FORM 10-QSB
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
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)
(978) 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 March 31, 2001 was 10,498,908 shares.
Transitional Small Business Disclosure Format (check one):
Yes ( ) No (X)
PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
INDEX
PAGE
PART I. FINANCIAL INFORMATION:
ITEM 1 Consolidated Financial Statements
Consolidated Balance Sheets - 1
March 31, 2001
and June 30, 2000 (unaudited)
Consolidated Statements of Operations - 2
Quarter Ended March 31, 2001
and March 31, 2000 (unaudited)
Nine Months Ended March 31, 2001
and March 31, 2001 (unaudited)
Consolidated Statements of Cash Flows - 3
Nine Months Ended March 31, 2001
and March 31, 2000 (unaudited)
Notes to Consolidated Financial Statements 4-5
ITEM 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 6-10
PART II. OTHER INFORMATION: 11
ITEMS 1-5 Not Applicable
ITEM 6 Exhibits and Reports on Form 8-K
(a) Exhibits - None
(b) Reports on Form 8-K
Signature 11
PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
MARCH 31, 2001 JUNE 30, 2000
-------------- -------------
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents $12,058,336 $15,128,750
Accounts Receivable, Net 752,643 638,299
Inventories 1,314,282 1,109,511
Prepaid Expenses 240,570 70,807
----------- -----------
Total Current Assets 14,365,831 16,947,367
----------- -----------
PROPERTY AND EQUIPMENT 9,097,874 5,768,913
Less: Accumulated Depreciation (3,487,071) (2,901,892)
----------- -----------
Net Property and Equipment 5,610,803 2,867,021
----------- -----------
OTHER ASSETS 257,456 270,806
----------- -----------
TOTAL ASSETS $20,234,090 $20,085,194
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable $ 306,825 $ 319,096
Accrued Payroll 94,551 52,116
Accrued Professional Services 62,707 126,866
Accrued Profit Sharing and Bonuses 11,250 15,000
Accrued Income Taxes -- 912
Accrued Vacation 111,634 91,930
Accrued Warranty Expense 50,000 50,000
Current Portion of Capital Lease Obligation 50,486 95,928
Other Accrued Liabilities 75,220 4,566
----------- -----------
Total Current Liabilities 762,673 756,414
----------- -----------
CAPITAL LEASE OBLIGATION AND OTHER 87,229 88,175
----------- -----------
STOCKHOLDERS' EQUITY
Common Stock, $.01 par value --
Authorized -- 20,000,000 shares
Issued and Outstanding -- 10,498,908 and
10,285,158 shares at March 31, 2001
June 30, 2000, respectively 104,989 102,852
Additional Paid-in Capital 27,638,474 25,094,195
Accumulated Deficit (8,359,275) (5,956,442)
----------- -----------
Total Stockholders' Equity 19,384,188 19,240,605
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $20,234,090 $20,085,194
=========== ===========
-1-
PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THIRD QUARTER AND NINE MONTHS ENDED
MARCH 31, 2001 AND 2000
--THIRD QUARTER-- --NINE MONTHS--
2001 2000 2001 2000
----------- ----------- ---------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
REVENUES $1,133,984 $784,503 $2,800,817 $2,088,791
COST OF GOODS SOLD 920,578 595,472 2,099,185 1,372,895
----------- ---------- ----------- -----------
GROSS PROFIT 213,406 189,031 701,632 715,896
RESEARCH and DEVELOPMENT EXPENSES 878,715 442,835 2,216,164 1,299,480
SELLING, GENERAL and
ADMINISTRATIVE EXPENSES 629,456 457,823 1,528,006 1,280,899
----------- ---------- ----------- -----------
TOTAL 1,508,171 900,658 3,744,170 2,580,379
----------- ---------- ----------- -----------
OPERATING LOSS (1,294,765) (711,627) (3,042,538) (1,864,483)
INTEREST EXPENSE (2,544) (6,537) (9,640) (19,414)
INTEREST INCOME 186,361 50,502 649,345 65,350
----------- ---------- ----------- -----------
NET LOSS $(1,110,948) $(667,662) $(2,402,833) $(1,818,547)
=========== ========== =========== ===========
BASIC AND DILUTED LOSS PER SHARE ($0.11) ($0.08) ($0.23) ($0.23)
======= ====== ======= ======
BASIC AND DILUTED WEIGHTED AVERAGE
COMMON SHARES OUTSTANDING 10,498,908 8,471,946 10,464,586 7,803,594
=========== ========== =========== ===========
-2-
PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED
MARCH 31, 2001 AND MARCH 31, 2000
(UNAUDITED)
2001 2000
-------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (2,402,833) $ (1,818,547)
Adjustments to Reconcile Net Loss to Net Cash
Used In Operating Activities -
Depreciation and Amortization 624,477 342,254
Non-Cash Royalty Expense -- 2,813
Changes in Assets and Liabilities-
Accounts Receivable (114,344) (158,384)
Inventories (204,771) 53,402
Prepaid Expenses (169,763) (104,696)
Accounts Payable (12,271) 160,118
Accrued Expenses 63,972 175,527
------------ -------------
Net Cash Used In Operating Activities (2,215,533) (1,347,513)
------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of Property and Equipment (3,328,961) (668,632)
