SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended March 31, 2000 Commission File No. 0-8828
Optelecom, Inc.
---------------
(Exact Name of Registrant as
Specified in its Charter)
Delaware 52-1010850
- ------------------------------- ---------------------------------
(State of Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
9300 Gaither Road Gaithersburg, MD 20877
- ---------------------------------------- --------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, (301) 840-2121
Including Area Code --------------
(Phone Number)
NONE
----
(Former Name, Former Address and Former Fiscal Year, if Changed
Since Last Report)
Indicate by checkmark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve (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 ninety (90) days.
Yes X No
--- ---
Common Stock Outstanding
as of May 5, 2000 2,163,757
1
OPTELECOM, INC.
FORM 10-Q
CONTENTS
--------
PART I. FINANCIAL INFORMATION
ITEM 1. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets as of March 31, 2000 (Unaudited)
and December 31, 1999 (Audited).................................... 3
Consolidated Statements of Operations for the Three Months
Ended March 31, 2000 and 1999 (Unaudited).......................... 4
Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 2000 and 1999 (Unaudited)................................ 5
Notes to Consolidated Financial Statements (Unaudited)............. 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
PART II. OTHER INFORMATION
2
OPTELECOM, INC.
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2000 AND DECEMBER 31, 1999
ASSETS 2000 1999
------ ----------- ---------
(Unaudited) (Audited)
Current Assets:
Cash and cash equivalents $ 259,912 $ 51,314
Accounts and contracts receivable 1,864,697 2,228,726
Inventories, net 1,994,347 1,894,155
Prepaid expenses and other assets 464,452 486,302
Deferred tax asset 314,518 303,363
----------- -----------
Total current assets 4,897,926 4,963,860
Intangible assets, net 1,912,845 2,000,589
Goodwill, net 202,537 209,728
Property and equipment, at cost less accumulated depreciated 1,194,146 1,206,635
Deferred tax assets 133,543 116,410
Other assets 170,742 118,392
----------- -----------
TOTAL ASSETS $ 8,511,739 $ 8,615,614
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Bank line-of-credit payable $ 1,179,469 $ 1,700,000
Accounts payable 1,015,611 1,280,248
Accrued payroll 256,991 180,934
Other current liabilities 287,503 390,249
Current portion of leases payable 46,330 46,330
Current portion of notes payable 750,000 625,000
----------- -----------
Total current liabilities 3,535,904 4,222,761
----------- -----------
LONG-TERM LIABILITIES:
Notes payable 1,122,504 1,310,004
Capital lease 57,115 70,571
Deferred rent liability 106,707 115,658
----------- -----------
TOTAL LIABILITIES 4,822,230 5,718,994
----------- -----------
Commitments and Contingencies - -
STOCKHOLDERS' EQUITY:
Common stock, $.03 par value-shares authorized,
15,000,000; issued and outstanding, 2,163,667
and 1,993,885 shares as of March 31,2000 and
December 31,1999 respectively 64,910 59,817
Discount on common stock (11,161) (11,161)
Additional paid-in capital 5,106,569 4,105,029
Additional paid-in-capital - Stock options 128,710 97,515
Less: Deferred Compensation expense (44,638) (38,031)
Treasury stock, 162,672 shares, at cost (1,265,047) (1,265,047)
Foreign currency translation adjustment 20,012 7,904
Accumulated (deficit) (309,846) (59,406)
----------- -----------
TOTAL STOCKHOLDERS EQUITY 3,689,509 2,896,620
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 8,511,739 $ 8,615,614
=========== ===========
The accompanying notes are an integral part of this statement.
3
OPTELECOM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31,
2000 1999
---------- ----------
Revenues $2,400,896 $3,528,854
Cost of goods sold 1,534,948 2,033,977
---------- ----------
Gross profit 865,948 1,494,877
Operating expenses:
Engineering 195,398 353,200
Selling and marketing 390,891 384,504
General and administrative 508,229 645,931
---------- ----------
Total operating expenses 1,094,518 1,383,635
Operating (loss) income (228,570) 111,242
Other expenses:
Interest expense 81,870 54,094
---------- ----------
Total other expenses 81,870 54,094
(Loss) Income before (benefit) provision for income taxes (310,440) 57,148
(Benefit) Provision for income taxes (60,000) 18,000
---------- ----------
Net (loss) income $ (250,440) $ 39,148
========== ==========
Basic (loss) income per share $ (0.12) $ 0.02
========== ==========
Diluted (loss) income per share $ (0.12) $ 0.02
========== ==========
Weighted Average Shares Outstanding 2,055,024 2,156,557
========== ==========
The accompanying notes are in integral part of this statement.
