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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, 2000
Commission file number 001-10647
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PRECISION OPTICS CORPORATION, INC.
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(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
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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 September 30, 2000 was 10,497,658 shares.
Transitional Small Business Disclosure Format (check one):
Yes |_| No |X|
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PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
INDEX
Page
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PART I. FINANCIAL INFORMATION:
Item 1 Consolidated Financial Statements
Consolidated Balance Sheets - 2
September 30, 2000
and June 30, 2000 (unaudited)
Consolidated Statements of Operations - 3
Three Months Ended September 30, 2000
and September 30, 1999 (unaudited)
Consolidated Statements of Cash Flows - 4
Three Months Ended September 30, 2000
and September 30, 1999 (unaudited)
Notes to Consolidated Financial Statements 5-6
Item 2 Management's Discussion and Analysis of 7-10
Financial Condition and Results of Operations
PART II. OTHER INFORMATION 11
Items 1-5 Not Applicable 11
Item 6 Exhibits and Reports on Form 8-K 11
(a) Exhibits - Exhibit 27
(b) Reports on Form 8-K
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PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
September 30, 2000 June 30, 2000
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CURRENT ASSETS
Cash and Cash Equivalents $16,944,359 $15,128,750
Accounts Receivable, Net 462,019 638,299
Inventories 1,227,444 1,109,511
Prepaid Expenses 241,200 70,807
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Total Current Assets 18,875,022 16,947,367
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PROPERTY AND EQUIPMENT 6,069,808 5,768,913
Less: Accumulated Depreciation (3,057,841) (2,901,892)
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Net Property and Equipment 3,011,967 2,867,021
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OTHER ASSETS 262,428 270,806
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TOTAL ASSETS $22,149,417 $20,085,194
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable $ 194,173 $ 319,096
Accrued Payroll 88,680 52,116
Accrued Professional Services 129,168 126,866
Accrued Profit Sharing and Bonuses 16,911 15,000
Accrued Income Taxes -- 912
Accrued Vacation 80,262 91,930
Accrued Warranty Expense 50,000 50,000
Current Portion of Capital Lease Obligation 72,011 95,928
Other Accrued Liabilities 44,146 4,566
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Total Current Liabilities 675,351 756,414
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CAPITAL LEASE OBLIGATION 75,708 88,175
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STOCKHOLDERS' EQUITY
Common Stock, $.01 par value-
Authorized -- 20,000,000 shares
Issued and Outstanding - 10,497,658 and
10,285,158 shares at September 30, 2000
June 30, 2000, respectively 104,977 102,852
Additional Paid-in Capital 27,685,813 25,094,195
Accumulated Deficit (6,392,432) (5,956,442)
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Total Stockholders' Equity 21,398,358 19,240,605
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $22,149,417 $20,085,194
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PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 2000 AND SEPTEMBER 30, 1999
(UNAUDITED)
2000 1999
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REVENUES $ 888,299 $ 716,885
COST OF GOODS SOLD 538,241 383,686
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Gross Profit 350,058 333,199
RESEARCH and DEVELOPMENT 565,172 389,419
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 447,517 396,467
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Total Operating Expenses 1,012,689 785,886
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Operating Loss (662,631) (452,687)
INTEREST EXPENSE (3,943) (5,824)
INTEREST INCOME 230,584 6,210
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Loss Before Provision for Income Taxes (435,990) (452,301)
PROVISION FOR INCOME TAXES -- --
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Net Loss $ (435,990) $ (452,301)
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Basic and Diluted Loss Per Share $ (0.04) $ (0.06)
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Weighted Average Common Shares Outstanding 10,396,241 7,354,262
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PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 2000 AND SEPTEMBER 30, 1999
(UNAUDITED)
2000 1999
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (435,990) $ (452,301)
Adjustments to Reconcile Net Loss to Net Cash
(Used In) Provided by Operating Activities -
Depreciation and Amortization 168,763 103,644
Changes in Assets and Liabilities-
Accounts Receivable 176,280 (156,611)
Inventories (117,933) 36,806
Prepaid Expenses (170,393) (39,291)
Accounts Payable (124,923) 51,098
Accrued Expenses 67,777 77,044
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Net Cash Used In Operating Activities (436,419) (379,611)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of Property and Equipment (300,895) (133,503)
Increase in Other Assets (4,436) (7,055)
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Net Cash Used in Investing Activities (305,331) (140,558)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of Capital Lease Obligation (36,384) (26,378)
