<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended September 30, 2000 Commission File No. 0-8828
Optelecom, Inc.
---------------
(Exact Name of Registrant as
Specified in its Charter)
Delaware 52-1010850
------------------------------- --------------------------------
(State of Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
9300 Gaither Road Gaithersburg, MD 20877
-------------------------------------- --------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, (301) 840-2121
--------------------
Including Area Code (Phone Number)
NONE
----
(Former Name, Former Address and Former Fiscal Year, if Changed
Since Last Report)
Indicate by checkmark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve (12) months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past ninety (90) days.
Yes X No
----- -----
Common Stock Outstanding
as of November 14, 2000 2,806,933
1
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OPTELECOM, INC.
FORM 10-Q
<TABLE>
<CAPTION>
CONTENTS
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<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets as of September 30, 2000 (Unaudited)
and December 31, 1999 (Audited)..................................................... 3
Consolidated Statements of Operations for the Three Months
Ended September 30, 2000 and 1999 (Unaudited) ...................................... 4
Consolidated Statements of Operations for the Nine Months
Ended September 30, 2000 and 1999 (Unaudited) ...................................... 5
Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 2000 and 1999 (Unaudited) ............................................ 6
Notes to Consolidated Financial Statements (Unaudited).............................. 7
ITEM 2. MANAGEMENT`S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS...................................... 10
PART II. OTHER INFORMATION............................................................................ 14
</TABLE>
2
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OPTELECOM, INC.
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2000 AND DECEMBER 31, 1999
<TABLE>
<CAPTION>
ASSETS 2000 1999
------ ----------- -----------
(Unaudited) (Audited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 1,718,794 $ 51,314
Accounts and contracts receivable 2,133,529 2,228,726
Inventories, net 1,628,807 1,894,155
Prepaid expenses and other assets 298,484 486,302
Deferred tax asset 254,517 303,363
----------- -----------
Total current assets 6,034,131 4,963,860
Intangible assets, net - 2,000,589
Goodwill, net - 209,728
Property and equipment, at cost less accumulated depreciated 1,072,894 1,206,635
Deferred tax assets 333,543 116,410
Other assets 65,702 118,392
----------- -----------
$ 7,506,270 $ 8,615,614
=========== ===========
TOTAL ASSETS
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Bank line-of-credit payable $ - $ 1,700,000
Accounts payable 1,113,641 1,280,248
Accrued payroll 252,651 180,934
Other current liabilities 235,414 390,249
Current portion of leases payable 46,330 46,330
Current portion of notes payable 750,000 625,000
----------- -----------
Total current liabilities 2,398,036 4,222,761
----------- -----------
LONG-TERM LIABILITIES:
Notes payable 747,503 1,310,004
Capital lease 39,334 70,571
Deferred rent liability 88,261 115,658
----------- -----------
TOTAL LIABILITIES 3,273,134 5,718,994
----------- -----------
Commitments and Contingencies - -
STOCKHOLDERS' EQUITY:
Common stock, $.03 par value-shares authorized, authorized;
issued and outstanding, 2,806,933 and 1,993,885 shares as
of September 30, 2000 and December 31, 1999 respectively 84,208 59,817
Additional paid-in capital 9,904,933 4,093,868
Additional paid-in-capital - Stock options 116,069 97,515
Less: Deferred Compensation expense (57,851) (38,031)
Treasury stock, 162,672 shares, at cost (1,265,047) (1,265,047)
Foreign currency translation adjustment 156,290 7,904
Accumulated (deficit) (4,705,466) (59,406)
----------- -----------
TOTAL STOCKHOLDERS EQUITY 4,233,136 2,896,620
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 7,506,270 $ 8,615,614
=========== ==========
</TABLE>
The accompanying notes are an integral part of this statement.
