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 June 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 August 5, 1998 2,123,408
1
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OPTELECOM, INC.
FORM 10-Q
CONTENTS
PART I. FINANCIAL INFORMATION
ITEM 1. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S><C>
Condensed Consolidated Balance Sheets as of June 30, 1998
and December 31, 1997..................................................... 3
Condensed Consolidated Statements of Operations for the Three Months
Ended June 30, 1998 and 1997 ............................................. 4
Condensed Consolidated Statements of Operations for the Six Months
Ended June 30, 1998 and 1997 ............................................. 5
Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 1998 and 1997 ................................................... 6
Notes to Condensed 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 Income (Loss) per share........ 11
Signatures ..................................................................... 11
</TABLE>
2
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OPTELECOM, INC.
Condensed Consolidated Balance Sheets
As of June 30, 1998 and December 31, 1997 (Unaudited)
ASSETS 1998 1997
------ ---------- --------
Current Assets:
Cash and cash equivalents $ 588,986 $ 242,656
Restricted cash 327,123 728,000
Accounts and contracts receivable 3,201,701 3,102,904
Note receivable - related party 40,000 40,000
Inventories 2,075,782 1,752,873
Prepaid expenses and other assets 306,916 334,530
Deferred tax asset 200,874 200,874
----------- -----------
Total current assets 6,741,382 6,401,837
Intangible Assets, net 2,486,037 2,614,062
Goodwill, net 1,849,126 1,914,785
Property and Equipment, at cost less
accumulated depreciation 1,437,739 1,265,550
Deferred Tax Asset 13,507 13,507
----------- -----------
TOTAL ASSETS $12,527,791 $12,209,741
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Demand note payable $ 1,510,022 $ 300,000
Accounts payable 1,513,870 1,640,460
Payable under factoring agreement --- 362,868
Accrued payroll 234,821 266,936
Accrued annual leave 146,340 138,661
Income taxes payable 327,123 728,000
Other current liabilities 279,931 300,384
Current portion of notes payable 520,830 208,332
----------- -----------
Total current liabilities 4,532,937 3,945,641
Long Term Liabilities:
Notes payable 1,984,068 2,291,668
Deferred rent liability 160,952 172,613
----------- -----------
Total long-term liabilities 2,145,020 2,464,281
----------- -----------
TOTAL LIABILITIES 6,677,957 6,409,922
----------- -----------
Stockholders' Equity
Common Stock - par value $.03 per share,
Authorized 15,000,000 shares at June 30, 1998,
5,000,000 shares at December 31, 1997, issued and
outstanding 2,115,670 and 2,032,137 63,470 60,964
Discount on common stock (11,161) (11,161)
Additional paid-in capital 4,017,028 3,812,638
Retained earnings 1,780,497 1,937,378
----------- -----------
Total stockholders' equity 5,849,834 5,799,819
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $12,527,791 $12,209,741
=========== ===========
The accompanying notes are an integral part of this statement.
3
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OPTELECOM, INC.
Condensed Consolidated Statements of Operations
for the Three Months Ended June 30, 1998 and 1997
(UNAUDITED)
Three Months Three Months
Ended Ended
June 30, 1998 June 30, 1997
------------- -------------
Revenue $4,232,214 $3,523,962
Direct Costs, Overhead and G&A 4,228,577 3,063,961
---------- ----------
Operating Income 3,637 460,001
Interest (Expense) Income (95,084) 144
Amortization of Goodwill (47,870) ---
---------- ----------
(Loss) Income Before Income Taxes (139,317) 460,145
Benefit (Provision) for Income Taxes 26,140 (164,239)
---------- ----------
Net (Loss) Income $(113,177) $ 295,906
========== ==========
Basic (Loss) Earnings Per Share $ (0.05) $ 0.16
Diluted (Loss) Earnings Per Share $ (0.05) $ 0.15
The accompanying notes are an integral part of this statement.
4
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OPTELECOM, INC.
Condensed Consolidated Statements of Operations
for the Six Months Ended June 30, 1998 and 1997
(UNAUDITED)
Six Months Six Months
Ended Ended
June 30, 1998 June 30, 1997
------------- -------------
Revenue $8,613,136 $6,202,173
Direct Costs, Overhead and G&A 8,549,680 5,448,871
---------- ----------
Operating Income 63,456 753,302
Interest (Expense) Income (169,712) (2,098)
Amortization of Goodwill (95,739) ---
---------- ----------
(Loss) Income Before Income Taxes (201,995) 751,204
Benefit (Provision) for Income Taxes 45,114 (287,439)
---------- ----------
Net (Loss) Income $(156,881) $ 463,765
========== ==========
Basic (Loss) Earnings Per Share $ (0.08) $ 0.25
Diluted (Loss) Earnings Per Share $ (0.08) $ 0.24
The accompanying notes are an integral part of this statement.
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OPTELECOM, INC.
