-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EfbS6/5Gwht86SzxcWzmFnLOdO7jzdGnvqAOGFUXagkGUmH5Zehiuj4f+oELymbv 0zC1GuCCRWjYv+aAVEjuKQ== 0000950168-99-002952.txt : 19991117 0000950168-99-002952.hdr.sgml : 19991117 ACCESSION NUMBER: 0000950168-99-002952 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: OPTELECOM INC CENTRAL INDEX KEY: 0000275858 STANDARD INDUSTRIAL CLASSIFICATION: RADIO & TV BROADCASTING & COMMUNICATIONS EQUIPMENT [3663] IRS NUMBER: 521010850 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-08828 FILM NUMBER: 99754037 BUSINESS ADDRESS: STREET 1: 9300 GAITHER RD CITY: GAITHERSBURG STATE: MD ZIP: 20877 BUSINESS PHONE: 3018402121 MAIL ADDRESS: STREET 1: 9300 GAITHER RD CITY: GAITHERSBURG STATE: MD ZIP: 20877 10-Q 1 OPTELECOM, INC.--FORM 10-Q 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, 1999 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 5, 1999 2,156,557 --------- 1 OPTELECOM, INC. FORM 10-Q CONTENTS PART I. FINANCIAL INFORMATION ITEM 1. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets as of September 30, 1999 (Unaudited) and December 31, 1998 (Audited)................................................3 Consolidated Statements of Operations for the Three Months Ended September 30, 1999 and 1998 (Unaudited) .................................4 Consolidated Statements of Operations for the Nine Months Ended September 30, 1999 and 1998 (Unaudited) .................................5 Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 1999 and 1998 (Unaudited) .......................................6 Notes to Consolidated Financial Statements (Unaudited).........................7 ITEM 2. MANAGEMENT`S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS PART II. OTHER INFORMATION
2 OPTELECOM, INC. Consolidated Balance Sheets as of September 30, 1999 and December 31, 1998
ASSETS 1999 1998 ---------- ---------- (Unaudited) (Audited) Current Assets: Cash and cash equivalents $ 62,246 $ 394,096 Restricted cash 336,538 328,700 Accounts and contracts receivable 1,910,166 1,426,306 Inventories, net 2,831,205 1,847,113 Prepaid expenses and other assets 262,752 344,448 Deferred tax asset 307,960 307,960 ----------- ---------- Total current assets 5,710,867 4,648,623 Intangible Assets, net 2,088,332 2,351,563 Goodwill, net 216,920 238,493 Property and Equipment, at cost less accumulated depreciated 1,349,142 1,361,095 Deferred Tax Assets 32,174 32,174 ---------- ---------- TOTAL ASSETS $9,397,435 $8,631,948 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Bank line-of-credit payable $1,400,000 $ 650,000 Accounts payable 1,784,797 765,971 Accrued payroll 252,077 204,888 Income taxes payable 268,757 328,700 Other current liabilities 370,905 892,848 Current portion of capital lease 44,253 - Current portion of notes payable 437,500 624,996 ---------- ---------- Total current liabilities 4,558,289 3,467,403 ---------- ---------- LONG-TERM LIABILITIES: Notes payable 1,497,504 1,726,672 Capital lease 71,834 - Deferred rent liability 124,609 147,241 ---------- ---------- TOTAL LIABILITIES 6,252,236 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 (15,573) 6,033 Retained (deficit) (997,793) (873,966) ---------- ---------- $9,397,435 $8,631,948 ========== ========== TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
The accompanying notes are an integral part of this statement. 3 OPTELECOM, INC. CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30,
1999 1998 ---------- ---------- Revenues $3,163,430 $4,180,177 Cost of goods sold 1,914,482 2,404,622 ---------- ---------- Gross profit 1,248,948 1,775,555 Operating expenses: Engineering 235,274 466,547 Selling and marketing 268,671 672,265 General and administrative 448,216 764,170 ---------- ---------- Total operating expenses 952,161 1,902,982 Operating income (loss) 296,787 (127,427) Other expenses: Interest expense 90,448 93,304 Amortization of goodwill 7,191 48,157 ---------- ---------- Total other expenses 97,639 141,461 Income(Loss) before provision (benefit) for income taxes 199,148 (268,888) Provision (Benefit) for income taxes 76,800 --- ---------- ---------- Net income (loss) $122,348 $(268,888) ======== ========== Basic income (loss) per share $ 0.05 $ (0.13) ====== ======== Diluted income (loss) per share $ 0.05 $ (0.13) ====== ========
