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, 2004
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
-------------------------------- ---------------
(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 April 30, 2004 was 1,752,053 shares.
Transitional Small Business Disclosure Format (check one):
Yes ( ) No (X)
1
PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
INDEX Page
PART I. FINANCIAL INFORMATION:
Item 1 Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets - 3
March 31, 2004
and June 30, 2003
Consolidated Statements of Operations - 4
Three Months Ended March 31, 2004
and 2003
Nine Months Ended March 31, 2004
and 2003
Consolidated Statements of Cash Flows - 5
Nine Months Ended March 31, 2004
and 2003
Notes to Consolidated Financial Statements 6-8
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-17
Item 3 Controls and Procedures 17
PART II. OTHER INFORMATION 18
Items 1-4 Not Applicable
Item 5 Other Information
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits
(b) Reports on Form 8-K
2
Item 1
PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
CURRENT ASSETS March 31, 2004 June 30, 2003
------------ ------------
Cash and Cash Equivalents $ 945,650 $ 3,504,414
Accounts Receivable, Net 128,823 191,669
Inventories, Net 1,156,180 1,257,288
Prepaid Expenses and Other Current Assets 157,452 91,213
Assets Held for Sale -- 152,550
------------ ------------
Total Current Assets 2,388,105 5,197,134
------------ ------------
PROPERTY AND EQUIPMENT 4,198,034 4,013,680
Less: Accumulated Depreciation (3,860,852) (3,723,350)
------------ ------------
Net Property and Equipment 337,182 290,330
------------ ------------
OTHER ASSETS 245,425 236,156
------------ ------------
TOTAL ASSETS $ 2,970,712 $ 5,723,620
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current Portion of
Capital Lease Obligation $ -- $ 3,826
Accounts Payable 110,293 141,398
Customer Advances 2,575 --
Accrued Employee Compensation 244,185 213,543
Accrued Professional Services 44,982 118,284
Accrued Warranty Expense 50,000 50,000
Other Accrued Liabilities 3,180 6,966
------------ ------------
Total Current Liabilities 455,215 534,017
------------ ------------
OTHER -- 1,555
------------ ------------
STOCKHOLDERS' EQUITY
Common Stock, $.01 par value-
Authorized -- 20,000,000 shares
Issued and Outstanding - 1,752,053
shares at March 31, 2004
and June 30, 2003 17,521 17,521
Additional Paid-in Capital 27,770,175 27,770,175
Accumulated Deficit (25,272,199) (22,599,648)
------------ ------------
Total Stockholders' Equity 2,515,497 5,188,048
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 2,970,712 $ 5,723,620
============ ============
3
PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED
MARCH 31, 2004 AND 2003
(UNAUDITED)
-- THREE MONTHS -- --NINE MONTHS--
2004 2003 2004 2003
----------- ----------- ----------- -----------
REVENUES $ 313,698 $ 903,068 $ 1,179,388 $ 2,035,270
COST OF GOODS SOLD 467,178 595,249 1,514,966 1,607,186
----------- ----------- ----------- -----------
Gross Profit (Loss) (153,480) 307,819 (335,578) 428,084
----------- ----------- ----------- -----------
RESEARCH and DEVELOPMENT 379,518 253,449 980,694 902,642
SELLING, GENERAL and
ADMINISTRATIVE EXPENSES 436,666 487,064 1,320,324 1,420,384
PROVISION FOR RESTRUCTURING 52,208 -- 52,208 53,131
LOSS ON SALE OF ASSETS HELD FOR SALE -- (870) -- 19,171
----------- ----------- ----------- -----------
Total Operating Expenses 868,392 739,643 2,353,226 2,395,328
----------- ----------- ----------- -----------
Operating Loss (1,021,872) (431,824) (2,688,804) (1,967,244)
INTEREST INCOME 4,560 15,318 16,302 54,423
INTEREST EXPENSE -- (207) (49) (6,769)
----------- ----------- ----------- -----------
Net Loss $(1,017,312) $ (416,713) $(2,672,551) $(1,919,590)
=========== =========== =========== ===========
Basic and Diluted Loss Per Share $ (0.58) $ (0.24) $ (1.53) $ (1.10)
=========== =========== =========== ===========
Weighted Average Common Shares
Outstanding 1,752,053 1,752,053 1,752,053 1,752,053
=========== =========== =========== ===========
4
PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED
MARCH 31, 2004 AND 2003
(UNAUDITED)
2004 2003
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(2,672,551) $(1,919,590)
Adjustments to Reconcile Net Loss to Net Cash
Used In Operating Activities -
Depreciation and Amortization 169,499 197,680
Provision for Restructuring -- 53,131
Loss on Sale of Assets Held for Sale -- 19,171
Other -- (6,872)
Changes in Operating Assets and Liabilities-
Accounts Receivable, Net 62,846 (355,162)
Inventories, Net 101,108 (232,846)
Prepaid Expenses (66,239) (75,022)
Refundable Income Taxes -- 13,849
Accounts Payable (31,105) 63,255
Accrued Restructuring Expense -- (221,102)
Customer Advances 2,575 (30,000)
Other Accrued Expenses (48,001) (4,172)
----------- -----------
Net Cash Used In Operating Activities (2,481,868) (2,497,680)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of Property and Equipment (31,804) (22,268)
Net Proceeds from Sale of Assets Held for Sale -- 553,091
Increase in Other Assets (41,266) (42,257)
----------- -----------
Net Cash Provided by (Used In) Investing Activities (73,070) 488,566
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITY:
Repayment of Capital Lease Obligation (3,826) (27,906)
----------- -----------
Net Cash Used In Financing Activity (3,826) (27,906)
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (2,558,764) (2,037,020)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 3,504,414 5,825,601
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 945,650 $ 3,788,581
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash Paid for-
Interest $ 49 $ 6,768
=========== ===========
Income Taxes $ - $ 1,824
=========== ===========
5
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 consolidated 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 2004.
These consolidated financial statements do not include all disclosures
associated with annual consolidated financial statements and, accordingly,
should be read in conjunction with footnotes contained in the Company's
consolidated financial statements for the year ended June 30, 2003
together with the auditors' report filed under cover of the Company's 2003
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 three and nine months ended March 31, 2004 and 2003, 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 issuable upon the exercise of outstanding stock options and
warrants that were excluded from the computation as their effect would be
antidilutive were approximately 221,250 and 203,748, for the three months
ended March 31, 2004 and 2003, respectively, and approximately 215,882 and
202,785 for the nine months ended March 31, 2004 and 2003, respectively.
2. INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or
market and consist of the following:
March 31, 2004 June 30, 2003
------------- -------------
Raw Materials $ 547,534 $ 679,647
Work-In-Progress 372,557 379,636
Finished Goods 236,089 198,005
------------- ------------
Total Inventories $ 1,156,180 $ 1,257,288
============= ============
During the quarter ended March 31, 2004, the Company recorded, in cost of
goods sold, a pretax non-cash provision for slow-moving inventories of
$125,000.
6
3. STOCK-BASED COMPENSATION
The Company accounts for its stock-based compensation using the intrinsic
value method provided for under Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees and related interpretations.
Under APB No. 25 and related interpretations, compensation cost is
recognized based on the difference, if any, on the date of grant between
the fair value of the Company's stock and the amount an employee must pay
to acquire the stock. Statement of Financial Accounting Standards ("SFAS")
No. 123, Accounting for Stock-Based Compensation, establishes a
fair-value-based method of accounting for stock-based compensation plans.
The Company has adopted the disclosure-only alternative under SFAS No.
123, which requires the disclosure of the pro forma effects on net loss
and net loss per share as if the fair value accounting prescribed by SFAS
No. 123 had been adopted.
