SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1995
Commission File Number 0-8828
OPTELECOM, INC.
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of
incorporation or organization)52-1010850
(I.R.S. employer identification number)
9300 GAITHER ROAD, GAITHERSBURG, MARYLAND 20877
(Address of principal executive offices)(Zip code)
Registrant's telephone number, including area code: (301) 840-2121.
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act: Common Stock $0.03
Par Value.
Indicate by check mark 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 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 ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulations S-K is not contained herein, and will not 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-K or any amendment to this
Form 10-K. [ ]
At March 26, 1996, shares of the registrant's Common Stock, $0.03 Par Value,
held by persons other than "affiliates" of the registrant had an aggregate
market value of $5,576,364, based on the average closing bid and asked prices as
reported by the National Association of Securities Dealers Automated Quotation
System for such date.
At March 26, 1996, the registrant had outstanding 1,394,091 shares of Common
Stock, $.03 Par Value.
DOCUMENT INCORPORATED BY REFERENCE
Part III of Form 10-K -- Proxy Statement for the 1996 Annual Meeting of
Stockholders.
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PART I
Item 1. BUSINESS
GENERAL
Optelecom, Inc. (the Company) is a Delaware corporation that was organized in
1972. The Company's business consists primarily of the development, manufacture,
and sale of fiber optic communications products and laser systems for commercial
and military customers.
The Company is organized into three operating divisions; the Research and
Development Division, which addresses primarily Government-related defense
business; the Communications Products Division (CPD), which sells optical fiber
based data communication equipment to the commercial marketplace; and the GLINT
Division, which is exclusively focused on business derived from manufacturing
and support of the semiconductor laser illuminator system for the GLINT night
vision system used on the US Air Force C-130 Gunship.
Fiber optic communication equipment, the main thrust of the Company's sales, is
an area of unprecedented growth and change. Technology is developing capability
for ever increasing data rates over ever greater distances. At the same time
prices of equipment are decreasing. The demand for transmission of high fiber
data rates is increasing even faster.
Most signals, voice, video and data are in electrical form. The transmission of
electrical signals from one point to another by converting them to optical
(light) signals has many advantages over electrical transmissions. Optical
fibers can transmit signals at a much greater data rate, over a much larger
distance and without disturbance from electric machinery, lightning or other
noise sources.
The fiber optic communication business has many parts. A few companies
manufacture optical fiber, while many more manufacture optical fiber cables.
Optelecom participates by providing the equipment that interfaces electrical
signals to optical signals at the transmitter end of a fiber optic communication
link and provides complementary equipment that converts the optical signals to
electrical form at the other end of the communications link. Optelecom sells its
equipment to users of these communication systems or to system integrators that
install the Company's equipment in large communication nets.
There are a larger number of communication applications that require different
communication rates, distances and signal formats. Optelecom provides equipment
specialized for transmission of various combinations of voice, data and video
required to meet the standards for a range of applications.
The Company also addresses U.S. Government defense related markets for
specialized and proprietary applications of fiber optic technology that make it
unique among traditional fiber optic communication equipment manufacturers.
While government business can provide an offset to periodic cycles in the
commercial sector, it is also subject to changing world conditions. Therefore,
the Company attempts to balance revenues generated by both types of markets to
avoid severe changes in its business posture. The Company is unable to predict
future Defense business activity or the related impact on the Company's
business.
Because of the advanced nature of the technology inherent in the Company's
products, the expertise of certain of the Company's officers and directors is
one of its principal assets. In particular, Dr. William H. Culver and Mr. Edmund
D. Ludwig, who are officers and directors of the Company, provide the Company
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with important technical expertise and have major responsibilities in managing
the Company. Although the Company pays for and is the beneficiary of a $300,000
insurance policy on the life of each of such persons, the loss of the services
of either of them, through death or otherwise, could have a negative impact on
the Company. Furthermore, because of the Company's relatively small size, the
loss of the services of certain other key employees could have a disruptive
effect on the Company's operations.
On March 13, 1996, the Company had 53 employees.
The table below displays the Company's three-year revenue and operating income
(loss) by division.
<TABLE>
<CAPTION>
1995 1994 1993
-------------------------------------------------------------------------------------------------------------
Operating Income Income Income
Divisions Revenue (Loss) Revenue (Loss) Revenue (Loss)
<S> <C> <C> <C> <C> <C> <C>
Company $6,430,136 $(427,427) $7,036,069 $ 412,690 $7,083,229 $ 237,868
Totals
CPD $5,319,556 $(470,866) $5,562,130 $ 174,084 $4,729,781 $ (81,530)
R&D $ 395,284 $(263,930) $ 554,542 $(175,589) $ 414,170 $(418,960)
GLINT $ 715,296 $ 307,369 $ 919,397 $ 414,195 $1,939,278 $ 738,358
</TABLE>
See Note 13 to the financial statements for identifiable assets by segment.
RESEARCH AND DEVELOPMENT DIVISION (R&D)
INTERFEROMETRIC FIBER OPTIC GYROS (IFOGS)
The R&D Division's business consists of providing technology development and
engineering services to the U.S. Government and its prime contractors, primarily
in the field of investigating techniques for design and manufacture of
specialized sensing coils for fiber optic gyros. A small portion of revenue is
also derived from sales of custom optical fiber coils for sensing and
communication applications.
In 1995, the division's activities continued to be primarily focused on
interferometric fiber optic gyros (IFOGs), which are rotation sensing
instruments that are expected to replace mechanical and laser gyros in aircraft,
missiles, and other vehicles. Optelecom has used its expertise in winding
high-speed payout coils for fiber optic guided missiles to develop winding
technology for IFOG coils, and to manufacture these coils in limited production.
These complex coils present key technical and cost challenges to the future of
IFOG viability.
In prior years, the R&D division's activities and major source of revenue were
concentrated on fiber optic missile payout technology, payout experiments, and
field demonstrations. These activities lead to the development of the IFOG coil
winding capability and products. The U.S. Department of Defense (DoD) has
identified the IFOG as a critical technology that will benefit from
manufacturing technology (MANTECH) funding and, in 1993, had authorized a $15
million Air Force MANTECH program. In November, 1993, Optelecom was notified by
Litton Industries that Litton had been selected as the winning contractor for
the MANTECH program. A subcontract with Optelecom was negotiated to perform key
IFOG sensing coil manufacturing technology development tasks on the program. In
the first quarter of 1994, work on this contract was minimal, awaiting the
resolution of various contractual issues between Litton and the Air Force.
Significant application of effort began during the second quarter and had
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continued throughout the year. However, in February 1995, Optelecom was informed
by Litton that the subcontract was terminated due to redirection of the MANTECH
effort to more pressing technological problems. For 1994, the Company had booked
a $35,000 reserve for unrecoverable costs related to this termination. These
costs were subsequently recovered in 1995, and were part of the $112,524 revenue
contributed by this contract prior to termination of effort. This contract
termination had a negative effect on divisional revenues in the first quarter of
1995, and through the balance of the year, since a major portion of the year's
planned work was associated with the contract. Although the Company expected to
receive new contract funding in the amount of $261,985 from the Advanced
Research Projects Agency (ARPA) for similar work beginning in the second quarter
of 1995, award was delayed until the third quarter and was initially funded at a
much lower level than originally anticipated. Full-scale funding did not begin
until late in the fourth quarter of 1995. A $127,836 contract for related fiber
optic gyro coil winding work was received from a team of Honeywell and Smiths
Industries beginning in August, 1995. Both the ARPA and Honeywell/Smiths
contracts are continuing in 1996 and represent the entire Division backlog of
$221,000. In May, 1995, a $58,176 Phase I Small Business Innovative Research
(SBIR) contract was received to investigate the technological feasibility of
fabricating an optical switch based on a piezo-electric-generated focussed
acoustic wave acting on a fiber grating structure. The work on this contract was
completed in November, 1995. Potential follow-on to this work could occur if
Optelecom can identify a business partner who would be willing to share the cost
risk with the Government to develop the concept into a commercially viable
product. We are currently seeking such a partner.
FIBER OPTIC GUIDED MISSILES AND ROBOTIC VEHICLES
This business segment has seen a continuing reduction in revenue from 1990
levels. This reduction is a result of the lower level of activity in the Defense
Department for new weapon system development, and the Company's inability to
establish a significant business base in this area. In January, 1995, a $16,800
contract was received from Allied-Signal to analyze fiber payout dynamics for a
fast-reaction, close range, anti-air threat defense missile. This work was
completed in July, 1995. Other revenues amounting to $2,876 were received from a
foreign company for investigation of historical fiber payout technology
development related to patent issues. There was no backlog at year-end 1995 for
this activity.
GLINT DIVISION
The division derives its revenues entirely from the U.S. Government and its
agencies. GLINT is an acronym associated with the U.S. Air Force's C-130 Gunship
laser illuminator system supported by Optelecom. By February, 1995, work was
completed on a $1,315,000 contract which was received in 1994 to fabricate spare
laser array assemblies to support the system. This effort contributed $123,849
to 1995 revenues. In late 1994, the Division received a $67,465 contract to
explore the feasibility of fabricating a new type of semiconductor laser
illuminator, which, if successful, could lead to a contract to develop a
replacement illuminator for the existing system. Work on this contract was
successfully completed in August, 1995, and marketing activities are on-going to
find applications for the new technology. Also, in April 1995, a $409,032
contract to fabricate spare laser array assemblies was received; this contract
was completed in October, 1995.
Due to the nature of the application of this system, contractual revenues are
dependent on government budgets, the worldwide political situation, and specific
crew training schedules. Although there was no backlog at the end of 1995, this
division expected to receive revenue by expanding its support role on
refurbishment and repair of existing laser illuminator systems for the C-130
Gunship application until a new system is deployed. In January, 1996, the
Company received a $6.5 million, four-year contract (one base year and three
one-year options) to furnish refurbishment services. Currently funded first year
work will exceed $1.0 million, and the Company anticipates additional
refurbishment requirements in the succeeding years.
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COMMUNICATION PRODUCTS DIVISION (CPD)
In 1995, CPD order booking and shipment levels declined slightly, and the
division incurred a loss.
