-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HzP7zwr74s5j1go/gJeHIVslb3ejVpj4OHzh6vrO3nFwJ+6f/UIRQo6W7XCNhQwo knytlSz4hoUF+38im2nNYg== 0000896415-97-000170.txt : 19970924 0000896415-97-000170.hdr.sgml : 19970924 ACCESSION NUMBER: 0000896415-97-000170 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970923 SROS: BSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PRECISION OPTICS CORPORATION INC CENTRAL INDEX KEY: 0000867840 STANDARD INDUSTRIAL CLASSIFICATION: ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS [3845] IRS NUMBER: 042795294 STATE OF INCORPORATION: MA FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 001-10647 FILM NUMBER: 97684090 BUSINESS ADDRESS: STREET 1: 22 EAST BROADWAY CITY: GARDNER STATE: MA ZIP: 01440-3338 BUSINESS PHONE: 5086301800 FORMER COMPANY: FORMER CONFORMED NAME: PRECISION OPTICS CORP INC DATE OF NAME CHANGE: 19600201 10KSB 1 PRECISION OPTICS CORPORATION, INC. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-KSB ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended June 30, 1997 Commission File Number 001-10647 PRECISION OPTICS CORPORATION, INC. (Name of small business issuer in its charter) MASSACHUSETTS 04-279-5294 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 22 EAST BROADWAY GARDNER, MASSACHUSETTS 01440 (Address of principal executive offices) (Zip Code) Issuer's telephone number is (508) 630-1800 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on Title of each class which registered COMMON STOCK, $.01 PAR VALUE BOSTON STOCK EXCHANGE, INC. Securities registered pursuant to Section 12(g) of the Act: None Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15 of the Exchange Act 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 Check if no disclosure of delinquent filers to Item 405 of Regulation S-B is contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements in- corporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. X The issuer's revenues for its most recent fiscal year were $7,372,310. The aggregate market value of the voting stock, consisting solely of common stock, held by non-affiliates of the issuer computed by reference to the closing price of such stock was $14,564,090 as of June 30, 1997. The number of shares of outstanding common stock of the issuer as of August 31, 1997 was 6,046,502. DOCUMENTS INCORPORATED BY REFERENCE The issuer's Proxy Statement for the 1997 Annual Meeting of Shareholders to be held on November 11, 1997 is incorporated into Part III of this Form 10-KSB. PART I ITEM 1. BUSINESS Business Development. Precision Optics Corporation, Inc. (the "Company") designs, develops, manufactures, and sells specialized optical systems and components and optical thin film coatings. The Company completed a private placement of 1,000,000 shares of Common Stock in August 1990, an initial public offering of 1,200,000 shares of Common Stock in November 1990, and a public offering of 1,176,250 shares of Common Stock in February 1992. In conjunction with these offerings, the Company issued warrants for a total of 320,000 shares of Common Stock to the selling agent and underwriters for the offerings. Before these offerings, the Company was privately held. Precision Optics Corporation, Inc. was incorporated in Massachusetts in 1982. In August 1992, the Company established a wholly-owned subsidiary in Hong Kong to market and sell the Company's products throughout the Pacific Rim marketplace and to engage in general activities relating to the Company's business. Also in August 1992, the Company established a wholly-owned subsidiary, Precise Medical, Inc. ("Precise Medical"), to market and sell medical video endoscopy systems that incorporated the Company's products directly to end users (hospitals, physicians, etc.). On July 14, 1993, the Company closed Precise Medical because of its inability to achieve acceptance in the medical video systems marketplace. References to the Company contained herein include its two wholly-owned subsidiaries except where the context otherwise requires. Business of Issuer. The Company designs, develops, manufactures, and sells specialized optical systems and components and optical thin film coatings. The Company conducts business in one industry segment only. The Company's products and services fall into the following areas: medical products for use by hospitals and physicians, industrial optical products and thin films, and advanced optical system design and development services and products, primarily under contract either directly or indirectly with the United States Government ("the Government"). PRINCIPAL PRODUCTS AND SERVICES AND METHODS OF DISTRIBUTION Medical Products. The Company's medical products include endoscopes and image couplers, beamsplitters, and adapters, which are used as accessories to endoscopes. In January 1991, the Company began the design and development of endoscopes using various optical technologies for use in a variety of minimally invasive surgical and diagnostic procedures throughout the human body. In fiscal year 1997, the Company completed development and began selling its new line of arthroscopes, which are specialized endoscopes used in joint surgery. The Company's endoscope sales have been primarily to manufacturers of video cameras and medical products and video endoscopy systems. In addition to its existing line of endoscopes, the Company is -2- continuing to develop different types of endoscopes that incorporate varying types of construction and technology for varying medical specialties and functionality. The Company developed and has manufactured and sold since 1985 a proprietary product line of state-of-the-art instrumentation to couple endoscopes to video cameras. Included in this product line are image couplers, which physically connect the endoscope to the video camera system and transmit the image viewed through the scope to the video camera. Another product -- the beamsplitter --performs the same function while preserving for the viewer an eyeport for direct, simultaneous viewing through the endoscope. The Company has sold these devices primarily to endoscope and video camera manufacturers and suppliers for resale under its customers' names. The Company's image couplers and beamsplitters can withstand surgery-approved sterilization. The Company also offers autoclavable image couplers, which are able to withstand sterilization in superheated steam under pressure. Autoclavability is a preferred method of sterilization because of its relative speed, safety, and efficiency. The Company believes there is a trend toward increased sterilization of medical instruments and that it is the only company in the world that produces autoclavable image couplers. The Company has investigated the development of an autoclavable beamsplitter. Although autoclavable endoscopes and video cameras, the necessary components to a fully autoclavable video-monitored endoscopy, are not yet available, the Company is in the process of developing an autoclavable endoscope and believes that video camera manufacturers are attempting to develop autoclavable video cameras. There can be no assurance as to the general market acceptance of any of the Company's new products. Included in the Company's medical products sales are sales of image couplers and beamsplitters for video-monitored examination of a variety of industrial cavities and interiors. The Company has developed, and may develop in the future, specialized borescopes for industrial applications. Advanced Optical Design and Development Services. The Company provides on a contract basis advanced lens design, image analysis, optical system design, structural design and analysis, prototype production and evaluation, optics testing, and optical system assembly. Some of the Company's development contracts have led to optical system production business for the Company, and the Company believes its prototype development service may lead to new product production from time to time. Within the advanced optical design and development area, the Company's recent sales have largely been of night-vision products and services which permit users to see in extreme low light. Under contract with