SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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, 1998
Commission File Number 0-8828
OPTELECOM, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE
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(State or other jurisdiction of incorporation or organization)
52-1010850
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(IRS employer identification number)
9300 GAITHER ROAD, GAITHERSBURG, MARYLAND 20877
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(Address of principal executive offices)(Zip code)
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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.
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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. [ X ]
At March 17, 1999, 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 $6,065,317, 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 17, 1999, the registrant had outstanding 2,156,557 shares of Common
Stock, $.03 Par Value.
DOCUMENTS INCORPORATED BY REFERENCE
Form 8-KA filed on February 25, 1998, reporting required financial information
from the Paragon acquisition.
Form 8-A12G filed June 30, 1998, reporting Shareholders Rights Agreement.
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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 and, through it's subsidiary, the Company provides
multi-media integrated products for sending data to the desktop over copper
wire.
The Company is organized into three operating segments: 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) which designs and markets electronic communication
products and systems utilizing copper cabling as the primary transmission
medium. Paragon, a wholly-owned UK subsidiary, was acquired in December 1997.
Fiber optic communication equipment, the main thrust of the Company's sales, is
an area of unprecedented growth and change. Technology development is constantly
and rapidly improving the capability to transmit ever increasing data rates over
even greater distances with fiber-based communication systems.
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. Compared to
copper wire, optical fibers can transmit signals at a much greater data rate
over a greater distance and without disturbance from electrical machinery,
lightning or other noise sources.
The fiber optic communication business has many parts, but can be divided
generally into two segments: the optical fiber/cable portion which supplies the
media for transporting optical signals, and the transmission equipment portion
which generates and receives optical signals. A few companies manufacture
optical fiber, while many more manufacture optical fiber cables. Optelecom
provides 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 large number of communication applications that require different
communication rates, distances and signal formats. Optelecom provides equipment
specifically designed for transmission of various combinations of voice, data
and video for a range of applications. The Company also addresses U.S.
Government defense related markets for specialized and proprietary applications
of fiber optic and laser system technology which the Company believes makes 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
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its business posture. The Company is unable to predict future defense business
activity or the related impact on the Company's business.
The table below displays the Company's three-year revenue and pretax income
(loss) by segment.
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1998 1997 1996
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PRETAX PRETAX PRETAX
(LOSS) INCOME INCOME
OPERATING SEGMENTS REVENUE INCOME REVENUE (LOSS) REVENUE (LOSS)
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Company
Totals $16,333,749 $(3,130,652) $12,271,057 $ 1,367,219 $ 8,910,263 $ 1,032,217
CPD $ 8,742,232 $ (237,357) $ 9,734,088 $ 574,789 $ 6,453,686 $ 17,543
GPD $ 1,549,730 $ 107,423 $ 2,372,950 $ 806,011 $ 2,456,577 $ 1,014,674
PARAGON AUDIO
VISUAL LIMITED $ 6,041,787 $(3,000,718) $ 164,019 $ (13,581) -- --
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See Note 14 to the financial statements for long-lived assets by segment.
PRODUCTS AND MARKETS
GOVERNMENT PRODUCTS DIVISION (GPD)
GPD consists of two operating groups: 1) The Electro/Optics Technology Group
("E/O") that provides technology development and engineering services to the
U.S. Government and its prime contractors and investigates techniques for design
and manufacture of specialized sensing coils for fiber optic gyros which is a
unique field and has few competitors; and 2) the Laser Illuminator Technology
Group ("L/I") that derives its revenues entirely from the U.S. Government and
its agencies. During 1998, GPD started a research and development effort focused
on high speed optical components for the commercial market sector.
In 1998 the group's activities continued to concentrate on interferometric fiber
optic gyros (IFOGs), which are rotation sensing instruments that are beginning
to replace mechanical and laser gyros in aircraft, missiles, and other vehicles.
Optelecom has used its expertise derived from prior activities to develop
winding technology for IFOG coils, and to manufacture these coils in production.
In 1998 significant strides were made in improving process and quality control
and increasing production capacity. A major portion of revenue is also derived
from sales of custom optical fiber coils for fiber gyro sensors and other
applications.
All the revenues generated by the L/I Group are related to its contract with the
U.S. Air Force GLINT program. GLINT is an acronym associated with the U.S. Air
Force's C-130 Gunship laser illuminator system supported by Optelecom. 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. In January 1996 the Company received a $6.5 million,
four-year contract (one base year and three one-year options) to provide
services for refurbishment of equipment for this system. The Company anticipates
additional refurbishment requirements will be completed by the end of 1999
coinciding with the contract period. Continued revenue under the contract is
highly dependent on the continued requirements of the United States Air Force.
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COMMUNICATION PRODUCTS DIVISION (CPD)
The Communication Products Division addresses business opportunities in the
worldwide commercial communication equipment marketplace, and specializes in
optical fiber technology. Currently, the majority of its revenues are provided
from several niche market areas including original equipment manufacturer (OEM)
equipment for process control and communications systems for highway traffic
monitoring and advanced air traffic control video monitor displays.
The CPD segment offers many product solutions to address its customers' needs.
The products are classified into the following categories:
Data Communications Products
Data Communications Products include Fiber Optic RS232, RS422, RS485, T1 and E1
Modems for market applications, including specialty data and timing distribution
modems for the military, aerospace and satellite earth station markets as well
as commercial, industrial, traffic control and surveillance markets. These
products are included in or are compatible with products in our new Series 9000
product line, as discussed in the next paragraph.
CCTV & Broadcast Video (FM), Audio and Data Products
This category includes fiber optic video only, audio only, video and data, audio
and data, and video, audio and data products, which use our traditional FM, PFM
and PCM transmission techniques. Most of these products are included in our 9000
series product line, which began shipping in late 1998, with a full promotion
being launched in March 1999. Significant additions to our product offerings are
an eight channel video multiplexer, a four channel video multiplexer with
bi-directional data and/or audio and a new rack mount chassis and power supplies
which provide dense packaging and operate over a wide temperature range. Also
significant is the new Windows based Graphical User Interface System Management
Software which allows the user to view the operating status of his whole fiber
optic transmission network from a PC, greatly facilitating maintenance. Markets
for these products include video surveillance, intelligent highways, robotics,
process control, military, distance learning and simulation markets.
High Resolution RGB Video Transmission Products
RGB Video Transmission Products include those used to remote a high-resolution
display, such as a monitor or projector, from the video source. Because of the
high bandwidth and fidelity required to transmit these signals, fiber optics may
be the only means to transmit them farther than a few hundred feet. While
relatively low resolution VGA video, in the 600 x 400 pixel range, may be
transmitted via copper using copper baluns (such as offered by Paragon) up to
distances approaching 1000 feet, the bandwidth required to transmit ultra high
resolution 2048 x 2048 pixel RGB video limits the transmission distance possible
over copper to less than 100 feet. Applications for this technology include air
traffic control, military control rooms, remote conference rooms, financial
trading desks and process control. Optelecom is not aware of any other fiber
optic RGB video transmission system that meets the performance requirements for
the SONY 2Kx2K video monitor.
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Compressed Digital Video Products
These products involve the digitization and compression of NTSC and PAL video
signal sources, allowing transmission via T1, E1, or Ethernet, via IP (Internet
Protocol). Currently this product group includes three products. One, the
DVS-100, using motion JPEG compression standards and a second, the Transform
100, using MPEG-2 compression standards, include a T1/E1 inverse multiplexing
network interface for video, audio and data transmission over one or two telecom
standard T1 or E1 channels. A third, the Transform 200, uses MPEG-2 compression
standards and includes a 10base10/100 interface for transmission using IP.
Applications include remote surveillance, distance learning and video
conferencing.
PARAGON AUDIO VISUAL, LTD. (PARAGON)
Paragon was organized in 1994 and designs and markets electronic products and
systems for multi-media applications utilizing unshielded twisted-pair copper of
"structured" cabling for in-house computer data networking applications. Such
products include baluns (Balanced to Unbalanced) devices that match the
different impedance of traditional coaxial and data networking cables. The use
of active baluns with higher-grade cables and high performance integrated
circuit devices allows for the transmission of high-resolution video, voice and
data signals without noticeable signal degradation. Paragon has been very active
in supporting networking applications for market data information and business
television services pertaining to financial markets.
Structured cable communications systems and fiber optic communications systems
offer comparable services in some applications and have distinct advantages or
disadvantages in others. For example, the use of baluns with structured cabling
has become common for in-house computer networking applications, while fiber
optic systems afford increased distance and higher bandwidths to information
systems. The Company believes that its acquisition of Paragon will enable it to
participate in and benefit from the development and growth of both technologies
and their joint applications.
Paragon markets a range of advanced product components for the display and
integration of multimedia information at the user's desktop. Not all products
are proprietary to Paragon, and the Company has close relationships with other
product suppliers where appropriate. Together, these products comprise a
complete family of product components that can be flexibly configured to build
complete multimedia information integration solutions to meet customer's
specific requirements.
Paragon is focused primarily (but not exclusively) on the financial systems
marketplace; i.e., financial and commercial organizations that deal on
national/international financial markets trading in a variety of instruments
(e.g. equities, foreign exchange, commodities, money markets, and derivatives).
The Company also markets to non-financial commercial organizations requiring the
integration of business television and video telephony services.
Paragon's products and services are grouped into four major categories:
o Multimedia Integration (Paragon active baluns, multi-function keyboards,
specialized display adapters)
o Business Television Distribution (head-end, switching and distribution
products)
o Video telephony
o Services (consultancy, integration of 3rd party products, configuration,
installation and support)
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Paragon is completely independent of any underlying trading room platform
technology, utilized for the distribution of digital market data, and is able to
operate independently of any distribution platform.
SALES AND MARKETING
GOVERNMENT PRODUCTS DIVISION
The E/O Group markets its services to both Government and commercial customers.
However, for the past five years all of its business has been obtained from
systems based on requirements of the Government, its prime contractors, and
contractors of foreign Governments. Successfully marketing new technology
initiatives directly to Government applications is difficult due to increased
competition from larger companies with far greater resources. As a result of the
utilization of IFOG sensing coil technology developed by Optelecom in 1993 and
the Company's prior experience with the development of fiber coils for high
speed payout, the Company identified the area of optical fiber gyro coil winding
as providing opportunity for new business development. Gyro coils are a defense
related Government program area that the Company sees receiving continued focus
amid shrinking defense spending. Although the customer base is small, the demand
is expected to increase over the next few years. Revenue from manufacturers of
custom optical fiber gyro coils represented the majority of income for the group
in 1998 and will be a major source of income in 1999.
The marketing efforts undertaken in 1998 are expected to provide additional
contracts in 1999 with technology development contracts in the IFOG
manufacturing and other areas.
The sole customer for the L/I Group 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 and the operations group at Hurlburt Field, Florida.
COMMUNICATION PRODUCTS DIVISION
The Communication Products Division (CPD) sells its products domestically
through direct sales and through select commercial integrators and resellers.
Additionally, CPD has several OEM accounts to different market sectors. Foreign
sales are made through agents and OEM accounts. The Company intends to add to
CPD additional direct sales personnel in additional territories in the United
States.
The sales process for new contracts generally requires a significant investment
in time and money and takes several months. This process involves senior
executives, sales personnel, engineering and systems integrators. The collective
sales group works together to properly specify and apply highly technical
products in the intelligent transportation control and surveillance market
segment.
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PARAGON
Paragon has developed close and mutually productive partnerships with suppliers
of "system component" products, where the partner has strong technical expertise
but very weak routes to market or poorly developed integration skills. These
products include multi-functional keyboard solutions, specialized graphic
display adapters and video conferencing systems.
This business model enables Paragon to deliver a broad portfolio of products,
establishing a single source of cohesive multimedia solutions and integration
services to the financial marketplace. This has enabled Paragon to derive
additional revenue from its existing client base, and also to appeal to new
prospects within the financial marketplace as well as new markets.
Paragon currently offers technical consulting and various product solutions
consisting of both its own and third party products, which matches the evolving
requirements currently required within the financial marketplace. Paragon's
offerings now range from complex integration at the user desk through to visual
distribution technologies.
RESEARCH AND DEVELOPMENT
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FINANCIAL INFORMATION RELATING TO COMPANY
SPONSORED RESEARCH AND DEVELOPMENT 1998 1997 1996
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Expenditures on Company sponsored research and
development activities $1,309,000 $874,000 $518,000
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Research and Development expense for 1998 increased significantly over 1997.
During 1998, the Company invested resources approximating $426,000 on a new
research effort. The product under development is a high speed optical component
that has numerous commercial applications. The Company has applied for three
patents related to the new product.
The Company's major effort in the CPD engineering area continues to focus on
compressed digital video development. The most recent product (MPEG2 digital
video) was released at the end of 1998 and market acceptance has been positive.
Another significant engineering effort within CPD has been directed to the
ongoing upgrade and improvement of our current product line with the
introduction of the new 9000 Series at the end of 1998.
Paragon defines all product specifications but currently subcontracts actual
product development and manufacturing. Looking forward, it is intended to
utilize Optelecom's engineering and manufacturing capabilities where possible in
order to increase Paragon's competitive advantage. This opportunity will be
fully explored during 1999.
MANUFACTURING PROCESSES
QUALITY ASSURANCE
Beginning in mid-1996, the Company initiated a corporate-wide effort to
implement a Quality Assurance system fully compliant with the requirements of
ISO-9001 (an internationally recognized quality system standard for companies
that design and manufacture products). In June 1996 all operating divisions of
the Company received certification to the standard. Paragon outsources all of
its manufacturing to specialized manufacturers and it does not
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maintain manufacturing facilities. During 1998 Paragon received certification of
the ISO-9002 standard, which fits Paragon's non-manufacturing status.
GOVERNMENT PRODUCTS DIVISION
E/O TECHNOLOGY GROUP
In 1991 the Company developed a winding machine to fabricate coils of optical
fiber wound in very specific configurations for fiber gyro systems. Additional
work in this area through 1996 was conducted to develop a winding machine
concept directed toward automated techniques. During 1998 Optelecom invested in
the manufacture of additional winding machinery to meet customer demands.
Currently, four machines are employed in satisfying contract winding production
requirements. The number of companies from which the group obtains raw materials
and optical fiber to meet these requirements is limited. However the Company
does not anticipate any problems with adequate supplies.
LASER ILLUMINATOR TECHNOLOGY GROUP
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 this 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 group obtains raw materials is limited,
although the materials are considered general items of commerce. Consequently,
the Company does not anticipate any problems with adequate supplies.
COMMUNICATION PRODUCTS DIVISION
The Company performs routine and specialized manufacturing, assembly, and
product testing functions in its corporate headquarters. The Company uses
equipment which automatically assembles components onto printed circuit boards
at high speed, which lowers manufacturing costs and reduces the time-to-market
for new product designs. 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.
PARAGON
Paragon currently subcontracts all product manufacture and it is not the
intention to change this in the short-term. In the medium term, however, Paragon
intends to work closer with Optelecom and to utilize Optelecom's manufacturing
capabilities where practical and possible.
COMPETITION
The Company's products fall within three (3) separate and distinct markets. As
such, the characteristics of competition in these markets differ greatly.
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Optelecom's Communication Products Division competes mainly with other companies
of roughly equal size that have similar resources. For low technology products,
such as fiber optic data modems, competition is intense, because 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.
Larger defense prime contractors dominate the market in which the E/O Technology
group competes. 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 primarily addressed by companies with
resources similar to Optelecom's. As a result, the E/O Technology group is at a
competitive disadvantage when competing against prime contractors. Optelecom
feels 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.
Paragon competes primarily with both large and similar sized companies that have
similar products and addresses worldwide markets in financial market data
information and business television services. These markets have numerous
suppliers who compete with Paragon. However Paragon's strategy of providing its
customers with superior products and support services has enabled it to achieve
a pre-eminent position in the financial data information market.
The L/I Group is a sole-source provider of the products it supplies to the U.S.
Air Force. The services it provides pursuant to its current contract with the
U.S. Air Force that expires at the end of 1999.
SEASONALITY
The Company's products are based on communications equipment technology. As
such, seasonality does not materially affect the Company's 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 backlog business imposed by patents of other
parties.
BACKLOG
At the end of 1998 the backlog for each segment was as follows: Communications
Products Division $651,000, Paragon Audio Visual $168,000 and Government
Products Division $419,000.
EMPLOYEES
At December 31, 1998, the Company had a total of 84 full-time employees
worldwide, including 15 in research, development and engineering, 21 in sales,
marketing and service, 35 in manufacturing and 13 in general management,
administration and finance. The number of employees by operating segment is as
follows: Communication Products Division - 58; Paragon Audio Visual -17;
Government Products Division - 9. Subsequent to year end, Paragon
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reduced its employees from 17 to 10 and CPD from 58 to 50. The Company intends
to hire additional personnel during the next 12 months in all areas except
general management, administration and finance. The Company's future success
will depend in part on its ability to attract, train, retain and motivate highly
qualified employees, who are in great demand. There can be no assurance that the
Company will be successful in attracting and retaining such personnel. The
Company's employees are not represented by any collective bargaining
organization and its employee relations are good.
RISK FACTORS
The statements contained in this report on Form 10-K that are not purely
historical are "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995 and Section 21E of the Securities
Exchange Act of 1934, including, without limitations, statements regarding the
Company's expectations, hopes, beliefs, anticipations, commitments, intentions
and strategies regarding the future. Forward-looking statements include, but are
not limited to, statements contained in "Item 1. Business," and "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" regarding the Company's business and strategies, products markets,
sales, marketing, customer support and service, research and development,
manufacturing, competition, backlog, employees, financial performance, revenue
and expense levels in the future, Year 2000 status and the sufficiency of its
existing assets to fund future operations and capital spending needs in Business
regarding the Company's products and its strategy. Actual results could differ
from those projected in any forward-looking statements for the reasons, among
others, detailed under "Risk Factors" in this Report on Form 10-K. The fact that
some of the risk factors may be the same or similar to the Company's past
filings means only that the risks are present in multiple periods. The Company
believes that many of the risks detailed here are part of doing business in the
industry in which the Company competes and will likely be present in all periods
reported. The fact that certain risks are endemic to the industry does not
lessen the significance of the risk. The forward-looking statements are made as
of the date of this Form 10-K and the Company assumes no obligation to update
the forward-looking statements, or to update the reasons why actual results
could differ from those projected in the forward-looking statements.
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 $8,742,232 for the twelve months ended December 31,
1998 compared to $9,734,087 for the same period in 1997, but an operating loss
of $237,357 in 1998 compared to operating income of $574,789 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
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was unable to reduce its expenses quickly once the lower rate of revenue
increase became known. Total revenues increased to $16,333,749 for the twelve
months ended December 31, 1998 compared to $12,271,057 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
$6,041,787 were included with those of the Company for the twelve months ended
December 31, 1998 but not for the same period in 1997. The Company's results of
operations was a net loss of $2,811,344 for the twelve months ended December 31,
1998 compared to net income of $948,729 for the same period in 1997. The major
factors contributing to the loss in 1998 included: acquisition expenses of
Paragon of $2,200,000 (valuation write-down of $1.4 million, amortization
expense of goodwill and intangibles in the amount of $465,000 and interest
expense of $335,000), an increase of inventory and accounts receivables reserves
of $543,000, employee termination related charges of $620,000 and a change in
product mix as revenues shifted from Glint to Paragon. The Company has taken
significant 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
twelve months ended December 31, 1998 approximately 30% 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, Fisher Control
Systems (an original equipment manufacturer), and Reuters could have a material
adverse effect on the company. The Company anticipates that sales of its
products to relatively few customers will diminish in magnitude over the next
few years. 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.
One contract with the U.S. Air Force accounted for 7% of the Company's revenues
and contributed $521,000 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"). At December 31, 1998 the
contract had a remaining funded contract value of $400,000.
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
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industry, the worldwide political situation and the continued requirements of
the Air Force, including its specific crew training schedules.
