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 September 30, 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 November 8, 1998 2,125,235
---------
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OPTELECOM, INC.
FORM 10-Q
CONTENTS
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PART I. FINANCIAL INFORMATION
ITEM 1. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets as of September 30, 1998
and December 31, 1997........................................... 3
Consolidated Statements of Operations for the Three Months
Ended September 30, 1998 and 1997 .............................. 4
Consolidated Statements of Operations for the Nine Months
Ended September 30, 1998 and 1997 .............................. 5
Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 1998 and 1997 .................................... 6
Notes to Consolidated Financial Statements...................... 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS...................................................... 8
PART II. OTHER INFORMATION
Item 11 - Statement regarding Computation of Net (Loss) Income per share........ 13
Signatures ..................................................................... 14
</TABLE>
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OPTELECOM, INC.
Consolidated Balance Sheets
As of September 30, 1998 and December 31, 1997
(UNAUDITED)
ASSETS
------
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<CAPTION>
1998 1997
----------- -----------
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Current Assets:
Cash and cash equivalents $ 366,199 $ 242,656
Restricted cash 337,154 728,000
Accounts and contracts receivable 2,901,886 3,102,904
Note receivable - related party 40,000 40,000
Inventories 2,003,592 1,752,873
Prepaid expenses and other assets 374,352 334,530
Deferred tax asset 200,874 200,874
----------- -----------
Total current assets 6,224,057 6,401,837
Intangible Assets, net 2,417,187 2,614,062
Goodwill, net 1,877,106 1,914,785
Property and equipment, net 1,438,970 1,265,550
Deferred tax asset 13,507 13,507
----------- -----------
TOTAL ASSETS $11,970,827 $12,209,741
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Bank line-of-credit payable $ 1,200,000 $ 300,000
Accounts payable 1,493,228 1,640,460
Payable under factoring agreement --- 362,868
Accrued payroll 242,841 405,597
Income taxes payable 355,209 728,000
Deferred revenue 183,924 ---
Other current liabilities 281,808 300,384
Current portion of notes payable 625,390 208,332
----------- -----------
Total current liabilities 4,382,400 3,945,641
Long-term Liabilities:
Notes payable 1,822,921 2,291,668
Deferred rent liability 154,609 172,613
----------- -----------
Total long-term liabilities 1,977,530 2,464,281
----------- -----------
Commitments and contingencies --- ---
TOTAL LIABILITIES 6,359,930 6,409,922
----------- -----------
Stockholders' Equity
- --------------------
Common Stock - par value $.03 per share,
Authorized 15,000,000 shares at
September 30, 1998, 5,000,000 shares at
December 31, 1997, issued and
outstanding 2,123,833 and 2,032,137 63,715 60,964
Discount on common stock (11,161) (11,161)
Additional paid-in capital 4,043,891 3,812,638
Foreign currency translation 2,844 ---
Retained earnings 1,511,608 1,937,378
----------- -----------
Total stockholders' equity 5,610,897 5,799,819
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $11,970,827 $12,209,741
=========== ===========
</TABLE>
The accompanying notes are an integral part of this statement.
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OPTELECOM, INC.
Consolidated Statements of Operations
(UNAUDITED)
Three Months Ended September 30,
1998 1997
---------- ----------
Revenues $4,180,177 $3,179,442
Cost of goods sold 2,404,622 1,591,604
---------- ----------
Gross profit 1,775,555 1,587,838
Operating expenses:
Research and development 466,547 278,975
Selling and marketing 672,265 373,278
General and administrative 764,170 431,389
---------- ----------
Total operating expenses 1,902,982 1,083,642
Operating (loss) income (127,427) 504,196
Other expenses: 5,969
Interest expense 93,304
Amortization of goodwill 48,157 ---
---------- ----------
Total other expenses 141,461 5,969
(Loss) income before income taxes (268,888) 498,227
(Benefit) provision for income taxes --- 131,120
---------- ----------
Net (loss) income $ (268,888) $ 367,107
========== ==========
Basic (loss) earnings per share $ (0.13) $ 0.20
Diluted (loss) earnings per share $ (0.13) $ 0.19
The accompanying notes are an integral part of this statement.
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OPTELECOM, INC.