Business Activity 1995 1994 Change
Order Booking $5.36 million $5.95 million -10%
Shipments $5.32 million $5.57 million -5%
The year-end backlog was $724,179, down from $929,000 at year-end 1994.
PRODUCT MIX SALES ANALYSIS
Revenues from sales of data products decreased significantly from 1994, due to
our increased emphasis on video products for the traffic control market. Also,
shipments of satellite ground link units ceased, due to a premature termination
of system installations by the system prime. This termination was caused by a
major down-sizing implemented by the prime's customer, a major shopping mall
retailer. Sales of RGB video links (i.e., Red, Green, Blue - a transmission
standard for high quality video displays) were stable and are expected to
increase in 1996 with the development of a very-high resolution system. Products
transmitting standard video using Optelecom's proprietary pulse frequency
modulated (PFM) technology continued to accelerate their sales growth due to
installation of systems in new municipal markets around Boston, and several
cities in Texas, Georgia, and Florida. Sales of ancillary products such as
cables, connectors, and custom-engineered communication products declined
slightly, as standard system configuration sales became more dominant. The
following table summarizes sales by product line to total sales:
Communication Fiber Optic Product Categories 1995 1994 1993
Data Transmission Products 32% 47% 55%
High Resolution RGB Video 9% 8% 11%
Standard PFM Video 50% 33% 20%
Cables/Connectors 2% 3% 4%
Other 7% 9% 10%
MARKET MIX ANALYSIS
The mix of CPD product sales for different market segments over the last three
years was as follows:
Markets 1995 1994 1993
Government 11% 23% 30%
Process Control and Industrial 18% 11% 23%
International 16% 17% 12%
Domestic Resellers 55% 49% 35%
The proportion of sales to government organizations was reduced by 12% as
defense spending continued to decline. Process control and industrial sales
increased, primarily due to increased sales to our major
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OEM customer. International sales decreased slightly; in 1994, one sale to Korea
represented a significant portion of the total, which distorted the modest
steady progression of increasing sales in prior years. In 1995, sales were more
evenly distributed throughout the countries where we had representation.
Currently, Optelecom has a sales presence in 22 countries through distributors
and resellers. Revenue from domestic resellers increased 6% and now represents a
majority of total sales. This is due primarily to our efforts to increase market
share in the traffic control and surveillance market.
CUSTOMER MIX ANALYSIS
The mix of customer types changed compared to 1994. OEM (Original Equipment
Manufacturers - sales of products to be included in a customer's product) sales
as a percent of total revenue decreased to 21%, compared to 40% in 1994, and 28%
in 1993. Of the total revenue, 43% was generated by sales to the top 10
customers for the division; in 1994 the figure was 53%. This continued a trend
of a slight shift to a larger pool of customers with smaller individual system
requirements. The largest single customer was an OEM account which provided
$710,000 of revenue, compared to $650,000 in 1994. Other major customers
included organizations such as AT&T $(230,000) and Physical Optics Corporation
$(115,000).
FINANCIAL INFORMATION RELATING TO COMPANY
SPONSORED RESEARCH AND DEVELOPMENT 1995 1994 1993
Expenditures on Company sponsored research
and development activities $538,977 $477,089 $479,888
Research and development of new fiber optic communication products is a key
component of the Company's overall business strategy. This research is focused
on existing product improvement and enhancement, and on adaptation of existing
products to alternative uses. Research into new product technology is focused on
the utilization of fiber optic technology in markets not previously addressed by
the Company's current product offering or development contracts. During 1995, a
new fiber optic modem, compatible with the 802.4 communication protocol and
meeting Electro-magnetic Compatibility requirements as defined in European
Directive 89/336/EEC, was designed, developed, and qualified for our major OEM
customer. Beginning in 1996, this modem, with improved performance
characteristics and a lower cost design, will replace an existing Optelecom
design supplied to the customer over the past several years. CPD Engineering
continued to add products to the family of systems developed for fiber optic
communication equipment for highway video surveillance and traffic sign message
control. A new, lower cost chassis configuration, the System 9000, was designed
and introduced. This system will incorporate high-performance, low cost modules
which allow the user to specifically configure the chassis to provide the
communication services required. A prototype ultra-high resolution Red, Green,
Blue (RGB) communication system was delivered to a customer for evaluation in an
air-traffic control application. Also, development work continued on a
Compressed Digital Video system which will have applications in a variety of our
existing and proposed markets.
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MARKETING
R&D DIVISION
The division markets its services to both Government and commercial customers;
however, for the past four years essentially all of its business has been
obtained from the Government and its prime contractors. Successfully marketing
new technology initiatives directly to the Government is difficult due to
increased competition from larger companies with far greater resources.
Traditionally, R&D has concentrated on markets providing research and products
used in fiber optic communication systems for airborne missiles, ground robotic
vehicles and underwater sensors. Optelecom had historically received contracts
from certain key Government organizations whose budgets have been reduced in
recent years; there are few new development opportunities available in the
technology areas pertinent to the Company's expertise. As a result of the
utilization of IFOG sensing coil technology developed by Optelecom in 1993 and
our prior experience with the development of fiber coils for high speed for
payout, we identified opportunities for the R&D Division in the area of optical
fiber gyro coil winding. Gyro coils are a defense related Government program
area which we see as receiving continued focus amid shrinking Defense spending.
Additional opportunities to diversify into commercial markets for fiber optic
amplifiers, sensors, and similar components, have been identified as well. We
continue to seek to develop new markets for R&D services and products in these
technical areas.
COMMUNICATION PRODUCTS DIVISION
In mid-1995, CPD's marketing activities were reorganized to provide more
emphasis on sales activities. A new Director of Sales and Marketing was hired,
the sales function was emphasized, and several personnel were re-assigned to
direct sales activities. An examination of the effectiveness of outside sales
representative firms in the U.S. indicated that only a few firms were providing
adequate value for the commissions paid. Therefore, most representation
agreements were terminated. The two sales representative firms added in the
southeast region of the U.S in 1994 were retained, and a firm in the New York
City area was added.
Since 1992, CPD has used selected sales representative firms in foreign
countries to promote and sell our products. These firms have gradually
established awareness of our products in their respective countries, and we have
seen a trend of increasing business from foreign sources.
GLINT
The only customer for this division is the Warner-Robins Air Logistics Support
Center of the U.S. Air Force. Optelecom maintains a very close working
relationship with the individual component item managers assigned at
Warner-Robins. We insure that these customer support personnel fully understand
Optelecom's capabilities and capacity to perform the required work. Bids are
carefully reviewed to be sure that the customer's requirements are satisfied.
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MANUFACTURING PROCESSES
COMMUNICATION PRODUCTS DIVISION
The Company performs specialized manufacturing, assembly, and product testing
functions in its corporate headquarters. In past years, routine fabrication had
been subcontracted to other manufacturers. During 1995, the Company purchased,
installed and placed into service equipment which automatically assembles
components onto printed circuit boards at high speed. This action was taken to
lower manufacturing costs and reduce the time-to market for new product designs.
The success of this decision has been apparent in the significant manufacturing
cost reduction realized on all assemblies produced using the equipment. The
Company also maintains a quality assurance function and testing area that
performs optical and electrical testing, and quality control. Raw materials and
supplies used in the Company's business include optical materials, plastic
products, and various electronic components, most of which are available from
numerous sources. The number of companies from which the division can obtain
optical emitters and detectors for use in its circuit assemblies is limited,
however, Optelecom has negotiated long-term supply contracts with these vendors
and does not anticipate significant supply problems.
R&D DIVISION
In 1991, the Company developed a winding machine to fabricate coils of optical
fiber wound in very specific configurations for fiber gyro systems for Smiths
Industries. Additional work in this area through 1995 was conducted to develop a
winding machine concept directed toward automated techniques for fabricating
similar fiber gyro coils. The number of companies from which the division
obtains raw materials and optical fiber is limited; however, the Company does
not anticipate any problems with adequate supplies.
GLINT DIVISION
Optelecom has established a specialized facility adjacent to its headquarters to
support fabrication and repair operations for the GLINT laser illuminator
system. The processes used to fabricate laser modules for the laser illuminator
system are proprietary to Optelecom and depend on sophisticated understanding of
specific semiconductor processing techniques. Proper use of the equipment and
materials associated with these activities depends on highly skilled personnel
whose technical knowledge is key to the successful fabrication of the final
product. The number of companies from which the division obtains raw materials
is limited; however the company does not anticipate any problems with adequate
supplies.
COMPETITION
The Company's products fall within three (3) separate and distinct markets. As
such, the characteristics of competition in these markets differ greatly. The
market that the Research & Development Division addresses is dominated by larger
Defense prime contractors. These companies have greater marketing,
manufacturing, financial, research, and personnel resources than Optelecom. In
addition, as Department of Defense contracting activity has declined, these
companies have started to compete in markets which were previously limited to
companies with resources similar to Optelecom's. As a result, this Division is
at a competitive disadvantage when competing against prime contractors.
Optelecom does feel that its IFOG coil winding technology is at least equal to
the technology developed by much larger prime contractors and in this market, it
can compete equally.
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Optelecom's Communication Products Division competes mainly with other companies
of roughly equal size, having similar resources. For low technology products,
such as fiber optic data modems, competition is intense, as these products have
reached a commodity status. In the areas of engineering products for specific
applications, Optelecom competes against companies of the same size or larger.
Competitors with larger research staffs have an advantage in these markets.
The GLINT Division is a sole-source provider of the products it supplies to the
U.S. Air Force. Optelecom is not aware of any competition in this market.
SEASONALITY
The Company's products are based on fiber optic technology. As such, seasonality
does not materially affect our revenues.
PATENTS
The Company holds certain patents; however, its business as a whole is not
materially dependent upon its ownership of any one patent or group of patents.
The Company does not license any patents from other parties, nor is it aware of
any restrictions on its current business imposed by patents of other parties.
CONTRACT RENEGOTIATION AND TERMINATION
None of the Company's current contracts are subject to price renegotiation.
However, the Company's contracts with the U.S. Government are always subject to
termination, which is a standard clause in any contract with the government. The
subcontract from Litton Systems was terminated in February, 1995.