3
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OPTELECOM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
(Unaudited)
2000 1999
----------- ----------
Revenues $ 2,585,959 $3,163,430
Cost of goods sold 2,585,282 1,914,482
----------- ----------
Gross profit 677 1,248,948
Operating expenses:
Engineering 471,120 235,274
Selling and marketing 504,693 268,671
General and administrative 818,167 455,407
----------- ----------
Total operating expenses 1,793,980 959,352
Operating loss/income (1,793,303) 289,596
Other expenses:
Interest expense 72,433 90,448
Write-off of Intangible Assets and Goodwill 1,925,513 -
----------- ----------
Total other expenses 1,997,946 90,448
Loss/income before income tax benefit (3,791,249) 199,148
Benefit for income taxes - 76,800
----------- ----------
Net loss/income $(3,791,249) $ 122,348
=========== ==========
Basic loss/income per share $ (1.52) $ 0.05
=========== ==========
Diluted loss/income per share $ (1.52) $ 0.05
=========== ==========
Weighted Average Shares Outstanding 2,488,908 2,156,557
=========== ==========
The accompanying notes are an integral part of this statement.
4
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OPTELECOM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
(Unaudited)
<TABLE>
<CAPTION>
2000 1999
-------------- -------------
<S> <C> <C>
Revenues $ 7,366,874 $ 9,220,783
Cost of goods sold 5,744,610 5,672,664
------------- -------------
Gross profit 1,622,264 3,548,119
Operating expenses:
Engineering 940,020 826,577
Selling and marketing 1,345,814 993,097
General and administrative 2,018,020 1,623,279
------------- -------------
Total operating expenses 4,303,854 3,442,953
Operating loss (2,681,590) 105,166
Other expenses:
Interest expense 238,957 214,008
Write-off of Intangible Assets and Goodwill 1,925,513 -
Write-off of Leasehold Improvements - 82,766
------------- -------------
Total other expenses 2,164,470 296,774
Loss before income tax benefit (4,846,060) $ (191,608)
Benefit for income taxes (200,000) (67,780)
------------- -------------
Net loss $ (4,646,060) $ (123,828)
============= =============
Basic loss per share $ (1.92) $ (0.06)
============= =============
Diluted loss per share $ (1.92) $ (0.06)
============= =============
Weighted Average Shares Outstanding 2,418,696 2,156,557
============= =============
</TABLE>
The accompanying notes are an integral part of this statement.
5
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OPTELECOM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
(Unaudited)
<TABLE>
<CAPTION>
2000 1999
----------- ----------
<S> <C> <C>
Cash Flows From Operating Activities
Net loss $(4,646,060) $ (123,828)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 584,767 582,256
Write-off on Intangible Assets and Goodwill 1,925,513 -
Deferred compensation expense (19,820) -
Deferred taxes (228,288) (67,781)
Deferred rent (27,397) (22,632)
Loss/Gain on sale/disposal of fixed assets 8,684 82,766
Effect of currency translations 152,134 (21,606
Change in assets and liabilities:
Accounts and contracts receivable 95,197 (483,860)
Inventories 265,348 (984,092)
Prepaid expenses 247,817 81,696
Other assets 52,690 -
Accounts payable (166,607) 1,018,826
Accrued payroll 71,717 47,189
Other current liabilities (154,836) (549,578)
----------- ----------
Net cash used in operating activities (1,839,141) (440,644)
----------- ----------
Cash Flows From Investing Activities
Proceeds from sale of equipment 9,200 2,000
Purchases under capital lease - (132,760)
Capital expenditures (187,852) (209,869)
----------- ----------
Net cash used in investing activities (178,652) (340,629)
----------- ----------
Cash Flows From Financing Activities
Borrowings on bank line-of-credit payable 5,216,690 900,000
Payments on bank line-of-credit payable (6,916,690) (150,000)
Payments on long term debt (437,500) (416,664)
Borrowings on capital lease - 132,760
Payments on capital lease (31,237) (16,673)
Proceeds from issuance of common stock 4,819,316 -
Proceeds from exercise of stock options 1,034,694 -
Net cash provided by financing activities 3,685,273 449,423
----------- ----------
Net increase (decrease) in cash and cash equivalents 1,667,480 (331,850)
Cash and cash equivalents - beginning of period $ 51,314 $ 394,096
----------- ----------
Cash and cash equivalents - end of period $ 1,718,794 $ 62,246
=========== ==========
Supplemental Disclosures of Cash Flow Information
Cash paid during the year for interest $ 247,974 $ 209,937
=========== =========
Cash paid during the year for income taxes $ 0 $ 3,000
=========== ==========
</TABLE>
The accompanying notes are an integral part of this statement.