No stock-based employee compensation cost is reflected in net loss, as all
options granted had an exercise price equal to the market value of the
underlying common stock on the date of grant. The following table
illustrates the effect on net loss and net loss per share if the Company
had applied the fair value recognition provisions of SFAS No. 123 to
stock-based employee compensation:
3 MONTHS ENDED 9 MONTHS ENDED
MARCH 31, MARCH 31,
2004 2003 2004 2003
----------- ----------- ----------- -----------
Net loss, as reported $(1,017,312) $ (416,713) $(2,672,551) $(1,919,590)
Add: Total stock-based employee
compensation expense determined under
fair-value-based method for all awards (9,448) (18,462) (52,383) (63,903)
----------- ----------- ----------- -----------
Pro forma net loss $(1,026,760) $ (435,175) $(2,724,934) $(1,983,493)
=========== =========== =========== ===========
Net loss per share:
As reported - basic and diluted $ (.58) $ (.24) $ (1.53) $ (1.10)
=========== ----------- =========== ===========
Pro forma - basic and diluted $ (.59) $ (.25) $ (1.56) $ (1.13)
=========== =========== =========== ===========
4. LIQUIDITY
The Company's working capital was approximately $7,418,000 and, $4,663,000
at June 30, 2002 and, June 30, 2003, respectively, and decreased further to
approximately $1,933,000 at March 31, 2004. This trend is primarily the result
of losses generated due to the loss of business from a major stereo endoscope
customer. The prospects for future sales to this customer remain uncertain.
Additionally, sales in the quarters ended December 31, 2003 and March 31, 2004,
were adversely affected by customer delays in the introduction of a new system
used in cardiac surgical applications, which employs a specialty endoscope
developed by the Company.
7
The Company's current sources of liquidity consist of its cash and cash
equivalents and accounts receivable. At March 31, 2004, the Company had $945,650
in cash and cash equivalents and $128,823 in accounts receivable. Based on
internal projections, the Company anticipates having sufficient funds to conduct
operations only through July 2004. On May 12, 2004, the Company filed a
registration statement to register 5,256,159 shares of the Company's common
stock in connection with a rights offering to the Company's stockholders. If all
of the rights are sold, the Company will receive gross proceeds of approximately
$5.3 million. However, in the event that all of the rights offered are not sold,
the proceeds could be significantly less than $5.3 million. The Company expects
to complete the rights offering in July 2004. There can be no assurance that
this offering will be partially or fully completed. If the Company does not
receive at least $3 million in the rights offering, it may need to seek funds
elsewhere. There can be no assurance that additional or alternative funding will
be available, or if available, that it will be available on favorable terms.
Lack of necessary funds may require the Company to delay, scale back or
eliminate some or all of its development efforts, or to discontinue operations
entirely.
The Company has taken additional measures to realign its cost structure
with current revenue expectations. In January 2004, the Company reduced its
workforce by five full-time employees, a 15% reduction. As a result of this
action, the Company recorded a non-recurring pretax charge to earnings of
$52,208 for employee severance benefits in the quarter ended March 31, 2004. In
addition, the Company is in the process of reviewing other expense areas to
determine where additional reductions in discretionary spending can be achieved.
The Company believes, based on its operating and strategic plans, that it
will have sufficient funds to conduct operations through at least the current
fiscal year, which ends June 30, 2004. The Company believes that the recent
introduction of several new products, along with new and on-going customer
relationships, may generate additional revenues, which are required in order for
the Company to continue operations beyond July 2004 if the rights offering is
not completed by July 2004 or is not successful; however, there can be no
assurance that the Company will generate additional revenues.
8
Item 2
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, uncertainty of future demand for the Company's products; the
uncertainty and timing of the successful development of the Company's new
products; the risks associated with reliance on a few key customers; the
Company's ability to maintain compliance with requirements for continued listing
on the Nasdaq SmallCap Market; 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; the level of proceeds
generated from the rights offering, if any; 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.