Item 2. PROPERTIES
In 1992, the Company moved its operations to new leased facilities at 9300
Gaither Road, Gaithersburg, Maryland, near Washington, DC. The facilities
consist of space in two adjacent buildings, one occupying 21,000 square feet,
with a ten-year lease term, beginning September 1, 1992, and the other occupying
4,000 square feet, with a one-year term, beginning in December, 1992, and two
one-year options. Current monthly rent is $15,550 on the larger space, and
$2,236 on the smaller one. All of the facilities are in good repair and are
adequate for the Company's current production requirements.
Item 3. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of 1995 to a vote of
security-holders.
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PART II
Item 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock, $0.03 par value (Common Stock) is traded in the
over-the-counter market. Set forth below are the highest and lowest closing bid
prices for the Common Stock as reported by the National Association of
Securities Dealers Automated Quotation Service (NASDAQ) during each quarter for
the three years ended December 31, 1995, 1994 and 1993, respectively. Such
quotations do not necessarily reflect actual transactions.
Bid Price
Quarter Ended High/Low
December 31, 1995 3 - 2 1/2
September 30, 1995 4 1/8 - 2 7/8
June 30, 1995 4 3/4 - 2 7/8
March 31, 1995 4 1/8 - 3
December 31, 1994 4 3/4 - 2 7/8
September 30, 1994 4 1/8 - 2 5/8
June 30, 1994 3 3/4 - 2 3/4
March 31, 1994 5 3/8 - 3 1/4
December 31, 1993 7 - 4 1/4
September 30, 1993 8 1/2 - 4 1/2
June 30, 1993 11 3/4 - 6 1/4
March 31, 1993 16 1/2 - 4 1/2
There are approximately 1,315 record-holders of the Common Stock as of March 18,
1996.
The Company has not declared any dividends to date and does not expect to do so
in the foreseeable future.
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Item 6. SELECTED FINANCIAL DATA
Set forth below is selected financial data for the Company's most recent five
fiscal years.
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1994 1993 1992 1991
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Revenue $6,430,136 $7,036,069 $7,083,229 $6,001,057 $4,867,790
Net (Loss) Income $(208,384) $382,347 $95,633 $400,274 $122,007
Earnings per Common
and Common Equivalent
Share before
Extraordinary Item and
Accounting Change $(.18) $0.33 $0.06 $0.31 $0.07
Extraordinary Item ------- ------ ------ $0.05 $0.04
Accounting Change ------- ------ $0.02 ------ ------
Net (Loss) Income per $(.18) $0.33 $0.08 $0.36 $0.11
Share
Total Assets $3,674,004 $3,617,298 $3,115,032 $2,871,896 $2,249,957
Long-Term Obligations $46,426 ------ ------ $158,296 ------
Stockholders' Equity $2,188,777 $2,384,303 $1,981,821 $1,771,833 $1,353,788
Cash Dividends Declared
per Common Share ------ ------ ------ ------ ------
</TABLE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FINANCIAL CONDITION
Due to the nature of the Company's business, the key components of its financial
condition constitute receivables, inventory, fixed assets, accounts payable, and
debt. Trends of key financial indicators show a change in corporate net worth to
$2,188,777 for 1995 compared to $2,384,303 in 1994 and $1,981,821 in 1993. The
current ratio for 1995 decreased to 2.2 from 2.8 in 1994 and 2.5 in 1993.
Billed accounts receivable at year-end 1995 was $1,378,424, compared to
$1,574,656 in 1994, and $1,495,586 in 1993. The days outstanding in accounts
receivable averaged 69 days in 1995, 66 days in 1994 and 57 days in 1993. Bad
debt write-offs represent less than 1/10 of one percent of the total yearly
revenues. The low level of bad debts is due partly to the percentage of business
the Company does with the U.S. Government and Fortune 500 companies. The Company
also uses a careful screening process and performs credit qualification of
customers before accepting their orders. For any new account, credit checks are
always conducted, and questionable situations are either placed on a COD or a
letter of credit basis. Accounts receivable are closely monitored; those that
are delinquent are continuously contacted until payment is received.
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The overall composition of the inventory has changed somewhat over the last
three years as shown in the following chart:
Inventory Composition 1995 1994 1993
Production Materials $ 549,277 $555,981 $499,914
Work In Process $ 153,203 $155,676 $164,020
Finished Goods $ 377,861 $ 65,339 $ 67,235
TOTAL $1,080,341 $776,996 $731,169
One of the tools the Company uses for trend analysis is a comparison of our
inventory levels to total sales. In 1995, this level was 17% compared to 11% in
1994 and 10% in 1993. The value of the raw material and work in process
inventory remained stable in 1995 compared to 1994. Although our objective is to
reduce inventory levels as much as possible, the value of finished goods
inventory was increased substantially in 1995 to provide products available from
stock. This action was taken to meet competitive pressures as customers are
demanding shorter product delivery times. We will attempt to reduce the amount
of raw material inventory to partially offset the higher level of finished goods
inventory. The Company believes that its reserve for inventory obsolescence is
adequate to properly value any excess quantities of this inventory.
Fixed asset additions were $289,704 in 1995, $207,025 in 1994, and $246,106 in
1993. Capital expenditures of $100,000 are planned in 1996 for test and
manufacturing equipment to lower the direct cost of manufacturing our products.
RESULTS OF OPERATIONS
Combined 1995 revenues were 9% less than both 1994 and 1993 results. A loss of
$(208,384), which represented (3%) of revenue for 1995, compares to a profit of
5% for 1994, and 1.3% for 1993.
COMMUNICATION PRODUCTS DIVISION (CPD)
Communication Products Division revenues decreased by 4% from 1994 revenues and
resulted in an operating loss of $(470,866) compared to a profit of $174,084 in
1994. Increased competition has forced the Company to significantly increase
sales discounts offered to customers on many products, and the requirement to
increase the volume of product shipments to achieve a slightly lower total
revenue compared to 1994 led to severely lower margins and the corresponding
loss. The Company has instituted a program of implementing product designs
specifically intended to be produced by automatic assembly processes to minimize
direct costs; also, a modification of our sales commission policy was initiated
to motivate the internal and external sales staff to achieve sales at higher
margins.
Cost of Sales
In 1995, direct CPD costs in relation to sales increased by 6%. The increase is
attributed to growing competition forcing us to lower our prices. However, the
cost to produce products continued to decrease due to the investment in
automated manufacturing facilities. As more of our product designs evolve toward
automated assembly, our ability to successfully compete at lower sale prices
will improve. As stated previously, direct costs as a percent of revenue
increased in 1995 while overhead as a percent of revenue remained constant.
12
<PAGE>
Cost Comparison 1995 1994 1993
Cost of Sales $3,595,328 $3,414,309 $3,067,470
Gross Sales $5,319,556 $5,562,130 $4,729,998
Cost as a Percent of Revenue 68% 56% 65%
The CPD division is an engineering driven producer of fiber optic equipment. Few
of its products have a long lifetime. This means new products are being
developed and released to production constantly, which leads to high initial
production costs and low margins at product introduction. Due to the degree of
difficulty in proceeding from a design phase to a production phase in a
relatively short time frame, the Company has, in many instances, been forced to
perform engineering through the production phase of the initial part of the
product life cycle.
Direct Costs Versus Sales 1995 1994 1993
Direct Costs $2,472,318 $2,297,661 $2,088,790
Percent of Sales 46% 41% 44%
Overhead and G&A
Absolute overhead costs fell in 1995 by 1%, although as a percent of revenue,
they were unchanged because 1995 revenue was lower than 1994. The Company
believes that some additional increases in sales can be attained at the current
level of fixed costs. Included below is a comparison of overhead costs for the
past three years:
Cost Comparison 1995 1994 1993
Overhead Costs $1,103,323 $1,113,798 $978,680
Overhead Costs as a Percent of Revenue 20% 20% 20%
Applied Overhead
Applied overhead allocates costs in overhead to a final product. The Company
uses a computation method in which overhead costs are divided by direct labor
costs. This establishes the percent of overhead costs to be applied to the final
product. Examples of these costs include rent, utilities, telephone, inventory
variances, and depreciation of production capital equipment costs. Applied
overhead amounts for the past three years were $(571,837) in 1995, $(490,776) in
1994 and $(461,244) in 1993.
Inventory Write-offs
Direct inventory write-offs increased in 1995 to $92,119 compared to $42,870 in
1994 and $121,855 in 1993. Generally, these write-offs are due to engineering
changes which result in obsolete raw materials and subassemblies used on
products we no longer intend to sell. In 1995, a write-off for $71,000 was taken
to recognize the lack of additional business in our satellite down-link market.
As previously mentioned, our major customer for this equipment discontinued
planned installations when their shopping mall customer underwent downsizing.
Although we make every attempt to minimize obsolete inventory, the rapid
engineering evolution of our product line and the changes in our product mix
makes some obsolescence unavoidable.
13
<PAGE>
G&A
General and Administrative costs consist primarily of expenses related to sales,
marketing and engineering activities. Commercial Product engineering development
costs have remained constant, reflecting stable staff size and workload. During
1995, development focused on additions to the product line for highway traffic
monitoring equipment. Also, a new effort to develop video technology was
initiated, which will result in new product introductions in 1996. The
three-year record of these engineering costs (exclusive of fringe) is $489,771
in 1995, $469,449 in 1994, and $478,000 in 1993.
Early in 1994, the company implemented changes to the Sales and Marketing staff
to more closely align the technical aspects of the selling process with customer
requirements. This led to a reorganization of these departments and
establishment of a customer support activity. The costs of this effort,
additional advertising and trade show costs, and commission payments to the
sales representative firms we have appointed during 1995 are reflected in the
increased G&A expenses for this year, which were $2,205,094. Prior-year costs
were $1,976,637 in 1994 and $1,743,841 in 1993.
RESEARCH AND DEVELOPMENT DIVISION (R&D)
Research and Development Division 1995 revenues decreased 29% compared to 1994.
