SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended June 30, 1999 Commission File No. 0-8828
Optelecom, Inc.
(Exact Name of Registrant as
Specified in its Charter)
<TABLE>
<CAPTION>
<S> <C>
Delaware 52-1010850
- -------------------------------- -------------------------------
(State of Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
9300 Gaither Road Gaithersburg, MD 20877
- ------------------------------------ ------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, (301) 840-2121
Including Area Code -----------------
(Phone Number)
</TABLE>
NONE
----
(Former Name, Former Address and Former Fiscal Year, if Changed
Since Last Report)
Indicate by checkmark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve (12) months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past ninety (90) days.
Yes X No
Common Stock Outstanding
as of August 9, 1999 2,156,557
---------
1
<PAGE>
OPTELECOM, INC.
FORM 10-Q
CONTENTS
--------
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
ITEM 1. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
<S> <C> <C> <C>
Consolidated Balance Sheets as of June 30, 1999 (Unaudited)
and December 31, 1998 (Audited).............................. ........3
Consolidated Statements of Operations for the Three Months
Ended June 30, 1999 and 1998 (Unaudited) .............................4
Consolidated Statements of Operations for the Six Months
Ended June 30, 1999 and 1998 (Unaudited) .............................5
Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 1999 and 1998 (Unaudited) ...................................6
Notes to Consolidated Financial Statements (Unaudited)....... ........7
</TABLE>
ITEM 2. MANAGEMENT`S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
PART II. OTHER INFORMATION
2
<PAGE>
OPTELECOM, INC.
Consolidated Balance Sheets
as of June 30, 1999 and December 31, 1998
<TABLE>
<CAPTION>
ASSETS 1999 1998
------ --------- -------
(Unaudited) (Audited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 225,697 $ 394,096
Restricted cash 314,979 328,700
Accounts and contracts receivable 1,880,514 1,426,306
Inventories, net 2,187,306 1,847,113
Prepaid expenses and other assets 357,057 344,448
Deferred tax asset 307,960 307,960
----------- ----------
Total current assets 5,273,513 4,648,623
2,176,075 2,351,563
Intangible Assets, net
224,111 238,493
Goodwill, net
Property and Equipment, at cost less accumulated depreciated 1,357,834 1,361,095
32,174 32,174
----------- ----------
Deferred Tax Assets
$ 9,063,707 $8,631,948
=========== ==========
TOTAL ASSETS
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Bank line-of-credit payable $1,300,000 $ 650,000
Accounts payable 1,457,227 765,971
Accrued payroll 313,864 204,888
Income taxes payable 170,399 328,700
Other current liabilities 433,392 892,848
Current portion of capital lease 44,253 -
Current portion of notes payable 624,996 624,996
----------- ----------
Total current liabilities 4,344,131 3,467,403
----------- ----------
LONG-TERM LIABILITIES:
Notes payable 1,414,174 1,726,672
Capital lease 87,249 -
Deferred rent liability 132,505 147,241
----------- ----------
TOTAL LIABILITIES 5,978,059 5,341,316
----------- ----------
Commitments and Contingencies - -
STOCKHOLDERS' EQUITY:
Common stock, $.03 par value - shares authorized,
15,000,000; issued and outstanding, 2,156,557 shares 64,697 64,697
Discount on common stock (11,161) (11,161)
Additional paid-in capital 4,105,029 4,105,029
Foreign currency translation adjustment 47,225 6,033
Retained (deficit) (1,120,142) (873,966)
----------- ----------
$ 9,063,707 $8,631,948
=========== ==========
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
The accompanying notes are an integral part of this statement.
3
<PAGE>
OPTELECOM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30,
1999 1998
------------ ------------
Revenues $2,528,499 $4,232,214
Cost of goods sold 1,724,205 2,560,537
---------- ----------
Gross profit` 804,294 1,671,677
Operating expenses:
Engineering 238,103 419,281
Selling and marketing 339,922 309,701
General and administrative 514,750 922,542
---------- ----------
Total operating expenses 1,092,775 1,651,524
Operating (loss) income (288,481) 20,153
Other expenses:
Interest expense 69,466 111,327
Write off of leasehold improvements 82,766 -
Amortization of goodwill 7,191 48,143
---------- ----------
Total other expenses 159,423 159,470
(Loss) before (benefit) for income taxes (447,904) (139,317)
(Benefit) for income taxes (162,580) (26,140)
---------- ----------
Net (loss) $(285,324) $(113,177)
========== ==========
Basic (loss) per share $ (0.13) $ (0.05)
========= =========
Diluted (loss) per share $ (0.13) $ (0.05)
========= =========
The accompanying notes are in integral part of this statement.
