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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1996
Commission File Number 0-8828
OPTELECOM, INC.
---------------
(Exact name of registrant as specified in its charter)
DELAWARE
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(State or other jurisdiction of incorporation or organization)
52-1010850
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(I.R.S. employer identification number)
9300 GAITHER ROAD, GAITHERSBURG, MARYLAND 20877
-----------------------------------------------
(Address of principal executive offices)(Zip code)
Registrant's telephone number, including area code: (301) 840-2121.
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act: Common Stock $0.03
Par Value.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulations S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
At March 17, 1997, shares of the registrant's Common Stock, $0.03 Par Value,
held by persons other than "affiliates" of the registrant had an aggregate
market value of $13,044,877, based on the average closing bid and asked prices
as reported by the National Association of Securities Dealers Automated
Quotation System for such date.
At March 17, 1997, the registrant had outstanding 1,213,477 shares of Common
Stock, $.03 Par Value.
DOCUMENT INCORPORATED BY REFERENCE
Part III of Form 10-K -- Proxy Statement for the 1997 Annual Meeting of
Stockholders.
PART I
Item 1. BUSINESS
GENERAL
Optelecom, Inc. (the Company) is a Delaware corporation that was organized in
1972. The Company's business consists primarily of the development,
manufacture, and sale of fiber optic communications products and laser systems
for commercial and military customers.
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 focussed on electro-optic technology
development for government-related defense business, and the Research and
Development Division, which addresses technology development business
opportunities. In 1996, the Research and Development Division had no revenues
and no significant expenses. GPD is composed of two operating groups,
Electro/Optics (E/O) Technology, and Laser Illuminator Technology. This Division
was formed in 1996 from two former divisions, R & D and GLINT. These divisions
were combined into one to provide a natural grouping of similar operations and
functions. Currently, the business addressed by the individual groups is
essentially the same as in prior years.
Fiber optic communication equipment, the main thrust of the Company's sales, is
an area of unprecedented growth and change. Technology development is constantly
and rapidly improving the capability to transmit ever increasing data rates over
ever greater distances with fiber-based communication systems.
Most signals, voice, video and data are in electrical form. The transmission of
electrical signals from one point to another by converting them to optical
(light) signals has many advantages over electrical transmissions. Compared to
copper wire, optical fibers can transmit signals at a much greater data rate,
over a greater distance and without disturbance from electrical machinery,
lightning or other noise sources.
The fiber optic communication business has many parts, but can be divided
generally into two segments: the optical fiber/cable portion, which supplies the
media for transporting optical and the transmission equipment portion, which
generates and receives optical signals. A few companies manufacture optical
fiber, while many more manufacture optical fiber cables. Optelecom participates
by providing the equipment that interfaces electrical signals to optical signals
at the transmitter end of a fiber optic communication link and provides
complementary equipment that converts the optical signals to electrical form at
the other end of the communications link. Optelecom sells its equipment to users
of these communication systems or to system integrators that install the
Company's equipment in large communication nets.
There are a large number of communication applications that require different
communication rates, distances and signal formats. Optelecom provides equipment
specifically designed for transmission of various combinations of voice, data
and video for a range of applications. The Company also addresses U.S.
Government defense related markets for specialized and proprietary applications
of fiber optic and laser system technology that make it unique among traditional
fiber optic communication equipment
2
manufacturers. While government business can provide an offset to periodic
cycles in the commercial sector, it is also subject to changing world
conditions. Therefore, the Company attempts to balance revenues generated by
both types of markets to avoid severe changes in its business posture. The
Company is unable to predict future defense business activity or the related
impact on the Company's business.
Because of the advanced nature of the technology inherent in the Company's
products, the expertise of certain officers and directors of the Company is one
of its principal assets. In particular, Dr. William H. Culver and Mr. Edmund D.
Ludwig, who are officers and directors of the Company, provide the Company with
important technical expertise and have major responsibilities in managing the
Company. Although the Company pays for and is the beneficiary of a $300,000
insurance policy on the life of each of such persons, the loss of the services
of either of them, through death or otherwise, could have a negative impact on
the Company. Furthermore, because of the Company's relatively small size, the
loss of the services of certain other key employees could have a disruptive
effect on the Company's operations.
On March 18, 1997, the Company had 61 employees.
The table below displays the Company's three-year revenue and operating income
(loss) by division.
1996 1995 1994
---------------------------------------------------------------------------
Operating Operating Operating
Operating Income Income Income
Divisions Revenue (Loss) Revenue (Loss) Revenue (Loss)
Company Totals $8,910,263 $1,075,338 $6,430,136 $(424,427) $7,036,069 $412,690
CPD $6,453,686 $60,664 $5,319,556 $(470,866) $5,562,130 $174,084
GPD:
E/O TECHNOLOGY
GROUP (formerly
R&D) $592,981 $(31,903) $395,284 $(263,930) $554,542 $175,589
LASER
ILLUMINATOR
TECHNOLOGY
GROUP (formerly
GLINT) $1,863,596 $1,046,577 $715,296 $307,369 $919,397 $414,195
See Note 12 to the financial statements for identifiable assets by segment.
