<PAGE> 1
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, 1998
Commission file number 001-10647
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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, 1998 was 6,677,595 shares.
Transitional Small Business Disclosure Format (check one):
Yes ( ) No (X)
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PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
INDEX
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<TABLE>
<CAPTION>
Page
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<S> <C> <C>
PART I. FINANCIAL INFORMATION:
ITEM 1 Consolidated Financial Statements
Consolidated Balance Sheets - 1
September 30, 1998
and June 30, 1998 (unaudited)
Consolidated Statements of Operations - 2
Three Months Ended September 30, 1998
and September 30, 1997 (unaudited)
Consolidated Statements of Cash Flows - 3
Three Months Ended September 30, 1998
and September 30, 1997 (unaudited)
Notes to Consolidated Financial Statements 4
ITEM 2
Management's Discussion and Analysis of
Financial Condition and Results of Operations 5-7
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
</TABLE>
<PAGE> 3
PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
September 30, 1998 June 30, 1998
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<S> <C> <C>
CURRENT ASSETS
Cash and Cash Equivalents $ 1,439,570 $ 2,060,146
Accounts Receivable, Net 245,731 486,070
Inventories 1,054,763 949,993
Deferred Tax Asset 145,000 145,000
Prepaid Expenses 103,269 44,870
----------- -----------
Total Current Assets 2,988,333 3,686,079
----------- -----------
PROPERTY AND EQUIPMENT 3,635,673 3,471,589
Less: Accumulated Depreciation 2,391,320 2,318,380
----------- -----------
Net Property and Equipment 1,244,353 1,153,209
----------- -----------
OTHER ASSETS 282,442 288,190
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TOTAL ASSETS $ 4,515,128 $ 5,127,478
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable $ 167,266 $ 124,566
Accrued Payroll 93,100 121,262
Accrued Professional Services 61,457 80,140
Accrued Profit Sharing and Bonuses 28,500 27,798
Accrued Income Taxes 4,082 4,924
Accrued Vacation 66,224 88,514
Accrued Warranty Expense 50,000 50,000
Customer Advances -- 116,841
Current Portion of Capital Lease Obligation 98,480 105,349
Other Accrued Liabilities 6,000 91,372
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Total Current Liabilities 575,109 811,766
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CAPITAL LEASE OBLIGATION 186,388 208,684
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STOCKHOLDERS' EQUITY
Common Stock, $.01 par value-
Authorized -- 10,000,000 shares
Issued and Outstanding -- 6,677,595 and
6,618,619 shares at September 30, 1998
June 30, 1998, respectively 66,776 66,186
Additional Paid-in Capital 6,242,446 6,172,349
Accumulated Deficit (2,555,591) (2,131,507)
----------- -----------
Total Stockholders' Equity 3,753,631 4,107,028
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,515,128 $ 5,127,478
=========== ===========
</TABLE>
Page 1 of 10
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PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
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<S> <C> <C>
REVENUES $ 679,895 $ 983,708
COST OF GOODS SOLD 516,129 749,816
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Gross Profit 163,766 233,892
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 600,480 635,791
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Operating Loss (436,714) (401,899)
INTEREST EXPENSE (6,678) (5,532)
INTEREST INCOME 19,308 25,191
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Loss Before Provision for Income Taxes (424,084) (382,240)
PROVISION FOR INCOME TAXES -- --
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Net Loss $(424,084) $(382,240)
========= =========
Basic (Loss) Earnings Per Share $ (0.06) $ (0.06)
========= =========
Diluted (Loss) Earnings Per Share $ (0.06) $ (0.06)
========= ==========
Common Shares Outstanding 6,649,179 6,040,252
========= =========
Common Shares Outstanding Assuming Dilution 6,649,179 6,040,252
========= =========
</TABLE>
Page 2 of 10
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PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (424,084) $ (382,240)
Adjustments to Reconcile Net Loss to Net Cash
Used In Operating Activities -
Depreciation and Amortization 83,411 87,956
Changes in Assets and Liabilities-
Accounts Receivable 240,339 (3,772)
Inventories (104,770) 74,020
Prepaid Expenses (50,899) 27,076
Refundable Income Taxes -- 52,970
Accounts Payable 42,700 (18,250)
Customer Advances (116,841) --
Accrued Expenses 155,647) 139,209
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Net Cash Used In Operating Activities (485,791) (301,449)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital Expenditures (164,084) (133,238)
Increase in Other Assets (4,724) (27,595)
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Net Cash Used in Investing Activities (168,808) (160,833)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of Capital Lease Obligation (29,164) (21,719)
Expenses Associated with Private Placement of
Common Stock (13,483) --
Proceeds from Exercise of Warrants 76,670 34,375
Net Cash Provided By (used in) Financing Activities 34,023 12,656
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NET DECREASE IN CASH AND CASH EQUIVALENTS (620,576) (449,626)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 2,060,146 2,348,382
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CASH AND CASH EQUIVALENTS AT END
OF PERIOD $1,439,570 $1,898,756
========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash Paid for-
Interest $ 6,678 $ 5,532
========== ==========
Income Taxes $ 842 --
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</TABLE>
Page 3 of 10
<PAGE> 6
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 1999. 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, 1998 together with the auditors' report filed under cover
of the Company's 1998 Annual Report on Form 10-KSB.