a customer that produces and sells aviation night-vision goggles to the United States Army, the Company has designed and produced the eyepieces for aviators' night-vision goggles. Under contract with the same customer, the Company designed and currently produces collimator and objective assemblies for night-vision goggles used by ground personnel. Under additional design and development contracts with the same customer, the Company has designed an objective lens for aviators' night-vision goggles, designed and built prototypes of an objective lens for ground personnel goggles, designed and built new lens system prototypes for night -3- driver's viewers and armament sites, and designed and built a magnifier attachment for ground personnel goggles. In addition, the Company has designed a new objective lens and eyepiece for aviators' night-vision goggles. The Company has in the past and expects in the future to have difficulty competing for production contracts for night-vision products due to the lower prices offered by foreign manufacturers. In addition, Government budget uncertainties and efforts to lower the federal budget deficit and defense spending may adversely affect the Company. The Company believes, however, that some of its night-vision products and development work incorporate new technology which the Government may use to update its existing equipment. In addition to its night-vision related design and development, the Company designs, develops, and manufactures thin film coatings and performs thin film coatings for use on various optical products. Many of the Company's advanced optical design and development projects and the manufacture of the Company's medical and night-vision products have been significantly dependent upon the Company's thin film capabilities. Presently, optical thin film business not associated with other Company business and products is limited or very specialized. However, the Company plans to aggressively pursue sales, marketing and technology development efforts for new optical thin films in the rapidly growing optical communications and semi-conductor industries which may begin to generate additional revenues in the first half of fiscal year 1998. In the third and fourth quarters of fiscal year 1997, several initial orders were received for thin films from new costumers in these business areas. Also, during the last half of fiscal year 1997, the Company began development of prototype Wavelength Division Multiplexer (WDM) optical filters. (WDMs are devices that allow telecommunications companies to increase the transmission capacity of fiber optic lines). The Company has also developed a lens-prism system which it has sold for industrial use as part of an automated registration system for machines and has developed and sells a lens system for optical character reading. COMPETITION AND MARKETS The areas in which the Company engages 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 may establish or use production facilities overseas to produce key components to the Company's business, such as lenses. The Company believes that the cost savings from such production may be essential to the Company's ability to compete on a price basis in the medical and night-vision optics areas and to the Company's profitability, and that the Company's inability to establish or maintain such production facilities could materially, adversely affect the Company. The Company believes that competition for sales of its products and services, which have been principally sold to 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. -4- The Company currently sells its image couplers, beamsplitters, and adapters to a market that consists of approximately 30 potential OEM customers. These potential customers sell video cameras, endoscopes, or video-endoscopy systems. The Company has made sales to approximately 20 of these customers. The Company estimates that it has approximately 30% of the market share in these products and anticipates growth in this area. The Company's primary competition in this area is the customers' own in-house capabilities to manufacture such products. The Company believes that these customers typically purchase products from the Company, despite their in-house capabilities, because they choose to devote their own technical resources to their primary products, such as cameras or endoscopes. The Company estimates that approximately 50% of the market demand for image couplers, beamsplitters, and adapters is met by "captive" or in-house capabilities. The Company anticipates increased demand for its autoclavable products because it believes there is a trend towards more stringent sterilization of medical instruments. The Company has marketed and sold its endoscopes to OEM video camera and video endoscopy suppliers for resale under the purchaser's name. A number of domestic and foreign competitors also sell endoscopes to such OEM suppliers, and the Company's share of the endoscope market is nominal. The Company believes that, while its resources are substantially more limited than these competitors, the Company may be able to be more responsive to the needs of endoscope users. With respect to the Company's advanced optical design and development services not related to night-vision or thin film coatings, the Company has numerous customers and competitors. The ability to supply design and development services to such customers is highly dependent upon a company's and its employees' reputations and prior experience. With respect to night-vision optics, the Company's sales of its products and services have been almost exclusively to one customer, which sells night-vision equipment to the United States Army. The Company faces intense competition for production of night-vision products from foreign manufacturers. In the night-vision optical design area, the Company has numerous competitors. The Company's business in the night-vision optics area is highly dependent upon the Company's reputation and performance, as well as upon Government contracts and policy. The Company believes the demand for night-vision optics generally, which are used extensively in drug and law enforcement and surveillance as well as search and rescue missions and military applications, will lessen. Recent experience with lens sales for new consumer night vision products also suggests that market growth in this area is severely limited. While the potential market for thin film coatings is perceived as growing rapidly, particularly in the telecommunications and semi-conductor industries, the Company's thin film coatings competitors are numerous and have deep and broad capabilities. The Company has had negligible direct export sales to date. RESEARCH AND DEVELOPMENT 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 and to enhance the performance characteristics and methods of manufacture of existing products. Accordingly, it expects to continue to -5- seek to obtain product-related design and development contracts with customers and to invest its own funds on its research and development. The Company received approximately $1,410,000 and $1,060,000 for the fiscal years ended June 30, 1997 and 1996, respectively, from customers for customer-sponsored design and development projects. Levels of customer contract funded research and development can fluctuate greatly in any given period depending upon the mix between design efforts and hardware development, which is generally more expensive and time consuming than the design phases. In addition to customer-sponsored research and development, the Company spent approximately $428,000 and $433,000 of its own funds during fiscal years 1997 and 1996, respectively, on the Company's own research and development. The Company expects to continue making significant Company-funded expenditures for research and development. RAW MATERIALS AND PRINCIPAL SUPPLIERS For all of the Company's products, except for thin film coatings, the basic raw material is precision grade optical glass, which the Company obtains from several major suppliers. Outside vendors grind and polish most of the Company's lenses and prisms. For optical thin film coatings, the