSB. X
The issuer's revenues for its most recent fiscal year were $7,372,310.
The aggregate market value of the voting stock, consisting solely of
common stock, held by non-affiliates of the issuer computed by reference to the
closing price of such stock was $14,564,090 as of June 30, 1997.
The number of shares of outstanding common stock of the issuer as of
August 31, 1997 was 6,046,502.
DOCUMENTS INCORPORATED BY REFERENCE
The issuer's Proxy Statement for the 1997 Annual Meeting of
Shareholders to be held on November 11, 1997 is incorporated into Part III of
this Form 10-KSB.
PART I
ITEM 1. BUSINESS
Business Development.
Precision Optics Corporation, Inc. (the "Company") designs, develops,
manufactures, and sells specialized optical systems and components and optical
thin film coatings.
The Company completed a private placement of 1,000,000 shares of Common
Stock in August 1990, an initial public offering of 1,200,000 shares of Common
Stock in November 1990, and a public offering of 1,176,250 shares of Common
Stock in February 1992. In conjunction with these offerings, the Company issued
warrants for a total of 320,000 shares of Common Stock to the selling agent and
underwriters for the offerings. Before these offerings, the Company was
privately held. Precision Optics Corporation, Inc. was incorporated in
Massachusetts in 1982.
In August 1992, the Company established a wholly-owned subsidiary in
Hong Kong to market and sell the Company's products throughout the Pacific Rim
marketplace and to engage in general activities relating to the Company's
business. Also in August 1992, the Company established a wholly-owned
subsidiary, Precise Medical, Inc. ("Precise Medical"), to market and sell
medical video endoscopy systems that incorporated the Company's products
directly to end users (hospitals, physicians, etc.). On July 14, 1993, the
Company closed Precise Medical because of its inability to achieve acceptance in
the medical video systems marketplace.
References to the Company contained herein include its two wholly-owned
subsidiaries except where the context otherwise requires.
Business of Issuer.
The Company designs, develops, manufactures, and sells specialized
optical systems and components and optical thin film coatings. The Company
conducts business in one industry segment only. The Company's products and
services fall into the following areas: medical products for use by hospitals
and physicians, industrial optical products and thin films, and advanced optical
system design and development services and products, primarily under contract
either directly or indirectly with the United States Government ("the
Government").
PRINCIPAL PRODUCTS AND SERVICES AND METHODS OF DISTRIBUTION
Medical Products. The Company's medical products include endoscopes
and image couplers, beamsplitters, and adapters, which are used as accessories
to endoscopes.
In January 1991, the Company began the design and development of
endoscopes using various optical technologies for use in a variety of minimally
invasive surgical and diagnostic procedures throughout the human body. In fiscal
year 1997, the Company completed development and began selling its new line of
arthroscopes, which are specialized endoscopes used in joint surgery. The
Company's endoscope sales have been primarily to manufacturers of video cameras
and medical products and video endoscopy systems. In addition to its existing
line of endoscopes, the Company is
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continuing to develop different types of endoscopes that incorporate varying
types of construction and technology for varying medical specialties and
functionality.
The Company developed and has manufactured and sold since 1985 a
proprietary product line of state-of-the-art instrumentation to couple
endoscopes to video cameras. Included in this product line are image couplers,
which physically connect the endoscope to the video camera system and transmit
the image viewed through the scope to the video camera. Another product -- the
beamsplitter --performs the same function while preserving for the viewer an
eyeport for direct, simultaneous viewing through the endoscope. The Company has
sold these devices primarily to endoscope and video camera manufacturers and
suppliers for resale under its customers' names.
The Company's image couplers and beamsplitters can withstand
surgery-approved sterilization. The Company also offers autoclavable image
couplers, which are able to withstand sterilization in superheated steam under
pressure. Autoclavability is a preferred method of sterilization because of its
relative speed, safety, and efficiency. The Company believes there is a trend
toward increased sterilization of medical instruments and that it is the only
company in the world that produces autoclavable image couplers. The Company has
investigated the development of an autoclavable beamsplitter. Although
autoclavable endoscopes and video cameras, the necessary components to a fully
autoclavable video-monitored endoscopy, are not yet available, the Company is in
the process of developing an autoclavable endoscope and believes that video
camera manufacturers are attempting to develop autoclavable video cameras.
There can be no assurance as to the general market acceptance of any of
the Company's new products.
Included in the Company's medical products sales are sales of image
couplers and beamsplitters for video-monitored examination of a variety of
industrial cavities and interiors. The Company has developed, and may develop in
the future, specialized borescopes for industrial applications.
Advanced Optical Design and Development Services. The Company provides
on a contract basis advanced lens design, image analysis, optical system design,
structural design and analysis, prototype production and evaluation, optics
testing, and optical system assembly. Some of the Company's development
contracts have led to optical system production business for the Company, and
the Company believes its prototype development service may lead to new product
production from time to time.
Within the advanced optical design and development area, the Company's
recent sales have largely been of night-vision products and services which
permit users to see in extreme low light.
Under contract with a customer that produces and sells aviation
night-vision goggles to the United States Army, the Company has designed and
produced the eyepieces for aviators' night-vision goggles. Under contract with
the same customer, the Company designed and currently produces collimator and
objective assemblies for night-vision goggles used by ground personnel.
Under additional design and development contracts with the same
customer, the Company has designed an objective lens for aviators' night-vision
goggles, designed and built prototypes of an objective lens for ground personnel
goggles, designed and built new lens system prototypes for night
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driver's viewers and armament sites, and designed and built a magnifier
attachment for ground personnel goggles. In addition, the Company has designed a
new objective lens and eyepiece for aviators' night-vision goggles.
The Company has in the past and expects in the future to have
difficulty competing for production contracts for night-vision products due to
the lower prices offered by foreign manufacturers. In addition, Government
budget uncertainties and efforts to lower the federal budget deficit and defense
spending may adversely affect the Company. The Company believes, however, that
some of its night-vision products and development work incorporate new
technology which the Government may use to update its existing equipment.
In addition to its night-vision related design and development, the
Company designs, develops, and manufactures thin film coatings and performs thin
film coatings for use on various optical products. Many of the Company's
advanced optical design and development projects and the manufacture of the
Company's medical and night-vision products have been significantly dependent
upon the Company's thin film capabilities. Presently, optical thin film business
not associated with other Company business and products is limited or very
specialized. However, the Company plans to aggressively pursue sales, marketing
and technology development efforts for new optical thin films in the rapidly
growing optical communications and semi-conductor industries which may begin to
generate additional revenues in the first half of fiscal year 1998. In the third
and fourth quarters of fiscal year 1997, several initial orders were received
for thin films from new costumers in these business areas. Also, during the last
half of fiscal year 1997, the Company began development of prototype Wavelength
Division Multiplexer (WDM) optical filters. (WDMs are devices that allow
telecommunications companies to increase the transmission capacity of fiber
optic lines).
