SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------------
FORM 10-KSB
(Mark One)
/X/ ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the Fiscal Year Ended JUNE 30, 2002
OR
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For transition period from ____ to ____
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)
(978) 630-1800
(Issuer's telephone number, including area code)
Securities registered under Section 12(b) of the Act:
NONE
Securities registered under Section 12(g) of the
Act:
COMMON STOCK, $.01 PAR VALUE
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) 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 in response 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 incorporated 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 $1,774,283.
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 $2,485,773 as of August 31, 2002.
The number of shares of outstanding common stock of the issuer as of
August 31, 2002 was 10,503,908.
DOCUMENTS INCORPORATED BY REFERENCE
The issuer's Proxy Statement for the 2002 Annual Meeting of
Shareholders to be held on November 12, 2002 is incorporated into Part III of
this Form 10-KSB.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
BUSINESS DEVELOPMENT
Precision Optics Corporation, Inc. (the "Company") was incorporated in
Massachusetts in 1982 and has been publicly owned since November 1990.
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, optical thin films used in telecommunications and other
applications, test instrumentation, and advanced optical system design and
development services.
PRINCIPAL PRODUCTS AND SERVICES AND METHODS OF DISTRIBUTION.
MEDICAL PRODUCTS. The Company's medical products include endoscopes, as
well as image couplers, beamsplitters and adapters, all of which are used as
accessories to endoscopes.
Since January 1991, the Company has developed and sold endoscopes using
various optical technologies for use in a variety of minimally invasive surgical
and diagnostic procedures. The Company's current line of specialized endoscopes
include arthroscopes (which are used in joint surgery), laryngoscopes (which are
used in the diagnosis of diseases of the larynx), laparoscopes (which are used
in abdominal surgery) and stereo endoscopes and cameras (which are used in
cardiac and general surgery, and enable surgeons to visualize the surgical field
in 3-D imagery, thus facilitating greater finesse and minimizing surgical risk).
In addition to its existing line of endoscopes, the Company is continuing to
develop different types of endoscopes that incorporate varying types of
construction and technology for use in various medical specialties.
In March 2002, the Company shipped the first production lot of
autoclavable endoscopes to a major orthopedic equipment supplier. These new
endoscopes, which are also CE Mark certified for European use, have been
designed and tested to withstand sterilization by flash and standard autoclave,
as well as all other commonly used medical sterilization means. The major
benefits of autoclavable instruments include increased patient safety, quick
turnaround, and elimination of hazardous sterilant and by-product materials, all
of which provide a much better value to the user. The Company believes its
autoclavable endoscope technology will generate significant opportunities for
endoscope revenue growth, particularly in Europe where autoclaving is the
preferred method of sterilization.
The Company developed and has manufactured and sold since 1985 a
proprietary product line of instrumentation to couple endoscopes to video
cameras. Included in this product line are imaging couplers, which physically
connect the endoscope to a 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 the Company's customers' names.
2
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 that it is the only
company in the world that produces autoclavable image couplers.
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.
OPTICAL THIN FILMS. Optical thin film filters are used as the key
components for devices which can separate laser communication signals into
constituent wavelengths (i.e., colors) of very narrow bandwidths. By separating
a communication signal into its constituent wavelengths, it is possible to
create additional communication channels and thereby increase the transmission
capacity of a fiber optic communication line. The technique of separating
communication signals into constituent wavelengths of very narrow bandwidths to
increase transmission capacity in fiber optic communication lines is called
Dense Wavelength Division Multiplexing (DWDM). The devices that perform this
separation technique, composed of one or more optical thin film filters and a
means of being attached to a fiber optic communication line, are called Dense
Wavelength Division Multiplexers. The Company's DWDM optical thin film filters
are designed to withstand changes in temperature and humidity, consistent with
customers' environmental requirements for passive components.
The Company also designs and manufactures various other types of high
quality thin film coatings for use in a wide range of optical applications. Thin
film coatings are produced in-house for the Company's medical instrumentation
and other products. Presently, optical thin film manufacturing not associated
with the Company's medical instruments and other products is limited or very
specialized.
DWDM FILTER TEST INSTRUMENTATION. In March 2001, the Company introduced
two new products at the Optical Fiber Communication Conference (OFC) trade show
- the manual Gen III-TM- DWDM Test Fixture for characterizing telecommunications
filters and a fully automated filter testing system. Both products are based on
patent-pending technology and allow greatly enhanced speed and accuracy in the
measurement of filters.
Current business prospects for the Company's DWDM filters and DWDM test
instrumentation are negligible, largely because of lack of visibility concerning
future spending levels for telecommunications equipment. The Company believes
that downward trends in the selling prices of DWDM filters may continue because
of existing inventory surpluses, increasing competitive pressure, the advent of
competing technologies, and erosion of demand experienced by telecommunications
equipment providers. As a result of these market factors, during fiscal year
2002 the Company implemented certain cost saving measures, and recorded
provisions for restructuring, inventory write-down and loss on impairment of
fixed assets. Earlier in fiscal year 2002, the Company ceased operations in its
Optical Thin Film Technology Center and recently entered into an agreement to
terminate the lease on that facility. The property and equipment used in the
facility is idle, and as of June 30, 2002, is being held for sale. However, the
Company has retained and is currently utilizing certain other thin film coating
equipment used for its medical products and other applications. The Company is
no longer actively marketing its DWDM filters and DWDM filter test equipment.
See Notes 6 and 7 of Notes to Consolidated Financial Statements.
OPTICAL SYSTEM DESIGN AND DEVELOPMENT SERVICES. The Company provides on
a contract basis advanced lens design, imaging 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.
3
COMPETITION AND MARKETS.
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 may establish or use 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 may be 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 currently sells its image couplers, beamsplitters, and
adapters to a market that consists of approximately 30 to 35 potential OEM
customers. These potential customers sell video cameras, endoscopes, or
video-endoscopy systems. The Company has made sales to approximately two thirds
of these customers. The Company estimates that it has approximately 20% to 30%
of the market share in these products. 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 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 can compete successfully in this market on the basis of price and
delivery.
The Company offers advanced optical design and development services not
related to thin film coatings to a wide range of potential customers and has
numerous 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.
The Company has had negligible direct export sales to date. However,
during fiscal year 2002, the Company's medical products received the CE Mark
Certification, which permits sales into the European marketplace.
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 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 its research and development. The Company spent approximately
$2,271,000 and $3,215,000 of its own funds during fiscal years 2002 and 2001,
respectively, on the Company's own research and development.
4
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. Certain of the thin film coatings utilized in the
Company's products are currently procured from an outside supplier, but most
thin film coatings are produced in-house. The Company believes that its demand
for these raw materials and thin film coating 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 2003. The Company believes, however, that there are
relatively few suppliers of the high quality lenses and prisms which its
endoscopes may require. The Company has therefore established an in-house
optical shop for producing ultra-high quality prisms, micro-optics and other
specialized optics for a variety of medical and industrial applications.
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 an outside supplier or
expanded in-house manufacturing facilities.
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 to the extent practicable. The Company holds the rights to
several United States and foreign patents and has several patent applications
pending. The Company knows of no infringements of its patents. The Company plans
to protect its patents from infringement in each instance where it determines
that doing so would be economical in light of the expense involved and the level
and availability of the Company's financial resources. 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 any patents issued
can be successfully defended or will effectively limit the development of
competitive products and services.
EMPLOYEES.
As of June 30, 2002, the Company had 38 full-time employees and 5
part-time employees. There were 22 employees in manufacturing, 12 in
engineering, 3 in sales and marketing, and 6 in finance and administration.
5
CUSTOMERS.
Revenues from the Company's largest customers, as a percentage of total
revenues, were as follows:
2001 2002
Customer A 41% 23%
Customer B 7 18
Customer C 18 6
All Others 34 53
---- ----
100% 100%
==== ====
No other customer accounted for more than 10% of the Company's revenues
in fiscal year 2001 and 2002.
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. The Company believes that it complies with all applicable
environmental laws and regulations.
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 several 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 endoscopes, image couplers, beamsplitters, and adapters,
the FDA has determined that the Company may market such devices, subject to the
general controls provisions of the Food, Drug and Cosmetic Act. This FDA
permission was obtained without the need to undergo a lengthy and expensive
approval process, on account of the FDA's determination that such devices meet
the regulatory standard of being substantially equivalent to an existing
approved device. 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 similar agencies in other countries. 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 sale of devices which do not comply with law.
ITEM 2. DESCRIPTION OF PROPERTY
The Company conducts its domestic operations at two facilities in
Gardner, Massachusetts. The main Gardner facility is leased from a corporation
owned by an officer-shareholder-director of the Company. The lease terminated in
December 1999 and the Company is currently a tenant at will. The other Gardner
facility is under a five-year lease which commenced on March 1, 1999. In August
2000, the Company entered into a five-year lease for approximately 37,400 square
feet of additional space to be used for its Optical Thin Film Technology Center.
Operations in the new facility commenced during the quarter ending December 31,
2000. However, currently this space is idle because of certain restructuring
measures the Company undertook during
6
fiscal year 2002 due to the severe decline in the market for the Company's DWDM
filters and DWDM filter test equipment The Company entered into an agreement to
terminate this lease effective September 30, 2002. 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
None.
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 2002.
7
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 Chairman of the Board, Chief Executive
Officer, President, Treasurer and
Director
Jack P. Dreimiller Senior Vice President,
Finance, Chief Financial
Officer and Clerk
Edward A. Benjamin Director and Member of Audit Committee. Mr.
Benjamin is a retired partner in the law firm of
Ropes & Gray, Boston, Massachusetts.
H. Angus Macleod Director. Dr. Macleod is President of the Thin
Film Center, Inc. of Tucson, Arizona, which
provides software consulting and courses for design
and analysis of thin film optical coatings and
filters.
Austin W. Marxe Director. Mr. Marxe is Managing Director of
Special Situations Fund III, L.P., a registered
investment company based in New York City, and
several other affiliated investment funds.
Joel R. Pitlor Director and Member of Audit Committee. Mr. Pitlor
is president of J.R. Pitlor, a management
consulting firm based in Cambridge, Massachusetts.