The decrease in revenue was caused by termination of work on a contract from
Litton Guidance and Control Systems. This contract was terminated for the
convenience of the Government, and had represented a significant portion of the
total revenue planned for 1995. Although other work was received later in the
year, it was not of sufficient magnitude to mitigate the effects of the lost
revenue. Other work included contracts from Smiths Industries for $129,000, and
$261,985 from ARPA for fiber optic technology development. Division revenue for
the last three years was $395,284 for 1995, $554,542 for 1994, and $414,170 for
1993. Comparable period profits (losses) were $(263,930) in 1995, $(175,589) in
1994, and $(418,960) in 1993.
Cost of Sales
The cost of sales as a percent of revenue has increased significantly due to the
severe erosion of revenue caused by the termination of the Litton contract.
Given below are the last three years' results:
Cost Comparison 1995 1994 1993
Cost of Sales $440,411 $521,539 $549,238
Gross Sales $395,284 $554,542 $414,170
Cost as a Percent of Revenue 111% 94% 133%
OVERHEAD AND G&A
Overhead
Overhead costs for the R&D Division were $316,493 in 1995, $369,342 in 1994, and
$437,264 in 1993. Overhead expenses have decreased due to lower labor costs
within the division and a lower corporate expense allocation. These costs are
apportioned as a percent of floor space assigned to revenue generating
activities and have been reduced as the size of the Division has declined.
14
<PAGE>
G&A
G&A expenses for the division were $218,801 in 1995, $208,592 in 1994, and
$283,892 in 1993. These numbers reflect a slightly higher expense in 1995, due
to the impact of the Litton contract termination and the costs of marketing as
the division has sought to obtain other business to replace the lost Litton
revenue. We expect additional business in 1996 from these efforts, primarily in
fiber optic gyroscope coil winding.
GLINT DIVISION
1995 was another successful year for the GLINT Division. At this time, it
appears that the Air Force will require ongoing support for the Gunship for at
least the next several years. While it is difficult to quantify the level of
potential business, it does seem likely that Optelecom will provide products and
maintenance support during that period. Divisional revenue for the year was
$715,296 compared to $919,397 in 1994 and $1,939,278 in 1993. Prior to the 4th
quarter of 1992, the financial results of this division were included in the R&D
Division as the GLINT laser array was in the final development phase. Profits
were $307,369 for 1995, $414,195 for 1994, and $738,358 for the fourth quarter
of 1993. The decline in revenue in 1995 compared to 1994 was due to a change in
the composition of the type of business addressed by this division. In 1994,
contract work consisted of fabrication of complete illuminator systems; in 1995,
work consisted essentially of fabrication of spare laser arrays, with a small
additional effort associated with contract development work.
In the fourth quarter the division's revenues declined to $13,094, and the
division incurred an operating loss of $(64,000). The decline was due solely to
the effects of the Government shutdowns which occurred during that
quarter. These shutdowns impacted the planned award of a new contract for
repair and refurbishment of laser illuminator systems which was eventually
received in early 1996. In anticipation of the imminent award of that
contract, the staff was retained, thus incurring costs in excess of revenue.
Cost of Sales
The cost of sales as a percent of revenue remained constant compared to 1994,
reflecting a balanced application of manpower to specific work requirements.
Cost Comparison 1995 1994 1993
Cost of Sales $305,769 $389,924 $1,088,622
Gross Sales $715,296 $919,397 $1,939,278
Cost as a Percent of Revenue 43% 42% 56%
OVERHEAD AND G&A
Overhead
Overhead costs for the GLINT Division were $118,197 compared to $125,382 for
1994, and $143,127 for 1993. Overhead expenses have decreased slightly due to a
lower level of revenue activity compared to 1994.
G&A
The general and administrative expenses were $102,158 in 1995, $115,278 for
1994, and $112,298 for 1993.
15
<PAGE>
OTHER OPERATING EXPENSES
Overall advertising costs increased substantially in 1995. These costs include
advertising in trade magazines, participation in trade shows, and product
literature, including catalogs and specification sheets. Compared to prior
years, the type of advertising changed as a result of a redirection of our
advertising emphasis. Advertising expenditures increases occurred mainly in the
areas of magazines and trade shows. The costs of advertising for the last three
years were $225,675 in 1995, $162,706 in 1994, and $158,612 in 1993. These costs
are attributed specifically to the Communications Products Division and are
included in its operating results.
Interest expense of $6,497 decreased significantly in 1995 compared to $22,646
in 1994 and $22,335 in 1993. This decrease was a direct result of the positive
cash flow from operations in the first three quarters of the year, which allowed
us to fund operations without borrowing.
Income tax (benefit) expense was $(233,756) in 1995, $188,000 in 1994, and
$136,000 in 1993. The effective tax rate was (53%) in 1995 primarily as a result
of realizing tax benefit of carrying back the current year loss to the prior
year. Accordingly, the Company recorded a $215,693 income tax refund receivable
in 1995 for amounts expected to be received in 1996.
Impact of Inflation
Inflation has not had any significant effect on the operations of the Company
during 1995, and we do not expect it to have any significant effect during 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity requirements are largely generated by working capital
needs. These needs are primarily focused on financing inventories and accounts
receivable.
As a result of a net operating loss and increases in inventory balances, net
cash used in operational activities was $(110,497). Non-cash outlays such as
depreciation and amortization were $212,470. Cash used in investing activities
was $287,854, and included expenditures for capital equipment for manufacturing
operations, facility upgrades, and general office equipment. In order to finance
these activities, Optelecom used existing cash flows, borrowing in short term
notes and long term borrowings for equipment. No other material changes in cash
flow are expected. The Company has the ability, provided there are sufficient
eligible receivables, to borrow up to $1,000,000 under its line of credit as of
December 31, 1995. The Company also has the ability to borrow funds for specific
capital asset purchases to a maximum of $150,000 from a local bank. Loans for
these assets are collateralized by the specific equipment asset and payable over
no more than 5 years. During 1995, the Company borrowed $120,000 to purchase
capital equipment for the manufacturing operation. At the end of 1995, the
outstanding balance on this loan was $81,245.
16
<PAGE>
EFFECTS OF RECENTLY ISSUED ACCOUNTING STANDARDS
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." The new standard defines a fair value method of accounting for
stock-based employee compensation plans. Under this method, compensation cost is
measured based on the fair value of the stock award when granted and is
recognized as an expense over the service period, which is usually the vesting
period. This standard will be effective for the Company beginning in 1996 and
requires measurement of awards made beginning in 1995.
The new standard permits companies to continue to account for equity
transactions with employees under existing accounting rules, but requires
disclosure in a note to the financial statements of the pro forma net income and
earnings per share as if the company had applied the new method of accounting.
The Company intends to implement these disclosure requirements beginning 1996.
Adoption of the new standard will not impact reported net income or cash flows.
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of." This standard
will be effective for the Company beginning in 1996 and is not expected to have
a significant impact on the Company's financial statement.
17
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
18
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and
Stockholders of Optelecom Inc.:
We have audited the accompanying balance sheet of Optelecom, Inc., as of
December 31, 1995, and the related statements of operations, stockholders'
equity, and cash flows for the year then ended. Our audit also included the
financial statement schedule listed in the accompanying index. These financial
statements and schedule as of and for the year ended December 31, 1995 are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements and schedule. 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, such financial statements present fairly, in all material
respects, the financial position of Optelecom, Inc., at December 31, 1995, and
the results of its operations and its cash flows for the year then ended in
conformity with generally accepted accounting principles. Also, in our opinion,
such financial statement schedule as of and for the year ended December 31,
1995, when considered in relation to the basic financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
Deloitte & Touche LLP
Washington, D.C.
March 1, 1996
19
<PAGE>
OPTELECOM, INC.
BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
- --------------------------------------------------------------------------------
ASSETS 1995 1994
CURRENT ASSETS:
Cash and cash equivalents $ 62,436 $ 316,183
Contract receivables 1,411,209 1,715,689
Inventories 1,080,341 776,996
Prepaid expenses and other receivables 108,960 68,629
Income tax refund receivable 215,693 --
----------- -----------
Total current assets 2,878,639 2,877,497
PROPERTY AND EQUIPMENT - At cost less accumulated
depreciation and amortization 795,365 721,801
DEFERRED TAX ASSET -- 18,000
-------------- ----------
TOTAL ASSETS $3,674,004 $3,617,298
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Demand note payable to bank $ 60,000 $ --
Accounts payable 800,409 375,505
Accrued payroll 95,956 100,684
Accrued annual leave 89,210 106,604
Accrued income taxes -- 45,000
Other current liabilities 152,962 391,951
Current portion of notes payable 34,819 --
------------ -----------
Total current liabilities 1,233,356 1,019,744
LONG-TERM LIABILITIES:
Note Payable 46,426 --
Other long-term liabilities 205,445 213,251
----------- ----------
Total long-term liabilities 251,871 213,251
----------- ----------
COMMITMENTS AND CONTINGENCIES
Total liabilities 1,485,227 1,232,995
----------- ---------
STOCKHOLDERS' EQUITY:
Common stock, $.03 par - shares
authorized, 5,000,000; issued and
outstanding 1,171,042 and 1,166,672 35,131 35,000
(11,161) (11,161)
1,898,239 1,885,512
Discount on common stock 266,568 474,952
Additional paid-in capital ----------- ---------
Retained earnings 2,188,777 2,384,303
---------- ---------
Total stockholders' equity $3,674,004 $3,617,298
========== ==========
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
See notes to financial statements.