The Company has also developed a lens-prism system which it has sold
for industrial use as part of an automated registration system for machines and
has developed and sells a lens system for optical character reading.
COMPETITION AND MARKETS
The areas in which the Company engages are highly competitive and
include both foreign and domestic competitors. Many of the Company's competitors
are larger and have substantially greater resources than the Company.
Furthermore, other domestic or foreign companies, some with greater experience
in the optics industry and greater financial resources than the Company, may
seek to produce products or services that compete with those of the Company. The
Company may establish or use production facilities overseas to produce key
components to the Company's business, such as lenses. The Company believes that
the cost savings from such production may be essential to the Company's ability
to compete on a price basis in the medical and night-vision optics areas and to
the Company's profitability, and that the Company's inability to establish or
maintain such production facilities could materially, adversely affect the
Company.
The Company believes that competition for sales of its products and
services, which have been principally sold to OEM customers, is based on
performance and other technical features, as well as other factors, such as
scheduling and reliability, in addition to competitive price.
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The Company currently sells its image couplers, beamsplitters, and
adapters to a market that consists of approximately 30 potential OEM customers.
These potential customers sell video cameras, endoscopes, or video-endoscopy
systems. The Company has made sales to approximately 20 of these customers. The
Company estimates that it has approximately 30% of the market share in these
products and anticipates growth in this area. The Company's primary competition
in this area is the customers' own in-house capabilities to manufacture such
products. The Company believes that these customers typically purchase products
from the Company, despite their in-house capabilities, because they choose to
devote their own technical resources to their primary products, such as cameras
or endoscopes. The Company estimates that approximately 50% of the market demand
for image couplers, beamsplitters, and adapters is met by "captive" or in-house
capabilities. The Company anticipates increased demand for its autoclavable
products because it believes there is a trend towards more stringent
sterilization of medical instruments.
The Company has marketed and sold its endoscopes to OEM video camera
and video endoscopy suppliers for resale under the purchaser's name. A number of
domestic and foreign competitors also sell endoscopes to such OEM suppliers, and
the Company's share of the endoscope market is nominal. The Company believes
that, while its resources are substantially more limited than these competitors,
the Company may be able to be more responsive to the needs of endoscope users.
With respect to the Company's advanced optical design and development
services not related to night-vision or thin film coatings, the Company has
numerous customers and competitors. The ability to supply design and development
services to such customers is highly dependent upon a company's and its
employees' reputations and prior experience.
With respect to night-vision optics, the Company's sales of its
products and services have been almost exclusively to one customer, which sells
night-vision equipment to the United States Army. The Company faces intense
competition for production of night-vision products from foreign manufacturers.
In the night-vision optical design area, the Company has numerous competitors.
The Company's business in the night-vision optics area is highly dependent upon
the Company's reputation and performance, as well as upon Government contracts
and policy. The Company believes the demand for night-vision optics generally,
which are used extensively in drug and law enforcement and surveillance as well
as search and rescue missions and military applications, will lessen. Recent
experience with lens sales for new consumer night vision products also suggests
that market growth in this area is severely limited.
While the potential market for thin film coatings is perceived as
growing rapidly, particularly in the telecommunications and semi-conductor
industries, the Company's thin film coatings competitors are numerous and have
deep and broad capabilities.
The Company has had negligible direct export sales to date.
RESEARCH AND DEVELOPMENT
The Company believes that its future success depends to a large degree
on its ability to continue to conceive and to develop new optical products and
services and to enhance the performance characteristics and methods of
manufacture of existing products. Accordingly, it expects to continue to
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seek to obtain product-related design and development contracts with customers
and to invest its own funds on its research and development.
The Company received approximately $1,410,000 and $1,060,000 for the
fiscal years ended June 30, 1997 and 1996, respectively, from customers for
customer-sponsored design and development projects. Levels of customer contract
funded research and development can fluctuate greatly in any given period
depending upon the mix between design efforts and hardware development, which is
generally more expensive and time consuming than the design phases. In addition
to customer-sponsored research and development, the Company spent approximately
$428,000 and $433,000 of its own funds during fiscal years 1997 and 1996,
respectively, on the Company's own research and development. The Company expects
to continue making significant Company-funded expenditures for research and
development.
RAW MATERIALS AND PRINCIPAL SUPPLIERS
For all of the Company's products, except for thin film coatings, the
basic raw material is precision grade optical glass, which the Company obtains
from several major suppliers. Outside vendors grind and polish most of the
Company's lenses and prisms. For optical thin film coatings, the basic raw
materials are metals and dielectric compounds, which the Company obtains from a
variety of chemical suppliers. The Company believes that its demand for these
raw materials and services is small relative to the total supply and that
materials and services required for the production of its products are currently
available in sufficient production quantities and will be available for fiscal
year 1998. The Company believes, however, that there are relatively few
suppliers of the high quality lenses and prisms which its endoscopes may
require. Depending upon the market acceptance of the Company's endoscopes, the
Company may seek to assure itself of a timely supply of lenses, prisms, or other
key materials or components through the acquisition of a supplier or expanded
manufacturing facilities of its own.
PATENTS AND TRADEMARKS
The Company relies, in part, upon patents, trade secrets, and
proprietary knowledge as well as personnel policies and employee confidentiality
agreements concerning inventions and other creative efforts to develop and to
maintain its competitive position. The Company does not believe that its
business is dependent upon any patent, patent pending, or license, although it
believes that trade secrets and confidential know-how may be important to the
Company's scientific and commercial success.
The Company plans to file for patents, copyrights, and trademarks in
the United States and in appropriate countries to protect its intellectual
property rights whenever possible. The Company holds the rights to two United
States patents and has Japanese and German patent applications pending relating
to one of its image couplers and holds the rights to a United States patent to
one of its endoscopes. The Company has received jointly with a customer a patent
relating to one of its night-vision designs. The Company will assign its rights
under this night-vision patent to such customer for night-vision applications.
The Company knows of no infringements of its patents. Although the Company plans
to protect any patents it has from infringement, it may not be able to pursue
such protection for economic reasons. While the Company believes that its
pending applications relate to patentable devices or concepts, there can be no
assurance that patents will be issued or that
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any patents issued can be successfully defended or will effectively limit the
development of competitive products and services.
Although the Company seeks to protect its proprietary information,
there can be no assurance that others will not either develop independently the
same or similar information or gain access to the Company's proprietary
information or that disputes will not arise as to proprietary rights to such
information.
The Company's products may now or in the future infringe upon others'
patents or proprietary technology. The Company's defense of any such claims
could have a material, adverse effect on the Company.
EMPLOYEES
As of June 30, 1997, the Company had forty-five full-time employees and
two part-time employees.