4
<PAGE>
OPTELECOM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30,
1999 1998
---------- ----------
Revenues $6,057,353 $8,613,136
Cost of goods sold 3,758,182 5,229,381
--------- ---------
Gross profit 2,299,171 3,383,755
Operating expenses:
Engineering 591,303 822,325
Selling and marketing 724,426 761,320
General and administrative 1,153,490 1,736,654
--------- ---------
Total operating expenses 2,469,219 3,320,299
Operating (loss) income (170,048) 63,456
Other expenses:
Interest expense 123,560 169,712
Write off of leasehold improvements 82,766 -
Amortization of goodwill 14,382 95,739
--------- ---------
Total other expenses 220,708 265,451
(Loss) before (benefit) for income taxes (390,756) (201,995)
(Benefit) for income taxes (144,580) (45,114)
--------- ---------
Net (loss) $(246,176) $(156,881)
========== ==========
Basic (loss) per share $ (0.11) $ (0.08)
========= =========
Diluted (loss) per share $ (0.11) $ (0.08)
========== =========
The accompanying notes are in integral part of this statement.
5
<PAGE>
OPTELECOM, INC.
CONSOLIDATED STATEMENTS OF CASH
FOR THE SIX MONTHS ENDED JUNE 30,
1999 1998
---------- ----------
Cash Flows From Operating Activities
Net (loss) $ (246,176) $(156,881)
Adjustments to reconcile net (loss) to net cash used in operating activities:
Depreciation and amortization 384,522 392,951
Deferred rent (14,736) (11,661)
Loss (Gain) on sale/disposal of fixed assets 82,766 (112)
Change in assets and liabilities:
Accounts and contracts receivable (454,208) (98,797)
Inventories (340,193) (322,909)
Prepaid expenses and other assets (12,609) 27,614
Restricted cash - 400,877
Accounts payable 691,256 (126,590)
Accrued payroll 108,976 (24,436)
Other current liabilities (459,456) (20,453)
Income taxes payable (144,580) (400,877)
----------- ------------
Net cash (used in) operating activities (404,438) (341,274)
Cash Flows From Investing Activities
Capital expenditures (141,397) (374,319)
Purchases under capital lease (132,760) -
Proceeds from sale of equipment - 2,975
----------- ------------
Net cash (used in) investing activities (274,157) 371,344)
----------- ------------
Cash Flows From Financing Activities
Borrowings on bank line-of-credit payable 800,000 2,320,308
Payments on bank line-of-credit payable (150,000) (1,114,318)
Payments under factoring agreement - (362,868)
Payments on long term debt (312,498) -
Borrowings of long term debt - 8,930
Borrowings on capital lease 132,760 -
Payments on capital lease (1,258) -
Proceeds from exercise of stock options - 206,896
----------- ------------
Net cash provided by financing activities 469,004 1,058,948
Effect on cash from currency translation adjustment 41,192 -
----------- ------------
Net (decrease) increase in cash and cash equivalents (168,399) 346,330
Cash and cash equivalents - beginning of period 394,096 242,656
----------- ------------
Cash and cash equivalents - end of period $ 225,697 $ 588,986
=========== ============
Supplemental Disclosures of Cash Flow Information
Cash paid during the year for interest $ 132,760 $ 165,212
=========== ============
Cash paid during the year for income taxes $ 3,000 $ 13,000
=========== ============
</TABLE>
The accompanying notes are an integral part of this statement.
6
<PAGE>
OPTELECOM, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
1. Basis of Presentation
---------------------
The accompanying unaudited financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and note disclosures normally included in the annual
financial statements, prepared in accordance with generally accepted accounting
principles, have been condensed or omitted pursuant to those rules and
regulations, although the Company believes that the disclosures made are
adequate to make the information presented not misleading.
In the opinion of management, the unaudited accompanying financial
statements reflect all necessary adjustments and reclassifications (all of which
are of a normal, recurring nature) that are necessary for fair presentation for
the periods presented. It is suggested that these financial statements be read
in conjunction with the financial statements and the notes thereto included in
the Company's latest annual report to the Securities and Exchange Commission on
Form 10-K for the year ended December 31, 1998.