6
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OPTELECOM, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
1. Basis of Presentation
---------------------
The accompanying unaudited financial statements have been prepared pursuant
to the rules and regulations of the Securities and Exchange Commission. Certain
information and note disclosures normally included in the annual financial
statements, prepared in accordance with generally accepted accounting
principles, have been condensed or omitted pursuant to those rules and
regulations, although the Company believes that the disclosures made are
adequate to make the information presented not misleading.
In the opinion of management, the unaudited accompanying financial
statements reflect all necessary adjustments 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, 1999.
In response to developments in the marketplace, a comprehensive analysis of
Optelecom's core competencies, and establishing the Company's strategic
direction demands of penetrating the delivery of video information marketplace,
the Company has restructured in order to maximize efficiencies. To this end, the
Company has now aligned itself into two business units: the Optical Products
unit and the Video Communications Unit. (See the "Overview" section of Item 2,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" on page 10 for a further discussion of the restructuring).
2. Line of Credit
--------------
On May 25, 2000 the Company renewed its existing credit agreement with a
bank through May 31, 2001. The Company may borrow up to $1,700,000 with interest
at the bank's prime rate plus 1 1/2%. The total amount of the borrowing that 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 $600,000. Also, the Company is to adhere
to certain covenants, quarterly and at year-end. Due to the size of the loss
before taxes, depreciation, amortization and interest incurred, the Company is
currently not in compliance with its debt service coverage covenant and has
received a waiver from its bank. The Company plans to be in compliance no later
than the second quarter of 2001 at which time our debt service coverage ratio
will comply with the credit terms. At that time, the bank will lower the
interest rate to its prime rate plus 1%.
In September 2000, the Company utilized $1,700,000 of the funds generated
from the sale of its common stock to pay off in its entirety the bank line-of-
credit. (See Note 5).
As of October 30, 2000 the Company had $1,700,000 available under this
credit agreement.
3. Bank Term Note
--------------
On September 12, 1999 the Company modified its existing bank term note
whereby principal payments were deferred for the period from September 1999
through February 2000. The remaining principal, $1,875,000 is to be paid from
March 2000 through August 2002 at a monthly rate of $62,500. The Company resumed
payments on this term note in March 2000.
7
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4. Inventory
---------
Inventory consisted of the following:
September 30, 2000 September 30, 1999
------------------ ------------------
Raw materials $ 583,327 $ 894,450
WIP 514,632 1,136,025
Finished goods 530,848 800,730
---------- ----------
Total $1,628,807 $2,831,205
========== ==========
5. Common Stock
------------
In May of 2000, the Company filed a Form S-2A with the Securities and
Exchange Commission whereby the Company registered an additional 500,000 shares
of its common stock, $.03 par value shares to be sold on the open market when
the Company deemed it appropriate. In June of 2000, the Company sold 50,000 of
these shares for net proceeds of $272,411. In August 2000 the Company sold the
remaining 450,000 shares for net proceeds of $4,046,905.
In July of 2000, the Company completed the private placement of 140,000
new, unregistered shares of its common stock, $.03 par value shares for proceeds
of $500,000. As part of this transaction, the Company also issued warrants on
options for the purchase of an additional 40,000 unregistered shares of its
common stock, $.03 par value shares. There have been no additional private
placement transactions as of October 30, 2000.
6. Comprehensive Income
--------------------
The Company's accumulated other comprehensive income consists only of
foreign currency translation adjustments and is shown separately on the
Company's Consolidated Balance Sheet. For the three months ended September 30,
2000 and 1999, the total accumulated comprehensive income/loss including net
loss and currency translation adjustments were $(3,749,725) and $185,146,
respectively. For the nine months ended September 30, 2000 and 1999, the total
accumulated comprehensive loss was $(4,497,674) and $(102,222), respectively.