CUSTOMERS
Sales to the Company's two largest customers, in terms of total sales
during fiscal year 1997, were approximately 38% and 23%. Sales to the Company's
three largest customers, in terms of total sales during fiscal year 1996, were
approximately 42%, 14% and 12%.
ENVIRONMENTAL PROTECTION AND THE EFFECT OF EXISTING OR PROBABLE
GOVERNMENT REGULATIONS ON THE BUSINESS
The Company's operations are subject to a variety of federal, state,
and local laws and regulations relating to the discharge of materials into the
environment or otherwise relative to the protection of the environment. From
time to time the Company uses a small amount of hazardous materials in its
operations. Although the Company believes that it complies with all applicable
environmental laws and regulations, any failure to comply with such laws and
regulations could have a material, adverse effect on its capital expenditures,
earnings, and competitive position.
NEED FOR GOVERNMENT APPROVAL OF PRINCIPAL PRODUCTS OR SERVICES AND
EFFECT OF EXISTING OR PROBABLE GOVERNMENT REGULATIONS ON THE BUSINESS
The Company currently sells and markets four medical products, the
marketing of which may require the permission of the United States Food and Drug
Administration ("FDA"). Pursuant to the Company's notification to the FDA of its
intent to market its laparoscope, additional types of endoscopes which it has
developed and is developing, image coupler, beamsplitter, and adapters, the FDA
has determined that each such device is substantially equivalent to a device
marketed in interstate commerce and that the Company may market such devices,
subject to the general controls provisions of the Food, Drug and Cosmetic Act.
Furthermore, the Company plans to market additional endoscopes and related
medical products that may require the FDA's permission to market such products.
The Company may also develop additional products or seek to sell some of its
current or future medical products in a manner that requires the Company to
obtain the permission of the FDA to market such products, as well as the
regulatory approval or license of other federal, state, and local agencies or
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similar agencies in other countries. There can be no assurance that the Company
will be able to maintain the FDA's permission to market its current products or
to obtain such regulatory permission, approvals, or licenses for any of its
other products. Furthermore, potential adverse FDA regulation affecting the
Company which might arise from future legislation or administrative action
cannot be predicted. In addition, FDA regulations may be established that could
prevent or delay regulatory clearances or approval of the Company's products.
The inability of the Company to secure any necessary licenses or regulatory
approvals or permission from the FDA could have a material adverse effect on its
business. The FDA has authority to conduct detailed inspections of manufacturing
plants in order to assure that "good manufacturing practices" are being followed
in the manufacture of medical devices, to require periodic reporting of product
defects to the FDA, and to prohibit the exploitation of devices which do not
comply with law. Failure to comply with applicable regulatory requirements can,
among other things, result in fines, suspensions of regulatory clearances or
approvals, product recalls, operating restrictions, and criminal prosecution.
ITEM 2. DESCRIPTION OF PROPERTY
The Company conducts its domestic operations at two facilities in
Gardner and Fitchburg, Massachusetts. The Gardner Facility is leased from a
corporation owned by an officer-shareholder-director of the Company, and the
Company's lease expires in December 1999. The Fitchburg facility is under a
three year lease which commenced on November 1, 1995. The Company rents office
space in Hong Kong for sales, marketing and supplier quality control and liaison
activities of its Hong Kong subsidiary.
The Company believes these facilities are adequate for its current
operations. Significant increases in production or the addition of significant
equipment additions or manufacturing capabilities in connection with the
production of the Company's line of endoscopes, optical thin films, and other
products may, however, require the acquisition or lease of additional
facilities. The Company may establish production facilities domestically or
overseas to produce key assemblies or components, such as lenses, for the
Company's products. Overseas facilities may subject the Company to the political
and economic risks associated with overseas operations. The loss of or inability
to establish or maintain such additional domestic or overseas facilities could
materially adversely affect the Company's competitive position and
profitability.
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries and their property are not party or
subject to any material pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders
during the fourth quarter of fiscal year 1997.
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DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The Company's executive officers and directors are as follows:
<TABLE>
<CAPTION>
<S> <C>
Position with the Company
Name or Principal Occupation
Richard E. Forkey President, Treasurer, and
Director
Jack P. Dreimiller Senior Vice President,
Finance and Chief Financial
Officer
Kumar M. Khajurivala Vice President, Operations
Edward A. Benjamin Director and Clerk. Mr. Benjamin is a partner
in the law firm of Ropes & Gray, Boston,
Massachusetts
Joel R. Pitlor Director. Mr. Pitlor is president of J.R. Pitlor,
a management consulting firm based in
Cambridge, Massachusetts.
Robert R. Shannon Director. Mr. Shannon is a professor at the
Optical Sciences Center of the University of
Arizona in Tuscon, Arizona.
</TABLE>
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's common stock currently trades on the Boston Stock
Exchange under the symbol "POC" and is listed on the National Association of
Securities Dealers Automated Quotation (NASDAQ) System under the symbol "POCI."
From January 1991 to December 1991, the Boston Stock Exchange was the principal
market in which the Company's stock was publicly traded. Since January 1992,
NASDAQ has been the principal market in which the Company's stock is publicly
traded. The high and low sales prices for the Company's stock for each full
quarterly period within the two most recent fiscal years were as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
1996 1997
---- ----
Quarter High Low High Low
---------------------------------------------------------------------
First $1 7/8 $1 1/8 $1 3/4 $ 7/8
Second $1 7/8 $1 1/4 $1 3/4 $1 1/8
Third $2 $1 1/4 $1 15/16 $1 1/16
Fourth $2 $1 1/8 $3 11/16 $1 1/8
</TABLE>
As of August 31, 1997, there were 99 holders of record of the Company's
common stock.
ITEM 6. 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" attached hereto 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.
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LIQUIDITY AND CAPITAL RESOURCES
For the year ended June 30, 1997, the Company's cash and cash
equivalents decreased by approximately $269,000 to $2,348,000. The decrease in
cash and cash equivalents was due to cash generated by operating activities of
approximately $290,000 and proceeds received from exercise of stock options of
approximately $57,000, less capital expenditures of approximately $445,000,
increases in other assets, primarily patents, of approximately $89,000 and
repayment of a capital lease obligation of approximately $82,000.
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 optical 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 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.
The Company's cash and cash equivalents and available lines of credit
are considered sufficient to support working capital and investment needs for
the foreseeable future.
RESULTS OF OPERATIONS
Total revenues for fiscal year 1997 were approximately $7,372,000, a
decrease of approximately $683,000, or 8.5%, from fiscal year 1996.
The revenue decrease was due to lower sales of non-medical products
(down 29%), partially offset by higher sales of medical products (up 22%). The
increase in sales of medical products was attributable to higher sales in all
major product categories. The reduction in non-medical sales was due primarily
to (1) lower sales of night-vision products due to completion of two government
production subcontracts and one government development subcontract and (2) lower
sales of industrial products due to discontinued sales to a significant
customer, both partially offset by higher sales of optical thin films.