Consolidated Statements of Operations
(UNAUDITED)
Nine Months Ended September 30,
1998 1997
----------- ----------
Revenues $12,793,313 $9,381,615
Cost of goods sold 7,575,103 4,955,206
----------- ----------
Gross profit 5,218,210 4,426,409
Operating expenses:
Research and development 1,309,892 872,133
Selling and marketing 1,781,715 1,180,641
General and administrative 2,195,074 1,116,137
----------- ----------
Total operating expenses 5,286,681 3,168,911
Operating (loss) income (68,471) 1,257,498
Other expenses:
Interest Expense 258,517 8,067
Amortization of goodwill 143,896 ---
----------- ----------
Total other expenses 402,413 8,067
(Loss) income before income taxes (470,884) 1,249,431
(Benefit) provision for income taxes (45,114) 418,559
----------- ----------
Net (loss) income $ (425,770) $ 830,872
=========== ==========
Basic (loss) earnings per share $ (0.20) $ 0.45
Diluted (loss) earnings per share $ (0.20) $ 0.43
The accompanying notes are an integral part of this statement.
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OPTELECOM, INC.
Consolidated Statements of Cash Flows
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1998 1997
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Operating Activities
- --------------------
Net (Loss) Income $(425,770) $ 830,872
Adjustments to reconcile net (loss) income to net
cash used in operating activities:
Depreciation and amortization 631,847 204,906
Loss(Gain) on sale/disposal of equipment 835 (15,357)
Deferred rent (18,004) (13,513)
Effect of currency translations 2,844 ---
Common stock issued for services --- 8,000
Change in assets and liabilities:
Accounts and contracts receivable 201,018 (1,507,666)
Inventories (250,719) (177,594)
Prepaid expenses and other assets (39,822) (100,557)
Restricted cash 390,846 ---
Accounts payable (147,232) 224,407
Accrued payroll (162,756) (8,096)
Deferred revenues 183,924 ---
Other current liabilities (18,576) 410,742
Income taxes payable (372,791) ---
--------- -----------
Net cash used in operating activities (24,356) (143,856)
Investing Activities
- --------------------
Proceeds from sale of equipment 2,972 22,000
Capital expenditures (465,624) (381,546)
Additional investment in Paragon (108,896) ---
--------- -----------
Net cash used in investing activities (571,548) (359,546)
Financing Activities
- --------------------
Increase in bank line-of-credit payable 900,000 300,000
Payments under factoring agreement (362,868) ---
Payments on long term debt (51,689) (46,426)
Proceeds from stock options 234,004 51,868
--------- -----------
Net cash provided by financing activities 719,447 305,442
--------- -----------
Net increase (decrease) in cash and cash equivalents 123,543 (197,960)
Cash and cash equivalents - beginning of period 242,656 266,575
--------- -----------
Cash and cash equivalents - end of period $ 366,199 $ 68,615
========= ===========
Supplemental Disclosures of Cash Flow Information
Cash paid during the period for interest $ 258,517 $ 10,016
--------- -----------
Cash paid during the period for income taxes $ 403,846 $ 15,000
--------- -----------
</TABLE>
The accompanying notes are an integral part of this statement.
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OPTELECOM, INC.
Notes to 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 accompanying unaudited financial
statements reflect all necessary adjustments that are necessary for fair
presentation of the Company's financial position, results of operations and cash
flows for the periods presented. Interim period results are unaudited and are
not necessarily indicative of results of operations or cash flows for a full
year period. 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
$1,700,000 with interest at the bank's prime rate plus 1/2%. The total amount of
borrowings which may be outstanding at any given time is based upon a percentage
of certain consolidated eligible receivables. The amount available under the
credit agreement as of September 30, 1998 is $500,000. The line-of-credit
expires on April 30, 1999.
3. Inventory
---------
Inventory consisted of the following:
September 30, 1998 December 31, 1997
------------------ -----------------
Raw materials $ 671,644 $ 591,768
WIP 445,236 455,648
Finished goods 1,041,353 798,141
Less: Inventory reserves (154,641) (92,684)
---------- ----------
Total $2,003,592 $1,752,873
========== ==========
4. Income (Loss) Per Share
-----------------------
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standard No. 128 "Earnings per Share" ("SFAS 128"). Amounts reported
for 1997 have been restated to reflect the adoption of SFAS 128 and the effects
of a three-for-two stock split declared on November 11, 1997.