20
<PAGE>
<TABLE>
<CAPTION>
OPTELECOM, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
- ----------------------------------------------------------------------------------------------------------------------------------
1995 1994 1993
<S> <C> <C> <C>
REVENUE:
Product sales $6,034,852 $6,481,527 $6,669,059
Engineering services 395,284 554,542 414,170
----------- ----------- -----------
Total revenue 6,430,136 7,036,069 7,083,229
---------- ---------- ----------
COSTS AND EXPENSES:
Direct labor 211,419 299,470 326,599
Other direct costs 2,582,075 2,414,880 2,819,660
Overhead 1,538,015 1,608,522 1,559,071
General and administrative 2,526,054 2,300,507 2,140,031
---------- --------- ---------
Total costs and expenses 6,857,563 6,623,379 6,845,361
---------- --------- ---------
(Loss) income from operations ( 427,427) 412,690 237,868
OTHER INCOME (EXPENSE):
Gain from claims settlement -- 209,012 --
Loss on sale of investment -- (20,000) --
Interest (3,763) (22,643) (22,335)
Other (10,950) (8,712) (13,900)
------------ ----------- -----------
Total other (expense) income (14,713) 157,657 (36,235)
------------ --------- -----------
(LOSS) INCOME BEFORE (BENEFIT) PROVISION
FOR INCOME TAXES AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE (442,140) 570,347 201,633
(BENEFIT) PROVISION FOR INCOME TAXES (233,756) 188,000 136,000
------------ ----------- -----------
(LOSS) INCOME BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE (208,384) 382,347 65,633
CUMULATIVE EFFECT ON PRIOR PERIODS OF
CHANGE IN ACCOUNTING FOR INCOME
TAXES -- -- 30,000
------------- ------------ -----------
NET (LOSS) INCOME $ (208,384) $ 382,347 $ 95,633
=========== ========= =========
(LOSS) EARNINGS PER COMMON AND
COMMON EQUIVALENT SHARE:
(Loss) earnings before accounting change $ (0.18) $ 0.33 $ 0.06
Accounting change -- -- 0.02
------------- ---------- -----------
(LOSS) EARNINGS PER COMMON AND
COMMON EQUIVALENT SHARE $ (0.18) $ 0.33 $ 0.08
============ ========== ==========
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 1,171,048 1,162,660 1,141,725
========== ========= =========
See notes to financial statements.
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
OPTELECOM, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
- ----------------------------------------------------------------------------------------------------------------------------------
Additional Capital
-------------------------------------------------
Number Total
of Common Discount on Paid-in Retained Stockholders'
Shares Stock Common Stock Capital Earnings Equity
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1993 1,111,455 $33,344 $11,161 $1,752,678 $ (3,028) $1,771,833
Common stock issued 47,574 1,427 -- 112,928 -- 114,355
Net income -- -- -- -- 95,633 95,633
------------- --------- ---------- ------------ --------- -----------
BALANCE, DECEMBER 31, 1993 1,159,029 34,771 11,161 1,865,606 92,605 1,981,821
Common stock issued 7,643 229 -- 19,906 -- 20,135
Net income -- -- -- -- 382,347 382,347
------------ -------- ---------- -------------- --------- -----------
BALANCE, DECEMBER 31, 1994 1,166,672 35,000 11,161 1,885,512 474,952 2,384,303
Common stock issued 4,370 131 -- 12,727 -- 12,858
Net loss -- -- -- -- (208,384) (208,384)
------------ -------- -------- -------------- ---------- -----------
BALANCE, DECEMBER 31, 1995 1,171,042 $35,131 $11,161 $1,898,239 $266,568 $2,188,777
========= ======== ======= ========== ======== ==========
</TABLE>
See notes to financial statements.
22
<PAGE>
<TABLE>
<CAPTION>
OPTELECOM, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
- -----------------------------------------------------------------------------------------------------------
1995 1994 1993
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $(208,384) $ 382,347 $ 95,633
Adjustments to reconcile net (loss) income to net cash
(used in) provided by operating activities:
Depreciation and amortization 212,470 201,187 194,887
Gain or loss on sale of assets 1,821 -- --
Deferred tax provision 18,000 12,000 --
Deferred rent (7,806) 39,817 92,353
Common stock issued for services 9,497 8,113 36,943
Cumulative effect of accounting change -- -- (30,000)
Provision for inventory obsolescence 105,722 83,803 116,498
Reserve for HydraLite, Inc. -- (71,000) 71,000
Loss on sale of HydraLite, Inc. -- 20,000 --
(Increase) decrease in assets:
Contract receivables 304,480 (99,777) (43,326)
Income tax refund receivable (215,693) -- --
Inventories (409,066) (129,630) (292,862)
Prepaid expenses and other receivables (40,331) (16,888) (11,178)
Other assets -- -- --
Increase (decrease) in liabilities:
Accounts payable 424,904 134,591 (262,675)
Accrued payroll (4,728) 8,569 17,857
Accrued annual leave (17,394) (1,449) 12,410
Accrued income taxes (45,000) 5,038 25,962
Other current liabilities (238,989) 298,218 (39,888)
--------- -------- ----------
Net cash (used in) provided by operating activities (110,497) 874,939 (16,386)
--------- -------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (287,854) (207,025) (246,106)
Investment in and advances to HydraLite, Inc. -- (21,000) (71,000)
Cash proceeds from sale of investment -- 30,000 --
----------- -------- ------------
Net cash used in investing activities (287,854) (198,025) (317,016)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings (payments) on note payable to bank 60,000 (385,000) 385,000
Proceeds from exercise of stock options 3,359 12,022 77,322
Repayments of long-term debt (23,212) -- (197,870)
Borrowings of long-term debt 104,457 -- --
--------- ----------- ------------
Net cash provided by (used in) financing activities 144,604 (372,978) 264,452
--------- --------- ---------
(DECREASE) INCREASE IN CASH (253,747) 303,936 (68,950)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 316,183 12,247 81,197
--------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 62,436 $ 316,183 $ 12,247
========= ======== =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the year for interest $ 6,497 $ 22,646 $ 22,335
Cash paid during the year for taxes $ 59,653 $170,962 $ 112,111
See notes to financial statements.
</TABLE>
23
<PAGE>
OPTELECOM, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business - Optelecom, Inc. (the Company) is a Delaware corporation
which was organized in 1972. The Company's business consists primarily of the
development, manufacture, and sale of fiber optic communications products and
laser systems for commercial and military customers.
The Company is organized into three operating divisions: the Research and
Development Division, which consists of providing development and engineeirng
services to the US Government and its prime contractors; the Communications
Products Division (CPD), which sells optical fiber based data communication
equipment to the commercial marketplace; and the GLINT Division, which is
exclusively focused on business derived from manufacturing and support of the
semiconductor laser illuminator system for the GLINT night vision system used on
the U.S. Air Force C-130 Gunship. The majority of the Company's revenues are
generated from the CPD division. The principal markets for the Company's
products and services are located in California and several Southeastern and
Southwestern regions of the United States. Additionally, the Company generates a
portion of its revenues from several countries in Europe.
Basis of Presentation - Certain estimates used by management are particularly
susceptible to significant changes in the economic environment. These include
estimates of percentage-of-completion on long-term contracts, inventory
obsolescence, and valuation allowances for contract receivables and deferred tax
assets. Each of these estimates, as well as the related amounts reported in the
financial statements, are sensitive to near-term changes in the factors used to
determine them. A significant change in any one of those factors could result in
the determination of amounts different than those reported in the financial
statements. Management believes that as of December 31, 1995, the estimates used
in the financial statements are adequate based on the information currently
available.
Revenue Recognition - Revenues from cost-plus-fixed-fee contracts are recognized
to the extent of costs incurred during the period plus a proportionate amount of
the fee earned. Revenues from fixed-price contracts are recognized on the
percentage-of-completion method based on costs incurred in relation to total
estimated costs. Revenues from time-and-materials contracts and sales orders are
recognized at the time completed units are delivered.
Contract costs include all direct labor and material costs, all indirect costs
related to contract performance, such as indirect labor, rent, depreciation and
supplies, and selling, general and administrative costs, such as officers'
salaries and professional fees. Provisions for estimated losses on uncompleted
contracts are made in the period in which such losses are determined.
Inventories - Production materials are valued at the lower of cost or market
applied on a weighted average cost basis. Work-in-process represents direct
labor, materials, and overhead incurred on products not delivered to date.
Finished goods inventories are valued at the lower of cost or market, cost being
determined using standards that approximate actual cost on a specific
identification basis.
Property, Equipment, and Depreciation - Property and equipment are stated at
cost and include additions and major replacements and betterments. Depreciation
is computed using the straight-line method over the estimated useful lives of
the assets, which range from 5 to 10 years. Leasehold improvements are amortized
over the terms of the respective leases or the service lives of the assets,
whichever is shorter.
24
<PAGE>
Research and Development Costs - Research and development costs are expensed as
incurred. The Company incurred research and development costs of $538,977,
$479,888, and $472,305 for the years ended December 31, 1995, 1994, and 1993,
respectively.
Earnings Per Share - The computation of earnings per share is based on the
weighted average number of outstanding common shares during the period plus,
when their effect is dilutive, common stock equivalents consisting of certain
stock options. The primary weighted average number of common and equivalent
shares outstanding was 1,177,048, 1,162,660, and 1,150,262 for 1995, 1994, and
1993, respectively. Primary and fully diluted earnings per share were the same
in 1995, 1994, and 1993.
Income Taxes - The Company files the Federal and Maryland state income tax
returns. Certain income and expense items are recognized in different periods
for income tax purposes than for financial reporting purposes.
Effective January 1, 1993, the Company adopted Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" (SFAS 109). SFAS 109 requires
the liability method, whereby deferred tax assets and liabilities are recognized
for the estimated future tax consequences attributable to temporary differences
between the financial statement carrying amounts and their respective tax basis.
The recognition of net deferred assets is reduced, if necessary, by a valuation
allowance for the amount of any tax benefits that, based on available evidence,
are not expected to be realized (see Note 9). The cumulative effect of adopting
SFAS 109 as of January 1, 1993, was $30,000.
Forward Exchange Contracts - The Company enters into forward exchange contracts
to hedge certain firm purchase commitments denominated in foreign currencies.
The purpose of the Company's foreign currency hedging activity is to protect the
Company from the risk that the eventual cash flows resulting from the purchases
from foreign suppliers will be adversely affected by changes in exchange rates.
Gains and losses resulting from the forward exchange contracts are deferred and
accounted for as part of the underlying transactions. In entering into these
contracts, the Company has assumed the risk that might arise from the possible
inability of counterparties to meet the terms of the contracts. The Company does
not expect any losses as a result of counterparty defaults.
Cash and Cash Equivalents - For the purpose of presentation in the statements of
cash flows, cash and cash equivalents are defined as cash and investments with
original maturities of three months or less.