2. Line of Credit
--------------
On May 13, 1999, the Company renewed, through May 31, 2000, its credit
agreement with a bank whereby it may borrow up to $1,700,000 with interest at
the bank's prime rate plus 1%. The total amount of the borrowing which may be
outstanding at any given time is based on the sum of a percentage of certain
eligible accounts receivable plus a percentage of qualifying inventory, with a
maximum borrowing against inventory of $400,000. Also, the Company is to adhere
to certain covenants, quarterly and at year-end
The remaining amount available under the line-of-credit as of June 30,
1999 is $160,220.
3. Inventory
---------
<TABLE>
<CAPTION>
Inventory consisted of the following:
<S> <C> <C> <C> <C>
June 30, 1999 June 30, 1998
------------- -------------
$ 815,078 $ 721,096
Raw materials
528,584 404,802
WIP
843,644 949,884
---------- ----------
Finished goods
$2,187,306 $2,075,782
========== ==========
Total
</TABLE>
The Company had a reserve for inventory obsolescence of $455,627 at
June 30, 1999 compared to $125,733 at June 30, 1998.
4. Comprehensive Income
The Company's other comprehensive income consists only of foreign
currency translation adjustments and is shown separately on the Company's
Consolidated Balance Sheet. For the six months ended June 30, 1999 and 1998, the
total comprehensive (loss) including net (loss) and currency translation
adjustments were $(287,368) and $(156,881), respectively. For the second quarter
of 1999 and 1998, the comprehensive (loss) were $(302,367) and $(113,177),
respectively.
7
<PAGE>
5. Earnings Per Share
Basic earnings per share is computed using the weighted average number
of common shares outstanding. Diluted earnings per share is computed using the
weighted average number of shares outstanding and the treasury stock computation
method for stock options. The following is a reconciliation of the basic and
diluted earnings per share.
<TABLE>
<CAPTION>
Three Months ended June 30, Six Months ended June 30,
<S> <C> <C> <C> <C>
1999 1998 1999 1998
--------- --------- --------- ---------
Net (Loss) $(285,324) $(113,177) $(246,176) $(156,881)
========== ========== ========== ==========
Weighted average shares - basic 2,156,557 2,115,670 2,156,557 2,072,231
--------- --------- --------- ---------
(Loss) per share - basic $ (0.13) $ (0.05) $ (0.11) $ (0.08)
========= ======== ======== ========
Weighted average shares - basic 2,156,557 2,115,670 2,156,557 2,072,231
Effect of dilution - stock options - - - -
--------- --------- --------- ---------
Weighted average shares - diluted 2,156,557 2,115,670 2,156,557 2,072,231
--------- --------- --------- ---------
(Loss) per share - diluted $ (0.13) $ (0.05) $ (0.11) $ (0.08)
======== ======== ======== ========
</TABLE>
6. Segment Information
-------------------
Optelecom has three reportable segments: the Communication Products
Division (CPD), the Government Products Division (GPD) and the Paragon Division.
These segments reflect management's internal reportable information analysis and
approximates the Company's strategic business units' financial results reported
before income taxes.
<TABLE>
<CAPTION>
Three Months Ended June 30, 1999 and 1998
(000's)
Income (Loss) Gross Additions
Revenues Before Income Taxes to Equipment
--------------------- ----------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
1999 1998 1999 1998 1999 1998
------- ------- -------- -------- -------- ------
CPD - gross $1,606 $2,384
Intercompany (10) -
------- -------
CPD - net $1,596 2,384 $(225) $93 $183 $121
GPD 170 314 (51) (27) - -
Paragon 762 1,534 (172) (205) 3 -
------- ------- -------- -------- -------- ------
Total $2,528 $4,232 $(448) $(139) $186 $121
======= ======= ======== ======== ======== ======
Six Months Ended June 30, 1999 and 1998
(000's)
Income (Loss) Gross Additions
Revenues Before Income Taxes to Equipment
--------------------- ----------------------- --------------------
1999 1998 1999 1998 1999 1998
------- ------- -------- -------- -------- ------
CPD - gross $3,789 $4,782
Intercompany (38) -
------- -------
CPD - net $3,751 $4,782 $(20) $66 $271 $295
GPD 566 750 35 57 - 40
Paragon 1,740 3,081 (406) (325) 3 39
------- ------- -------- -------- -------- ------
Total $6,057 $8,613 $(391) $(202) $274 $374
======= ======= ======== ======== ======== ======
</TABLE>
7. During the second quarter of 1999, the Company entered into lease agreements
to finance certain computer and manufacturing equipment. These leases have
three-year terms and are accounted for as capital leases.