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5. New Accounting Pronouncements
-----------------------------
In 1998, Optelecom adopted SFAS No.130, "Reporting Comprehensive Income"
and SFAS N0. 131, "Disclosures About Segments of an Enterprise and Related
Information." SFAS No. 131 redefines how operating segments are determined and
requires disclosure of certain financial and descriptive information about the
Company's operating segments. The Company is continuing to assess operating
segments on which it may report. 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 nine months
ended September 30, 1998, the Company had comprehensive income of approximately
$2,900 greater than net income due to gains on foreign currency translations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Except for the historical financial information contained herein, the
following discussion and analysis may contain "forward looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Such statements
include declarations regarding the intent, belief or current expectations of the
Company and its management. Prospective investors are cautioned that any such
forward looking statements are not guarantees of future performance and involve
a number of risks and uncertainties; actual results could differ materially from
those indicated by such forward looking statements.
The following discussion should be read in conjunction with the Financial
Statements and Notes thereto.
OVERVIEW
Optelecom, Inc. designs, manufactures and markets video communication
products, specializing in transmission and distribution equipment for the
delivery of real time video. The Company's integrated video solutions include
fiber optic transmission, UTP copper distribution, and digital video conversion
and access products. From simple baseband transmitters and baluns to complex
broadband systems and video distribution switches, Optelecom offers innovative
technologies that meet its customers' needs.
Through 1998, the Company was organized into three operating divisions:
the Communications Products Division (CPD), which develops, manufactures, and
sells optical fiber-based data communication equipment to the commercial
marketplace, the Government Products Division (GPD) which is primarily focused
on electro-optic technology development for government related defense business,
and Paragon Audio Visual Ltd., (Paragon), located in the United Kingdom.
Paragon, which was acquired at the end of 1997, is a wholly owned subsidiary of
Optelecom, Inc. Paragon designs and markets electronic communication products
and systems utilizing copper cabling as the transmission media. GPD is composed
of two operating groups, Electro/Optics (E/O) Technology and Laser Illuminator
Technology.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1997
REVENUE
Revenues recognized were $4,180,177 and $3,179,442 for the three months
ended September 30, 1998 and 1997, respectively. The increase of $1,000,735, or
31%, was largely due to the acquisition of Paragon, offset by a decline in
contract sales for the U.S. Air Force's C-130 Gunship laser illuminator system
("GLINT") supported by Optelecom, Inc. The increase in revenues attributed to
Paragon was approximately $1.4 million and the decline in
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sales under the GLINT contract was $350,000. For the year, the Company expects a
decline in revenues under the GLINT contract of approximately $600,000 over the
prior year.
GROSS PROFIT
Gross profits for the three months ended September 30, 1998 and 1997 were
$1,775,555 and $1,587,838, respectively. The increase over 1997 was attributed
to the increase in revenues in the third quarter of 1998 compared to 1997. Gross
margins as a percentage of revenues were 42% and 50% for the third quarters of
1998 and 1997, respectively. The decrease in gross margins for the third quarter
is attributed primarily to product mix and an increase in inventory reserves
recorded in the third quarter. Paragon's revenues realized lower gross margins
of approximately 26% and GLINT revenues had a decline in gross margins to 63% in
1998 as compared to 77% in the same quarter for 1997. Approximately $60,000 in
additional inventory reserves related to obsolescence of discontinued products
was recorded during the third quarter of 1998. Gross margins for other product
lines remained unchanged.
RESEARCH AND DEVELOPMENT
Research and development costs for the three months ended September 30,
1998 and 1997 were $466,547 and $278,975 , respectively. Research and
development costs as a percentage of revenues were 11% for the third quarter of
1998 and 9% for the third quarter of 1997. The increase over 1997 is attributed
to increases in research and development staffing levels, prototype materials,
outside design consultants and new product development. The Company continues to
focus on enhancements to core technologies by improvements in manufacturability
combined with new feature enhancements. A significant effort was undertaken
during the year to rationalize its product lines for its commercial products
sector. The Company expended funds approximating $100,000 during the third
quarter of 1998 related to research efforts for high speed optical components.