Net Proceeds from litigation settlement 2,369,184 --
Net Proceeds (Costs) From Private Placements of
Common Stock (9,797) 1,028,670
Proceeds from Exercise of Options and Warrants 234,356 --
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Net Cash Provided By Financing Activities 2,557,359 1,002,292
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NET INCREASE IN CASH AND
CASH EQUIVALENTS 1,815,609 482,123
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 15,128,750 480,732
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CASH AND CASH EQUIVALENTS AT END
OF PERIOD $16,944,359 $ 962,855
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash Paid for-
Interest $ 3,943 $ 5,824
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Income Taxes $ -- $ 912
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SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Capital Lease Obligation $ -- $ 42,500
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PRECISION OPTICS CORPORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements include the accounts of
Precision Optics Corporation, Inc. and its wholly-owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
These financial statements have been prepared by the Company, without
audit, and reflect normal recurring adjustments which, in the opinion of
management, are necessary for a fair statement of the results of the first
quarter of the Company's fiscal year 2001. 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, 2000
together with the auditors' report filed under cover of the Company's 2000
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, 2000 and 1999,
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 1,195,348 and 2,605,500, for the three
months ended September 30, 2000 and 1999, respectively.
2. INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or
market and consist of the following:
September 30, 2000 June 30, 2000
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Raw Materials $ 752,460 $ 686,856
Work-In-Process 278,622 241,686
Finished Goods and Components 196,362 180,969
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Total Inventories $1,227,444 $1,109,511
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3. NEW ACCOUNTING STANDARDS
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101, REVENUE RECOGNITION IN FINANCIAL
STATEMENTS. In June 2000, this SAB was amended by SAB 101B, which delays
the implementation date of SAB 101 until no later than the fourth fiscal
quarter of fiscal years beginning after December 15, 1999. SAB 101
provides additional guidance on the accounting for revenue recognition,
including both generally applicable, as well as certain industry-specific,
guidance. The Company is in the process of accumulating the information
necessary to quantify the potential impact, if any, of SAB 101.
On July 1, 2000, the Company adopted SFAS No. 133, ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. This statement, as amended
by SFAS No. 137 and 138, establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as derivatives) and
for hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. The adoption of this
new standard has not had a significant impact on the Company's
consolidated financial statements based on its current structure and
operations.
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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. 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; the performance and reliability of the
Company's vendors; 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, 2000, the Company's cash and cash
equivalents increased by approximately $1,816,000 to $16,944,000. The increase
in cash and cash equivalents was due to net proceeds received of approximately
$2,369,000 from settlement of litigation and proceeds received of approximately
$234,000 from exercise of stock options and warrants, partially offset by cash
used by operating activities of approximately $436,000, capital expenditures of
approximately $301,000, repayment of debt of approximately $36,000, expenses of
approximately $10,000 associated with a private placement of common stock in
fiscal year 2000, and an increase in other assets (primarily patents) of
approximately $4,000.
In July 2000, the Company reached an agreement to settle certain claims of
the Company arising under Section 16(b) of the Securities Exchange Act of 1934
and to settle and dismiss with prejudice a related shareholder lawsuit. Under
the agreement, the defendants have paid the Company a total of $2,650,000 to
resolve claims of "short-swing" trading profits allegedly made in violation of
Section 16(b). This settlement and dismissal
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with prejudice of the shareholder lawsuit was approved by the United States
District Court for the Southern District of New York in August 2000.
After deducting estimated legal expenses, the net proceeds of the
settlement of approximately $2,369,000 have been credited to Additional Paid-In
Capital in the Company's Consolidated Balance Sheet in the quarter ending
September 30, 2000.
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. 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 of 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 cash and cash equivalents are considered sufficient to
support working capital and investment needs for at least the next twelve
months.