Gross profit decreased by approximately $701,000 in fiscal year 1997,
and as a percentage of revenues decreased from 30.6% to 23.9% compared to the
previous year. The decrease in gross profit was due primarily to the lower sales
volume and higher occupancy and depreciation expenses related to equipment and
manufacturing facilities additions.
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For the fiscal years ended June 30, 1997, 1996 and 1995, approximately
38%, 44% and 45% of the Company's total revenues, respectively, were derived
from production and development contracts and subcontracts involving the
Government and its agencies. The Company's current Government business is
substantially comprised of a development subcontract with one customer on a
cost-plus-fixed-fee basis extending approximately through April, 1998, and two
fixed-price production subcontracts with another customer for night-vision lens
systems with deliveries scheduled approximately through May, 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.
Selling, general and administrative expenses increased by approximately
$169,000 or 7.9% in fiscal year 1997 compared to fiscal year 1996. The increase
was due primarily to higher spending on advertising and bid and proposal
expenses targeted at the industrial and thin films marketplace, and higher
legal, consulting and employee recruiting expenses.
Interest expense relates primarily to capital lease obligations
incurred in the third quarter of fiscal years 1994 and 1996.
Interest income decreased by approximately $20,000 in fiscal year 1997
due to the lower investment base of cash equivalents.
The benefit for income taxes as a percentage of the pre-tax loss in
fiscal year 1997 is lower than the federal statutory income tax rate primarily
due to inability to recognize the full amount of deferred tax assets to offset
prior years' taxable income. Such tax benefits will be recognized in future
years if sufficient future taxable income is generated.
FISCAL YEAR 1996 RESULTS OF OPERATIONS
Total revenues for fiscal year 1996 were approximately $8,055,000, an
increase of approximately $477,000, or 6.3%, over fiscal year 1995.
The revenue increase over the prior year was due to higher sales of
medical products (up 30.3%) and higher sales of night-vision products (up 1.8%),
partially offset by lower sales of industrial products (down 23.2%). The
increase in sales of medical products was primarily attributable to higher sales
of endocouplers, which increased by 89% for the year to record levels. The
reduction in industrial sales was due primarily to lower sales of industrial
lenses to a significant customer. This customer accounted for 12%, 18%, and 7%
of the Company's total revenues for fiscal years 1996, 1995 and 1994,
respectively.
Gross profit decreased by approximately $123,000 in fiscal year 1996,
and as a percentage of revenues, decreased from 34.1% to 30.6% compared to the
previous year. The decrease in gross profit was due primarily to an unfavorable
shift in sales mix away from industrial products, which have relatively higher
gross margins than other product lines, and higher occupancy and depreciation
expenses related to equipment and manufacturing facilities additions.
Selling, general and administrative expenses increased by approximately
$191,000 or 10% in fiscal year 1996 compared to fiscal year 1995. The increase
was due primarily to higher spending on
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new product research and development, principally related to medical products,
which increased by 19% to approximately $433,000 in fiscal year 1996, higher
advertising expenditures targeted at the industrial marketplace, and higher
depreciation and amortization expenses.
Interest expense relates primarily to capital lease obligations
incurred in the third quarter of fiscal years 1994 and 1996.
Interest income increased by approximately $32,000 in fiscal year 1996
due to the higher investment base of cash equivalents and higher interest rates.
The provision for income taxes as a percentage of pre-tax income is
lower than the federal statutory income tax 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 will begin to generate
modest incremental revenues in the last half of this calendar year. In the third
and fourth quarters of fiscal year 1997, several initial orders were received
for thin films from new customers in these business areas. Development efforts
on prototype Wavelength Division Multiplexer (WDM) optical filters are
continuing.
Although the Company had 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 in
conjunction with the Company's endocouplers. Consequently, no shipments were
made to this customer during the six months ending June 30, 1997, and none are
scheduled for the quarter ending September 30, 1997. The Company has been
advised by this customer, who accounted for 23% of the Company's revenues for
the year ending June 30, 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.
ITEM 7. CONSOLIDATED FINANCIAL STATEMENTS: The Consolidated
Financial Statements are filed on pages 14 to 28 of this Form 10-KSB.
-13-
<PAGE>
PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
Consolidated Financial Statements
as of June 30, 1997 and 1996
Together with Auditors' Report
-14-
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Precision Optics Corporation, Inc.:
We have audited the accompanying consolidated balance sheets of Precision Optics
Corporation, Inc. (a Massachusetts corporation) and subsidiaries as of June 30,
1997 and 1996, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended June 30, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Precision Optics Corporation,
Inc. and subsidiaries as of June 30, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
June 30, 1997, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
July 31, 1997
-15-
<PAGE>
<TABLE>
PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS--JUNE 30, 1997 AND 1996
<CAPTION>
<S> <C> <C> <C> <C> <C>
ASSETS 1997 1996 LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996
CURRENT ASSETS: CURRENT LIABILITIES:
Cash and cash equivalents $ 2,348,382 $ 2,617,813
Marketable Securities 30,000 - Accounts payable $ 271,911 $ 829,428
Accounts receivable (net of Accrued payroll 81,122 81,990
allowance for doubtful accounts Accrued profit sharing and bonuses 30,000 93,938
of approximately $69,000 and Accrued professional services 85,556 49,360
$82,000 in l997 and 1996, Accrued vacation 64,903 51,881
respectively) 466,811 1,139,804 Accrued warranty expense 50,000 50,000
Inventories 1,576,967 1,863,694 Accrued income taxes 18,946 35,383
Deferred tax asset 157,300 119,000 Other accrued liabilities 42,164 51,638
Prepaid expenses 40,273 44,684 Current portion of capital
Refundable income taxes 52,970 30,276 lease obligation 89,532 82,678
---------- -------- -------- --------
Total current assets 4,672,703 5,815,271 Total current liabilities 734,134 1,326,296
--------- --------- --------- ---------
PROPERTY AND EQUIPMENT, AT COST:
Machinery and equipment 2,474,478 2,049,758 CAPITAL LEASE OBLIGATION, NET
OF CURRENT PORTION 189,413 278,949
Leasehold improvements 433,832 420,230 -------- ---------
Furniture and Fixtures 109,568 102,976
Vehicles 44,742 44,742
--------- ---------
3,062,620 2,617,706 COMMITMENTS (Note 4)
Less--Accumulated depreciation 1,927,578 1,531,228
and amortization --------- ---------
1,135,042 l,086,478
--------- --------- STOCKHOLDERS' EQUITY:
Common stock, $.01 par value-
OTHER ASSETS: Authorized--10,000,000 shares
Cash surrender value of life Issued and outstanding--6,021,502
insurance policies 51,871 52,851 and 5,980,502 shares at June 30,
Patents, net 155,986 125,995 1997 and 1996, respectively 60,215 59,805
Deferred costs, net - 2,025 Additional paid-in capital 5,202,558 5,145,655
Retained (deficit) earnings (170,718) 271,915