SELLING AND MARKETING
Selling and marketing costs were $672,265 and $373,278 for the three
months ended September 30, 1998 and 1997, respectively. The increase of $298,987
in the third quarter of 1998 compared with the same period in 1997 is attributed
to increased costs from Paragon. Additionally, the Company increased bad debt
reserves by $100,000 based on current sales volume and to reflect the Company's
historical experience for bad debt write-offs as a percentage of revenue.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $764,170 and $431,389 for the
third quarter 1998 and 1997, respectively. The increase in expenses of $332,781
in the third quarter of 1998 compared to 1997 is attributed to expenses
associated with Paragon, amortization of intangibles acquired from Paragon,
increased facility costs and related to employee termination costs.
OTHER EXPENSES
Other expenses for the three months ended September 30, 1998 and 1997 were
$141,666 and $5,969, respectively. The increase of $135,697 in 1998 compared
with 1997 is attributed to interest expense resulting from acquisition debt and
amortization of the goodwill from the Paragon acquisition.
INCOME TAXES
No income tax provision (benefit) was recorded during the third quarter of
1998 compared with income tax expense of $131,120 for the third quarter of 1997.
During the third quarter of 1998, the Company had a loss before income taxes of
$269,000. A portion of this loss is attributable to Paragon, a U.K. company.
Paragon's losses are not available for current utilization, or resulting tax
benefit, in either the United States or the U.K. The remaining income tax
(benefit) provision resulting from third quarter results is offset by the
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Company's adjustment of its tax provision (benefit) to its 1997 tax returns that
were completed during the third quarter. The effective tax rate during the third
quarter of 1997 was 25% since all taxable income was subject to U.S. income
taxes in 1997.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1997
REVENUE
Revenues recognized were $12,793,313 and $9,381,615 for the nine months
ended September 30, 1998 and 1997, respectively. The increase of $3,411,698 or
36% was largely due to the acquisition of Paragon, offset by a decline in
contract sales for GLINT. The increase in revenues attributed to Paragon was
approximately $3.4 million and the decline in sales under the GLINT contract was
$600,000. The Company anticipates that revenues under the GLINT contract for the
fourth quarter will continue at the same rate as the first nine months of 1998.
GROSS PROFIT
Gross profits for the nine months ended September 30, 1998 and 1997 were
$5,218,210 and $4,426,409, respectively. The increase over 1997 of $791,801 was
attributed to the increase in revenues for the nine months of 1998 compared to
1997. Gross margins for the same period as a percentage of revenues were 41% and
47%, respectively. The decrease in gross margins for the nine months ended
September 30, 1998 compared to the same period ended September 30, 1997 is
attributed primarily to product mix. Lower gross margins are realized for
Paragon's revenues (average of 26%) and the decline of GLINT revenues, which had
gross margins of 61% in 1998 compared to 72% for the nine months ended September
30, 1997. Gross margins for other product lines remained unchanged.
RESEARCH AND DEVELOPMENT
Research and development costs for the nine months ended September 30,
1998 and 1997 were $1,309,892 and $872,133, respectively. Research and
development costs as a percentage of revenues were 10% for the nine months ended
September 30, 1998 and 9% for the same period in 1997. The increase over 1997 is
attributed to increases in research and development staffing levels, prototype
materials, outside design consultants and new product development. The Company
continues to focus on enhancements to core technologies by improvements in
manufacturability combined with new feature enhancements. A significant effort
was undertaken during the year to rationalize its product lines for its
commercial products sector. The Company expended funds approximating $350,000
for the nine months ended September 30, 1998 related to research efforts for
high speed optical components.
SELLING AND MARKETING
Selling and marketing costs were $1,781,715 and $1,180,641 for the nine
months ended September 30, 1998 and 1997, respectively. The increase of $601,074
during 1998 compared with the same period in 1997 is attributed to increased
costs from Paragon. Bad debt reserves were increased by $140,000 based on
current sales volume and to reflect the Company's historical experience for bad
debt write-offs as a percentage of revenue.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $2,195,074 and $1,116,137 for the
nine months ended September 30, 1998 and 1997, respectively. The increase in
expenses of $1,078,937 in 1998 compared to 1997 is attributed to expenses
associated with Paragon, amortization of intangibles acquired from Paragon,
increased facility costs, and costs related to employee termination.
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OTHER EXPENSES
Other expenses for the nine months ended September 30, 1998 and 1997 were
$402,617 and $8,067, respectively. The increase of $394,550 in 1998 compared
with 1997 is attributed to interest expense resulting from acquisition debt and
amortization of the goodwill from the Paragon acquisition.