8
<PAGE>
8. New Accounting Pronouncements
-----------------------------
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.
9. Legal Proceedings
-----------------
See Part II - Other Information, Item 1 - Legal Proceedings, on page
11 for a discussion of the Company's litigation.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Except for the historical financial information contained herein, the
following discussion and analysis may contain "forward looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Such statements
include declarations regarding the intent, belief or current expectations of the
Company and its management. Prospective investors are cautioned that any such
forward looking statements are not guarantees of future performance and involve
a number of risks and uncertainties; actual results could differ materially from
those indicated by such forward looking statements.
The following discussion should be read in conjunction with the
Financial Statements and Notes thereto.
OVERVIEW
Optelecom, Inc. designs, manufactures and markets video communication
products, specializing in transmission and distribution equipment for the
delivery of real time video. The Company's integrated video solutions include
fiber optic transmission, UTP copper distribution, and digital video conversion
and access products. From simple baseband transmitters and baluns to complex
broadband systems and video distribution switches, Optelecom offers innovative
technologies that meet its customers' needs.
The Company is organized into three operating divisions: the
Communications Products Division (CPD), which develops, manufactures, and sells
optical fiber-based data communication equipment to the commercial marketplace,
the Government Products Division (GPD) which is primarily focused on
electro-optic technology development for government related defense business,
and Paragon Audio Visual Ltd., (Paragon), located in the United Kingdom.
Paragon, which was acquired at the end of 1997, is a wholly owned subsidiary of
Optelecom, Inc. Paragon designs and markets electronic communication products
and systems utilizing copper cabling as the transmission media.
9
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998
REVENUE
Revenues recognized were $2,528,499 and $4,232,214 for the three months
ended June 30, 1999 and 1998, respectively. The decrease of $(1,703,715), or
40.3%, was largely due to a reduction in sales for Paragon and Communication
Products Division (CPD). Sales at Paragon were down approximately $772,000 or
50% from 1998. Paragon's major customer from 1998 has ordered very little
product in 1999, putting severe pressure to gain new customers.
Sales in CPD were down approximately $788,000 in 1999 compared to 1998.
Loss of sales positions during the first quarter of 1999 reduced orders, which
could have been shipped in the second quarter. This coupled with a large order
in 1998's second quarter accounted for the 33% drop in revenue.
GROSS PROFIT
Gross profits for the three months ended June 30, 1999 and 1998 were
$804,294 and $1,671,677, respectively. Gross margins as a percentage of revenues
were 32% in 1999 and 39% in 1998. While the decrease in sales is responsible for
the majority of the decrease in 1999, the Company also had more of its remaining
sales in lower margin commercial products.
ENGINEERING
Engineering costs for the three months ended June 30, 1999 and 1998
were $238,103 and $419,281, respectively. The decline in costs from 1998 is
attributed to decreases in prototype materials, and a reduction in costs at
Paragon. The Company continues to focus on enhancements to core technologies by
improvements in manufacturability combined with new feature enhancements.
The Company expended funds approximating $15,000 during the second
quarter of 1999 as compared to $130,00 in 1998 related to research efforts for
high speed optical components.
SELLING AND MARKETING
Selling and marketing costs were $339,922 and $309,701 for the three
months ended June 30, 1999 and 1998, respectively. This increase of $30,221
resulted from additional trade show costs incurred during the quarter as well as
additional costs incurred by Paragon in its efforts to sell its new products.
These expenses are in line with management's increased focus on generating sales
revenue.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $514,750 and $922,542 for the
second quarter 1999 and 1998, respectively. The decrease in expenses of $407,792
in the second quarter of 1999 compared to 1998 is attributed to an overall
reduction in expenses, offset by an increase in amortization of intangibles
acquired from Paragon. The majority of expense reduction occurred at Paragon,
which has eliminated such items as automobiles as well as reduced personnel.