---------- -------- --------- ---------
Total other assets 207,857 180,871 Total stockholders' equity 5,092,055 5,477,375
--------- --------- --------- ---------
$ 6,015,602 $7,082,620 $ 6,015,602 $ 7,082,620
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
16
<PAGE>
<TABLE>
PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1997, 1996 AND 1995
<CAPTION>
<S> <C> <C> <C>
- ---------
1997 1996 1995
REVENUES $ 7,372,310 $ 8,055,271 $ 7,578,097
COST OF GOODS SOLD 5,610,438 5,592,871 4,992,785
--------- --------- ---------
Gross profit 1,761,872 2,462,400 2,585,312
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 2,296,687 2,128,155 1,937,497
--------- --------- ---------
Operating (loss) income (534,815) 334,245 647,815
INTEREST EXPENSE (27,241) (16,639) (9,598)
Interest Income 104,423 124,104 92,499
------------ ------------ ----------
(Loss) Income before provision for income taxes (457,633) 441,710 730,716
(Benefit) Provision for Income Taxes (15,000) 36,000 150,000
------------ ------------ ----------
Net (loss) income $ (442,633) $ 405,710 $ 580,716
============ ============ ============
(LOSS) INCOME PER COMMON AND COMMON EQUIVALENT SHARE $(.07) $.07 $.10
============== ============== ==============
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING 5,982,210 6,116,569 6,066,366
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
17
<PAGE>
PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
ADDITIONAL RETAINED TOTAL
NUMBER OF COMMON PAID-IN (DEFICIT) STOCKHOLDERS
SHARES STOCK CAPITAL EARNINGS EQUITY
BALANCE, JUNE 30, 1994 5,980,502 $ 59,805 $ 4,997,655 $(714,511) $ 4,342,949
Tax benefit from exercise of
options to purchase common
stock - - 148,000 - 148,000
Net Income - - - 580,716 580,716
---------------- -------------- -------------- ------------ -------------
BALANCE, JUNE 30, 1995 5,980,502 59,805 5,145,655 (133,795) 5,071,665
Net Income - - - 405,710 405,710
---------------- -------------- -------------- ------------ -------------
BALANCE, JUNE 30, 1996 5,980,502 59,805 5,145,655 271,915 5,477,375
Proceeds from exercise of
options to purchase common
stock 41,000 410 56,903 - 57,313
Net loss - - - (442,633) (442,633)
---------------- -------------- -------------- ------------ -------------
BALANCE, JUNE 30, 1997 6,021,502 $ 60,215 $ 5,202,558 $(170,718) $ 5,092,055
================ ============== ============== ============ =============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
-18-
<PAGE>
PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1997 1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (442,633) $ 405,710 $ 580,716
Adjustments to reconcile net (loss) income to net cash provided
by operating activities-
Depreciation and amortization 428,054 308,275 184,849
Deferred income taxes (38,300) (67,000) (52,000)
Changes in assets and liabilities-
Accounts receivable 672,993 276,567 (123,485)
Inventories 286,727 (395,215) 86,378
Prepaid expenses 4,411 (21,810) (4,091)
Refundable income taxes (22,694) (30,276) -
Accounts payable (557,517) 361,467 16,732
Accrued payroll (868) 16,984 (5,527)
Accrued profit-sharing and bonuses (63,938) (46,062) 140,000
Accrued professional services 36,196 505 (3,238)
Accrued income taxes (16,437) (15,401) 47,722
Other accrued liabilities 3,548 22,933 (22,108)
----------- ------------ ------------
Net cash provided by operating activities 289,542 816,677 845,948
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities (30,000) - -
Purchases of property and equipment (444,914) (615,798) (115,602)
Increase in other assets (58,690) (59,844) (47,717)
------------ ----------- ------------
Net cash used in investing activities (533,604) (675,642) (163,319)
------------ ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of capital lease obligation (82,682) (51,068) (26,603)
Tax benefit from stock options exercised - - 148,000
Proceeds from exercise of stock options 57,313 - -
--------------- --------------- ------------
Net cash (used in) provided by financing activities (25,369) (51,068) 121,397
----------- ------------ ------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (269,431) 89,967 804,026
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 2,617,813 2,527,846 1,723,820
----------- ------------ -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 2,348,382 $ 2,617,813 $ 2,527,846
=========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for-
Interest $ 27,241 $ 16,639 $ 9,598
============ ========== ============
Income taxes $ 101,461 $ 151,325 $ 6,278
=========== =========== ============
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTMENT ACTIVITIES:
Capital lease obligation $ - $ 299,180 $ -
============ ============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
-19-
<PAGE>
PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(1) Summary of Significant Accounting Policies
(a) Nature of Business
Precision Optics Corporation, Inc. (the Company) designs,
manufactures and sells optical systems, components and
thin-film coatings. The Company conducts business in one
industry segment only and its customers are primarily
domestic. The Company's products and services fall into two
principal areas: medical products for use by hospitals and
physicians, and advanced optical system design and development
services and products, primarily under contract either
directly or indirectly with the United States Government.
(b) Principles of Consolidation
The accompanying consolidated financial statements include the
accounts of the Company and its two wholly owned subsidiaries.
All significant intercompany accounts and transactions have
been eliminated in consolidation.
(c) Revenues
Revenues for industrial and medical products sold in the
normal course of business are recognized upon shipment.
Contract revenues are recognized under the
percentage-of-completion method. The percentage of completion
is determined by computing the percentage of the actual cost
of work performed to the anticipated total contract costs, or
on the basis of units shipped. When the estimate on a contract
indicates a loss, the Company's policy is to record the entire
loss in the current period.
(d) Cash and Cash Equivalents
The Company includes in cash equivalents all highly liquid
investments with original maturities of three months or less
at the time of acquisition. Cash equivalents at June 30, 1997
and 1996 include approximately $1,529,000 and $1,455,000,
respectively, of United States Treasury bills.
(e) Marketable Securities
Marketable securities consist of equity securities and are
carried at the lower of aggregate cost or market value.
-20-
<PAGE>
PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(Continued)
(f) Inventories
Inventories are stated at the lower of cost
(first-in, first-out) or market and include material,
labor and manufacturing overhead. The components of
inventories are as follows at June 30, 1997 and 1996:
<TABLE>
<CAPTION>
<S> <C> <C>
1997 1996
Raw material $ 1,075,294 $ 1,282,924
Work -in-progress 272,980 502,658
Finished goods 228,693 78,112
------------- --------------
$ 1,576,967 $ 1,863,694
============ ============
</TABLE>
(g) Depreciation and Amortization
The Company provides for depreciation and amortization by
charges to operations, using the straight-line and
declining-balance methods, which allocate the cost of property
and equipment over the following estimated useful lives:
ESTIMATED
ASSET CLASSIFICATION USEFUL LIFE
Machinery and equipment 5-7 years
Leasehold improvements Life of lease
Furniture and fixtures 5 years
Vehicles 3 years
(h) Significant Customers and Concentration of Credit Risk
Statement of Financial Accounting Standards (SFAS) No. 105,
Disclosure of Information About Financial Instruments with
Off-Balance-Sheet Risk and Financial Instruments with
Concentrations of Credit Risk, requires disclosure of any
significant off-balance sheet and credit risk concentrations.
