FORM 10-QSB
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
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)
(978) 630-1800
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(Issuer's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes (X) No ( )
The number of shares outstanding of issuer's common stock, par value $.01 per
share, at March 31, 1998 was 6,118,619 shares.
Transitional Small Business Disclosure Format (check one):
Yes ( ) No (X)
PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
INDEX
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Page
PART I. FINANCIAL INFORMATION:
Item 1 Consolidated Financial Statements
Consolidated Balance Sheets - 1
March 31, 1998
and June 30, 1997 (unaudited)
Consolidated Statements of Operations - 2
Quarter Ended March 31, 1998
and March 31, 1997(unaudited)
Nine Months Ended March 31, 1998
and March 31, 1997 (unaudited)
Consolidated Statements of Cash Flows - 3
Nine Months Ended March 31, 1998
and March 31, 1997(unaudited)
Notes to Consolidated Financial Statements 4-5
Item 2
Management's Discussion and Analysis of 6-9
Financial Condition and Results of Operations
PART II. OTHER INFORMATION
Items 1-5 Not Applicable
Item 6 Exhibits and Reports on Form 8-K 10
(a) Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K - None
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PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
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ASSETS
March 31, 1998 June 30, 1997
-------------- -------------
CURRENT ASSETS
Cash and Cash Equivalents $1,215,619 $2,348,382
Marketable Securities 65,000 30,000
Accounts Receivable, Net 551,000 466,811
Inventories 1,197,199 1,576,967
Deferred Tax Asset 135,300 157,300
Prepaid Expenses 101,813 40,273
Refundable Income Taxes --- 52,970
----------- -----------
Total Current Assets 3,265,931 4,672,703
--------- ---------
PROPERTY AND EQUIPMENT 3,444,316 3,062,620
Less: Accumulated Depreciation 2,211,875 1,927,578
--------- ---------
Net Property and Equipment 1,232,441 1,135,042
--------- ---------
OTHER ASSETS 287,543 207,857
---------- ---------
TOTAL ASSETS $4,785,915 $6,015,602
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable $ 228,564 $ 271,911
Accrued Payroll 97,114 81,122
Accrued Professional Services 47,490 85,556
Accrued Profit Sharing and Bonuses 23,968 30,000
Accrued Income Taxes 3,924 18,946
Accrued Vacation 72,136 64,903
Accrued Warranty Expense 50,000 50,000
Current Portion of Capital Lease Obligation 113,292 89,532
Other Accrued Liabilities 49,563 42,164
---------- ---------
Total Current Liabilities 686,051 734,134
--------- ---------
CAPITAL LEASE OBLIGATION, Net of Current Portion 229,358 189,413
--------- ----------
STOCKHOLDERS' EQUITY
Common Stock, $.01 par value-
Authorized -- 10,000,000 shares
Issued and Outstanding -- 6,118,619 and
6,021,502 shares at March 31, 1998
June 30, 1997, respectively 61,186 60,215
Additional Paid-in Capital 5,246,679 5,202,558
Unrealized Gain on Marketable Securities 33,000 ---
Accumulated Deficit (1,470,359) (170,718)
---------- ----------
Total Stockholders' Equity 3,870,506 5,092,055
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS'EQUITY $4,785,915 $6,015,602
========= =========
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Page 1 of 10
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PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THIRD QUARTER AND NINE MONTHS ENDED
MARCH 31, 1998 AND 1997
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-THIRD QUARTER- -NINE MONTHS-
1998 1997 1998 1997
---- ---- ----- -----
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
REVENUES $1,131,310 $1,349,222 $3,196,238 $6,142,887
COST OF GOODS SOLD 983,067 1,198,500 2,694,348 4,504,439
---------- ---------- --------- ----------
GROSS PROFIT 148,243 150,722 501,890 1,638,448
SELLING, GENERAL and
ADMINISTRATIVE EXPENSES 630,327 533,029 1,943,734 1,626,843
----------- ---------- --------- ---------
OPERATING INCOME (LOSS) (482,084) (382,307) (1,441,844) 11,605
GAIN ON SALE OF MARKETABLE
SECURITIES 102,392 --- 102,392 ---
INTEREST EXPENSE (7,773) (6,379) (19,029) (21,281)
INTEREST INCOME 13,823 30,008 58,840 78,862
----------- ----------- ---------- ---------
INCOME (LOSS) BEFORE PROVISION