Increase in Other Assets (25,948) (27,429)
------------ -------------
Net Cash Used in Investing Activities (3,354,909) (696,061)
------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of Capital Lease Obligation (83,746) (104,563)
Net proceeds from litigation settlement 2,368,485 --
Net Proceeds (Costs) From Private Placement of
Common Stock (16,921) 15,048,960
Proceeds from Exercise of Stock Options and Warrants 232,210 3,322,699
------------ -------------
Net Cash Provided By Financing Activities 2,500,028 18,267,096
------------ -------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (3,070,414) 16,223,522
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 15,128,750 480,732
------------ -------------
CASH AND CASH EQUIVALENTS AT END
OF PERIOD $ 12,058,336 $ 16,704,254
============ =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash Paid for-
Interest $ 9,640 $ 19,414
============ =============
Income Taxes $ -- $ 912
============ =============
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Capital Lease Obligation $ -- $ 55,837
============ =============
-3-
PRECISION OPTICS CORPORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements include the
accounts of Precision Optics Corporation, Inc. and its
wholly-owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated in consolidation.
These financial statements have been prepared by the Company,
without audit, and reflect normal recurring adjustments which, in
the opinion of management, are necessary for a fair statement of
the results of the third quarter and nine months 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 per share is computed by dividing net loss by the
weighted average number of shares of common stock outstanding
during the period. For the nine months ended March 31, 2001 and
2000, the effect of stock options and warrants was antidilutive;
therefore, they were not included in the computation of diluted
loss per share. The number of shares that were excluded from the
computation as their effect would be antidilutive were 1,217,598
and 1,864,648 for the nine months ended March 31, 2001 and 2000,
respectively.
2. INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out)
or market and consist of the following:
MARCH 31, 2001 JUNE 30, 2000
-------------- -------------
Raw Materials $775,112 $686,856
Work-In-Process 387,704 241,686
Finished Goods and Components 151,466 180,969
--------- ---------
Total Inventories $1,314,282 $1,109,511
========= =========
-4-
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 delayed
the implementation date of SAB 101 until 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 adopted SAB 101 as of July 1, 2000, which had no
impact on the Company's previously reported results.
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.
As of December 31, 2000, in accordance with EMERGING ISSUES TASK FORCE
(EITF) ISSUE NO. 00-19, ACCOUNTING FOR DERIVATIVE FINANCIAL INSTRUMENTS
INDEXED TO, AND POTENTIALLY SETTLED IN, A COMPANY'S OWN STOCK, the
Company has reclassified the fair value of outstanding non-employee
options to purchase 25,000 shares of common stock of the Company from
stockholders' equity to a liability category. The fair value of such
options totals approximately $37,000 and has been included under the
"Capital Lease Obligation and Other" caption of the Company's
consolidated balance sheet as of March 31, 2001.
-5-
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", "expects," 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; performance by the Company's
vendors; 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 nine months ended March 31, 2001, the Company's cash and
cash equivalents decreased by approximately $3,070,000 to $12,058,000. The
decrease in cash and cash equivalents was due to cash used by operating
activities of approximately $2,215,000, capital expenditures of approximately
$3,329,000, repayment of capital lease obligations of approximately $84,000,
expenses of approximately $17,000 associated with a private placement of
common stock in fiscal year 2000, and an increase in other assets (primarily
patents) of approximately $26,000, partially offset by net proceeds received
of approximately $2,369,000 from settlement of litigation and proceeds
received of approximately $232,000 from exercise of stock options and
warrants.
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.
The Company's cash and cash equivalents are considered sufficient to
support working capital and investment needs for at least the next twelve
months.
-6-
RESULTS OF OPERATIONS
Total revenues for the quarter and nine months ended March 31, 2001
increased by $349,481 or 44.5% and $712,026 or 34.1%, respectively, from the
same periods in the prior year.