Overview
Precision Optics Corporation, a leading developer and manufacturer of advanced
optical instruments since 1982, designs and produces high-quality optical thin
film coatings, medical instruments, and other advanced optical systems. The
Company's medical instrumentation line includes laparoscopes, arthroscopes and
endocouplers and a world-class product line of 3-D endoscopes for use in
minimally invasive surgical procedures.
The Company is currently developing specialty instruments incorporating its
patent-pending LENSLOCKTM technology which ensures lower cost, easier
repairability and enhanced durability as well as ultra-small instruments (some
with lenses less than one millimeter in diameter) utilizing patent-pending
micro-precisionTM lens technology. The Company is also exploring new initiatives
in single-molecule technology and nanotechnology for biomedical and other
applications.
9
Precision Optics Corporation is certified to the ISO 9001 Quality Standard, and
complies with the FDA Good Manufacturing Practices and the European Union
Medical Device Directive for CE Marking of its medical products. The Company's
Internet Website is www.poci.com.
The areas in which the Company does business are highly competitive and include
both foreign and domestic competitors. Many of the Company's competitors are
larger and have substantially greater resources than the Company. Furthermore,
other domestic or foreign companies, some with greater experience in the optics
industry and greater financial resources than the Company, may seek to produce
products or services that compete with those of the Company. The Company uses
production facilities overseas to produce key components for the Company's
business, such as lenses. The Company believes that the cost savings from such
production is essential to the Company's ability to compete on a price basis in
the medical products area particularly and to the Company's profitability
generally.
The Company believes that competition for sales of its medical products and
services, which have been principally sold to Original Equipment Manufacturer
(OEM) customers, is based on performance and other technical features, as well
as other factors, such as scheduling and reliability, in addition to competitive
price.
The Company believes that its future success depends to a large degree on its
ability to continue to conceive and to develop new optical products and services
to enhance the performance characteristics and methods of manufacture of
existing products. Accordingly, it expects to continue to seek to obtain
product-related design and development contracts with customers and to invest
its own funds on research and development, to the extent funds are available.
The Company relies, in part, upon patents, trade secrets and proprietary
knowledge as well as personnel policies and employee confidentiality agreements
concerning inventions and other creative efforts to develop and to maintain its
competitive position. The Company does not believe that its business is
dependent upon any particular patent, patent pending, or license, although it
believes that trade secrets and confidential know-how may be important to the
Company's scientific and commercial success.
The Company conducts its domestic operations at two leased facilities in
Gardner, Massachusetts. The Company rents office space in Hong Kong for sales,
marketing and supplier quality control and liaison activities of its Hong Kong
subsidiary. The Company believes these facilities are adequate for its current
operations. Significant increases in production or the addition of significant
equipment or manufacturing capabilities in connection with the production for
the Company's line of endoscopes, optical thin films, and other products may,
however, require the acquisition or lease of additional facilities.
Critical Accounting Policies and Estimates
General
Management's discussion and analysis of financial condition and results of
operations are based upon the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States of America ("U.S. GAAP"). The preparation of these
financial statements requires the Company to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses. The
Company bases its estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions.
10
The Company believes the following critical accounting policies affect its more
significant judgments and estimates used in the preparation of its consolidated
financial statements.
Revenue Recognition
The Company recognizes revenue in accordance with U.S. GAAP and SEC Staff
Accounting Bulletin ("SAB") No. 104, Revenue Recognition. SAB No. 104 requires
that four basic criteria must be met before revenue can be recognized: (1)
persuasive evidence of an arrangement exists; (2) delivery has occurred or
services have been rendered; (3) the price to the buyer is fixed and
determinable; and (4) collectibility is reasonably assured. Determination of
criteria (3) and (4) are based on management's judgments regarding the fixed
nature of the price to the buyer charged for products delivered or services
rendered and collectibility of the sales price. The Company assesses credit
worthiness of customers based upon prior history with the customer and
assessment of financial condition. The Company's shipping terms are customarily
FOB shipping point.
Bad Debt
The Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments.
Allowances for doubtful accounts are established based upon review of specific
account balances and historical experience. If the financial condition of the
Company's customers were to deteriorate, resulting in an impairment of their
ability to make future payments, additional allowances may be required.