FOR INCOME TAXES (373,642) (358,678) (1,299,641) 69,186
PROVISION (BENEFIT) FOR INCOME TAXES --- (89,750) --- 17,250
----------- ------------ ----------- ---------
NET INCOME (LOSS) ($373,642) ($268,928) ($1,299,641) $51,936
======== =========== =========== ========
BASIC EARNINGS (LOSS) PER SHARE ($0.06) ($0.04) ($0.21) $0.01
===== ====== ===== ======
DILUTED EARNINGS (LOSS) PER SHARE ($0.06) ($0.04) ($0.21) $0.01
===== ====== ===== ======
COMMON SHARES OUTSTANDING 6,070,541 5,980,502 6,051,214 5,980,502
========= ========= ========= =========
COMMON SHARES OUTSTANDING
ASSUMING DILUTION 6,070,541 5,980,502 6,051,214 6,060,700
========= ========= ========= =========
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Page 2 of 10
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PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
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1998 1997
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) $(1,299,641) $ 51,936
Adjustments to Reconcile Net Income (Loss) to Net
Cash (Used in) Provided By Operating Activities -
Depreciation and Amortization 310,595 331,200
Deferred Income Taxes --- (7,600)
Gain on Sale of Marketable Securities (102,392) ---
Changes in Assets and Liabilities-
Accounts Receivable (84,189) 332,561
Inventories 379,768 (1,658)
Prepaid Expenses (61,540) (17,562)
Refundable Income Taxes 52,970 (21,144)
Accounts Payable (43,347) (538,798)
Accrued Payroll 15,992 (13,854)
Accrued Professional Services (38,066) (8,068)
Accrued Profit Sharing and Bonuses (6,032) (50,058)
Accrued Income Taxes (15,022) (6,873)
Other Accrued Liabilities 14,632 5,548
----------- ---------
Net Cash (Used in) Provided By
Operating Activities (876,272) 55,630
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds From Sale of Marketable Securities 122,392 ----
Purchases of Property and Equipment (242,129) (333,588)
Increase in Other Assets (105,984) (37,161)
----------- ----------
Net Cash Used in Investing Activities (225,721) (370,749)
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of Capital Lease Obligation (75,862) (61,390)
Proceeds from Exercise of Stock Options and Warrants 45,092 --- ---
---------- -----------
Net Cash Used in
Financing Activities (30,770) (61,390)
---------- -----------
NET DECREASE IN CASH AND
CASH EQUIVALENTS (1,132,763) (376,509)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 2,348,382 2,617,813
----------- ------------
CASH AND CASH EQUIVALENTS AT END
OF PERIOD $1,215,619 $2,241,304
========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash Paid for-
Interest $ 19,029 $ 21,281
============ ============
Income Taxes $ 39,608 $ 52,866
============ ============
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTMENT ACTIVITIES:
Capital Lease Obligation $ 139,567 $ ---
============ ============
Page 3 of 10
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PRECISION OPTICS CORPORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements include the accounts
of Precision Optics Corporation, Inc. and its wholly-owned subsidiaries.
All significant intercompany accounts and transactions have been
eliminated in consolidation.
These financial statements have been prepared by the Company, without
audit, and reflect normal recurring adjustments which, in the opinion of
management, are necessary for a fair statement of the results of the
third quarter of the Company's fiscal year 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.
Basic earnings per share were computed by dividing net income (loss) by
the weighted average number of shares of common stock outstanding during
the period. Diluted earnings per share for the nine months ended March
31, 1997 include the effect of outstanding stock options of 80,198
shares, computed in accordance with the treasury stock method. For the
quarter and nine months ended March 31, 1998, the effect of stock options
was antidilutive; therefore they were not included in the computation of
diluted earnings per share. The Company has adopted SFAS No. 128,
Earnings per Share, effective December 15, 1997. As a result, the
Company's reported earnings per share for fiscal year 1997 were
restated; however, this had no effect on previously reported earnings
per share data.