Robert R. Shannon Director and Member of Audit Committee. Mr.
Shannon is a professor at the Optical Sciences
Center of the University of Arizona in Tucson,
Arizona.
8
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's common stock is listed on the National Association of
Securities Dealers Automated Quotation (NASDAQ) System under the symbol "POCI."
Since January 1992, the NASDAQ SmallCap Market 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:
2001 2002
---- ----
Quarter High Low High Low
-----------------------------------------------------------------------
First $20.25 $7.50 $1.99 $.61
Second $8.56 $1.81 $ .99 $.68
Third $5.59 $1.63 $ .98 $.50
Fourth $2.55 $1.22 $ .73 $.38
As of August 31, 2002, there were approximately 90 holders of record of
the Company's common stock.
The Company has not declared any dividends during the last two fiscal
years. At present, the Company intends to retain its earnings, if any, to
finance research and development and expansion of its business.
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. These risks and uncertainties, many of which are not within
the Company's control, include, but are not limited to, the uncertainty and
timing of the successful development of the Company's new products,
particularly in the optical thin films area, the risks associated with
reliance on a few key customers; the Company's ability to regain and 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; performance of
the Company's vendors; the ability of the Company to control costs associated
with performance under fixed price contracts; and the continued availability
to the Company of essential supplies, materials and services; which are
described further in Exhibit 99.1 hereto. 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
9
which may be made to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events.
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.
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. 101, REVENUE RECOGNITION IN FINANCIAL
STATEMENTS. SAB No. 101 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 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
The Company accounts for impairment of long-lived assets in accordance with SFAS
No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED
ASSETS TO BE DISPOSED OF. This statement requires
10
that long-lived assets and certain identifiable intangibles be reviewed for
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. 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. Assets to be disposed of through sale are reported at
the lower of the carrying amount or fair value less estimated costs to sell.
FISCAL YEAR 2002 RESULTS OF OPERATIONS
Total revenues for fiscal year 2002 decreased by approximately
$2,474,000 or 58.2% from fiscal year 2001.
The revenue decrease from the prior year was due to lower sales of
medical products (down 51%), and lower sales of non-medical products (down 73%).
Medical sales were lower due primarily to lower sales of stereo endoscopes and
cameras, and non-stereo endoscopes. Non-medical sales were lower due primarily
to lower sales of DWDM filters and DWDM test instrumentation.
Revenues from the Company's largest customers, as a percentage of total
revenues, were as follows:
2002 2001 2000
Customer A 23% 41% 46%
Customer B 18 7 11
Customer C 6 18 4
All Others 53 34 39
---- ---- ----
100% 100% 100%
==== ==== ====
No other customer accounted for more than 10% of the Company's revenues
in fiscal years 2002, 2001, and 2000.
Gross profit for fiscal year 2002 was negative and reflected an
unfavorable change of approximately $2,158,000 compared to fiscal year 2001.
Gross profit as a percentage of revenues decreased from 19.0% in fiscal year
2001 to a negative 76.0% in the current year. The unfavorable change in gross
profit was due primarily to (1) a provision for excess and obsolete inventories
of DWDM filters and DWDM filter test instrumentation of approximately $540,000
recorded in the first quarter ended September 30, 2001; and (2) the reduction in
sales of higher margin stereo endoscopes and related products and the lower
overall sales volume of other products; and (3) a manufacturing cost structure
that was not reflective of the sharply lower sales volume in fiscal year 2002.
The Company has implemented significant cost reduction measures during fiscal
year 2002 to address this issue, the full year effects of which will be
reflected in the Company's fiscal year 2003 financial statements. See Note 6 of
Notes to Consolidated Financial Statements.
Research and development expenses decreased by approximately $944,000,
or 29.4%, during fiscal year 2002 compared to the previous year. The decrease
was due to a lower level of resources being devoted to the development of DWDM
filters used in telecommunications systems, as reflected in reductions of staff.
Selling, general and administrative expenses decreased by approximately
$24,000, or 1.1%, during fiscal year 2002 compared to the previous year. The
decrease was due primarily to lower provision for estimated uncollectable
customer accounts and employee recruiting, partially offset by higher sales and
marketing expense.
11
The sharp reduction in demand and industry-wide excess inventory levels
of passive telecommunications components has hampered the Company's ability to
obtain new orders for its DWDM products. In calendar year 2001, the Company
announced that two major customers for DWDM filters had canceled the balance of
orders placed with the Company. Revenues from DWDM filters and test
instrumentation in the quarters ended September 30, 2001 and December 31, 2001
were sharply lower than in previous quarters, and such revenues were negligible
in the quarters ended March 31, 2002 and June 30, 2002. Current business
prospects in this marketplace continue to remain negligible because of the lack
of visibility concerning future spending levels for telecommunications
equipment. The provision for asset impairment and restructuring of $4,445,021 in
the year ended June 30, 2002, consists of (1) a provision for restructuring
costs of $402,065, representing the present value of future lease payments
related to idle space in the Company's Optical Thin Films Technology Center, and
employee severance costs; and (2) a provision for asset impairment of
$4,042,956, representing a writedown to the lower of carrying value or fair
market value less estimated selling costs of certain of the Company's property
and equipment invested in its optical thin films coating product line, and the
writeoff of certain patent costs. These provisions are more fully described in
Note 6 of Notes to Consolidated Financial Statements.
The following table sets forth the quarterly impacts and cash payments
associated with the asset impairment and restructuring provisions:
PROVISION FOR -
----------------------------------------------------------------
PROPERTY &
EQUIPMENT PATENT EMPLOYEE IDLE LEASE
WRITEDOWN WRITEDOWN SEVERANCE SPACE TOTAL
---------- --------- --------- ----------- -----
Quarter Ended--
September 30, 2001 $ 3,444,378 $ -- $ -- $ -- $ 3,444,378
December 31, 2001 -- -- 186,250 482,000 668,250
June 30, 2002 541,000 57,578 -- (266,185) 332,393
----------- -------- --------- --------- -----------
Total Provision 3,985,378 57,578 186,250 215,815 4,445,021
Non-cash Charges (3,985,378) (57,578) -- -- (4,042,956)
Cash Payments -- -- (186,250) (47,844) (234,094)
----------- -------- --------- --------- -----------
Provision Balance, June 30, 2002 $ -- $ -- $ -- $ 167,971 $ 167,971
=========== ======== ========= ========= ===========
Interest expense consists of interest on capital lease obligations and
imputed interest on accrued restructuring costs related to the present value of
future lease payments on idle space. Interest expense increased by $8,103, or
68.3%, over fiscal year 2001 due primarily to the imputed interest on
restructuring costs.
Interest income decreased by approximately $588,000 or 75.4% during
fiscal year 2002 compared to the previous year. The decrease was due to the
lower base of cash and cash equivalents and lower interest rates.
The income tax provisions in fiscal year 2002 and 2001 represent the
minimum statutory state income tax liability.
FISCAL YEAR 2001 RESULTS OF OPERATIONS
Total revenues for fiscal year 2001 increased by approximately
$1,238,000 or 41.1% from fiscal year 2000.
12
The revenue increase from the prior year was due to higher sales of
medical products (up 11%), and higher sales of non-medical products (up 225%).
Medical sales were higher due primarily to higher sales of stereo endoscopes and
endoscopic cameras, and non-stereo endoscopes. Non-medical sales were higher due
primarily to higher sales of DWDM filters and initial sales of DWDM test
instrumentation.
Gross profit decreased by approximately $235,000 in fiscal year 2001,
and as a percentage of revenue decreased from 34.7% to 19.0%, compared to the
previous year. The decrease in the gross profit percentage was due primarily to
higher fixed manufacturing costs resulting from increased personnel, significant
capital expenditures and the commencement of operations in a new optical thin
film technology facility, and lower average selling prices for DWDM filters
compared to fiscal year 2000.
Research and development expenses increased by approximately
$1,521,000, or 89.8%, during fiscal year 2001 compared to the previous year.
During both years, research and development expenses consisted primarily of
development efforts related to DWDM filters used in telecommunications systems.
The increase was due to more resources being devoted to the DWDM filter project
in the current year, and to the commencement of product development efforts on a
new product line - filter test equipment.
Selling, general and administrative expenses increased by approximately
$344,000, or 19.5%, during fiscal year 2001 compared to the previous year. The
increase was due primarily to higher sales and marketing headcount, employee
recruiting, insurance, advertising and trade show expenses, and higher
provisions for estimated uncollectable customer accounts.
Interest expense relates primarily to capital lease obligations and
decreased by approximately $12,000 or 51.2% during fiscal year 2001 due to the
lower average debt balance.
Interest income increased by approximately $500,000 or 178.7% during
fiscal year 2001 compared to the previous year. The increase was due to the
higher base of cash and cash equivalents related primarily to net proceeds
received from a private placement of common stock in March 2000, from exercise
of stock options and warrants.
The income tax provision in fiscal year 2001 represents the minimum
statutory state income tax liability.
LIQUIDITY AND CAPITAL RESOURCES
For the year ended June 30, 2002, the Company's cash and cash
equivalents decreased by approximately $4,705,000 to $5,826,000. The decrease in
cash and cash equivalents was due to cash used by operating activities of
approximately $4,513,000, capital expenditures of approximately $91,000,
repayment of capital lease obligation and other of approximately $44,000, and
expenditures for other assets (primarily patents) of $57,000.
The Company has entered into an agreement to terminate the lease on its
37,000 sq. ft. Optical Thin Film Technology Center effective September 30, 2002.
Operations in this facility ceased in November 2001 in connection with the
Company's restructuring and cost reduction measures, as previously announced.
The termination agreement requires payment of a cancellation fee of
approximately $161,000, and relieves the Company of a lease obligation estimated
at approximately $460,000.
13
Contractual cash commitments for the fiscal years subsequent to June
30, 2002 are summarized as follows:
2003 2004 THEREAFTER TOTAL
Long-term debt $ -- $ -- $ -- $ --
Capital leases 34,450 3,874 -- 38,324
Operating leases 211,000 12,000 -- 223,000
-------- ------- ------ --------
$245,450 $15,874 $ -- $261,324
======== ======= ====== ========
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 new and existing medical and optical thin films
product lines. 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.