basic raw materials are metals and dielectric compounds, which the Company obtains from a variety of chemical suppliers. The Company believes that its demand for these raw materials and services is small relative to the total supply and that materials and services required for the production of its products are currently available in sufficient production quantities and will be available for fiscal year 1998. The Company believes, however, that there are relatively few suppliers of the high quality lenses and prisms which its endoscopes may require. Depending upon the market acceptance of the Company's endoscopes, the Company may seek to assure itself of a timely supply of lenses, prisms, or other key materials or components through the acquisition of a supplier or expanded manufacturing facilities of its own. PATENTS AND TRADEMARKS 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 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 plans to file for patents, copyrights, and trademarks in the United States and in appropriate countries to protect its intellectual property rights whenever possible. The Company holds the rights to two United States patents and has Japanese and German patent applications pending relating to one of its image couplers and holds the rights to a United States patent to one of its endoscopes. The Company has received jointly with a customer a patent relating to one of its night-vision designs. The Company will assign its rights under this night-vision patent to such customer for night-vision applications. The Company knows of no infringements of its patents. Although the Company plans to protect any patents it has from infringement, it may not be able to pursue such protection for economic reasons. While the Company believes that its pending applications relate to patentable devices or concepts, there can be no assurance that patents will be issued or that -6- any patents issued can be successfully defended or will effectively limit the development of competitive products and services. Although the Company seeks to protect its proprietary information, there can be no assurance that others will not either develop independently the same or similar information or gain access to the Company's proprietary information or that disputes will not arise as to proprietary rights to such information. The Company's products may now or in the future infringe upon others' patents or proprietary technology. The Company's defense of any such claims could have a material, adverse effect on the Company. EMPLOYEES As of June 30, 1997, the Company had forty-five full-time employees and two part-time employees. CUSTOMERS Sales to the Company's two largest customers, in terms of total sales during fiscal year 1997, were approximately 38% and 23%. Sales to the Company's three largest customers, in terms of total sales during fiscal year 1996, were approximately 42%, 14% and 12%. ENVIRONMENTAL PROTECTION AND THE EFFECT OF EXISTING OR PROBABLE GOVERNMENT REGULATIONS ON THE BUSINESS The Company's operations are subject to a variety of federal, state, and local laws and regulations relating to the discharge of materials into the environment or otherwise relative to the protection of the environment. From time to time the Company uses a small amount of hazardous materials in its operations. Although the Company believes that it complies with all applicable environmental laws and regulations, any failure to comply with such laws and regulations could have a material, adverse effect on its capital expenditures, earnings, and competitive position. NEED FOR GOVERNMENT APPROVAL OF PRINCIPAL PRODUCTS OR SERVICES AND EFFECT OF EXISTING OR PROBABLE GOVERNMENT REGULATIONS ON THE BUSINESS The Company currently sells and markets four medical products, the marketing of which may require the permission of the United States Food and Drug Administration ("FDA"). Pursuant to the Company's notification to the FDA of its intent to market its laparoscope, additional types of endoscopes which it has developed and is developing, image coupler, beamsplitter, and adapters, the FDA has determined that each such device is substantially equivalent to a device marketed in interstate commerce and that the Company may market such devices, subject to the general controls provisions of the Food, Drug and Cosmetic Act. Furthermore, the Company plans to market additional endoscopes and related medical products that may require the FDA's permission to market such products. The Company may also develop additional products or seek to sell some of its current or future medical products in a manner that requires the Company to obtain the permission of the FDA to market such products, as well as the regulatory approval or license of other federal, state, and local agencies or -7- similar agencies in other countries. There can be no assurance that the Company will be able to maintain the FDA's permission to market its current products or to obtain such regulatory permission, approvals, or licenses for any of its other products. Furthermore, potential adverse FDA regulation affecting the Company which might arise from future legislation or administrative action cannot be predicted. In addition, FDA regulations may be established that could prevent or delay regulatory clearances or approval of the Company's products. The inability of the Company to secure any necessary licenses or regulatory approvals or permission from the FDA could have a material adverse effect on its business. The FDA has authority to conduct detailed inspections of manufacturing plants in order to assure that "good manufacturing practices" are being followed in the manufacture of medical devices, to require periodic reporting of product defects to the FDA, and to prohibit the exploitation of devices which do not comply with law. Failure to comply with applicable regulatory requirements can, among other things, result in fines, suspensions of regulatory clearances or approvals, product recalls, operating restrictions, and criminal prosecution. ITEM 2. DESCRIPTION OF PROPERTY The Company conducts its domestic operations at two facilities in Gardner and Fitchburg, Massachusetts. The Gardner Facility is leased from a corporation owned by an officer-shareholder-director of the Company, and the Company's lease expires in December 1999. The Fitchburg facility is under a three year lease which commenced on November 1, 1995. 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 additions or manufacturing capabilities in connection with the production of the Company's line of endoscopes, optical thin films, and other products may, however, require the acquisition or lease of additional facilities. The Company may establish production facilities domestically or overseas to produce key assemblies or components, such as lenses, for the Company's products. Overseas facilities may subject the Company to the political and economic risks associated with overseas operations. The loss of or inability to establish or maintain such additional domestic or overseas facilities could materially adversely affect the Company's competitive position and profitability. ITEM 3. LEGAL PROCEEDINGS The Company and its subsidiaries and their property are not party or subject to any material pending legal proceedings. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of the Company's security holders during the fourth quarter of fiscal year 1997. -8- DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY The Company's executive officers and directors are as follows:
Position with the Company Name or Principal Occupation Richard E. Forkey President, Treasurer, and Director Jack P. Dreimiller Senior Vice President, Finance and Chief Financial Officer Kumar M. Khajurivala Vice President, Operations Edward A. Benjamin Director and Clerk. Mr. Benjamin is a partner in the law firm of Ropes & Gray, Boston, Massachusetts Joel R. Pitlor Director. Mr. Pitlor is president of J.R. Pitlor, a management consulting firm based in Cambridge, Massachusetts. Robert R. Shannon Director. Mr. Shannon is a professor at the Optical Sciences Center of the University of Arizona in Tuscon, Arizona.
