SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended March 31, 1998 Commission File No. 0-8828
Optelecom, Inc.
----------------------------
(Exact Name of Registrant as
Specified in its Charter)
Delaware 52-1010850
- ------------------------------- ---------------------------------
(State of Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
9300 Gaither Road Gaithersburg, MD 20877
- ---------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, (301) 840-2121
Including Area Code ---------------
(Phone Number)
NONE
----
(Former Name, Former Address and Former Fiscal Year, if Changed
Since Last Report)
Indicate by checkmark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve (12) months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past ninety (90) days.
Yes X No
----- -----
Common Stock Outstanding
as of May 14, 1998 2,110,490
---------
1
<PAGE>
OPTELECOM, INC.
FORM 10-Q
CONTENTS
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PART I. FINANCIAL INFORMATION
ITEM 1. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of March 31, 1998 (Unaudited)
and December 31, 1997 (Audited)........................................3
Condensed Consolidated Statements of Operations for the Three Months
Ended March 31, 1998 and 1997 (Unaudited) .............................4
Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 1998 and 1997 (Unaudited) ...................................5
Notes to Condensed Consolidated Financial Statements (Unaudited) ......6
ITEM 2. MANAGEMENT`S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
PART II. OTHER INFORMATION
2
<PAGE>
OPTELECOM, INC.
Condensed Consolidated Balance Sheets
as of March 31, 1998 and December 31, 1997
<TABLE>
<CAPTION>
ASSETS 1998 1997
------ (Unaudited) (Audited)
----------- ---------
<S> <C>
Current Assets:
Cash and cash equivalents $ 390,907 $ 242,656
Restricted cash 327,610 728,000
Accounts and contracts receivable 3,404,182 3,102,904
Note receivable - related party 40,000 40,000
Inventories 2,171,759 1,752,873
Prepaid expenses and other assets 311,053 334,530
Deferred tax asset 200,874 200,874
----------- -----------
Total current assets 6,846,385 6,401,837
Intangible Assets, net 2,533,433 2,614,062
Goodwill, net 1,882,193 1,914,785
Property and Equipment, at cost less accumulated
depreciated 1,414,118 1,265,550
Deferred Tax Asset 13,507 13,507
----------- -----------
TOTAL ASSETS $12,689,636 $12,209,741
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Demand note payable $ 1,111,373 $ 300,000
Accounts payable 2,182,920 1,640,460
Payable under factoring agreement --- 362,868
Accrued payroll 262,581 266,936
Accrued annual leave 142,263 138,661
Income taxes payable 327,574 728,000
Other current liabilities 225,236 300,384
Current portion of notes payable 364,250 208,332
----------- -----------
Total current liabilities 4,616,197 3,945,641
Long Term Liabilities:
Notes payable 2,144,680 2,291,668
Deferred rent liability 166,506 172,613
----------- -----------
Total long-term liabilities 2,311,186 2,464,281
----------- -----------
TOTAL LIABILITIES 6,927,383 6,409,922
----------- -----------
Stockholders' Equity
- --------------------
Common Stock - par value $.03 per share,
Authorized 5,000,000 shares, issued and outstanding
2,034,400 and 2,032,137 61,032 60,964
Discount on common stock (11,161) (11,161)
Additional paid-in capital 3,818,708 3,812,638
Retained earnings 1,893,674 1,937,378
----------- -----------
Total stockholders' equity 5,762,253 5,799,819
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $12,689,636 $12,209,741
=========== ===========
</TABLE>
The accompanying notes are an integral part of this statement.
3
<PAGE>
OPTELECOM, INC.
Condensed Consolidated Statements of Operations
for the Three Months Ended March 31, 1998 and 1997
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
March 31, 1998 March 31, 1997
-------------- --------------
<S> <C>
Revenue $4,380,922 $2,678,211
Direct Costs, Overhead and G&A 4,368,080 2,384,910
---------- ----------
Operating Income 12,842 293,301
Other Expenses 75,520 2,242
---------- ----------
(Loss) Income Before Income Taxes (62,678) 291,059
(Benefit) Provision for Income Taxes (18,974) 123,200
---------- ----------
Net (Loss) Income (43,704) 167,859
========== ==========
Basic (Loss) Earnings Per Share $ (0.02) $ 0.08
Diluted (Loss) Earnings Per Share $ (0.02) $ 0.09
Weighted Average Number of Common Shares Outstanding 2,032,456 1,928,832
</TABLE>
The accompanying notes are an integral part of this statement.
