<PAGE>
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, 1999
Commission file number 001-10647
----------------------
PRECISION OPTICS CORPORATION, INC.
- --------------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Massachusetts 04-2795294
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(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)
(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 September 30, 1999 was 7,687,595 shares.
Transitional Small Business Disclosure Format (check one):
Yes ( ) No (X)
<PAGE>
PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
INDEX
<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, 1999
and June 30, 1999 (unaudited)
Consolidated Statements of Operations - 2
Three Months Ended September 30, 1999
and September 30, 1998 (unaudited)
Consolidated Statements of Cash Flows - 3
Three Months Ended September 30, 1999
and September 30, 1998 (unaudited)
Notes to Consolidated Financial Statements 4
ITEM 2
Management's Discussion and Analysis of 5-9
Financial Condition and Results of Operations
PART II. OTHER INFORMATION 10
ITEM 1 Not Applicable
ITEM 2 Changes in Securities and Use of Proceeds.
ITEMS 3-5 Not Applicable
ITEM 6 Exhibits and Reports on Form 8-K
(a) Exhibits - Exhibit 27
(b) Reports on Form 8-K
</TABLE>
<PAGE>
PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
September 30, 1999 June 30, 1999
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<S> <C> <C>
CURRENT ASSETS
Cash and Cash Equivalents $ 962,855 $ 480,732
Accounts Receivable, Net 366,690 210,079
Inventories 942,478 979,284
Prepaid Expenses 87,287 47,996
----------- -----------
Total Current Assets 2,359,310 1,718,091
----------- -----------
PROPERTY AND EQUIPMENT 3,926,476 3,750,473
Less: Accumulated Depreciation (2,588,903) (2,496,949)
----------- -----------
Net Property and Equipment 1,337,573 1,253,524
----------- -----------
OTHER ASSETS 278,245 282,880
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TOTAL ASSETS $ 3,975,128 $ 3,254,495
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable $ 245,717 $ 194,619
Accrued Payroll 126,373 75,644
Accrued Professional Services 81,874 50,283
Accrued Profit Sharing and Bonuses 31,250 25,000
Accrued Income Taxes -- 912
Accrued Vacation 61,034 78,056
Accrued Warranty Expense 50,000 50,000
Current Portion of Capital Lease Obligation 150,352 105,542
Other Accrued Liabilities 41,800 35,392
----------- -----------
Total Current Liabilities 788,400 615,448
----------- -----------
CAPITAL LEASE OBLIGATION 137,624 166,312
----------- -----------
STOCKHOLDERS' EQUITY
Common Stock, $.01 par value-
Authorized -- 10,000,000 shares
Issued and Outstanding - 7,687,595 and
6,687,595 shares at September 30, 1999
June 30, 1999, respectively 76,876 66,876
Additional Paid-in Capital 7,255,081 6,206,411
Accumulated Deficit (4,252,853) (3,800,552)
----------- -----------
Total Stockholders' Equity 3,049,104 2,472,735
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,975,128 $ 3,254,495
=========== ===========
</TABLE>
Page 1 of 12
<PAGE>
PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
REVENUES $ 716,885 $ 679,895
COST OF GOODS SOLD 383,686 516,129
----------- -----------
Gross Profit 333,199 163,766
RESEARCH and DEVELOPMENT 389,419 235,612
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 396,467 364,868
----------- -----------
Total Operating Expenses 785,886 600,480
Operating Loss (452,687) (436,714)
INTEREST EXPENSE (5,824) (6,678)
INTEREST INCOME 6,208 19,308
----------- -----------
Loss Before Provision for Income Taxes (452,301) (424,084)
PROVISION FOR INCOME TAXES -- --
----------- -----------
Net Loss $ (452,301) $ (424,084)
=========== ===========
Basic and Diluted Loss Per Share $ (0.06) $ (0.06)
=========== ===========
Weighted Average Common Shares Outstanding 7,354,262 6,649,179
=========== ===========
</TABLE>
Page 2 of 12
<PAGE>
PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (452,301) $ (424,084)
Adjustments to Reconcile Net Loss to Net Cash
(Used In) Provided by Operating Activities -
Depreciation and Amortization 103,644 83,411
Changes in Assets and Liabilities-
Accounts Receivable (156,611) 240,339
Inventories 36,806 (104,770)
Prepaid Expenses (39,291) (50,899)
Accounts Payable 51,098 42,700
Customer Advances -- (116,841)
Accrued Expenses 77,044 (155,647)
----------- -----------
Net Cash Used In Operating Activities (379,611) (485,791)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of Property and Equipment (133,503) (164,084)
Increase in Other Assets (7,055) (4,724)
----------- -----------
Net Cash Used in Investing Activities (140,558) (168,808)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of Capital Lease Obligation (26,378) (29,164)
Net Proceeds (Costs) From Private Placement of
Common Stock 1,028,670 (13,483)
Proceeds from Exercise of Warrants -- 76,670
----------- -----------
Net Cash Provided By Financing Activities 1,002,292 34,023
----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 482,123 (620,576)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 480,732 2,060,146
----------- -----------
CASH AND CASH EQUIVALENTS AT END
OF PERIOD $ 962,855 $ 1,439,570