The accompanying notes are in integral part of this statement. 4 OPTELECOM, INC. CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1999 1998 ---------- ---------- Revenues $9,220,783 $12,793,313 Cost of goods sold 5,672,664 7,575,103 ---------- ---------- Gross profit 3,548,119 5,218,210 Operating expenses: Engineering 826,577 1,309,892 Selling and marketing 993,097 1,781,715 General and administrative 1,601,706 2,195,074 ---------- ---------- Total operating expenses 3,421,380 5,286,681 Operating income(loss) 126,739 (68,471) Other expenses: Interest expense 214,008 258,517 Write off of leasehold improvements 82,766 --- Amortization of goodwill 21,573 143,896 ---------- ---------- Total other expenses 318,347 402,413 (Loss) before (benefit) for income taxes $(191,608) (470,884) (Benefit) for income taxes (67,780) (45,114) ---------- ---------- Net (loss) $(123,828) $ (425,770) ========== =========== Basic (loss) per share $ (0.06) $(0.20) ======== ======= Diluted (loss) per share $ (0.06) $(0.20) ======== =======
The accompanying notes are in integral part of this statement. 5 OPTELECOM, INC. CONSOLIDATED STATEMENTS OF CASH FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1999 1998 ---------- ---------- Cash Flows From Operating Activities Net (loss) $(123,828) $(425,770) Adjustments to reconcile net (loss) to net cash used in operating activities: Depreciation and amortization 582,256 631,847 Deferred rent (22,632) 835 Loss (Gain) on sale/disposal of fixed assets 82,766 (18,004) Effect of currency translations (21,606) 2,844 Change in assets and liabilities: Accounts and contracts receivable (483,860) 201,018 Inventories (984,092) (250,719) Prepaid expenses and other assets 81,696 (39,822) Restricted cash - 390,846 Accounts payable 1,018,826 (147,232) Accrued payroll 47,189 (162,756) Deferred revenues - 183,924 Other current liabilities (549,578) (18,576) Income taxes payable (67,781) (372,791) ---------- ---------- Net cash (used in) operating activities (440,644) (24,356) ---------- ---------- Cash Flows From Investing Activities Capital expenditures (209,869) (456,624) Purchases under capital lease (132,760) - Additional investment in Paragon - (108,896) Proceeds from sale of equipment 2,000 2,972 ---------- ---------- Net cash (used in) investing activities (340,629) (571,548) ---------- ---------- Cash Flows From Financing Activities Borrowings on bank line-of-credit payable 900,000 900,000 Payments on bank line-of-credit payable (150,000) --- Payments under factoring agreement - (362,868) Payments on long term debt (416,664) (51,689) Borrowings of long term debt - --- Borrowings on capital lease 132,760 --- Payments on capital lease (16,673) --- Proceeds from exercise of stock options - 234,004 ---------- ---------- Net cash provided by financing activities 449,423 719,447 ---------- ---------- Net (decrease) increase in cash and cash equivalents (331,850) 123,543 Cash and cash equivalents - beginning of period 394,096 242,656 ---------- ---------- Cash and cash equivalents - end of period $ 62,246 $ 366,199 ======== ========= Supplemental Disclosures of Cash Flow Information Cash paid during the year for interest $ 209,937 $ 258,517 ========= ========= Cash paid during the year for income taxes $ 3,000 $ 403,846 ======= =========
The accompanying notes are an integral part of this statement. 6 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 As of September 30, 1999 the Company had borrowed the maximum amount available under its existing line-of-credit. 3. Bank Term Note S On September 12, 1999 the Company modified its existing bank term note whereby principal payments have been deferred for the period from September 1999 through February 2000. The balance at September 30, 1999 of $1,875,000 will be due and payable in new monthly installments of $62,500 from March 2000 through August 2002. Interest will continue to accrue and be payable on a monthly basis. All other terms of the note remain the same. 4. Inventory Inventory consisted of the following: September 30, 1999 September 30, 1998 ------------------ ------------------- $ 894,450 $ 671,644 Raw materials 1,136,025 445,236 WIP 800,730 1,041,353 ---------- ---------- Finished goods $2,831,205 $2,003,592 ========== ========== Total The Company had a reserve for inventory obsolescence of $460,087 at September 30, 1999 compared to $154,641 at September 30, 1998. 5. 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 nine months ended September 30, 1999 and 1998, the total comprehensive (loss) including net (loss) and currency translation adjustments were $(102,222) and $(425,770), respectively. For the third quarter of 1999 and 1998, the comprehensive income (loss) was $185,146 and $(268,888), respectively. 7 6. 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.
