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 September 30, 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 September 30, 1997 was 6,046,502 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
September 30, 1997
and June 30, 1997 (unaudited)
Consolidated Statements of Operations - 2
Three Months Ended September 30, 1997
and September 30, 1996(unaudited)
Consolidated Statements of Cash Flows - 3
Three Months Ended September 30, 1997
and September 30, 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
(a) Exhibits - None
(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
September 30, 1997 June 30, 1997
-------------- -------------
CURRENT ASSETS
Cash and Cash Equivalents $1,898,756 $2,348,382
Marketable Securities 195,000 30,000
Accounts Receivable, Net 470,583 466,811
Inventories 1,502,947 1,576,967
Deferred Tax Asset 92,300 157,300
Prepaid Expenses 13,197 40,273
Refundable Income Taxes --- 52,970
----------- -----------
Total Current Assets 4,172,783 4,672,703
--------- ---------
PROPERTY AND EQUIPMENT 3,195,858 3,062,620
Less: Accumulated Depreciation 2,007,755 1,927,578
--------- ---------
Net Property and Equipment 1,188,103 1,135,042
--------- ---------
OTHER ASSETS 227,673 207,857
---------- ---------
TOTAL ASSETS $5,588,559 $6,015,602
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable $ 253,661 $ 271,911
Accrued Payroll 54,181 81,122
Accrued Professional Services 37,378 85,556
Accrued Profit Sharing and Bonuses 19,036 30,000
Accrued Income Taxes 18,946 18,946
Accrued Vacation 45,266 64,903
Accrued Warranty Expense 50,000 50,000
Current Portion of Capital Lease Obligation 91,333 89,532
Other Accrued Liabilities 8,675 42,164
---------- ---------
Total Current Liabilities 578,476 734,134
--------- ---------
CAPITAL LEASE OBLIGATION 165,893 189,413
--------- ----------
STOCKHOLDERS' EQUITY
Common Stock, $.01 par value-
Authorized -- 10,000,000 shares
Issued and Outstanding -- 6,046,502 shares and
6,021,502 shares at September 30, 1997
June 30, 1997, respectively 60,465 60,215
Additional Paid-in Capital 5,236,683 5,202,558
Unrealized Gain on Marketable Securities 100,000 ---
Accumulated Deficit (552,958) (170,718)
---------- ----------
Total Stockholders' Equity 4,844,190 5,092,055
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS'EQUITY $5,588,559 $6,015,602
========= =========
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Page 1 of 9
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PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 1997 AND SEPTEMBER 30, 1996
(UNAUDITED)
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1997 1996
---- ----
REVENUES $ 983,708 $2,638,374
COST OF GOODS SOLD 749,816 1,751,022
--------- ----------
GROSS PROFIT 233,892 887,352
SELLING GENERAL and
ADMINISTRATIVE EXPENSES 635,791 561,736
----------- ----------
OPERATING INCOME (LOSS) (401,899) 325,616
INTEREST EXPENSE (5,532) (8,111)
INTEREST INCOME 25,191 26,917
----------- -----------
INCOME (LOSS) BEFORE PROVISION
FOR INCOME TAXES (382,240) 344,422
(BENEFIT) PROVISION FOR INCOME TAXES --- 86,000
----------- ------------
NET INCOME (LOSS) ($382,240) $ 258,422
======== ===========
INCOME (LOSS) PER COMMON and
COMMON EQUIVALENT SHARE ($0.06) $0.04
===== =====
WEIGHTED AVERAGE COMMON and
COMMON EQUIVALENT SHARES
OUTSTANDING 6,040,252 6,057,395
========= =========
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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 THREE MONTHS ENDED SEPTEMBER 30, 1997 AND SEPTEMBER 30, 1996
(UNAUDIRED)
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1997 1996
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) $ (382,240) $ 258,422
Adjustments to Reconcile Net Income (Loss) to Net
Cash Used in Operating Activities -
Depreciation and Amortization 87,956 94,079
Deferred Income Taxes --- (38,000)
Changes in Assets and Liabilities-
Accounts Receivable (3,772) (114,884)
Inventories 74,020 24,405
Prepaid Expenses 27,076 (12,887)
Refundable Income Taxes 52,970 ---
Accounts Payable (18,250) (316,069)
Accrued Payroll (26,941) (29,616)
Accrued Professional Services (48,178) (15,530)
Accrued Profit Sharing and Bonuses (10,964) (23,112)
Accrued Income Taxes --- 88,955
Other Accrued Liabilities (53,126) (62,923)
----------- ---------
Net Cash Used in
Operating Activities (301,449) (147,160)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital Expenditures (133,238) (57,135)
Increase in Other Assets (27,595) ---
----------- ----------
Net Cash Used in Investing Activities (160,833) (57,135)
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of Capital Lease Obligation (21,719) (20,057)
Proceeds from Exercise of Stock Options 34,375 ---
---------- -----------
Net Cash Provided By (Used in)
Financing Activities 12,656 (20,057)
---------- -----------
NET DECREASE IN CASH AND
CASH EQUIVALENTS (449,626) (224,352)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 2,348,382 2,617,813
----------- ------------
CASH AND CASH EQUIVALENTS AT END
OF PERIOD $1,898,756 $2,393,461
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash Paid for-
Interest $ 5,532 $ 8,111
============ ===========
Income Taxes $ --- $ 35,912
============ ===========
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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
first quarter of the Company's fiscal year 1998. 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, 1997 together with the auditors' report
filed under cover of the Company's 1997 Annual Report on Form 10-KSB.