25
<PAGE>
2. CONTRACT RECEIVABLES
Contract receivables at December 31, 1995 and 1994, consisted of the
following:
1995 1994
Billed $1,378,424 $1,574,656
Unbilled-net of cumulative progress billings of
$210,820 for 1995 and $1,297,753 for 1994 32,785 141,033
----------- -----------
1,411,209 1,715,689
========== ===========
Billed contract receivables are due from
the following:
US Government Agencies $ 49,888 $ 52,325
Prime contractors on U.S.
Government contracts and
commercial customers, net 1,361,321 1,522,331
----------- -----------
Total $1,411,209 $1,574,656
========== ==========
Unbilled receivables include estimated (loss) earnings of $(804) and
$290,445 in 1995 and 1994, respectively.
Approximately 26% of the Company's revenues in 1995, 26% in 1994, and 42%
in 1993 were derived from contracts with agencies of the United States
Government and their prime contractors. The Company performs the services
and ships equipment according to the specific contract terms. Contracts
with the United States Department of Defense allow the Defense Contract
Audit Agency (DCAA) to audit the contract costs and the Company's
compliance with the Federal Acquisition Regulations. The DCAA has audited
the costs under contracts for years through 1993. The Company believes
that the ultimate outcome of future DCAA audits for subsequent years will
not have a material effect on the financial statements. Generally, the
contract terms for both government and commercial customers require
payment of invoices in 30 days.
On January 25, 1995, the Company was notified that a contract with a prime
contractor in the amount of $1,020,232 was terminated for convenience. As
a result of the termination, the Company recorded an allowance for
uncollectible costs of $34,711 in 1994. During 1995 the Company collected
all amounts due under this contract, and accordingly reversed the
allowance for uncollectible costs.
Included in the billed receivables at December 31, 1995, is a retainage
receivable of approximately $178,000, which is expected to be received
upon completion of the project in 1997.
26
<PAGE>
3. INVENTORIES
Inventories at December 31, 1995 and 1994, consist of the following:
1995 1994
Production materials $ 549,277 $555,981
Work in process 153,203 155,676
Finished goods 377,861 65,339
----------- ---------
$1,080,341 $776,996
========== ========
4. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1995 and 1994, consist of the
following:
1995 1994
Laboratory equipment $ 1,034,058 $ 867,138
Office equipment 576,675 512,474
Furniture and fixtures 26,366 26,366
Leasehold improvements 367,876 317,155
----------- -----------
2,004,975 1,723,133
Less accumulated depreciation and
amortization (1,209,610) (1,001,332)
------------ -----------
Net property and equipment $ 795,365 $ 721,801
========== ==========
5. DEMAND NOTE PAYABLE TO BANK
The Company has a credit agreement with a bank, whereby it may borrow up
to $1,000,000 with interest at the bank's prime rate plus 3/4% (9.25% at
December 31, 1995). The total amount of borrowings that may be outstanding
at any given time is based upon a percentage of certain eligible
receivables. The amount available under the credit agreement as of
December 31, 1995, was $1,000,000, less $60,000, which was outstanding.
The weighted average interest rate for short-term borrowings for the years
ended December 31, 1995, 1994, and 1993, are as follows:
1995 1994 1993
Weighted average interest rate 9.75% 7.67% 7.00%
The Company computed the weighted average interest rate by dividing the
sum of the weighted average interest rates on all borrowings outstanding
during the period by the total number of days the borrowings were
outstanding.
27
<PAGE>
6. NOTES PAYABLE
During 1995, Optelecom entered into a promissory note agreement to finance
the purchase of equipment. The equipment serves as collateral on the
promissory note. The principal amount of the note was $104,458, and the
amount outstanding at December 31, 1995, was $81,245. The promissory note
is payable at $2,902 a month until April 1998. Principal amounts due under
the note in 1996, 1997 and 1998 are $34,824, $34,824 and $11,547,
respectively. Interest is payable at prime plus 3/4%. The weighted average
interest rate during 1995 was 9.59%. The fair value of this note payable
is approximately equal to its carrying value.
7. FINANCIAL INSTRUMENTS
In October 1995, the Company entered into a foreign exchange forward
contract to purchase approximately 372,000 Netherlands guilders for
approximately $237,000. The foreign exchange contract was exercisable
between January 1, 1996, through February 2, 1996. The fair value of the
foreign exchange forward contract at December 31, 1995, was estimated by
obtaining quotes for futures contracts with similar terms. As of December
31, 1995, the fair value of foreign exchange forward contracts
approximated its carrying value.
8. STOCK OPTIONS
In March 1991, the Board of Directors adopted the 1991 Stock Option Plan
(the "1991 Plan") under which options to purchase up to 133,333 shares of
common stock may be granted to officers (including officers who are
directors) other key employees of, and consultants to, the Company. The
1991 Plan superseded and replaced the Incentive Stock Option Plan and the
Non-Qualified Stock Option Plan that the Company had in operation prior to
the adoption of the 1991 Plan. Options outstanding in prior years for the
previous plans are included in the 1991 Plan information as presented
below.
The exercise price of each option may not be less than 100% of the fair
market value of the stock on the date of grant for incentive stock options
or 85% of such fair market value for non-qualified stock options, as
determined by the Board. Options are exercisable in whole or in part any
time after one year from the date of grant. Options expire three years
after the date of grant and, in most cases, upon termination of
employment. The 1991 Plan will terminate on May 31, 2001, unless
terminated sooner by the Board.
28
<PAGE>
The following table relates to options outstanding, granted, exercised,
and canceled, during 1995, 1994, and 1993 under the 1991 Plan:
Number Option Price
Options of Shares Per Share
Exercisable at:
December 31, 1993 36,800 $6.50
December 31, 1994 40,750 $2.88 to $6.50
December 31, 1995 34,500 $2.88 to $6.50
Granted:
During 1993 38,050 $6.50
During 1994 38,750 $2.88 to $3.38
During 1995 7,500 $3.00 to $3.63
Exercised:
During 1993 23,410 $ .94 to $2.63
During 1994 -- --
During 1995 -- --
Canceled:
During 1993 1,583 $2.13 to $6.50
During 1994 34,800 $6.50
During 1995 6,250 $3.13 to $6.50
On December 19, 1988, the Board of Directors approved the Directors
Stock Option Plan (1988 Directors Plan) under which each non-employee
director who attends a meeting of the Board of Directors is, at his
election, granted an option to purchase 333 shares of common stock in
lieu of receiving a certain dollar value of common stock. The options
have an exercise price equivalent to the market value of the stock on
the date of such Board meeting. The options are exercisable upon grant
and expire three years thereafter. This plan was terminated as of
December 31, 1992, and accordingly, no more options will be granted
under this plan.
29
<PAGE>
The following table relates to options outstanding, granted, exercised,
and canceled during 1995, 1994, and 1993 under the terminated 1988
Directors Plan:
Number Option Price
Options of Shares Per Share
Exercisable at:
December 31, 1993 9,657 $1.03 to $3.88
December 31, 1994 2,997 $1.59 to $3.88
December 31, 1995 -- --
Granted:
During 1993 -- --
During 1994 -- --
During 1995 -- --
Exercised:
During 1993 3,996 $1.03 to $2.25
During 1994 4,329 $1.03 to $3.00
During 1995 1,332 $1.59 to $3.00
Canceled:
During 1993 -- --
During 1994 2,331 $1.88 to $3.00
During 1995 1,665 $3.00 to $3.88
On December 7, 1992, the Board of Directors approved the 1993 Directors'
Stock Option Plan (1993 Directors' Plan), which replaces the 1988
Directors' Plan. Under this plan, each non-employee director who attends a
meeting of the Board of Directors is, at his election, granted an option
to purchase 450 shares of common stock in lieu of receiving a certain
dollar value of the stock on the date of such Board meeting. The options
are exercisable upon grant and expire three years thereafter.
The following table relates to options outstanding and granted during
1995, 1994 and 1993 under the 1993 Directors' Plan.
Number Option Price
Options of Shares Per Share
Exercisable at:
December 31, 1993 4,500 $6.12 to $7.25
December 31, 1994 17,500 $2.88 to $7.25
December 31, 1995 27,450 $2.75 to $7.25
Granted:
During 1993 45,000 $6.12 to $7.25
During 1994 13,050 $2.88 to $4.63
During 1995 9,900 $2.75 to $4.50
No options were exercised or canceled during 1995, 1994 and 1993.
30
<PAGE>
In June 1990, the Board of Directors adopted a stock option plan
(Chairman's) under which the Chairman of the Board is the sole
participant. On each January 1, the Participant is granted an option to
purchase 1,666 shares of common stock at a price equivalent to the fair
market value at that date. Each option granted under this plan will expire
three years after the date of grant. On the date of adoption, 3,332
options were granted to the participant under the plan. The total amount
of shares available under this plan is 13,328. The plan terminates when
the participant ceases to be employed by the Company or December 31, 1996,
whichever is earlier.
The following table relates to options outstanding, granted, and exercised
during 1995, 1994 and 1993 under the Chairman's Plan.
Number Option Price
Options of Shares Per Share
Exercisable at:
December 31, 1993 3,332 $1.69 to $5.00
December 31, 1994 3,332 $4.88 to $5.00
December 31, 1995 4,998 $3.13 to $5.00
Granted:
During 1993 1,666 $5.00
During 1994 1,666 $4.88
During 1995 1,666 $3.13
Exercised:
During 1993 4,999 $1.13 to $2.06
During 1994 1,666 $1.69
During 1995 -- --
No options were canceled in 1995, 1994, and 1993.
In January, 1991, the Board of Directors approved a special arrangement
for the granting of a total of 30,000 stock options to the Company's
president (President's Plan). Under the arrangement, the president
receives 10,000 options on January 1 of each year at a predetermined
price. The options expire four years from the date of grant.
31
<PAGE>
The following table relates to options outstanding, granted and exercised
during 1995, 1994, and 1993 under the President's Plan.
Number Option Price
Options of Shares Per Share
Exercisable at:
December 31, 1993 20,000 $3.00 to $4.50
December 31, 1994 20,000 $3.00 to $4.50
December 31, 1995 20,000 $3.00 to $4.50
Granted:
During 1993 10,000 $4.50
During 1994 -- --
During 1995 -- --
Exercised:
During 1993 10,000 $1.50
During 1994 -- --
During 1995 -- --
No options were cancelled during 1995, 1994 and 1993.