Technological Change
The Company's communication products are sold in markets that are subject to
rapid technological change. The Company's future success will depend in part
upon its ability to enhance its current products and to develop and introduce
new products that keep pace with technological developments and emerging
industry standards and that address the increasingly sophisticated needs of its
customers. There can be no assurance that the Company will be successful in
developing and marketing such products or producing enhancements that meet these
changing demands, that the Company will not experience difficulties that could
delay or prevent the successful development, introduction and marketing of these
products or that its new products and product enhancements will adequately meet
the demands of the marketplace and achieve market acceptance. The Company's
inability to develop and introduce new products or product enhancements in a
timely manner, or its failure to achieve market acceptance of a new product
could have a material adverse effect on the Company.
Competition
The Company faces intense and increasing competition from a large number of
competitors, some of which are larger than the Company and have larger product
development, research and sales staffs. To enhance the technological innovation
of its products, the Company has recently increased the size of its engineering
and development staff. There can be no assurance, however, that the Company's
competitors will not develop products that are more effective than the Company's
or that would render the Company's products obsolete or non-competitive.
Furthermore, the Company's ability to expand commercial sales of its products is
dependent in part upon its becoming more competitive with respect to
manufacturing efficiency and marketing capabilities. The Company has recently
increased its investment in manufacturing facilities and the size of its sales
and production staffs for communication products. There can be no assurance,
however, that these additions will provide the efficiencies and experience
necessary for an expansion of sales.
Paragon Operations
In December 1997 the Company acquired Paragon Audio Visual Limited ("Paragon").
The integration of Paragon proved to be costly in time and resources. As a
result of the length of time to integrate the acquisition, the Paragon operation
accumulated a loss of $3,000,718 during 1998, including employee severance
charges and write offs of intangibles acquired at the acquisition of Paragon.
During 1998, the Company invested in Paragon an additional $790,000 to fund
working capital requirements.
At the end of 1998, the Chairman of Paragon was terminated. Subsequently, the
remaining Directors of Paragon were terminated. Optelecom has named a new
management team from existing Paragon employees that has significant experience
in Paragon's markets and expects that the operations will return to
profitability during 1999. Paragon expects to return to profitability in 1999 by
materially reducing its overhead costs. Significant reductions include employee
terminations, closing of its New York City office, elimination of company
vehicles, travel and entertainment expenses. Sales for 1999 are expected to
remain constant with 1998 levels. However, there can be no assurance that
profitability will, in fact, be achieved.
12
<PAGE>
With the acquisition of Paragon, the Company expects to expand its presence in
international markets and may in the future derive an even more significant
portion of its revenues from these markets. The Company's current and future
international business activities are subject to a variety of potential risks,
including political, regulatory and trade and economic policy risks. The Company
will also be subject to the risks attendant to translations in foreign
currencies. These factors could have a material adverse effect on the Company.
Future Capital Needs; Uncertainty Of Additional Funding
The Company believes that its existing capital resources and future operating
cash flows will generate the funds needed for its long-term cash requirements.
If the Company's growth rate should exceed expectations, or if the Company
should fail to generate the anticipated operating cash flows, the Company would
be required to seek additional funding. In those circumstances, the Company
would consider public or private debt or equity financings. There can be no
assurance that additional financing will be available in a timely manner or on
acceptable terms. If additional funds are raised by issuing equity securities,
further dilution to existing stockholders may result. If adequate funds are not
available when needed, the Company may be required to delay, scale back or
eliminate its product research and development and overhead costs.
Need To Attract And Retain Key Employees
The Company is substantially dependent on the business and technical expertise
of its senior management and on its ability to attract and retain key management
and technical employees. The loss of members of senior management or of other
key employees or the Company's inability to attract and retain other employees
with necessary business or technical skills in the future would have a material
adverse effect on the Company's business.
Year 2000 Potential Issues
Many of the world's computer systems currently record years in a two-digit
format. Such computer systems will be unable to properly interpret dates beyond
the year 1999, which could lead to business interruptions. The Company has
established an internal committee to address this problem.
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 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
cost of this project is being funded through operating cash flows. The estimated
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
13
<PAGE>
were derived utilizing numerous resources, third party modification plans and
other factors. There can be no assurance that these estimates will be achieved,
and actual results could differ from those plans.
Price Volatility In Public Market
The Company's Common Stock currently trades on the NASDAQ SmallCap Market. The
securities markets have from time-to-time experienced significant price and
volume fluctuations that may be unrelated to the operating performance of the
Company. In addition, the market prices of the common stock of many publicly
traded technology companies have in the past been, and can in the future be
expected to be, especially volatile. Announcements of technological innovations
or new products of the Company or its competitors, developments or disputes
concerning proprietary rights, publicity regarding products under development by
the Company or its competitors, regulatory developments in both the United
States and foreign countries, and economic and other external factors, as well
as period-to-period fluctuations in the Company's operating and product
development results, may have a significant impact on the market price of the
Company's Common Stock.
Absence Of Dividends; Dilution
The Company has not paid any cash dividends since its inception and does not
intend to pay any cash dividends in the foreseeable future. Dilution will occur
upon the exercise of outstanding stock options of the Company and may occur upon
future equity financings of the Company that could be required to fund
operations.
CONTRACT RENEGOTIATION AND TERMINATION
None of the Company's current contracts are subject to price re-negotiation.
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
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 one-year
renewal options. Current monthly rent is $17,592 on the larger space and $2,662
on the smaller one. On September 1, 1997, Optelecom rented additional space of
8,056 square feet co-located with its existing facilities. Current monthly rent
on this space is $5,186. All of the facilities are in good repair and are
adequate for the Company's current production requirements. Paragon rents
facilities in Beedon and London, England. These facilities consist of
approximately 3,234 square feet of office space with a total rent of $6,420 per
month and have leases that expire in March 2001.
ITEM 3. LEGAL PROCEEDINGS
On March 18, 1999, David Brown, formerly Chairman and Marketing Director of
Paragon Audio Visual Ltd., lodged an Originating Application with the Employment
Tribunal of the United Kingdom in Reading, England. Mr. Brown alleges that
Paragon dismissed Mr. Brown unlawfully and in breach of his alleged employment
contract rights. He seeks an award of money in an unspecified amount. The time
within which Paragon may file a response has not
14
<PAGE>
yet expired and the Company has not yet filed a response. The Company believes
that Mr. Brown's claims are without merit and intends to present a vigorous
defense. The Company also believes that it may have counterclaims that may be
asserted against Mr. Brown in this proceeding and is considering the assertion
of such counter-claims.
From time to time, the Company is involved in legal proceedings and litigation
arising in the ordinary course of business. As of the date of this report,
except as described above, the Company is not a party to any litigation or other
legal proceeding that, in the opinion of management, could have a material
adverse effect on the Company's business, financial condition or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of 1998 to a vote of
security-holders.
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 two years ended December 31, 1998 and 1997, respectively. The quoted prices
are reflective of a three-for-two common stock split issued to shareholders of
record on November 17, 1997. Such quotations do not necessarily reflect actual
transactions.
Bid Price
---------
Quarter Ended High Low
------------- ---- ---
December 31, 1998 5 13/16 - 2 3/8
September 30, 1998 10 7/16 - 6
June 30, 1998 11 1/2 - 6 1/8
March 31, 1998 10 1/8 - 6 1/2
December 31, 1997 10 1/8 - 6
September 30, 1997 12 - 11 11/16
June 30, 1997 9 3/8 - 9 3/16
March 31, 1997 8 5/16 - 6 7/8
There are approximately 892 record-holders of the Common Stock as of March 17,
1999.
The Company has not declared any cash dividends to date and does not expect to
do so in the foreseeable future.
15
<PAGE>
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,
1998 1997 1996 1995 1994
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Revenue $ 16,333,749 $ 12,271,057 $ 8,910,263 $ 6,430,136 $ 7,036,069
Net (Loss) Income $ (2,811,344) $ 948,729 $ 722,081 $ (208,384) $ 382,347
Basic (Loss) Earnings per
Common Share $(1.34) $0.51 $0.41 $(0.12) $0.25
Diluted (Loss) Earnings
per Share $(1.34) $0.48 $0.39 $(0.12) $0.25
Total Assets $ 8,631,948 $ 12,209,741 $ 4,466,463 $ 3,674,004 $ 3,617,298
Long-Term Obligations $ 1,726,672 $ 2,291,668 $ 11,607 $ 46,426 --
Stockholders' Equity $ 3,290,632 $ 5,799,819 $ 3,041,631 $ 2,188,777 $ 2,384,303
Cash Dividends Declared
per Common Share $.00 $.00 $.00 $.00 $.00
</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. The Company saw a decrease in net worth to $3,290,632 in 1998. Prior year
trends of key financial indicators show a change in corporate net worth from
$5,799,819 for 1997 compared to $3,041,631 in 1996. The 1998 current ratio
decreased to 1.34 from 1.62 in 1997 and 2.95 in 1996. This was due to increases
in current notes payable and other current liabilities.
Total corporate accounts receivable after allowance for doubtful accounts but
including Paragon were $1,426,306. Year-end 1998 billed accounts receivable was
$1,727,778. Billed accounts receivable was $3,052,207 at year-end 1997 and
$1,324,564 in 1996. The decrease in accounts receivable was due to the general
decrease in business experienced in the fourth quarter of 1998. In 1998 Days
Sales Outstanding in receivables was 51 days compared to 58 days in 1997 and 52
days in 1996. The decrease from 1997 was primarily a result of the Company's
aggressive approach to account collections and the Company will maintain its
aggressive accounts collection program. The 1998 increase in allowance for
doubtful accounts reflects management's attempt to properly reserve against
write offs and also due to specific identification of problem accounts at year
end. 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 is closely
monitored; those that are delinquent are continuously contacted until payment is
received.
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<PAGE>
The overall composition of the inventory has changed somewhat over the last
three years as shown in the following chart: (Paragon inventory is included
which is composed solely of finished goods.)
INVENTORY COMPOSITION 1998 1997 1996
Production Materials (net of allowance) $ 407,022 $ 499,084 $ 765,783
Work In Process 381,659 455,648 397,123
Finished Goods 1,058,432 798,141 342,062
---------- ---------- ----------
TOTAL $1,847,113 $1,752,873 $1,504,968
One of the tools the Company uses for trend analysis is a comparison of r
inventory levels to total sales. In 1998, this level was 11% compared to 14% in
1997 and 17% in 1996. The value of the raw material and work in process
inventory decreased by approximately $166,000 in 1998 compared to 1997. The
increase in Finished Goods reflects growth in CPD inventory and the addition of
the Paragon inventory. Although the Company's objective is to reduce inventory
levels as much as possible, the value of finished goods inventory increased
substantially in 1998 to provide products available from stock. This action was
taken to meet competitive pressures, as customers are demanding shorter product
delivery times. The Company has reduced 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.
In 1998, fixed asset additions were $505,616 compared to $701,529 in 1997,
excluding the Paragon acquisition and $219,119 in 1996.
RESULTS OF OPERATIONS
1998 versus 1997
Consolidated sales in 1998 were $16.3 million, which represents an increase over
1997 sales of $4.06 million or 33%. The increase in sales in 1998 is directly
related to Optelecom's acquisition of Paragon whose sales contributed $6.04
million in 1998. Although the company achieved record revenues in 1998, the
operating results were significantly lower than expectations. The Company
recorded a net loss of $2.81 million or $1.34 per share in 1998 compared to a
profit of $949,000 or $0.48 per share in 1997. These losses were attributed to
various factors with the most significant factor the costs incurred related to
the acquisition of Paragon. Paragon had a loss of $3,000,718 during 1998.
In total, the Company recorded losses before income tax benefit aggregating $3.4
million relating to the acquisition of Paragon, which includes the write off of
$1.4 million in intangibles related to employment commitments by the former
Paragon shareholders. In the beginning of 1999, the Company replaced the former
owners with a new management team. Significant reductions in overheads were
implemented with the expectation that Paragon will achieve operating profits in
1999.
The Company made a significant investment in its research and development
efforts. The most significant investment was the allocation of $426,000 to a new
research effort related to the development of high-speed optical components. The
Company is committed to invest in this project until the middle of 1999, by
which time it intends to seek outside funding to continue with the product
development efforts. There can be no assurance that the Company will be
successful in securing outside funding.
17
<PAGE>
Additional valuation reserves aggregating $543,000 were recorded in 1998 to
write-down inventory and accounts receivables. They were recorded to account for
obsolescence of some products and for failure to collect a portion of current
accounts receivable.
Another factor contributing to the downturn in profits from 1997 was lower sales
from the GLINT program and lower sales in the CPD segment. The GLINT contract is
slowly winding down and, as such, revenues are expected to decline. The Company
expects that revenues from the GLINT contract will terminate after 1999. CPD
sales were down as a result of a lack of new large contract sales in 1998
compared to 1997 and the delay in the introduction of a new product, the 9000
series.
1997 versus 1996
Consolidated 1997 revenues were 38% higher than 1996. Consolidated 1997 revenues
include $164,040 from Paragon subsequent to the December 12, 1997 acquisition
date. A net profit of $948,729, which represented 8% of revenue for 1997,
compares to a net profit of $722,081 (8%) for 1996.
Operating Segments
Optelecom's products and services are categorized into three operating segments:
Communications Products, Government Products and Paragon Products. The financial
results for the three operating segments have been prepared on a basis that is
consistent with the manner in which Optelecom management internally evaluates
financial information for the purpose of assisting in making internal operating
decisions. In this regard, certain common expenses have been allocated among
segments differently than would be required for stand alone financial
information prepared in accordance with generally accepted accounting
principles.
COMMUNICATION PRODUCTS DIVISION
<TABLE>
<CAPTION>
1998 % 1997 % 1996 %
<S> <C> <C> <C> <C> <C> <C>
Net sales $8,742,232 100.0 $9,734,087 100.0 $6,453,685 100.0
Gross profit 4,039,724 46.2 4,387,639 45.1 2,657,056 41.2
Total operating expense 4,277,081 48.9 3,812,850 39.2 2,639,513 40.9
Operating (loss) income (237,357) (2.7) 574,789 5.9 17,543 .3
</TABLE>
In 1998, the CPD group underwent significant changes. Key members of management
were replaced as the group regained its focus on its core competencies.
Expansion efforts in 1997 severely impeded the organization, as revenue growth
expectations did not materialize. The Company implemented cost reductions in
1998 and recorded approximately $300,000 related to legal costs associated with
employee terminations.
Sales in the CPD segment were down almost $1 million compared to 1997. The
decline in sales is partly due to a delay in the introduction of the 9000
product series. Additionally, significant changes in the sales organization
during 1998 had a negative impact on sales expectations. Two large contracts in
1997 resulted in a significant growth from the previous year. However, these
contracts did not repeat in 1998. Gross profits declined by $348,000 due to the
reduction in sales levels from 1997. The gross profit margin was 46% in 1998
compared with 45% in 1997. Operating expenses increased by $360,000 or 9.5%
primarily due to increases in engineering and general and administrative costs.
Engineering increased by
18
<PAGE>
$235,000 to reflect additional resources added to the engineering group. General
and administrative costs increased as a result of termination charges related to
employee terminations.
In 1997, the Communication Products Division revenues increased by 51% over 1996
and resulted in an operating profit of $605,271 compared to a profit of $56,784
in 1996. The product sales mix was more favorable in 1997, with system
integrator sales up significantly and low margin product sales down compared to
1996. New products in fiber optic trader desk and air traffic control video
monitors and lower cost designs helped increase revenues in 1997. The Company
was successful in implementing product designs specifically intended to be
produced by automatic assembly processes to minimize direct costs.
Gross profits increased in 1997 as a percent of sales due to higher sales volume
and the reduction in price discounts compared to 1996.
Operating expenses increased in 1997 by $1,182,096 over 1996 expenses.
Commercial Product engineering development costs has increased, reflecting
increased staff size and workload. During 1997, development focussed on
additions to the product line for compressed digital video equipment and air
traffic control equipment. The Company implemented changes to the sales and
marketing staff to more closely align the technical aspects of the selling
process with customer requirements and also changed the corporate management
staff to strengthen the division's efforts.
GOVERNMENT PRODUCTS DIVISION
<TABLE>
<CAPTION>
1998 % 1997 % 1996 %
<S> <C> <C> <C> <C> <C> <C>
Net sales $1,549,731 100.0 $2,372,950 100.0 $2,456,577 100.0
Gross profit 875,628 56.5 1,371,284 57.8 1,383,285 56.3
Total operating expense 768,205 49.6 565,273 23.8 368,606 15.0
Operating income 107,473 6.9 806,011 34.0 1,014,679 41.3
</TABLE>
Sales decreased by $823,000 in 1998 compared with 1997. The decline in sales is
related to lower revenue on the GLINT contract ($585,000) and a reduction in
sales in the Electro/Optics group related to DARPA and Honeywell Systems
($239,000). The decline in revenue is expected to continue in 1999 as the GLINT
contract requirements are completed. Gross profit declined by $495,000 in 1998
due to the decline in sales. The gross profit margin remained unchanged at 56%
in 1998 and in 1997. Operating expenses increased by $203,000 as a result of a
$426,000 investment in new research and development efforts and was offset by
declines in allocated administrative charges.
Sales declined $83,627 in 1997 compared to 1996. E/O Technology Group's 1997
revenues increased 16% compared to 1996. The increase occurred primarily due to
additional work from DARPA and Honeywell Systems and contract coil winding work.
The Laser Illuminator technology group's revenue for 1997 was $1,684,260
compared to $1,863,596 in 1996 and $715,296 in 1995. The slight decrease in the
level of revenue in 1997 compared to 1996 was due to fewer Air Force
requirements based on the number of serviceable aircraft. Gross profits remain
constant in 1997 compared to 1996. The increase in operating expenses in 1997
over 1996 reflects a higher corporate allocation to GPD, which is apportioned on
the basis of percent of segment revenue compared to total Company revenue.
19
<PAGE>
PARAGON AUDIO VISUAL LIMITED
Paragon was acquired in December 1997. Accordingly, 1998 was the first year of
its operations within Optelecom. During 1998, Paragon had a pretax loss of
$(3,412,991). The components of Paragon's loss can be summarized as follows:
<TABLE>
<CAPTION>
1998
<S> <C>
Revenues $ 6,041,784
Gross margins 1,545,596
Operating expenses 2,560,776
Operating (loss) (1,015,180)
The following expenses were incurred during 1998 related to Paragon:
Amortization of intangibles 265,178
Amortization of goodwill 200,722
Acquisition interest 233,207
License fee 175,000
Write down of intangible assets related to employment commitments 1,462,500
Financing Costs:
Interest expense of working capital loan 61,206
</TABLE>
Revenues for 1998 represented increased sales in Paragon's products in its
traditional market. Paragon sold minimal Optelecom fiber products, as there were
product certification and market issues that delayed the selling efforts. The
gross margin was 26%. This rate reflects the fact that Paragon subcontracts its
product design and manufacturing. Significant improvements in gross margins are
expected to be realized once Paragon products are developed and manufactured by
the Company. Operating expenses increased at a much higher rate than expected.
The number of employees doubled in 1998 from 1997 and facilities increased both
by expanding the headquarters and opening a sales office in London and New York
City. Significant reserves were recorded for accounts receivable and inventory.
Paragon previously had not recorded provisions for bad debts or inventory
obsolescence.
As a result of the operating losses, cost reductions were taken by terminating
positions and closing down the New York City office. All the original Directors
of Paragon were terminated and their positions either eliminated or replaced by
existing Paragon employees. The Company moved to reduce all unnecessary costs.
The Company has taken the steps to bring expenses in line with revenues. Paragon
recorded $320,000 related to the cost reductions. The expectations for 1999 are
that Paragon will achieve operating profits.
OTHER OPERATING EXPENSES
Corporate
Income tax (benefit) expense was $(319,308) in 1998, $418,490 in 1997 and
$310,136 in 1996. The effective tax rate was (10.2%) in 1998, 30.5% in 1997 and
30% in 1996. In 1998 the effective tax rate was (10.2%) as a result of the net
operating loss during the year. The effective tax rate in 1997 and 1996 is
positively influenced by increased overseas sales, since certain tax advantages
can be realized through our Foreign Sales Corporation (FSC).
