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, 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 December 31, 2000 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
December 31, 2000
and June 30, 2000 (unaudited)
Consolidated Statements of Operations - 2
Quarter Ended December 31, 2000
and December 31, 1999 (unaudited)
Six Months Ended December 31, 2000
and December 31, 1999 (unaudited)
Consolidated Statements of Cash Flows - 3
Six Months Ended December 31, 2000
and December 31, 1999 (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 10
ITEMS 1-3 Not Applicable
ITEM 4 Submission of Matters to a Vote of Security Holders
ITEM 5 Not Applicable
ITEM 6 Exhibits and Reports on Form 8-K
(a) Exhibits - Exhibit 27
(b) Reports on Form 8-K
PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
DECEMBER 31, 2000 JUNE 30, 2000
----------------- -------------
CURRENT ASSETS
Cash and Cash Equivalents $15,559,959 $15,128,750
Accounts Receivable, Net 496,637 638,299
Inventories 1,291,096 1,109,511
Prepaid Expenses 245,763 70,807
----------- -----------
Total Current Assets 17,593,455 16,947,367
----------- -----------
PROPERTY AND EQUIPMENT 6,610,549 5,768,913
Less: Accumulated Depreciation (3,270,392) (2,901,892)
----------- -----------
Net Property and Equipment 3,340,157 2,867,021
----------- -----------
OTHER ASSETS 257,578 270,806
----------- -----------
TOTAL ASSETS $21,191,190 $20,085,194
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable $ 236,839 $ 319,096
Accrued Payroll 69,362 52,116
Accrued Professional Services 59,451 126,866
Accrued Profit Sharing and Bonuses 22,500 15,000
Accrued Income Taxes --- 912
Accrued Vacation 91,166 91,930
Accrued Warranty Expense 50,000 50,000
Current Portion of Capital Lease Obligation 55,332 95,928
Other Accrued Liabilities 8,265 4,566
----------- -----------
Total Current Liabilities 592,915 756,414
----------- -----------
CAPITAL LEASE OBLIGATION AND OTHER 115,498 88,175
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STOCKHOLDERS' EQUITY
Common Stock, $.01 par value-
Authorized -- 20,000,000 shares
Issued and Outstanding - 10,498,908 and
10,285,158 shares at December 31, 2000
June 30, 2000, respectively 104,989 102,852
Additional Paid-in Capital 27,626,115 25,094,195
Accumulated Deficit (7,248,327) (5,956,442)
----------- -----------
Total Stockholders' Equity 20,482,777 19,240,605
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $21,191,190 $20,085,194
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PAGE 1 OF 12
PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SECOND QUARTER AND SIX MONTHS ENDED
DECEMBER 31, 2000 AND 1999
-- SECOND QUARTER -- -- SIX MONTHS --
2000 1999 2000 1999
---- ---- ---- ----
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
REVENUES $ 778,534 $ 587,403 $ 1,666,833 $ 1,304,288
COST OF GOODS SOLD 640,366 393,737 1,178,607 777,423
----------- ----------- ----------- -----------
GROSS PROFIT 138,168 193,666 488,226 526,865
----------- ----------- ----------- -----------
RESEARCH and DEVELOPMENT 772,277 467,226 1,337,449 856,645
SELLING, GENERAL and
ADMINISTRATIVE EXPENSES 451,033 426,610 898,550 823,076
----------- ----------- ----------- -----------
TOTAL OPERATING EXPENSES 1,223,310 893,836 2,235,999 1,679,721
----------- ----------- ----------- -----------
OPERATING LOSS (1,085,142) (700,170) (1,747,773) (1,152,856)
INTEREST EXPENSE (3,153) (7,053) (7,096) (12,877)
INTEREST INCOME 232,400 8,640 462,984 14,848
----------- ----------- ----------- -----------
LOSS BEFORE PROVISION
FOR INCOME TAXES (855,895) (698,583) (1,291,885) (1,150,885)
PROVISION FOR INCOME TAXES -- -- -- --
----------- ----------- ----------- -----------
NET LOSS $ (855,895) $ (698,583) $(1,291,885) $(1,150,885)
=========== =========== =========== ===========
BASIC and DILUTED LOSS PER SHARE ($0.08) ($0.09) ($0.12) ($0.15)
===== ===== ===== =====
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 10,498,608 7,751,239 10,447,425 7,469,417
========== ========== ========== ==========
PAGE 2 OF 12
PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED
DECEMBER 31, 2000 AND DECEMBER 31, 1999
(UNAUDITED)
2000 1999
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (1,291,885) $ (1,150,885)
Adjustments to Reconcile Net Loss to Net Cash
(Used In) Provided by Operating Activities -
Depreciation and Amortization 394,331 216,703
Changes in Assets and Liabilities-
Accounts Receivable 141,662 1,204
Inventories (181,585) 17,884
Prepaid Expenses (174,956) (31,678)
Accounts Payable (82,257) (19,632)
Accrued Expenses (40,646) 197,225
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Net Cash Used In Operating Activities (1,235,336) (769,179)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of Property and Equipment (841,636) (217,556)
Increase in Other Assets (12,603) (20,199)
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Net Cash Used in Investing Activities (854,239) (237,755)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of Capital Lease Obligation (65,828) (49,705)
Net proceeds from litigation settlement 2,368,485 --
