FORM 10-QSB
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 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
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(508) 630-1800
- -------------------------------------------------------------------------------
(Issuer's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes (X) No ( )
The number of shares outstanding of issuer's common stock, par value $.01 per
share, at December 31, 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
December 31, 1997
and June 30, 1997 (unaudited)
Consolidated Statements of Operations - 2
Quarter Ended December 31, 1997
and December 31, 1996(unaudited)
Six Months Ended December 31, 1997
and December 31, 1996 (unaudited)
Consolidated Statements of Cash Flows - 3
Six Months Ended December 31, 1997
and December 31, 1996 (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
(a) Exhibits - Exhibit 27
(b) Reports on Form 8-K - None
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PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
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ASSETS
December 31, 1997 June 30, 1997
-------------- -------------
CURRENT ASSETS
Cash and Cash Equivalents $1,458,275 $2,348,382
Marketable Securities 195,000 30,000
Accounts Receivable, Net 512,570 466,811
Inventories 1,334,348 1,576,967
Deferred Tax Asset 92,300 157,300
Prepaid Expenses 79,642 40,273
Refundable Income Taxes --- 52,970
----------- -----------
Total Current Assets 3,672,135 4,672,703
--------- ---------
PROPERTY AND EQUIPMENT 3,394,018 3,062,620
Less: Accumulated Depreciation 2,107,647 1,927,578
--------- ---------
Net Property and Equipment 1,286,371 1,135,042
--------- ---------
OTHER ASSETS 268,853 207,857
---------- ---------
TOTAL ASSETS $5,227,359 $6,015,602
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable $ 266,183 $ 271,911
Accrued Payroll 56,456 81,122
Accrued Professional Services 77,237 85,556
Accrued Profit Sharing and Bonuses 31,269 30,000
Accrued Income Taxes 3,924 18,946
Accrued Vacation 54,968 64,903
Accrued Warranty Expense 50,000 50,000
Current Portion of Capital Lease Obligation 116,934 89,532
Other Accrued Liabilities 16,171 42,164
---------- ---------
Total Current Liabilities 673,142 734,134
--------- ---------
CAPITAL LEASE OBLIGATION, Net of Current Portion 253,786 189,413
--------- ----------
STOCKHOLDERS' EQUITY
Common Stock, $.01 par value-
Authorized -- 10,000,000 shares
Issued and Outstanding -- 6,046,502 and
6,021,502 shares at December 31, 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 (1,096,717) (170,718)
---------- ----------
Total Stockholders' Equity 4,300,431 5,092,055
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS'EQUITY $5,227,359 $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 SECOND QUARTER AND SIX MONTHS ENDED
DECEMBER 31, 1997 AND 1996
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--SECOND QUARTER-- --SIX MONTHS--
1997 1996 1997 1996
---- ---- ---- ----
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
REVENUES $ 1,081,220 $2,155,291 $2,064,928 $4,793,665
COST OF GOODS SOLD 961,465 1,554,917 1,711,281 3,305,939
---------- ---------- ---------- ----------
GROSS PROFIT 119,755 600,374 353,647 1,487,726
SELLING, GENERAL and
ADMINISTRATIVE EXPENSES 677,616 532,078 1,313,407 1,093,814
----------- ---------- --------- ---------
OPERATING INCOME (LOSS) (557,861) 68,296 (959,760) 393,912
INTEREST EXPENSE (5,724) (6,791) (11,256) (14,902)
INTEREST INCOME 19,826 21,937 45,017 48,854
----------- ----------- ----------- ----------
INCOME (LOSS) BEFORE PROVISION
FOR INCOME TAXES (543,759) 83,442 (925,999) 427,864
PROVISION FOR INCOME TAXES --- 21,000 --- 107,000
----------- ------------ ---------- ---------
NET INCOME (LOSS) $(543,759) $ 62,442 $(925,999) $320,864
========== =========== ========== =========
BASIC EARNINGS (LOSS) PER SHARE ($0.09) $0.01 ($0.15) $0.05
======= ===== ======= =====
DILUTED EARNINGS (LOSS)
PER SHARE ($0.09) $0.01 ($0.15) $0.05
====== ====== ======= ======
COMMON SHARES OUTSTANDING 6,046,502 5,980,502 6,042,931 5,980,502
========= ========= ========= =========
COMMON SHARES OUTSTANDING ASSUMING
DILUTION 6,046,502 6,056,097 6,042,931 6,056,746
========= ========= ========= =========
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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 SIX MONTHS ENDED DECEMBER 31, 1997 AND 1996
(UNAUDITED)
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1997 1996
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) $ (925,999) $ 320,864
Adjustments to Reconcile Net Income (Loss) to Net
Cash Used in Operating Activities -
Depreciation and Amortization 196,997 207,266
Deferred Income Taxes --- (46,896)
Changes in Assets and Liabilities-
Accounts Receivable (45,759) 129,199
Inventories 242,619 (84,766)
Prepaid Expenses (39,369) (21,405)
Refundable Income Taxes 52,970 ---
Accounts Payable (5,728) (580,925)
Accrued Payroll (24,666) (63,215)
Accrued Professional Services (8,319) (6,354)
Accrued Profit Sharing and Bonuses 1,269 (26,474)
Accrued Income Taxes (15,022) 102,125
Other Accrued Liabilities (35,928) (28,875)
----------- ---------
Net Cash Used in
Operating Activities (606,935) (99,366)
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital Expenditures (191,831) (239,164)
Increase in Other Assets (77,924) (19,836)
----------- ----------
Net Cash Used in Investing Activities (269,755) (259,000)
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of Capital Lease Obligation (47,792) (40,517)
Proceeds from Exercise of Stock Options 34,375 ---
---------- -----------
Net Cash Used in
Financing Activities (13,417) (40,517)
---------- -----------
NET DECREASE IN CASH AND
CASH EQUIVALENTS (890,107) (398,883)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 2,348,382 2,617,813
----------- ------------
CASH AND CASH EQUIVALENTS AT END
OF PERIOD $1,458,275 $2,218,930
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash Paid for-
Interest $ 11,256 $ 14,902
============ ===========
Income Taxes $ 39,608 $ 48,412
============ ===========
SUPPLEMENTAL DISCLOSURES OF NON-CASH
INVESTMENT ACTIVITIES:
Capital Lease Obligation $ 139,567 $ ----
============ =============
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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
second 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 quarter and six months
ended December 31, 1996 include the effect of outstanding stock options
of 75,595 shares and 76,244 shares, respectively, computed in accordance
with the treasury stock method. For the quarter and six months ended
December 31, 1997, 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 1996 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 at June 30, 1997 and
December 31, 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 December 31, 1997.