20
<PAGE>
Interest expense was $334,749 in 1998 compared to $19,653 for 1997 and increased
from $19,460 in 1996. The majority of the interest expense, $290,480 in 1998, is
reflective of increased borrowings related to the Paragon acquisition.
Impact of Inflation
Inflation has not had any significant effect on the operations of the Company
during 1998, and we do not expect it to have any significant effect during 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations through cash generated from operations
and investing activities, primarily through its bank line-of-credit. In 1998,
net cash provided from operations was $513,127 compared to $526,794 and $387,304
in 1997 and 1996, respectively. Noncash items for depreciation and amortization
amounted to $2,334,665 in 1998. Noncash outlays for these items in 1997 were
$300,232 and $235,431 in 1996. Net cash used in investing activities in 1998
amounted to $502,644 used for the purchase of capital equipment, general office
equipment and facility upgrades. In 1997, the cash used in investing activities
was $3,343,380 of which $2,750,851 was used in the purchase of Paragon Audio
Visual Ltd. In 1996, the cash used in investing activities was $219,119 for the
purchase of manufacturing equipment and general office equipment. The Company
generated $134,924 from its financing activities in 1998, $2,879,667 in 1997 and
$35,954 in 1996. Borrowings on the line-of-credit was the primary source in
1998. Borrowings on a long-term note (for the purchase of Paragon) was the
primary source in 1997 and proceeds from exercise of stock options was the
primary source in 1996. The Company has the ability, provided there are
sufficient eligible receivables, to borrow up to $1,700,000 under its line of
credit as of December 31, 1998. The Company's line-of-credit expires on April
30, 1999; however, management expects to renew the line-of credit under
substantially similar terms through April 30, 2000. The Company is required to
comply with certain financial ratios including maintaining a minimum current
ratio and a minimum ratio of cash flow to fixed obligations. The Company was in
violation of the cash flow covenant as of December 31, 1998. At the end of 1998
the outstanding balance under the line of credit agreement was $650,000.
As of December 31, 1997, the Company's subsidiary, Paragon, had been advanced
$363,000 under a factoring agreement. In February 1998, the Company terminated
the factoring agreement and settled all outstanding liabilities under the
agreement. Paragon's future working capital needs are expected to be financed by
its operating cash flows or inter-company loans from the Company. Paragon is
operating as a stand-alone entity. Should the need arise for increased cash due
to increased business activity, additional funding needs will be addressed.
Management anticipates that operating cash flows will generate the long-term
cash requirements of Optelecom and Paragon. If the level of business should
dictate, other infusions of capital may be needed. Paragon's business is
transacted in British Pounds. The results of operations may be affected by
foreign exchange gains/losses. Currently neither Optelecom nor Paragon have
hedging strategies in place.
21
<PAGE>
Contingencies
On March 18, 1999, David Brown, formerly Chairman and Marketing Director of
Paragon Audio Visual Ltd., lodged an Originating Application with the Employment
Tribunal of the United Kingdom in Reading, England. Mr. Brown alleges that
Paragon dismissed Mr. Brown unlawfully and in breach of his alleged employment
contract rights. He seeks an award of money in an unspecified amount. The time
within which Paragon may file a response has not yet expired and the Company has
not yet filed a response. The Company believes that Mr. Brown's claims are
without merit and intends to present a vigorous defense. The Company also
believes that it may have counterclaims that may be asserted against Mr. Brown
in this proceeding and is considering the assertion of such counter-claims.
YEAR 2000
The Year 2000 is an issue because many computers, software and other devices
with embedded technology use programs written using two digits rather than four
to identify the applicable year and this may prevent them from accurately
processing information with dates beyond 1999. This could result in system
failures or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to manufacture products, acquire or ship
inventory, process transactions or engage in other normal business activities.
The Company has developed and is well into implementing a Company-wide Year 2000
plan to identify all systems which will require modification or replacement and
to establish appropriate contingency plans to avoid an impact on the Company's
ability to provide its products and
22
<PAGE>
services. This plan encompasses the Company's products, financial reporting and
operating systems, external suppliers and facilities. The Company's plan
includes a series of initiatives to ensure that all of the Company's computer
equipment and software will function properly and includes broad identification,
assessment, remediation and testing efforts.
Based upon its inventory of systems and assessment efforts to date, the Company
believes that certain of its computer equipment and software will require
replacement or modification. In addition, in the ordinary course of business,
the Company replaces computer equipment and software, and in so doing, seeks to
acquire only Year 2000 compliant software and hardware. The Company believes
that its planned modifications or replacements will be completed on a timely
basis so as to avoid any disruptions or malfunctions due to any Year 2000
related problems.
The Company has substantially completed its compliance review of virtually all
of its products and has not learned of any products which it manufactures that
will cease functioning or experience an interruption of operation as a result of
the transition to the Year 2000.
The Company is currently assessing the Year 2000 readiness of suppliers to
determine the extent to which the Company may be vulnerable if those parties
fail to properly identify and fix their own Year 2000 issues. The Company
intends to monitor the progress made by these parties and formulate appropriate
contingency plans.
The costs of the plan are based on management's best estimates and are not
expected to be material to the Company's financial condition. The Company's
total cost of the Year 2000 plan, which will be funded through operating cash
flow, is estimated to be approximately $500,000 of which $200,000 is anticipated
to be spent on capital assets. These estimated costs include the internal costs,
including training, and those of external resources to implement any new
software needed to become Year 2000 compliant.
Management believes, based on the information currently available to them, that
the most likely worst case scenario would be: failure to be able to serve
customers, increased operation costs due to manual processing, legal risks,
including customer, supplier or shareholder lawsuits over failure to provide
contracted services, product failures or heath and safety issues and inability
to bill or invoice resulting in a loss of revenue. Although the Company believes
that Year 2000 compliance will be achieved by December 31, 1999, there can be no
assurance that the Year 2000 problem will not have a material adverse affect on
the Company's business, financial condition and results of operations.
The Company's plan requires that contingency plans be developed and validated in
the event that any critical system cannot be corrected and certified before the
system's failure date. In many cases, the Company already has arrangements with
suppliers of goods and services so that in the event a commitment is not met; a
substitute is available to the Company. Although the Company is in the process
of installing new enterprise-wide systems that are Year 2000 compliant,
management believes the Company can readily upgrade its critical financial and
operating systems with vendor provided version upgrades that are Year 2000
compliant. The Company currently has an informal contingency plan and it will
formalize its contingency plan during the first half of 1999.
23
<PAGE>
New Accounting Standard
In June 1998 the Financial Accounting Standards Board issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities." The Company does
not currently use derivatives, and it does not expect adoption of this Standard
to have a material impact on its financial position or results of operations.
In March 1998 the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position (SOP)
98-1 entitled "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." The pronouncement will become effective January 1,
1999. The Company does not believe that the SOP will have a material impact on
the Company's financial position or results of operation.
Item 7A Quantitative and Qualitative Disclosure about Market Risks.
Not Applicable.
24
<PAGE>
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
OPTELECOM, INC.
Consolidated Financial Statements as of December 31, 1998 and 1997,
and the Three Years in the period ended December 31, 1998,
and Independent Auditors' Report
25
<PAGE>
OPTELECOM, INC.
<TABLE>
<CAPTION>
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Page
<S> <C>
INDEPENDENT AUDITORS' REPORT ..........................................................26
CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE YEARS IN THE PERIOD ENDED
DECEMBER 31, 1998, 1997 and 1996:
Consolidated Balance Sheets.........................................................27
Consolidated Statements of Operations...............................................28
Consolidated Statements of Comprehensive (Loss) Income..............................29
Consolidated Statements of Stockholders' Equity.....................................30
Consolidated Statements of Cash Flows...............................................31
Notes to Consolidated Financial Statements..........................................32
Schedule of Valuation and Qualifying Accounts.......................................49
</TABLE>
25
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and
Stockholders of Optelecom, Inc.:
We have audited the accompanying consolidated balance sheets of Optelecom, Inc.
and subsidiaries (the Company) as of December 31, 1998 and 1997, and the related
consolidated statements of operations, comprehensive (loss) income,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1998. Our audits also included the financial statement
schedule listed in the accompanying index. These financial statements and
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on the financial statements and
financial statement schedule based on our audits.
We conducted our audits 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. 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 audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of December 31, 1998
and 1997, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles. Also, in our opinion, such financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
/s/Deloitte & Touche LLP
McLean, VA
March 26, 1999
27
<PAGE>
OPTELECOM, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
ASSETS 1998 1997
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 394,096 $ 242,656
Restricted cash (Note 14) 328,700 728,000
Accounts and contracts receivable (Note 3) 1,426,306 3,102,904
Note receivable - related party (Note 4) -- 40,000
Inventories, net (Note 5) 1,847,113 1,752,873
Prepaid expenses and other assets 344,448 334,530
Deferred tax asset 307,960 200,874
------------ ------------
Total current assets 4,648,623 6,401,837
Intangible assets, net (Notes 2 and 6) 2,351,563 4,239,062
Goodwill, net (Note 2) 238,493 289,785
Property and equipment, net (Note 7) 1,361,095 1,265,550
Deferred tax asset 32,174 13,507
------------ ------------
TOTAL ASSETS $ 8,631,948 $ 12,209,741
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank line-of-credit payable (Note 8) $ 650,000 $ 300,000
Accounts payable 765,971 1,640,460
Payable under factoring agreement (Note 14) -- 362,868
Accrued payroll 204,888 405,597
Income taxes payable (Notes 9 and 14) 328,700 728,000
Other current liabilities 892,848 300,384
Current portion of notes payable (Note 10) 624,996 208,332
------------ ------------
Total current liabilities 3,467,403 3,945,641
------------ ------------
LONG-TERM LIABILITIES:
Notes payable (Note 10) 1,726,672 2,291,668
Deferred rent liability 147,241 172,613
------------ ------------
Total liabilities 5,341,316 6,409,922
------------ ------------
Commitments and contingencies (Note 11) -- --
STOCKHOLDERS' EQUITY (Note 12):
Common stock, $.03 par value - shares authorized, 15,000,000; issued
and outstanding, 2,156,557 and 2,032,137 shares 64,697 60,964
Discount on common stock (11,161) (11,161)
Additional paid-in capital 4,105,029 3,812,638
Foreign currency translation adjustment 6,033 --
Retained earnings (deficit) (873,966) 1,937,378
------------ ------------
Total stockholders' equity 3,290,632 5,799,819
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 8,631,948 $ 12,209,741
============ ============
</TABLE>
See notes to consolidated financial statements.
28
<PAGE>
OPTELECOM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Revenues $ 16,333,749 $ 12,271,057 $ 8,910,263
Cost of goods sold 9,967,408 6,462,447 4,869,922
------------ ------------ ------------
Gross profit 6,366,341 5,808,610 4,040,341
Operating expenses:
Engineering 1,773,904 1,031,724 678,222
Selling and marketing 2,367,408 1,548,005 1,180,296
General and administrative 3,520,210 1,833,750 1,130,146
------------ ------------ ------------
Total operating expenses 7,661,522 4,413,479 2,988,664
Operating (loss) income (1,295,181) 1,395,131 1,051,677
Other expenses:
Interest expense 334,749 19,653 19,460
Write-down of intangible assets (Note 15) 1,462,500 -- --
Amortization of goodwill 38,222 8,259 --
------------ ------------ ------------
Total other expenses 1,835,471 27,912 19,460
(Loss) income before (benefit) provision for
income taxes (3,130,652) 1,367,219 1,032,217
(Benefit) provision for income taxes (319,308) 418,490 310,136
------------ ------------ ------------
Net (loss) income $ (2,811,344) $ 948,729 $ 722,081
============ ============ ============
Basic (loss) earnings per share $ (1.34) $ 0.51 $ 0.41
============ ============ ============
Diluted (loss) earnings per share $ (1.34) $ 0.48 $ 0.39
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
29
<PAGE>
OPTELECOM, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Net (Loss) Income $(2,811,344) $ 948,729 $ 722,081
Foreign Currency Translation Adjustments 6,033 -- --
----------- ----------- -----------
Comprehensive (Loss) Income $(2,805,311) $ 948,729 $ 722,081
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
30
<PAGE>
OPTELECOM, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
ADDITIONAL CAPITAL
-----------------------
NUMBER COMMON DISCOUNT PAID-IN
OF STOCK ON COMMON CAPITAL
SHARES STOCK
<S> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1996 1,171,042 $ 35,131 $ (11,161) $ 1,898,239
Common stock issued 36,532 1,096 -- 129,677
Net income -- -- -- --
--------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1996 1,207,574 36,227 (11,161) 2,027,916
Common stock issued from exercise of
options and for services provided 49,511 1,485 -- 124,608
Tax effect of options exercised -- -- -- 67,352
Three-for-two stock split (see Note 10) 603,800 18,114 -- (18,114)
Issuance of Common stock for acquisition of
Paragon, net of issuance cost of $8,986 171,252 5,138 -- 1,610,876
Net Income -- -- -- --
--------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1997 2,032,137 60,964 (11,161) 3,812,638
Common stock issued from exercise of
Options 124,420 3,733 -- 292,391
Foreign currency translation adjustment -- -- -- --
Net Loss -- -- -- --
--------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1998 2,156,557 $ 64,697 $ (11,161) $ 4,105,029
========= =========== =========== ===========
<CAPTION>
RETAINED FOREIGN TOTAL
EARNINGS CURRENCY STOCKHOLDERS'
(DEFICIT) TRANSLATION EQUITY
ADJUSTMENT
<S> <C> <C> <C>
BALANCE, JANUARY 1, 1996 $ 266,568 -- $ 2,188,777
Common stock issued -- -- 130,773
Net income 722,081 -- 722,081
----------- ----------- -----------
BALANCE, DECEMBER 31, 1996 988,649 -- 3,041,631
Common stock issued from exercise of
options and for services provided -- -- 126,093
Tax effect of options exercised -- -- 67,352
Three-for-two stock split (see Note 10) -- -- --
Issuance of Common stock for acquisition of
Paragon, net of issuance cost of $8,986 -- -- 1,616,014
Net Income 948,729 -- 948,729
----------- ----------- -----------
BALANCE, DECEMBER 31, 1997 1,937,378 -- 5,799,819
Common stock issued from exercise of
Options -- -- 296,124
Foreign currency translation adjustment -- 6,033 6,033
Net Loss (2,811,344) -- (2,811,344)
----------- ----------- -----------
BALANCE, DECEMBER 31, 1998 $ (873,966) $ 6,033 $ 3,290,632
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
31
<PAGE>
OPTELECOM, INC.
CONSOLIDATED STATEMENTS OF CASH
FOR THE YEARS ENDED DECEMBER 31,
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net (loss) income $(2,811,344) $ 948,729 $ 722,081
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation and amortization 872,165 300,232 235,431
Write-down of intangible assets 1,462,500 -- --
Loss (gain) on sale/disposal of equipment 835 (15,357) --
Deferred rent (25,372) (19,343) (13,489)
Common stock issued for services -- 8,000 --
Deferred taxes (125,753) (68,560) (145,821)
Change in assets and liabilities:
Accounts and contracts receivable 1,676,598 (880,155) (52,217)
Inventories (94,240) (50,828) (424,627)
Prepaid expenses and other assets 40,472 (1,595) (197,660)
Restricted cash 399,300 (728,000) --
Accounts payable (874,489) 316,214 (208,727)
Accrued payroll (200,709) 111,554 46,794
Income tax refund receivable -- -- 215,693
Other current liabilities 592,464 (122,097) 209,846
Income taxes payable (399,300) 728,000 --
----------- ----------- -----------
Net cash provided by operating activities 513,127 526,794 387,304
Cash Flows From Investing Activities
Proceeds from sale of equipment 2,972 22,000 --
Capital expenditures (505,616) (701,529) (219,119)
Investment in Paragon, net of cash acquired -- (2,750,851) --
----------- ----------- -----------
Net cash used in investing activities (502,644) (3,430,380) (219,119)
Cash Flows From Financing Activities
Borrowings on bank line-of-credit payable 2,158,526 800,000 340,000
Payments on bank line-of-credit payable (1,808,526) (500,000) (400,000)
Payments under factoring agreement (362,868) -- --
Payments on long term debt (208,332) (46,426) (34,819)
Borrowings of long term debt 60,000 2,500,000 --
Proceeds from exercise of stock options 296,124 126,093 130,773
----------- ----------- -----------
Net cash provided by financing activities 134,924 2,879,667 35,954
Effect on cash from currency translation adjustment 6,033 -- --
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 151,440 (23,919) 204,139
Cash and cash equivalents - beginning of year 242,656 266,575 62,436
----------- ----------- -----------
Cash and cash equivalents - end of year $ 394,096 $ 242,656 $ 266,575
=========== =========== ===========
Supplemental Disclosures of Cash Flow Information
Cash paid during the year for interest $ 336,250 $ 12,715 $ 24,731
=========== =========== ===========
Cash paid during the year for income taxes $ 403,846 $ 604,948 $ 276,477
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
32
<PAGE>
OPTELECOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS - 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 segments: 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 the Paragon division (acquired
in December 1997), which designs and markets electronic products and
systems utilizing copper cabling. 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, including Paragon's business, which is
primarily in the U.K.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of the Company and its wholly owned subsidiaries,
Optelecom UK Limited (Optelecom UK), and Paragon Audio Visual Limited.
All significant intercompany transactions and balances have been
eliminated.
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
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 are recorded at the contract rates times
the labor hours plus other direct costs as incurred. Sales of products
are recognized at the time completed units are delivered. Provisions for
estimated losses on uncompleted contracts and product sales returns 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 costs on a specific identification basis.
PROPERTY, EQUIPMENT, AND DEPRECIATION - Property and equipment are
stated at cost. Depreciation is computed using the straight-line method
over the estimated useful lives
33
<PAGE>
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.
INTANGIBLE ASSETS AND GOODWILL - Intangible assets consist primarily of
technology, trade names, customer lists and employment agreements that
are being amortized on the straight-line method over their estimated
useful lives, which range from three to fifteen years. Goodwill
represents the cost in excess of fair value of the identifiable net
assets acquired, which is being amortized on the straight-line method
over 10 years. The Company periodically reviews the carrying value of
intangible assets, including goodwill, for impairment. If the facts and
circumstances indicate an asset is impaired, the asset will be reduced
to its estimated fair value.
RESEARCH AND DEVELOPMENT COSTS - Research and development costs are
expensed as incurred. The Company incurred research and development
costs of approximately $1,309,000, $874,000 and $518,000 for the years
ended December 31, 1998, 1997, and 1996, respectively.
INCOME TAXES - The Company recognizes income tax expense for financial
statement purposes following the asset and liability approach for
computing deferred income taxes. Under this method, deferred tax assets
and liabilities are determined based on the difference between financial
reporting and tax basis of assets and liabilities based on enacted tax
rates. Deferred tax assets are reduced by a valuation allowance when, in
the opinion of management, it is more likely than not that some portion
or all of the deferred tax assets will not be realized.
STOCK-BASED COMPENSATION - The Company follows Statement of Financial
Accounting Standard No. 123 (SFAS No. 123), ACCOUNTING FOR STOCK-BASED
COMPENSATION, for disclosure purposes only. The Company continues to
measure compensation expense for its stock-based employee compensation
plans using the intrinsic value method prescribed by APB No. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and has provided pro forma
disclosures of the effect on net (loss) income and (loss) earnings per
share as if the fair value-based method prescribed by SFAS 123 had been
applied in measuring compensation expense.
FOREIGN CURRENCY TRANSLATION - The Company translates the assets and
liabilities of its foreign subsidiaries into U.S. dollars at the current
exchange rate in effect at the end of the year. The gains and losses
that result from this process, and gains and losses on inter-company
transactions that are long-term in nature and that the Company does not
intend to repatriate, are shown in the foreign currency translation
adjustment balance in the stockholder's equity section of the balance
sheet. The revenue and expense accounts of the foreign subsidiaries are
translated into U.S. dollars at the average rates that prevailed during
the period.