The Company believes that its cash and cash equivalents are sufficient
to support working capital and investment needs for at least the next twelve
months.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards ("SFAS") No. 141, BUSINESS
COMBINATIONS. SFAS No. 141 requires all business combinations initiated after
June 30, 2001 to be accounted for using the purchase method. This statement is
effective for all combinations initiated after June 30, 2001. The adoption of
SFAS No. 141 on July 1, 2001 had no impact on the Company's consolidated
financial statements.
In June 2001, the FASB issued SFAS No. 142, GOODWILL AND OTHER
INTANGIBLE ASSETS. This statement applies to goodwill and intangible assets
acquired after June 30, 2001, as well as goodwill and intangible assets
previously acquired. Under this statement goodwill as well as certain other
intangible assets, determined to have an indefinite life, will no longer be
amortized; instead these assets will be reviewed for impairment on a periodic
basis. This statement was adopted by the Company on July 1, 2001. The adoption
of this new accounting standard did not have a material impact on the Company's
consolidated financial statements.
In October 2001, the FASB issued SFAS No. 144, ACCOUNTING FOR THE
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS, which is effective in fiscal years
beginning after December 15, 2001 and interim periods within those fiscal
periods. SFAS No. 144 supersedes FASB Statement No. 121 ACCOUNTING FOR THE
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE
DISPOSED OF, and parts of APB Opinion No. 30, REPORTING THE RESULTS OF
OPERATIONS-REPORTING THE EFFECTS OF DISPOSAL OF A SEGMENT OF A BUSINESS, AND
EXTRAORDINARY, UNUSUAL AND INFREQUENTLY OCCURRING EVENTS AND TRANSACTIONS
RELATING TO EXTRAORDINARY ITEMS," however, SFAS No. 144 retains the requirement
of APB Opinion No. 30 to report discontinued operations separately from
continuing operations and extends that reporting to a component of an entity
that either has been disposed of (by sale, by abandonment, or in a distribution
to owners) or is classified as held for sale. SFAS No. 144 addresses financial
accounting and reporting for the impairment of certain long-lived assets and for
long-lived assets to be disposed of. The Company does not believe adopting SFAS
No. 144 on July 1, 2002 will have a material impact on the Company's
consolidated financial statements.
The FASB issued SFAS No. 145, RESCISSION OF FASB STATEMENTS NO. 4, 44,
AND 64, AMENDMENT OF FASB STATEMENT NO. 13, AND TECHNICAL CORRECTIONS, effective
for fiscal years beginning May 15, 2002 or later
14
that rescinds FASB Statement No. 4, REPORTING GAINS AND LOSSES FROM
EXTINGUISHMENT OF DEBT, FASB Statement No. 64, EXTINGUISHMENTS OF DEBT MADE TO
SATISFY SINKING-FUND REQUIREMENTS, and FASB Statement No. 44, ACCOUNTING FOR
INTANGIBLE ASSETS OF MOTOR CARRIERS. This Statement amends SFAS No. 4 and SFAS
No. 13, ACCOUNTING FOR LEASES, to eliminate an inconsistency between the
required accounting for sale-leaseback transactions. This Statement also amends
other existing authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability under changed
conditions. The Company does not believe adopting SFAS No. 145 on July 1, 2002
will have a material impact on its consolidated financial statements.
In July 2002, the FASB issued SFAS No. 146, ACCOUNTING FOR COSTS
ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES. SFAS No. 146 is based on the
fundamental principle that a liability for a cost associated with an exit or
disposal activity should be recorded when it (1) is incurred, that is, when it
meets the definition of a liability in FASB Concepts Statement No. 6, ELEMENTS
OF FINANCIAL STATEMENTS, and (2) can be measured at fair value. The principal
reason for issuing SFAS No. 146 is the Board's belief that some liabilities for
costs associated with exit or disposal activities that entities record under
current accounting pronouncements, in particular EITF Issue 94-3, do not meet
the definition of a liability. SFAS No. 146 nullifies EITF Issue 94-3; thus, it
will have a significant effect on practice because commitment to an exit or
disposal plan no longer will be a sufficient basis for recording a liability for
costs related to those activities. SFAS No. 146 is effective for exit and
disposal activities initiated after December 31, 2002. Early application is
encouraged; however, previously issued financial statements may not be restated.
An entity would continue to apply the provisions of EITF Issue 94-3 to an exit
activity that is initiated under an exit plan that met the criteria of EITF
Issue 94-3 before the entity initially applied SFAS No. 146. The Company does
not believe adopting SFAS No. 146 on July 1, 2002 will have a material impact on
its consolidated financial statements.
TRENDS AND UNCERTAINTIES THAT MAY AFFECT FUTURE RESULTS
The Company's asset impairment, restructuring and workforce reduction
measures implemented in fiscal year 2002, and other cost saving measures, are
expected to result in a reduction in future annual operating expenses, primarily
in the areas of cost of goods sold and research and development. These cost
reduction measures are expected to result in expense savings of at least $4
million per year, of which approximately $3.2 million per year represent actual
cash savings, and the remainder is due to a reduction in annual depreciation and
amortization expense.
For the quarter ended June 30, 2002, cash and cash equivalents
decreased by approximately $905,000, a 10% sequential decrease in cash usage
from the previous quarter ended March 31, 2002. A further reduction in the rate
of cash usage is anticipated during the quarter ending September 30, 2002.
Capital equipment expenditures during the year ended June 30, 2002 were
approximately $91,000, down 97% from the $3.6 million for fiscal year 2001.
Future capital equipment expenditures will be dependent upon future sales and
success of on-going research and development efforts. It is anticipated that the
level of capital spending for the foreseeable future will continue to be
substantially lower than fiscal year 2001.
For the quarter ended June 30, 2002, research and development expenses
were approximately $355,000, down 64% from the $999,000 for the quarter ended
June 30, 2001. It is anticipated that the quarterly level of R&D expenses for
the foreseeable future will be substantially lower than fiscal year 2001, but is
ultimately dependent upon the Company's assessment of new product opportunities.
The Company is pursuing advances on several fronts in the medical area
and certain non-medical applications of its optical technology. Among these
initiatives are a new 30 degree line of sight version of the successful 5 mm
laparoscope, a new version of the 4 mm arthroscope for use in carpal tunnel
surgery, and other new products.
15
Following customer evaluations of a new, longer version of the Company's
standard 10 mm laparoscope, a pilot production order was received for this
instrument for use in bariatric surgery. The Company also previously announced
several major successes related to its medical instrument business:
- The first production shipment of autoclavable endoscopes in March
2002.
- Receipt of new orders for stereo endoscopes and related products.
- Receipt of new orders for the development and production of a
relay lens system for use in medical digital photo microscopy.
These initiatives have generated orders from new and existing customers
totaling approximately $780,000, of which approximately $68,000 was shipped in
fiscal year 2002, and approximately $445,000 is scheduled to be shipped during
the first half of fiscal year 2003. The timing of the remaining shipments on
these orders of approximately $267,000 is dependent upon customer delivery
instructions. The Company anticipates additional follow-on orders for these
products.
Achievements of ISO 9001 and CE Mark certification, as previously
announced, are also expected to support increased future sales opportunities,
both foreign and domestic, for the Company's medical products.
COMMON STOCK LISTING ON NASDAQ SMALLCAP MARKET
The Company has been notified that it is not in compliance with the
$1.00 minimum share price requirement for continued listing on the Nasdaq
SmallCap Market. The Company will have until February 10, 2003 to regain
compliance with Nasdaq's $1.00 minimum bid price requirement. In order to regain
compliance, the bid price of the Company's common stock must close at or above
$1.00 per share for a minimum of 10 consecutive trading days. As indicated
above, the Company has undertaken a number of product development and marketing
initiatives to increase sales and shareholder value.
The delisting of the Company's common stock from the Nasdaq SmallCap
Market may materially impair the stockholder's ability to buy and sell shares of
the Company's common stock, and could have an adverse effect on the market price
of, and the efficiency of the trading market for, the Company's common stock. In
addition, the delisting of the Company's common stock could significantly impair
the Company's ability to raise capital should it desire to do so in the future.
The Company's listing on the Nasdaq SmallCap Market is very
important to the Company and the Company intends to take all reasonable
measures to regain and maintain compliance. The Company intends to seek
shareholder approval at the annual meeting of shareholders in November 2002
of an amendment to its Articles of Organization to effect a reverse stock
split. The Company believes that a reverse stock split will increase the
chances that its common stock will trade at or above the required $1.00
minimum bid price. There can be no assurance, however, that a reverse stock
split will have the desired consequences. Specifically, there can be no
assurance that, after a reverse stock split, the market price of the common
stock will not decrease to a level that causes the Company to again face
de-listing, or that the Company's market capitalization after the reverse
split will not be less than its market capitalization before the reverse
split.
ITEM 7. CONSOLIDATED FINANCIAL STATEMENTS: The Consolidated Financial Statements
are filed on pages 17 through 38 of this Form 10-KSB.
16
PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
Consolidated Financial Statements
as of June 30, 2002 and 2001
Together with Auditors' Report
17
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Precision Optics Corporation, Inc.:
We have audited the accompanying consolidated balance sheet of Precision
Optics Corporation, Inc. and subsidiaries as of June 30, 2002 and the related
consolidated statements of operations, stockholders' equity and cash flows
for the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audit. The
accompanying consolidated balance sheet of Precision Optics Corporation, Inc.
and subsidiaries as of June 30, 2001 and the related consolidated statements
of operations, stockholders' equity, and cash flows for each of the years in
the two-year period ended June 30, 2001 were audited by other auditors who
have ceased operations. Those auditors expressed an unqualified opinion on
those consolidated financial statements in their report dated July 24, 2001.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. 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 audit provides a
reasonable basis for our opinion.
In our opinion, the 2002 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Precision Optics Corporation, Inc. and subsidiaries as of June 30, 2002 and the
results of their operations and their cash flows for the year then ended in
conformity with accounting principles generally accepted in the United States of
America.