3
GOVERNMENT PRODUCTS DIVISION (GPD)
ELECTRO/OPTICS TECHNOLOGY GROUP (Formerly R & D DIVISION)
INTERFEROMETRIC FIBER OPTIC GYROS (IFOGS)
The E/O Technology group's business consists of providing technology development
and engineering services to the U.S. Government and its prime contractors. This
field of investigating techniques for design and manufacture of specialized
sensing coils for fiber optic gyros is unique and has few competitors. A small
portion of revenue is also derived from sales of custom optical fiber coils for
sensing and communication applications.
In 1996, the group's activities continued to concentrate on interferometric
fiber optic gyros (IFOGs), which are rotation sensing instruments that are
expected to replace mechanical and laser gyros in aircraft, missiles, and other
vehicles. Optelecom has used its expertise in winding high-speed payout coils
for fiber optic guided missiles to develop winding technology for IFOG coils,
and to manufacture these coils in limited production. These complex coils
present key technical and cost challenges to the future of IFOG viability.
In prior years, the group's activities and major source of revenue were
concentrated on fiber optic missile payout technology, payout experiments, and
field demonstrations. These activities led to the development of the IFOG coil
winding capability and products. The U.S. Department of Defense (DoD) has
identified the IFOG as a critical technology that will benefit from
manufacturing technology (MANTECH) funding and, in 1993, had authorized a $15
million Air Force MANTECH program. The Company received multi-year contracts
from the Defense Advanced Projects Research Agency (DARPA) and Honeywell
beginning in 1995. Through 1996, total funding from these contracts was $540,228
(DARPA) and $322,161 (Honeywell) as part of the MANTECH effort. Both the DARPA
and Honeywell contracts were active through 1996 and together contributed
$462,215 in revenue; these contracts are continuing in 1997 and represent the
group's entire year end backlog of approximately $214,000.
FIBER OPTIC GUIDED MISSILES AND ROBOTIC VEHICLES
There was no business activity in this area in 1996.
LASER ILLUMINATOR TECHNOLOGY GROUP (Formerly GLINT DIVISION)
The group derives its revenues entirely from the U.S. Government and its
agencies. GLINT is an acronym associated with the U.S. Air Force's C-130 Gunship
laser illuminator system supported by Optelecom. Due to the nature of the
application of this system, contractual revenues are dependent on government
budgets, the worldwide political situation, and specific crew training
schedules. In January 1996, the Company received a $6.5 million, four-year
contract (one base year and three one-year options) to provide refurbishment
services. First year work totalled $1,863,596, and the Company anticipates
additional refurbishment requirements in succeeding years. Backlog at the end of
1996 was $1,284,467.
4
COMMUNICATION PRODUCTS DIVISION (CPD)
The Communication Products Division addresses business opportunities in the
world-wide commercial communication equipment marketplace, and specializes in
optical fiber technology. Currently, the majority of its revenues are provided
from several niche market areas including original equipment manufacturer (OEM)
equipment for process control, video signal transmission equipment for financial
brokerage desks, and communications systems for highway traffic monitoring and
advanced air traffic control video monitor displays. In 1996, CPD order booking
levels and shipments increased significantly, resulting in a small profit.
Business Activity 1996 1995 Change
Order Booking $6.03 million $5.36 million +13%
Shipments $6.45 million $5.32 million +21%
The Division's year-end backlog was approximately $417,000, down from $724,000
at year-end 1995.
PRODUCT MIX SALES ANALYSIS
Although revenues from sales of data products increased in terms of absolute
dollars, they continued a decreasing trend as a portion of total revenues, due
to our increased emphasis on video products for the transportation market. Sales
of RGB video systems (i.e., Red, Green, Blue - a transmission standard for high
quality video displays) increased significantly in the fourth quarter with
receipt of a $ 500,000 order to provide terminal display communications
equipment used in trading floor workstations for a major New York City
investment bank. Products transmitting closed circuit TV (CCTV) video using
Optelecom's proprietary pulse frequency modulated (PFM) technology continued
strong sales with installation of systems in new intelligent transportation
systems (ITS) projects for state Departments of Transportation in Washington and
California. Sales of ancillary products such as cables, connectors, and
custom-engineered communication products increased slightly, since many
customers ordered complete system configurations rather than procuring
individual items from multiple vendors. The following table summarizes sales by
product line as a percentage of total sales:
Communication Fiber Optic Product Categories 1996 1995 1994
Data Transmission Products 29% 32% 47%
High Resolution RGB Video 18% 9% 8%
Standard PFM Video 42% 50% 33%
Cables/Connectors 3% 2% 3%
Other 8% 7% 9%
5
MARKET MIX ANALYSIS
The mix of CPD product sales for different market segments over the last three
years was as follows:
Markets 1996 1995 1994
Government 18% 11% 23%
Industrial (including process control) 21% 18% 11%
International 19% 16% 17%
Commercial Integrators and Resellers 42% 55% 49%
The proportion of sales to government organizations increased to 18% due to our
focus on selling Commercial Off-The-Shelf (COTS) products into military
communications applications. Although down slightly as a percent of total
revenue, process control and industrial sales increased in absolute dollars,
primarily due to increased sales to our major OEM customer. International sales
increased slightly, reflecting our increased emphasis on Europe and Pacific Rim
countries. Currently, Optelecom has a sales presence in 19 countries through
distributors and resellers. Revenue from commercial integrators and resellers
decreased, as more sales were achieved from our direct sales force. This
reflects the requirement, in many cases, for a "consultive" sales approach to
properly specify and apply highly technical products in the intelligent
transportation control and surveillance market segments.