Three Months ended Sept. 30, Nine Months ended Sept. 30, 1999 1998 1999 1998 ---------- ---------- ----------- ---------- Net Income (Loss) $ 122,348 $(268,888) $ (123,828) $(425,770) ========== ========== =========== ========== Weighted average shares - basic 2,156,557 2,121,283 2,156,557 2,088,991 ---------- ---------- ----------- ---------- Income (Loss) per share - basic $ 0.05 $ (0.13) $ (0.06) $ (0.20) == ======= ========== =========== ========== Weighted average shares - basic 2,156,557 2,121,283 2,156,557 2,088,991 Effect of dilution - stock options - - - - ---------- ---------- ----------- ---------- Weighted average shares - diluted 2,156,557 2,121,283 2,156,557 2,088,991 ---------- ---------- ----------- ---------- Income (Loss) per share - diluted $ 0.05 $ (0.13) $ (0.06) $ (0.20) ========== ========== =========== ==========
7. 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.
Three Months Ended September 30, 1999 and 1998 (000's) Income (Loss) Gross Additions Revenues Before Income Taxes to Equipment ------------------ ------------------- ----------------- 1999 1998 1999 1998 1999 1998 ------- ------- ------- ------- ------- ------- CPD - gross $ 1,955 $ 2,287 Intercompany (2) -- ------- ------- ------- ------- ------- ------- CPD - net 1,953 2,287 $ 179 $ 214 $ 69 $ 92 GPD 147 377 (23) 0 0 0 Paragon 1,064 1,516 43 (483) 0 0 ------- ------- ------- ------- ------- ------- Total $ 3,164 $ 4,180 $ 199 $ (269) $ 69 $ 92 ======= ======= ======= ======= ======= =======
Nine Months Ended September 30, 1999 and 1998 (000's) Income (Loss) Gross Additions Revenues Before Income Taxes to Equipment -------------------- ---------------------- ------------------- 1999 1998 1999 1998 1999 1998 ------- ------- ------- ------- ------ ------ CPD - gross $ 5,744 $ 7,069 ------- ------- ------- ------- ------ ------ Intercompany (40) - ------- ------- CPD - net 5,704 7,069 $ 159 $ 280 $ 340 $ 387 GPD 713 1,127 12 57 0 40 Paragon 2,804 4,597 (363) (808) 3 39 ------- ------- ------- ------- ------ ------ Total $9,221 $12,793 $ (192) $ (471) $ 343 $ 466 ====== ======= ======= ======= ===== =====
8 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 14 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. RESULTS OF OPERATIONS THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 1998 REVENUE Revenues for the three months ended September 30, 1999 and 1998, respectively, were $3,163,430 and $4,180,177 which is a decrease of $1,016,747 or 24%. Sales were down in each business segment, with Paragon having the largest decrease of $452,000 or 30%. Paragon is still attempting to overcome the loss of 9 orders from their main customer in 1998 but did ship a new product to a new customer during the third quarter of 1999 The GPD group's revenues were off $230,000 or 61% which reflects the continued lack of orders for the Glint group. The Company has been notified that the contract the Glint group had with the Government will end at the end of 1999. Revenue in the CPD segment was down approximately $332,000 in the third quarter of 1999 compared to the same period in 1998. An incomplete sales force which translated into fewer bookings and shipments has also effected the third quarter of 1999. GROSS PROFIT The gross profit for the Company was down $526,607 in 1999 compared with the same period of 1998 due primarily to the decrease in revenues. The gross profit percentage was 39% for the third quarter of 1999 versus a gross profit percentage of 42% for the same period in 1998. Paragon and CPD had gross profit margin percentages in 1999 slightly better than in 1998. However, lower gross profit margin in the GPD group, especially as a result of the lack of Glint gross profits, lowered the overall gross profit percentage for the Company. ENGINEERING The decrease in costs of $231,273 to $235,274 in the third quarter of 1999 compared to 1998 reflects reduced costs in the GPD and CPD segments. Costs in the GPD division decreased $78,000 and is attributed to no spending on the high-speed optical components project. For CPD, the reduction of $110,000 is a result of the direct engineering efforts expended on the large customer order shipped at the beginning of October 1999, which required significant engineering effort. SELLING AND MARKETING Costs in these categories dropped $403,594 compared to the third quarter of the prior year. Costs for the third quarter of 1999 were $268,271 and they were $672,265 for the same quarter in 1998. Costs in the CPD segment are down reflecting the lower staffed departments plus the elimination of trade show costs that had been incurred in the same