4
OPTELECOM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31,
2000 1999
----------- --------
Cash Flows From Operating Activities
Net (loss) income $ (250,440) $ 39,148
Adjustments to reconcile net (loss) income to net cash used in
operating activities:
Depreciation and amortization 199,665 191,864
Deferred compensation expense (6,607) -
Deferred taxes (28,288)
Deferred rent (8,951) (5,325)
Loss (Gain) on sale/disposal of fixed assets 8,603 -
Effect of currency translations 8,837 24,149
Change in assets and liabilities:
Accounts and contracts receivable 364,029 (467,382)
Inventories (100,192) (48,820)
Prepaid expenses and other assets 21,850 (94,970)
Other assets (52,350) -
Accounts payable (264,637) 562,732
Accrued payroll 76,057 65,520
Other current liabilities (102,747) (347,938)
Income taxes payable - 18,000
----------- ---------
Net cash (used in) operating activities (135,171) (63,022)
----------- ---------
Cash Flows From Investing Activities
Proceeds from sale of equipment 1,600 -
Capital expenditures (99,172) (87,954)
----------- ---------
Net cash (used in) investing activities (97,572) (87,954)
----------- ---------
Cash Flows From Financing Activities
Borrowings on bank line-of-credit payable 959,661 250,000
Payments on bank line-of-credit payable (1,480,192) (150,000)
Payments on long term debt (62,500) (156,249)
Payments on capital lease (13,456) -
Proceeds from exercise of stock options 1,037,828 -
----------- ---------
Net cash provided by financing activities 441,341 (56,249)
----------- ---------
Net increase (decrease) in cash and cash equivalents 208,598 (207,225)
Cash and cash equivalents - beginning of period $ 51,314 $ 394,096
----------- ---------
Cash and cash equivalents - end of period $ 259,912 $ 186,871
=========== =========
Supplemental Disclosures of Cash Flow Information
Cash paid during the year for interest $ 77,562 $ 62,871
=========== =========
Cash paid during the year for income taxes $ 0 $ 0
=========== =========
The accompanying notes are an integral part of this statement.
5
OPTELECOM, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
1. Basis of Presentation
---------------------
The accompanying unaudited financial statements have been prepared pursuant
to the rules and regulations of the Securities and Exchange Commission. Certain
information and note disclosures normally included in the annual financial
statements, prepared in accordance with generally accepted accounting
principles, have been condensed or omitted pursuant to those rules and
regulations, although the Company believes that the disclosures made are
adequate to make the information presented not misleading.
In the opinion of management, the unaudited accompanying financial statements
reflect all necessary adjustments and reclassifications (all of which are of a
normal, recurring nature) that are necessary for fair presentation for the
periods presented. It is suggested that these financial statements be read in
conjunction with the financial statements and the notes thereto included in the
Company's latest annual report to the Securities and Exchange Commission on Form
10-K for the year ended December 31, 1999.
2. Line of Credit
--------------
On May 13, 1999, the Company renewed, through May 31, 2000, its credit
agreement with a bank whereby it may borrow up to $1,700,000 with interest at
the bank's prime rate plus 1%. The total amount of the borrowing which may be
outstanding at any given time is based on the sum of a percentage of certain
eligible accounts receivable plus a percentage of qualifying inventory, with a
maximum borrowing against inventory of $600,000. Also, the Company is to adhere
to certain covenants, quarterly and at year-end.
The Company is currently in negotiations with its bank to renew this line-of-
credit and we believe it will be renewed with substantially similar terms. As
of May 4, 2000 the company had approximately $200,000 available under the line-
of-credit.
3. Bank Term Note
--------------
On September 12, 1999 the Company modified its existing bank term note
whereby principal payments were deferred for the period from September 1999
through February 2000. The remaining principal, $1,875,000 is to be paid from
March 2000 through August 2002 at a monthly rate of $62,500. The Company resumed
payments on this term note in March 2000.
4. Inventory
---------
Inventory consisted of the following:
March 31, 2000 March 31, 1999
-------------- --------------
Raw materials $ 782,783 $ 796,140
WIP 327,118 390,657
Finished goods 884,446 709,136
---------- ----------
Total $1,994,347 $1,895,933
========== ==========
The Company had a reserve for inventory obsolescence of $394,715 at March 31,
2000 compared to $414,135 at March 31, 1999.