9. INCOME TAXES
The components of the (benefit) provision for income taxes for the years
ended December 31, 1995, 1994, and 1993, are summarized as follows:
1995 1994 1993
Current $(251,756) $176,000 $136,000
Deferred 18,000 12,000 --
--------- -------- --------
$(233,756) $188,000 $136,000
========== ======== ========
The Company's 1995 tax provision includes the benefit of the carryback of
the current year loss to the prior year. Accordingly, an income tax refund
receivable of $215,693 has been recorded as of December 31, 1995.
32
<PAGE>
The difference between the Federal income tax expense (benefit) and the
amount computed applying the statutory Federal income tax rate for the
years ended December 31, 1995, 1994, and 1993, are summarized as follows:
1995 1994 1993
Federal income tax at statutory rates (34%) 34% 34%
Increase (reduction) of taxes:
State taxes, net of federal benefit (7) 5 10
Utilization of tax credits -- (6) (30)
Valuation allowance related to net
deferred tax assets (8) -- 51
Other (4) -- 2
------- ---- ---
Effective income tax rate (53%) 33% 67%
===== === ===
Deferred income taxes reflect the net tax effects of temporary differences
between the amount of assets and liabilities for income tax and financial
reporting purposes. The components of deferred income tax liabilities and
assets as of December 31, 1995 and 1994 are as follows:
1995 1994
Deferred tax liabilities:
Retainage receivable on long-term
contracts $(67,275) $ --
--------- ----------
Gross deferred tax liabilities (67,275) --
--------- ----------
Deferred tax assets:
Excess book depreciation 5,389 8,934
Capitalized overhead and inventory
obsolescence reserve 58,874 52,970
Accrued vacation 27,386 34,189
Deferral of rent expense 77,309 87,433
General business tax credits and capital
losses 48,317 17,890
--------- --------
Gross deferred tax assets 217,275 201,416
-------- -------
Less: Valuation allowance 150,000 183,416
-------- -------
Net deferred tax assets $ -- $ 18,000
========== =======
A valuation allowance is provided to reduce the deferred tax assets to a
level that more likely than not, under the rules in SFAS 109, will be
realized. General business tax credits and capital losses expire in
varying amounts through December 31, 2010.
33
<PAGE>
10. EMPLOYEE BENEFIT PLANS
The Company has a noncontributory Profit-Sharing Retirement Plan covering
substantially all employees. Vesting occurs over a period of six years
from date of entry into the plan. Under the plan, the Company's
contribution is determined annually by the Board of Directors and is
funded as accrued. The accrual for 1995, 1994, and 1993 was $-0-,
$115,354, and $39,466, respectively.
The Company has established a combined tax-qualified cash and deferred
profit sharing plan under Section 401(k) of the Internal Revenue Code for
all of the Company's full-time employees. The Company instituted a plan in
1993 that matched employee contributions to the plan to a maximum of 2.5%.
Total contributions were $60,163 and $52,139 in 1995 and 1994,
respectively.
11. COMMITMENTS AND CONTINGENCIES
Operating Lease - During 1992, the Company moved its corporate office and
manufacturing facilities and entered into a new 10-year noncancelable
operating lease expiring August 31, 2002. As an inducement to enter the
new lease, the Company received certain incentives such as rent abatement
and assumption of existing lease obligations. Additionally, the new lease
provides for scheduled rent increases in the future. These lease
incentives will be amortized over the new lease period. Rent expense is
being recognized on a straight-line basis. In addition to the basic
rentals, the lease agreement provides for increases based on payment by
the Company of its share of real estate and insurance taxes.
As of December 31, 1995, future net minimum rental payments required under
operating leases that have initial or remaining noncancellable terms in
excess of one year are as follows:
Year Ended December 31,
1996 $ 195,126
1997 200,980
1998 207,009
1999 213,220
2000 219,616
Later years 379,994
-----------
$1,415,945
Rental expense was $216,566, $211,867, and $208,469 in 1995, 1994, and
1993, respectively.
Employment Agreement - The Company has an employment agreement with an
officer. In the event of his death while employed, the officer's salary is
to be paid for one year. Additionally, he earns a bonus of 1,666 shares of
common stock for each twelve-month period of the term of employment (which
began January 1, 1984), but no such stock shall be issued directly to him
until January 2, 1999. A total of 11,663 shares has been issued in trust
through December 31, 1995. An additional 1,666 shares were issued in trust
subsequent to December 31, 1995. All of the shares earned through December
31, 1995, are to be transferred to the officer in the future. The Company
recorded expense of $4,948, $4,998, and $8,130 in 1995, 1994, and 1993,
respectively in connection with this agreement.
34
<PAGE>
Employee Cash/Stock Bonus Plan - In 1980, the Company adopted an employee
cash/stock bonus plan for which 8,333 shares of the Company's common stock
have been set aside to be issued to employees at the discretion of
management. Through 1989, 1,533 shares had been issued. No shares were
issued in 1995, 1994, and 1993.
12. INVESTMENT IN HYDRALITE, INC.
In May, 1993, the Company agreed to make a 14% equity investment in
HydraLite, Inc., a start-up telecommunications company under a stock
purchase agreement. As of December 31, 1993, the Company had paid a total
of $50,000 for the stock and provided an additional $75,345 in
administrative, research and development and marketing support to
HydraLite of which $21,000 was recorded as a receivable. The Company had a
commitment at December 31, 1993, to pay an additional $21,000 for
administrative assistance until HydraLite's first-round equity financing
was completed. Due to delays in the completion of HydraLite's financing,
management recorded a valuation reserve for the entire receivable and
investment at December 31, 1993.
In April 1994, HydraLite received its first-round equity financing and the
Company reversed the reserve for the investment and receivable. The
Company also recorded a $42,000 receivable for repayment of the amounts
advanced to HydraLite for administrative support. In December 1994, the
Company sold its stock to the individual investors of HydraLite for
$30,000 and recorded a loss on the sale of $20,000. In addition, the
Company and HydraLite settled various claims against each other and, as a
result, the Company recognized a gain of $209,012.
13. SEGMENT INFORMATION
Segment information by major business segment is presented below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
RESEARCH AND COMMUNICATION
---------------------------------------------------------------------------
Research and Communications
Development Products GLINT
Division Division Division Totals
<S> <C> <C> <C> <C>
Revenues $ 395,284 $5,319,556 $715,296 $6,430,136
Operating income (loss) (263,930) (470,866) 307,369 (427,427)
Identifiable assets 101,103 $3,117,177 $ 68,635 $3,286,915
Corporate assets -- -- -- 387,089
-------- --------- ------- ---------
Total assets $ 101,103 $3,117,177 $ 68,635 $3,674,004
======== ========= ======= =========
Gross additions to property and
equipment:
Identifiable $ -- $ 289,704 $ -- $ 289,704
Corporate -- -- -- --
-------- --------- ------- ---------
Total $ -- $ 289,704 $ -- $ 289,704
======== ========= ======= =========
Depreciation and amortization:
Identifiable $ -- $ 212,470 $ -- $ 212,470
Corporate -- -- -- --
-------- --------- ------- ---------
Total $ -- $ 212,470 $ -- $ 212,470
======== ========= ======== =========
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1994
---------------------------------------------------------------------
Research and Communication
Development Products GLINT
Division Division Division Total
<S> <C> <C> <C> <C>
Revenue $ 554,542 $5,562,130 $919,397 $7,036,069
Operating income (loss) (175,589) 174,084 414,195 412,690
Identifiable assets 488,915 2,538,970 189,501 3,217,386
Corporate assets -- -- -- 399,912
--------- ---------- -------- ----------
Total assets $ 488,915 $2,538,970 $189,501 $3,617,298
======== ========== ======== =========
Gross additions to property
and equipment:
Identifiable $ 82,810 $ 124,215 $ -- $ 207,025
Corporate -- -- -- --
--------- ---------- -------- ----------
Total $ 82,810 $ 124,215 $ -- $ 207,025
========= ========== ======== ==========
Depreciation and amortization:
Identifiable $ 80,475 $ 120,712 $ -- $ 201,187
Corporate -- -- -- --
--------- ---------- -------- ----------
Total $ 80,475 $ 120,712 $ -- $ 201,187
========= ========== ======== ==========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1993
-----------------------------------------------------------------
Research and Communication
Development Products GLINT
Division Division Division Total
<S> <C> <C> <C> <C>
Revenues $ 414,170 $4,729,781 $1,939,278 $7,083,229
Operating income (loss) (418,960) (81,530) 738,358 237,868
Identifiable assets 399,036 2,354,054 267,954 3,021,044
Corporate assets -- -- -- 93,988
-------- --------- --------- ---------
Total assets $ 399,036 $2,354,054 $ 267,954 $3,115,032
======== ========= ========= =========
Gross additions to property
and equipment:
Identifiable $ 98,442 $ 147,664 $ -- $ 246,106
Corporate -- -- -- --
-------- --------- --------- ---------
Total $ 98,442 $ 147,664 $ -- $ 246,106
======== ========= ========= =========
Depreciation and amortization:
Identifiable $ 77,954 $ 116,933 $ -- $ 194,887
Corporate -- -- -- --
-------- --------- --------- ---------
Total $ 77,954 $ 116,933 $ -- $ 194,887
======== ========= ========= =========
</TABLE>
36
<PAGE>
The Company is engaged primarily in the development, manufacture, and sale
of optical communications products and laser systems. Revenue represents
shipments and services provided to third parties. Contract costs and
operating expenses directly traceable to individual segments were deducted
from revenue to arrive at operating income. Identifiable assets by segment
are those assets that are used in the Company's operations in each
segment. Corporate assets consist primarily of cash, prepaid expenses, and
long-term assets.
14. SIGNIFICANT CUSTOMERS AND FOREIGN EXPORTS
The Company's primary business activity is with the U.S. Government, its
prime contractors, and customers providing communications products and
services. During 1995, the Company made sales to two commercial customers
that accounted for approximately 10% and 9% of revenues, respectively.
During 1994, the Company made sales to individual commercial customers
which accounted for approximately 12% and 10% of revenues, respectively.