4
<PAGE>
OPTELECOM, INC.
Consolidated Statements of Cash Flows
as of March 31, 1998 and 1997
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended March 31
1998 1997
----- ----
<S> <C>
Operating Activities
- --------------------
Net (Loss) Income $ (43,704) $ 167,859
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization 217,888 65,311
Gain on sale of equipment --- (15,357)
Deferred rent (6,107) (4,338)
Common stock issued for services --- 8,200
Change in assets and liabilities:
Accounts and contracts receivable (301,278) (177,530)
Inventory (418,886) (143,762)
Prepaid expenses and other assets 23,477 (93,921)
Restricted cash - Paragon 400,390 ---
Accounts payable 542,460 331,791
Accrued payroll (4,355) (47,737)
Accrued annual leave 3,602 21,545
Other current liabilities (75,148) 10,911
Income taxes payable (400,426) ---
---------- ---------
Net cash used in (provided by) operating activities (62,087) 122,972
Investing Activities
- --------------------
Proceeds from sale of equipment --- 22,000
Capital expenditures (253,200) (154,645)
---------- ---------
Net cash used in investing activities (253,200) (132,645)
Financing Activities
- --------------------
Borrowings on note payable to bank 811,373 ---
Payments on long term debt (362,868) 18,156
Borrowings under notes 8,930 ---
Proceeds from stock options 6,103 (46,426)
---------- ---------
Net cash provided by (used in) financing activities 463,538 (28,270)
Net (decrease) increase in cash and cash equivalents 148,251 (37,943)
Cash and cash equivalents - beginning of period 242,656 266,575
---------- ---------
Cash and cash equivalents - end of period 390,907 $ 228,632
========== =========
Supplemental Disclosures of Cash Flow Information
Cash Paid During the Period for Interest 75,520 1,360
</TABLE>
The accompanying notes are an integral part of this statement.
5
<PAGE>
OPTELECOM, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
1. Basis of Presentation
The accompanying unaudited financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and note disclosures normally included in the annual
financial statements, prepared in accordance with generally accepted accounting
principles, have been condensed or omitted pursuant to those rules and
regulations, although the Company believes that the disclosures made are
adequate to make the information presented not misleading.
In the opinion of management, the unaudited accompanying financial
statements reflect all necessary adjustments and reclassifications (all of which
are of a normal, recurring nature) that are necessary for fair presentation for
the periods presented. It is suggested that these financial statements be read
in conjunction with the financial statements and the notes thereto included in
the Company's latest annual report to the Securities and Exchange Commission on
Form 10-K for the year ended December 31, 1997.
2. Line of Credit
The Company has a credit agreement with a bank, whereby it may borrow
up to $1,250,000 with interest at the bank's prime rate plus 1/4%. The total
amount of borrowings, which 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 March 31, 1998 is $ 150,000. On April 30, 1998, the bank
renewed the line of credit through April 30, 1999 and on May 13, 1998, the bank
increased the line of credit to $1,700,000 to reflect borrowing needs for our
newly acquired subsidiary, Paragon Audio Visual Ltd.
3. Inventory
Inventory consisted of the following:
March 31, 1998 March 31, 1997
-------------- --------------
Raw materials 781,779 618,961
WIP 603,282 490,234
Finished goods 786,698 539,535
---------- ----------
Total $2,171,759 $1,648,730
========== ==========
4. New Accounting Pronouncement
In 1998, Optelecom adopted FASB Statement No.130, "Reporting
Comprehensive Income." Comprehensive Income includes net income and other
changes in assets and liabilities not reported in net income, but instead
reported as a separate component of stockholders equity. During the three months
ended March 31, 1998, the Company had comprehensive income that approximated net
income.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Set forth below is management's discussion and analysis of the
Company's financial condition and results of operations.
6
<PAGE>
Results of Operations
In 1998, year-to-date revenues were $4,380,922 with a net loss of
$(43,704) compared to same-period revenues of $2,678,211 and net income of
$167,859 in 1997. The 1998 results are reflective of the amortization of
goodwill and intangibles of $113,000, and interest expenses of $58,385 related
to the Paragon acquisition.