Inventories
The Company provides for estimated obsolescence on unmarketable inventory based
upon assumptions about future demand and market conditions. If actual demand and
market conditions are less favorable than those projected by management,
additional inventory write downs may be required. Inventory, once written down,
is not subsequently written back up, as these adjustments are considered
permanent adjustments to the carrying value of the inventory.
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of
In accordance with Statement of Financial Accounting Standards ("SFAS") No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets, the Company
assesses impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. Recoverability of assets
to be held and used is measured by a comparison of the carrying amount of an
asset to undiscounted future net cash flows expected to be generated by the
asset. Estimating the future cash flows expected to be generated by the asset is
dependent upon significant judgments made by management. If such assets are
considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceeds the fair value of the
assets. The Company classifies assets to be sold as held for sale in the period
in which all of the following criteria are met:
11
a) Management, having the authority to approve the action, commits to a plan
to sell the asset.
b) The asset is available for immediate sale in its present condition subject
only to terms that are usual and customary for sales of such assets.
c) An active program to locate a buyer and other actions required to complete
the plan to sell the asset have been initiated.
d) The sale of the asset is probable, and transfer of the asset is expected
to qualify for recognition as a completed sale, generally within one year.
e) The asset is being actively marketed for sale at a price that is
reasonable in relation to its current fair value.
f) Actions required to complete the plan indicate that it is unlikely that
significant changes to the plan will be made or that the plan will be
withdrawn.
Assets classified as held for sale are carried at the lower of cost or fair
value less cost to sell and the asset is no longer depreciated. When determining
the fair value, management considers the condition of the assets and pertinent
market conditions. When considered necessary, management will engage third party
valuation experts to assist in the determination of fair value. At each balance
sheet date, management makes an assessment of the assets' fair value and whether
the assets continue to meet the criteria to be classified as held for sale.
Results of Operations
Total revenues for the quarter and nine months ended March 31, 2004
decreased by $589,370, or 65.3%, and $855,882, or 42.1%, respectively, from the
same periods in the prior year. Revenues for the quarter increased 38.3%
sequentially from the preceding quarter.
The decrease in revenues for the quarter was due primarily to lower sales
of medical products (down by approximately $436,000, or 49.3%). Sales of medical
products were lower due primarily to lower shipments of stereo endoscope
products.
The revenue decrease from the prior year for the nine months ended March
31, 2004 was due to lower sales of medical products (down by approximately
$932,286, or 47.9%). Medical sales were lower due primarily to lower shipments
of stereo endoscope products, partially offset by shipments to a new customer
(in the quarter ended September 30, 2003) of specialty endoscopes used for
cardiac surgical applications.
12
Revenues from the Company's largest customers, as a percentage of total
revenues for the nine months ended March 31, 2004 and 2003, were as follows:
2004 2003
Customer A 27 2
Customer B 20 14
Customer C - 50
All Others 53 34
------- -------
100% 100%
======= =======
No other customer accounted for more than 10% of the Company's revenues
during those periods.
At March 31, 2004, receivables from the Company's four largest customers
were approximately 30%, 26%, 14% and 10%, respectively, of the total accounts
receivable. At June 30, 2003, receivables from the Company's largest customer
were approximately 55% of the total accounts receivable. No other customer
accounted for more than 10% of the Company's receivables as of March 31, 2004
and June 30, 2003.
Gross profit (loss) for the quarter and nine months ended March 31, 2004
reflected an unfavorable change of approximately $461,000 and $764,000,
respectively, compared to the quarter and nine months ended March 31, 2003.
Gross profit as a percentage of revenues decreased from 34.1% in the quarter
ended March 31, 2003 to a negative 48.9% in the quarter ended March 31, 2004,
and decreased from 21.0% in the nine months ended March 31, 2003 to a negative
28.5% in the nine months ended March 31, 2004. The unfavorable change in gross
profit was due primarily to lower overall sales volume and provision for slow
moving inventories, partially offset by a lower manufacturing cost structure
resulting from restructuring measures implemented in fiscal year 2003.