CASH AND CASH EQUIVALENTS - For the purpose of presentation in the
statements of cash flows, cash and cash equivalents are defined as cash
and liquid investments with original maturities of three months or less.
RESTRICTED CASH - The Company has deposited into escrow amounts that it
is obligated to pay to U.K. tax authorities resulting from its December
1997 purchase transaction (see Notes 2 and 11). Accordingly, such
amounts are classified as restricted cash.
34
<PAGE>
FAIR VALUE OF FINANCIAL INSTRUMENTS - The fair value of the Company's
long-term debt is estimated using discounted cash flow analysis based on
the incremental borrowing rates currently available to the Company for
loans with similar terms and maturities. At December 31, 1998 and 1997,
the fair value approximated the carrying amount. The fair value of trade
receivables, trade payables, payable under factoring agreement, and the
revolving credit agreement approximate their carrying amount because of
the short maturity of these instruments.
RECLASSIFICATIONS - Certain reclassifications have been made to prior
years amounts to conform to current year presentation.
2. ACQUISITION
On December 12, 1997, the Company acquired Paragon Audio Visual Limited
(Paragon), a United Kingdom company. Paragon designs and markets
electronic products and systems utilizing copper cabling for in-house
computer data networking applications. The total cost of the acquisition
was $4,422,000, consisting of $2.5 million in cash and 171,252 shares of
common stock of the Company (with a fair value of $1,625,000 at the
acquisition date), plus acquisition costs, in exchange for all common
shares of Paragon. The cash payment was financed under a new debt
agreement entered into by the Company (see Note 10). The acquisition was
accounted for as a purchase and the purchase price was allocated to the
net assets acquired based upon the estimated fair value of such assets.
Goodwill recorded as a result of this transaction will be amortized on a
straight-line basis over its estimated useful life of 10 years. The
Company's consolidated financial statements include the operating
results of Paragon since December 12, 1997.
During 1998, the Company continued to evaluate the fair value of the
assets acquired from Paragon and the goodwill associated with the
purchase. As a result of this evaluation, the Company determined that a
portion of the purchase price paid related to contractual employment
obligations by Paragon's four selling shareholders, who were related
family members, employees, officers and Board members of Paragon
(hereafter "the Paragon individuals"). The purchase agreement required
the Paragon individuals to fulfill these employment obligations or
return up to $1,625,000 of the purchase price to the Company.
Accordingly, the Company reclassified $1,625,000 from goodwill to other
intangibles - employment agreements, and such amounts were to be
amortized over the employment period of three years. Additionally, the
Company performed an internal valuation and analysis of the assets
acquired and determined that identified intangibles acquired included
technology, customer lists and trade names. Accordingly, the Company
reclassified the fair value of the acquired intangibles to these
specific intangible assets.
35
<PAGE>
The following supplemental unaudited pro forma information has been
prepared as though the acquisition had occurred at January 1, 1996.
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Revenue $16,710,000 $12,355,000
Net Income 451,000 294,000
----------- -----------
Per Share:
Basic $ 0.25 $ 0.15
----------- -----------
Diluted $ 0.23 $ 0.14
----------- -----------
</TABLE>
3. ACCOUNTS AND CONTRACTS RECEIVABLE
Accounts and contracts receivable at December 31, 1998 and 1997,
consisted of the following:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Billed $ 1,727,778 $ 3,052,207
Unbilled - net of cumulative progress billings of
$124,891 for 1998 and $495,047 for 1997 760 102,234
Less: Allowance for doubtful accounts (302,232) (51,537)
----------- -----------
$ 1,426,306 $ 3,102,904
=========== ===========
</TABLE>
Approximately 18%, 25%, and 40% of the Company's revenues in 1998, 1997,
and 1996, respectively, 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 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.
4. NOTE RECEIVABLE RELATED PARTY
At December 31, 1997, the Company had a $40,000 non-interest bearing
note receivable from a former officer and board member of the Company,
which was due on December 15, 1998. This receivable was written off in
1998.
5. INVENTORIES
Inventories at December 31, 1998 and 1997 consist of the following:
1998 1997
Production materials $ 771,157 $ 591,768
Work in process 381,659 455,648
Finished goods 1,058,432 798,141
Less: inventory allowance (364,135) (92,684)
----------- -----------
Net $ 1,847,113 $ 1,752,873
=========== ===========
36
<PAGE>
6. INTANGIBLE ASSETS
Intangible assets at December 31, 1998 and 1997 (see Note 2) consist of
the following:
1998 1997
Technology $ 800,000 $ 800,000
Customer lists 725,000 725,000
Employment agreements -- 1,625,000
Trade names 1,100,000 1,100,000
----------- -----------
2,625,000 4,250,000
Accumulated amortization (273,437) (10,938)
----------- -----------
Net $ 2,351,563 $ 4,239,062
=========== ===========
During December 1998, the Company properly terminated for cause one of
the Paragon individuals, who at the time was also a member of the
Company's Board of Directors, and it began discussions with the three
other Paragon individuals regarding their future management and
operating responsibilities. In February 1999, the Company properly
terminated for cause the other three Paragon individuals. The Company is
seeking its contractual right for a return of a portion of the purchase
price. As a result of these terminations, the Company wrote off
$1,462,500 during the fourth quarter of the remaining unamortized
intangible asset related to the employment agreements.
The Company has installed new management at Paragon and revised
Paragon's operating plan. The Company has evaluated the recoverability
of Paragon's other assets, intangibles and goodwill, and based on its
cash flow projections, the Company believes that such recorded assets
continue to be recoverable.
7. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1998 and 1997 consist of the
following:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Laboratory equipment $ 1,419,678 $ 1,231,446
Office equipment 1,275,850 1,070,367
Furniture and fixtures 99,776 90,756
Leasehold improvements 641,560 553,154
Motor vehicles 13,524 8,255
3,450,388 2,953,978
----------- -----------
Less accumulated depreciation and amortization (2,089,293) (1,688,428)
----------- -----------
Net property and equipment $ 1,361,095 $ 1,265,550
=========== ===========
</TABLE>
37
<PAGE>
8. DEMAND NOTE PAYABLE TO BANK
The Company has a revolving 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%
(8.25% at December 31, 1998). The total amount of borrowings that may be
outstanding at any given time is based upon a percentage of certain
eligible receivables. Amounts under the agreement are due in full on
April 30, 1999. The Company expects the credit agreement to be renewed
for one year with substantially similar terms. The balance outstanding
under the agreement was $650,000 and $300,000 at December 31, 1998 and
1997, respectively. The amount available under the Agreement was
$1,050,000 at December 31, 1998.
The Company is required to comply with certain financial ratios
including maintaining a minimum current ratio and a minimum ratio of
cash flow to fixed obligations. The Company was in violation of the cash
flow covenant as of December 31, 1998. However, the bank has provided a
waiver of such covenant violation at December 31, 1998.
9. INCOME TAXES
The components of the (benefit) provision for income taxes for the years
ended December 31, 1998, 1997, and 1996 are summarized as follows:
1998 1997 1996
Current $(174,487) $ 487,050 $ 455,957
Deferred (789,821) (68,560) 4,179
Change in valuation allowance 645,000 -- (150,000)
--------- --------- ---------
$(319,308) $ 418,490 $ 310,136
========= ========= =========
No U.S. income taxes have been provided for unremitted earnings of
foreign subsidiaries as the Company intends to reinvest those profits
overseas. The Company's 1998 tax provision includes the benefit of the
carryback of the net taxable loss to prior years. 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, 1998, 1997, and 1996 are summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
% % %
<S> <C> <C> <C>
Federal income tax (benefit) expense at statutory rates (34) 34 34
(Reduction) increase of taxes:
State taxes, net of federal benefit (1.8) 3.5 4
Valuation allowance related to net deferred tax assets 20.5 -- (15)
Losses of foreign subsidiary 5.6 -- --
Other (0.5) (7) 7
----- ---- ---
Effective income tax rate (10.2) 30.5 30
===== ==== ===
</TABLE>
38
<PAGE>
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, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Deferred liabilities:
Amortization $ (8,632) $ (11,188)
State taxes (33,080) (10,666)
Retainage receivable on long-term contracts -- (790)
----------- -----------
Gross deferred tax liabilities (41,712) (22,644)
Deferred tax assets:
Excess book depreciation 3,529 16,796
Capitalized overhead and inventory obsolescence reserve 217,650 109,126
Accrued vacation 39,470 42,921
Deferral of rent expense 56,057 68,182
Amortization 694,911 --
Note reserve 15,229 --
----------- -----------
Gross deferred tax assets 1,026,846 237,025
Less: valuation allowance (645,000) --
----------- -----------
Net deferred tax assets $ 340,134 $ 214,381
=========== ===========
</TABLE>
The Company assumed certain income tax liabilities upon the acquisition
of Paragon (see Note 11).
Prepaid expenses and other assets as of December 31, 1998 included
income tax receivables of approximately $28,000.
10. NOTES PAYABLE
In December 1997 the Company entered into a promissory note agreement to
finance the purchase of Paragon (see Note 2). The note is collateralized
by substantially all the assets and contracts of the Company, and
includes certain financial and other covenants. The Company was in
violation of one of its covenants as of December 31, 1998 and the bank
has provided a waiver of the debt covenant. The principal amount of the
note is $2,500,000, which is payable in monthly installments of $52,083
through August 2002. Interest is payable monthly at prime plus 1% (8.75%
at December 31, 1998 and 9.5% at December 31, 1997).
In December 1998, the Company received a loan of $60,000 from the
Economic Development Fund of Montgomery County, Maryland to maintain or
establish jobs and an economic presence in Montgomery County, Maryland.
Under the terms of the loan agreement, the loan will convert to a grant
if certain conditions at specific dates are met, primarily certain job
levels and the maintaining of a place of business within Montgomery
County, Maryland. All grants convert back to a loan if the Company does
not maintain a majority of its business interests within Montgomery
County, Maryland for at least eight years from the date of the receipt
of the loan.
Interest is at the rate of five percent (5%) per annum. No principal or
interest is payable until January 2002, at which time principal and
interest payments, including interest during 1999-2001, will be made
over a five year period.
39
<PAGE>
The required principal payments of the notes payable are as follows:
1999 $624,996
2000 624,996
2001 624,996
2002 428,680
2003 12,000
Thereafter 36,000
----------
Total $2,351,668
11. COMMITMENTS AND CONTINGENCIES
OPERATING LEASE - During 1992, the Company entered into a 10-year
non-cancelable operating lease expiring August 31, 2002 for corporate
office and manufacturing facilities. As an inducement to enter the new
lease, the Company received certain incentives such as a rent abatement
and assumption of existing lease obligations. Additionally, the lease
provided for scheduled rent increases. These lease incentives are being
amortized over the 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.
Paragon has entered into leases for office and sales facilities, which
expire March 24, 2001.
As of December 31, 1998, future net minimum rental payments required
under operating leases that have initial or remaining non-cancelable
terms in excess of one year are as follows:
Year Ended December 31,
1999 $ 349,000
2000 354,000
2001 303,000
2002 193,000
----------
$1,199,000
==========
Rental expense was approximately $364,000, $242,000 and $222,000 in
1998, 1997, and 1996, respectively.
PARAGON ACQUISITION - In conjunction with the acquisition described in
Note 2, the Company deposited $728,000 into a restricted escrow account
to pay income tax liabilities to U.K. tax authorities assumed upon
acquisition of Paragon. During 1998, a payment was made to the U.K. tax
authorities in the amount of $400,000.
At the acquisition date, Paragon had a factoring agreement with a
financing company. Under the agreement, the financing company purchased
Paragon's accounts receivable at a discount and provided Paragon with
operating funds. Paragon incurred a liability until the purchased
accounts receivable were fully collected by the financing company. At
December 31, 1997, the Company had a liability of $363,000 to the
financing
40
<PAGE>
company. In February 1998, the Company terminated the factoring
agreement and settled all outstanding liabilities.
LEGAL PROCEEDINGS - The Company is involved in certain other legal
proceedings that arise in the ordinary course of business. Management
believes that the final disposition of these matters in the aggregate,
will not have a material effect on the Company's financial position,
results of operations or cash flows.
On March 18, 1999, David Brown, formerly Chairman and Marketing Director
of Paragon Audio Visual Ltd., lodged an Originating Application with the
Employment Tribunal of the United Kingdom in Reading, England. Mr. Brown
alleges that Paragon dismissed Mr. Brown unlawfully and in breach of his
alleged employment contract rights. He seeks an award of money in an
unspecified amount. The time within which Paragon may file a response
has not yet expired and the Company has not yet filed a response. The
Company believes that Mr. Brown's claims are without merit and intends
to present a vigorous defense. The Company also believes that it may
have counterclaims that may be asserted against Mr. Brown in this
proceeding and is considering the assertion of such counter-claims.
12. STOCKHOLDER'S EQUITY
On November 11, 1997, the Company's Board of Directors approved a
three-for-two common stock split to be distributed in the form of a
stock dividend. As a result, 603,800 shares were issued to shareholders
of record on November 17, 1997. Par value remained at $0.03 per share
that resulted in the Company transferring $18,114 to common stock from
paid-in capital, representing the aggregate par value of the shares
issued under the stock split. Share amounts presented in the
consolidated financial statements reflect the actual share amounts
outstanding for each period presented. All agreements concerning stock
options and other commitments payable in shares of the Company's common
stock provide for the issuance of additional shares due to the
declaration of the stock split. All references to number of shares,
except shares authorized, stock option agreements, and to per-share
information in the consolidated financial statements have been adjusted
to reflect the stock split on a retroactive basis. At December 31, 1998,
367,561 shares were reserved for issuance under stock option agreements
and the employee stock bonus plan.
41
<PAGE>
Reconciliations of the numerator and denominator for earnings per common
share and diluted earnings per common share are shown below.
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Basic Earnings Per Share:
(Loss) Income available to common stockholders $(2,811,344) $ 948,729 $ 722,081
=========== ========== =========
Weighted average common shares outstanding 2,098,819 1,845,399 1,774,880
=========== ========== =========
Basic (Loss) Earnings per share $ (1.34) $ 0.51 $ 0.41
=========== ========== =========
Diluted Earnings Per Share:
(Loss) income available to common stockholders (2,811,344) 948,729 722,081
=========== ========== =========
Weighted average common shares
Shares outstanding 2,098,819 1,845,399 1,774,880
=========== ========== =========
Dilutive Shares -- 120,799 53,460
----------- ---------- ---------
Diluted Shares 2,098,819 1,966,198 1,828,340
=========== ========== =========
Diluted (loss) earnings per share $ (1.34) $ 0.48 $ 0.39
=========== ========== =========
</TABLE>
Shareholders Rights Plan
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) 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. As of
December 31, 1998, the Company has reserved 5,400,000 shares of
authorized but unissued common stock for issuance under the shareholders
rights plan.
Stock Options
In May 1996, the 1991 Stock Option Plan (the 1991 Plan) was amended to
increase the number of options available to purchase shares of common
stock from 200,000 to 800,000 shares. The options may be granted to
officers (including officers who are directors), other key employees of,
and consultants to, the Company.
The exercise price of each option is the fair market value of the stock
at the grant date. Options issued prior to April 1, 1996 are exercisable
in whole or in part any time after one year from the date of grant.
Options issued after April 1, 1996 are exercisable after one year from
the date of grant and in equal increments over four years. Options
issued prior to April 1, 1996 expire three years after the date of grant
and, in most cases, upon termination of employment. Options issued after
April 1, 1996, expire five years from 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.
42
<PAGE>
A summary of stock option activity during the years ended December 31,
1998, 1997, and 1996 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------------------- ------------------------ -----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER OF EXERCISE NUMBER OF EXERCISE NUMBER OF EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
<S> <C> <C> <C> <C> <C> <C>
Outstanding, January 1 309,012 $5.11 205,460 $2.78 93,750 $1.76
Granted 117,650 7.96 127,927 8.36 151,085 3.11
Exercised (115,129) 2.34 (23,625) 2.16 (25,500) 2.12
Canceled (19,384) 7.48 (750) 2.08 (13,875) 2.92
---------- ----- --------- ----- -------- -----
Outstanding, December 31 292,149 $7.23 309,012 $5.11 205,460 $2.78
========== ===== ========= ===== ======== =====
Exercisable options, end of year 130,163 $6.82 163,021 $3.10 58,875 $1.43
========== ===== ========= ===== ======== =====
</TABLE>
The following table summarizes information about stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------ -----------------------------
WEIGHTED
AVERAGE WEIGHTED
REMAINING WEIGHTED AVERAGE
TOTAL LIFE IN AVERAGE TOTAL EXERCISE
OUTSTANDING YEARS PRICE EXERCISABLE PRICE
<S> <C> <C> <C> <C>
24,000 2.8 $1.96 24,000 $1.96
27,387 2.8 3.22 5,775 3.25
114,135 3.4 6.91 55,916 7.14
108,989 4.1 9.19 39,641 9.34
17,638 3.9 10.52 4,831 10.91
------- -------
292,149 130,163
======= =======
</TABLE>
On December 7, 1992, the Board of Directors approved the 1993 Directors'
Stock Option Plan (1993 Directors' Plan). Under this plan, each
non-employee director who attends a Board of Directors meeting is, at
his election, granted an option to purchase 675 shares of common stock
at the fair market value at the grant date 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 Board of Directors replaced this plan with a 1996 Director's Plan
and no additional options were granted under this plan after December
31, 1995.
43
<PAGE>
A summary of stock option activity during the years ended December 31,
1998, 1997, and 1996 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------------------- ---------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
NUMBER OF AVERAGE NUMBER OF AVERAGE NUMBER OF AVERAGE
SHARES EXERCISE SHARES EXERCISE SHARES EXERCISE
PRICE PRICE PRICE
<S> <C> <C> <C> <C> <C> <C>
Outstanding, January 1 2,025 $1.92 14,175 $2.28 41,175 $ 2.59
Granted -- -- -- -- -- --
Exercised (2,025) 1.92 (12,150) 2.34 (24,300) 2.63
Canceled -- -- -- -- ( 2,700) 3.81
------ ----- ------- ------ ------ ------
Outstanding, December 31 -- $ -- 2,025 $ 1.92 14,175 $ 2.28
====== ===== ======= ====== ====== ======
Exercisable options -- $ -- 2,025 $ 1.92 14,175 $ 2.28
====== ===== ======= ====== ====== ======
</TABLE>
In February 1996, the Board of Directors approved the 1996 Directors'
Stock Option Plan (1996 Directors' Plan), which replaced the 1993
Directors' Plan. Under this plan, each non-employee director who attends
a Board of Directors meeting is granted an option to purchase 750 shares
of common stock at fair market value on the date of such Board meeting.
The options are exercisable upon grant and expire five years thereafter.
A summary of stock option activity during the year ended December 31,
1998, 1997 and 1996 (as adjusted for the three-for-two stock split) is
as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------------- -------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
NUMBER AVERAGE AVERAGE AVERAGE
OF EXERCISE NUMBER EXERCISE NUMBER EXERCISE
SHARES PRICE OF SHARES PRICE OF SHARES PRICE
<S> <C> <C> <C> <C> <C> <C>
Outstanding, January 1 45,000 $7.16 24,000 $3.49 -- $--
Granted 19,500 7.30 32,250 8.59 24,000 3.49
Exercised (3,750) 3.48 (11,250) 3.25 -- --
Canceled -- -- -- -- -- --
------ ----- ------ ----- ------ -----
Outstanding, December 31 60,750 $7.43 45,000 $7.16 24,000 $3.49
====== ===== ====== ===== ====== =====
Exercisable options 60,750 $7.43 45,000 $7.16 24,000 $3.49
====== ===== ====== ===== ====== =====
</TABLE>
44
<PAGE>
The following table summarizes information about stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------- -----------------------------
WEIGHTED
AVERAGE WEIGHTED
REMAINING WEIGHTED AVERAGE
TOTAL LIFE IN AVERAGE TOTAL EXERCISE
OUTSTANDING YEARS PRICE EXERCISABLE PRICE
<S> <C> <C> <C> <C>
10,500 3.33 $ 3.24 10,500 $ 3.24
8,250 3.30 5.97 8,250 5.97
13,500 3.87 6.89 13,500 6.89
14,250 3.89 8.78 14,250 8.78
14,250 4.01 10.54 14,250 10.54
------ ------
60,750 60,750
====== ======
</TABLE>
In June 1990, the Board of Directors adopted a stock option plan (the
Chairman's Plan) under which the Chairman of the Board is the sole
participant. On each January 1, the Participant was granted an option to
purchase 2,500 shares of common stock at fair market value on the grant
date. Each option granted under this plan will expire three years after
the date of grant. Effective December 31, 1996, no additional options
were granted under this plan and all options granted were either
exercised or cancelled during 1997.