The revenue increase from the prior year for the third quarter was due
to higher sales of medical products (up 19%), and higher sales of non-medical
products (up 400%). For the quarter ending March 31, 2001, medical sales were
higher due primarily to higher shipments of stereo endoscopes and endoscopic
cameras. Non-medical sales were higher for the quarter due primarily to higher
sales of Dense Wavelength Division Multiplexing (DWDM) filters and initial sales
of DWDM filter test instrumentation.
The revenue increase from the prior year for the nine months ended
March 31, 2001 was due to higher sales of medical products (up 16%), and higher
sales of non-medical products (up 186%). For the nine months ended March 31,
2001, medical sales were higher due primarily to higher sales of stereo
endoscopes and endoscopic cameras, and non-stereo endoscopes. Non-medical sales
were higher year to date due primarily to higher sales of DWDM filters and
initial sales of DWDM test instrumentation.
Revenues from the Company's single largest customer were approximately
48% of total revenues for the nine months ended March 31, 2001, and revenues
from the Company's two largest customers, were approximately 48% and 11% of
total revenues for the nine months ended March 31, 2000. No other customers
accounted for more than 10% of the Company's revenues during those periods.
Gross profit expressed as a percentage of revenues decreased from 24.1%
to 18.8% for the third quarter, and decreased from 34.3% to 25.1% for the nine
months ended March 31, 2001, compared to the corresponding periods in the prior
year. The decrease in the gross profit percentage was due primarily to higher
fixed manufacturing costs such as depreciation, insurance, operating supplies,
equipment and building rent, utilities, and indirect labor and benefits, and
lower average selling prices for DWDM filters.
Research and development expenses increased by approximately $436,000,
or 98%, for the quarter ending March 31, 2001, and by approximately $917,000, or
71%, for the nine months ending March 31, 2001 compared to the corresponding
periods of the prior year. During both years, internal research and development
expenses consisted primarily of development efforts related to DWDM filters used
in telecommunications systems. The increase was due to more resources being
devoted to the DWDM filter project in the current year, and to the commencement
of product development efforts on a new product line - filter test equipment.
Selling, general and administrative expenses increased by approximately
$172,000, or 37.5%, for the quarter ending March 31, 2001 and by approximately
$247,000, or 19.3%, for the nine months ending March 31, 2001 compared to the
corresponding periods of the prior year. The increase is due primarily to higher
employee recruiting, insurance, depreciation,
-7-
advertising and trade show expenses, and higher provisions for estimated
uncollectable customer accounts.
Interest expense relates primarily to capital lease obligations.
Interest income increased by approximately $136,000 for the quarter and
by $584,000 for the nine months ending March 31, 2001 compared to the
corresponding periods of the prior year due to the higher base of cash and cash
equivalents related primarily to net proceeds received from a private placement
of common stock in March 2000, from exercise of stock options and warrants, and
from net proceeds received from settlement of litigation.
No income tax provision was recorded in fiscal year 2001 or 2000
because of the losses generated in those periods.
TRENDS AND UNCERTAINTIES THAT MAY AFFECT FUTURE RESULTS
200 GHz DWDM Filters
During the quarter ended March 31, 2001, sales of 200 GHz DWDM filters
more than doubled over last year's third quarter to a record quarterly level,
and represented 19.4% and 15.6%, respectively, of total revenues for the quarter
and nine months ended March 31, 2001.
As previously reported, this growth had been interrupted during the
previous quarter pending the renegotiation of pricing and delivery terms on
several large orders amidst downward pricing pressure in the DWDM market. During
the quarter ended March 31, 2001, these negotiations were successfully completed
and shipments were resumed. However, one customer, who was a participant in
these negotiations, and accounted for 5.7% and 3.9%, respectively, of total
revenues for the quarter and nine months ended March 31, 2001, subsequently
canceled the balance of its order prior to quarter end due to the loss of a
contract with one of its own customers.
Production levels and yields for 200 GHz filters have continued to
improve significantly. Sales this quarter through the first week of May, none of
which were made in connection with the canceled order referred to above, have
already exceeded filter sales for the entire quarter ended March 31, 2001.
Current orders as of March 31, 2001 for 200 GHz filters totaled approximately
$885,000, with delivery scheduled during the quarters ending June and September,
2001. Discussions are now proceeding to secure new and repeat filter orders
extending beyond this period.
100 GHz DWDM Filters
In late March the Company took delivery of a new state-of-the-art 100
GHz production system. Installation was completed in April, with full production
and shipment of 100 GHz filters expected to begin in the quarter ending June 30,
2001.