Research and development expenses increased by approximately $126,000, or
49.7%, for the quarter ended March 31, 2004, and by approximately $78,000, or
8.6%, for the nine months ended March 31, 2004 compared to the corresponding
periods of the prior year. The increase was due to a higher level of resources
being devoted to product development activities.
Selling, general and administrative expenses decreased by approximately
$50,000, or 10.3%, for the quarter ended March 31, 2004, and by approximately
$100,000, or 7.0%, for the nine months ended March 31, 2004 compared to the
corresponding periods of the prior year. The decrease is due primarily to lower
outside consulting and legal expenses and the effects of the workforce reduction
in January 2004.
The provision for asset impairment and restructuring of $52,208 in the
quarter and nine months ended March 31, 2004, consists of a provision for
severance benefits paid in the quarter ended March 31, 2004 related to the
January 2004 workforce reduction of 15%, or five employees.
Interest expense relates primarily to capital lease obligations.
13
Interest income decreased by approximately $11,000 for the quarter and by
$38,000 for the nine months ended March 31, 2004 compared to the corresponding
periods of the prior year due to the lower base of cash and cash equivalents and
to lower interest rates.
The loss on sale of assets held for sale of $19,171 in the nine months
ended March 31, 2003, represents the loss on the sales of a portion of the
property and equipment held for sale, which formerly was invested in the
Company's telecommunications product line. The Company received net proceeds
from these sales of approximately $553,000 in the nine months ended March 31,
2003.
No income tax provision was recorded in the first, second or third
quarters of fiscal year 2004 or 2003 because of the losses generated in those
periods.
Liquidity and Capital Resources
For the nine months ended March 31, 2004, the Company's cash and cash
equivalents decreased by approximately $2,559,000 to $946,000. The decrease in
cash and cash equivalents was due to cash used by operating activities of
approximately $2,482,000, capital expenditures of approximately $32,000,
repayment of debt of approximately $4,000, and an increase in patent costs of
approximately $41,000. Cash used by operating activities consisted of the net
loss of approximately $2,673,000 and an increase in prepaid expenses of
approximately $66,000, partially offset by other net changes in other operating
accounts totaling approximately $257,000.
The Company's working capital was approximately $7,418,000 and, $4,663,000 at
June 30, 2002 and, June 30, 2003, and decreased further to approximately
$1,933,000 at March 31, 2004. This trend is primarily the result of losses
generated due to the loss of business from a major stereo endoscope customer.
The prospects for future sales to this customer remains uncertain. Additionally,
sales in the quarters ended December 31, 2003 and March 31, 2004 were adversely
affected by customer delays in the introduction of a new system used in cardiac
surgical applications which employs a specialty endoscope developed by the
Company. Despite these delays, the Company anticipates follow-on orders from
this customer.
Contractual cash commitments for the fiscal years subsequent to March 31, 2004
are summarized as follows:
2004 2005 Thereafter Total
--------- --------- ---------- ---------
Operating leases $ 9,227 $ 3,383 $ -- $ 12,610
--------- --------- ---------- ---------
Total $ 9,227 $ 3,383 $ -- $ 12,610
========= ========= ========== =========
14
The Company provides a standard one-year warranty on materials and workmanship
to its customers. The Company provides for estimated warranty costs at the time
product revenue is recognized. Warranty costs are included as a component of
cost of goods sold in the accompanying consolidated statements of operations.
For the nine month periods ended March 31, 2004 and 2003, warranty costs were
not significant.
The Company intends to continue devoting 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 instrument product line and medical instruments
related optical thin films. These investments may temporarily result in negative
cash flow, but the Company anticipates that the result of these efforts will
translate into increased revenues.