/s/ KPMG LLP
Boston, Massachusetts
August 14, 2002
18
THE FOLLOWING REPORT OF ARTHUR ANDERSEN LLP ("ANDERSEN") IS A COPY OF THE REPORT
PREVIOUSLY ISSUED BY ANDERSEN ON JULY 24, 2001. THE REPORT OF ANDERSEN IS
INCLUDED IN THIS ANNUAL REPORT ON FORM 10-KSB PURSUANT TO RULE 2-02(E) OF
REGULATION S-X. AFTER REASONABLE EFFORTS THE COMPANY HAS NOT BEEN ABLE TO OBTAIN
A REISSUED REPORT FROM ANDERSEN. ANDERSEN HAS NOT CONSENTED TO THE INCLUSION OF
ITS REPORT IN THIS ANNUAL REPORT ON FORM 10-KSB. BECAUSE ANDERSEN HAS NOT
CONSENTED TO THE INCLUSION OF ITS REPORT IN THIS ANNUAL REPORT, IT MAY BE
DIFFICULT FOR YOU TO SEEK REMEDIES AGAINST ANDERSEN AND YOUR ABILITY TO SEEK
RELIEF AGAINST ANDERSEN MAY BE IMPAIRED.
REPORT OF INDEPENDENT AUDITORS
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,
2001 and 2000 and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended June 30, 2001. 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 auditing standards generally accepted
in the United States. 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 consolidated financial position of Precision Optics
Corporation, Inc. and subsidiaries as of June 30, 2001 and 2000 and the results
of their operations and their cash flows for each of the three years in the
period ended June 30, 2001, in conformity with accounting principles generally
accepted in the United States.
/s/ Arthur Andersen, LLP
Arthur Andersen, LLP
Boston, Massachusetts
July 24, 2001
19
PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, 2002 and 2001
2002 2001
ASSETS
Current Assets:
Cash and cash equivalents $ 5,825,601 $10,530,298
Accounts receivable (net of allowance for doubtful
accounts of approximately $155,000 in 2002 and 2001). 374,499 1,003,496
Inventories 1,009,009 1,524,119
Prepaid expenses 93,574 109,760
Refundable income taxes 13,849 --
Assets held for sale 847,696 --
----------- -----------
Total current assets 8,164,228 13,167,673
----------- -----------
Property and Equipment, at cost:
Machinery and equipment 3,302,304 8,459,998
Leasehold improvements 543,851 761,525
Furniture and fixtures 95,200 125,038
Vehicles 42,343 39,486
3,983,698 9,386,047
Less--Accumulated depreciation and amortization 3,492,403 3,600,380
----------- -----------
491,295 5,785,667
----------- -----------
Other Assets:
Cash surrender value of life insurance policies 42,127 37,065
Patents, net 182,389 229,606
----------- -----------
Total other assets 224,516 266,671
----------- -----------
$ 8,880,039 $19,220,011
=========== ===========
2002 2001
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of capital lease obligation $ 33,544 $ 51,695
Accounts payable 118,901 584,786
Customer advances 30,000 --
Accrued payroll 63,650 103,392
Accrued bonuses 30,000 15,000
Accrued professional services 105,995 69,051
Accrued vacation 121,042 119,143
Accrued warranty expense 50,000 50,000
Accrued income taxes 912 912
Other accrued liabilities 24,509 68,077
Accrued restructuring expense 167,971 --
------------ ------------
Total current liabilities 746,524 1,062,056
------------ ------------
Capital Lease Obligation, net of current portion, and
Other 17,705 68,703
------------ ------------
Commitments (Note 3)
Stockholders' Equity:
Common stock, $0.01 par value-
Authorized--20,000,000 shares
Issued and outstanding--10,503,908
shares at June 30, 2002 and 2001 105,039 105,039
Additional paid-in capital 27,682,657 27,682,657
Accumulated deficit (19,671,886) (9,698,444)
------------ ------------
Total stockholders' equity 8,115,810 18,089,252
------------ ------------
$ 8,880,039 $ 19,220,011
============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
20
PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
for the Years Ended June 30, 2002, 2001, and 2000
2002 2001 2000
Revenues $ 1,774,283 $ 4,247,828 $ 3,009,649
Cost of Goods Sold 3,123,196 3,438,679 1,965,989
------------ ------------ -----------
Gross profit (loss) (1,348,913) 809,149 1,043,660
------------ ------------ -----------
Research and Development Expenses 2,270,880 3,215,257 1,694,409
Selling, General and Administrative Expenses 2,079,994 2,103,517 1,759,886
Provision for Asset Impairment and Restructuring 4,445,021 -- --
------------ ------------ -----------
Total operating expenses 8,795,895 5,318,774 3,454,295
------------ ------------ -----------
Operating loss (10,144,808) (4,509,625) (2,410,635)
Interest Income 192,241 780,395 279,974
Interest Expense (19,963) (11,860) (24,317)
------------- ------------ -----------
Loss before provision for income taxes (9,972,530) (3,741,090) (2,154,978)
Provision for Income Taxes 912 912 912
------------- ------------ -----------
Net loss $ (9,973,442) $ (3,742,002) $(2,155,890)
============ ============ ===========
Basic and Diluted Loss per Share $ (.95) $ (.36) $ (.26)
============ ============ ===========
Weighted Average Common Shares Outstanding 10,503,908 10,473,348 8,379,408
============ ============ ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
21
PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
for the Years Ended June 30, 2002, 2001 and 2000
=============================================================================================================================
Additional Total
Number of Common Paid-in Accumulated Stockholders'
Shares Stock Capital Deficit Equity
-----------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1999 6,687,595 $ 66,876 $ 6,206,411 $ (3,800,552) $ 2,472,735
Proceeds from exercise of
options and warrants to purchase
common stock 1,808,100 18,081 3,908,836 -- 3,926,917
Net proceeds from private
placement of common stock 1,789,463 17,895 14,978,948 -- 14,996,843
Net loss -- -- -- (2,155,890) (2,155,890)
----------- -------- ------------ ------------ ------------
Balance, June 30, 2000 10,285,158 102,852 25,094,195 (5,956,442) 19,240,605
Proceeds from litigation settlement -- -- 2,368,485 -- 2,368,485
Proceeds from exercise of
options and warrants to purchase
common stock 218,750 2,187 236,898 -- 239,085
Costs associated with private
placement of common stock -- -- (16,921) -- (16,921)
Net loss -- -- -- (3,742,002) (3,742,002)
----------- -------- ------------ ------------ ------------
Balance, June 30, 2001 10,503,908 105,039 27,682,657 (9,698,444) 18,089,252
Net loss -- -- -- (9,973,442) (9,973,442)
----------- -------- ------------ ------------ ------------
Balance, June 30, 2002 $10,503,908 $105,039 $ 27,682,657 $(19,671,886) $ 8,115,810
=========== ======== ============ ============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
22
PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows for the
Years Ended June 30, 2002, 2001, and 2000
2002 2001 2000
Cash Flows from Operating Activities:
Net loss $ (9,973,442) $ (3,742,002) $ (2,155,890)
Adjustments to reconcile net loss to net cash used in
operating activities-
Depreciation and amortization 593,491 730,500 481,569
Provision for asset impairment 4,042,956 -- --
Provision for inventory write-down 540,000 -- --
Other (25,345) --
Changes in operating assets and liabilities-
Accounts receivable, net 628,997 (365,197) (428,220)
Inventories (24,890) (414,608) (130,227)
Prepaid expenses 16,186 (38,953) (22,811)
Refundable income taxes (13,849) -- --
Accounts payable (465,885) 265,690 124,477
Accrued restructuring expense 167,971 -- --
Customer advances 30,000 -- --
Other accrued expenses (29,467) 84,185 26,103
------------ ------------ ------------
Net cash used in operating activities (4,513,277) (3,448,168) (2,104,999)
------------ ------------ ------------
Cash Flows from Investing Activities:
Purchases of property and equipment (90,818) (3,617,134) (1,990,527)
Increase in other assets (56,798) (27,877) (36,628)
------------ ------------ ------------
Net cash used in investing activities (147,616) (3,645,011) (2,027,155)
------------ ------------ ------------
Cash Flows from Financing Activities:
Repayment of capital lease obligation and other (43,804) (95,922) (143,588)
Proceeds from litigation settlement -- 2,368,485 --
Net proceeds (costs) from private placements of common stock -- (16,921) 14,996,843
Proceeds from exercise of stock options and warrants -- 239,085 3,926,917
------------ ------------ ------------
Net cash provided by (used in) financing activities (43,804) 2,494,727 18,780,172
------------ ------------ ------------
Net Increase (Decrease) in Cash and Cash Equivalents (4,704,697) (4,598,452) 14,648,018
Cash and Cash Equivalents, beginning of year $ 10,530,298 15,128,750 480,732
------------ ------------ ------------
Cash and Cash Equivalents, end of year $ 5,825,601 $ 10,530,298 $ 15,128,750
============ ============ ============
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for-
Interest $ 19,963 $ 11,860 $ 24,317
============ ============ ============
Income taxes $ 912 $ 912 $ 912
============ ============ ============
Supplemental Disclosure of Noncash Investing and Financing
Activities:
Capital lease obligation $ -- $ -- $ 55,837
============ ============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
23
PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, June 30, 2002
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) NATURE OF BUSINESS
Precision Optics Corporation, Inc. (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 and its customers are primarily domestic. The
Company's products and services fall into two principal areas: (i)
medical products for use by hospitals and physicians and (ii) advanced
optical system design and development services and products.
The Company has incurred significant operating losses during the last
six fiscal years. This trend was primarily the result of the loss of
several significant customers, completion of several large
nonrecurring government contracts, and operating losses and provision
for asset impairment, restructuring, and inventory write-downs
associated with the downturn in demand for optical filters used in
telecommunications systems. In fiscal 1998, the Company began making
significant investments in research and development and capital
purchases for new products. In August 1999 and March 2000, the Company
raised gross proceeds of approximately $16 million of additional cash
through the issuance of common stock (see Note 4). The Company
believes, based on its operating and strategic plans along with the
cash generated from the fiscal year 2000 equity financings, that it
will have sufficient funds to conduct operations through at least the
next fiscal year.