-9- PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock currently trades on the Boston Stock Exchange under the symbol "POC" and is listed on the National Association of Securities Dealers Automated Quotation (NASDAQ) System under the symbol "POCI." From January 1991 to December 1991, the Boston Stock Exchange was the principal market in which the Company's stock was publicly traded. Since January 1992, NASDAQ has been the principal market in which the Company's stock is publicly traded. The high and low sales prices for the Company's stock for each full quarterly period within the two most recent fiscal years were as follows:
1996 1997 ---- ---- Quarter High Low High Low --------------------------------------------------------------------- First $1 7/8 $1 1/8 $1 3/4 $ 7/8 Second $1 7/8 $1 1/4 $1 3/4 $1 1/8 Third $2 $1 1/4 $1 15/16 $1 1/16 Fourth $2 $1 1/8 $3 11/16 $1 1/8
As of August 31, 1997, there were 99 holders of record of the Company's common stock. ITEM 6. 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. See "Important Factors Regarding Forward-Looking Statements" attached hereto as Exhibit 99 and incorporated herein by reference. 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. -10- LIQUIDITY AND CAPITAL RESOURCES For the year ended June 30, 1997, the Company's cash and cash equivalents decreased by approximately $269,000 to $2,348,000. The decrease in cash and cash equivalents was due to cash generated by operating activities of approximately $290,000 and proceeds received from exercise of stock options of approximately $57,000, less capital expenditures of approximately $445,000, increases in other assets, primarily patents, of approximately $89,000 and repayment of a capital lease obligation of approximately $82,000. 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 film product lines, and the development of new methods of distribution. These investments may temporarily result in negative cash flow, but the Company anticipates that the results of these efforts will translate into increased revenues and profits. Furthermore, depending upon the market acceptance of the Company's products, the Company believes that it may be obligated to acquire new facilities, add additional manufacturing or research and development equipment, or acquire a business that manufactures or sells to the Company components, materials, supplies, or services used in the manufacture, marketing, distribution or servicing of the Company's new products, as well as the Company's existing products. The Company continues to maintain a secured line of credit of $500,000 available with a bank at 1/4% over the prime rate. The Company's cash and cash equivalents and available lines of credit are considered sufficient to support working capital and investment needs for the foreseeable future. RESULTS OF OPERATIONS Total revenues for fiscal year 1997 were approximately $7,372,000, a decrease of approximately $683,000, or 8.5%, from fiscal year 1996. The revenue decrease was due to lower sales of non-medical products (down 29%), partially offset by higher sales of medical products (up 22%). The increase in sales of medical products was attributable to higher sales in all major product categories. The reduction in non-medical sales was due primarily to (1) lower sales of night-vision products due to completion of two government production subcontracts and one government development subcontract and (2) lower sales of industrial products due to discontinued sales to a significant customer, both partially offset by higher sales of optical thin films. Gross profit decreased by approximately $701,000 in fiscal year 1997, and as a percentage of revenues decreased from 30.6% to 23.9% compared to the previous year. The decrease in gross profit was due primarily to the lower sales volume and higher occupancy and depreciation expenses related to equipment and manufacturing facilities additions. -11- For the fiscal years ended June 30, 1997, 1996 and 1995, approximately 38%, 44% and 45% of the Company's total revenues, respectively, were derived from production and development contracts and subcontracts involving the Government and its agencies. The Company's current Government business is substantially comprised of a development subcontract with one customer on a cost-plus-fixed-fee basis extending approximately through April, 1998, and two fixed-price production subcontracts with another customer for night-vision lens systems with deliveries scheduled approximately through May, 1998. The Government may terminate a government contract at any time, with or without cause. After expiration of the current subcontracts, there can be no assurance that the Government will award future contracts or subcontracts to the Company. Selling, general and administrative expenses increased by approximately $169,000 or 7.9% in fiscal year 1997 compared to fiscal year 1996. The increase was due primarily to higher spending on advertising and bid and proposal expenses targeted at the industrial and thin films marketplace, and higher legal, consulting and employee recruiting expenses. Interest expense relates primarily to capital lease obligations incurred in the third quarter of fiscal years 1994 and 1996. Interest income decreased by approximately $20,000 in fiscal year 1997 due to the lower investment base of cash equivalents. The benefit for income taxes as a percentage of the pre-tax loss in fiscal year 1997 is lower than the federal statutory income tax rate primarily due to inability to recognize the full amount of deferred tax assets to offset prior years' taxable income. Such tax benefits will be recognized in future years if sufficient future taxable income is generated. FISCAL YEAR 1996 RESULTS OF OPERATIONS Total revenues for fiscal year 1996 were approximately $8,055,000, an increase of approximately $477,000, or 6.3%, over fiscal year 1995. The revenue increase over the prior year was due to higher sales of medical products (up 30.3%) and higher sales of night-vision products (up 1.8%), partially offset by lower sales of industrial products (down 23.2%). The increase in sales of medical products was primarily attributable to higher sales of endocouplers, which increased by 89% for the year to record levels. The reduction in industrial sales was due primarily to lower sales of industrial lenses to a significant customer. This customer accounted for 12%, 18%, and 7% of the Company's total revenues for fiscal years 1996, 1995 and 1994, respectively. Gross profit decreased by approximately $123,000 in fiscal year 1996, and as a percentage of revenues, decreased from 34.1% to 30.6% compared to the previous year. The decrease in gross profit was due primarily to an unfavorable shift in sales mix away from industrial products, which have relatively higher gross margins than other product lines, and higher occupancy and depreciation expenses related to equipment and manufacturing facilities additions. Selling, general and administrative expenses increased by approximately $191,000 or 10% in fiscal year 1996 compared to fiscal year 1995. The increase was due primarily to higher spending on -12- new product research and development, principally related to medical products, which increased by 19% to approximately $433,000 in fiscal year 1996, higher advertising expenditures targeted at the industrial marketplace, and higher depreciation and amortization expenses. Interest expense relates primarily to capital lease obligations incurred in the third quarter of fiscal years 1994 and 1996. Interest income increased by approximately $32,000 in fiscal year 1996 due to the higher investment base of cash equivalents and higher interest rates. The provision for income taxes as a percentage of pre-tax income is lower than the federal statutory income tax rate primarily due to recognition of available tax credits and future tax deductions not previously benefited. OTHER FACTORS THAT MAY AFFECT FUTURE RESULTS The Company continues to aggressively pursue sales, marketing, and technology