Financial instruments that subject the Company to credit risk
consist primarily of cash and cash equivalents and trade
accounts receivable. The Company places its investments in
highly rated financial institutions. The Company has not
experienced any losses on these investments to date. At June
30, 1997 and 1996, receivables from the Company's largest
customer were approximately 29% and 58% of the total accounts
receivable, respectively. The Company has not experienced any
material losses related to accounts receivable from individual
customers.
-21-
<PAGE>
PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(Continued)
Revenues from the Company's two largest customers were
approximately 38% and 23%, respectively, of total revenues for
the year ended June 30, 1997. Revenues from the Company's
three largest customers were approximately 42%, 14% and 12%,
respectively, of total revenues for the year ended June 30,
1996. Revenues from the Company's two largest customers were
approximately 43% and 18%, respectively, of total revenues for
the year ended June 30, 1995. No other customers accounted for
more than 10% of the Company's revenues in each of the three
years ended June 30, 1997. Approximately 38%, 44% and 45% of
the Company's revenues for the years ended June 30, 1997, 1996
and 1995, respectively, were derived from sales to agencies of
the government or customers that supply agencies of the
government.
(i) Research and Development
Research and development costs, which are expensed as
incurred, are included in selling, general and administrative
expenses and include direct costs plus overhead. Such costs
totaled approximately $428,000, $433,000 and $363,000 for the
years ended June 30, 1997, 1996 and 1995, respectively.
(j) Income (Loss) per Common and Common Equivalent Share
Income (loss) per common and common equivalent share is
computed based on the weighted average number of common and
common equivalent shares (if dilative) outstanding during each
year. The difference between the weighted average shares
outstanding under the primary and fully diluted methods is not
significant.
In March 1997, the Financial Accounting Standards Board (FASB)
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. 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 including the effect on prior periods, will not have a
material effect on its financial statements.
-22-
<PAGE>
PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(Continued)
(k) Stock-Based Compensation
The Company accounts for its stock-based compensation under
Accounting Principals Board Opinion No. 25, Accounting for
Stock Issued to Employees. In October 1995, the FASB issued
SFAS No. 123, Accounting for Stock-Based Compensation, which
is effective for fiscal years beginning after December 15,
1995. SFAS No. 123 establishes a fair-value-based method of
accounting for stock-based compensation plans. The Company has
adopted the disclosure-only alternative under SFAS No. 123,
which required the disclosure of the pro forma effects on
earnings and earnings per share as if the accounting
prescribed by SFAS No. 123 had been adopted, as well as
certain other information.
(l) Foreign Currency Translation
The Company translates certain accounts and financial
statements of its foreign subsidiary in accordance with SFAS
No. 52, Foreign Currency Translation. The functional currency
of the Company's foreign subsidiary is the United States
dollar. Accordingly, translation gains or losses are reflected
in the accompanying consolidated statements of operations and
have not been significant.
(m) Other Assets
Patents and deferred costs are carried at cost, less
accumulated amortization of approximately $71,000 and $60,000
at June 30, 1997 and 1996, respectively. Such costs are
amortized using the straight-line method over their legal or
estimated useful lives, generally five to ten years.
(n) 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.
(2) Line of Credit
At June 30, 1997, the Company had available a demand line of credit of
$500,000 at an interest rate equal to the bank's prime rate (8.5% at
June 30, 1997) plus 0.25%. At June 30, 1997, there
-23-
<PAGE>
PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(Continued)
were no borrowings outstanding under this line of credit. Borrowings
under this line of credit are secured by all assets of the Company. The
line of credit expires on November 30, 1997; however, the Company
anticipates its renewal.
(3) Capital Lease Obligation
At June 30, 1997, future minimum lease payments under capital lease
obligations are as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
FISCAL YEAR AMOUNT
1998 $ 109,000
1999 93,920
2000 72,808
2001 42,474
-----------
Total minimum lease payments 318,202
Amount representing interest (39,257)
-----------
Present value of minimum lease payments 278,945
Less--Current portion 89,532
-----------
$ 189,413
===========
</TABLE>
Capital leases are secured by all assets of the Company under a
security agreement subordinate to the Company's demand line of credit.
(4) Related Party Transactions and Commitments
The Company leases one of its facilities from a corporation owned by an
officer of the Company. The lease, that was renewed during fiscal 1995,
terminates in December 1999 and requires lease payments of $9,000 per
month. The Company may terminate the lease as of the end of any
calendar year during the term by providing written notice to the lessor
by June 30 of such year.
Total future minimum rental payments under all operating leases for
fiscal 1998 are $223,000.
Rent expense on operating leases was approximately $213,000, $187,000
and $144,000 for the years ended June 30, 1997, 1996 and 1995,
respectively.
-24-
<PAGE>
PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(Continued)
The Company paid fees to a director of approximately $60,000 during
each of fiscal 1997, 1996 and 1995 for consulting services. Another
director is a partner in a law firm that has performed legal services
for the Company during fiscal 1997, 1996 and 1995.
(5) Stockholders' Equity
In conjunction with previous equity offerings, the Company issued
warrants to acquire a total of 320,000 shares of common stock, of which
warrants for a total of 100,000 shares expired during fiscal 1997 and
1996. Warrants for 220,000 shares expire on October 23, 1998 and have
an exercise price of $1.375 per share. As of June 30, 1997, all of
these warrants were exercisable.
During 1989, the stockholders approved a stock option plan (the Plan)
for key employees. The Plan, as amended, authorizes the grant of
options to purchase up to 1,110,000 shares of the Company's common
stock at an exercise price not less than 100% of the fair market value
per share at the date of grant. Options granted are exercisable for a
period determined by the Board of Directors, not to exceed 10 years
from the date of grant. At June 30, 1997, 10,748 shares of common stock
were available for future grants under the Plan.