INCOME TAXES
An income tax benefit of $45,114 was recorded for the nine months ended
September 30, 1998 compared with income tax expense of $418,559 for the nine
months ended September 30, 1997. The effective tax rate for the nine months
ended September 30, 1998 was 10% compared with 33% for the same period in 1997.
The difference in the rates is attributed to the tax losses generated by its
U.K. subsidiary Paragon that are not available for utilization for United States
tax purposes.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998 the Company had combined balances of cash and cash
equivalents of $366,199 compared with $242,656 at December 31, 1997.
Cash used in operating activities approximated $24,000 in 1998 and is
primarily the result of its net loss adjusted for depreciation and amortization
and partially offset by increases in inventory and decreases in accounts
receivables. Net cash of $571,548 was used for purchasing property and equipment
and paying additional acquisition expenses for Paragon. The Company continues to
invest in capital equipment to support its employee and facility growth and its
research and development and manufacturing activities.
The Company has a working capital line-of-credit with a bank for an amount
up to $1,700,000 with interest at the bank's prime rate plus 1/2%. The amount
available on the line is based on a percentage of eligible receivables.
The Company's future capital requirements depend on many factors,
including continued research and development activities, competing technological
and market developments, and successful full integration of Paragon, its U.K.
subsidiary. The Company expects to fund operations over the next 12 months from
its available working capital line and operating cash flows.
Company backlog at the end of September 30, 1998 was $2,100,041.
YEAR 2000 POTENTIAL ISSUES
The Company is currently engaged in a comprehensive project to upgrade its
information, technology and manufacturing and facilities computer software to
programs that will consistently and properly recognize the Year 2000. Many of
the Company's systems include new hardware and packaged software recently
purchased from large vendors who have represented that these systems are already
Year 2000 compliant. The Company is in the process of obtaining assurances from
vendors that timely updates will be made available to make all remaining
purchased software Year 2000 compliant. The manufacturing related computer
system was rendered compliant as of August 5, 1998.
The Company will utilize both internal and external resources to reprogram
or replace and test all of its software for Year 2000 compliance, and the
Company expects to complete the project in mid 1999. Failure by the Company
and/or vendors and customers to complete Year 2000 compliance work in a timely
manner could have a material adverse effect on certain of the Company
operations. The costs of this project have not been determined, however the
costs associated with this project could be material to the Company's financial
position or results of operations in any fiscal year. The Company anticipates
that it will determine the cost of this project by the first quarter of 1999.
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RISK FACTORS
FLUCTUATIONS IN FINANCIAL PERFORMANCE
The Company has experienced and may in the future continue to experience
fluctuations in its quarterly and annual operating results. Factors that may
cause the Company's operating results to vary include, among other things,
customer purchasing patterns, changing technology, new product transitions,
delays in new product introductions, shortages of system components, changes in
the mix of products and services sold, the timing of investments in additional
personnel, facilities and research and development. As a result of the impact of
these and other factors, past financial performance should not be considered to
be a reliable indicator of the future performance in any particular fiscal
period. Moreover, because the Company has been increasing its operating expenses
for personnel, facilities and product development and is limited in its ability
to reduce expenses quickly in response to any revenue shortfalls, the Company's
business, financial condition and operating results would be adversely affected
if increased revenues are not achieved. For example, the Communications Products
Division had revenues of $7,069,568 for the nine months ended September 30, 1998
compared to $7,460,848 for the same period in 1997, but an operating income of
$87,614 in the nine months ended September 30, 1998 compared to an operating
income of $539,797 for the same period in 1997. The decline in operating profits
resulted in part because the Division increased its product development
expenses, experienced a lower rate of increase in revenues than anticipated and
was unable to reduce its expenses quickly once the lower rate of revenue
increase became known. Total revenues increased to $12,793,313 for the nine
months ended September 30, 1998 compared to $9,381,615 for the same period in
1997. The increase was attributable in large part to the acquisition of Paragon
Audio Visual Limited ("Paragon") in December, 1997; Paragon's revenues of
$4,596,179 were included with those of the Company for the nine months ended
September 30, 1998 but not for the same period in 1997. The Company's results of
operations was a net loss of $425,770 for the nine months ended September 30,
1998 compared to a net income of $830,872 for the same period in 1997. The
factors contributing to the loss included expenses arising from the acquisition
of Paragon: amortization of goodwill and intangibles in the amount of $354,388
and interest expense of $222,682. Also contributing to the loss was an increase
of inventory and accounts receivables reserves of $202,000, employee termination
charges of $231,000 and a change in product mix. The Company has taken steps to
reduce its expenses, but there can be no assurance that the Company will return
to profitability in any future period.