The Company's current sources of liquidity consist of its cash and cash
equivalents and accounts receivable. At March 31,2004, the Company had $945,650
in cash and cash equivalents and $128,823 in accounts receivable. Based on
internal projections, the Company anticipates having sufficient funds to conduct
operations only through July 2004. On May 12, 2004, the Company filed a
registration statement to register 5,256,159 shares of the Company's common
stock in connection with a rights offering to the Company's stockholders. If all
of the rights are sold the Company will receive gross proceeds of approximately
$5.3 million. However, in the event that all of the rights offered are not sold,
the proceeds could be significantly less than $5.3 million. The Company expects
to complete the rights offering in July 2004. There can be no assurance that
this offering will be partially or fully completed. If the Company does not
receive at least $3 million in the rights offering, it may need to seek funds
elsewhere. There can be no assurance that additional or alternative funding will
be available, or if available, that it will be available on favorable terms.
Lack of necessary funds may require the Company to delay, scale back or
eliminate some or all of its development efforts, or to discontinue operations
entirely.
The Company believes, based on its operating and strategic plans, that it will
have sufficient funds to conduct operations through at least the current fiscal
year ended June 30, 2004. The Company believes that the recent introduction of
several new products, along with new and on-going customer relationships, may
generate additional revenues, which are required in order for the Company to
continue operations beyond July 2004 if the rights offering is not completed by
July 2004 or is not successful; however, there can be no assurance that the
Company will generate additional revenues.
Recent Accounting Pronouncements
In January 2003, the FASB issued Interpretation No. 46 (FIN 46), Consolidation
of Variable Interest Entities - an Interpretation of ARB No. 51, and, in October
2003, the FASB issued FASB Staff Position (FSP) No. FIN 46-6, Effective Date of
FASB Interpretation 46. This staff position deferred the effective date for
applying FIN 46 to an interest held in a VIE or potential VIE that was created
before February 1, 2003 until the end of the first interim or annual period
ending after December 15, 2003, except if the company had already issued
statements reflecting a VIE in accordance with FIN 46. In December 2003, the
FASB issued Interpretation No. 46R (FIN 46R), Consolidation of Variable Interest
Entities -- An Interpretation of ARB No. 51. FIN 46R replaces FIN 46 and
addresses consolidation by business enterprises of variable interest entities
that possess certain characteristics. A variable interest entity ("VIE") is
defined as (a) an ownership, contractual or monetary interest in an entity where
the ability to influence financial decisions is not proportional to the
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investment interest, or (b) an entity lacking the invested capital sufficient to
fund future activities without the support of a third party. FIN 46R establishes
standards for determining under what circumstances VIEs should be consolidated
with their primary beneficiary, including those to which the usual condition for
consolidation does not apply. Adoption of the required sections of FIN 46, as
modified and interpreted, including the provisions of FIN 46R, did not have any
effect on the Company's consolidated financial statements or disclosures.
In December 2003, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 104, Revenue Recognition (SAB 104), which supersedes SAB 101,
Revenue Recognition in Financial Statements. The primary purpose of SAB 104 is
to rescind accounting guidance contained in SAB 101 related to multiple element
revenue arrangements, which was superseded as a result of the issuance of EITF
00-21, Accounting for Revenue Arrangements with Multiple Deliverables. While the
wording of SAB 104 has changed to reflect the issuance of EITF 00-21, the
revenue recognition principles of SAB 101 remain largely unchanged by the
issuance of SAB 104. The adoption of SAB 104 did not have a material impact on
the Company's consolidated financial statements.
Trends and Uncertainties That May Affect Future Results
For the quarter ended March 31, 2004, cash and cash equivalents decreased by
approximately $781,000 compared to a decrease of approximately $1,024,000 for
the previous quarter ended December 31, 2003. Cash disbursements during the
quarter ended March 31, 2004 included approximately $52,000 paid for employee
severance costs. Cash disbursements during the quarter ended December 31, 2003,
included approximately $330,000 for certain payments occurring only during the
second quarter each year, such as annual insurance premiums and costs associated
with preparation of annual reports and shareholder proxy materials.