7. 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 September 30, Nine Months ended September 30,
2000 1999 2000 1999
------ ------- ------ ------
<S> <C> <C> <C> <C>
Net Income/Loss $ (3,791,249) $ (122,348) $ (4,646,060) $ (123,828)
============= =========== ============= ==========
Weighted average shares - basic 2,488,906 2,156,557 2,418,696 2,156,557
------------- ----------- ------------- ----------
Loss per share - basic $ (1.52) $ 0.05 $ (1.92) $ (0.06)
============= =========== ============= ==========
Weighted average shares - basic 2,488,906 2,156,557 2,418,696 2,156,557
Effect of dilution - stock options - - - -
------------- ----------- ------------- ----------
Weighted average shares - diluted 2,488,906 2,156,557 2,418,696 2,156,557
------------- ----------- ------------- ----------
Loss per share - diluted $ (1.52) $ 0.05 $ (1.92) $ (0.06)
============= =========== ============= ==========
</TABLE>
8
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8. Business Unit Information
-------------------------
During the third quarter of 2000, Optelecom reorganized its business
operations into two business units: the Optical Products Unit and the Video
Communications Unit. The new organization more closely reflects our internal
management structure and is indicative of Optelecom's strategic direction and
the manner in which each strategic business unit's financial results are
reported before income taxes. (See the Overview section of "Management's
Discussion and Analysis of Financial Condition and Results of Operations" for a
discussion of the Company's Business Units).
<TABLE>
<CAPTION>
Three Months Ended September 30, 2000 and 1999
(000's)
Income (Loss) Gross Additions
Revenues Before Income Taxes to Equipment
-------- ------------------- ------------
2000 1999 2000 1999 2000 1999
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Optical Products - gross $ 2,025 $ 2,102
Inter business unit sales (60) (2)
------- -------
Optical Products - net 1,965 2,100 $ (3,433) $ 156 $ 53 $ 69
Video Communications 621 1,064 (358) 43 0 0
------- ------- --------- ------ ---- -----
Total $ 2,586 $ 3,164 $ (3,791) $ 199 $ 53 $ 69
======= ======= ======== ====== ==== =====
<CAPTION>
Nine Months Ended September 30, 2000 and 1999
(000's)
Income (Loss) Gross Additions
Revenues Before Income Taxes to Equipment
-------- ------------------- ------------
2000 1999 2000 1999 2000 1999
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Optical Products - gross $ 5,763 $ 6,457
Inter business unit sales (60) (40)
------- -------
Optical Products - net 5,703 6,417 $ (4,198) $ 171 $188 $ 340
Video Communications 1,664 2,804 (648) (363) 0 3
------- ------- --------- ------ ---- -----
Total $ 7,367 $ 9,221 $ (4,846) $ (192) $188 $ 343
======= ======= ========= ====== ==== =====
</TABLE>
9. New Accounting Pronouncements
-----------------------------
In December 1999, the SEC issued Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" (SAB 101). SAB 101 provides
guidance on the recognition, presentation and disclosure of revenue in financial
statements and it will be effective during the fourth quarter of the Company's
current fiscal year. The Company continues to evaluate SAB 101 and it has not
determined what impact, if any, will result from its adoption.
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 hedge accounting. SFAS No. 133, as amended, will be effective for
the Company's fiscal year ending December 31, 2001. The Company had no
derivative or hedging activity in any of the periods presented.
9
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10. Legal Proceedings
-----------------
See Part II - Other Information, Item 1 - Legal Proceedings, on page 14
for a discussion of the Company's litigation activities.
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
In response to developments in the marketplace, a comprehensive analysis of
Optelecom's core competencies, and establishing the Company's strategic
direction demands of penetrating the delivery of video information marketplace,
the Company has restructured in order to maximize efficiencies as follows:
First, the Optical Products Unit has been established. This segment of the
business will be responsible for the delivery and growth of the legacy set of
products that transports video over dedicated and shared fiber optic systems
from remote sensors to customer control and monitoring centers. Presently this
Unit serves the Intelligent Traffic, Security, Audio-Visual, and instrumentation
marketplaces. This Unit includes the new Digital Video, PixelVue and PixelStream
products, in addition to the Company's legacy products. Also, included in the
Unit are the optical coil products that are used in gyro systems and dispersion
coils that are used in complex optical communications systems. This Unit will be
responsible for the development of new products, strategic alliances, worldwide
distribution channels, and growth of these businesses.
Second, a Video Communications Unit has been organized to exploit core
competencies in optical components, video compression techniques, and
distribution technologies to focus on the video distribution and delivery
marketplace. This Unit will also provide the leadership of the Paragon PC/Video
products unit, headquartered in London, that has had a long history of providing
systems with the capability to distribute video information over the CAT5 cable
systems already in place in both residential and industrial facilities
worldwide. In addition, this Unit will manage the development and business
growth strategy of the Company's Fiber-To-The-Home "FTTH" business. This Unit
will be responsible for the management of this internal development effort.