(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
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101 which establishes guidance in
applying generally accepted accounting principles to revenue
recognition in financial statements and was effective for the
Company's fiscal year 2001. SAB No. 101 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 rendered; (3) the price to the buyer is fixed and
determinable; and (4) collectibility is reasonably assured. The
Company's shipping terms are customarily FOB shipping point. The
Company's revenue recognition practices comply with the guidance in
the bulletin.
Revenues for industrial and medical products sold in the normal course
of business are recognized upon shipment when delivery terms are FOB
shipping point and all other revenue recognition criteria have been
met. Contract revenues including revenues from customer-sponsored
research and development contracts, 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. When the estimate
on a contract indicates a loss, the Company's policy is to record the
entire estimated loss in the current period.
24
PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements June 30, 2002
(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 of $5,678,705 and $9,951,016 at June 30,
2002 and 2001, respectively, consist primarily of overnight repurchase
agreements, money market funds, and United States Treasury bills.
(e) 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 at June 30, 2002 and 2001 are as follows:
2002 2001
Raw material $ 532,228 $ 777,269
Work-in-progress 302,128 462,517
Finished goods 174,653 284,333
--------------- ---------------
$ 1,009,009 $ 1,524,119
=============== ===============
(f) PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Maintenance and repair
items are expensed as incurred. 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:
ASSET CLASSIFICATION ESTIMATED USEFUL LIFE
Machinery and equipment 3-7 years
Leasehold improvements Shorter of lease term or estimated useful life
Furniture and fixtures 5 years
Vehicles 3 years
Amortization of assets under capital leases is included in
depreciation and amortization expense. Depreciation and amortization
expense was $552,116, $698,488 and $432,867 for the years ended June
30, 2002, 2001 and 2000, respectively.
(g) 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
25
PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements June 30, 2002
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, 2002 and 2001, receivables from the Company's largest
customer were approximately 63% and 59% of the total accounts
receivable, respectively. No other customer accounted for more than
10% of the Company's receivables as of June 30, 2002 and 2001. The
Company has not experienced any material losses related to accounts
receivable from individual customers. The Company generally does not
require collateral or other security as a condition of sale rather
relying on credit approval, balance limitation and monitoring
procedures to control credit risk of trade account financial
instruments. Management believes that allowances for doubtful
accounts, which are established based upon review of specific account
balances and historical experience, are adequate.
Revenues from the Company's largest customers, as a percentage of
total revenues, were as follows:
2002 2001 2000
Customer A 23% 41% 46%
Customer B 18 7 11
Customer C 6 18 4
All Others 53 34 39
--- --- ---
100% 100% 100%
==== ==== ====
No other customer accounted for more than 10% of the Company's
revenues in fiscal year 2002, 2001 and 2000.
(h) LOSS PER SHARE
The Company calculates earnings per share according to SFAS No. 128,
EARNINGS PER SHARE. 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 each of the three years in the
period ended June 30, 2002, the effect of stock options and warrants
was antidilutive; therefore, they were not included in the computation
of diluted loss per share. The number of shares that were excluded
from the computation, as their effect would be antidilutive, were
1,209,198, 1,232,598 and 1,396,698 during fiscal 2002, 2001, and 2000,
respectively.
(i) 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, including FASB Interpretation No. 44, ACCOUNTING FOR
CERTAIN TRANSACTIONS INVOLVING STOCK COMPENSATION, AN INTERPRETATION
OF APB OPINION NO. 25, issued in March 2000. 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. 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 earnings and earnings per share as if the fair
value accounting prescribed by SFAS No. 123 had been adopted, as well
as certain other information. [See Note 4 (c)].
26
PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements June 30, 2002
(j) 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.
(k) PATENTS
Patents are carried at cost, less accumulated amortization of
approximately $253,000 and $232,000 at June 30, 2002 and 2001,
respectively. Such costs are amortized using the straight-line method
over the shorter of their legal or estimated useful lives, generally
five to ten years. Amortization expense was $41,375, $32,012, and
$48,702 for the years ended June 30, 2002, 2001, and 2000,
respectively.
(l) FINANCIAL INSTRUMENTS
SFAS No. 107, DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS,
requires disclosures about the fair value of financial instruments.
Financial instruments consist principally of cash equivalents,
accounts receivable, accounts payable, and accrued expenses. The
estimated fair value of these financial instruments approximates their
carrying value due to the short-term nature of these financial
instruments.
(m) LONG-LIVED ASSETS
The Company accounts for long-lived assets in accordance with SFAS No.
121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR
LONG-LIVED ASSETS TO BE DISPOSED OF. This statement requires that
long-lived assets and certain identifiable intangibles be reviewed for
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 future net cash flows expected to be
generated by the asset. 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.
Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell.
(n) WARRANTY COSTS
The Company does not incur future performance obligations in the
normal course of business other than providing 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 were $9,317, $26,219, and $11,221 for the
years ended June 30, 2002, 2001, and 2000, respectively and have been
included as a component of cost of goods sold in the accompanying
consolidated statements of operations.
27
PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements June 30, 2002
(o) RESEARCH AND DEVELOPMENT
Research and development expenses are charged to operations as
incurred.
(p) COMPREHENSIVE INCOME
SFAS No. 130 requires disclosure of all components of comprehensive
income on an annual and interim basis. Comprehensive income is defined
as the change in equity of a business enterprise during a period from
transactions and other events and circumstances from nonowners
sources.
The Company's comprehensive loss for the years ended June 30, 2002,
2001 and 2000 was equal to its net loss for the same periods.
(q) INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change
in tax rates is recognized in income in the period that includes the
enactment date.
In assessing the likelihood of utilization of existing deferred tax
assets, management has considered historical results of operations and
the current operating environment.
(r) USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
standards generally accepted in the United States 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.
(s) RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards ("SFAS") No. 141, BUSINESS
COMBINATIONS. SFAS No. 141 requires all business combinations
initiated after June 30, 2001 to be accounted for using the purchase
method. This statement is effective for all combinations initiated
after June 30, 2001. The adoption of SFAS No. 141 on July 1, 2001 had
no impact on the Company's consolidated financial statements.
In June 2001, the FASB issued SFAS No. 142, GOODWILL AND OTHER
INTANGIBLE ASSETS. This statement applies to goodwill and intangible
assets acquired after June 30, 2001, as well as goodwill and intangible
assets previously acquired. Under this statement goodwill as well as
certain other intangible assets, determined to have an indefinite life,
will no longer be amortized; instead these assets will be reviewed for
impairment on a periodic basis. This statement was adopted by the
Company on July 1, 2001. The adoption of this new accounting standard
did not have a material impact on the Company's consolidated financial
statements.
28
PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements June 30, 2002
In October 2001, the FASB issued SFAS No. 144, ACCOUNTING FOR THE
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS, which is effective in
fiscal years beginning after December 15, 2001 and interim periods
within those fiscal periods. SFAS No. 144 supersedes FASB Statement
No. 121 ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED
ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, and parts of APB
Opinion No. 30, REPORTING THE RESULTS OF OPERATIONS-REPORTING THE
EFFECTS OF DISPOSAL OF A SEGMENT OF A BUSINESS, AND EXTRAORDINARY,
UNUSUAL AND INFREQUENTLY OCCURRING EVENTS AND TRANSACTIONS RELATING
TO EXTRAORDINARY ITEMS, however, SFAS No. 144 retains the requirement
of APB Opinion No. 30 to report discontinued operations separately from
continuing operations and extends that reporting to a component of an
entity that either has been disposed of (by sale, by abandonment, or
in a distribution to owners) or is classified as held for sale. SFAS
No. 144 addresses financial accounting and reporting for the impairment
of certain long-lived assets and for long-lived assets to be disposed
of. The Company does not believe adopting SFAS No. 144 on July 1, 2002
will have a material impact on the Company's consolidated financial
statements.
The FASB issued SFAS No. 145, RESCISSION OF FASB STATEMENTS NO. 4, 44,
AND 64, AMENDMENT OF FASB STATEMENT NO. 13, AND TECHNICAL CORRECTIONS,
effective for fiscal years beginning May 15, 2002 or later that
rescinds FASB Statement No. 4, REPORTING GAINS AND LOSSES FROM
EXTINGUISHMENT OF DEBT, FASB Statement No. 64, EXTINGUISHMENTS OF DEBT
MADE TO SATISFY SINKING-FUND REQUIREMENTS, and FASB Statement No. 44,
ACCOUNTING FOR INTANGIBLE ASSETS OF MOTOR CARRIERS. This Statement
amends SFAS No. 4 and SFAS No. 13, ACCOUNTING FOR LEASES, to eliminate
an inconsistency between the required accounting for sale-leaseback
transactions. This Statement also amends other existing authoritative
pronouncements to make various technical corrections, clarify meanings,
or describe their applicability under changed conditions. The Company
does not believe adopting SFAS No. 145 on July 1, 2002 will have a
material impact on its consolidated financial statements.
In July 2002, the FASB issued SFAS No. 146, ACCOUNTING FOR COSTS
ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES. SFAS No. 146 is based on
the fundamental principle that a liability for a cost associated with
an exit or disposal activity should be recorded when it (1) is
incurred, that is, when it meets the definition of a liability in FASB
Concepts Statement No. 6, ELEMENTS OF FINANCIAL STATEMENTS, and (2)
can be measured at fair value. The principal reason for issuing SFAS
No. 146 is the Board's belief that some liabilities for costs
associated with exit or disposal activities that entities record under
current accounting pronouncements, in particular EITF Issue 94-3, do
not meet the definition of a liability. SFAS No. 146 nullifies EITF
Issue 94-3; thus, it will have a significant effect on practice because
commitment to an exit or disposal plan no longer will be a sufficient
basis for recording a liability for costs related to those activities.
SFAS No. 146 is effective for exit and disposal activities initiated
after December 31, 2002. Early application is encouraged; however,
previously issued financial statements may not be restated. An entity
would continue to apply the provisions of EITF Issue 94-3 to an exit
activity that is initiated under an exit plan that met the criteria of
EITF Issue 94-3 before the entity initially applied SFAS No. 146. The
Company does not believe adopting SFAS No. 146 on July 1, 2002 will
have a material impact on its consolidated financial statements.