Net Proceeds (Costs) From Private Placement of
Common Stock (16,921) 1,019,391
Proceeds from Exercise of Stock Options
and Warrants 235,048 1,060,382
------------ ------------
Net Cash Provided By Financing Activities 2,520,784 2,030,068
------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 431,209 1,023,134
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 15,128,750 480,732
------------ ------------
CASH AND CASH EQUIVALENTS AT END
OF PERIOD $ 15,559,959 $ 1,503,866
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash Paid for-
Interest $ 7,096 $ 12,877
============ ============
Income Taxes $ -- $ --
============ ============
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Capital Lease Obligation $ -- $ 42,500
============ ============
PAGE 3 OF 12
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 and first half 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 six months ended December 31, 2000 and
1999, 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 1,207,598
and 2,409,635 for the six months ended December 31, 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:
DECEMBER 31, 2000 JUNE 30, 2000
----------------- -------------
Raw Materials $ 782,106 $ 686,856
Work-In-Process 308,674 241,686
Finished Goods and Components 200,316 180,969
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Total Inventories $1,291,096 $1,109,511
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PAGE 4 OF 12
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 $53,000 and has been included under the
"Capital Lease Obligation and Other" caption of the Company's
consolidated balance sheet as of December 31, 2000.
PAGE 5 OF 12
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 six months ended December 31, 2000, the Company's cash and cash
equivalents increased by approximately $431,000 to $15,560,000. 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
$235,000 from exercise of stock options and warrants, partially offset by cash
used by operating activities of approximately $1,235,000, capital expenditures
of approximately $842,000, repayment of debt of approximately $66,000, 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 $13,000.
The Company intends to continue devoting significant resources to
internally-funded research and development spending on both new products and the
improvement of existing products. The Company also intends to devote resources
to the marketing and product support of its medical and optical thin films
product lines, and the development of new methods of distribution.
The Company's cash and cash equivalents are considered sufficient to
support working capital and investment needs for at least the next twelve
months.
PAGE 6 OF 12
RESULTS OF OPERATIONS
Total revenues for the quarter and six months ended December 31, 2000
increased by $191,131 or 32.5% and $362,545 or 27.8%, respectively, from the
same periods in the prior year.
The revenue increase from the prior year for the second quarter was due
to higher sales of medical products (up 45%), partially offset by lower sales of
non-medical products (down 36%). For the quarter ending December 31, 2000,
medical sales were higher due primarily to higher shipments of endoscopes,
stereo endoscopes and endoscopic cameras. Non-medical sales were lower for the
quarter due primarily to lower sales of industrial products and Dense Wavelength
Division Multiplexing (DWDM) filters.
The revenue increase from the prior year for the six months ended
December 31, 2000 was due to higher sales of medical products (up 14%), and
higher sales of non-medical products (up 200%). For the six months ended
December 31, 2000, medical sales were higher due primarily to higher sales of
endoscopes, stereo endoscopes and endoscopic cameras, and higher sales of
non-stereo endoscopes. Non-medical sales were higher year to date due primarily
to higher sales of DWDM filters.
Revenues from the Company's single largest customer were approximately
51% of total revenues for the six months ended December 31, 2000, and revenues
from the Company's two largest customers, were approximately 51% and 10% of
total revenues for the six months ended December 31, 1999. 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 33.0%
to 17.7% for the second quarter, and decreased from 40.4% to 29.3% for the six
months ended December 31, 2000, 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 and indirect labor and benefits.
Research and development expenses increased by approximately $305,000,
or 65%, for the quarter ending December 31, 2000, and by approximately $481,000,
or 56%, for the six months ending December 31, 2000 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.
Selling, general and administrative expenses increased by approximately
$24,000, or 5.7%, for the quarter ending December 31, 2000 and by approximately
$75,000, or 9.2%, for the six months ending December 31, 2000 compared to the
corresponding periods of the prior year. The year to date increase is due
primarily to higher employee recruiting, insurance and depreciation expenses.