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 and $10,000 at June 30, 1997
and March 31, 1998, respectively, and a market value of $30,000 and
$65,000, respectively. During the quarter ending March 31, 1998, the
Company sold securities with a total cost of $20,000 and realized a gain
of $102,392. The unrealized net gain on marketable securities of
$33,000 (net of income taxes) has been reflected as a separate
component of stockholders' equity at March 31, 1998.
Page 4 of 10
<PAGE>
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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March 31, 1998 June 30, 1997
------------------ -------------
Raw Materials $ 695,872 $1,075,294
Work-In-Process 389,211 272,980
Finished Goods and Components 112,116 228,693
-------------- --------------
Total Inventories $1,197,199 $1,576,967
============== ==============
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Page 5 of 10
<PAGE>
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 nine months ended March 31, 1998, the Company's cash and
cash equivalents decreased by approximately $1,133,000 to $1,216,000. The
decrease in cash and cash equivalents was due to cash used by operating
activities of approximately $876,000, capital expenditures of approximately
$242,000, repayment of debt of approximately $76,000, and an increase in other
assets (primarily patents) of $106,000, partially offset by proceeds received
from exercise of stock options amd warrants of approximately $45,000, and
proceeds received from sale of marketable securities of approximately $122,000.
During the quarter ending December 31, 1997, the Company entered into
a five-year capital lease obligation for the acquisition of manufacturing
equipment totaling approximately $140,000.
Marketable securities increased from $30,000 at June 30, 1997 to
$65,000 at March 31, 1998, which represents adjustments for sales during the
period and adjustments to fair market value as of March 31, 1998. A
corresponding unrealized holding gain of $33,000 (net of income taxes) has been
reflected in stockholders' equity, in accordance with generally accepted
accounting principles. A realized gain of approximately $102,000 resulting from
sales of marketable securities was reflected in earnings for the quarter
ending March 31, 1998. Since these securities are not heavily traded
and subject to volatility, the market value at March 31, 1998 is not
necessarily indicative of the future cash flows that would result from liquida-
tion of the Company's position in such securities.
Page 6 of 10
<PAGE>
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 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.
Furthermore, depending upon the market acceptance of the Company's
products, the Company believes that it may need 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. Under the line of credit
agreement, the Company is required to maintain certain financial ratios
(Debt Service Coverage, Leverage, Current Ratio), and must maintain a minimum
cash liquidity of $1,000,000. There can be no assurance that the Company will
be able to comply with all of the terms of such agreement. As of March 31,
1998, there were no borrowings outstanding under the line of credit.
The Company has no material unused sources of liquidity other than its
cash and cash equivalents, marketable securities, accounts receivable and
available lines of credit. If these liquidity sources, along with revenues
from operations, are not sufficient to fund operations or growth, the Company
will require additional financing. The timing and amount of additional
financing requirements depend on a number of factors, including the status of
development and commercialization efforts, the cost of equipment and personnel
to support manufacturing of new and existing products, and the amount of working
capital necessary to start up and maintain operations supporting new products.
The Company may seek additional funds through public or private equity or debt
financing. There can be no assurance that such funds will be available on
satisfactory terms, if at all. Lack of necessary funds may require the Company
to delay, scale back, or eliminate some or all of its development efforts.
Results of Operations
Total revenues for the third quarter and for the nine months ended
March 31, 1998 decreased by $217,912 or 16.2% and $2,946,649 or 48.0%,
respectively, over the same periods in the prior year.
The revenue decrease from the prior year for the third quarter was
due to lower sales of night vision products (down 69%), partially offset by
higher sales of medical
Page 7 of 10
<PAGE>
products (up 43%) and higher sales of industrial and thin film products
(up 160%). See explanation below for variation in night vision sales. The
increae in medical sales was due to higher shipments of micro couplers,
endoscopes, and customer-funded development of a new class of stereo endoscope.
The increase in industrial and thin film sales was due to revenues attributable
to a government-funded thin film development contract which was concluded in
March 1998.
The revenue decrease from the prior year for the nine months ended
March 31, 1998 was due to lower sales of night vision products (down 68%),
medical products (down 64%), and industrial and thin film products (down 23%).