Income (loss) per common and common equivalent share is computed on the
weighted average number of common and common equivalent shares (if
dilutive) outstanding during each year. The difference between the
weighted average shares outstanding under the primary and fully dilutive
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
periods 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 the quarter ending December 31, 1997 and 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.
2. MARKETABLE SECURITIES
The Company applies SFAS No. 115, Accounting for Certain Investments
in Debt and Equity Securities. Accordingly, the Company's investments
in marketable securities are classified as available-for-sale.
Marketable securities had a cost of $30,000 at June 30, 1997 and
September 30, 1997 and a market value of $30,000 and $195,000,
respectively. The unrealized net gain on marketable securities of
$100,000 (net of income taxes) has been reflected as a separate
component of stockholders' equity at September 30, 1997.
Page 4 of 9
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3. INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or
market and consists of the following:
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September 30, 1997 June 30, 1997
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Raw Materials $ 902,104 $1,075,294
Work-In-Process 483,408 272,980
Finished Goods and Components 117,435 228,693
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Total Inventories $1,502,947 $1,576,967
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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 Annual Report on Form 10-KSB for the period ending June 30, 1997
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 three months ended September 30, 1997, the Company's cash and
cash equivalents decreased by approximately $450,000 to $1,899,000. The
decrease in cash and cash equivalents was due to cash used by operating
activities of approximately $301,000, capital expenditures of approximately
$133,000, repayment of debt of approximately $22,000, and an increase in other
assets (primarily patents) of $28,000, partially offset by proceeds received
from exercise of stock options of approximately $34,000.
Marketable securities increased from $30,000 at June 30, 1997 to
$195,000 at September 30, 1997, which represents an adjustment to fair market
value as of September 30, 1997. A corresponding unrealized holding gain of
$100,000 (net of income taxes) has been reflected in stockholders' equity, in
accordance with generally accepted accounting principles. Realized gains or
losses, if any, resulting from sales of marketable securities will be reflected
in earnings at the time of sale. Since these securities are not heavily traded
and subject to volatility, the market value at September 30, 1997 is not
necessarily indicative of the future cash flows that would result from liquida-
tion of the Company's position in such securities.
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 films 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.
Page 6 of 9
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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.
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 the three months ending September 30, 1997 decreased
by $1,654,666, or 62.7% from the same period in the prior year, due primarily to
lower sales of medical products (down 61%), and lower sales of non-medical
products (down 65%). The reduction in medical products sales was due to lower
shipments of endocouplers, partially offset by higher sales of endoscopes. The
higher shipments of endocouplers in the prior year was mainly attributable to
sales to one customer representing approximately 38% of total Company revenues
for the quarter ended September 30, 1996. No sales were made to this customer
in the quarter ended September 30, 1997. As previously reported, additional
orders from this customer will be deferred until it consumes its existing stock
of the Company's endocouplers. The reduction in non-medical sales was due
primarily to lower sales of night vision products due to successful completion
during the prior fiscal year of two government development subcontracts, and
lower shipments on two government production subcontracts.
Revenues from the Company's two largest customers were approximately
25% and 13% of total revenues for the quarter ended September 30, 1997, and
approximately 38% and 36% of total revenues for the quarter ended September 30,
1996. No other customers accounted for more than 10% of the Company's revenues
during those periods.
For the quarter ended September 30, 1997, approximately 28% of the
Company's total revenues were derived from production and development contracts
and subcontracts involving the Government and its agencies compared to
approximately 36% for the corresponding period of the prior year. 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.
Gross profit for the three months ending September 30, 1997
decreased from the same period in the prior year by $653,460,
and decreased as a percentage of revenues
Page 7 of 9
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from 33.6% in fiscal year 1997 to 23.8% in the current period. The decrease
in gross profit was due mainly to the lower sales volume in the current quarter.
Selling, general and administrative expenses increased by $74,055, or
13.2% from the same period in the prior year due primarily to higher research
and development expenses.
Interest expense relates primarly 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 in fiscal year 1997
than the federal statuory rate primarily due to recognition of available tax
credits and future tax deductions not previously benefited. No income tax
provision was recorded in the first quarter of fiscal year 1998 because of the
loss.
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. Significant
progress has been achieved in the Company's development efforts for Wavelength
Divison Multiplexer (WDM) optical filters, which are used in telecommunications
systems. Continued success in these efforts is expected to result in prototype
WDM filters by the end of the calendar year and optical filter sales in the
first calendar quarter of 1998.
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 - None
(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: November 3, 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
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<S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> SEP-30-1997
<CASH> 1,898,756
<SECURITIES> 195,000
<RECEIVABLES> 470,583
<ALLOWANCES> 0
<INVENTORY> 1,502,947
<CURRENT-ASSETS> 4,172,783
<PP&E> 3,195,858
<DEPRECIATION> 2,007,755
<TOTAL-ASSETS> 5,588,559
<CURRENT-LIABILITIES> 578,476
<BONDS> 257,226
0
0
<COMMON> 60,465
<OTHER-SE> 4,848,725
<TOTAL-LIABILITY-AND-EQUITY> 5,588,559
<SALES> 983,708
<TOTAL-REVENUES> 983,708
<CGS> 749,816
<TOTAL-COSTS> 749,816
<OTHER-EXPENSES> 635,791
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,532
<INCOME-PRETAX> (382,240)
<INCOME-TAX> 0
<INCOME-CONTINUING> (382,240)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (382,240)
<EPS-PRIMARY> (.06)
<EPS-DILUTED> (.06)
</TABLE>