-8-
DWDM Filter Test Instrumentation
Also in March, the Company introduced two major new products at the
Optical Fiber Communication Conference (OFC) trade show -- the manual Gen
III(TM) DWDM Test Fixture for characterizing telecommunications filters and a
fully automated filter testing system. Both products are based on patent-pending
technology and allow greatly enhanced speed and accuracy in the measurement of
filters. These were received enthusiastically. Initial shipments of manual test
fixtures represented 8.7% of total Company revenues for the quarter, and
additional units are scheduled for delivery during the current quarter. Product
development is continuing on the automated filter testing system, with initial
sales anticipated during the next fiscal year.
Product and Infrastructure Development
The Company has continued to invest aggressively in research,
development and capital equipment to support increased participation in the
long-term opportunities the telecommunications industry offers. In particular,
work has accelerated on improved, higher-capacity manufacturing processes for
200 GHz filter production, and development and commercialization of 100 GHz
filters. With the installation of the 100 GHz system described above, the
Company now has proprietary state-of-the-art systems in place for producing both
100 and 200 GHz filters. These systems have accounted for a substantial portion
of the Company's recent research and development and capital equipment expenses.
For the nine months ended March 31, 2001, R&D expenses were approximately $2.2
million (up 71% from last year), and capital equipment expenditures were
approximately $3.3 million, up more than 350% from the same period last year.
With a large part of the DWDM infrastructure currently in place, R&D and capital
equipment expenditure increases of this magnitude are not anticipated in the
foreseeable future.
Medical Products
Sales of medical products were up 19.8% over last year's third quarter,
and represented 77% of total revenues for the nine months ended March 31, 2001.
However, the Company's principal customer for stereo endoscopes has notified the
Company that, upon completion of current orders in June 2001, it would cease
placing orders for stereo endoscopes with the Company in favor of other sources
of supply. Sales of stereo endoscopes to this customer amounted to 35% of total
revenues for the nine months ended March 31, 2001.
Outlook
The loss of the Company's principal customer for stereo endoscopes will
have an adverse impact on near-term medical sales unless these revenues are
replaced. However, we are moving aggressively to offset this reduction in
revenue with new product offerings to other major medical customers. One example
is a new 5mm laparoscope which began shipping in April following successful
prototype trials.
-9-
The Company believes that downward trends in the selling prices of both
100 GHz and 200 GHz DWDM filters may continue, due primarily to increasing
competitive pressure from other filter manufacturers and softening demand
experienced by telecommunications equipment providers whose products incorporate
DWDM filters as integral components. To address the effects of anticipated
reductions in selling prices, the Company is continuing its efforts (1) to
control and reduce manufacturing costs by increasing production capacity and
yields and by streamlining manufacturing processes, and (2) to complete the
commercialization of 100 GHz filters, which the Company anticipates will have
higher profit margins than those of the 200 GHz filters.
While the current economic slowdown has had significant impact
throughout the telecommunications industry, the Company believes that its
current DWDM filters and filter testing products are well positioned to help
customers respond to continuing price pressures as well as long-term demand for
high-performance components.
A major thrust of Company activity over the last two quarters has been
the development of higher-volume, higher-yield and lower-cost production and
test facilities for both 200 and 100 GHz filters. April 2001 marked the first
month in which the Company attained consistent production volumes over an entire
month's production, and work is continuing to improve yield per deposition run,
helped by the significantly higher throughput of the Company's new manual Gen
III(TM) DWDM Test Fixture, which is also generating revenue as a separate
product. The automatic test system currently being integrated into production
lines will enable further increases in throughput, and should begin to generate
its own additional sales in the coming fiscal year. The Company believes that
these developments in the DWDM area are positive indicators for near-term
improvements in telecommunications-related sales.
Notwithstanding these recent and anticipated accomplishments, the long
term success of the Company's DWDM filter products continues to depend upon a
number of factors, including the Company's timely completion of ongoing product
development efforts, continued ability to meet a set of rigorous customer
specifications, ability to control and reduce manufacturing costs to generate
acceptable profit margins, and success in reliably manufacturing such products
in sufficient quantities at acceptable yields to meet customer demand.
-10-
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 -- The Company
filed one Current Report on Form 8-K
during the quarter ended March 31, 2001
as follows -- On February 8, 2001, the
Company reported a press release issued
February 7, 2001 reporting its operating
results for the quarter ended December 31,
2000.
SIGNATURE
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: May 15 , 2001 BY: /s/ JACK P. DREIMILLER
---------------------------------
Jack P. Dreimiller
Senior Vice President, Finance,
Chief Financial Officer and Clerk
-11-