quarter of 1998. Also, travel costs were reduced in the third quarter of 1999. Paragon's costs dropped $240,607 compared to 1998 as a result of the overall cost reductions implemented in the first quarter of 1999 as well as reduction in non-essential travel and entertainment costs, which were significant in the third quarter of 1998. GENERAL AND ADMINISTRATIVE Costs for the third quarter of 1999 were $448,216 compared with $764,170 for the same quarter of 1998, a reduction of $315,954. This decrease reflects the Company's yearlong mission to reduce costs in all areas. Paragon reduced costs by approximately $90,000 as a result of fewer administrative personnel and their associated costs. CPD and GPD had lower costs as a result of the closing of excess office space and the overall cutting of costs in most accounts, including lower personnel costs. OTHER EXPENSES Other expenses dropped to $97,639 for the third quarter of 1999 from $141,461 in the same period of 1998 primarily due to lower amortization of goodwill. This resulted from the end-of-year reclassification and write-off of a portion of the goodwill costs. INCOME TAXES The Company recorded a provision for income taxes of $76,800 during the third quarter of 1999 10 compared with no provision or benefit for the third quarter of 1998. The effective tax rate during the third quarter of 1999 was 39%. NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1998 REVENUE Revenue for the nine months ended September 30, 1999 was $9,220,783 and for the nine months ended September 30, 1998 as $12,793,313. This decrease of $3,572,530, or 28%, occurred in all business segments. GPD's decrease of $414,000 is attributed to the expected reduction and winding down of the government contract at the Glint division. The $1,365,000 decrease at CPD reflects lower shipments as a result of an incomplete sales staff. Paragon's sales decrease of $1,793,000 is a result of a change to new products and lack of orders from its largest customer from 1998. GROSS PROFIT Gross profit was $3,548,119 and $5,218,210 for the nine months ended September 30, 1999 and 1998, respectively. Gross profit at GPD was down $304,000 and reflects the decrease in Glint revenues. There was a decrease of $864,000 at the CPD segment as a result of lower sales in 1999 and a change in product mix to lower margin products. Paragon's gross profit margin was lower by $488,000 and is due primarily to lower sales volume as well as a $50,000 increase in inventory reserves. ENGINEERING Total Engineering costs for the nine months ended September 30, 1999 were lower by $483,315 compared to the same period in 1998 and were lower in each business segment. Costs expended on research efforts for higher speed optical components were lower by $220,000. There was also a decline in costs of prototype materials as well as a reduction in the cost of outside consultants. Paragon's engineering costs were only slightly lower and were a result of lower personnel costs. SELLING AND MARKETING There was a decrease of $788,618 from $1,781,715 for the nine months ended September 30, 1998 to $993,097 for the same period in 1999. Fewer sales personnel at CPD and less travel and other expenses associated with trade shows accounted for the major part of the reductions in the CPD segment. Fewer people as well as a significant decrease in non-essential vehicle costs and travel and entertainment costs accounted for the decrease of $322,000 at paragon. An increase of $20,000 in reserves for Bad Debts slightly offset the decrease in other costs at Paragon. GENERAL AND ADMINISTRATIVE A Company-wide program to reduce costs is responsible for the decrease of $593,368 to the total of $1,601,706 incurred for the nine months ended September 30, 1999. These reductions were offset by an increase in the amortization of intangibles acquired from Paragon as a result of the reclassification at December 31, 1998 of certain of the costs associated with the acquisition of Paragon. OTHER EXPENSES Other expenses for the Nine Months ended September 30, 1999 and 1998 were $318,317 and $402,413, respectively. The decrease of $84,096 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. 