A summary of stock option activity during the years ended December 31,
1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1997 1996
---------------------- -------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
NUMBER EXERCISE NUMBER EXERCISE
OF SHARES PRICE OF SHARES PRICE
<S> <C> <C> <C> <C>
Outstanding, January 1 5,000 $2.59 7,500 $2.89
Granted - - 2,500 1.92
Exercised (2,500) 1.92 (2,500) 2.09
Canceled (2,500) 3.25 (2,500) 3.33
------- ---- ------- -----
Outstanding, December 31 -- $ -- 5,000 $2.59
======= ======= ===== =====
Exercisable options -- $ -- 5,000 $2.59
======= ======= ===== =====
</TABLE>
The Company has adopted the disclosure provisions of Statement of
Financial Accounting Standards No. 123 ("SFAS 123"), ACCOUNTING FOR
STOCK BASED COMPENSATION. The required disclosures include pro forma net
income (loss) and basic earnings (loss) per share as if the fair
value-based method of accounting had been used.
45
<PAGE>
If compensation cost for the Company's 1998, 1997, and 1996 grants for
stock-based compensation had been determined consistent with the fair
value based method of accounting per SFAS 123, the Company's pro forma
net income (loss) and pro forma basic (loss) earnings per share for the
years ended December 31, 1998, 1997, and 1996, would be as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Net (loss) income
As reported $(2,811,344) $948,729 $722,081
Pro forma $(3,048,288) $708,932 $538,647
Basic (loss) earnings per share
As reported $ (1.34) $ 0.51 $ 0.41
Pro forma $ (1.45) $ 0.38 $ 0.30
</TABLE>
The weighted average fair value at date of grant for options granted
during 1998, 1997 and 1996 was $4.14, $4.27 and $4.66 per option. The
fair value of the option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following assumptions:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Expected dividend yield 0% 0% 0%
Expected stock price volatility 74% 300% 244%
Risk-free interest rate 5.13% 6.12% 6.37%
Expected option term 3 years 5 years 3 and 4 years
</TABLE>
On December 31, 1998, the Company authorized the cancellation and
reissuance of employee stock options held by employees at the manager
level and lower with exercise prices in excess of fair market value. The
employees had 30 days during which they could elect to accept the
repricing offer. A total of 49,469 options with an average price of
$8.23 were cancelled in January 1999 and reissued at an average price of
$3.06.
13. EMPLOYEE BENEFIT PLANS
The Company has a noncontributory Profit-Sharing Retirement Plan
covering substantially all employees. Vesting occurs over a period of
four years from the date of entry into the plan (date of employment).
Under the plan, the Company's contribution is determined annually by the
Board of Directors and is funded as accrued. The profit-sharing expense
for 1998, 1997 and 1996 was $0, $152,722 and $113,329, respectively.
The Company has established a contributory cash and deferred profit
sharing plan qualified under Section 401(k) of the Internal Revenue Code
for all of the Company's full-time employees. The Company matches
employee contributions to the plan up to a maximum of 2.5%. Total
matching contributions were $101,831, $83,203 and $62,827 in 1998, 1997
and 1996, respectively.
46
<PAGE>
In 1980, the Company adopted an employee cash/stock bonus plan for which
12,500 shares of the Company's common stock have been set aside to be
issued to employees at the discretion of management. During 1998, 1,000
shares were issued under the plan and no shares were issued in 1997 and
1996. In the aggregate, 4,320 shares have been issued under the plan.
14. SEGMENT INFORMATION
Optelecom has three reportable segments: 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 the Paragon division (acquired in December 1997), which
designs and markets electronic products and systems utilizing copper
cabling. The segments reflect management's internal reportable
information analysis and approximates the Company's strategic business
units' financial results reported before income taxes. The accounting
policies of the segments are the same as those described in the summary
of significant accounting policies. The Company accounts for
intersegment revenues as if the revenues were from third parties, that
is, at current market prices. There were no intersegment revenues or
expenses during 1997 or 1996. The Company does not allocate income
taxes, interest or other corporate expenses to segments.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
--------------------------------------------------------
COMMUNICATION GOVERNMENT PARAGON
PRODUCTS PRODUCTS AUDIO
DIVISION DIVISION VISUAL LTD. TOTAL
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues $ 8,860,852 $ 1,549,730 $ 6,041,787 $ 16,452,369
Intersegment revenues (118,620) -- --
------------ ------------ ------------ ------------
(118,620)
Total Revenues 8,742,232 1,549,730 6,041,787 16,333,749
Operating (loss) income 174,916 107,423 (3,412,991) (3,130,652)
Intersegment expenses (412,273) -- 412,273 --
------------ ------------ ------------ ------------
Total (loss) income before taxes (237,357) 107,423 (3,000,718) (3,130,652)
Corporate assets -- -- -- 958,566
Identifiable assets 7,935,721 370,587 1,541,808 9,848,116
Intersegment assets (2,174,734) -- -- (2,174,734)
------------ ------------ ------------ ------------
Total identifiable assets $ 5,760,987 $ 370,587 $ 1,541,808 $ 8,631,948
============ ============ ============ ============
Gross additions to property and
equipment:
Identifiable $ 290,121 $ 142,485 $ 73,010 $ 505,616
------------ ------------ ------------ ------------
Depreciation and amortization:
Identifiable $ 337,692 $ 28,497 $ 505,976 $ 872,165
============ ============ ============ ============
</TABLE>
47
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
---------------------------------------------------
COMMUNICATION GOVERNMENT PARAGON
PRODUCTS PRODUCTS AUDIO
DIVISION DIVISION VISUAL LTD. TOTAL
---------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 9,734,088 $ 2,372,950 $ 164,019 $12,271,057
Operating income (loss) 574,789 806,011 (13,581) 1,367,219
Identifiable assets 9,885,518 367,113 1,165,543 11,418,174
Corporate assets -- -- -- 791,567
----------- ----------- ----------- -----------
Total assets 9,885,518 367,113 1,165,543 12,209,741
=========== =========== =========== ===========
Gross additions to property and equipment:
Identifiable 592,150 36,757 -- 628,907
Corporate
-- -- -- 72,622
----------- ----------- ----------- -----------
Total $ 592,150 $ 36,757 $ -- $ 701,529
=========== =========== =========== ===========
Depreciation and amortization:
Identifiable $ 299,623 $ -- $ 609 $ 300,232
=========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
-------------------------------------------
COMMUNICATION GOVERNMENT PARAGON
PRODUCTS PRODUCTS AUDIO
DIVISION DIVISION VISUAL LTD. TOTAL
-------------------------------------------
<S> <C> <C> <C> <C>
Revenues $6,453,686 $2,456,577 $ -- $8,910,263
Operating income (loss) 17,543 1,034,134 -- 1,051,677
Identifiable assets 3,186,605 510,278 -- 3,696,883
Corporate assets -- -- -- 769,580
---------- ---------- ------- ----------
Total assets 3,186,605 510,278 4,466,463
========== ========== ======= ==========
Gross additions to property and equipment:
Identifiable 219,119 -- -- 219,119
========== ========== ======= ==========
Depreciation and amortization:
Identifiable $ 235,431 $ -- $ -- $ 235,431
========== ========== ======= ==========
</TABLE>
The Company is engaged primarily in the development, manufacture, and
sale of optical fiber 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, deferred taxes, and long-term assets.
48
<PAGE>
15. SIGNIFICANT CUSTOMERS AND FOREIGN EXPORTS
The Company's primary business is with commercial customers and the U.S.
Government and its prime contractors. In 1998, one commercial customer
accounted for 14% of sales and no other customer accounted for more than
5% of sales. In 1997, two commercial customers each accounted for 10%
and one customer accounted for 7% of sales. In 1996, sales to three
commercial customers were 21%, 8% and 8% of sales, respectively. The
Company has operations outside of the United States in the United
Kingdom. Included in revenues are export sales of $2,097,000, $2,130,000
and $1,159,000 for 1998, 1997 and 1996, respectively. Foreign sales as a
result of Paragon Audio Visual Ltd. were $6,034,000 for 1998 and
$164,000 for 1997 (see Note 2). Long-lived assets reported for the
Paragon segment are located in the United Kingdom. All other long-lives
assets are located in the United States.
16. EFFECT OF NEW ACCOUNTING PROUNCEMENTS
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities." This statement requires companies
to record derivatives on their balance sheet as assets or liabilities,
measured at fair value. Gains or losses resulting from changes in the
values of those derivatives would be accounted for depending on the use
of the derivative and whether it qualifies for hedging accounting. SFAS
No. 133 will be effective for the Company's fiscal year ending December
31, 2000. The Company had no derivative or hedging activity in any of
the periods presented.
* * * * * *
49
<PAGE>
SCHEDULE II
OPTELECOM, INC.
SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
BALANCE CHARGED TO BALANCE
AT BEGINNING COSTS AND AT END
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS OF PERIOD
<S> <C> <C> <C> <C>
Year Ended December 31, 1996
Reserves and allowances
deducted
from assets accounts:
Obsolescence reserve for
Inventory $ 97,005 $ 92,494 $(113,250) $ 76,249
Allowance for uncollectible
Accounts receivable -- 78,186 -- 78,186
Year Ended December 31, 1997
Reserves and allowances
deducted
from asset accounts:
Obsolescence reserve for
Inventory $ 76,249 $ 88,466 $ (72,031) $ 92,684
Allowance for uncollectible
Accounts receivable 78,186 (15,000) (11,649) 51,537
Year Ended December 31, 1998
Reserves and allowances
deducted
from asset accounts:
Obsolescence reserve for
Inventory $ 92,684 $ 292,790 $ (21,339) $ 364,135
Allowance for uncollectible
Accounts receivable 51,537 250,695 -- 302,232
</TABLE>
50
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None
51
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
33-53145 of Optelecom, Inc. on Form S-3 of our report dated March 26, 1999,
appearing in this Annual Report on Form 10-K of Optelecom, Inc. for the year
ended December 31, 1998.
McLean, VA
March 26, 1999
52
<PAGE>
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES OF THE
REGISTRANT
Executive officers are selected annually and serve at the discretion of the
board of directors. No family relationships exist between any of the
executive officers or directors of the Company. The following table sets
forth certain information with respect to each person who is an executive
officer, key employee or director of the Company as of March 17, 1999.
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Executive Officers
Edmund Ludwig 59 President, Chief Executive Officer and Director
Carole Argo 37 Vice President, Chief Financial Officer
Significant Employees
James Coffman 51 Vice President, Engineering
Anthony DeVito 51 Director, Sales and Marketing
Thomas Driscoll 46 Controller
John Kinnaman 40 Manufacturing Manager
Michael Weight 40 Managing Director, Paragon Audio Visual Ltd.
Outside Directors
Alexander Karpinski(1)(2) 67 Chairman of the Board, Optelecom, Inc.
Gordon Smith(1)(2) 64 Director, Optelecom, Inc.
Clyde Heintzelman 60 Director, Optelecom, Inc.
Richard Kreter 52 Director, Optelecom, Inc.
</TABLE>
- -----------------------------
1. Member of the Audit Committee
2. Member of the Executive Compensation Committee
Executive Officers
Edmund Ludwig - President and Chief Executive Officer of the Company. Mr.
Ludwig joined Optelecom in 1974 as Executive Vice President managing the
development of fiber optic technology systems for communications and
sensors as well as continuing with management of laser illuminator systems
contracts. He assumed roles of increasing responsibility culminating in
election to President and CEO in January 1991. Prior to Optelecom, Mr.
Ludwig was employed by IBM Federal Systems Division as Manager of
semiconductor laser illuminator system development.
53
<PAGE>
Carole Argo - Vice President, Chief Financial Officer of the Company since
August 3, 1998. From July 1991 - June 1997, Ms. Argo was employed by, BYK
GARDNER USA, a manufacturer of electro-optical instrument system for
analysis of color and other appearance attributes in the role of Vice
President of Finance and Operations (January 1994- June 1997) and
Controller (July 1991-December 1993).
Significant Employees
James Coffman - Vice President, Engineering. Mr. Coffman has been with
Optelecom since 1978 in various management positions within the Engineering
group. Prior to Optelecom, he was employed by E Systems.
Anthony DeVito - Director, Sales and Marketing. Mr. DeVito joined the
Company in May 1997 as Southeast Regional Sales Manager and was named to
his current position in February 1999. Prior to joining Optelecom, he
worked at Pirelli Cables Corporation from 1995 to 1997 as Southeast
Regional Sales Manager. From 1971 to 1995 he was Manager Telecommunications
at Bell South.
Thomas Driscoll - Controller. Mr. Driscoll joined the Company in September
1998. Previously Mr. Driscoll was Controller of GSE Systems, Inc. from 1997
to 1998. From 1987 - 1997, Tom was Controller, International Filler
Corporation, New York.
John Kinnaman - Manager, Manufacturing. Mr. Kinnaman joined the Company in
December 1998. Prior to joining Optelecom, he was employed at
Telecommunications Techniques Corporation as Director of Telecommunications
Manufacturing Operations from 1996 to 1997; and Product Line Manager from
1988 to 1996.
Michael Weight - Managing Director, Paragon. Mr. Weight joined Paragon in
May 1998 as Chief Engineer and was appointed Managing Director in February
1999. From October 1997 to May 1998, he was Product Manager for all trading
room desktop products for Open Trade Technologies, Ltd. From January 1995
to October 1997, Mr. Weight was Product Manager for Management
Technologies, Inc. From October 1990 to December 1994, Mr. Weight held
various management positions in Research and Development for Digital
Equipment Company.
Outside Directors
Alexander Karpinski has been a Director of the Company since April 1996 and
Chairman since May 1998. Mr. Karpinski is Founder and President of Alex
International, Inc., a telecommunications consulting firm to business and
Government clients since April 1985. From April 1992 to June 1995, he was a
Telecommunications Project Manager for teleconsultant under contract for
the U.S. agency for International Development in Warsaw, Poland. He was
with Chesapeake and Potomac Telephone Company and then Bell Atlantic in
various capacities at the General Manager level including engineering,
marketing and operations after an assignment at Bell Telephone
Laboratories.
54
<PAGE>
Gordon Smith has been a Director of the Company since October 1995. He has
been Vice President, Eastern Region of Vanguard Research, Inc. from June
1995 to present and President and CEO of Datatape, Inc. from August 1990 to
September 1994. Dr. Smith has advised the Company that he will not run for
re-election at the end of his term in 1999.
Clyde Heintzelman has been a Director of the Company since December 1998.
Mr. Heintzelman is President and CEO of SAVVIS Communications, Inc., an
internet company, since December 1998. Prior to his role at SAVVIS, Mr.
Heintzelman was President and Chief Operating Officer of Digex, Inc., also
an internet company, from 1995 through 1997. During 1992 through 1994, he
also participated as a founder in a start-up firm (CSI) which focused on
building products (hardware/software for switched wide area networks using
ISDN technology). Prior to these start-up firms, Mr. Heintzelman spent 28
years (1964-1992) with Bell Atlantic and its predecessor companies.
Richard Kreter was appointed a Director of the Company in March 1999. Mr.
Kreter is currently Managing Partner of Kreter & Associates, a private
management consulting firm. Mr. Kreter served as Director of Corporate
Development for Marriott International before founding his own firm.
The current Directors are elected pursuant to the terms of the Company's
By-Laws. The Board of Directors is divided into three classes, as nearly
equal in number as the then total number of Directors, constituting the
Whole Board permits, with the term of office of one class expiring each
year. No class of directors will contain more than one director more than
any other class. Class I will expire at the annual meeting of stockholders
to be held in 1999, Class II will expire at the annual meeting of 2000 and
Class III will expire at the annual meeting of 2001. At each annual meeting
of stockholders, the successors to directors whose terms will then expire
will be elected to serve from the time of election and qualification until
the third annual meeting following election and until their successors have
been duly elected and qualified, or until their earlier resignation or,
removal, if any. Richard Kreter and Gordon Smith have been designated Class
I Directors. Clyde Heintzelman and Alexander Karpinski have been designated
Class II Directors. Edmund Ludwig has been designated a Class III Director.
55
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
Summary of Compensation. The following table shows a three-year history of
the Company's compensation of its Chief Executive Officer and the other two
most highly compensated executive officers of the Company (the "Named
Executives") serving as such as of the end of 1998, each of whose total
salary and bonus for the year ended December 31, 1998 was in excess of
$100,000 for services rendered in all capacities for such year.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
--------------------------------------------------
SECURITIES
NAME AND PRINCIPAL YEAR SALARY BONUS OTHER ANNUAL UNDERLYING ALL OTHER
POSITION COMPENSATION OPTIONS (#) COMPENSATION
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Edmund Ludwig, President, 1998 $147,433 $34,000(1) - - -
Chief Executive Officer and 1997 133,613 30,000(1) - 12,000 $ 6,810
Director 1996 105,000 - - 22,500 $56,712(2)
---------------------------------------------------------------------------------------------------
Andrew Brown, Managing 1998 $102,920 - - - -
Director, Paragon Audio 1997 - - - - -
Visual Ltd. (3)(5) 1996 - - - - -
---------------------------------------------------------------------------------------------------
David Brown, Chairman 1998 $102,920 - - - -
And Marketing Director, 1997 - - - - -
Paragon Audio Visual, 1996 - - - - -
Ltd. and Director(4)(5)
---------------------------------------------------------------------------------------------------
</TABLE>
(1) Bonus paid for the prior fiscal year-end results.
(2) Includes debt forgiveness of $22,207 to cover income tax expense incurred
in acquiring shares under an escrow plan and $34,505 associated with cost
of living adjustments for years 1984 through 1995, which was included in
employment contract of 1984.
(3) On February 26, 1999, the Company terminated Andrew Brown's employment.
(4) On December 21, 1998, the Company terminated David Brown's employment. On
February 19, 1999, David Brown resigned as a Director of the Company.
(5) The Company acquired Paragon Audio Visual, Ltd. in December 1997.
Aggregated Option Exercises in Last Year and Year-End Option Values. The
Company did not grant any stock options to any Named Executives during
1998. The following table shows information regarding the stock options
exercised by the Company's Named Executives during 1998 and the number and
value of unexercised stock options at December 31, 1998. The value of
unexercised stock options is based on the closing price of $2-13/16 per
share of common stock on December 31, 1998, the last trading day of 1998.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Options at In-the-Money Options at
December 31, 1998 (#) December 31, 1998 ($)
Shares Acquired
Name on Exercise Value
(#) Realized Exercisable Unexercisable Exercisable Unexercisable
----------------- ---------------- -------- ------------ ------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
Edmund Ludwig 30,000 $29,490 27,000 13,500 $0 $0
David Brown - - - - - -
Andrew Brown - - - - - -
</TABLE>
56
<PAGE>
BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange
Commission (SEC) and the NASD. Officers, directors and greater than
ten-percent stockholders are required by SEC regulations to furnish the
Company with copies of all Section 16(a) forms they file.
Based solely on a review of the copies of such forms furnished to the
Company, or written representations that no Forms 4 were required, the
Company believes that during 1998 it has complied with all Section 16(a)
filing requirements applicable to its officers, directors and greater than
ten-percent beneficial owners.
COMPENSATION OF DIRECTORS
As compensation for attending each meeting of the Board of Directors,
Directors who are not also employees of the Company (outside Directors),
receive options to purchase 750 shares of Optelecom, Inc. stock with an
option price equal to the market price of Optelecom, Inc. stock on the day
of the meeting. Outside Directors are also paid their expenses for
attending meetings. Directors who are also employees receive no
compensation for attending meetings of the Board of Directors.