development efforts for new optical thin films in the rapidly growing telecommunications and semi-conductor industries, which will begin to generate modest incremental revenues in the last half of this calendar year. In the third and fourth quarters of fiscal year 1997, several initial orders were received for thin films from new customers in these business areas. Development efforts on prototype Wavelength Division Multiplexer (WDM) optical filters are continuing. Although the Company had experienced substantial growth in its sales of endocouplers during the six months ending December 31, 1996, these sales have been largely dependent upon a relatively new application for these instruments. While the Company believes that prospects for continued success of the new endocoupler application are good, recent demand for endocouplers has softened due primarily to technical problems in a customer's product which is used in conjunction with the Company's endocouplers. Consequently, no shipments were made to this customer during the six months ending June 30, 1997, and none are scheduled for the quarter ending September 30, 1997. The Company has been advised by this customer, who accounted for 23% of the Company's revenues for the year ending June 30, 1997, that although the technical problems in its product have recently been corrected, additional orders for endocouplers will be deferred until it consumes its existing stock of endocouplers. ITEM 7. CONSOLIDATED FINANCIAL STATEMENTS: The Consolidated Financial Statements are filed on pages 14 to 28 of this Form 10-KSB. -13- PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES Consolidated Financial Statements as of June 30, 1997 and 1996 Together with Auditors' Report -14- REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Precision Optics Corporation, Inc.: We have audited the accompanying consolidated balance sheets of Precision Optics Corporation, Inc. (a Massachusetts corporation) and subsidiaries as of June 30, 1997 and 1996, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended June 30, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Precision Optics Corporation, Inc. and subsidiaries as of June 30, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 1997, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Boston, Massachusetts July 31, 1997 -15- PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS--JUNE 30, 1997 AND 1996
ASSETS 1997 1996 LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996 CURRENT ASSETS: CURRENT LIABILITIES: Cash and cash equivalents $ 2,348,382 $ 2,617,813 Marketable Securities 30,000 - Accounts payable $ 271,911 $ 829,428 Accounts receivable (net of Accrued payroll 81,122 81,990 allowance for doubtful accounts Accrued profit sharing and bonuses 30,000 93,938 of approximately $69,000 and Accrued professional services 85,556 49,360 $82,000 in l997 and 1996, Accrued vacation 64,903 51,881 respectively) 466,811 1,139,804 Accrued warranty expense 50,000 50,000 Inventories 1,576,967 1,863,694 Accrued income taxes 18,946 35,383 Deferred tax asset 157,300 119,000 Other accrued liabilities 42,164 51,638 Prepaid expenses 40,273 44,684 Current portion of capital Refundable income taxes 52,970 30,276 lease obligation 89,532 82,678 ---------- -------- -------- -------- Total current assets 4,672,703 5,815,271 Total current liabilities 734,134 1,326,296 --------- --------- --------- --------- PROPERTY AND EQUIPMENT, AT COST: Machinery and equipment 2,474,478 2,049,758 CAPITAL LEASE OBLIGATION, NET OF CURRENT PORTION 189,413 278,949 Leasehold improvements 433,832 420,230 -------- --------- Furniture and Fixtures 109,568 102,976 Vehicles 44,742 44,742 --------- --------- 3,062,620 2,617,706 COMMITMENTS (Note 4) Less--Accumulated depreciation 1,927,578 1,531,228 and amortization --------- --------- 1,135,042 l,086,478 --------- --------- STOCKHOLDERS' EQUITY: Common stock, $.01 par value- OTHER ASSETS: Authorized--10,000,000 shares Cash surrender value of life Issued and outstanding--6,021,502 insurance policies 51,871 52,851 and 5,980,502 shares at June 30, Patents, net 155,986 125,995 1997 and 1996, respectively 60,215 59,805 Deferred costs, net - 2,025 Additional paid-in capital 5,202,558 5,145,655 Retained (deficit) earnings (170,718) 271,915 ---------- -------- --------- --------- Total other assets 207,857 180,871 Total stockholders' equity 5,092,055 5,477,375 --------- --------- --------- --------- $ 6,015,602 $7,082,620 $ 6,015,602 $ 7,082,620 ========= ========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements. 16 PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED JUNE 30, 1997, 1996 AND 1995
- --------- 1997 1996 1995 REVENUES $ 7,372,310 $ 8,055,271 $ 7,578,097 COST OF GOODS SOLD 5,610,438 5,592,871 4,992,785 --------- --------- --------- Gross profit 1,761,872 2,462,400 2,585,312 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 2,296,687 2,128,155 1,937,497 --------- --------- --------- Operating (loss) income (534,815) 334,245 647,815 INTEREST EXPENSE (27,241) (16,639) (9,598) Interest Income 104,423 124,104 92,499 ------------ ------------ ---------- (Loss) Income before provision for income taxes (457,633) 441,710 730,716 (Benefit) Provision for Income Taxes (15,000) 36,000 150,000 ------------ ------------ ---------- Net (loss) income $ (442,633) $ 405,710 $ 580,716 ============ ============ ============ (LOSS) INCOME PER COMMON AND COMMON EQUIVALENT SHARE $(.07) $.07 $.10 ============== ============== ============== WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING 5,982,210 6,116,569 6,066,366 =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. 17 PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED JUNE 30, 1997, 1996 AND 1995
ADDITIONAL RETAINED TOTAL NUMBER OF COMMON PAID-IN (DEFICIT) STOCKHOLDERS SHARES STOCK CAPITAL EARNINGS EQUITY BALANCE, JUNE 30, 1994 5,980,502 $ 59,805 $ 4,997,655 $(714,511) $ 4,342,949 Tax benefit from exercise of options to purchase common stock - - 148,000 - 148,000 Net Income - - - 580,716 580,716 ---------------- -------------- -------------- ------------ ------------- BALANCE, JUNE 30, 1995 5,980,502 59,805 5,145,655 (133,795) 5,071,665 Net Income - - - 405,710 405,710 ---------------- -------------- -------------- ------------ ------------- BALANCE, JUNE 30, 1996 5,980,502 59,805 5,145,655 271,915 5,477,375 Proceeds from exercise of options to purchase common stock 41,000 410 56,903 - 57,313 Net loss - - - (442,633) (442,633) ---------------- -------------- -------------- ------------ ------------- BALANCE, JUNE 30, 1997 6,021,502 $ 60,215 $ 5,202,558 $(170,718) $ 5,092,055 ================ ============== ============== ============ ============= The accompanying notes are an integral part of these consolidated financial statements.
-18- PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JUNE 30, 1997, 1996 AND 1995
1997 1996 1995 CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income $ (442,633) $ 405,710 $ 580,716 Adjustments to reconcile net (loss) income to net cash provided by operating activities- Depreciation and amortization 428,054 308,275 184,849 Deferred income taxes (38,300) (67,000) (52,000) Changes in assets and liabilities- Accounts receivable 672,993 276,567 (123,485) Inventories 286,727 (395,215) 86,378 Prepaid expenses 4,411 (21,810) (4,091) Refundable income taxes (22,694) (30,276) - Accounts payable (557,517) 361,467 16,732 Accrued payroll (868) 16,984 (5,527) Accrued profit-sharing and bonuses (63,938) (46,062) 140,000 Accrued professional services 36,196 505 (3,238) Accrued income taxes (16,437) (15,401) 47,722 Other accrued liabilities 3,548 22,933 (22,108) ----------- ------------ ------------ Net cash provided by operating activities 289,542 816,677 845,948 ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of marketable securities (30,000) - - Purchases of property and equipment (444,914) (615,798) (115,602) Increase in other assets (58,690) (59,844) (47,717) ------------ ----------- ------------ Net cash used in investing activities (533,604) (675,642) (163,319) ------------ ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of capital lease obligation (82,682) (51,068) (26,603) Tax benefit from stock options exercised - - 148,000 Proceeds from exercise of stock options 57,313 - - --------------- --------------- ------------ Net cash (used in) provided by financing activities (25,369) (51,068) 121,397 ----------- ------------ ------------ NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (269,431) 89,967 804,026 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 2,617,813 2,527,846 1,723,820 ----------- ------------ ----------- CASH AND CASH EQUIVALENTS, END OF YEAR $ 2,348,382 $ 2,617,813 $ 2,527,846 =========== ========== ========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the year for- Interest $ 27,241 $ 16,639 $ 9,598 ============ ========== ============ Income taxes $ 101,461 $ 151,325 $ 6,278 =========== =========== ============ SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTMENT ACTIVITIES: Capital lease obligation $ - $ 299,180 $ - ============ ============ ===========