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash Paid for-
Interest $ 5,824 $ 6,678
=========== ===========
Income Taxes $ 912 $ 842
=========== ===========
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Capital Lease Obligation $ 42,500 $ --
=========== ===========
Common Stock Issued for Payment of Royalties $ -- $ 7,500
=========== ===========
</TABLE>
Page 3 of 12
<PAGE>
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 2000. 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, 1999 together with the auditors' report filed under cover
of the Company's 1999 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, 1999 and
1998, the effect of stock options and warrants was antidilutive;
therefore, they were not included in the computation of diluted (loss)
earnings per share. The number of shares that were excluded from the
computation as their effect would be antidilutive were 2,605,500 and
1,754,500, for the three months ended September 30, 1999 and 1998,
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, 1999 June 30, 1999
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<S> <C> <C>
Raw Materials $643,494 $589,762
Work-In-Process 174,764 248,085
Finished Goods and Components 124,220 141,437
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Total Inventories $942,478 $979,284
======== ========
</TABLE>
Page 4 of 12
<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. These
risks and uncertainties, many of which are not within the Company's control,
include, but are not limited to, the uncertainty and timing of the successful
development of the Company's new products, particularly in the optical thin
films area; the risks associated with reliance on a few key customers; the
Company's ability to attract and retain personnel with the necessary scientific
and technical skills; the timing and completion of significant orders; the
timing and amount of the Company's research and development expenditures; the
timing and level of market acceptance of customers' products for which the
Company supplies components; the level of market acceptance of competitors'
products; the ability of the Company to control costs associated with
performance under fixed price contracts; and the continued availability to the
Company of essential supplies, materials and services. 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, 1999, the Company's cash and
cash equivalents increased by approximately $482,000 to $963,000. The increase
in cash and cash equivalents was due to net proceeds received of approximately
$1,028,000 for a private placement of common stock, partially offset by cash
used by operating activities of approximately $380,000, capital expenditures of
approximately $133,000, repayment of debt of approximately $26,000, and an
increase in other assets (primarily patents) of approximately $7,000.
During the three months ending September 30, 1999, the Company entered
into a capital lease obligation for the acquisition of manufacturing equipment
totaling approximately $42,500.
Page 5 of 12
<PAGE>
The Company's working capital was approximately $3,939,000, $2,874,000
and $1,103,000 at June 30, 1997, 1998 and 1999, respectively, and then increased
to approximately $1,571,000 at September 30, 1999. This trend through June 30,
1999 is primarily the result of losses being generated beginning in fiscal 1997,
due primarily to a reduction in night vision products revenues occurring over
the last three years ending June 1999 and significant investments in internal
research and development and capital expenditures in order to transition the
Company into more profitable business areas such as medical products and optical
thin films. In August 1999, the Company completed a private placement of
1,000,000 shares of common stock with gross proceeds of $1,062,500. In
conjunction with this offering, the purchasers were issued warrants to acquire
1,000,000 shares of common stock at an exercise price of $1.125 per share.
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's $500,000 secured bank line of credit was terminated
during October 1999.
The Company has no material unused sources of liquidity other than its
cash and cash equivalents and accounts receivable. 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
and undertake other cost reduction measures.
Page 6 of 12
<PAGE>
RESULTS OF OPERATIONS
Total revenues for the three months ending September 30, 1999 (the
first quarter of fiscal year 2000) increased by $36,990, or 5.4%, from the same
period in the prior year. The increase was due primarily to higher sales of
medical products (up by approximately $122,000), partially offset by lower sales
of non-medical products (down by approximately $85,000). The higher sales of
medical products were due to shipments of stereo endoscopes and cameras to one
customer against an order of approximately $900,000 received in the fourth
quarter of fiscal year 1999. Future deliveries of approximately $420,000 on this
order are scheduled for the second and third quarter of fiscal year 2000. The
reduction in non-medical sales was due to lower sales of night vision products
due to completion last year of several government contracts.