PAGE 7 OF 12
Interest expense relates primarily to capital lease obligations.
Interest income increased by approximately $224,000 for the quarter and
by $448,000 for the six months ending December 31, 2000 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 the first or second quarter of
fiscal year 2001 or 2000 because of the losses generated in those periods.
TRENDS AND UNCERTAINTIES THAT MAY AFFECT FUTURE RESULTS
DWDM FILTERS
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. For the six months ended December 31, 2000, research and development
expenses were approximately $1.3 million, up 56% from last year's first half,
and capital equipment expenditures were approximately $842,000, up more than
220% from the same period last year.
Several new state-of-the-art coating systems and ancillary equipment
were installed in the Company's new Optical Thin Film Technology Center in the
quarter ending December 31, 2000 and in January 2001. One of these is a
proprietary high volume production system currently under development for both
100 GHz and 200 GHz DWDM filters. A new state-of-the-art system for the
production of 200 GHz filters has been installed, is presently in final
commissioning, and is expected to be in production by the end of February 2001.
In January 2001, the first customer shipment of 100 GHz DWDM filters
was achieved. The installation and commissioning of a new state-of-the-art 100
GHz production system is anticipated to be completed in March 2001.
Shipments of 200 GHz DWDM filters during the quarter were sharply
curtailed pending the renegotiation of pricing and delivery terms on several
large orders with two customers amidst downward pricing pressure in the DWDM
filter market generally. Shipments of 200 GHz filters were resumed in early
January under an interim pricing arrangement, and it is anticipated that
shipments to these two customers under renegotiated terms will resume during the
quarter ending March 31, 2001.
It is anticipated that the above-mentioned shipment delays and
re-pricing of DWDM filters will result in reductions to previously anticipated
fiscal year 2001 sales and results. However, the addition of the above-mentioned
production systems for 100 GHz and 200 GHz
PAGE 8 OF 12
DWDM filters currently scheduled to be installed and operational in advance
of fiscal year end is expected to significantly increase DWDM filter
production capabilities and offset, at least partially, the effects of
slowdowns and re-pricing.
Because of the uncertainties associated with both the renegotiation of
certain DWDM filter orders and the resulting impact on the timing and amount of
sales during the balance of this fiscal year, it is not possible to accurately
predict the overall reduction in previously forecasted fiscal year 2001 sales at
this time. However, assuming the renegotiations are concluded this quarter as
expected, the Company anticipates significantly increased sales in the second
half of fiscal year 2001.
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.
The Company has made sequential quarterly increases in production of
200 GHz filters over the past year, and has delivered the first customer
shipment of 100 GHz filters in January 2001. New systems for the production
of DWDM filters are expected to be operational in February 2001 and March
2001. 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.
MEDICAL PRODUCTS
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 51% of total
revenues for the six months ended December 31, 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
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. Also, in December 2000, this customer
announced that the FDA has granted permission to initiate a multi-center
clinical evaluation of the Company's surgical system for minimally invasive
surgical repair of the mitral valve at six major medical centers in the United
States. The
PAGE 9 OF 12
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 additional orders for stereo endoscopes and cameras
from this customer totaling approximately $850,000, scheduled for delivery
between January 2001 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.
PART II. OTHER INFORMATION
ITEMS 1-3 Not Applicable.
ITEM 4 Submission of Matters to a Vote of Security Holders
At the annual meeting of stockholders of the Company held on
November 14, 2000, 8,837,248 (or 84.183%) of the 10,497,658
then-outstanding shares of common stock of the Company were
present and voted by proxy. Richard E. Forkey and Edward A.
Benjamin were reelected as Class I directors of the Company,
in the case of Mr. Forkey, by a vote of 8,752,856 shares for
and 0 shares against with 84,392 shares abstaining and, in
the case of Mr. Benjamin, by a vote of 8,751,411 shares for
and 0 shares against with 85,837 shares abstaining.
ITEM 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 one
Current Report on Form 8-K during the quarter
ended December 31, 2000 as follows - On October
30, 2000, the Company reported a press release
issued October 26, 2000 reporting its operating
results for the quarter ended September 30, 2000.
PAGE 10 OF 12
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 13 , 2001 BY: /s/ JACK P. DREIMILLER
-----------------------------------
Jack P. Dreimiller
Senior Vice President, Finance,
Chief Financial Officer and Clerk
PAGE 11 OF 12
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION
27 Financial Data Schedule
PAGE 12 OF 12