10
<PAGE>
OTHER EXPENSES
Other expenses for the three months ended June 30, 1999 and 1998 were
$159,423 and $159,470. While the total other expenses remained the same, the
make up was different for the second quarter 1999. The Company incurred an
expense of $82,766 to write off the remaining leasehold improvements, which had
been located in the office space that was recently closed. Due to the
reclassification at the end of 1998 of intangibles to goodwill, amortization
costs were $40,952 lower in 1999. Also, interest costs were lower in 1999 as a
result of there being term debt compared to factoring debt at Paragon.
INCOME TAXES
An income tax benefit of $162,580 was recorded during the second
quarter of 1999 compared with income tax benefit of $26,140 for the second
quarter of 1998. The effective tax rate during the second quarter of 1999 was
36% as compared to 19% in 1998.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
REVENUE
Revenues recognized were $6,057,353 and $8,613,136 for the six months
ended June 30, 1999 and 1998, respectively. The decrease of $(2,555,783), or
30%, was largely due to a reduction in sales for Paragon and Communication
Products Division (CPD). Sales at Paragon were down approximately $1,341,000 or
44% from 1998. Changes in management during the first half of the year had a
negative impact on sales at Paragon. In 1999, there was also an almost complete
elimination of shipments to their biggest customer of 1998.
Sales in CPD were down approximately $1,031,000 in 1999 compared to
1998. This reduction reflects the impact to sales of the loss of sales position
at the beginning of the year. Also, there was higher government sales recorded
as the GLINT contract was still in full status in 1998 compared to the wind down
state of the contract in 1999.
GROSS PROFIT
Gross profits for the six months ended June 30, 1999 and 1998 were
$2,299,171 and $3,383,755, respectively. Gross margins as a percentage of
revenues were 38% and 39% for the first half of 1999 and 1998, respectively. The
reduction in gross margins for the first half of 1999 compared to 1998 is
attributed primarily to product mix as well as by an increase in approximately
$50,000 in additional inventory reserves related to obsolescence of discontinued
Paragon products that was recorded during the first half of 1999. There is also
a reduction in 1999 due to lower GLINT revenue, which has higher gross margins
than the commercial sales.
ENGINEERING
Engineering costs for the six months ended June 30, 1999 and 1998 were
$591,303 and $822,325, respectively. Engineering costs as a percentage of
revenues were 10% for the first half of 1999 and 9% for the first half of 1998.
The decline in costs from 1998 is attributed to decreases in prototype materials
and outside design consultants. The Company continues to focus on enhancements
to core technologies by improvements in manufacturability combined with new
feature enhancements. A reduction in Paragon costs as well as the reduction in
costs expended on research efforts for higher speed optical components, which
are approximating $89,000 during the first half of 1999 as compared to $234,000
in 1998.
11
<PAGE>
SELLING AND MARKETING
Selling and marketing costs were $724,426 and $761,320 for the six
months ended June 30, 1999 and 1998, respectively. The decrease of $36,894 in
the first half of 1999 compared with the same period in 1998 is attributed to
decreased costs from CPD having fewer employees in its sales and marketing group
during 1999 as compared to 1998, an additional $20,000 to increase the reserves
for bad debt. These were offset by a reduction of Paragon expenses in these
categories.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $1,153,490 and $1,736,654 for
the first half 1999 and 1998, respectively. The decrease in expenses of $583,164
in the first half of 1999 compared to 1998 is attributed to an overall reduction
in expenses, offset by an increase in amortization of intangibles acquired from
Paragon.
OTHER EXPENSES
Other expenses for the six months ended June 30, 1999 and 1998 were
$220,708 and $265,451, respectively. The decrease of $44,743 in 1999 compared
with 1998 is attributed to a reduction in amortization of the goodwill from the
Paragon acquisition, a reduction in the interest paid offset by a write off of
leasehold improvements from closed office space.
INCOME TAXES
An income tax benefit of $144,580 was recorded during the first half of
1999 compared with income tax benefit of $45,114 for the first half of 1998. The
effective tax rate during the first half of 1999 was 37% as compared to 22% in
1998.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1999, the Company had combined balances of cash and cash
equivalents of $225,697 compared with $394,096 at December 31, 1998.