EMPLOYMENT CONTRACTS
Edmund Ludwig, CEO, is compensated pursuant to an employment agreement,
which expires on December 31, 1999 and continues for successive one-year
periods thereafter unless terminated by either party upon at least sixty
(60) days notice. The Board of Directors establishes Mr. Ludwig's salary
for each succeeding year. Should Mr. Ludwig die while employed under this
agreement, the Company will pay his estate one year's salary.
57
<PAGE>
ITEM 12. OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of December 31, 1998, the name and
address of each person (other than directors of the Company) who is known
by the Company to be the beneficial owner of more than 5% of the Company's
outstanding Common Stock, the number of shares Common Stock so owned
beneficially owned by each such person, and the percentage of the Company's
outstanding.
<TABLE>
<CAPTION>
NAME AND ADDRESS AMOUNT OF PERCENT
OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP OF CLASS
------------------- -------------------- --------
<S> <C> <C>
Andrew Sean Brown
Coombe Folley, The Grove Park Lane 40,668(1) 1.89%
Thatcham, Berkshire RG18 4NI
Darren Neil Brown
Waverley House, Long Lane 40,668(1) 1.89%
Thatcham, Berkshire RG19 9QT
Mark David Brown
Sandhill House, Long Lane, Hermitage 40,668(1) 1.89%
Newbury, Berkshire RG18 9XU
David Arthur Brown
Waverly, Long Lane, Hermitage 40,668(1) 1.89%
Newbury, Berkshire RG18 9QT
Adventatum Jersey Limited (a company formed
under the laws of Jersey), Wellington House, 8,580(1) .40%
Union Street, St. Helier, Jersey.
Modelege Limited (a company formed under the
laws of England), 64 Queen Street, London, 8,580(1)(2) .40%
England.
TOTAL 179,832 8.36%
</TABLE>
- ---------------------
1. According to the SEC Form 13D/A filed on March 1, 1999, the parties
make a statement that although the reporting persons may be deemed to
constitute a "group" within the meaning of Section 13 (d)(3) of the
Securities Exchange Act of 1934, as amended, each reporting person
disclaims the existence of any such group.
2. These shares are owned by record by Adventatum Jersey Limited.
58
<PAGE>
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth certain information with respect to the
beneficial ownership of the common stock of the Company as of March 17,
1999 by each director, nominee for director, Named Executives and all
current directors and executive officers as a group.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENT
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) OF CLASS
------------------------ ------------------ --------
<S> <C> <C>
Edmund Ludwig 116,310(2)(3) 5.4%
------------------------------------------------------ --------------------- ------------
Alexander Karpinski 38,250(2) *
------------------------------------------------------ --------------------- ------------
Clyde Heintzelman 3,750(2) *
------------------------------------------------------ --------------------- ------------
Gordon Smith 51,525(2) *
------------------------------------------------------ --------------------- ------------
Richard Kreter 7,750(2) *
------------------------------------------------------ --------------------- ------------
ALL DIRECTORS AND EXECUTIVE OFFICERS AS A GROUP 217,585(2)(3) 10.09%
(6 PERSONS)
</TABLE>
----------------
* Less than 1%.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Shares of Common Stock
subject to options currently exercisable within sixty (60) days are
deemed to be outstanding for computing the percentage of the person
holding such options or warrants, but are not deemed outstanding for
computing the percentage of any other person. Except as indicated by
footnote, and subject to community property laws where applicable, the
persons named in the table have sole voting and investment power with
respect to all shares of Common Stock shown as beneficially owned by
them.
(2) Includes shares of common stock, which were subject to options
entitling the holder to acquire the shares subject thereto within
sixty (60) days. As of March 17, 1999, Mr. Heintzelman, Mr. Karpinski,
Mr. Kreter, Mr. Ludwig and Dr. Smith held such options for the
purchase of 3,750, 22,400, 1,500, 4,500 and 30,000 shares,
respectively.
(3) Includes 19,997 shares held in trust by the Company for Mr. Ludwig and
23,693 shares, which Mr. Ludwig owns jointly with his wife, Mrs.
Roberta Ludwig.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTIES
During 1998, the Company retained Kreter & Associates to perform
consulting services in connection with certain financial and operations
matters. Mr. Richard Kreter, now a Director, is managing partner of Kreter
& Associates. Total fees paid to Kreter & Associates for its work for
Optelecom amounted to approximately $54,000 for strategic planning for the
research and development project and $61,000 for accounting, finance and
budgetary consulting during the absence of a company Chief Financial
Officer.
59
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
1. Consolidated Financial Statements and Financial Statement Schedules
Report of Independent Certified Public Accountants
Statements
Consolidated Balance Sheets as of December 31, 1998 and 1997
Consolidated Statements of Operations for the Years Ended December 31,
1998, 1997 and 1996
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Comprehensive (Loss) Income for the Years Ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the Years Ended December 31,
1998, 1997 and 1996
Summary of Accounting Policies
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
Schedule II Valuation and Qualifying Accounts, Years Ended December 31,
1998 and 1997 and 1996
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) Restated Certificate of Incorporation of Optelecom, Inc. as in
effect March 23, 1998
Item 3(i)(1) Amended and Restated By-Laws of Optelecom, Inc. as in effect
December 1, 1998
Item 4(1) Rights Agreement dated June 15, 1998, incorporated by reference
from the Company's Form 8A-12 dated June 30, 1998
Item 10(1) 1991 Stock Option Plan incorporated by reference from the
Company's Form S-8 dated November 11, 1991
60
<PAGE>
Item 10(2) 1996 Directors Stock Option Plan incorporated by reference from
the Company's Form S-8 dated August 14, 1995
Item 10(3) Agreement dated December 12, 1997 among the Company, Paragon
Audio Visual Ltd., David Brown, Mark Brown, Andrew Brown, Darren Brown and
Modeledge Ltd., hereby incorporated by reference to the exhibits to the
Company's Form 8-K filed with the Commission on December 23, 1997.
Item 21 - The significant subsidiaries of the Registrant, as defined in
Section 1-02(w) of regulations S-X are:
Paragon Audio Visual, Ltd. (Paragon), acquired by the Company on
December 12, 1997.
4. Reports on Form 8-K
None.
61
<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 /s/Edmund D. Ludwig
--------------------------------
Edmund D. Ludwig
DIRECTOR AND PRESIDENT AND CEO
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 /s/Alexander L. Karpinski
--------------------------------
Alexander L. Karpinski
CHAIRMAN
Date: By /s/Clyde Heintzelman
--------------------------------
Clyde Heintzelman
DIRECTOR
Date: By /s/Gordon A. Smith
--------------------------------
Gordon A. Smith
DIRECTOR
Date: By /s/Richard C. Kreter
--------------------------------
Richard C. Kreter
DIRECTOR
Date: By /s/Carole D. Argo
--------------------------------
Carole D. Argo
CHIEF FINANCIAL OFFICER
62
EXHIBITS
OPTELECOM, INC.
BY-LAWS
Amended and Restated as of
December 1, 1998
ARTICLE I
Officers
Section 1. The registered office shall be in the City of Wilmington,
County of New Castle, State of Delaware.
Section 2. The Corporation may also have offices at such places both
within and without the State of Delaware as the Board of Directors may from time
to time determine or the business of the Corporation may require.
ARTICLE II
Meetings of Stockholders
Section 1. All meetings of the stockholders for the election of
directors shall be held at such place either within or without the State of
Delaware as shall be designated from time to time by the Board of Directors and
stated in the notice of the meeting. Meetings of stockholders for any other
purpose may be held at such time and place, within or without the State of
Delaware, as shall be stated in the notice of meeting or in a duly executed
waiver of notice thereof.
Section 2. Annual meetings of stockholders, commencing with the year
1982, shall be held at a date and time in the third week of May, or any other
week, as shall be designated from time to time by the Board of Directors and
stated in the notice of the meeting, at which they shall elect by a plurality
vote a Board of Directors, and transact such other business as may properly be
brought before the meeting.
Section 3. Written notice of the annual meeting stating the place, date
and hour of the meeting shall be given to each stockholder entitled to vote at
such meeting not less than ten nor more than 60 days before the date of the
meeting.
Section 4. The officer who has charge of the stock ledger of the
Corporation shall prepare and make, at least ten days before every meeting of
stockholders, a complete list of the stockholders entitled to vote at the
meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at least
ten days prior to the meeting, either at a place within the city where the
meeting is to be held, which place shall be specified in the notice of the
meeting, or, if not so specified, at the place where the meeting is to be held.
The list shall also be produced and kept at the time and place of the meeting
during the whole time thereof, and may be inspected by any stockholder who is
present.
<PAGE>
Section 5. Special meetings of the stockholder, for any purpose or
purposes, unless otherwise prescribed by statute or by the Certificate of
Incorporation, may be called by the President and shall be called by the
President or Secretary at the request in writing of a majority of the Board of
Directors, or at the request in writing of stockholders owning a majority in
amount of the entire capital stock of the Corporation issued and outstanding and
entitled to vote. Such request shall state the purpose or purposes of the
proposed meeting.
Section 6. Written notice of a special meeting stating the place, date
and hour of the meeting and the purpose or purposes for which the meeting is
called, shall be given not less than ten nor more than 60 days before the date
of the meeting, to each stockholder entitled to vote at such meeting.
Section 7. No business shall be transacted at any Annual Meeting of
Stockholders, except as may be (i) specified in the notice of the meeting given
by or at the direction of the Board (including, if so specified, any stockholder
proposal submitted pursuant to the rules and regulations of the Securities and
Exchange Commission), (ii) otherwise brought before the meeting by or at the
direction of the Board or (iii) otherwise brought before the meeting in
accordance with the procedure set forth in the following paragraph, by a
stockholder of the corporation entitled to vote at such meeting.
For business to be brought by a stockholder before an Annual Meeting of
Stockholders pursuant to clause (iii) above, the stockholder must have given
written notice thereof to the Secretary of the corporation, such notice to be
received at the principal executive offices of the corporation not less than 90
nor more than 120 days prior to the one year anniversary of the date of the
Annual Meeting of Stockholders of the previous year provided however; that in
the event that the Annual Meeting of Stockholders is called for a date that is
not within 30 days before or after such anniversary date, notice by the
stockholder must be received at the principal executive offices of the
corporation not later than the close of business on the tenth day following the
day on which the corporation's notice of the date of the meeting is first given
or made to the stockholders or disclosed to the general public (which disclosure
may be effected by means of a publicly available filing with the Securities and
Exchange Commission), whichever occurs first. A stockholder's notice to the
Secretary shall set forth, as to each matter the stockholder proposes to bring
before the Annual Meeting of Stockholders, (i) a brief description of the
business proposed to be brought before the Annual Meeting of Stockholders and of
the reasons for bringing such business before the meeting and, if such business
includes a proposal to amend either the Certificate of Incorporation or these
By-Laws, the text of the proposed amendment, (ii) the name and record address of
the stockholder proposing such business, (iii) the number of shares of each
class of stock of the corporation that are beneficially owned by such
stockholder, (iv) any material interest of the stockholder in such business and
(v) such other information relating to the proposal that is required to be
disclosed in solicitations pursuant to the Securities Exchange Act of 1934, as
amended, and the rules and regulations of the Securities and Exchange Commission
or other applicable law.
Notwithstanding anything in these By-Laws to the contrary, no business
shall be conducted at the Annual Meeting of Stockholders except in accordance
with the procedures set forth in this Section 7 provided however; that nothing
in this Section 7 shall be deemed to preclude discussion by any stockholder of
any business properly brought before the Annual Meeting of Stockholders in
accordance with such procedures. The Chairman of an Annual Meeting of
Stockholders shall, if the facts warrant, determine and declare to the meeting
that the business was not properly brought before the meeting in accordance with
the provisions of
2
<PAGE>
this Section 7, and if he or she should so determine, he or
she shall so declare to the meeting and any such business not properly brought
before the Annual Meeting of Stockholders shall not be transacted.
Section 8. The holders of 33-1/3% of the stock issued and outstanding
and entitled to vote thereat, present in person or represented by proxy, shall
constitute a quorum at all meetings of the business except as otherwise provided
by statute or the Certificate of Incorporation. If, however, such quorum shall
not be present or represented at any meeting of the stockholders, the
stockholders entitled to vote thereat, present in person or represented by
proxy, shall have power to adjourn the meeting from time to time, without notice
other than announcement at the meeting, until a quorum shall be present or
represented. At such adjourned meeting, at which a quorum shall be present or
represented, any business may be transacted which might have been transacted at
the meeting as originally notified. If the adjournment is for more than 30 days,
or if after the adjournment a new record date is fixed for the adjourned
meeting, a notice of the adjourned meeting shall be given to each stockholder of
record entitled to vote at the meeting.
Section 9. When a quorum is present at any meeting, the vote of the
holders of a majority of the stock actually voting on any question shall decide
that question unless the question is one upon which, by express provision of the
statutes or of the Certificate of Incorporation, a different vote is required,
in which case such express provision shall govern and control the decision of
such question.
Section 10. Unless otherwise provided in the Certificate of
Incorporation, each stockholder shall at every meeting of the stockholders be
entitled to one vote in person or by proxy for each share of the capital stock
having voting power held by such stockholder, but no proxy shall be voted on
after three years from its date, unless the proxy provides for a longer period.
Section 11. Unless otherwise provided in the Certificate of
Incorporation, any action required to be taken at any annual or special meeting
of stockholders of the Corporation, or any action which may be taken at any
annual or special meeting of such stockholders, may be taken without a meeting,
without a prior notice and without a vote, if a consent in writing, setting
forth the action so taken, shall be signed by the holders of outstanding stock
having not less than the minimum number of votes that would be necessary to
authorize or take such action at a meeting at which all shares entitled to vote
thereon were present and voted. Prompt notice of the taking of the corporate
action without a meeting by less than unanimous written consent shall be given
to those stockholders who have not consented in writing.
ARTICLE III
Directors
Section 1. The number of directors of the corporation shall not be less
than three (3) nor more than nine (9), the exact number of directors to be
determined from time to time by resolution adopted by the affirmative vote of a
majority of the Whole Board of Directors. As used in this Article III, the terms
"Whole Board" and "Whole Board of Directors" means the total number of directors
which the Corporation would have if there were no vacancies on the Board of
Directors. The Board of Directors shall be divided into three classes, as nearly
equal in number as the then total number of directors constituting the Whole
Board permits, with the term of office of one class expiring each year. No class
of directors shall contain more than one director more than any other class. At
the annual meeting of shareholders in 1983, directors of
3
<PAGE>
the first class shall be elected to hold office for a term expiring at the next
succeeding annual meeting, directors of the second class shall be elected to
hold office for a term expiring at the second succeeding annual meeting and
directors of the third class shall be elected to hold office for a term expiring
at the third succeeding annual meeting. Directors need not be stockholders.
Section 2. Any vacancies in the Board of Directors for any reason, and
any newly created directorship resulting from any increase in the number of
directors, may be filled by the Board of Directors, acting by a majority of the
directors then in office, although less than a quorum, and any directors so
chosen shall hold office until the next election of the respective class for
which such director shall have been chosen and their successors shall be elected
and qualified. No decrease in the number of directors shall shorten the term of
office of any incumbent director. At each annual meeting of shareholders, the
successors to the class of directors whose terms shall then expire shall be
elected to hold office for a term expiring at the third succeeding annual
meeting. Directors shall hold office until expiration of their respective terms
and thereafter until their successors shall have been duly elected and have
qualified.
Section 3. The business of the Corporation shall be managed by its Board
of Directors which may exercise all such powers of the Corporation and do all
such lawful acts and things as are not by statute or by the Certificate of
Incorporation or by these By-Laws directed or required to be exercised or done
by the stockholders.
Section 4. Subject to the rights of holders of any class or series of
stock having a preference over the common shares as to dividends or upon
liquidation, nominations for the election of directors may only be made (i) by
the Board or a committee appointed by the Board or (ii) by a stockholder of the
corporation entitled to vote at the meeting at which a person is to be nominated
in accordance with the procedure set forth in the following paragraph.
A stockholder may nominate a person or persons for election as directors
only if the stockholder has given written notice of its intent to make such
nomination to the Secretary of the corporation, such notice to be received at
the principal executive offices of the corporation (i) with respect to an Annual
Meeting of Stockholders, not less than 90 nor more than 120 days prior to the
one year anniversary of the date of the Annual Meeting of Stockholders of the
previous year provided however; that in the event that the Annual Meeting of
Stockholders is called for a date that is not within 30 days before or after
such anniversary date, notice by the stockholder must be received at the
principal executive offices of the corporation not later than the close of
business on the tenth day following the day on which the corporation's notice of
the date of the meeting is first given or made to the stockholders or disclosed
to the general public (which disclosure may be effected by means of a publicly
available filing with the Securities and Exchange Commission), whichever occurs
first and (ii) with respect to a Special Meeting of Stockholders called for the
purpose of electing directors, not later than the close of business on the tenth
day following the day on which the corporation's notice of the date of the
meeting is first given or made to the stockholders or disclosed to the general
public (which disclosure may be effected by means of a publicly available filing
with the Securities and Exchange Commission), whichever occurs first. A
stockholder's notice to the Secretary shall set forth (i) the name and record
address of the stockholder who intends to make such nomination, (ii) the name,
age, business and residence addresses and principal occupation of each person to
be nominated, (iii) the number of shares of each class of stock of the
corporation that are beneficially owned by the stockholder, (iv) a description
of all arrangements and understandings between the stockholder and each proposed
nominee and any other person or persons (including their names) pursuant to
which the nomination(s) are to
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be made by such stockholder, (v) such other information relating to the
person(s) that is required to be disclosed in solicitations for proxies for
election of directors pursuant to the Securities Exchange Act of 1934, as
amended, and the rules and regulations of the Securities and Exchange Commission
or other applicable law and (vi) the written consent of each proposed nominee,
to furnish to the corporation any information it may request upon the advice of
counsel for the purpose of determining such proposed nominee's eligibility to
serve as a director. The Chairman of the meeting shall, if the facts warrant,
determine and declare to the meeting that a nomination was not made in
accordance with the foregoing procedures and if he or she should so determine,
he or she shall so declare to the meeting and the defective nomination shall be
disregarded.
MEETINGS OF THE BOARD OF DIRECTORS
Section 5. The Board of Directors of the Corporation may hold meetings,
both regular and special, either within or without the State of Delaware.
Section 6. A meeting of the Board of Directors shall be held immediately
after the annual meeting at the company's offices and no notice of such meeting
shall be necessary to the Directors in order legally to constitute the meeting,
provided a quorum shall be present. Alternatively, such first meeting of the
Board of Directors may be held at such time and place as shall be specified in a
notice given as hereinafter provided for special meetings of the Board of
Directors, or as shall be specified in a written waiver signed by all of the
Directors.
Section 7. Regular meetings of the Board of Directors may be held
without notice at such time and at such place as shall from time to time be
determined by the Board.
Section 8. Special meetings of the Board may be called by the President
on two days' notice to each Director, either personally or by mail or by
telegram; special meetings shall be called by the President or Secretary in like
manner and on like notice on the written request of two Directors.
Section 9. At all meetings of the Board, two-thirds of the Directors
shall constitute a quorum for the transaction of business and the act of a
majority of the Directors present at any meeting at which there is a quorum
shall be the act of the Board of Directors, except as may be otherwise
specifically provided by statute or by the Certificate of Incorporation. If a
quorum shall not be present at any meeting of the Board of Directors, the
Directors present thereat may adjourn the meeting from time to time, without
notice other than announcement at the meeting, until a quorum shall be present.
Section 10. Unless otherwise restricted by the Certificate of
Incorporation or these By-Laws, any action required or permitted to be taken at
any meeting of the Board of Directors or of any committee thereof may be taken
without a meeting if all members of the Board or committee, as the case may be,
consent thereto in writing and the writing or writings are filed with the
minutes of proceedings of the Board or committee.