Results of Operations
Total revenues for the three months ending September 30, 2000 (the first
quarter of fiscal year 2001) increased by approximately $171,000, or 23.9%, from
the same period in the prior year. The increase was due primarily to higher
sales of non-medical products (up by approximately $218,000), partially offset
by lower sales of medical products (down by approximately $47,000). The increase
in sales of non-medical products as due primarily to higher sales of Dense
Wavelength Division Multiplexer (DWDM) filters used in telecommunications
systems, which increased by approximately $204,000. DWDM filter sales
represented 22.8% of total revenues during the quarter ended September 30, 2000,
and increased by approximately 29% sequentially over DWDM filter revenues for
the quarter ended June 30, 2000. Sales of medical products were lower due
primarily to lower shipments of stereo endoscopes and cameras.
Revenues from the Company's largest customer were approximately 46% of
total revenues for the quarter ended September 30, 2000. Revenues from the
Company's largest customer were approximately 69% of total revenues for the
quarter ending September 30, 1999. No other customers accounted for more than
10% of the Company's revenues during those periods.
Gross profit increased by approximately $17,000 for the quarter ending
September 30, 2000 compared to the same period last year, but decreased as a
percentage of revenues from 46.5% in fiscal year 2000 to 39.4% in the current
period. The decrease in the gross profit percentage was due primarily to reduced
sales of higher-margin medical products and higher fixed manufacturing costs
such as depreciation, equipment rental, supplies and indirect labor.
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Research and development expenses increased by approximately $176,000, or
45.1%, for the quarter ending September 30, 2000 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 more resources being devoted to the DWDM filter project in the current
year.
Selling, general and administrative expenses increased by approximately
$51,000, or 12.9%, for the quarter ending September 30, 2000 compared to the
same period last year. The increase was due primarily to higher costs of
professional services, insurance and depreciation.
Interest expense relates primarily to capital lease obligations.
Interest income increased by approximately $224,000 during the quarter
ending September 30, 2000 compared to the previous year. The increase was due to
the higher base of cash and cash equivalents related primarily to net proceeds
received from private placements of common stock in August 1999 and March 2000
and from exercise of stock options and warrants.
No income tax provision was recorded in the first quarter of fiscal year
2001 or 2000 because of the losses generated in those periods.
Trends and Uncertainties That May Affect Future Results
The Company continues to aggressively pursue sales, marketing, and
technology development efforts for DWDM filters 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.
A new high volume coating system and ancillary equipment were installed in
the month of July 2000. It is anticipated that the new system will begin higher
volume production of DWDM filters during the first half of the fiscal year 2001.
The Company has leased additional space for a new Optical Thin Films
Technology Center to be devoted to development and manufacturing of optical thin
films for telecommunications and other applications. Operations in the new
facility are anticipated to commence during the quarter ending December 31,
2000.
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 46% of total
revenues for the quarter ended September 30, 2000. This customer has seen
significant acceptance in the international marketplace for its
computer-enhanced surgical system for use in minimally invasive cardiovascular
and general surgery procedures, and in July 2000 announced that it received
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clearance from the U.S. Food & Drug Administration (FDA) to begin
commercialization of its surgical system in the United States for use in
laparoscopic surgical procedures. The stereo endoscopes and cameras manufactured
by the Company are key components of this system, enabling surgeons to visualize
the operative site in high resolution 3-D imagery.
The Company has received additional orders from this customer totalling
approximately $1,200,000, which are currently scheduled for delivery between
October 2000 and April 2001. 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.
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PART II. OTHER INFORMATION
Item 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 - The Company filed three Current
Reports on Form 8-K during the quarter ended September 30,
2000 as follows:
(i) On July 28, 2000, the Company reported an agreement to
resolve its claims under Section 16(b) of the Securities
Exchange Act of 1934 involving four investment funds and
certain related persons and entities and to settle and
dismiss with prejudice a related shareholder lawsuit.
(ii) On August 1, 2000, the Company reported a press
release issued the same date reporting its operating
results for the fiscal year and fourth quarter ended June
30, 2000.
(iii) On August 28, 2000 the Company reported a press
release issued on August 25, 2000 reporting that it had
entered into a lease for a new Optical Thin Films
Technology Center in Gardner, Massachusetts.
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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 10, 2000 BY: /s/ Jack P. Dreimiller
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Jack P. Dreimiller
Senior Vice President, Finance,
Chief Financial Officer and Clerk
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EXHIBIT INDEX
Exhibit Number Description
27 Financial Data Schedule