29
PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements June 30, 2002
(2) CAPITAL LEASE OBLIGATION
At June 30, 2002, future minimum lease payments under capital lease obligation
are as follows:
AMOUNT
Fiscal year ended June 30 -
2003 $34,450
2004 3,874
-------
Total minimum lease payments 38,324
Amount representing interest (at rates ranging from 7.5% to 9.4%) 1,721
-------
Present value of future minimum lease payments 36,603
Less--Current portion 33,544
-------
$ 3,059
=======
Capital leases are secured by substantially all assets of the Company
under a security agreement.
(3) COMMITMENTS
(a) RELATED PARTY TRANSACTIONS
The Company leases one of its facilities from a corporation owned by
an officer of the Company. The lease terminated in December 1999 and
required lease payments of $9,000 per month. The Company is currently
a tenant at will paying lease payments of $9,000 a month. Total rent
expense for related parties included in the accompanying consolidated
statements of operations amounted to $108,000 in each of fiscal years
2002, 2001, and 2000.
The Company paid fees to a director of approximately $24,000, $24,000,
and $45,000 for services performed during fiscal 2002, 2001 and 2000,
respectively. Another director is a former partner in a law firm that
has performed legal services for the Company during fiscal 2002, 2001
and 2000 of approximately $117,000, $320,000, and $253,000,
respectively. Another director is the owner of a company that provided
approximately $19,000, $20,000, and $67,000 in software and consulting
services to the Company during fiscal 2002, 2001 and 2000,
respectively.
(b) OPERATING LEASE COMMITMENTS
In August 2000, the Company entered into a facility lease for
development and manufacturing purposes. The lease includes a yearly
escalation clause and provides for the option to renew at the end of
the term. Lease commitments began in November 2000 and include
estimated-shared costs. The lease expires in October 2005. In August
2002, the Company entered into a lease termination agreement,
providing for the termination of this lease effective September 30,
2002 by payment of a lease cancellation fee of approximately $161,000
in September 2002. [See Note 6]
30
PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements June 30, 2002
The Company has entered into operating leases for its office space and
equipment that expire at various dates through fiscal year 2004. Total
future minimum rental payments under all non-cancelable operating
leases are approximately as follows:
AMOUNT
Fiscal year ended June 30--
2003 $ 211,000
2004 12,000
---------
$ 223,000
=========
Rent expense on operating leases was approximately $178,000, $258,000,
and $158,000 for the years ended June 30, 2002, 2001 and 2000,
respectively.
(4) STOCKHOLDERS' EQUITY
(a) PRIVATE PLACEMENTS
In fiscal year 2000, the Company completed two private placements of a
total of 1,789,463 shares of common stock with net proceeds of
$14,996,843. In conjunction with this offering, the purchasers were
issued warrants to acquire 1,465,798 shares of common stock at a
weighted average exercise price of $9.26 per share.
(b) WARRANTS
During fiscal year 2000, warrants with an exercise price of $4.00 per
share for 500,000 common shares and warrants with an exercise price of
$1.125 per share for 789,500 common shares were exercised, resulting
in proceeds to the Company of $2,888,188. During fiscal year 2001,
warrants with an exercise price of $1.125 per share for 210,500 shares
were exercised resulting in proceeds to the Company of $236,813. As of
June 30, 2002, the Company had 465,798 fully-exercisable warrants to
acquire common stock outstanding at a weighted average exercise price
of $26.73. The warrants are immediately exercisable and expire in
March 2005.
(c) STOCK OPTIONS
During fiscal 1989, the stockholders approved a stock option plan (the
"1989 Plan") for key employees. The 1989 Plan, as amended, authorizes
the grant of options of up to 1,110,000 shares of the Company's common
stock at an exercise price of not less than 100% of the fair market
value per share at the date of grant. Options granted vest and are
exercisable for periods determined by the Board of Directors, not to
exceed 10 years from the date of grant.
During fiscal 1998, the stockholders approved an incentive plan (the
"1997 Incentive Plan"), which provides eligible participants (certain
employees, directors, consultants, etc.) the opportunity to receive a
broad variety of equity based and cash awards. Options granted vest
and are exercisable for periods determined by the Board of Directors,
not to exceed 10 years from the date of grant. A total of 1,200,000
shares of common stock have been reserved for issuance under the 1997
Incentive Plan. Upon the adoption of the 1997 Incentive Plan, no new
awards will be granted under the 1989 Plan. At June 30, 2002, 614,750
shares of common stock were available for future grants under the 1997
Incentive Plan.
31
PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements June 30, 2002
The following is a summary of transactions in the plans for the three
years ended June 30, 2002:
WEIGHTED
AVERAGE
NUMBER OF OPTION PRICE PER EXERCISE
SHARES SHARE PRICE
Options outstanding, June 30, 1999 961,500 1.312-3.844 2.39
Granted 215,000 1.00-5.00 3.91
Exercised (441,100) 1.00-3.844 2.13
Canceled (81,500) 1.00-3.844 2.55
--------- ------------ -------
Options outstanding, June 30, 2000 653,900 1.00-5.00 3.03
Granted 66,900 2.50-12.50 5.65
Exercised (8,250) 1.00-1.563 1.36
Canceled (750) 3.844 3.844
--------- ----------- -------
Options outstanding, June 30, 2001 711,800 $1.00-12.50 $ 2.73
Granted 180,500 .67-1.19 .78
Canceled (203,900) 1.00-5.00 4.93
--------- ----------- -------
Options outstanding, June 30, 2002 688,400 $ .67-12.50 $ 2.33
========= =========== =======
Options exercisable, June 30, 2002 556,450 $ .67-12.50 $ 2.53
========= =========== =======
Options exercisable, June 30, 2001 551,125 $1.00-12.50 $ 2.95
========= =========== =======
Options exercisable, June 30, 2000 386,400 $ 1.00-5.00 $ 2.42
========= =========== =======
32
PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements June 30, 2002
The following table summarizes information about stock options
outstanding and exercisable at June 30, 2002:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------------------------------- -- ---------------------------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Options Contractual Exercise Options Exercise
Prices Outstanding Life Price Exercisable Price
$.67-$.76 152,100 9.56 years $.71 56,775 $ .72
1.00 - 1.375 190,900 4.29 years $1.31 165,225 $1.33
1.56 - 2.19 111,000 4.85 years $1.82 111,000 $1.82
2.75 6,250 5.12 years $2.75 6,250 $2.75
3.84 - 5.50 216,250 5.94 years $4.05 211,250 $4.05
12.50 11,900 8.17 years $12.50 5,950 $12.50
------- --------
$.67 - $12.50 688,400 4.89 years $2.33 556,450 $2.53
======= ========
In addition, the Company has granted options outside the plans, primarily
to directors and consultants at 100% of the fair market value per share
at the date of grant. The weighted average remaining contractual life of
the options outside the plans is 2.66 years as of June 30, 2002. The
following is a summary of all transactions outside the plans:
WEIGHTED
AVERAGE
NUMBER OF OPTION PRICE EXERCISE
SHARES PER SHARE PRICE
Options outstanding, June 30, 1999 144,000 0.50-5.69 1.50
Exercised (77,500) 0.50-5.69 1.75
-------- --------- ------
Options outstanding, June 30, 2000 66,500 0.50-1.375 1.20
Canceled (11,500) 0.50 0.50
-------- ----------- ------
Options outstanding, June 30, 2001 55,000 $1.30-1.375 $ 1.35
======== =========== ======
Options outstanding, June 30, 2002 55,000 $1.30-1.375 $ 1.35
======== ============= ======
Options exercisable, June 30, 2002 55,000 $1.30-1.375 $ 1.35
======== ============= ======
Options exercisable, June 30, 2001 55,000 $1.30-1.375 $ 1.35
======== ============= ======
33
PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements June 30, 2002
The Company has computed the pro forma disclosures required under SFAS
No. 123 for fiscal 2002, 2001 and 2000 using the Black-Scholes option
pricing model prescribed by SFAS No. 123.
The assumptions used for each of the three years in the period ended June
30, 2002 are as follows:
YEAR ENDED
------------------------------------
2002 2001 2000
Risk-free interest rates 4.10% 5.52% 6.30%
Expected dividend yield - - -
Expected lives 7 years 7 years 7 years
Expected volatility 279% 123% 99%
Weighted average fair value
of grants $.78 $5.18 $3.32
The effect of applying SFAS No. 123 would be as follows:
YEAR ENDED
----------------------------------------
2002 2001 2000
Net loss-
As reported $ (9,973,442) $ (3,742,002) $ (2,155,890)
Pro forma $(10,071,916) $ (4,204,298) $ (2,623,201)
Net loss per share-
As reported, basic and diluted $ (.95) $ (.36) $ (.26)
Pro forma, basic and diluted $ (.96) $ (.40) $ (.31)
(5) INCOME TAXES
The provision for income taxes in the accompanying consolidated
statements of operations consists of the following for the three years
ended June 30, 2002:
2002 2001 2000
Current-
Federal $ -- $ -- $ --
State 912 912 912
Foreign -- -- --
----- ----- -----
912 912 912
----- ----- -----
Deferred-
Federal -- -- --
State -- -- --
----- ----- -----
$ 912 $ 912 $ 912
===== ===== =====
34
PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements June 30, 2002
A reconciliation of the federal statutory rate to the Company's effective tax
rate for the three years ended June 30, 2002 is as follows:
2002 2001 2000
Income tax benefit at federal statutory rate (34.0)% (34.0)% (34.0)%
Increase (decrease) in tax resulting from-
State taxes, net of federal benefit (6.0) (6.0) (6.0)
Tax Credits (.7) (4.9) (2.8)
Change in valuation allowance (net of
valuation allowance of approximately
$929,000 and $2,223,000 related to
items allocable to stockholders' equity
for fiscal 2001 and 2000, respectively) 40.0 44.5 38.7
Other .7 .4 4.1
----- ----- ------
Effective tax rate 0.0% 0.0% 0.0%
===== ===== ======
35
PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements June 30, 2002
The components of the net deferred tax asset at June 30, 2002 and 2001
are approximately as follows:
2002 2001
Deferred tax assets:
Net operating loss carryforwards $ 5,553,000 $ 3,758,000
Tax credit carryforwards 595,000 527,000
Reserves and accruals not yet
deducted for tax purposes 3,972,000 1,787,000
----------- -----------
Total deferred tax assets 10,120,000 6,072,000
Deferred tax liabilities:
Accelerated depreciation (485,000) (425,000)
Valuation allowance (9,635,000) (5,647,000)
----------- -----------
Net deferred tax asset $ -- $ --
=========== ===========
The Company has provided a valuation allowance to reduce the net
deferred tax asset to an amount the Company believes is "more likely
than not" to be realized. The valuation allowance increased in fiscal
2002 by approximately $3,988,000 primarily due to the generation of a
net operating loss carryforward and the recording of provisions for
asset impairment and restructuring. Approximately $2,241,000 of the
valuation allowance at June 30, 2002 related to the exercise of stock
options will be allocated to stockholders' equity when recognized. As
of June 30, 2002, the Company has net operating loss carryforwards for
U.S. federal and state income taxes of approximately $13,880,000 and
$14,339,000, respectively. The U.S. federal net operating loss
carryforwards expire approximately as follows: $730,000 in 2013,
$1,500,000 in 2019, $7,150,000 in 2020, and $4,500,000 in 2022. The
state net operating loss carryforwards expire approximately as
follows: $1,244,000 in 2003, $1,487,000 in 2004, $7,108,000 in 2005,
and $4,500,000 in 2007. The tax credit carryforwards expire in 2003
through 2022. Pursuant to the Tax Reform Act of 1986, the utilization
of net operating loss carryforwards for tax purposes may be subject to
an annual limitation if a cumulative change of ownership of more than
50% occurs over a three-year period. As a result of the Company's
recent stock offerings, such a change in ownership may have occurred.