DEPENDENCE ON MAJOR CUSTOMERS
Historically, a relatively small number of customers have accounted for a
significant portion of the Company's revenues in any particular period. For the
nine months ended September 30, 1998, approximately 35% of the Company's
revenues were accounted for by sales to the U.S. Government and three commercial
customers. The loss of the Company's contract with the U.S. Air Force (discussed
below) or its contract with one of these commercial customers, Reuters Limited
and other affiliated companies, could have a material adverse effect on the
company. The Company anticipates that sales of its products to relatively few
customers will continue to account for a significant portion of its revenues for
the foreseeable future. In the event of a reduction, delay or cancellation of
orders from one or more significant customers or if one or more significant
customers select products from one of the Company's competitors for inclusion in
future product generations, the Company's business, financial condition and
operating results could be materially and adversely affected. There can be no
assurance that the Company's current customers will continue to place orders
with the Company, that orders by existing customers will continue at current or
historical levels or that the Company will be able to obtain orders from new
customers. The loss of one or more of the Company's current significant
customers could materially and adversely affect the Company's business,
financial condition and operating results.
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One contract with the U.S. Air Force accounted for 6% of the Company's
revenues and contributed $374,000 in operating income. The Company received the
contract in January 1996. It is a four year contract, with one base year and
three one-year options exercisable at the discretion of the Air Force, under
which the Company provides services for refurbishment of equipment for the C-130
Gunship laser illuminator system (the "Glint Contract").
Government contracts are subject to audits, and contract payments in
excess of allowable costs are subject to adjustment and repayment. Audits have
been completed through 1993. Based on its interpretation of contracting
regulations and past experience, the Company believes that cost disallowances,
if any, on Government contracts will not be material, but there can be no
assurance in that regard. There can also be no assurance that the Company will
receive continuations of its existing contracts or additional contracts in the
future or that the federal government will not exercise its contractual rights
to suspend or cancel contracts, in whole or in part, on short notice. The future
revenues which the Company receives under the Glint Contract are also dependent
on U.S. Government and Air Force budgets, the defense industry, the worldwide
political situation and the continued requirements of the Air Force, including
its specific crew training schedules.
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
None
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ITEM 11 - STATEMENT REGARDING COMPUTATION OF NET INCOME (LOSS) PER
SHARE
The 1997 results are reflective of a stock dividend effective in
November 1997.
Nine Months Ended Nine Months Ended
September 30, 1998 September 30, 1997
------------------ ------------------
Basic
-----
Average common shares
outstanding 2,088,991 1,832,805
Net (loss) income $(425,770) $830,872
Basic (loss) earnings per share $ (0.20) $ 0.45
Diluted
-------
Average common equivalent shares
outstanding 2,088,991 1,944,857
Net (loss) income $(425,770) $830,872
Diluted (loss) earnings per share $ (0.20) $ 0.43
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, CEO
Date: _________________________________________
Carole D. Argo, Chief Financial Officer
14
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<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1998
<CASH> 366,199
<SECURITIES> 0
<RECEIVABLES> 3,065,167
<ALLOWANCES> (163,281)
<INVENTORY> 2,003,592
<CURRENT-ASSETS> 6,224,057
<PP&E> 3,410,397
<DEPRECIATION> (1,971,427)
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<CURRENT-LIABILITIES> 4,382,400
<BONDS> 0
0
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<COMMON> 63,715
<OTHER-SE> 5,610,897
<TOTAL-LIABILITY-AND-EQUITY> 11,970,827
<SALES> 4,180,177
<TOTAL-REVENUES> 4,180,177
<CGS> 2,404,622
<TOTAL-COSTS> 4,307,604
<OTHER-EXPENSES> 48,157
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 93,304
<INCOME-PRETAX> (268,888)
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<NET-INCOME> (268,888)
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