The following is a summary of transactions in the Plan for the three
years ended June 30, 1997:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
NUMBER OPTION PRICE WEIGHTED AVERAGE
OF SHARES PER SHARE EXERCISE PRICE
Options outstanding, June 30, 1994 295,000 $ 3.50-$5.6875 $ 4.76
Granted 395,000 1.375 1.38
Canceled (295,000) 3.50-5.6875 4.76
----------- ------------- ---------------
Options outstanding, June 30, 1995 395,000 1.375 1.38
Granted 60,000 1.375-1.50 1.40
---------- -------------- ---------------
Options outstanding, June 30, 1996 455,000 1.375-1.50 1.38
Granted 190,000 1.5625-2.1875 1.89
Exercised (41,000) 1.3750-1.5625 1.40
--------- --------------- ---------------
Options outstanding, June 30, 1997 604,000 1.375 - 2.1875 1.54
--------- -------------- -------------
Options exercisable, June 30, 1997 308,500 $ 1.375 - $2.1875 1.46
========= ================ =============
</TABLE>
In addition, the Company has granted options outside the Plan,
primarily to directors and consultants at 100% of the fair market value
per share at the date of grant. During fiscal 1995, options for 30,000
shares at $1.375 per share, including options for 15,000 shares issued
to replace existing options, were granted to two directors of the
Company, which became exercisable in four equal annual installments
beginning on
-25-
<PAGE>
PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(Continued)
December 15, 1994. Also during fiscal 1995, options for 35,000 shares
at $1.375 per share, including options for 15,000 shares issued to
replace existing options, were granted to two consultants and one
former employee of the Company; 15,000 such options were exercisable at
December 15, 1994, and options for 20,000 shares became exercisable in
four equal annual installments beginning on December 15, 1994. During
fiscal 1996, options for 60,000 shares at $1.30 per share were granted
to a consultant to the Company, which became exercisable in five equal
annual installments beginning on July 31, 1995. As of June 30, 1997,
options outside the Plan for 221,617 shares were outstanding at
exercise prices ranging from $.067 to $5.6875 per share, with a
weighted average exercise price of $1.45 per share, of which 173,117
were exercisable within the same exercise price range.
The Company has computed the pro forma disclosures required under SFAS
No. 123 for all stock options granted in 1997 and 1996 using the Black-
Scholes option pricing model prescribed by SFAS No. 123.
The assumption used and the weighted average information for the years
ended June 30, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
YEARS ENDED
1997 1996
Risk-free interest rates 6.95% 6.83%
Expected dividend yield - -
Expected lives 7 years 7 years
Expected volatility 87% 87%
Weighted-average remaining contractual life of
options outstanding 8.16 years 8.57 years
The effect of applying SFAS No. 123 would be as follows:
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1997 1996
Net (loss) income
As reported $ (442,633) $ 405,710
Pro forma (520,373) 391,610
Net (loss) income per share
As reported $ (.07) $ .07
Pro forma (.09) .06
</TABLE>
-26-
<PAGE>
PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(Continued)
(6) Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes, whereby a deferred tax asset or liability
is measured by the enacted tax rates that would be in effect when any
differences between the financial statement and tax bases of assets and
liabilities reverse.
The (benefit) provision for income taxes in the accompanying
consolidated statements of operations consists of the following for the
three years ended June 30, 1997:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1997 1996 1995
Current-
Federal $ 26,300 $ 67,000 $ 52,000 -
State 1,000 3,000 -
Foreign (4,000) 33,000 2,000
---------- ---------- -----------
23,300 103,000 54,000
---------- ---------- -----------
Deferred-
Federal (34,300) (57,000) (44,000)
State (4,000) (10,000) (8,000)
---------- ---------- ----------
(38,300) (67,000) (52,000)
---------- ---------- ----------
Charge in lieu of income taxes - - 148,000
---------- ---------- -----------
$ (15,000) $ 36,000 $ 150,000
========== ======== ==========
</TABLE>
A reconciliation of the federal statutory rate to the Company's
effective tax rate for the three years ended June 30, 1997 is as
follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
1997 1996 1995
Income tax (benefit) provision at federal statutory rate (34.0)% 34.0% 34.0%
Increase (decrease) in tax resulting from -
Utilization of operating loss carryforwards - - (3.1)
Temporary items with no tax benefit 6.1 7.3 -
Tax credits utilized - (4.1) (6.4)
Change in valuation allowance 22.9 (35.5) (7.1)
Effect of state taxes (4.6) - -
Prior year tax adjustments 5.2 5.0 -
Other 1.1 1.5 3.1
--- --- ---
(3.3)% 8.2% 20.5%
====== ==== =====
Effective tax rate
</TABLE>
-27-
<PAGE>
PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(Continued)
The components of the net deferred tax asset at June 30, 1997 and 1996
are approximately as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1997 1996
Reserves and accruals not yet deducted for tax $ 311,000 $ 175,000
purposes
Other temporary differences 24,000 17,000
------- -------
335,000 192,000
Valuation allowance (178,000) (73,000)
--------- --------
Net deferred tax asset $ 157,000 $ 119,000
=========== =========
</TABLE>
The Company has provided a valuation allowance to reduce the net
deferred tax asset to an amount the Company believes it is "more likely
than not" to be realized. The net deferred tax asset represents the
amount that can be carried back to offset the prior years' tax
liabilities, if necessary.
(7) Profit Sharing Plan
The Company has a defined contribution profit-sharing plan that covers
all eligible employees. The Company has accrued and expensed an
employer contribution to this plan of $50,000 in fiscal 1996 and
$50,000 in fiscal 1995. No employer contributions were made in fiscal
1997.
-28-
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE: None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT: The Company
will furnish to the Securities and Exchange Commission a
definitive Proxy Statement (the "Proxy Statement") not later
than 120 days after the close of its fiscal year ended June
30, 1997. The information required by this item is
incorporated herein by reference to the Proxy Statement.
ITEM 10. EXECUTIVE COMPENSATION: The information required by this
item is incorporated herein by reference to the Proxy
Statement.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT: The information required by this item is
incorporated herein by reference to the Proxy Statement.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS: The
information required by this item is incorporated herein by
reference to the Proxy Statement.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K:
<TABLE>
<CAPTION>
<S> <C>
(a) Exhibits.
The exhibits listed below are filed with or
incorporated by reference in this report.