In the event that the Company has had a change in ownership, as
defined, the utilization of substantially all of the Company's net
operating loss carryforwards may be restricted.
(6) PROVISION FOR ASSET IMPAIRMENT AND RESTRUCTURING
The sharp reduction in demand and industry-wide excess inventory
levels of passive telecommunications components has hampered the
Company's ability to obtain new orders for its DWDM products. In
calendar year 2001, the Company announced that two major customers for
DWDM filters had canceled the balance of orders placed with the
Company.
Revenues from DWDM filters and test instrumentation in the quarters
ended September 30, 2001 and December 31, 2001 were sharply lower than
in previous quarters, and such revenues were negligible in the
quarters ended March 31, 2002 and June 30, 2002. Current business
prospects in this marketplace continue to remain negligible because of
the lack of visibility concerning future spending levels for
telecommunications equipment.
36
PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements June 30, 2002
Asset Impairment:
In accordance with Statement of Financial Accounting Standards ("SFAS") No. 121:
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO
BE DISPOSED OF, the Company reviews the recoverability of its long-lived assets
when changes in circumstances indicate the carrying value of the asset may not
be recoverable. As a result of the business conditions noted above, the Company
determined such an assessment was required for the assets invested in its
optical thin films business. The Company assesses recoverability of its assets
based upon cumulative expected undiscounted cash flows of the related product
lines. As a result of this assessment, the Company determined that the costs
invested in certain property and equipment of the Company's optical thin film
coating business are not fully recoverable and, under generally accepted
accounting principles, should be written down to the lower of carrying value or
fair market value (or, in the case of assets held for sale, fair value less cost
to sell). Fair market value was determined by an independent appraisal based on
a market approach.
Consequently, in the quarter ended September 30, 2001, the Company recorded a
pretax non-cash charge of $3,444,378 for the impairment in value of certain of
its optical thin film coating property and equipment.
As a result of the continuing and more recent decline in spending levels for
telecommunications equipment, the Company obtained an updated independent
appraisal of the fair market value of its optical thin film coating fixed assets
and reviewed the recoverability of other intangible assets, as part of its
review of fiscal year 2002 financial results. This assessment resulted in an
additional pretax non-cash impairment charge of $598,578 recorded in the quarter
ended June 30, 2002, which includes a charge of approximately $58,000 for the
writeoff of certain patent costs deemed not to have future value.
The thin film coating equipment used in the Company's telecommunications product
line is idle, and as of June 30, 2002, is being held for sale. Accordingly,
these assets (whose fair value less cost to sell is estimated at $847,696) have
been reclassified to the category of "Assets held for sale" in the accompanying
consolidated balance sheet as of June 30, 2002.
Restructuring:
On August 1, 2001, the Company announced that it had reduced its workforce by
approximately 30%, or 24 employees, and indicated it would be monitoring
marketplace conditions to determine whether additional cost savings measures
would be necessary.
The Company has taken additional measures to reflect the lower revenue
expectations in its telecommunications product line by a further reduction in
its workforce in November, 2001, and by recording provisions for employee
severance and costs of idle leased space in its Optical Thin Films Technology
Center. The November 2001 workforce reduction affected 13 employees, or 24% of
the existing workforce.
As a result of these actions, the Company recorded a non-recurring pretax charge
to earnings of $402,065 in the year ended June 30, 2002, consisting of (1) a
non-cash element of $215,815 representing the present value of future lease
payments related to idle space in the Company's Optical Thin Films Technology
Center plus a lease cancellation fee of approximately $161,000, and (2) $186,250
representing employee severance costs.
During the year ended June 30, 2002, cash payments of $234,094 were made for
lease payments related to idle space and employee severance costs, leaving a
balance of $167,971 of accrued restructuring expense, at June 30, 2002, related
to lease payments and lease termination costs. The balance of accrued
restructuring expense is expected to be paid during the quarter ending September
30, 2002.
37
PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements June 30, 2002
The following table sets forth the quarterly impacts and cash payments
associated with the asset impairment and restructuring provisions:
PROVISION FOR -
---------------------------------------------------------------------------
PROPERTY & IDLE
EQUIPMENT PATENT EMPLOYEE LEASE
WRITEDOWN WRITEDOWN SEVERAMCE SPACE TOTAL
Quarter Ended -
September 30, 2001 $ 3,444,378 $ -- $ -- $ -- $ 3,444,378
December 31, 2001 -- -- 186,250 482,000 668,250
June 30, 2002 541,000 57,578 -- (266,185) 332,393
----------- -------- ----------- --------- -----------
Total Provision 3,985,378 57,578 186,250 215,815 4,445,021
Non-cash Charges (3,985,378) (57,578) -- -- (4,042,956)
Cash Payments -- -- (186,250) (47,844) (234,094)
----------- -------- ----------- --------- -----------
Provision Balance, June 30, 2002 $ -- $ -- $ -- $ 167,971 $ 167,971
=========== ======== =========== ========= ===========
(7) PROVISION FOR INVENTORY WRITE-DOWN
As a result of the business conditions noted above, the Company
determined that certain inventories of DWDM filters and filter test
instrumentation would not be sold within the Company's business cycle
or the products' life cycle. Consequently, the Company recorded, in
cost of goods sold, a provision for excess and obsolete inventory of
approximately $540,000 in the first quarter ended September 30, 2001.
(8) PROFIT SHARING PLAN
The Company has a defined contribution 401K profit sharing plan.
Employer profit sharing and matching contributions to the plan are
discretionary. No employer profit sharing contributions were made to
the plan in fiscal years 2002, 2001, or 2000. Employer matching
contributions to the plan amounted to $34,608, $32,354, and $29,983
for fiscal years 2002, 2001 and 2000, respectively.
(9) SEGMENT REPORTING
SFAS No. 131 establishes standards for reporting information regarding
operating segments in annual financial statements and requires
selected information for those segments to be presented in interim
financial reports issued to stockholders. SFAS No. 131 also
establishes standards for related disclosures about products and
services and geographic areas. Operating segments are identified as
components of an enterprise about which separate discrete financial
information is available for evaluation by the chief operating
decision maker, or decision making group, in making decisions about
how to allocate resources and assess performance. The Company's chief
decision-maker, as defined under SFAS No. 131, is the Chief Executive
Officer. To date, the Company has viewed its operations and manages
its business as principally one segment. For all periods presented,
over 90% of the Company's sales have been to customers in the United
States.
38
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE: As previously disclosed on a current report on Form 8-K
filed with the Securities and Exchange Commission on July 2, 2002 (the "Form
8-K"), the Company dismissed Arthur Andersen LLP ("Arthur Andersen") as its
independent accountants on July 1, 2002. The Company's Audit Committee and Board
of Directors approved this action.
The reports of Arthur Andersen on the Company's financial statements for the two
fiscal years ended June 30, 2001 and June 30, 2000 contained no adverse opinion
or disclaimer of opinion and were not qualified or modified as to uncertainty,
audit scope or accounting principles.
During the Company's fiscal years ended June 30, 2001 and June 30, 2000, and
through July 1, 2002, there were no disagreements, resolved or unresolved, with
Arthur Andersen on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure, which disagreements, if not
resolved to the satisfaction of Arthur Andersen, would have caused Arthur
Andersen to make reference thereto in connection with its reports on the
financial statements.
During the Company's fiscal years ended June 30, 2001 and June 30, 2000, and
through July 1, 2002, Arthur Andersen has not advised the Company as to any of
the matters described in Item 304(a)(1)(iv)(B) of Regulation S-B promulgated
under the Securities Act of 1933, as amended.
The Company has been unable, after reasonable efforts, to have Arthur Andersen
review and respond to the above disclosure; however, Arthur Andersen provided a
letter dated July 2, 2002 stating that it was in agreement with the disclosure
included in paragraphs 2, 3 and 4 of the Form 8-K, which disclosure is the same
as the disclosure in paragraphs 2, 3 and 4 of the response to this Item 8.
On July 16, 2002, the Company engaged KPMG LLP as its new independent
accountant. The Company's Audit Committee and Board of Directors approved this
action. The decision to engage KPMG LLP followed the Company's evaluation of
proposals from several accounting firms.