Capital equipment expenditures during the nine months ended March 31, 2004 were
approximately $32,000, up 42.8% from the same period in 2003. Future capital
expenditures will depend on future sales and the success of ongoing research and
development efforts.
For the quarter ended March 31, 2004, research and development expenses were
approximately $380,000, up 49.7% from $253,000 for the quarter ended March 31,
2003. Quarterly research and development expenses depend on the Company's
assessment of new product opportunities.
For the quarter and nine months ended March 31, 2004, the Company's revenues and
cash flow have been adversely affected by the loss of stereo endoscope business
from a major customer, as previously reported. The Company does, however,
continue to derive repair revenues from this customer, and is continuing its
development of a new generation of stereo endoscopes for their consideration.
Additionally, revenues were adversely affected by customer delays in the
introduction of a new system used in cardiac surgical applications which employs
a specialty endoscope developed by the Company. Despite these setbacks, the
Company believes that these two customers could provide revenue opportunities
this calendar year, though there can be no assurance they will provide such
opportunities.
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Also, the Company is in discussions with several customers regarding
manufacturing of prototypes of advanced endoscopes incorporating ultra-small
lenses, ranging in size from .5 mm to 1 mm, which include utilization of the
Company's patent-pending micro-precisionTM lens technology. These initiatives
encompass a variety of innovative techniques involving minimally invasive
surgery.
The Company expects its recent pattern of quarter-to-quarter revenue
fluctuations to continue, due to the uncertain timing of orders from customers
and their size in relation to total revenues. The Company continues to move
forward with new products and technical innovations, in particular, the
development of a new generation (patent pending) of its world-class product line
of 3-D endoscopes, the development of a new prototype 2.7 mm endoscope, and new
instruments utilizing the Company's new micro-precisionTM lens technology
(patent pending) for endoscopes under 1 mm.
Item 3
Controls and Procedures
The Company's Chief Executive Officer and Chief Financial Officer have conducted
an evaluation of the Company's disclosure controls and procedures as of March
31, 2004. Based on their evaluation, the Company's Chief Executive Officer and
Chief Financial Officer have concluded that the Company's disclosure controls
and procedures are effective to ensure that information required to be disclosed
by the Company in reports that it files or submits under the Securities Exchange
Act of 1934 is recorded, processed, summarized and reported within the time
periods specified in the applicable Securities and Exchange Commission rules and
forms. There were no significant changes in the Company's internal controls or
in other factors that could significantly affect these controls subsequent to
the date of the most recent evaluation of these controls by the Company's Chief
Executive Officer and Chief Financial Officer, including any corrective actions
with regard to significant deficiencies and material weaknesses.
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PART II. OTHER INFORMATION
Items 1-4 Not Applicable.
Item 5 Other Information
On May 12, 2004, the Company filed a registration
statement to register 5,256,159 shares of the
Company's common stock in connection with a rights
offering to the Company's stockholders. The Company
expects to complete the rights offering in July 2004.
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits -
Exhibit 31.1 - Certification of the Company's
Chief Executive Officer required by Rule
13a-14(a)/15d-14(a).
Exhibit 31.2 - Certification of the Company's
Chief Financial Officer required by Rule
13a-14(a)/15d-14(a).
Exhibit 32.1 - Certifications of the Company's
Chief Executive Officer and Chief Financial
Officer required by Rule 13a-14(b) and 18
U.S.C. 1350.
(b) Reports on Form 8-K - The Company filed two
Current Reports on Form 8-K during the quarter
ended March 31, 2004 as follows: On January 23,
2004, the Company reported under Item 5 a press
release issued on January 22, 2004, reporting a
workforce reduction due to customer order delays.
On February 11, 2004, the Company reported under
Item 12 a press release issued on February 10,
2004, reporting its operating results for the
quarter and six months ended December 31, 2003.
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 12, 2004 BY: /s/ JACK P. DREIMILLER
----------------------------
Jack P. Dreimiller
Senior Vice President, Finance,
Chief Financial Officer and Clerk
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