3.1 Articles of Organization of the Company<F1>
3.2 By-laws of Precision Optics Corporation, Inc.<F2>
4.1 Specimen common stock certificate<F1>
4.2 Private Placement Selling Agent Common Stock Warrant No. 4 dated April 28, 1992
issued to James L. Davis and Schedule 1 of Omitted Documents<F3>
4.3 Initial Public Offering Common Stock Purchase Warrant No. 3 dated July 10, 1992
issued to John C. Michalak and Schedule 2 of Omitted Documents<F3>
4.4 Warrant No. U-1 to Purchase Shares of Common Stock of the Company dated
January 24, 1992 issued to Nathan Newman and Schedule 3 of Omitted Documents<F3>
4.5 Promissory Note dated December 5, 1991 between the Company and The First
National Bank of Boston<F4>
4.6 Agreement Restricting Sale of Stock dated January 15, 1992 by and among Richard
E. Forkey, the Company, Kennedy, Mathews, Landis, Healy & Pecora Incorporated,
and Equity Securities Trading Co., Inc.<F3>
10.1 Lease dated June 29, 1984 between the Company and
Equity, First Amendment to Commercial Lease dated
June 25, 1990, and letter agreement dated June 25,
1990 renewing such lease<F1>
10.2 Precision Optics Corporation, Inc. 1989 Stock Option Plan amended to date (the
"Plan")<F5>
10.3 Three separate life insurance policies on the life of Richard E. Forkey<F1>
10.4 Master Lease Finance Agreement dated November 3, 1993 between the Company
and BancBoston Leasing<F5>
10.5 Second Amendment to Commercial Lease between the Company and Equity dated
December 9, 1994<F6>
-29-
<PAGE>
10.6 Lease dated November 1, 1995 between the Company and Janice M. Bouchard,
Trustee of Authority Drive Realty Trust<F6>
21 Subsidiaries of Precision Optics Corporation, Inc.<F6>
27 Financial Data Schedule.
99 Important Factors Regarding Forward-Looking Statements<F7>
</TABLE>
[FN]
<F1> Incorporated herein by reference to the Company's Registration
Statement on Form S-18 (No. 33-36710-B).
<F2> Incorporated herein by reference to the Company's 1991 Annual Report
on Form 10-KSB.
<F3> Incorporated herein by reference to the Company's 1992 Annual Report
on Form 10-KSB.
<F4> Incorporated herein by reference to the Company's Registration
Statement on Form S-1 (No. 33-43929).
<F5> Incorporated herein by reference to the Company's 1994 Annual Report
on Form 10-KSB.
<F6> Incorporated herein by reference to the Company's 1996 Annual Report
on Form 10-KSB.
<F7> Incorporated herein by reference to the Company's Quarterly Report
on Form 10-QSB for the quarter ended March 31, 1996.
</FN>
(b) Reports on Form 8-K.
None.
-30-
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
Date: September 16, 1997 PRECISION OPTICS CORPORATION, INC.
By:/s/ Richard E. Forkey
Richard E. Forkey
Chairman of the Board and
Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
By:/s/ Richard E. Forkey By:/s/ Jack P. Dreimiller
Richard E. Forkey Jack P. Dreimiller
President, Treasurer, and Senior Vice
Director (Principal President, Finance
Executive Officer) and Chief Financial
Officer(Principal
Financial and
Accounting Officer)
September 16, 1997 September 16, 1997
------------------------------ ------------------
Date Date
By:/s/ Joel R. Pitlor By:/s/ Edward A. Benjamin
Joel R. Pitlor Edward A. Benjamin
Director Director
September 16, 1997 September 16, 1997
----------------------------- ------------------
Date Date
By:/s/ Robert R. Shannon
Robert R. Shannon
Director
September 16, 1997
Date
-31-
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
INDEX TO EXHIBITS
3.1 Articles of Organization of the Company<F1>
3.2 By-laws of Precision Optics Corporation, Inc.<F2>
4.1 Specimen common stock certificate<F1>
4.2 Private Placement Selling Agent Common Stock Warrant No. 4 dated April 28,
1992 issued to James L. Davis and Schedule 1 of Omitted Documents<F3>
4.3 Initial Public Offering Common Stock Purchase Warrant No. 3 dated July 10,
1992 issued to John C. Michalak and Schedule 2 of Omitted Documents<F3>
4.4 Warrant No. U-1 to Purchase Shares of Common Stock of the Company dated
January 24, 1992 issued to Nathan Newman and Schedule 3 of Omitted
Documents<F3>
4.5 Promissory Note dated December 5, 1991 between the Company and The First
National Bank of Boston<F4>
4.6 Agreement Restricting Sale of Stock dated January 15, 1992 by and among
Richard E. Forkey, the Company, Kennedy, Mathews, Landis, Healy & Pecora
Incorporated, and Equity Securities Trading Co., Inc.<F3>
10.1 Lease dated June 29, 1984 between the Company and
Equity, First Amendment to Commercial Lease dated
June 25, 1990, and letter agreement dated June 25,
1990 renewing such lease<F1>
10.2 Precision Optics Corporation, Inc. 1989 Stock Option Plan amended to date (the
"Plan")<F5>
10.3 Three separate life insurance policies on the life of Richard E. Forkey<F1>
10.4 Master Lease Finance Agreement dated November 3, 1993 between the
Company and BancBoston Leasing<F5>
10.5 Second Amendment to Commercial Lease between the Company and Equity
dated December 9, 1994<F6>
10.6 Lease dated November 1, 1995 between the Company and Janice M. Bouchard,
Trustee of Authority Drive Realty Trust<F6>
21 Subsidiaries of Precision Optics Corporation, Inc.<F6>
27 Financial Data Schedule.
99 Important Factors Regarding Forward-Looking Statements<F7>
<FN>
<F1> Incorporated herein by reference to the Company's Registration Statement on Form S-18
(No. 33-36710-B).
<F2> Incorporated herein by reference to the Company's 1991 Annual Report on Form 10-KSB.
<F3> Incorporated herein by reference to the Company's 1992 Annual Report on Form 10-KSB.
<F4> Incorporated herein by reference to the Company's Registration Statement on Form S-1
(No. 33-43929).
<F5> Incorporated herein by reference to the Company's 1994 Annual Report on Form 10-KSB.
<F6> Incorporated herein by reference to the Company's 1996 Annual Report on Form 10-KSB.
<F7>7 Incorporated herein by reference to the Company's Quarterly Report on Form 10-QSB for the
quarter ended March 31, 1996.
</FN>
</TABLE>
-32-
<PAGE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<CAPTION>
<S> <C>
<ARTICLE>5
<MULTIPLIER>1
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> JUN-30-1997
<CASH> 2,348,382
<SECURITIES> 30,000
<RECEIVABLES> 466,811
<ALLOWANCES> 69,000
<INVENTORY> 1,576,967
<CURRENT-ASSETS> 4,672,703
<PP&E> 3,062,620
<DEPRECIATION> 1,927,578
<TOTAL-ASSETS> 6,015,602
<CURRENT-LIABILITIES> 734,134
<BONDS> 278,945
0
0
<COMMON> 60,215
<OTHER-SE> 5,031,840
<TOTAL-LIABILITY-AND-EQUITY> 6,015,602
<SALES> 7,372,310
<TOTAL-REVENUES> 7,372,310
<CGS> 5,610,438
<TOTAL-COSTS> 5,610,438
<OTHER-EXPENSES> 2,296,687
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 27,241
<INCOME-PRETAX> (457,633)
<INCOME-TAX> (15,000)
<INCOME-CONTINUING> (442,633)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (442,633)
<EPS-PRIMARY> (.07)
<EPS-DILUTED> (.07)
-33-
<PAGE>
</TABLE>