Basic (loss) earnings per share is computed by dividing net income (loss)
by the weighted average number of shares of common stock outstanding
during the period. For the three months ended September 30, 1998 and
1997, the effect of stock options and warrants was antidilutive;
therefore, they were not included in the computation of diluted (loss)
earnings per share. The Company has adopted SFAS No. 128, Earnings per
Share, effective December 15, 1997. As a result, the Company's reported
loss per share for the three months ended September 30, 1997 was
restated; however, this had no effect on previously reported loss per
share data. The number of shares that were excluded from the computation
as their effect would be antidilutive were 1,754,500 and 1,045,617, for
the three months ended September 30, 1998 and 1997, respectively.
2. INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or
market and consist of the following:
<TABLE>
<CAPTION>
September 30, 1998 June 30, 1998
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<S> <C> <C>
Raw Materials $ 678,267 $588,727
Work-In-Process 249,739 246,264
Finished Goods and Components 346,757 118,502
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Total Inventories $1,054,763 $949,993
========== ========
</TABLE>
Page 4 of 10
<PAGE> 7
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, 1998 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, 1998, the Company's cash and cash
equivalents decreased by approximately $620,000 to $1,440,000. The decrease in
cash and cash equivalents was due to cash used by operating activities of
approximately $486,000, capital expenditures of approximately $164,000,
repayment of debt of approximately $29,000, expenses associated with a private
placement of common stock of approximately $13,000, and an increase in other
assets (primarily patents) of $5,000, partially offset by proceeds received from
exercise of warrants of approximately $77,000.
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 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 terms of the line
of credit, the Company is required to maintain certain ratios under specified
financial covenants (Debt
Page 5 of 10
<PAGE> 8
Service Coverage, Leverage, Current Ratio), and must maintain a minimum cash
liquidity of $1,000,000. The Company was in compliance with all such covenants
as of June 30, 1998, except with respect to the Debt Service Coverage ratio.
There can be no assurance that the Company will be able to comply with all of
such terms. As of September 30, 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, 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 three months ending September 30, 1998 decreased by
$303,813, or 30.9% from the same period in the prior year, due primarily to
lower sales of night-vision products due to successful completion during the
prior fiscal year of two government production subcontracts.
Revenues from the Company's three largest customers were approximately 27%,
18% and 11% of total revenues for the quarter ended September 30, 1998, and
revenues from the Company's two largest customers were approximately 25% and 13%
of total revenues for the quarter ended September 30, 1997. No other customers
accounted for more than 10% of the Company's revenues during those periods.
For the quarter ended September 30, 1998, approximately 6% of the Company's
total revenues were derived from production and development contracts and
subcontracts involving the Government and its agencies compared to approximately
28% for the corresponding period of the prior year. The Company's current
Government business is substantially complete, and 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, 1998 decreased from
the same period in the prior year by $70,126, but increased as a percentage of
revenues from 23.8% in fiscal year 1998 to 24.1% in the current period. The
decrease in gross profit was due mainly to lower sales volume in the current
quarter.
Selling, general and administrative expenses decreased by $35,311, or 5.6%
from the same period in the prior year due primarily to lower sales and
marketing expenses.
Interest expense relates primarily to capital lease obligations incurred in
fiscal years 1994, 1996 and 1998.
Page 6 of 10
<PAGE> 9
Interest income decreased by $5,883 from the previous year due to the lower
investment base of cash.
No income tax provision was recorded in the first quarter of fiscal year
1998 or 1997 because of the losses.
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 Division
Multiplexer (WDM) optical filters, which are used in telecommunication 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 semi-conductor industries. The
Company believes that these efforts should lead to significant future thin film
sales.
Based on a recent preliminary assessment, the Company has determined that
it is required to modify portions of its hardware and software so that its
computer systems and other date-sensitive equipment will properly utilize data
beyond December 31, 1999. The Company believes that with upgrades or
modifications to existing software and hardware, the impact of Year 2000 issues
can be mitigated. However, if such upgrades or modifications are not made, or
are not made in a timely manner, Year 2000 issues could have a material adverse
impact on the Company's operations and financial condition. The Company will
utilize primarily external resources to test and/or replace hardware and
software for Year 2000 compliance. The Company plans to complete the Year 2000
project not later than December 31, 1998, and believes the costs of the project
will not be material to the Company's operating results or financial condition.
As the Company's ongoing assessment of its Year 2000 compliance status
progresses, the Company will establish such contingency plans as it deems
necessary to address any residual Year 2000 risks. The Company currently is not
aware of any material risks to its business and operations presented by the Year
2000 compliance status of its customers, suppliers and service providers.
Page 7 of 10
<PAGE> 10
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: November 6, 1998 BY: /s/ Jack P. Dreimiller
-------------------------------------
Jack P. Dreimiller
Senior Vice President, Finance,
Chief Financial Officer and Clerk
Page 8 of 10
<PAGE> 11
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION
27 Financial Data Schedule
Page 9 of 10
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,439,570
<SECURITIES> 0
<RECEIVABLES> 245,731
<ALLOWANCES> 0
<INVENTORY> 1,054,763
<CURRENT-ASSETS> 2,988,333
<PP&E> 3,635,673
<DEPRECIATION> 2,391,320
<TOTAL-ASSETS> 4,515,128
<CURRENT-LIABILITIES> 575,109
<BONDS> 186,389
0
0
<COMMON> 66,776
<OTHER-SE> 3,686,855
<TOTAL-LIABILITY-AND-EQUITY> 4,515,128
<SALES> 679,895
<TOTAL-REVENUES> 679,895
<CGS> 516,129
<TOTAL-COSTS> 516,129
<OTHER-EXPENSES> 600,480
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,678
<INCOME-PRETAX> (424,084)
<INCOME-TAX> 0
<INCOME-CONTINUING> (424,084)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (424,084)
<EPS-PRIMARY> (.06)
<EPS-DILUTED> (.06)
</TABLE>