Included in total revenues are sales for customer-funded research and
development projects totaling approximately $0 and $185,000 for the quarter
ending September 30, 1999 and 1998, respectively. Levels of customer-funded
research and development can fluctuate greatly in any given period depending
upon the level of customer demand during such period. All other product sales
totaled approximately $717,000 and $495,000 for the quarter ending September 30,
1999 and 1998, respectively.
Revenues from the Company's largest customer were approximately 69% of
total revenues for the quarter ending September 30, 1999. Revenues from the
Company's three largest customers were approximately 27%, 18% and 11% of total
revenues for the quarter ending September 30, 1998. No other customers accounted
for more than 10% of the Company's revenues during those periods.
Gross profit increased by approximately $169,000 for the quarter ending
September 30, 1999 compared to the same period last year, and increased as a
percentage of revenues from 24.1% in fiscal year 1999 to 46.5% in the current
period. The increase in the gross profit percentage was due primarily to sales
with significantly higher gross margins in the current period.
Research and development expenses increased by approximately $154,000,
or 65.3%, for the quarter ending September 30, 1999 compared to the same period
last year. During both years, internal research and development expenses
consisted primarily of development efforts related to Dense Wavelength Division
Multiplexing (DWDM) filters used in telecommunications systems. The increase was
due to a higher level of technical staff resources being devoted to the DWDM
filter project in the current year.
Selling, general and administrative expenses increased by approximately
$32,000, or 8.7%, for the quarter ending September 30, 1999 compared to the same
period last year. The increase was due primarily to higher professional services
and sales and marketing expenses.
Interest expense relates primarily to capital lease obligations.
Page 7 of 12
<PAGE>
Interest income decreased by approximately $13,000 during the quarter
ending September 30, 1999 compared to last year due to the lower base of cash
equivalents.
No income tax provision was recorded in the first quarter of fiscal
year 2000 or 1999 because of the losses generated in those periods.
YEAR 2000 READINESS
The Company was required to modify portions of its hardware and
software so that its computer systems and other date-sensitive equipment would
properly utilize data beyond December 31, 1999. The Company believes that with
upgrades and replacements of existing software and hardware, the impact of Year
2000 issues has been mitigated. While the Company believes that it has taken the
necessary measures to address Year 2000 issues, if such upgrades or
modifications have not been properly made, they could have a material adverse
impact on the Company's operations and financial condition. The Company utilized
primarily external resources to test and/or replace hardware and software for
Year 2000 compliance. The completion date for implementation of the hardware and
software replacements necessitated by the Year 2000 project was September 30,
1999, with ongoing testing to continue through December 31, 1999. The Company
believes the costs of becoming Year 2000 compliant will not exceed $40,000
(which includes approximately $26,000 for capital equipment upgrades). These
costs do not include time spent by internal personnel, which is not material. As
of September 30, 1999, approximately $28,000 of such costs have been incurred
and recorded in the accounts. 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 or
service providers.
TRENDS AND UNCERTAINTIES THAT MAY AFFECT FUTURE RESULTS
The Company continues to aggressively pursue sales, marketing, and
technology development efforts for optical thin films in the rapidly growing
telecommunications industry. The success of these products depends upon a number
of factors, including the Company's timely completion of development efforts,
ability to meet a set of rigorous customer specifications, and ability to
reliably manufacture such products in sufficient quantity at acceptable yields
to meet anticipated demand. The Company is currently supporting product
evaluation tests with several potential customers. While the Company believes
that these efforts should lead to significant future thin film sales, it remains
uncertain exactly when the Company's manufacturing processes for such products
will satisfy all customer requirements. The emphasis of the Company's
development efforts during the last several quarters has been on addressing
specific product requirements for various environmental properties (such as the
ability to withstand temperature and humidity changes), certain production
specifics (including cutting and packaging), and the quality control procedures
and measurement processes necessary to meet customer requirements in large scale
production. Close customer interaction is continuing regarding all of these
issues.
Page 8 of 12
<PAGE>
In March 1999, the Company announced that it had received orders
totaling over $1.9 million from several customers for 100GHz and 200GHz channel
separation DWDM filters used in telecommunications systems. Revenues on these
contracts were approximately $300,000 for the year ending June 30, 1999. No
revenues were recorded on these contracts during the quarter ending September
30, 1999 due to production and shipment delays resulting primarily from a major
customer's new requirements for the Company to meet more rigorous specifications
for its DWDM filters. The Company has made substantial progress in addressing
these new requirements and continues working closely with this customer to
resolve any remaining issues. Future deliveries on the remainder of these orders
depend upon the Company satisfying all customer requirements. The Company is
working closely with a number of other potential customers to evaluate
continuously evolving requirements and to refine prototype filters.