It has been determined that it will cost approximately $300,000 to achieve
and implement this management action and it will be completed in the fourth
quarter of 2000.
During its third quarter analysis the Company decided to reduce the number
of products it offered. In connection with the reduction in product offerings,
the Company has determined that there is inventory on hand that is associated
with products that will not be actively sold and therefore considered to be of
no value to the Company. Optelecom has reduced the value of its inventory by
approximately $700,000 in the third quarter of 2000.
As a result of the comprehensive evaluation completed during the third
quarter, the Company has determined that certain assets associated with the
purchase of Paragon Audio Visual Ltd. are impaired and are recorded at a value
greater than that realizable in the marketplace. The intangible assets
associated with Paragon Audio Visual, Ltd., technology, its customer list and
company name had a book value of approximately $1,735,000
10
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in September 2000. It was decided in the third quarter of 2000 that Paragon was
marketing and selling products developed, engineered and manufactured by
Optelecom. Therefore the value of the technology originally purchased has no
future value to the Company. In addition, Paragon is now marketing the new
products to a different client base. Therefore the old customer list has no
future value to Paragon. The remaining intangible asset acquired, the Paragon
Audio Visual, Ltd. company name, has value in the marketplace only by being
associated with Optelecom, Inc. and the new products and client base it is
serving, and plans to serve in the future. Optelecom has concluded that any
value of the name would only be associated with the former customer list that
has been determined to have no future value to Optelecom. We have therefore
concluded that the intangible assets associated with Paragon have no value to
the Company at this time and will be completely written off in the third quarter
of 2000.
Further, Optelecom believes that, as a result of the impairment of the
intangible assets and the value of the other assets originally acquired, the
excess value assigned over the purchase price now associated with goodwill is
also impaired and will be written off in its entirety, an expense of
approximately $190,000 in the third quarter of 2000.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1999
REVENUE
The revenue for the three months ended September 30, 2000 was
$2,585,959 compared to revenue of $3,163,430 for the same period of 1999
Revenue for the Optical Products Unit decreased $133,839 to $1,965,367
and was primarily a result of orders being delayed due to parts not being
available timely. These orders will ship in the fourth quarter.
Revenue for the Video Communications Unit was down approximately 42% to
$620,592 and reflected this Unit's switch to selling new product offerings. An
order for over $300,00 for one of its new products was shipped in September
2000.
GROSS PROFIT
Gross margin was $677 for the three months ended September 30, 2000
compared to $1,248,948 for the same period of 1999. Included in the gross profit
was a write off of inventory in the amount of $700,000 making the third quarter
operating gross profit $700,677.
The Optical Products Unit's gross profit was approximately $137,000 and
included $500,000 of the inventory write-off making the third quarter operating
gross profit $637,000. The lower margin in 2000 also reflects higher material
costs and the effect of the lower revenue levels.
The Video Communications Unit had negative gross profit of
approximately $136,000 and included $200,000 of the write off of inventory. This
Unit's gross profit is lower also as a result of the lower revenue levels.
ENGINEERING
The engineering costs for the third quarter of 2000 were $471,120
compared to $235,274 in the third quarter of 1999 and were all generated in the
Optical Products Unit. This increase of $235,846 included a $200,000 charge for
the development of products, increased personnel costs and outside services
employed in product development.
SELLING AND MARKETING
11
<PAGE>
Selling and marketing costs increased to $504,696 for the third quarter
of 2000 from $268,671 incurred in the same quarter of 1999 and reflect the
Company's continuing intent to provide the resources needed to generate
increased revenue. This increase resulted from additional personnel costs in
2000 and also increased spending for literature, trade shows and advertising for
the Optical Products Unit. Additionally, the Video Communications Unit increased
its spending to provide literature for its new products and for additional
visits to customers.
GENERAL AND ADMINISTRATIVE
General and administrative costs were $818,167 for the third quarter of
2000 compared to $455,407 for the same period in 1999. This increase of
approximately $362,760 reflected additional personnel costs, higher professional
fees including legal fees for the litigation against a former employee, costs
for the Company's SEC registration statements and costs associated with the
installation and implementation of the Company's new ERP software. Also included
in the third quarter of 2000 was a $100,000 charge as a result of the
organizational changes made during the quarter.