The accompanying notes are an integral part of these consolidated financial statements. -19- PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1997 (1) Summary of Significant Accounting Policies (a) Nature of Business Precision Optics Corporation, Inc. (the Company) designs, manufactures and sells optical systems, components and thin-film coatings. The Company conducts business in one industry segment only and its customers are primarily domestic. The Company's products and services fall into two principal areas: medical products for use by hospitals and physicians, and advanced optical system design and development services and products, primarily under contract either directly or indirectly with the United States Government. (b) Principles of Consolidation The accompanying consolidated financial statements include the accounts of the Company and its two wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. (c) Revenues Revenues for industrial and medical products sold in the normal course of business are recognized upon shipment. Contract revenues are recognized under the percentage-of-completion method. The percentage of completion is determined by computing the percentage of the actual cost of work performed to the anticipated total contract costs, or on the basis of units shipped. When the estimate on a contract indicates a loss, the Company's policy is to record the entire loss in the current period. (d) Cash and Cash Equivalents The Company includes in cash equivalents all highly liquid investments with original maturities of three months or less at the time of acquisition. Cash equivalents at June 30, 1997 and 1996 include approximately $1,529,000 and $1,455,000, respectively, of United States Treasury bills. (e) Marketable Securities Marketable securities consist of equity securities and are carried at the lower of aggregate cost or market value. -20- PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1997 (Continued) (f) Inventories Inventories are stated at the lower of cost (first-in, first-out) or market and include material, labor and manufacturing overhead. The components of inventories are as follows at June 30, 1997 and 1996:
1997 1996 Raw material $ 1,075,294 $ 1,282,924 Work -in-progress 272,980 502,658 Finished goods 228,693 78,112 ------------- -------------- $ 1,576,967 $ 1,863,694 ============ ============
(g) Depreciation and Amortization The Company provides for depreciation and amortization by charges to operations, using the straight-line and declining-balance methods, which allocate the cost of property and equipment over the following estimated useful lives: ESTIMATED ASSET CLASSIFICATION USEFUL LIFE Machinery and equipment 5-7 years Leasehold improvements Life of lease Furniture and fixtures 5 years Vehicles 3 years (h) Significant Customers and Concentration of Credit Risk Statement of Financial Accounting Standards (SFAS) No. 105, Disclosure of Information About Financial Instruments with Off-Balance-Sheet Risk and Financial Instruments with Concentrations of Credit Risk, requires disclosure of any significant off-balance sheet and credit risk concentrations. Financial instruments that subject the Company to credit risk consist primarily of cash and cash equivalents and trade accounts receivable. The Company places its investments in highly rated financial institutions. The Company has not experienced any losses on these investments to date. At June 30, 1997 and 1996, receivables from the Company's largest customer were approximately 29% and 58% of the total accounts receivable, respectively. The Company has not experienced any material losses related to accounts receivable from individual customers. -21- PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1997 (Continued) Revenues from the Company's two largest customers were approximately 38% and 23%, respectively, of total revenues for the year ended June 30, 1997. Revenues from the Company's three largest customers were approximately 42%, 14% and 12%, respectively, of total revenues for the year ended June 30, 1996. Revenues from the Company's two largest customers were approximately 43% and 18%, respectively, of total revenues for the year ended June 30, 1995. No other customers accounted for more than 10% of the Company's revenues in each of the three years ended June 30, 1997. Approximately 38%, 44% and 45% of the Company's revenues for the years ended June 30, 1997, 1996 and 1995, respectively, were derived from sales to agencies of the government or customers that supply agencies of the government. (i) Research and Development Research and development costs, which are expensed as incurred, are included in selling, general and administrative expenses and include direct costs plus overhead. Such costs totaled approximately $428,000, $433,000 and $363,000 for the years ended June 30, 1997, 1996 and 1995, respectively. (j) Income (Loss) per Common and Common Equivalent Share Income (loss) per common and common equivalent share is computed based on the weighted average number of common and common equivalent shares (if dilative) outstanding during each year. The difference between the weighted average shares outstanding under the primary and fully diluted methods is not significant. In March 1997, the Financial Accounting Standards Board (FASB) issued SFAS No. 128, Earnings per Share. SFAS No. 128 establishes standards for computing and presenting earnings per share and applies to entities with publicly held common stock. This statement is effective for fiscal years ending after December 15, 1997 and early adoption is not permitted. When adopted, the statement will require restatement of prior years' earnings per share. The Company will adopt this statement for its fiscal year ended June 30, 1998. In addition, the Company believes that the adoption of SFAS No. 128 including the effect on prior periods, will not have a material effect on its financial statements. -22- PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1997 (Continued) (k) Stock-Based Compensation The Company accounts for its stock-based compensation under Accounting Principals Board Opinion No. 25, Accounting for Stock Issued to Employees. In October 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based Compensation, which is effective for fiscal years beginning after December 15, 1995. SFAS No. 123 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 required the disclosure of the pro forma effects on earnings and earnings per share as if the accounting prescribed by SFAS No. 123 had been adopted, as well as certain other information. (l) Foreign Currency Translation The Company translates certain accounts and financial statements of its foreign subsidiary in accordance with SFAS No. 52, Foreign Currency Translation. The functional currency of the Company's foreign subsidiary is the United States dollar. Accordingly, translation gains or losses are reflected in the accompanying consolidated statements of operations and have not been significant. (m) Other Assets Patents and deferred costs are carried at cost, less accumulated amortization of approximately $71,000 and $60,000 at June 30, 1997 and 1996, respectively. Such costs are amortized using the straight-line method over their legal or estimated useful lives, generally five to ten years. (n) Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (2) Line of Credit At June 30, 1997, the Company had available a demand line of credit of $500,000 at an interest rate equal to the bank's prime rate (8.5% at June 30, 1997) plus 0.25%. At June 30, 1997, there -23- PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1997 (Continued) were no borrowings outstanding under this line of credit. Borrowings under this line of credit are secured by all assets of the Company. The line of credit expires on November 30, 1997; however, the Company anticipates its renewal. (3) Capital Lease Obligation At June 30, 1997, future minimum lease payments under capital lease obligations are as follows:
FISCAL YEAR AMOUNT 1998 $ 109,000 1999 93,920 2000 72,808 2001 42,474 ----------- Total minimum lease payments 318,202 Amount representing interest (39,257) ----------- Present value of minimum lease payments 278,945 Less--Current portion 89,532 ----------- $ 189,413 ===========
Capital leases are secured by all assets of the Company under a security agreement subordinate to the Company's demand line of credit. (4) Related Party Transactions and Commitments The Company leases one of its facilities from a corporation owned by an officer of the Company. The lease, that was renewed during fiscal 1995, terminates in December 1999 and requires lease payments of $9,000 per month. The Company may terminate the lease as of the end of any calendar year during the term by providing written notice to the lessor by June 30 of such year. Total future minimum rental payments under all operating leases for fiscal 1998 are $223,000. Rent expense on operating leases was approximately $213,000, $187,000 and $144,000 for the years ended June 30, 1997, 1996 and 1995, respectively. -24- PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1997 (Continued) The Company paid fees to a director of approximately $60,000 during each of fiscal 1997, 1996 and 1995 for consulting services. Another director is a partner in a law firm that has performed legal services for the Company during fiscal 1997, 1996 and 1995. (5) Stockholders' Equity In conjunction with previous equity offerings, the Company issued warrants to acquire a total of 320,000 shares of common stock, of which warrants for a total of 100,000 shares expired during fiscal 1997 and 1996. Warrants for 220,000 shares expire on October 23, 1998 and have an exercise price of $1.375 per share. As of June 30, 1997, all of these warrants were exercisable. During 1989, the stockholders approved a stock option plan (the Plan) for key employees. The Plan, as amended, authorizes the grant of options to purchase up to 1,110,000 shares of the Company's common stock at an exercise price not less than 100% of the fair market value per share at the date of grant. Options granted are exercisable for a period determined by the Board of Directors, not to exceed 10 years from the date of grant. At June 30, 1997, 10,748 shares of common stock were available for future grants under the Plan. The following is a summary of transactions in the Plan for the three years ended June 30, 1997:
NUMBER OPTION PRICE WEIGHTED AVERAGE OF SHARES PER SHARE EXERCISE PRICE Options outstanding, June 30, 1994 295,000 $ 3.50-$5.6875 $ 4.76 Granted 395,000 1.375 1.38 Canceled (295,000) 3.50-5.6875 4.76 ----------- ------------- --------------- Options outstanding, June 30, 1995 395,000 1.375 1.38 Granted 60,000 1.375-1.50 1.40 ---------- -------------- --------------- Options outstanding, June 30, 1996 455,000 1.375-1.50 1.38 Granted 190,000 1.5625-2.1875 1.89 Exercised (41,000) 1.3750-1.5625 1.40 --------- --------------- --------------- Options outstanding, June 30, 1997 604,000 1.375 - 2.1875 1.54 --------- -------------- ------------- Options exercisable, June 30, 1997 308,500 $ 1.375 - $2.1875 1.46 ========= ================ =============
In addition, the Company has granted options outside the Plan, primarily to directors and consultants at 100% of the fair market value per share at the date of grant. During fiscal 1995, options for 30,000 shares at $1.375 per share, including options for 15,000 shares issued to replace existing options, were granted to two directors of the Company, which became exercisable in four equal annual installments beginning on -25- PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1997 (Continued) December 15, 1994. Also during fiscal 1995, options for 35,000 shares at $1.375 per share, including options for 15,000 shares issued to replace existing options, were granted to two consultants and one former employee of the Company; 15,000 such options were exercisable at December 15, 1994, and options for 20,000 shares became exercisable in four equal annual installments beginning on December 15, 1994. During fiscal 1996, options for 60,000 shares at $1.30 per share were granted to a consultant to the Company, which became exercisable in five equal annual installments beginning on July 31, 1995. As of June 30, 1997, options outside the Plan for 221,617 shares were outstanding at exercise prices ranging from $.067 to $5.6875 per share, with a weighted average exercise price of $1.45 per share, of which 173,117 were exercisable within the same exercise price range. The Company has computed the pro forma disclosures required under SFAS No. 123 for all stock options granted in 1997 and 1996 using the Black- Scholes option pricing model prescribed by SFAS No. 123. The assumption used and the weighted average information for the years ended June 30, 1997 and 1996 are as follows:
YEARS ENDED 1997 1996 Risk-free interest rates 6.95% 6.83% Expected dividend yield - - Expected lives 7 years 7 years Expected volatility 87% 87% Weighted-average remaining contractual life of options outstanding 8.16 years 8.57 years The effect of applying SFAS No. 123 would be as follows:
1997 1996 Net (loss) income As reported $ (442,633) $ 405,710 Pro forma (520,373) 391,610 Net (loss) income per share As reported $ (.07) $ .07 Pro forma (.09) .06
-26- PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1997 (Continued) (6) Income Taxes The Company accounts for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes, whereby a deferred tax asset or liability is measured by the enacted tax rates that would be in effect when any differences between the financial statement and tax bases of assets and liabilities reverse. The (benefit) provision for income taxes in the accompanying consolidated statements of operations consists of the following for the three years ended June 30, 1997:
1997 1996 1995 Current- Federal $ 26,300 $ 67,000 $ 52,000 - State 1,000 3,000 - Foreign (4,000) 33,000 2,000 ---------- ---------- ----------- 23,300 103,000 54,000 ---------- ---------- ----------- Deferred- Federal (34,300) (57,000) (44,000) State (4,000) (10,000) (8,000) ---------- ---------- ---------- (38,300) (67,000) (52,000) ---------- ---------- ---------- Charge in lieu of income taxes - - 148,000 ---------- ---------- ----------- $ (15,000) $ 36,000 $ 150,000 ========== ======== ==========
A reconciliation of the federal statutory rate to the Company's effective tax rate for the three years ended June 30, 1997 is as follows:
1997 1996 1995 Income tax (benefit) provision at federal statutory rate (34.0)% 34.0% 34.0% Increase (decrease) in tax resulting from - Utilization of operating loss carryforwards - - (3.1) Temporary items with no tax benefit 6.1 7.3 - Tax credits utilized - (4.1) (6.4) Change in valuation allowance 22.9 (35.5) (7.1) Effect of state taxes (4.6) - - Prior year tax adjustments 5.2 5.0 - Other 1.1 1.5 3.1 --- --- --- (3.3)% 8.2% 20.5% ====== ==== ===== Effective tax rate