During 1993, the Company made sales to individual commercial customers
which accounted for 12% and 11% of revenues, respectively. In 1995 and
1994, the Company had export sales to foreign customers totaling
approximately $860,000 and $923,000, respectively. In 1993, sales to
foreign customers were less than 10% of revenues. At December 31, 1995,
contract receivables from three customers represented 13%, 10%, and 9%,
respectively, of total contract receivables outstanding.
15. RECENT ACCOUNTING STANDARDS
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." The new standard defines a fair value method of accounting
for stock-based employee compensation plans. Under this method,
compensation cost is measured based on the fair value of the stock award
when granted and is recognized as an expense over the service period,
which is usually the vesting period. This standard will be effective for
the Company beginning in 1996 and requires measurement of awards made
beginning in 1995.
The new standard permits companies to continue to account for equity
transactions with employees under existing accounting rules, but requires
disclosure in a note to the financial statements of the pro forma net
income and earnings per share as if the company had applied the new method
of accounting. The Company intends to implement these disclosure
requirements beginning 1996. Adoption of the new standard will not impact
reported net income or cash flows.
* * * * * *
37
<PAGE>
<TABLE>
<CAPTION>
OPTELECOM, INC.
SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
YEAR ENDED DECEMBER 31, 1995, 1994 AND 1993 SCHEDULE II
BALANCE CHARGED
- ------------------------------------------------------------------------------------------------------------------
Balance Charged
at to Balance
Beginning Costs and Other at End
DESCRIPTION Of Period Expenses Changes Deductions of Period
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1993
Reserves and allowances
deducted from asset accounts:
Obsolescence reserve for
inventory $47,826 $116,498 -- $(121,855)1/ $42,469
Reserve for investment -- (71,000) -- -- 71,000
Year Ended December 31, 1994
Reserves and allowances
deducted from asset accounts:
Obsolescence reserve for
inventory $42,469 $ 83,803 -- $ (42,870)1/ $83,402
Allowance for uncollectible
contract costs -- 34,711 -- -- 34,711
Reserve for investment 71,000 (71,000) -- -- --
Year Ended December 31, 1995
Reserves and allowances
deducted from asset accounts:
Obsolescence reserve for
inventory $83,402 $105,722 -- $ (92,119) $97,005
Allowance for uncollectible
contract costs 34,711 (34,711) -- -- --
</TABLE>
1/Scrap Inventory
38
<PAGE>
<TABLE>
<CAPTION>
OPTELECOM, INC. EXHIBIT 11
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
- -----------------------------------------------------------------------------------------------------------------
1995 1994 1993
<S> <C> <C> <C>
Primary Earnings Per Share:
(Loss) earnings before accounting change $ (208,384) $ 382,347 $ 65,633
Accounting change -- -- 30,000
--------- ---------- ----------
Net (loss) earnings (208,384) $ 382,347 $ 95,633
========= ========== ==========
Weighted average common and common
equivalent shares 1,170,393 1,162,660 1,141,725
Adjustment to options using average year
price when dilutive 6,655 352 8,537
--------- ---------- ----------
Primary shares 1,177,048 1,163,012 1,150,262
========= ========== ==========
(Loss) earnings per share:
Earnings before accounting change $ (0.18) $ 0.33 $ 0.06
Accounting change -- -- 0.02
--------- ---------- ----------
$ (0.18) $ 0.33 $ 0.08
========= ========== ==========
Fully Diluted Earnings Per Share:
(Loss) earnings before accounting change $ (208,384) $ 382,347 $ 65,633
Accounting change -- -- 30,000
--------- ---------- ----------
Net earnings $ (208,384) $ 382,347 $ 95,633
========= ========== ==========
Weighted average common and common
equivalent shares 1,170,393 1,162,660 1,141,725
Adjustment to options using year
end price when dilative 8,214 352 9,521
--------- ---------- ----------
Fully diluted shares 1,178,607 1,163,012 1,151,246
========= ========== ==========
Earnings per share:
(Loss) earnings before accounting change $ (0.18) $ 0.33 $ 0.06
Accounting change -- -- 0.02
--------- ---------- ----------
$ (0.18) $ 0.33 $ 0.08
========= ========== ==========
</TABLE>
39
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
Optelecom, Inc.
Gaithersburg, Maryland
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 for the Optelecom, Inc. 1991 Stock Option Plan, the 1993
Directors Stock Option Plan, the Stock Option Plan for William H. Culver and the
1996 Directors Stock Option Plan, respectively, of our report dated March 1,
1996, relating to the financial statements and schedule of Optelecom, Inc.
appearing in the Company's Annual Report on Form 10-K for the year ended
December 31, 1995.
Deloitte & Touche LLP
Washington, D.C.
March 28, 1996
<PAGE>
Item 9. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
The submitted Form 8-K which was submitted on May 2, 1995 is as
follows:
Item 4 Changes in Registrant's Certifying Accountant.
Item 304 Changes and Disagreements with Accountants on Accounting
and Financial Disclosure
(a)(1)(i) The Registrant's informed BDO Seidman, by letter dated
on April 24, 1995, that its Board of Directors had
approved termination of its engagement as independent
auditors, effective immediately.
(a)(1)(ii) BDO Seidman's report on the financial statements for
each year in the two year period ended December 31,
1994, did not contain an adverse, qualified or
disclaimer of opinion nor did it contain an explanatory
paragraph due to a material uncertainty.
(a)(1)(iv) (A) Set forth below are certain matters, related to
the financial statements for the year ended
December 31, 1994, which were disagreements as that
term is used in instruction 4 to Item 304 of
Regulation S-K. Each of these matters was resolved,
to the satisfaction of BDO Seidman, prior to
issuance of its report on the financial statements
for the year ended December 31, 1994.
1. Expense rework cost improperly capitalized as a
component of inventory cost - $16,585.
2. Increase the reserve for obsolete inventory - $15,492.
3. Establish a warranty reserve - $17,500.
4. Establish a specific warranty reserve for known product
repairs/replacements - $10,000.
5. Establish a reserve for claims incurred but not
reported related to Registrant's self insured medical
plan - $20,346.
6. Valuation allowance related to deferred tax assets -
$183,416.
(B) BDO Seidman discussed each of the matters set forth
above with the Board of Directors in a special
meeting on March 14, 1995.
(C) The Registrant has authorized BDO Seidman to
respond fully to the inquiries of the successor
accountant concerning the matters set forth above.
(a)(1)(v) (A) BDO Seidman advised the Registrant, in a
memorandum dated March 10, 1995, that is considered
the failure to properly estimate and accrue for
warranty costs a material weakness as defined under
standards established by the American Institute of
Certified Public Accountants.
41
<PAGE>
3. The Registrant has provided BDO Seidman with a copy of this
disclosure and has requested that BDO Seidman furnish the
Registrant with a letter addressed to the Securities and
Exchange Commission stating whether BDO Seidman agrees with
the statement set forth above.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
1. Directors of the Company
See the Company's Proxy Statement, incorporated by Reference
as Part III of this Form 10-K, under the heading "Proposal 1 and
Miscellaneous."
2. Executive Officers of the Company
See the Company's Proxy Statement, incorporated by Reference
as Part III of this Form 10-K, under the heading "Proposal 1 and
Miscellaneous."
Item 11. EXECUTIVE COMPENSATION
See the Company's Proxy Statement, incorporated by Reference as Part
III of this Form 10-K, under the heading "Summary Compensation
Table."
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
See the Company's Proxy Statement, incorporated by Reference as Part
III of this Form 10-K, under the heading "Proposal 1."
Item 13. CERTAIN RELATIONSHIPS AND RELATED PARTIES
See the Company's Proxy Statement, incorporated by Reference as Part
III of this Form 10-K, under the heading "Miscellaneous."
42
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
1. Financial Statements and Financial Statement Schedules
Report of Independent Certified Public Accountants
Statements
Balance Sheets as of December 31, 1995 and 1994
Statements of Income for the Years Ended December 31, 1995,
1994, and 1993
Statements of Stockholders' Equity for the Years Ended
December 31, 1995, 1994, and 1993
Statements of Cash Flows for the Years Ended December 31,
1995, 1994, and 1993
Summary of Accounting Policies
Notes to Financial Statements
2. Financial Statement Schedules
Schedule II Valuation and Qualifying Accounts, Years
Ended December 31, 1995 and 1994
Other schedules are omitted because they are not applicable or
information is shown elsewhere in the financial statements or notes
thereto.
3. Exhibits
Item 3(i)(1) Restated Certificate of Articles of Incorporation
of Optelecom, Inc. as in effect March 14, 1994.
Item 3(i)(2) Certificate of Amendment of Articles of
Incorporation
Item 11 - Statement Regarding Computations of Per Share
Earnings
Item 24 - Consent of Independent CPA
4. Reports on Form 8-K
No 8-Ks were filed during this period.
43
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: By
William H. Culver, Chairman
and Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
OPTELECOM, INC.
Date: By
William H. Culver, Chairman
and Treasurer
Date: By
Edmund D. Ludwig, Director and
President
Date: By
John A. Jamieson, Director
Date: By
Joseph H. Sharlitt, Director and
Secretary
Date: By
Gordon A. Smith, Director
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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<ARTICLE> 5
<MULTIPLIER> 0
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 62,436
<SECURITIES> 0
<RECEIVABLES> 1,411,209
<ALLOWANCES> 0
<INVENTORY> 1,080,341
<CURRENT-ASSETS> 2,878,639
<PP&E> 2,004,975
<DEPRECIATION> (1,209,610)
<TOTAL-ASSETS> 3,674,004
<CURRENT-LIABILITIES> 1,233,356
<BONDS> 0
0
0
<COMMON> 35,131
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 3,674,004
<SALES> 6,430,136
<TOTAL-REVENUES> 6,430,136
<CGS> 6,857,563
<TOTAL-COSTS> 6,857,563
<OTHER-EXPENSES> (14,713)
<LOSS-PROVISION> (442,140)
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (208,384)
<INCOME-TAX> (208,384)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (208,384)
<EPS-PRIMARY> (.18)
<EPS-DILUTED> (.18)
</TABLE>