During fiscal year 1999, the Company commenced deliveries of stereo
endoscopes and cameras to a customer who has developed a computer-enhanced
surgery system. Revenues from this customer were approximately 37% of total
revenues for the year ended June 30, 1999. In the fourth quarter of fiscal year
1999, the Company received a follow-on order from this customer of approximately
$900,000, with deliveries beginning in July 1999. Revenues from this customer
were approximately 69% of total revenues for the quarter ended September 30,
1999. In October 1999, the Company received an additional follow-on order of
$184,000, with deliveries scheduled from January 2000 to December 2000. The
Company anticipates additional follow-on orders from this customer, but the
magnitude of such future business depends upon a number of factors, such as the
customer's own success in marketing its computer-enhanced surgery system and the
customer's continued acceptance of the Company's pricing, performance and
product reliability.
Page 9 of 12
<PAGE>
PART II. OTHER INFORMATION
ITEM 1 Not Applicable.
ITEM 2 Changes in Securities and Use of Proceeds.
On August 5, 1999, the Company issued pursuant to
Section 4(2) of the Securities Act of 1933 an aggregate of
1,000,000 shares of its common stock and warrants exercisable
for an additional aggregate of 1,000,000 shares of its common
stock to Special Situations Cayman Fund, L.P., Special
Situations Fund III, L.P., Special Situations Private Equity
Fund, L.P. and Special Situations Technology Fund, L.P., four
affiliated private investment funds based in New York City
(the "Special Situations Funds") in exchange for aggregate
cash consideration of $1,062,500.
The terms of the warrants issued to the Special
Situations Funds provide that the warrants may be exercised at
any time prior to 5:00pm on August 5, 2004 at a price per
share of $1.125, subject to adjustment pursuant to customary
anti-dilution provisions triggered by any future issuances of
the Company's common stock for a consideration per share less
than the greater of the then current market price or $1.125.
The warrants provide that they will terminate if not exercised
within 10 days of the Special Situations Funds' receipt of a
notice from the Company which may be delivered at the
Company's option in the event that the last sale price of the
Company's common stock on the NASDAQ SmallCap Market equals or
exceeds $2.25 on each of any 20 consecutive trading days.
In connection with the issuance of common stock and
warrants to the Special Situations Funds, the Company has
filed with the Securities and Exchange Commission a
registration statement covering the resale of shares of common
stock issued to, or issuable upon the exercise of warrants
issued to, the Special Situations Funds. Pursuant to a
Registration Rights Agreement dated August 5, 1999, the
Company would be obligated to issue additional shares and
additional warrants to the Special Situations Funds for no
additional consideration in the event such registration
statement is not declared effective on or prior to December
31, 1999.
ITEMS 3-5 Not Applicable.
ITEM 6 Exhibits and Reports on Form 8-K
(a) Exhibits - Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K - The Company filed a Current
Report on Form 8-K on August 16, 1999 in
connection with a press release announcing the
private placement of shares and warrants
described in Item 2 above.
In accordance with 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 5, 1999 BY: /s/ Jack P. Dreimiller
-----------------------------------
Jack P. Dreimiller
Senior Vice President, Finance,
Chief Financial Officer and Clerk
Page 10 of 12
<PAGE>
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION
27 Financial Data Schedule
Page 11 of 12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-END> SEP-30-1999
<CASH> 962,855
<SECURITIES> 0
<RECEIVABLES> 366,690
<ALLOWANCES> 0
<INVENTORY> 942,478
<CURRENT-ASSETS> 2,359,310
<PP&E> 3,926,476
<DEPRECIATION> 2,588,903
<TOTAL-ASSETS> 3,975,128
<CURRENT-LIABILITIES> 788,400
<BONDS> 137,624
0
0
<COMMON> 76,876
<OTHER-SE> 3,002,228
<TOTAL-LIABILITY-AND-EQUITY> 3,049,104
<SALES> 716,885
<TOTAL-REVENUES> 716,885
<CGS> 383,868
<TOTAL-COSTS> 383,686
<OTHER-EXPENSES> 785,886
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,842
<INCOME-PRETAX> (452,301)
<INCOME-TAX> 0
<INCOME-CONTINUING> (452,301)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (452,301)
<EPS-BASIC> (.06)
<EPS-DILUTED> (.06)
</TABLE>