11 INCOME TAXES An income tax benefit of $67,780 was recorded during the first three quarters of 1999 compared with income tax benefit of $45,114 for the first three quarters of 1998. The effective tax rate during the first three quarters of 1999 was 35% as compared to 10% in 1998. LIQUIDITY AND CAPITAL RESOURCES At September 30, 1999, the Company had combined balances of cash and cash equivalents of $62,246 compared with $394,096 at December 31, 1998. Cash used in operating activities was approximately $441,000 in 1999 and is the result of several factors. Accounts Receivable increased $984,000 due primarily to large September revenues compared to the end of 1998. Inventory increased over $1 million in large part due to the costs associated with a large shipment made in the beginning of October 1999. Other Accrued Liabilities decreased also as costs accrued at December 1998 for items such as severance costs, were paid. The increases were offset by the adjustment for depreciation and amortization and the significant increase in Accounts payable. The increase in Accounts Payable is also mainly due to the costs associated with the large shipment made in the beginning of October 1999. 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 cash of $209,869 to purchase capital assets and the net borrowings on capital leases of $132,760. 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 $750,000. On September 12, 1999 the Company modified its existing bank term note whereby principal payments have been deferred for the period from September 1999 through February 2000. The balance at September 30, 1999 of $1,875,000 will be due and payable in new monthly installments of $62,500 from March 2000 through August 2002. Interest will continue to accrue and be payable on a monthly basis. All other terms of the note remain the same. 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 September 30, 1999 was $2,260,000. 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 12 of its computer equipment and software will require replacement or modification. The Company has and will continue to install software upgrades and hardware to its existing systems that are Year 2000 compliant. 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. 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 $200,000 of which $125,000 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 $175,000 through the end of the third 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. 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. All computer hardware is Year 2000 compliant through the purchase of new equipment which has been installed by the end of the third quarter of 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 13 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 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 alleged that Paragon dismissed Mr. Brown unlawfully and in breach of his alleged employment contract rights. Mr. Brown's three sons, who also worked for Paragon, filed for the same reasons and all actions were combined into one. An agreement in principle has been reached whereby all matters before the Employment Tribunal have been settled to the satisfaction of Management. On November 10, 1999 the Company filed a complaint for injunctive relief and damages against the Browns alleging, among other actions, Breach of Contract, Breach of Duty and Interference with Contractual Relations. The Court issued a Temporary Restraining Order against the Browns forbidding them, from among other things, from competing against Optelecom or Paragon, soliciting business from any customer of Paragon and using any of Paragon's confidential technology. 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 ITEM 3 - DEFAULTS UPON SENIOR SECURITIES None ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Two items were submitted to a vote of security holders at the Company's Annual Meeting, which was held on October 13, 1999. The first was to elect Directors of the Company and the second was to consider and act upon a stockholder proposal to redeem rights issued pursuant to the Rights Agreement. (See the Company's Proxy Statement Filed on September 15, 1999). Security holders voted with management on each proposal. No other matters were submitted during the third quarter of 1999 to a vote of security holders. ITEM 5 - OTHER INFORMATION None 14 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: 11/15, 1999 /s/ EDMUND D. LUDWIG _______ _________________________________________ Edmund D. Ludwig, President and CEO /S/ THOMAS F. DRISCOLL Date: 11/15, 1999 _____________________________________________ _______ Thomas F. Driscoll, Vice President of Finance and Administration 15 EX-27 2 FINANCIAL DATA SCHEDULE FOR 3RD QTR 10-Q
5 3-MOS DEC-31-1999 SEP-30-1999 62,246 0 2,095,502 (185,336) 2,831,205 5,710,867 3,710,097 (2,360,956) 9,397,435 4,558,289 0 0 0 64,697 3,080,502 9,397,435 3,163,430 3,163,430 1,914,482 2,866,643 7,191 0 90,448 199,148 76,800 0 0 0 0 122,348 0.05 0.05
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