The reduction in night vision sales was due to successful completion during the
prior fiscal year of two government development subcontracts, and lower
shipments on two government production subcontracts. 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 were mainly attributable to sales to one customer representing
approximately 28% of total Company revenues for the nine months ended March 31,
1997. No sales were made to this customer in the nine months ended March 31,
1998. The reduction in industrial and thin film sales was due to lower sales
of industrial lenses, partially offset by higher thin film sales.
Revenues from the Company's four largest customers were approximately
23%, 10%, 10%, and 10% of total revenues for the nine months ended March 31,
1998, and revenues from the Company's two largest customers were approximately
39% and 28% of total revenues for the nine months ended March 31, 1997. No
other customers accounted for more than 10% of the Company's revenues during
those periods.
For the nine months ended March 31, 1998, approximately 27% of the
Company's total revenues were derived from production and development contracts
and subcontracts involving the Government and its agencies compared to
approximately 39% for the corresponding period of the prior year. The Company's
current Government business is substantially comprised of two fixed-price
production subcontracts with one 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 expressed as a percentage of revenues increased from 11.2%
to 13.1% for the quarter, and decreased from 26.7% to 15.7% for the nine months
ended March 31, 1998, compared to the corresponding periods in the prior year.
The decrease in the gross profit percentage year to date was due primarily to
the lower overall sales volume in the current year.
Selling, general and administrative expenses increased for the third
quarter and nine months ended March 31, 1998 by $97,298, or 18.3%, and $316,891
or 19.5%, respectively, compared to the corresponding periods of the prior
year. The major reason for the increase was higher research and development
spending on new products, which
Page 8 of 10
<PAGE>
increased by approximately $133,000, or 121% for the quarter, and by
approximately $354,000, or 113% for the nine months ended March 31, 1998
versus last year's corresponding periods.
Interest income decreased for the third quarter and nine months ended
March 31, 1998 by $16,185 and $20,022, respectively, due to the lower investment
base of cash equivalents.
Interest expense relates primarly to capital lease obligations incurred
in the third quarter of fiscal years 1994 and 1996, and the second quarter of
fiscal year 1998.
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 nine months 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. Significant progress has been
achieved in the Company's development efforts for Wavelength Divison
Multiplexer (WDM) optical filters, which are used in telecommunications
systems.
These successful development efforts have resulted in prototypes of
a 10-nanometer bandwidth WDM filter and several narrow (under 1-nanometer)
bandwidth filters. The Company is currently supporting product evaluation
tests with several potential optical thin film filter and coating customers
for applications in the telecommunications and semiconductor industries. The
Company believes that these efforts should lead to significant future thin film
sales.
Page 9 of 10
<PAGE>
PART II. OTHER INFORMATION
Items 1-5 Not Applicable.
- ---------
Item 6 Exhibits and Reports on Form 8-K
- ------
(a) Exhibits - Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K - There were no reports on
Form 8-K filed during the period covered by
this report.
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PRECISION OPTICS CORPORATION, INC.
DATE: May 1, 1998 BY: /S/ Jack P. Dreimiller
-----------------------
Jack P. Dreimiller
Senior Vice President, Finance
and Chief Financial Officer
Page 10 of 10
<PAGE>
EXHIBIT INDEX
Exhibit Number DESCRIPTION
27 FINANCIAL DATA SCHEDULE
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> MAR-31-1998
<CASH> 1,215,619
<SECURITIES> 65,000
<RECEIVABLES> 551,000
<ALLOWANCES> 0
<INVENTORY> 1,197,199
<CURRENT-ASSETS> 3,265,931
<PP&E> 3,444,316
<DEPRECIATION> 2,211,875
<TOTAL-ASSETS> 4,785,915
<CURRENT-LIABILITIES> 686,051
<BONDS> 229,358
0
0
<COMMON> 61,186
<OTHER-SE> 3,809,320
<TOTAL-LIABILITY-AND-EQUITY> 4,785,915
<SALES> 3,196,238
<TOTAL-REVENUES> 3,196,238
<CGS> 2,694,348
<TOTAL-COSTS> 2,694,348
<OTHER-EXPENSES> 1,943,734
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 19,029
<INCOME-PRETAX> (1,299,641)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,299,641)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,299,641)
<EPS-PRIMARY> (.21)
<EPS-DILUTED> (.21)
</TABLE>