Communication Products Division
Communication Products Division (CPD) had first quarter revenues of
$2,398,088. This compares to $2,123,853 for the same period in 1997. The CPD
group had an operating loss of $(73,823) compared to an operating net income of
$145,448 in 1997. Recently, cost control efforts in Manufacturing and other
support groups have not kept pace with increased overheads and G&A. Management
intends to make adjustments in the organization to return to profitability.
Government Products Division
Revenues for the Electro-Optics Technology Group were $134,335 for the
first quarter of 1998 compared to $155,866 for the first quarter of 1997. The
group achieved an operating income of $8,154 for the first quarter, which was an
improvement over the loss of $(1,664), incurred in the same quarter of 1997. The
revenue consists primarily of contract work for winding fiber optic gyro coils
booked in the last half of 1997. The profit reflects reductions achieved through
lower cost allocations due to more efficient use of floor space.
Laser Illuminator Group revenues were $301,946 for the quarter compared
to $338,492 for the equivalent period of 1997; operating income was $179,486
compared to $149,517 for the same quarter in 1997. The decrease in revenue in
the first quarter of 1998 was due to lower delivery requirements by the United
States Air Force.
Costs incurred in the first quarter of 1998 associated with a new
business activity were expensed in the Government Products Division; this
activity had no revenue and costs of $(103,639) for the first quarter of 1998.
There were no corresponding prior year expenses for this effort.
Paragon Audio Visual Ltd.
In December of 1997, Optelecom acquired Paragon Audio Visual Ltd. The
first quarter of 1998 reflects the first full quarter of combined operations
recorded by the Company. The revenues for this wholly owned subsidiary were
$1,546,553 as of March 31, 1998 with operating income of $117,724.
Company backlog at the end of March 31, 1998 was $1,892,433.
Liquidity and Capital Resources
Changes in the Company's financial condition in the first quarter of
1998 were primarily due to the acquisition of Paragon. The current ratio was
1.48 as of March 31, 1998 compared to 1.62 on December 31, 1997 and 2.7 at the
end of the first quarter of 1997. The overall cash (used in)/provided by
operating activities for the first three months of 1998 was $(62,007) compared
to $122,972 the first three months of 1997. The major reason for the negative
cash flow was due to a general increase in inventories and accounts receivable
and payment of income tax related to the Paragon acquisition.
7
<PAGE>
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
None
ITEM 2 - CHANGES IN SECURITIES
None
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5 - OTHER INFORMATION
None
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
The Company filed a Form 8-K/A on February 25, 1998 reporting
its acquisition of Paragon Audio Visual Ltd. with inclusion of
Paragon's audited financial statements.
EXHIBIT 11 - STATEMENT REGARDING COMPUTATION OF NET INCOME (LOSS) PER
SHARE
The 1997 results are reflective of a stock dividend effective
in November 1997.
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 1998 March 31, 1997
------------------ ------------------
<S> <C>
Basic
Average common shares outstanding 2,032,471 1,811,361
Net (loss) income $ (43,704) $ 167,859
Basic earnings per share $ (0.02) $ 0.09
Diluted
Average common shares and common
share equivalents outstanding 2,032,471 1,928,832
Net (loss) income $ (43,704) $ 167,859
Diluted earnings per share $ (0.02) $ 0.09
</TABLE>
8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OPTELECOM, INC.
Date: _________________________________________
Edmund D. Ludwig, President and CEO
Date: _________________________________________
Robert S. Lalley, Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1998
<CASH> 390,907
<SECURITIES> 0
<RECEIVABLES> 3,526,919
<ALLOWANCES> (122,737)
<INVENTORY> 2,171,759
<CURRENT-ASSETS> 6,846,385
<PP&E> 3,207,213
<DEPRECIATION> (1,793,095)
<TOTAL-ASSETS> 12,689,636
<CURRENT-LIABILITIES> 4,616,197
<BONDS> 0
0
0
<COMMON> 61,032
<OTHER-SE> 5,701,221
<TOTAL-LIABILITY-AND-EQUITY> 12,689,636
<SALES> 4,380,922
<TOTAL-REVENUES> 4,380,922
<CGS> 4,368,080
<TOTAL-COSTS> 4,368,080
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 75,520
<INCOME-PRETAX> (62,678)
<INCOME-TAX> (18,974)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (43,704)
<EPS-PRIMARY> (0.02)
<EPS-DILUTED> (0.02)
</TABLE>