OTHER EXPENSES
Interest expense was lower due to the lower principal balance of the
Company's term note and a lower average bank line-of-credit borrowing level in
the third quarter of 2000.
The write off of intangibles and goodwill are a result of the Company's
analysis of its business and reflect the Company's determination that the value
of the underlying assets had been impaired.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1999
REVENUE
The Company recorded revenue of $7,366,874 for the nine months ended
September 30, 2000, a decrease of approximately $1,854,000 from the $9,220,783
recorded in the same period of 1999.
Revenue was down by $714,000 in the Optical Products Unit reflecting
lower sales in 2000 of the optical laser products to the government as well as
entering 2000 with a much lower shippable backlog.
Revenue for the Video Communications Unit was down in 2000 from 1999 by
approximately 40%. This decrease reflects the difficulties this Unit has had
switching to new products and the time necessary to gain customer acceptance of
these products.
GROSS PROFIT
The Gross Profit for the period ended September 30, 2000 was $1,622,264
compared to the $3,548,119 recorded for the same period of 1999 and can be
attributed to the lower revenue level in each unit. The Optical Products Unit
wrote off $500,000 of inventory in the third quarter of 2000 and also had to pay
higher prices for raw materials in 2000. The Video Communications Unit's gross
profit decrease also includes an inventory write off. Their write off was
$200,000.
ENGINEERING
Costs recorded for Engineering for the nine months ended September 30,
2000 were $940,020, which is $113,443 more than the nine months ended September
30, 1999. The increase is a combination of higher personnel and outside service
costs for product development in 2000 compared to higher prototype costs in
1999, costs associated with discontinued development of a high speed optical
component as well as a high
12
<PAGE>
level of engineering effort expended in the third quarter of 1999 on a customer
order. The third quarter of 2000 also includes $200,000 of development costs
expensed as a result of the Company's reorganization.
SELLING AND MARKETING
For the nine months ended September 30, 2000, Selling and Marketing
costs were $1,345,814, approximately $353,000 more than the same period of 1999.
The Optical Products Unit's increase in Selling and Marketing costs were a
result of higher personnel costs as well as higher costs for literature,
advertising and trade shows. Higher collateral material for new product
offerings in 2000 also accounted for a part of the increase in expenses of this
business unit. The increase in the Video Communications Unit was a result of
higher advertising, literature and collateral material costs as well as
increased travel costs to customers.
GENERAL AND ADMINISTRATIVE
These costs increased to $2,018,020 for the nine months ended September
30, 2000 from $1,623,279 in the same period of 1999. The increase in these costs
result from higher personnel costs, higher professional fees, the costs
associated with the Company's SEC filings and a $100,000 charge in the third
quarter of 2000 associated with the Company's reorganization. The increased
costs for the nine months ended September 30, 2000 also include costs associated
with the Company's 2000 Annual Meeting that was held in the second quarter of
2000. The 1999 Annual Meeting and costs associated with it were recorded in the
forth quarter of 1999.
OTHER EXPENSES
The increase of $1,867,696 to $2,164,470 in the nine months ended
September 30, 2000 from the same period of 1999 is due to increased levels of
borrowing of the Company's bank line-of-credit as well as a write off of
intangibles and goodwill as a result of the conclusion made by management of the
Company that the value of the underlying assets had been impaired. The write off
of Leasehold Improvements in 1999 was incurred when the Company consolidated
offices.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash and cash equivalents of $1,718,794 at September
30, 2000 compared to $51,314 at December 31, 1999 and reflects the cash
generated by the sale of common stock by the Company at the end of June 2000.
During the first nine months of 2000, the Company used $1,839,141 in
operating activities compared to the $440,644 used in operating activities in
1999. For 2000, the Company's net loss of $4,646,060 was offset by non-cash
items of depreciation and amortization of $584,767, a $265,348 decrease in
inventories, a decrease in other assets of $247,817 and an increase in deferred
taxes of $228,288.
The Company invested $187,852 in 2000 in capital equipment to support
its employees and its manufacturing and research and development activities
compared to the $209,869 invested in these items in 1999.
In the first quarter of 2000, stock options on approximately 170,000
shares were exercised and provided funds to the Company, based on the exercise
price of the stock options, in the amount of $1,037,828. These funds were used
for operating and investing activities.