5. Comprehensive Income
--------------------
The Company's other comprehensive income consists only of foreign currency
translation adjustments and is shown separately on the Company's Consolidated
Balance Sheet. For the three months ended March 31, 2000 and 1999, the total
comprehensive (loss)gain including net (loss)gain and currency translation
adjustments were $(238,332) and $63,297, respectively.
6
6. Earnings Per Share
------------------
Basic earnings per share is computed using the weighted average number of
common shares outstanding. Diluted earnings per share is computed using the
weighted average number of shares outstanding and the treasury stock computation
method for stock options. The following is a reconciliation of the basic and
diluted earnings per share.
Three Months ended March 31,
2000 1999
--------- ----------
Net Income (Loss) Income $ (250,440) $ 39,148
========== ==========
Weighted average shares - basic 2,055,024 2,156,557
---------- ----------
(Loss) Income per share - basic $ (0.12) $ .02
========== ==========
Weighted average shares - basic 2,055,024 2,156,557
Effect of dilution - stock options - 19,531
---------- ----------
Weighted average shares - diluted 2,055,024 2,176,088
---------- ----------
(Loss) Income per share - diluted $ (0.12) $ 0.02
========== ==========
7. Segment Information
-------------------
Optelecom has three reportable segments: the Communication Products Division
(CPD), the Government Products Division (GPD) and the Paragon Division. These
segments reflect management's internal reportable information analysis and
approximates the Company's strategic business units' financial results reported
before income taxes.
Three Months Ended March 31, 2000 and 1999
(000's)
Income (Loss) Gross Additions
Revenues Before Income Taxes to Equipment
-------------- ------------------- ---------------
2000 1999 2000 1999 2000 1999
---- ---- ---- ---- ---- ----
CPD - gross $1,783 $2,183
Intercompany 0 (28)
------ ------
CPD - net 1,783 2,155 $ (41) $ 205 $ 99 $ 88
GPD 93 396 9 86 0 0
Paragon 525 978 (278) (234) 0 0
------ ------ ----- ----- ----- -----
Total $2,401 $3,529 $(310) $ 57 $ 99 $ 88
====== ====== ===== ===== ===== =====
8. New Accounting Pronouncements
-----------------------------
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities." 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 hedge accounting. SFAS No. 133 will be effective for
the Company's fiscal year ending December 31, 2001. The Company had no
derivative or hedging activity in any of the periods presented.
7
9. Legal Proceedings
-----------------
See Part II - Other Information, Item 1 - Legal Proceedings, on page 10 for a
discussion of the Company's litigation.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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, Inc. designs, manufactures and markets video communication
products, specializing in transmission and distribution equipment for the
delivery of real time video. The Company's integrated video solutions include
fiber optic transmission, UTP copper distribution, and digital video conversion
and access products. From simple baseband transmitters and baluns to complex
broadband systems and video distribution switches, Optelecom offers innovative
technologies that meet its customers' needs.
The Company is organized into three operating divisions: the Communications
Products Division (CPD), which develops, manufactures, and sells optical fiber-
based data communication equipment to the commercial marketplace, the Government
Products Division (GPD) which is primarily focused on electro-optic technology
development for government related defense business, and Paragon Audio Visual
Ltd., (Paragon), located in the United Kingdom. Paragon, which was acquired at
the end of 1997, is a wholly owned subsidiary of Optelecom, Inc. Paragon
designs and markets electronic communication products and systems utilizing
copper cabling as the transmission media.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999
REVENUE
Total revenues for the three months ended March 31, 2000 were $2,400,896
which is a $1,127,958 decrease from the $3,528,854 of revenue for the three
months ended March 31, 1999 and represents a reduction across all business
segments.
Revenue of the GPD segment was approximately $300,000 lower and is due in its
entirety to the discontinuance of the government GLINT contract as of December
31, 1999. The Electro/Optics division, which now represents the GPD segment,
had $19,000 more revenue in the first three months of 2000 than the same period
of 1999.
The CPD segment had revenue of $1,782,682 in 2000 compared to revenue of
$2,155,015 in 1999, a reduction of $372,333. This reduction reflects this
segments lower shippable backlog entering 2000.
Paragon's first quarter 2000 revenue of $524,963 was $452,763 lower than the
$977,726 of revenue
8
recorded in 1999. This decrease is attributable to a lower shippable backlog at
the beginning of 2000 and their introduction of new products, which need time to
be demonstrated before being accepted by customers.