Section 11. Unless otherwise restricted by the Certificate of
Incorporation or these By-Laws, members of the Board of Directors, or any
committee designated by the Board of Directors, may participate in a meeting of
the Board of Directors, or any committee, by means of conference telephone or
similar communications equipment by means of which all persons participating in
the meeting can hear each other, and such participation in a meeting shall
constitute presence in person at the meeting.
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Committee of Directors
Section 12. The Board of Directors may, by resolution passed by a
majority of the whole Board, designate one or more committees, each committee to
consist of one or more of the Directors of the Corporation. The Board may
designate one or more Directors as alternate members of any committee, who may
replace any absent or disqualified member at any meeting of the committee. Any
such committee, to the extent provided in the resolution of the Board of
Directors, shall have and may exercise all the powers and authority of the Board
of Directors in the management of the business and affairs of the Corporation,
and may authorize the Seal of the Corporation to be affixed to all papers which
may require it; but no such committee shall have the power or authority in
reference to amending the Certificate of Incorporation, adopting an agreement of
merger or consolidation, recommending to the stockholders the sale, lease or
exchange of all or substantially all of the Corporation's property and assets,
recommending to the stockholders a dissolution of the Corporation or a
revocation of a dissolution, or amending the By-Laws of the Corporation; and,
unless the resolution or the Certificate of Incorporation expressly so provide,
no such committee shall have the power or authority to declare a dividend or to
authorize the issuance of stock. Such committee or committees shall have such
name or names as may be determined from time to time by resolution adopted by
the Board of Directors.
Section 13. Each committee shall keep regular minutes of its meetings
and report the same to the Board of Directors when required.
COMPENSATION OF DIRECTORS
Section 14. Unless otherwise restricted by the Certificate of
Incorporation or these By-Laws, the Board of Directors shall have the authority
to fix the compensation of Directors. The Directors may be paid their expenses,
if any, of attendance at each meeting of the Board of Directors and may be paid
a fixed sum for attendance at each meeting of the Board of Directors or a stated
salary as Director. No such payment shall preclude any Director from serving the
Corporation in any other capacity and receiving compensation therefor. Members
of special or standing committees may be allowed like compensation for attending
committee meetings.
ARTICLE IV
Notices
Section 1. Whenever any notice is required to be given under the
provisions of the statutes or of the Certificate of Incorporation or of these
By-Laws, a waiver thereof in writing, signed by the person or persons entitled
to said notice, whether before or after the time stated therein, shall be deemed
equivalent thereto.
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ARTICLE V
Officers
Section 1. The Officers of the Corporation shall be elected by the Board
of Directors and shall be a Chairman of the Board, a President, a Secretary and
a Treasurer. The Board of Directors may also choose a Chief Executive Officer, a
Chief Financial Officer, and one or more Corporate Vice Presidents, Assistant
Secretaries and Assistant Treasurers. Any number of offices may be held by the
same person, unless the Certificate of Incorporation or By-Laws or General
Corporation law of the State of Delaware otherwise provides.
Notwithstanding the above, the President shall have the authority to
grant the title of "Vice-President" to one or more non-officer employees from
time to time without approval of the Board of Directors, subject to the
following:
(a) Each person that is granted the title of "Vice President" by the
President pursuant to this authority shall be given a written explanation of his
or her duties and responsibilities which, among other things, specifically
states that he or she shall have no authority to bind the Company and that, if
he or she does so he or she shall be subject to immediate dismissal. Such
appointee shall be required to sign the written explanation and a copy of it
shall be placed in the person's personnel folder.
(b) The President shall also have the authority to remove any person
from any such office at any time.
(c) The President shall report the names of all persons that he
designates as Vice President to the Board of Directors at the Board meeting
immediately following such action.
Section 2. The Board of Directors may appoint such other officers and
agents as it shall deem necessary who shall hold their offices for such terms
and shall exercise such powers and perform such duties as shall be determined
from time to time by the Board.
Section 3. The salaries of all officers and agents of the Corporation
shall be fixed by the Board of Directors.
Section 4. The Officers of the Corporation shall hold office until their
successors are chosen and qualify. Any officer elected or appointed by the Board
of Directors may be removed at any time by the affirmative vote of a majority of
the Board of Directors. Any vacancy occurring in any office of the Corporation
shall be filled by the Board of Directors.
CHAIRMAN OF THE BOARD
Section 5. The Chairman of the Board shall preside at meetings of the
Board of Directors and stockholders and shall have such powers and perform such
duties as shall from time to time be specified by the Board of Directors.
THE PRESIDENT
Section 6. Unless the Board of Directors had designated a Chief
Executive Officer, the President shall be the chief executive officer of the
Corporation, shall have general and active management of the business of the
Corporation and shall see that all orders and resolutions of the Board of
Directors are carried into effect.
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Section 7. He shall execute bonds, mortgages and other contracts
requiring a seal, under the Seal of the Corporation, except where required or
permitted by law to be otherwise signed and executed and except where the
signing and execution thereof shall be expressly delegated by the Board of
Directors to some other officer or agent of the Corporation.
CORPORATE VICE PRESIDENTS
Section 8. In the absence of the President or in the event of his or her
inability or refusal to act, the Corporate Vice President (or in the event there
be more than one Corporate Vice President, the Corporate Vice Presidents in the
order designated by the Directors, or in the absence of any designation, then in
the order of their election) shall perform the duties of the President, and when
so acting, shall have all the powers of and be subject to all the restrictions
upon the President. The Corporate Vice Presidents shall perform such other
duties and have such other powers as the Board of Directors may from time to
time prescribe.
The Secretary and Assistant Secretaries
Section 9. The Secretary shall attend all meetings of the Board of
Directors and all meetings of the Stockholders and record all the proceedings of
the meetings of the Corporation and of the Board of Directors in a book to be
kept for that purpose and shall perform like duties for the standing committees
when required. He shall give, or cause to be given, notice of all meetings of
the stockholders and special meetings of the Board of Directors, and shall
perform such other duties as may be prescribed by the Board of Directors or
President, under whose supervision he shall be. He shall have custody of the
Corporate Seal of the Corporation and he, or an Assistant Secretary, shall have
authority to affix the same to any instrument requiring it and when so affixed,
it may be attested by his signature or by the signature of such Assistant
Secretary. The Board of Directors may give general authority to any other
officer to affix the seal of the Corporation and to attest the affixing by his
signature.
Section 10. The Assistant Secretary, or if there be more than one, the
Assistant Secretaries in the order determined by the Board of Directors (or if
there be no such determination, then in the order of their election) shall, in
the absence of the Secretary or in the event of his inability or refusal to act,
perform the duties and exercise the powers of the Secretary and shall perform
such other duties and have such other powers as the Board of Directors may from
time to time prescribe.
THE TREASURER AND ASSISTANT TREASURERS
Section 11. The Treasurer shall have the custody of the corporate funds
and securities and shall keep full and accurate accounts of receipts and
disbursements in books belonging to the Corporation and shall deposit all monies
and other valuable effects in the name and to the credit of the Corporation in
such depositories as may be designated by the Board of Directors.
Section 12. He shall disburse the funds of the Corporation as may be
ordered by the Board of Directors, taking proper vouchers for such
disbursements, and shall render to the President and the Board of Directors, at
its regular meetings, or when the Board of Directors so requires, an account of
all his transactions as Treasurer and of the financial condition of the
Corporation.
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Section 13. If required by the Board of Directors, he shall give the
Corporation a bond (which shall be renewed every six years) in such sum and with
such surety or sureties as shall be satisfactory to the Board of Directors for
the faithful performance of the duties of his office and for the restoration to
the Corporation, in case of his death, resignation, retirement or removal from
office, of all books, papers, vouchers, money and other property of whatever
kind in his possession or under his control belonging to the Corporation.
Section 14. The Assistant Treasurer, or if there shall be more than one,
the Assistant Treasurers, in the order determined by the Board of Directors (or
if there be no such determination, then in the order of their election) shall,
in the absence of the Treasurer or in the event of his inability or refusal to
act, perform the duties and exercise the powers of the Treasurer and shall
perform such other duties and have such other powers as the Board of Directors
may from time to time prescribe.
CHIEF EXECUTIVE OFFICER
Section 15. The Board of Directors may designate a Chief Executive
Officer who shall perform all other duties as from time to time may be requested
of him or her by the Board of Directors. In the absence of the designation, the
President shall serve as the Chief Executive Officer.
CHIEF FINANCIAL OFFICER
Section 16. The Chief Financial Officer shall have the custody of the
corporate funds and securities and shall keep full and accurate account of
receipts and disbursements in books belonging to the Corporation. He or she
shall deposit all money and other valuables in the name and to the credit of the
Corporation in such depositaries as may be designated by the Board of Directors.
The Chief Financial Officer shall disburse the funds of the Corporation
as may be ordered by the Board of Directors, or the President, taking proper
vouchers for such disbursements. He or she shall render to the President and
Board of Directors at the regular meetings of the Board of Directors, or
whenever they may request it, an account of all his or her transactions as Chief
Financial officer and of the financial condition of the Corporation. If required
by the Board of Directors, he or she shall give the Corporation a bond for the
faithful discharge of his or her duties in such amount and with such surety as
the Board shall prescribe.
ARTICLE VI
Certificates of Stock
Section 1. Every holder of stock in the Corporation shall be entitled to
have a certificate, signed by, or in the name of the Corporation by the Chairman
or Vice Chairman of the Board of Directors, or the President or a Vice
President, and the Treasurer or an Assistant Treasurer, or the Secretary or an
Assistant Secretary of the Corporation, certifying the number of shares owned by
him in the Corporation.
Section 2. Any of or all of the signatures on the certificate may be
facsimile. In case any officer, transfer agent, or registrar who has signed or
whose facsimile signature has been placed upon a certificate shall have ceased
to be such officer, transfer agent, or registrar
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before such certificate is issued, it may be issued by the Corporation with the
same effect as if he were such officer, transfer agent, or registrar at the date
of issue.
LOST CERTIFICATES
Section 3. The Board of Directors may direct a new certificate or
certificates to be issued in place of any certificate or certificates
theretofore issued by the Corporation alleged to have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
the certificate of stock to be lost, stolen or destroyed. When authorizing such
issue of a new certificate or certificates, the Board of Directors may, in its
discretion and as a condition precedent to the issuance thereof, require the
owner of such lost, stolen or destroyed certificate or certificates, or his
legal representative, to advertise the same in such manner as it shall require
the owner of such lost, stolen or destroyed certificate or certificates, or his
legal representative, to advertise the same in such manner as it shall require
and/or to give the Corporation a bond in such sum as it may direct as indemnity
against any claim that may be made against the Corporation with respect to the
certificate alleged to have been lost, stolen or destroyed.
TRANSFER OF STOCK
Section 4. Upon surrender to the Corporation or the transfer agent of
the Corporation of a certificate for shares duly endorsed or accompanied by
proper evidence of succession, assignment or authority to transfer, it shall be
the duty of the Corporation to issue a new certificate to the person entitled
thereto, cancel the old certificate, and record the transaction upon its books.
FIXING RECORD DATE
Section 5. In order that the Corporation may determine the stockholders
entitled to notice of or to vote at any meeting of stockholders or any
adjournment thereof, or to express consent to corporate action in writing
without a meeting, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of any
other lawful action, the Board of Directors may fix, in advance, a record date,
which shall not be more than 60 nor less than 10 days before the date of such
meeting, nor more than 60 days prior to any other action. A determination of
stockholders shall apply to any adjournment of the meeting; provided, however,
that the Board of Directors may fix a new record date for the adjourned meeting.
REGISTERED STOCKHOLDERS
Section 6. The Corporation shall be entitled to recognize the exclusive
right of a person registered on its books as the owner of shares to receive
dividends, and to vote as such owner, and to hold liable for calls and
assessments a person registered on its books as the owner of shares, and shall
not be bound to recognize any equitable or other claim to or interest in such
shares on the part of any other person, whether or not it shall have express or
other notice thereof, except as otherwise provided by the laws of Delaware.
ARTICLE VII
General Provisions
Dividends
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Section 1. Dividends upon the capital stock of the Corporation, subject
to the provisions of the Certificate of Incorporation, if any, may be declared
by the Board of Directors at any regular or special meeting, pursuant to law.
Dividends may be paid in cash, in property, or in shares in the capital stock,
subject to the provisions of the Certificate of Incorporation.
Section 2. Before payment of any dividend, there may be set aside out of
any funds of the Corporation available for dividends such sum or sums as the
Directors from time to time, in their absolute discretion, think proper as a
reserve or reserves to meet contingencies, or for equalizing dividends, or for
repairing or maintaining any property of the Corporation, or for such other
purpose as the Directors shall think conducive to the interest of the
Corporation, and the Directors may modify or abolish any such reserve in the
manner in which it was created.
ANNUAL STATEMENT
Section 3. The Board of Directors shall present at each annual meeting,
and at any special meeting of the stockholders when called for by vote of the
stockholders, a full and clear statement of the business and condition of the
Corporation.
CHECKS
Section 4. All checks or demands for money and notes of the Corporation
shall be signed by such officer or officers or such other person or persons as
the Board of Directors may from time to time designate.
Fiscal Year
Section 5. The fiscal year of the Corporation shall be fixed by
resolution of the Board of Directors.
SEAL
Section 6. The Corporate Seal shall have inscribed thereon the name of
the Corporation, the year of its organization and the words "Corporate Seal,
Delaware". The seal may be used by causing it, or a facsimile thereof, to be
impressed or affixed or reproduced or otherwise.
ARTICLE VIII
Indemnification
Section 1. The Corporation shall indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending, or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the Corporation) by
reason of the fact that he is or was a director, officer or employee of the
Corporation, or is or was serving at the request of the Corporation as a
director, officer or employee of another Corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorney's
fees), judgments, fines and amounts paid in settlement actually and reasonable
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner reasonably believed to be in or not opposed to the
best interests of the Corporation, and, with respect to any criminal action or
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proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent shall not, of
itself, create a presumption that the person did not act in good faith and in a
manner which he reasonably believed to be in or not opposed to the best
interests of the Corporation, and, with respect to any criminal action or
proceeding, had reasonable cause to believe that his conduct was unlawful.
Section 2. The Corporation shall indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the Corporation to procure
judgment in its favor by reason of the fact the he is or was a director, officer
or employee of the Corporation or is or was serving as a director, officer or
employee of another corporation, partnership, joint venture, trust or other
enterprise against expenses (including attorney's fees) actually and reasonably
incurred by him in connection with the defense or settlement of such action or
suit if he acted in good faith and in a manner he reasonably believed to be in
or not opposed to the best interests of the Corporation and except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the Corporation
unless and only to the extent that the Delaware Court of Chancery or the court
in which such action or suit was brought shall determine upon application that,
despite the adjudication of liability, but in view of all the circumstances of
the case, such person is fairly and reasonably entitled to indemnify for such
expenses which the Delaware Court of Chancery or such other court shall deem
proper.
Section 3. To the extent that a Director, Officer or employee of the
Corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in Sections 1 and 2, or in defense of any
claim, issue or matter therein, he shall be indemnified against expenses
(including attorney's fees) actually and reasonably incurred by him in
connection therewith.
Section 4. Any indemnification under Sections 1 and 2 (unless ordered by
a court) shall be made by the Corporation only as authorized in the specific
case upon a determination that the indemnification of the Director, Officer or
employee is proper in the circumstances because he has met the applicable
standard of conduct set forth in Sections 1 and 2. Such determination shall be
made (1) by the Board of Directors or the Executive Committee by a majority vote
of a quorum consisting of Directors who were not parties to such action, suit or
proceeding, or (2) if such quorum is not obtainable or, even if obtainable, a
quorum of disinterested directors so directs, by independent legal counsel in a
written opinion, or (3) by the shareholders.
Section 5. Expenses incurred in defending a civil or criminal action,
suit or proceeding shall be paid by the Corporation in advance of the final
disposition of such action, suit or proceeding upon receipt of an undertaking by
or on behalf of the director, officer or employee to repay such amount if it
shall ultimately be determined that he is not entitled to be indemnified by the
Corporation as authorized in this Article VIII.
Section 6. The indemnification and advancement of expenses provided or
granted pursuant to the other subsections of this Article VIII shall not be
deemed exclusive of any other rights to which those seeking indemnifications or
advancement of expenses may be entitled under any by-law, agreement, vote of
shareholders or disinterested directors or otherwise, both as to action in his
official capacity and as to action in another capacity while holding such
office.
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Section 7. The Corporation shall have the power to purchase and maintain
insurance on behalf of any person who is or was a director, officer or employee
of the Corporation, or is or was serving at the request of the Corporation, as a
director, officer or employee of another Corporation, partnership, joint
venture, trust or other enterprise against any liability asserted against him
and incurred by him in any such capacity, or arising out of his status as such,
whether or not the Corporation would have the power to indemnify him against
such liability under the provisions of this Article VIII.
Section 8. For purposes of this Article VIII, references to "the
Corporation" shall include, in addition to Optelecom, Inc., any constituent
corporation (including any constituent of a constituent) absorbed in a
consolidation or merger which, if its separate existence had continued, would
have had power and authority to indemnify its directors, officers and employees,
so that any person who is or was a director, officer or employee of such
constituent corporation, or is or was serving at the request of such constituent
corporation as a director, officer or employee of another corporation,
partnership, joint venture, trust or other enterprise, shall stand in the same
position under and subject to the provisions of this Article VIII (including,
without limitation, the provisions of Section 4) with respect to the resulting
or surviving corporation as he would have with respect to such constituent
corporation if its separate existence had continued.
Section 9. For purposes of this Article VIII, references to "other
enterprises" shall include employee benefit plans; references to "fines" shall
include any excise taxes assessed on a person with respect to an employee
benefit plan; and references to "serving at the request of the Corporation"
shall include any service as a director, officer or employee of the Corporation
which imposes duties on, or involves services by such director, officer,
employee, or agent with respect to an employee benefit plan, its participants,
or beneficiaries; and a person who acted in good faith and in a manner he
reasonably believed to be in the interest of the participants and beneficiaries
of an employee benefit plan shall be deemed to have acted in a manner "not
opposed to the best interests of the Corporation" as referred to in this Article
VIII.
Section 10. The indemnification and advancement of expenses provided by,
or granted pursuant to, this Article VIII shall, unless otherwise provided when
authorized or ratified, continue as to a person who has ceased to be a director,
officer or employee and shall inure to the benefit of the heirs, executors and
administrators of such a person.
Section ll. The Corporation may enter into indemnity agreements with the
directors, officers and employees of the Corporation substantially in the form
attached hereto as Appendix A and hereby incorporated by reference; provided,
however, such indemnity agreements shall exclude indemnity for the directors',
officers' and employees' knowing fraud, deliberate dishonesty or willful
misconduct.
ARTICLE IX
Amendments
Section 1. These By-Laws may be altered, amended or repealed or new
By-Laws may be adopted by the stockholders or by the Board of Directors, when
such power is conferred upon the Board of Directors by the Certificate of
Incorporation, at any regular meeting of the stockholders or of
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the Board of Directors or at any special meeting of the stockholders or of the
Board of Directors if notice of such alteration, amendment, repeal or adoption
of new By-Laws be contained in the notice of such special meeting.
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RESTATED CERTIFICATE OF INCORPORATION
OF
OPTELECOM, INC.
CURRENT AS OF MARCH 23, 1998
Optelecom, Inc., a corporation organized and existing under and by
virtue of the General Corporation Law of the State of Delaware, does hereby
certify that:
1. The name of the corporation is OPTELECOM, INC. The corporation was
originally incorporated under the name Optical Telecommunications Corporation by
filing its Certificate of Incorporation with the Secretary of State of Delaware
on November 29, 1973.
2. The Board of Directors of the corporation, at a meeting duly convened
and held on March 2, 1992, adopted resolutions proposing and declaring advisable
and in the best interest of the corporation the following restatement of and
further amendment to the Certificate of Incorporation of the corporation, as
previously amended and supplemented, and recommended the adoption of such
restatement and further amendment to the stockholders of the corporation.
