Effective January 1, 2001, Optelecom adopted SFAS No. 133, issued by FASB, "Accounting for Derivative Instruments and Hedging Activities", (as amended by SFAS No. 137). This statement requires companies to record derivatives on their balance sheet as assets or liabilities, measured at fair value. Gains or losses resulting from changes in the values of those derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedging accounting. The Company had no derivative or hedging activity in any of the periods presented. Optelecom believes there is no impact of these Standards on its financial position or results of operations.
See Part II - Other Information, Item 1 - Legal Proceedings, for a discussion of the Company's litigation activities.
Except for the historical financial information contained herein, the following discussion and analysis may contain "forward looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements include declarations regarding the intent, belief or current expectations of the Company and its management. Prospective investors are cautioned that any such forward looking statements are not guarantees of future performance and involve a number of risks and uncertainties; actual results could differ materially from those indicated by such forward looking statements.
The following discussion should be read in conjunction with the Financial Statements and Notes thereto.
OVERVIEW
Optelecom offers integrated multi-media products for communicating video, audio, and other data over both copper wire and optical network systems. Optelecom has two business segments: the Optical Products unit (OP) which designs, manufactures, and sells optical fiber-based data communication equipment to both commercial and Government clients, and the Video Communications unit (VC) which is focused on the delivery and distribution of video systems over Category5 (CAT5) copper cabling as the transmission medium.
The Optical Products unit addresses business opportunities in the worldwide optical communication equipment marketplace, specializing in optical fiber transmission technologies. The majority of its current and future revenues are derived from several niche markets that leverage the advantages of fiber optic telecommunications to solve their transmission requirements. Presently, the vertical markets served include communications systems for highway traffic monitoring, advanced air traffic control video monitor displays, security surveillance and control systems, and manufacturing process and control communications. Verticals that offer future sources of revenue include Video Teleconferencing, Healthcare, and Broadcasting market opportunities.
The Video Communications unit addresses worldwide markets in financial market data information and business television services. Their products include multi-media applications utilizing unshielded twisted-pair copper or “structured” Category 5 (CAT5) cabling for in-house computer data networking applications. The Video Communications Unit offers technical consulting and various product solutions ranging from complex integration of video delivery to the individual user desk, to video distribution technologies for multiple users.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO THREE MONTHS ENDED MARCH 31, 2000
REVENUE
The revenue for the three months ended March 31, 2001 was $3,054,932 compared to revenue of $2,400,896 for the same period of 2000, representing a 27% increase over last year.
Revenue for the Optical Products Unit increased by $786,293, or 42% to $2,662,226. Last year’s focus of increasing sales channels both domestically and internationally is beginning to pay off. Sales to integrators, distributors and OEMs increased substantially.
The Video Communications Unit had revenue of $475,699, a reduction of $49,264, or 9% from the first quarter of 2000. The decrease is related to lack of backlog at the beginning of the quarter as a result of delays in customer projects.
GROSS PROFIT
Gross margin was $1,296,584 for the three months ended March 31, 2001 compared to $1,082,233 for the same period of 2000. The increase in gross profit of $214,351 is due to the increased volume, partially offset by a lower gross margin of 42% compared to 45% last year.
The Optical Products Unit’s gross profit was $1,124,362, or 42% compared to $865,184, or 46%, in 2000. Lower gross margin was partially due to increased costs in optics, due to the market shortage in optics.
The Video Communications Unit’s gross profit totaled $161,081, or 34%, compared to $217,051, or 41%, in the same period of 2000. Lower gross margins were primarily due to increased use of third party products in the system solutions sold. Gross margins on third party products are considerably lower than margins on internally manufactured products.
ENGINEERING
The engineering costs for the first quarter of 2001 were $540,326 compared to $213,441 in the first quarter of 2000. The increase of $326,885 is primarily due to increased personnel costs and consulting/outside services associated with the development of the compressed DV product, a cost effective transmission product for the MPEGII video delivery marketplace.
SELLING AND MARKETING
Selling and marketing costs increased to $569,600 for the first quarter of 2001 from $406,246 incurred in the same quarter of 2000. A key reason for the increase was greater commission expense due to the higher sales level in Optical Products. Marketing costs were also greater than in 2000, due to spending for literature, marketing materials, integrator support programs, and advertising for the Optical Products Unit.
GENERAL AND ADMINISTRATIVE
General and administrative costs were $856,427 for the first quarter of 2001 compared to $691,116 for the same period in 2000. This $165,311 increase in costs is partially due to higher compensation expense from personnel hired in the second half of 2000 and continued costs associated with the implementation and training of the Company’s new ERP software.
OTHER EXPENSES
Interest expense of $54,704 for the first quarter of 2001 compared to $81,870 for the same period last year. Interest expense was lower primarily due to the lower principal balance of the Company’s term note but also to a lower average bank line-of-credit borrowing level in the first quarter of 2001.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash and cash equivalents of $267,282 at March 31, 2001 compared to $233,928 at December 31, 2000.
During the first three months of 2001, the Company used $209,808 in operating activities compared to the $144,008 used in operating activities in 2000. For the first quarter of 2001, the Company’s had a net loss of $724,473. After adding back adjustments such as depreciation, loss on disposal of fixed assets, and stock based compensation, to reconcile the net loss to net cash used by operating activities, the net cash usage was $617,712. Working capital decreased by $407,904: a $743,955 decrease in accounts receivable and a $783,410 increase in accounts payable were partially offset by an increase in inventory of $789,499 and a decrease in other current liabilities of $223,904.
The Company invested $20,577 in 2001 in capital equipment compared to the $99,172 invested in 2000.
In the first quarter of 2001, several employees participated in a stock purchase plan, providing $11,976 in funds to the Company. In addition, $1000 in funds were generated from the exercise of employee stock options. These funds were used for operating activities.
The Company believes that its current cash, cash from operations and borrowings under its bank line-of-credit are adequate to fund its operations for the next twelve months. The Company is currently in negotiations with its bank to extend the line-of-credit. Furthermore, the Company may pursue additional funding, either public or private debt or equity financing.
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
On June 2, 2000, Optelecom was granted a preliminary injunction against Anthony DeVito, former Optelecom Vice President of Sales and Marketing and Meridian, Inc. Specifically, DeVito is enjoined from using Optelecom trade secrets and confidential information during the pendency of any litigation, and Meridian was enjoined from employing DeVito in any capacity until September 28, 2000. A trial is currently scheduled for May 22, 2001, and the Company intends to pursue this issue until a final satisfactory resolution is achieved.
From time to time, the Company is involved in legal proceedings and litigation arising in the ordinary course of business. As of the date of this report, except as described above, the Company is not a party to any litigation or other legal proceeding that, in the opinion of management, could have a material adverse effect on the Company's business, financial condition or results of operations.
ITEM 2 - CHANGES IN SECURITIES
None.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5 - OTHER INFORMATION
None
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
None
ITEM 11 - STATEMENT REGARDING COMPUTATION OF NET INCOME (LOSS) PER SHARE
See Note 5 to the financial statements.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | OPTELECOM, INC.
|
| Date: | May 11, 2001 | /s/ Irving Zaks |
| | |
|
| | | Irving Zaks, President and Chief Executive Officer |
| | |
|
| Date: | May 11, 2001 | /s/ Linda A. Broenniman |
| | |
|
| | | Linda A. Broenniman, Chief Financial Officer |