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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December 31, 1997 June 30, 1997
------------------ -------------
Raw Materials $ 804,218 $1,075,294
Work-In-Process 426,076 272,980
Finished Goods and Components 104,054 228,693
-------------- --------------
Total Inventories $1,334,348 $1,576,967
============== ==============
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Page 5 of 10
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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 six months ended December 31, 1997, the Company's cash and
cash equivalents decreased by approximately $890,000 to $1,458,000. The
decrease in cash and cash equivalents was due to cash used by operating
activities of approximately $607,000, capital expenditures of approximately
$192,000, repayment of debt of approximately $48,000, and an increase in other
assets (primarily patents) of $78,000, partially offset by proceeds received
from exercise of stock options of approximately $34,000.
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
$195,000 at December 31, 1997, which represents an adjustment to fair market
value as of December 31, 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 December 31, 1997 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
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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 fiancial 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.
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 second quarter and for the six months ended
December 31, 1997 decreased by $1,074,071 or 49.8% and $2,728,737 or 56.9%,
respectively, over the same period in the prior year.
The revenue decrease from the prior year for the second quarter was due
to lower sales of medical products (down 40%) and lower sales of non-medical
products (down 63%).
Page 7 of 10
<PAGE>
The revenue decrease from the prior year for the six months ended
December 31, 1997 was doue to lower sales of medical products (down 52%) and
lower sales of non-medical products (down 64%).
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 36% of total Company revenues for the
six months ended December 31, 1996. No sales were made to this customer in the
six months ended December 31, 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 three largest customers were approximately
25%, 12% and 11% of total revenues for the six months ended December 31, 1997,
and revenues from the Company's two largest customers were approximately
36% and 35% of total revenues for the six months ended December 31, 1996. No
other customers accounted for more than 10% of the Company's revenues during
those periods.
For the six months ended December 31, 1997, 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 35% 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 expressed as a percentage of revenues decreased from
27.9% to 11.1% for the quarter, and from 31.0% to 17.1% for the six months
ended December 31, 1997, compared to the corresponding periods in the prior
year. The decrease in the gross profit percentage was due primarily to the
lower overall sales volume in the current periods.
Selling, general and administrative expenses increased for the second
quarter and six months ended December 31, 1997 by $145,538, or 27.4% and
$219,593, or 20.1%, 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 increased by approximately $125,000,
or 170% for the quarter, and by approximately $221,000, or 108% for the six
months ended December 31, 1997 versus last year's corresponding periods.
Page 8 of 10
<PAGE>
Interst income decreased for the second quarter and six months ended
December 31, 1997 by $2,111 and $3,837, 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 six 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.
On December 30, 1997, the Company announced that a prototype
broadband optical thin film filter has been accepted for use in a customer's
proprietary optical communications application. This filter is one of a series
of prototypes for use in optical communications under development by the Company
over the past year. This filter utilizes technology qualified by a customer
earlier this year for the requisite environmental stability for use in optical
communications systems. The Company believes that this class of filter, having
a relatively broad bandwidth of approximately twelve nanometers, may be used for
at least two-channel WDM devices and as a component in WDM devices of up to
eight-channels, and may also be used in various other optical communication
applications.
The Company is continuing efforts for the demonstration and production
of narrower bandwidth filters of this class for other WDM devices. The Company
expects these on-going efforts to enable initial production and sales for this
growing business sector later in calendar year 1998.
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 - 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: February 2, 1998 BY: /S/ Jack P. Dreimiller
-----------------------
Jack P. Dreimiller
Senior Vice President, Finance
and Chief Financial Officer
Page 10 of 10
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EXHIBIT INDEX
Exhibit Number DESCRIPTION
27 FINANCIAL DATA SCHEDULE
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,458,275
<SECURITIES> 195,000
<RECEIVABLES> 512,570
<ALLOWANCES> 0
<INVENTORY> 1,334,348
<CURRENT-ASSETS> 3,672,135
<PP&E> 3,394,018
<DEPRECIATION> 2,107,647
<TOTAL-ASSETS> 5,227,359
<CURRENT-LIABILITIES> 673,142
<BONDS> 253,786
0
0
<COMMON> 60,465
<OTHER-SE> 4,239,966
<TOTAL-LIABILITY-AND-EQUITY> 5,227,359
<SALES> 2,064,928
<TOTAL-REVENUES> 2,064,928
<CGS> 1,711,281
<TOTAL-COSTS> 1,711,281
<OTHER-EXPENSES> 1,313,407
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,256
<INCOME-PRETAX> (925,999)
<INCOME-TAX> 0
<INCOME-CONTINUING> (925,999)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (925,999)
<EPS-PRIMARY> (.15)
<EPS-DILUTED> (.15)
</TABLE>