3. Thereafter, at a meeting duly called and held in accordance with
Section 222 of the General Corporation Law of the State of Delaware, the
following restatement of and further amendment to the Certificate of
Incorporation of the corporation was duly adopted by the stockholders of the
corporation.
4. This restatement of and further amendment to the Certificate of
Incorporation of the corporation has been duly adopted in accordance with
Sections 242 and 245 of the General Corporation Law of the State of Delaware.
5. The text of the Certificate of Incorporation of Optelecom, Inc., as
previously amended and supplemented, is hereby restated and further amended to
read in full as follows:
FIRST. The name of the corporation (which is hereinafter referred to as
the "Corporation") is OPTELECOM, INC.
SECOND. The address of the registered office of the Corporation in the
State of Delaware is 25 Greystone Manor Street, in the City of Lewes, County of
Sussex. The name of the Corporation's registered agent at such address is
Harvard Business Services, Inc.
THIRD. The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of Delaware.
FOURTH. The total number of shares of stock which the Corporation is
authorized to issue is five million (5,000,000) shares of Common Stock, $.03 par
value per share.
Each three (3) shares of Common Stock of the Corporation, $0.01 par
value per share that was issued and outstanding immediately prior to the time of
the filing of this Restated Certificate of Incorporation ("Certificate") with
the Secretary of State of Delaware shall, upon the filing of this Certificate
with the Secretary of State of Delaware, thereby and thereupon automatically be
combined without any further action into one (1) validly issued, fully paid and
nonassessable share of common stock of the corporation, $0.03 par value per
share. Further, every right, option and warrant to acquire three (3) shares of
common stock of the
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corporation, outstanding immediately prior to the time of filing of this
Certificate with the Secretary of State of Delaware, thereby and thereupon
automatically be converted without any further action into the right to acquire
one (1) share of common stock of the Corporation, upon the terms of the right,
option or warrant, except that the purchase price of the common stock, upon
exercising the right, option or warrant, shall be proportionately increased. The
Corporation shall not issue fractional shares with respect to the combination or
conversion. To the extent that a stockholder holds a number of shares of common
stock immediately prior to the filing of this Certificate that is not evenly
divisible by three (3), such stockholder shall receive a cash payment from the
Corporation. If the common stock is quoted on the National Association of
Security Dealers, Inc. Automated Quotation ("NASDAQ") System, the cash payment
from the Corporation will be determined by multiplying the fraction of a share
by the equivalent of the average of the closing bid prices for one share of
common stock for the ten business days immediately preceding the effective date
(the date of filing of this Certificate with the Secretary of State of Delaware)
for the reverse stock split for which transactions in the common stock are
reported, as reported by NASDAQ.
FIFTH. The Board of Directors is expressly authorized to make, alter and
repeal the By-laws of the Corporation.
SIXTH. (a) The number of directors of the Corporation shall not be less
than three (3) nor more than nine (9), the exact number of directors to be
determined from time to time by resolution adopted by the affirmative vote of a
majority of the Whole Board of Directors. As used in this Article Sixth, the
terms "Whole Board" and "Whole Board of Directors" means the total number of
directors which the Corporation would have if there were no vacancies on the
Board of Directors.
(b) The Board of Directors shall be divided into three classes, as
nearly equal in number as the then total number of directors constituting the
Whole Board permits, with the term of office of one class expiring each year. No
class of directors shall contain more than one director more than any other
class. Any vacancies in the Board of Directors for any reason, and any newly
created directorship resulting from any increase in the number of directors, may
be filled by the Board of Directors, acting by a majority of the directors then
in office, although less than a quorum, and any directors so chosen shall hold
office until the next election of the respective class for which such director
shall have been chosen and their successors shall be elected and qualified. No
decrease in the number of directors shall shorten the term of office of any
incumbent director. At each annual meeting of stockholders, the successors to
the class of directors whose terms shall then expire shall be elected to hold
office for a term expiring at the third succeeding annual meeting. Directors
shall hold office until expiration of their respective terms and thereafter
until their successors shall have been duly elected and have qualified.
(c) Notwithstanding any other provisions of this Certificate of
Incorporation or the By-laws of the Corporation (and notwithstanding the fact
that some lesser percentage may be provided for by law, this Certificate of
Incorporation or the By-laws of the Corporation), any director or the entire
Board of Directors of the Corporation may be removed at any time but only for
cause and only by the affirmative vote of the holders of at least 66 2/3% of the
outstanding shares of capital stock of the Corporation entitled to vote
generally in the election of directors at a meeting of the stockholders called
for that purpose.
(d) Elections of directors need not be written ballot unless the By-laws
of the Corporation shall so provide.
16
<PAGE>
(e) Notwithstanding any other provision of this Certificate of
Incorporation or the By-laws of this Corporation (and notwithstanding the fact
that some lesser percentage may be provided for by law, this Certificate of
Incorporation or the By-laws of the Corporation), the affirmative vote of the
holders of at least 66 2/3% of the then issued and outstanding shares of capital
stock of the Corporation entitled to vote generally in the election of directors
shall be required to amend, alter, change or repeal this Article Sixth of this
Certificate of Incorporation.
SEVENTH. (a)(1) In addition to any affirmative vote required by law or
under any other provision of this Certificate of Incorporation, and except as
otherwise expressly provided in this Article Seventh:
(A) any merger or consolidation of this Corporation or any Subsidiary
(as hereinafter defined in paragraph (c)(8) of this Article Seventh)
with or into (i) any Substantial Stockholder (as hereinafter defined in
paragraph (c)(2) of this Article Seventh) or (ii) any other corporation
(whether or not itself a Substantial Stockholder) which, after such
merger or consolidation, would be an Affiliate (as hereinafter defined
in paragraph (c)(7) of this Article Seventh) of a Substantial
Stockholder, or
(B) any sale, lease, exchange, mortgage, pledge, transfer or other
disposition (in one transaction or a series of related transactions) to
or with any Substantial Stockholder of any substantial part (as
hereinafter defined in paragraph (c)(9) of this Article Seventh) of the
assets of this Corporation or of any Subsidiary, or
(C) the issuance or transfer by this Corporation or by any Subsidiary
(in one transaction or a series of related transactions) of any equity
securities (as hereinafter defined in paragraph (c)(11) of this Article
Seventh) of this Corporation or any Subsidiary to any Substantial
Stockholder in exchange for cash, securities or other property (or a
combination thereof) having an aggregate fair market value of $2,000,000
or more, or
(D) the adoption of any plan or proposal for the liquidation or
dissolution of this Corporation if, as of the record date for the
determination of stockholders entitled to notice thereof and to vote
thereon, any person shall be a Substantial Stockholder, or
(E) any reclassification of securities (including any reverse stock
split) or recapitalization of this Corporation, or any reorganization,
merger or consolidation of this Corporation with any of its Subsidiaries
or any similar transaction (whether or not with or into or otherwise
involving a Substantial Stockholder) which has the effect, directly or
indirectly, of increasing the proportionate share of the outstanding
securities of any class of equity securities of this Corporation or any
Subsidiary which is directly or indirectly beneficially owned (as
hereinafter defined in paragraph (c)(3) of this Article Seventh) by any
Substantial Stockholder.
shall (except as otherwise expressly provided in this Certificate of
Incorporation) require the affirmative vote of the holders of then outstanding
Voting Shares (as hereinafter defined in paragraph (c)(10) of this Article
Seventh) entitled to cast at least 66 2/3% of the votes entitled to be cast by
the holders of all of the then outstanding Voting Shares; provided that such
affirmative vote must include the affirmative vote of the holders of Voting
Shares entitled to cast a majority of the votes entitled to be cast by the
holders of all then outstanding Voting Shares not beneficially owned by any
Substantial Stockholder. Each such affirmative vote shall be required
notwithstanding the fact that no vote may be required, or that some lesser
17
<PAGE>
percentage may be specified, by law or in any agreement with any national
securities exchange or otherwise.
(a)(2) The term "business combination" as used in this Article Seventh
shall mean any transaction which is described in any one or more of clauses (A)
through (E) of paragraph (a)(1) of this Article Seventh.
(b) The provisions of this Article Seventh shall not be applicable to
any business combination, the terms of which shall be approved, prior to the
date the Substantial Stockholder which is a party thereto or whose proportionate
share of the outstanding securities of any class of equity securities of this
corporation or any Subsidiary is increased by reason thereof, or, in the case of
a business combination described in clause (D) of paragraph (a)(1) of this
Article Seventh, prior to the date any Substantial Stockholder affected by such
business combination, became a Substantial Stockholder, by two-thirds of the
whole board (as hereinafter defined in paragraph (c)(6) of this Article
Seventh), but only if a majority of the members of the
Board of Directors acting upon such matter shall be continuing directors (as
hereinafter defined in paragraph (c)(5) of this Article Seventh).
(c) For the purpose of this Article Seventh:
(c)(1) A "person" shall mean any individual, firm, corporation or other
entity.
(c)(2) "Substantial Stockholder" shall mean any person (other than this
Corporation or any Subsidiary) who or which, as of the record date for the
determination of stockholders entitled to notice of and to vote on any business
combination, or immediately prior to the consummation of any such business
combination (other than a business combination referred to in paragraph
(a)(1)(D) of this Article Seventh).
(A) is the beneficial owner (as hereinafter defined in
subparagraph (3) of this paragraph (c), directly or indirectly,
of more than 15% of the then outstanding Voting Shares
(determined as aforesaid), or
(B) is an Affiliate of this Corporation and at any time within
three years prior thereto was the beneficial owner, directly or
indirectly, of more than 15% of the then outstanding Voting
Shares (determined as aforesaid), or,
(C) is an assignee of or has otherwise succeeded to any shares
of capital stock of this Corporation which were at any time
within three years prior thereto beneficially owned by any
Substantial Stockholder, and such assignment or succession shall
have occurred in the course of a transaction or series of
transactions not involving a public offering within the meaning
of the Securities Act of 1933.
(c)(3) "Beneficial ownership" shall be determined pursuant to Rule 13d-3
of the General Rules and Regulations under the Securities Exchange Act of 1934
(or any successor rule or statutory provision) or, if said Rule 13d-3 shall be
rescinded and there shall be no successor rule or statutory provision thereto,
pursuant to said Rule 13d-3 as in effect on January 1, 1983; provided, however,
that a person shall, in any event, also be deemed to be the "beneficial owner"
of any Voting Shares:
18
<PAGE>
(A) which such person or any of its Affiliates or Associates (as
hereinafter defined in subparagraph (7) of this paragraph (c))
beneficially own, directly or indirectly, or
(B) which such person or any of its Affiliates or Associates has
(i) the right to acquire (whether such right is exercisable
immediately or only after the passage of time), pursuant to any
agreement, arrangement or understanding (but shall not be deemed
to be the beneficial owner of any Voting Shares solely by reason
of an agreement, arrangement or understanding with the
Corporation to effect a business combination ) or upon the
exercise of conversion rights, exchange rights, warrants, or
options, or otherwise, or (ii) sole or shared voting or
investment power with respect thereto pursuant to any agreement,
arrangement, understanding, relationship or otherwise (but solely
by reason of a revocable proxy granted for a particular meeting
of stockholders, pursuant to a public solicitation of proxies for
such meeting, with respect to shares of which neither such person
nor any such Affiliate or Associate is otherwise deemed the
beneficial owner), or
(C) which are beneficially owned, directly or indirectly, by any
other person with which such first mentioned person or any of its
Affiliates or Associates acts as a partnership, limited
partnership, syndicate or other group pursuant to any agreement,
arrangement or understanding for the purpose of acquiring,
holding, voting or disposing of any shares of capital stock of
this Corporation;
and provided further, however, that (i) no director or officer of this
Corporation, nor any Associate or Affiliate of any such director or officer,
shall, solely by reason of any or all of such directors and officers acting in
their capacities as such, be deemed, for any purposes hereof, to beneficially
own any Voting Shares beneficially owned by any other such director or officer
(or any Associate or Affiliate thereof), and (ii) no employee stock ownership or
similar plan of this Corporation or any Subsidiary nor any trustee with respect
thereto, nor any Associate or Affiliate of any such trustee, shall, solely by
reason of such capacity of such trustee, be deemed, for any purposes hereof, to
beneficially own any Voting Shares held under any such plan.
(c)(4) For purposes of computing the percentage beneficial ownership of
Voting Shares of a person in order to determine whether such person is a
Substantial Stockholder, the outstanding Voting Shares shall include shares
deemed owned by such person through application of subparagraph (3) of this
paragraph (c) but shall not include any other Voting Shares which may be
issuable by this Corporation pursuant to any agreement, or upon the exercise of
conversion rights, warrants or options, or otherwise. For all other purposes,
the outstanding Voting Shares shall include only Voting Shares then outstanding
and shall not include any Voting Shares which may be issuable by this
Corporation pursuant to any agreement, or upon the exercise of conversion
rights, warrants or options, or otherwise.
(c)(5) "Continuing director" shall mean a person who was a member of the
Board of Directors of this Corporation as of January 1, 1983 or thereafter
elected by the stockholders or appointed by the Board of Directors of this
Corporation prior to the date as of which the Substantial Stockholder (or
Substantial Stockholders) in question became a Substantial Stockholder (or
Substantial Stockholders), or a person designated (before his initial election
or appointment as a director) as a continuing director by a majority of
19
<PAGE>
the whole board, but only if a majority of the whole board shall then consist of
continuing directors, or, if a majority of the whole board shall not then
consist of continuing directors, by a majority of the then continuing directors.
(c)(6) "Whole board" shall mean the total number of directors which this
Corporation would have if there were no vacancies.
(c)(7) An "Affiliate" of a specified person is a person that directly,
or indirectly through one or more intermediaries, controls, or is controlled by,
or is under common control with the person specified. The term "Associate" used
to indicate a relationship with any person shall mean (i) any corporation or
organization (other than this Corporation or a Subsidiary) of which such person
is an officer or partner or is, directly or indirectly, the beneficial owner of
10 percent or more of any class of equity securities, (ii) any trust or other
estate in which such person has a substantial beneficial interest or as to which
such person serves as trustee or in a similar fiduciary capacity, and (iii) any
relative or spouse of such person, or any relative of such spouse, who has the
same home as such person, or is an officer or director of any corporation
controlling or controlled by such person.
(c)(8) "Subsidiary" shall mean any corporation of which a majority of
any class of equity security is owned, directly or indirectly, by this
Corporation; provided, however, that for the purposes of the definition of
Substantial Stockholder set forth in subparagraph (2) of this paragraph (c), the
term "Subsidiary" shall mean only a corporation of which a majority of each
class of equity security is owned, directly or indirectly, by this Corporation.
(c)(9) "Substantial part" shall mean assets having a book value
(determined in accordance with generally accepted accounting principles) in
excess of 10% of the book value (determined in accordance with generally
accepted accounting principles) of the total consolidated assets of this
Corporation, at the end of its most recent fiscal year ending prior to the time
the determination is made.
(c)(10) "Voting Shares" shall mean any shares of capital stock of this
Corporation entitled to vote generally in the election of directors.
(c)(11) "Equity security" shall have the meaning given to such term
under Rule 3a11-1 of the General Rules and Regulations under the Securities
Exchange Act of 1934, as in effect on January 1, 1983.
(d) A majority of the whole board shall have the power to determine, but
only if a majority of the whole board shall then consist of continuing
directors, or, if a majority of the whole board shall not then consist of
continuing directors, a majority of the then continuing directors shall have the
power to determine, for the purposes of this Article Seventh, on the basis of
information known to them, (i) the number of Voting Shares beneficially owned by
any person, (ii) whether a person is an Affiliate or Associate of another, (iii)
whether a person has an agreement, arrangement or understanding with another as
to any matter referred to in subparagraph (3) (C) of paragraph (c) of this
Article Seventh, (iv) whether the assets subject to any business combination
constitute a substantial part of the assets of the corporation in question,
and/or (v) any other factual matter relating to the applicability or effect of
this Article Seventh.
(e) A majority of the whole board shall have the right to demand, but
only if a majority of the whole board shall then consist of continuing
directors, or, if a majority of the whole board shall not then consist of
continuing directors, a majority of the then continuing directors
20
<PAGE>
shall have the right to demand, that any person who it is reasonably believed is
a Substantial Stockholder (or holds of record Voting Shares beneficially owned
by any Substantial Stockholder) supply this Corporation with complete
information as to (i) the record owner(s) of all shares beneficially owned by
such person who it is reasonably believed is a Substantial Stockholder, (ii) the
number, of and class or series of, shares beneficially owned by such person who
it is reasonably believed is a Substantial Stockholder and held of record by
each such record owner and the number(s) of the stock certificate(s) evidencing
such shares, and (iii) any other factual matter relating to the applicability or
effect of this Article Seventh, as may be reasonably requested of such person,
and such person shall furnish such information within 10 days after receipt of
such demand.
(f) Any determination made by the Board of Directors, or by the
continuing directors, as the case may be, pursuant to this Article Seventh in
good faith and on the basis of such information and assistance as was then
reasonably available for such purpose shall be conclusive and binding upon this
Corporation and its stockholders, including any Substantial Stockholder.
(g) Any amendment, alteration, change or repeal of this Article Seventh
shall, in addition to any other vote or approval required by law or by this
Certificate of Incorporation, require the affirmative vote of the holders of
then outstanding Voting Shares entitled to cast at least 66 2/3% of the votes
entitled to be cast by the holders of then outstanding Voting Shares (and such
affirmative vote must include the affirmative vote of the holders of Voting
Shares entitled to cast a majority of the votes entitled to be cast by the
holders of all Voting Shares not beneficially owned and any Substantial
Stockholder); provided, however, that this paragraph (g) shall not apply to, and
such 66 2/3% vote (and such further majority vote) shall not be required for,
any amendment, alteration, change or repeal declared advisable by the Board of
Directors by the affirmative vote of two-thirds of the whole board and submitted
to the stockholders for their consideration, but only if a majority of the
members of the Board of Directors acting upon such matter shall be continuing
directors.
(h) Nothing contained in this Article Seventh shall be construed to
relieve any Substantial Stockholder from any fiduciary obligation imposed by
law.
(i) In the event any paragraph (or portion thereof) of this Article
Seventh shall be found to be invalid, prohibited or unenforceable for any
reason, the remaining provisions (or portions thereof) of this Article Seventh
shall be deemed to remain in full force and effect, and shall be construed as if
such invalid, prohibited or enforceable provision had been stricken herefrom or
otherwise rendered inapplicable, it being the intent of this Corporation and its
stockholders that each such remaining provision (or portion thereof) of this
Article Seventh remain, to the fullest extent permitted by law, applicable and
enforceable as to all stockholders, including Substantial Stockholders,
notwithstanding any such finding.
EIGHTH. Except as provided below, a director shall have no personal
liability to the Corporation or its stockholders for monetary damages for breach
of fiduciary duty as a director; however, the foregoing provision shall not
limit the liability of a director (i) for any breach of the director's duty of
loyalty to the Corporation or its stockholders (ii) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, (iii) under Section 174 of the Delaware Corporation Law, (iv) for any
transaction from which the director derived an improper personal benefit, or (v)
for any act or omission occurring prior to the date when this Article Eighth
becomes effective.
21
<PAGE>
NINTH. The Corporation reserves the right at any time and from time to
time to amend, alter, change or repeal any provision contained in this Restated
Certificate of Incorporation in the manner now or hereafter prescribed by law;
and all rights, preferences and privileges of whatsoever nature conferred upon
stockholders, directors or any other persons whomsoever by and pursuant to this
Restated Certificate of Incorporation in its present form or as hereafter
amended are granted subject to the right reserved in this Article Ninth.
IN WITNESS WHEREOF, Optelecom, Inc. has caused this Restated Certificate of
Incorporation to be executed by _____________________, its ____________________,
and attested by __________________, its ______________________, this __________
day of _____________, 1992.
OPTELECOM, INC.
By:___________________________
President
(Seal)
Attest:______________________________________
Assistant Secretary
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<NAME> OPTELECOM, INC.
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