During the Company's fiscal years ended June 30, 2001 and June 30, 2000, and
through July 16, 2002, neither the Company nor any person on the Company's
behalf consulted with KPMG LLP regarding: (i) the application of accounting
principles to a specific completed or contemplated transaction, or the type of
audit opinion that might be rendered on the Company's financial statements, or
(ii) any matter that was the subject of a disagreement or event described in
Item 304(a)(1)(iv) of Regulation S-B.
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, 2002. 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.
39
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, as amended and
corrected(1)
3.2 By-laws of Precision Optics Corporation, Inc.(2)
4.1 Specimen common stock certificate(3)
4.2 Registration Rights Agreement dated as of March 17, 2000 by and
among the Company and the Initial Investors as defined
therein(4)
4.3 Registration Rights Agreement dated as of June 30, 1998 by and
among the Company, Special Situations Private Equity Fund, L.P.
and Special Situations Technology Fund, L.P.(5)
4.4 Registration Rights Agreement dated as of August 5, 1999 by and
among the Company, Special Situations Cayman Funds, L.P.,
Special Situations Fund III, L.P., Special Situations Private
Equity Fund, L.P. and Special Situations Technology Fund, L.P.
(6)
4.5 Form of Stock Purchase Warrant dated March 17, 2000 issued to
each investor in March 17, 2000 private placement
transaction(4)
4.6 Warrant No. 1 dated March 17, 2000 issued to First Security Van
Kasper(4)
4.7 Warrant No. 2 dated March 17, 2000 issued to First Security Van
Kasper(4)
4.8 Common Stock Purchase Warrant dated August 5, 1999 issued to
Special Situations Cayman Fund, L.P.(6)
40
4.9 Common Stock Purchase Warrant dated August 5, 1999 issued to
Special Situations Technology Fund, L.P. (6)
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(3)
10.2 Second Amendment to Commercial Lease between the Company and
Equity dated December 9, 1994(7)
10.3 Precision Optics Corporation, Inc. 1989 Stock Option Plan
amended to date(8)
10.4 Three separate life insurance policies on the life of Richard
E. Forkey.(3)
10.5 Master Lease Finance Agreement dated November 3, 1993 between
the Company and BancBoston Leasing(8)
10.6 Lease dated March 1, 1999, between the Company and Philip A.
Wood, as executor of the Estate of Alma L. Wood and as devisee
under the Will of Alma L. Wood; Martha A. Mount, devisee under
the Will of Alma L. Wood; and Nancy E. Popinchalk, devisee
under the Will of Alma L. Wood for 21 Pleasant Street, Gardner,
Massachusetts(6)
10.7 Precision Optics Corporation, Inc. 1997 Incentive Plan.(5)
10.8 Stock Subscription Agreement dated as of June 30, 1998 by and
among the Company, Special Situations Private Equity Fund, L.P.
and Special Situations Technology Fund, L.P.(5)
10.9 Stock Subscription Agreement dated as of August 5, 1999 by and
among the Company, Special Situations Cayman Funds, L.P.,
Special Situations Fund III, L.P., Special Situations Private
Equity Fund, L.P. and Special Situations Technology Fund, L.P.
(6)
10.10 Securities Purchase Agreement dated as of March 13, 2000 by and
among the Company and the Purchasers as defined therein
(excluding exhibits)(4)
21 Subsidiaries of Precision Optics Corporation, Inc.(7)
23 Consent of KPMG LLP.
99.1 Important Factors Regarding Forward-Looking Statements.
99.2 Certification of Annual Report
(1) Incorporated herein by reference to the Company's Registration Statement on
Form S-8 (No. 333-97525).
(2) Incorporated herein by reference to the Company's 1991 Annual Report on Form
10-KSB No. 001-10647.
(3) Incorporated herein by reference to the Company's Registration Statement on
Form S-18 (No. 33-36710-B).
(4) Incorporated herein by reference to the Company's Registration Statement on
Form S-3 (No. 333-35884).
(5) Incorporated herein by reference to the Company's 1998 Annual Report on Form
10-KSB No. 001-10647.
(6) Incorporated herein by reference to the Company's 1999 Annual Report on Form
10-KSB No. 001-10647.
(7) Incorporated herein by reference to the Company's 1996 Annual Report on Form
10-KSB No. 001-10647.
(8) Incorporated herein by reference to the Company's 1994 Annual Report on Form
10-KSB No. 001-10647.
41
(b) REPORTS ON FORM 8-K.
The Company filed two Current Reports on Form 8-K during the quarter
ended June 30, 2002 as follows - (a) On April 4, 2002, the Company
reported a press release issued April 3, 2002, reporting the first
production shipment of autoclavable endoscopes and the receipt of new
orders for medical products and (b) On April 30, 2002, the Company
reported a press release issued April 26, 2002, reporting its
operating results for the quarter ended March 31, 2002.
ITEM 14. CONTROLS AND PROCEDURES: 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.
42
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 23, 2002 PRECISION OPTICS CORPORATION, INC.
By: /s/ Richard E. Forkey
----------------------------------
Richard E. Forkey
Chairman of the Board,
Chief Executive Officer, President
and Treasurer
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 President, Finance,
Director (principal Chief Financial Officer and Clerk
executive officer) (principal financial and accounting
officer)
Date: September 23, 2002 Date: September 23, 2002
By: /s/ Joel R. Pitlor By: /s/ Edward A. Benjamin
----------------------------- ---------------------------------------
Joel R. Pitlor Edward A. Benjamin
Director Director
Date: September 23, 2002 Date: September 22, 2002
By: /s/ Robert R. Shannon By: /s/ H. Angus Macleod
----------------------------- ---------------------------------------
Robert R. Shannon H. Angus Macleod
Director Director
Date: September 22, 2002 Date: September 23, 2002
By: /s/ Austin W. Marxe
-----------------------------
Austin W. Marxe
Director
Date: September 27, 2002
43
CERTIFICATIONS
I, Richard E. Forkey, certify that:
1. I have reviewed this annual report on Form 10-KSB of Precision Optics
Corporation, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
Date: September 23, 2002
/s/ Richard E. Forkey
----------------------------------------
Richard E. Forkey
Chief Executive Officer
* * * * *
I, Jack P. Dreimiller, certify that:
1. I have reviewed this annual report on Form 10-KSB of Precision Optics
Corporation, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
Date: September 23, 2002
/s/ Jack P. Dreimiller
----------------------------------------
Jack P. Dreimiller
Chief Financial Officer
44
INDEX TO EXHIBITS
3.1 Articles of Organization of the Company, as amended and corrected(1)
3.2 By-laws of Precision Optics Corporation, Inc.(2)
4.1 Specimen common stock certificate(3)
4.2 Registration Rights Agreement dated as of March 17, 2000 by and
among the Company and the Initial Investors as defined therein(4)
4.3 Registration Rights Agreement dated as of June 30, 1998 by and
among the Company, Special Situations Private Equity Fund, L.P.
and Special Situations Technology Fund, L.P.(5)
4.4 Registration Rights Agreement dated as of August 5, 1999 by and
among the Company, Special Situations Cayman Funds, L.P., Special
Situations Fund III, L.P., Special Situations Private Equity Fund,
L.P. and Special Situations Technology Fund, L.P.(6)
4.5 Form of Stock Purchase Warrant dated March 17, 2000 issued to each
investor in March 17, 2000 private placement transaction(4)
4.6 Warrant No. 1 dated March 17, 2000 issued to First Security Van
Kasper(4)
4.7 Warrant No. 2 dated March 17, 2000 issued to First Security Van
Kasper(4)
4.8 Common Stock Purchase Warrant dated August 5, 1999 issued to
Special Situations Cayman Fund, L.P.(6)
4.9 Common Stock Purchase Warrant dated August 5, 1999 issued to
Special Situations Technology Fund, L.P.(6)
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(3)
10.2 Second Amendment to Commercial Lease between the Company and
Equity dated December 9, 1994(7)
10.3 Precision Optics Corporation, Inc. 1989 Stock Option Plan amended
to date(8)
10.4 Three separate life insurance policies on the life of Richard E.
Forkey.(3)
10.5 Master Lease Finance Agreement dated November 3, 1993 between the
Company and BancBoston Leasing(8)
10.6 Lease dated March 1, 1999, between the Company and Philip A. Wood,
as executor of the Estate of Alma L. Wood and as devisee under the
Will of Alma L. Wood; Martha A. Mount, devisee under the Will of
Alma L. Wood; and Nancy E. Popinchalk, devisee under the Will of
Alma L. Wood for 21 Pleasant Street, Gardner, Massachusetts(6)
10.7 Precision Optics Corporation, Inc. 1997 Incentive Plan.(5)
10.8 Stock Subscription Agreement dated as of June 30, 1998 by and
among the Company, Special Situations Private Equity Fund, L.P.
and Special Situations Technology Fund, L.P.(5)
10.9 Stock Subscription Agreement dated as of August 5, 1999 by and
among the Company, Special Situations Cayman Funds, L.P., Special
Situations Fund III, L.P., Special Situations Private Equity Fund,
L.P. and Special Situations Technology Fund, L.P.(6)
10.10 Securities Purchase Agreement dated as of March 13, 2000 by and
among the Company and the Purchasers as defined therein (excluding
exhibits)(4)
21 Subsidiaries of Precision Optics Corporation, Inc.(7)
23 Consent of KPMG LLP.
99.1 Important Factors Regarding Forward-Looking Statements.
99.2 Certification of Annual Report
45
(1) Incorporated herein by reference to the Company's Registration Statement on
Form S-8 (No. 333-97525).
(2) Incorporated herein by reference to the Company's 1991 Annual Report on Form
10-KSB No. 001-10647.
(3) Incorporated herein by reference to the Company's Registration Statement on
Form S-18 (No. 33-36710-B).
(4) Incorporated herein by reference to the Company's Registration Statement on
Form S-3 (No. 333-35884).
(5) Incorporated herein by reference to the Company's 1998 Annual Report on Form
10-KSB No. 001-10647.
(6) Incorporated herein by reference to the Company's 1999 Annual Report on Form
10-KSB No. 001-10647.
(7) Incorporated herein by reference to the Company's 1996 Annual Report on Form
10-KSB No. 001-10647.
(8) Incorporated herein by reference to the Company's 1994 Annual Report on Form
10-KSB No. 001-10647.
46