GROSS PROFIT
Total gross profit for the first 3 months of 2000 was down approximately
$629,000 to $865,948 from $1,494,877 in the same period of 1999 and is primarily
a result of the lower revenue level. Also, the 2000 gross margin percentage of
36% was lower than the 42% recorded in 1999. This reflects the effect fixed
costs have at lower revenue levels, especially at CPD. In addition, gross
margin on the GLINT contract was significantly higher than the margin enjoyed by
the other segments.
ENGINEERING
The Engineering costs of $195,398 are 45% lower in the first quarter of 2000
compared to the $353,200 incurred in the first quarter of 1999 and are lower in
each segment. The GPD segment had approximately $75,000 lower engineering costs
that are attributable to the discontinuance of work on the high speed optical
component project. CPD had lower costs as a result of personnel changes.
Paragon's $30,000 lower costs reflect the change in personnel costs and having
engineering tasks performed by CPD.
SELLING AND MARKETING
Selling and Marketing costs are approximately the same in 2000 at $390,891
compared to the $384,504 incurred in 1999 and shows the Company's intent to
provide the necessary resources to secure future revenue. Paragon's costs were
lower as a result of personnel changes whereby CPD incurred slightly higher
costs in the area of travel and literature costs.
GENERAL AND ADMINISTRATIVE
General and administrative costs decreased approximately $138,000 to $508,229
in 2000 from $645,931 in 1999. This decrease is a result of the Company's
continued cost reduction efforts and the elimination of personnel and other
costs associated with the employment of the previous managers of Paragon in
1999.
OTHER EXPENSES
The increase in interest expense from $54,094 for the first quarter of 1999
to $81,870 for the first quarter of 2000 is a combination of three factors: a
significantly higher average line-of-credit balance for the first quarter of
2000 of $1,400,000 compared to an average of $700,000 in the first quarter of
1999, a 100 basis points higher interest rate and lower principal on the term
note.
INCOME TAXES
The Company recorded a tax benefit of $60,000 for the first quarter of 2000
compared to a tax provision of $18,000 for the same period in 1999 and in 2000
is based on US activity. The effective tax rate for 2000 and 1999 was
approximately 35%.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash and cash equivalents of $259,912 as of March 31, 2000.
The balance in these accounts at March 31, 1999 was $51,314.
During the first quarter of 2000, the Company used $135,171 in operating
activities compared to the $87,171 used in operating activities in 1999. For
2000, the Company's net loss of $250,440 was offset by non-cash items of
depreciation and amortization of $199,665, collections on accounts receivable of
$364,029, a $100,192 increase in inventories, a reduction in accounts payable of
$264, 637 and a reduction in other current liabilities of $102,746.
9
The Company invested $99,172 in 2000 in capital equipment to support its
employees and its manufacturing and research and development activities compared
to the $87,954 invested in these items in 1999.
In the first quarter of 2000, stock options on approximately 170,000 shares
were exercised in the first quarter of 2000 and provided funds to the Company,
based on the exercise price of the stock options, in the amount of $1,037,828.
In addition to using a portion of these funds for operating and investing
activities, the Company reduced its bank line-of-credit by $520,531 to a March
31, 2000 balance of $1,179,469.
The Company has a working capital line-of-credit with a bank for an amount up
to $1,700,000 with interest at the bank's prime rate plus one percent. The
amount available is based on a percentage of eligible receivables and
inventories. The bank line-of-credit expires on May 31, 2000. The Company is
currently in negotiations with its bank to renew this line-of-credit and we
believe it will be renewed with substantially similar terms. As of May 4, 2000
the company had approximately $200,000 available under the line-of-credit.
The Company has a promissory note agreement with a bank that is
collateralized by substantially all the assets and contracts of the Company. On
September 12, 1999 the bank modified the term note whereby principal payments
were suspended from September 1999 through February 2000, with interest only
paid during that time. In March 2000, the Company resumed principal payments on
this note agreement.
The Company believes that its current cash from operations and borrowings
under its bank line-of-credit are adequate to fund its operations for the next
twelve months. However, the Company may pursue additional funding, either
public or private debt or equity financing.
Company backlog at the end of March 31, 2000 was $1,001,000.
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
The Company has filed for and been granted a Temporary Restraining Order in
an action involving former sales manager Anthony Devito and Meridian, Inc. The
Company alleged, among other actions, breach of contract, breach of duty and
interference with contractual relations.
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
No matters were submitted during the first quarter of 2000 to a
vote of security holders.
10
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 15, 2000 ------------------------
Edmund D. Ludwig, President and CEO
Date: May 15, 2000 ------------------------
Thomas F. Driscoll, Vice President of Finance
and Administration
11