-27- PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1997 (Continued) The components of the net deferred tax asset at June 30, 1997 and 1996 are approximately as follows:
1997 1996 Reserves and accruals not yet deducted for tax $ 311,000 $ 175,000 purposes Other temporary differences 24,000 17,000 ------- ------- 335,000 192,000 Valuation allowance (178,000) (73,000) --------- -------- Net deferred tax asset $ 157,000 $ 119,000 =========== =========
The Company has provided a valuation allowance to reduce the net deferred tax asset to an amount the Company believes it is "more likely than not" to be realized. The net deferred tax asset represents the amount that can be carried back to offset the prior years' tax liabilities, if necessary. (7) Profit Sharing Plan The Company has a defined contribution profit-sharing plan that covers all eligible employees. The Company has accrued and expensed an employer contribution to this plan of $50,000 in fiscal 1996 and $50,000 in fiscal 1995. No employer contributions were made in fiscal 1997. -28- ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE: None. PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT: The Company will furnish to the Securities and Exchange Commission a definitive Proxy Statement (the "Proxy Statement") not later than 120 days after the close of its fiscal year ended June 30, 1997. The information required by this item is incorporated herein by reference to the Proxy Statement. ITEM 10. EXECUTIVE COMPENSATION: The information required by this item is incorporated herein by reference to the Proxy Statement. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT: The information required by this item is incorporated herein by reference to the Proxy Statement. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS: The information required by this item is incorporated herein by reference to the Proxy Statement. ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K:
(a) Exhibits. The exhibits listed below are filed with or incorporated by reference in this report. 3.1 Articles of Organization of the Company 3.2 By-laws of Precision Optics Corporation, Inc. 4.1 Specimen common stock certificate 4.2 Private Placement Selling Agent Common Stock Warrant No. 4 dated April 28, 1992 issued to James L. Davis and Schedule 1 of Omitted Documents 4.3 Initial Public Offering Common Stock Purchase Warrant No. 3 dated July 10, 1992 issued to John C. Michalak and Schedule 2 of Omitted Documents 4.4 Warrant No. U-1 to Purchase Shares of Common Stock of the Company dated January 24, 1992 issued to Nathan Newman and Schedule 3 of Omitted Documents 4.5 Promissory Note dated December 5, 1991 between the Company and The First National Bank of Boston 4.6 Agreement Restricting Sale of Stock dated January 15, 1992 by and among Richard E. Forkey, the Company, Kennedy, Mathews, Landis, Healy & Pecora Incorporated, and Equity Securities Trading Co., Inc. 10.1 Lease dated June 29, 1984 between the Company and Equity, First Amendment to Commercial Lease dated June 25, 1990, and letter agreement dated June 25, 1990 renewing such lease 10.2 Precision Optics Corporation, Inc. 1989 Stock Option Plan amended to date (the "Plan") 10.3 Three separate life insurance policies on the life of Richard E. Forkey 10.4 Master Lease Finance Agreement dated November 3, 1993 between the Company and BancBoston Leasing 10.5 Second Amendment to Commercial Lease between the Company and Equity dated December 9, 1994 -29- 10.6 Lease dated November 1, 1995 between the Company and Janice M. Bouchard, Trustee of Authority Drive Realty Trust 21 Subsidiaries of Precision Optics Corporation, Inc. 27 Financial Data Schedule. 99 Important Factors Regarding Forward-Looking Statements
[FN] Incorporated herein by reference to the Company's Registration Statement on Form S-18 (No. 33-36710-B). Incorporated herein by reference to the Company's 1991 Annual Report on Form 10-KSB. Incorporated herein by reference to the Company's 1992 Annual Report on Form 10-KSB. Incorporated herein by reference to the Company's Registration Statement on Form S-1 (No. 33-43929). Incorporated herein by reference to the Company's 1994 Annual Report on Form 10-KSB. Incorporated herein by reference to the Company's 1996 Annual Report on Form 10-KSB. Incorporated herein by reference to the Company's Quarterly Report on Form 10-QSB for the quarter ended March 31, 1996. (b) Reports on Form 8-K. None. -30- SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: September 16, 1997 PRECISION OPTICS CORPORATION, INC. By:/s/ Richard E. Forkey Richard E. Forkey Chairman of the Board and Chief Executive Officer In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By:/s/ Richard E. Forkey By:/s/ Jack P. Dreimiller Richard E. Forkey Jack P. Dreimiller President, Treasurer, and Senior Vice Director (Principal President, Finance Executive Officer) and Chief Financial Officer(Principal Financial and Accounting Officer) September 16, 1997 September 16, 1997 ------------------------------ ------------------ Date Date By:/s/ Joel R. Pitlor By:/s/ Edward A. Benjamin Joel R. Pitlor Edward A. Benjamin Director Director September 16, 1997 September 16, 1997 ----------------------------- ------------------ Date Date By:/s/ Robert R. Shannon Robert R. Shannon Director September 16, 1997 Date -31-
INDEX TO EXHIBITS 3.1 Articles of Organization of the Company 3.2 By-laws of Precision Optics Corporation, Inc. 4.1 Specimen common stock certificate 4.2 Private Placement Selling Agent Common Stock Warrant No. 4 dated April 28, 1992 issued to James L. Davis and Schedule 1 of Omitted Documents 4.3 Initial Public Offering Common Stock Purchase Warrant No. 3 dated July 10, 1992 issued to John C. Michalak and Schedule 2 of Omitted Documents 4.4 Warrant No. U-1 to Purchase Shares of Common Stock of the Company dated January 24, 1992 issued to Nathan Newman and Schedule 3 of Omitted Documents 4.5 Promissory Note dated December 5, 1991 between the Company and The First National Bank of Boston 4.6 Agreement Restricting Sale of Stock dated January 15, 1992 by and among Richard E. Forkey, the Company, Kennedy, Mathews, Landis, Healy & Pecora Incorporated, and Equity Securities Trading Co., Inc. 10.1 Lease dated June 29, 1984 between the Company and Equity, First Amendment to Commercial Lease dated June 25, 1990, and letter agreement dated June 25, 1990 renewing such lease 10.2 Precision Optics Corporation, Inc. 1989 Stock Option Plan amended to date (the "Plan") 10.3 Three separate life insurance policies on the life of Richard E. Forkey 10.4 Master Lease Finance Agreement dated November 3, 1993 between the Company and BancBoston Leasing 10.5 Second Amendment to Commercial Lease between the Company and Equity dated December 9, 1994 10.6 Lease dated November 1, 1995 between the Company and Janice M. Bouchard, Trustee of Authority Drive Realty Trust 21 Subsidiaries of Precision Optics Corporation, Inc. 27 Financial Data Schedule. 99 Important Factors Regarding Forward-Looking Statements Incorporated herein by reference to the Company's Registration Statement on Form S-18 (No. 33-36710-B). Incorporated herein by reference to the Company's 1991 Annual Report on Form 10-KSB. Incorporated herein by reference to the Company's 1992 Annual Report on Form 10-KSB. Incorporated herein by reference to the Company's Registration Statement on Form S-1 (No. 33-43929). Incorporated herein by reference to the Company's 1994 Annual Report on Form 10-KSB. Incorporated herein by reference to the Company's 1996 Annual Report on Form 10-KSB. 7 Incorporated herein by reference to the Company's Quarterly Report on Form 10-QSB for the quarter ended March 31, 1996.
-32- EX-27 2 FINANCIAL DATA SCHEDULE WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
5 1 12-MOS JUN-30-1997 JUN-30-1997 2,348,382 30,000 466,811 69,000 1,576,967 4,672,703 3,062,620 1,927,578 6,015,602 734,134 278,945 0 0 60,215 5,031,840 6,015,602 7,372,310 7,372,310 5,610,438 5,610,438 2,296,687 0 27,241 (457,633) (15,000) (442,633) 0 0 0 (442,633) (.07) (.07) -33-
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