Consolidated Statements of Cash Flows
as of June 30, 1998 and 1997
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended June 30
1998 1997
----- ----
<S><C>
Operating Activities
Net (Loss) Income $(156,881) $ 463,765
Adjustments to reconcile net (loss) income to net
cash provided by (used in) operating activities:
Depreciation and amortization 392,951 134,110
Gain on sale of equipment (112) (15,357)
Deferred rent (11,661) (7,643)
Common stock issued for services --- 8,000
Change in assets and liabilities:
Accounts and contracts receivable (98,797) (1,270,886)
Inventories (322,909) (230,505)
Prepaid expenses and other assets 27,614 (84,003)
Restricted cash 400,877 ---
Accounts payable (126,590) 664,894
Accrued payroll (32,115) 17,436
Accrued annual leave 7,679 37,478
Other current liabilities (20,453) 228,949
Income taxes payable (400,877) ---
---------- ---------
Net cash (used in) operating activities (341,274) (53,762)
Investing Activities
Proceeds from sale of equipment 2,975 22,000
Capital expenditures (374,319) (239,535)
---------- ---------
Net cash used in investing activities (371,344) (217,535)
Financing Activities
Borrowings on note payable to bank 1,214,920 100,000
Payments under factoring agreement (362,868) ---
Payments on long term debt --- (46,426)
Proceeds from stock options 206,896 41,908
---------- ---------
Net cash provided by financing activities 1,058,948 95,482
---------- ---------
Net increase (decrease) in cash and cash equivalents 346,330 (175,815)
Cash and cash equivalents - beginning of period 242,656 266,575
---------- ---------
Cash and cash equivalents - end of period $ 588,986 $ 90,760
========== =========
Supplemental Disclosures of Cash Flow Information
Cash Paid During the Period for Interest $ 165,212 $ 902
Cash paid during the Period for Income Taxes $ 13,000 $ 15,000
</TABLE>
The accompanying notes are an integral part of this statement.
6
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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 (all of which are of a normal,
recurring nature) 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 1/4%. 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 June 30, 1998 is approximately $190,000. On
April 30, 1998, the bank renewed the line of credit through April 30, 1999.
3. Inventory
Inventory consisted of the following:
June 30, 1998 December 31, 1997
------------- -----------------
Raw materials $ 721,096 $ 591,768
WIP 404,802 455,648
Finished goods 1,075,617 798,141
Less: Inventory allowance (125,733) (92,684)
---------- ----------
Total $2,075,782 $1,752,873
========== ==========
The increase in inventory relates primarily to the consolidation of assets
belonging to Paragon Audio Visual Limited, purchased in December, 1997.
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.
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
7
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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
six months ended June 30, 1998, the Company had comprehensive income that
approximated net income.
In June 1998, the Financial Accounting Standard Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 is
effective for years beginning after June 15, 1999 and requires the recognition
of all derivatives at fair value as either assets or liabilities in the
statement of financial position. Under certain conditions, a derivative may be
designated as a hedging instrument. For a derivative not designated as a hedging
instrument, any gain or loss in fair value is recognized in earnings in the
period of change. For a derivative instrument designated as a hedge, earnings or
comprehensive income will reflect the extent to which the hedge is not effective
in achieving offsetting changes in fair value in the period of change. The
Company does not believe that adoption of SFAS No. 133 will have a material
impact on its financial position or results of operations.
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.
The following discussion contains forward-looking statements that
involve risks and uncertainties. The Company's actual results for future periods
could differ materially from those discussed herein. Factors that could cause or
contribute to such differences include, but are not limited to, those discussed
in this section.
Results of Operations
In 1998, year-to-date revenues were $8,613,136 with operating income of
$63,456 compared to same-period revenues of $6,202,173 and an operating income
of $753,302 in 1997. The 1998 revenue increase relates to its Paragon
subsidiary, acquired in December 1997. Operating income for 1998 reflects
$130,703 of amortization of Paragon intangibles and interest expense of $165,212
relating primarily to the acquisition and operation of Paragon. Operating income
was also negatively impacted by the lower sales by the Laser Illuminator Group
in 1998 compared to 1997.
Communication Products Division
Communication Products Division (CPD) had second quarter revenues of
$2,384,346. This compares to $2,809,379 for the same period in 1997. The CPD
group had an operating income of $144,521 compared to operating income of
$172,704 in 1997. Management was able to maintain operating margins in 1998
despite a decrease in sales compared to 1997. Cost controls instituted during
the first and second quarter of 1998 resulted in a $72,000 improvement in
operating income in the second quarter on even sales as compared to the first
quarter.
Government Products Division
Revenues for the Electro-Optics Technology Group were $113,959 for the
second quarter of 1998 compared to $206,063 for the second quarter of 1997. The
group achieved an operating income of $38,650 for the second quarter, which was
an improvement over the $29,576, for the same quarter of 1997. The second
quarter 1998 operating margin improvement is largely a result of group labor
allocations to new business development.
8
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Laser Illuminator Group revenues were $199,934 for the quarter compared to
$508,520 for the equivalent period of 1997; operating income was $83,109
compared to $320,581 for the same quarter in 1997. The decrease in revenue in
the second quarter of 1998 was due to lower delivery requirements by the United
States Air Force. Management anticipates forecasted government orders to result
in improved revenue and operating profit during the second half of 1998.