In the second quarter of 2000, the company received $272,411 from the
sale of 50,000 shares of common stock that had been registered by the Company
through the filing of a Form S-2 in May of 2000. These funds were used for
operating and investing activities.
In July 2000 the company completed the private placement of 140,000
shares of its common stock for $500,000. In addition, there were warrants issued
on options to purchase an additional 40,000 shares of the
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Company's common stock in the future. These funds were used for operating and
investing activities.
In August 2000, the Company received $4,046,905 from the sale of the
remaining 450,000 shares of its common stock registered by the Form S-2A in May
of 2000. These funds were used for operating and investing activities as well as
to pay off the Company's bank line-of-credit.
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 and one-
half percent. The amount available is based on a percentage of eligible
receivables and inventories. On May 25, 2000 the Company renewed its working
capital line-of-credit until May 31, 2001 under substantially the same terms
except that the interest rate increased 50 basis points to one and one half
percent above the bank's prime rate. This rate will return to one percentage
point above the bank's prime rate when the Company is in compliance with the
bank's debt coverage covenant. In September 2000, the Company paid off this
line-of-credit with proceeds from the sale of is common stock.
The Company has a promissory note agreement with a bank that is
collateralized by substantially all the assets and contracts of the Company. On
September 12, 1999 the bank modified the term note whereby principal payments
were suspended from September 1999 through February 2000, with interest only
paid during that time. In March 2000, the Company resumed principal payments on
this note agreement.
The Company believes that its current cash, cash from operations and
borrowings under its bank line-of-credit are adequate to fund its operations for
the next twelve months. However, the Company may pursue additional funding,
either public or private debt or equity financing.
Company backlog at the end of September 30, 2000 was $2,124,000.
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
On June 2, 2000, Optelecom was granted a preliminary injunction against
Anthony DeVito, former Optelecom Vice President of Sales and Marketing and
Meridian, Inc. Specifically, DeVito is enjoined from using Optelecom trade
secrets and confidential information during the pendency of any litigation, and
Meridian was enjoined from employing DeVito in any capacity until September 28,
2000. The Company intends to pursue this issue until a final satisfactory
resolution is achieved.
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
In May of 2000, the Company filed a Form S-2A with the Securities and
Exchange Commission whereby the Company registered an additional 500,000 shares
of its common stock, $.03 par value shares to be sold on the open market when
the Company deemed it appropriate.
In July of 2000, the Company completed private placement of 140,000
new, unregistered shares of its common stock, $.03 par value shares for proceeds
of $500,000. As part of this transaction, the Company also issued warrants on
options for the purchase of an additional 40,000 unregistered shares of its
common stock, $.03 par value shares. No additional private placement
transactions had occurred as of August 7, 2000.
Use of Proceeds
14
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<TABLE>
<S> <C> <C>
a) Date of Sale of Securities: June 2000 50,000 shares of $.03 par value, common
August 2000 450,000 shares of $.03 par value, common
b) Securities sold through Branch Cabell and Company, Richmond, VA
f) Registration Statement: Form S-2A
(1)Effective Date: June 20, 2000
(2)Date Offering Commenced: June 25, 2000
(4) (i) Date of sale of last securities under offering: August 30, 2000
(iii) Securities Sold $.03 par value, common
(iv) Amount Registered 500,000 shares of $.03 par value
common
Aggregate Price of Offering $2,625,000
Amount sold: 500,000 shares of $.03 par value
Common
Aggregate offering price of shares sold: $2,625,000
(v) Reasonable estimate of expenses incurred:
(B) Direct or indirect payments to others $50,000
(vi) Net proceeds to Company: $4,319,316
(vii) Use of proceeds
(B) Direct or indirect payments to others:
Repayment of Indebtedness: $1,700,000
Working Capital (reasonable estimate): 700,000
Temporary Investments 1,919,316
</TABLE>
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5 - OTHER INFORMATION
None
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
15
<PAGE>
None
ITEM 11 - STATEMENT REGARDING COMPUTATION OF NET INCOME (LOSS) PER
SHARE
See Note 7 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: November 14, 2000 /s/ Irving Zaks
____________________________________
Irving Zaks, President and Chief Executive
Officer
Date: November 14, 2000 /s/ Thomas F. Driscoll
_____________________________________________
Thomas F. Driscoll, Vice President of Finance
and Administration and Treasurer
16