Cash used in operating activities approximated $404,000 in 1999 and is
primarily the result of its net loss adjusted for depreciation and amortization,
increases in accounts receivables and offset by increases in current payables
and current liabilities. Net cash of $586,655 was used for purchasing property
and equipment and paying acquisition debt for Paragon. The Company continues to
invest in capital equipment to support its employee and facility growth and its
research and development and manufacturing activities as evidenced by the net
borrowings on capital leases of $131,502.
The Company has a working capital line-of-credit with a bank for an
amount up to $1,700,000 with interest at the bank's prime rate plus one percent.
The amount available on the line is based on a percentage of eligible
receivables and inventory. During the year, the Company has increased its
borrowing under this line-of-credit by $650,000.
The Company intends to fund future operations through operating cash
flow, borrowings under the line-of-credit and other borrowing for capital
expenditures as needed.
Company backlog at the end of June 30, 1999 was $2,667,000.
12
<PAGE>
YEAR 2000 POTENTIAL ISSUES
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 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 continuing its assessment of 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 reviewing key suppliers web
pages for discussions of their Year 2000 readiness and by sending out letters in
August to all suppliers requesting confirmation of their Year 2000 compliance.
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, line-of-credit borrowings and capital lease obligations are estimated to
be approximately $500,000 of which $325,000 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. The Company has spent approximately $125,000 at
the end of the second quarter of 1999.
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.
13
<PAGE>
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. The Company is
in the process of installing new enterprise-wide systems that are Year 2000
compliant. However, should this system not be in place and operating in time,
the Company's contingency plan calls for the installation of Year 2000 compliant
version upgrades from the suppliers of its current operating and financial
systems. Final written agreements with these suppliers will be put in place in
the third quarter.
Some Year 2000 compliant hardware has been purchased and all had been
installed by the end of July 1999.
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 believes the operations, prior to
intercompany allocations, will return to profitability during 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 be
lower than 1998 levels. However, there can be no assurance that profitability
will, in fact, be achieved.
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.
PART II - OTHER INFORMATION
ITEM 1 - 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 Company filed its Notice of Appearance on April 12, 1999 asserting Mr.
Brown's claims are without merit. 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.
On June 1, 1999, Darren Brown, Andrew Brown and Mark Brown, the sons of
Mr. David Brown and former directors of Paragon Audio Visual Ltd. filed an
Originating Application with the Employment Tribunal of the United Kingdom
alleging they were dismissed from Paragon unlawfully and in breach of their
alleged employment contract rights. The Company has filed; notice asserting
these claims are without merit. The Company also believes that it may have
counterclaims that may be asserted against each of the Browns in this proceeding
and is considering assertion of such counterclaims.
The Employment Tribunal has consolidated the claims of Mr. David Brown
with those of his three sons.
In June, the Employment Tribunal ruled that these claims would be heard in
the United Kingdom.
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 2 - CHANGES IN SECURITIES
None
14
<PAGE>
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the second quarter of 1999 to
a vote of security holders.
ITEM 5 - OTHER INFORMATION
None
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
None
ITEM 11 - STATEMENT REGARDING COMPUTATION OF NET INCOME (LOSS) PER
SHARE
See Note 5 to the financial statements.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OPTELECOM, INC.
Date: August 16, 1999
-------------------------------------
Edmund D. Ludwig, President and CEO
Date: August 16, 1999
---------------------------------------------------
Thomas F. Driscoll, V.P. Finance and Administration
15
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 225,697
<SECURITIES> 0
<RECEIVABLES> 2,070,034
<ALLOWANCES> (189,520)
<INVENTORY> 2,187,306
<CURRENT-ASSETS> 5,273,513
<PP&E> 3,626,653
<DEPRECIATION> (2,268,819)
<TOTAL-ASSETS> 9,063,707
<CURRENT-LIABILITIES> 4,344,131
<BONDS> 0
0
0
<COMMON> 64,697
<OTHER-SE> 3,020,951
<TOTAL-LIABILITY-AND-EQUITY> 9,063,707
<SALES> 6,057,353
<TOTAL-REVENUES> 6,057,353
<CGS> 2,469,219
<TOTAL-COSTS> 2,469,219
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 123,560
<INCOME-PRETAX> (390,756)
<INCOME-TAX> (144,580)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (246,176)
<EPS-BASIC> (0.11)
<EPS-DILUTED> (0.11)
</TABLE>