Costs incurred in the second quarter of 1998 associated with a new
business activity were expensed in the Government Products Division; this
activity had no revenue and costs of $130,477 for the second quarter and
$226,332 for the first half 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
second quarter of 1998 reflects the second full quarter of combined operations
recorded by the Company. The revenues for this wholly owned subsidiary were
$1,533,975 as of June 30, 1998 with an operating loss of $70,330.
Liquidity and Capital Resources
Changes in the Company's financial condition in the second quarter of 1998
were primarily due to the acquisition of Paragon. The current ratio was 1.49 as
of June 30, 1998 compared to 1.62 on December 31, 1997 and 2.24 at the end of
the second quarter of 1997. The overall cash used in operating activities for
the six months ended June 30, 1998 was $341,274 compared to $53,762 the six
months ended June 30, 1997. The major reasons for the negative cash flow were an
increase in inventories, a decrease in accounts payable and an overall increase
in research and development activities.
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.
Company backlog at the end of June 30, 1998 was $1,650,267.
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 has been 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 20000 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 cost of this project is not deemed to be significant, and it has
not been, and is not anticipated to be, material to the Company's financial
position or results of operations in any fiscal year. These costs and the time
at which the Company plans to complete any Year 2000 modifications are based on
management's best estimates, which were derived utilizing numerous assumptions
of future events including the continued availability of certain resources,
third party modification plans and other factors.
9
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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
The annual meeting of shareholders was held on May 4, 1998. The
following items were submitted to shareholders for a vote:
1. The election of Edmund D. Ludwig to hold office as a
director for a term of three years and until his successor
shall be elected and shall qualify.
In Favor of: 1,710,998 Authority Withheld: 35,342
2. The approval of an amendment to the certificate of
incorporation to increase the authorized capital stock from
5,000,000 shares to 15,000,000 shares.
In Favor of: 1,480,111 Opposed: 258,029
3. The approval of an amendment to the 1996 Directors
Stock Option Plan to increase the number of shares which may
be issued upon exercise of options from 75,000 shares to
200,000 shares.
In Favor of: 820,415 Opposed: 320,225
ITEM 5 - OTHER INFORMATION
On June 15, 1998, the Company adopted a shareholders rights plan
that provides for a dividend distribution of one right for each
outstanding share of common stock. In the event that, following the
Distribution Date (as defined in the 8-A filing) a person is or becomes
the beneficial owner of 10% or more of the then-outstanding shares of
Common Stock, each Right Holder may purchase three (3) shares of Common
Stock at a price per share equal to 50% of the then current market price
of the Common Stock. The Company filed a form 8-A on June 30, 1998
reporting its adoption of the Plan. As of June 30, 1998, the Company has
reserved 5,400,000 shares of authorized but unissued common stock for
issuance under the shareholders rights plan.
On May 4, 1998, the Board of Directors elected David Brown to serve
as a director, until the annual meeting of Stockholders in 1999, replacing
Calvin T. Mathews.
On May 20, 1998, the Company filed a registration statement of Form
S-3 to register common shares issued in December 1997 for the Purchase of
Paragon.
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ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
None
ITEM 11 - STATEMENT REGARDING COMPUTATION OF NET INCOME (LOSS) PER SHARE
The 1997 results are reflective of a stock dividend effective in
November 1997.
Six Months Ended Six Months Ended
June 30, 1998 June 30, 1997
---------------- ----------------
Basic
Average common shares outstanding 2,072,231 1,820,986
Net (loss) income $(156,881) $ 463,765
Basic (loss) earnings per share $ (0.08) $ 0.25
Diluted
Average common equivalent
shares outstanding 2,072,231 1,940,553
Net (loss) income $(156,881) $ 463,765
Diluted (loss) earnings per share $ (0.08) $ 0.24
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: August 11, 1998 /s/ Edmund D. Ludwig
______________________________
Edmund D. Ludwig, President,
CEO and Interim CFO
11
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1998
<CASH> 588,986
<SECURITIES> 0
<RECEIVABLES> 3,264,438
<ALLOWANCES> (62,737)
<INVENTORY> 2,075,782
<CURRENT-ASSETS> 6,741,382
<PP&E> 3,317,199
<DEPRECIATION> (1,879,460)
<TOTAL-ASSETS> 12,527,791
<CURRENT-LIABILITIES> 4,532,937
<BONDS> 0
0
0
<COMMON> 63,470
<OTHER-SE> 5,786,364
<TOTAL-LIABILITY-AND-EQUITY> 12,527,791
<SALES> 4,232,214
<TOTAL-REVENUES> 4,232,214
<CGS> 4,228,577
<TOTAL-COSTS> 4,228,577
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (95,084)
<INCOME-PRETAX> (139,317)
<INCOME-TAX> 26,140
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (113,177)
<EPS-PRIMARY> (0.05)
<EPS-DILUTED> (0.05)
</TABLE>