CUSTOMER MIX ANALYSIS
In 1996, the mix of customer types changed compared to 1995. OEM sales as a
percent of total revenue was 26%, compared to 21% in 1995, and 40% in 1994. Of
the total revenue, 50% was generated by sales to the top 10 customers for the
division; in 1995 the figure was 43%. This continued a trend of a slight shift
to a larger pool of customers with smaller individual system requirements. The
two largest accounts included a new customer (an integrator for the financial
trading segment) at $705,000, and a long-standing OEM account which provided
$864,000 of revenue, compared to $710,000 for the same OEM account in 1995.
Other major customers included organizations such as Traffic Control Devices
($150,000), Pacific Teleoptics ($291,000), and McDonnell Douglas ($188,000).
Financial Information Relating to Company
Sponsored Research and Development 1996 1995 1994
Expenditures on Company sponsored research
and development activities $517,654 $538,977 $477,089
Research and development of new fiber optic communication products is a key
component of the Company's overall business strategy. This research is focussed
on existing product improvement and enhancement, and on adaptation of existing
products to alternative uses. Research into new product technology is focussed
on the utilization of fiber optic technology in markets not previously addressed
by the Company's current product offering or development contracts. During 1996,
a new series of high resolution video products was designed, developed, and
qualified for a major international customer. Beginning in 1997, these systems,
with improved performance characteristics and a lower cost design, will replace
an existing Optelecom product supplied to RGB customers over the past several
years. CPD Engineering continued to add products to the family of systems
developed for fiber optic communication
6
equipment for intelligent transportation system and traffic signal control.
Our first telecommunications product, a protected T1/E1 fiber extender
for digital local loop applications, was developed and delivered to a
foreign telephone company. Also, development work continued on our Compressed
Digital Video codec system (DVS) which, with it's telecom interfaces, will
have applications in a variety of our existing and proposed markets.
MARKETING
GOVERNMENT PRODUCTS DIVISION
E/O TECHNOLOGY GROUP
The group markets its services to both Government and commercial customers;
however, for the past four years all of its business has been obtained from the
Government and its prime contractors. Successfully marketing new technology
initiatives directly to the Government is difficult due to increased competition
from larger companies with far greater resources. Traditionally, the group has
concentrated on markets providing research and products used in fiber optic
communication systems for airborne missiles, ground robotic vehicles and
underwater sensors. Optelecom had historically received contracts from certain
key Government organizations whose budgets have been reduced in recent years;
there are few new development opportunities available in the technology areas
pertinent to the Company's expertise. As a result of the utilization of IFOG
sensing coil technology developed by Optelecom in 1993 and our prior experience
with the development of fiber coils for high speed payout, we identified
opportunities in the area of optical fiber gyro coil winding. Gyro coils are a
defense related Government program area which we see as receiving continued
focus amid shrinking defense spending. Additional potential opportunities to
diversify into commercial markets for fiber optic amplifiers, sensors, and
similar components, have been identified as well. We continue to seek to develop
new markets for the group's services and products in these technical areas.
LASER ILLUMINATOR TECHNOLOGY GROUP
The sole customer for this division is the Warner-Robins Air Logistics Support
Center of the U.S. Air Force. Optelecom maintains a very close working
relationship with the individual component item managers assigned at
Warner-Robins and the operations group at Hurlburt Field, Florida. We insure
that these support personnel fully understand Optelecom's capabilities and
capacity to perform the required work. Bids are carefully reviewed to be sure
that the customer's requirements are satisfied. The value of this approach to a
working relationship can be judged by the receipt in 1996 of a four year,
multi-million dollar contract to provide training and equipment refurbishment
services for the GLINT laser illuminator system.
COMMUNICATION PRODUCTS DIVISION
In late 1996, a General Manager for CPD was hired to provide additional market
and business process knowledge for the division. Also, at the same time, the
Director of Optelecom's west coast office was moved to our east coast facility
and appointed Vice President of Sales and Marketing. These staff changes will
greatly strengthen CPD's ability to define, enter, and service new communication
systems markets. Since 1992, CPD has used selected sales representative firms in
foreign countries to promote and sell our products. These firms have gradually
established awareness of our products in their respective countries, and we have
seen a trend of increasing business from foreign sources.
7
MANUFACTURING PROCESSES
Beginning in mid-1995, the company initiated a corporate-wide effort to
implement a Quality Assurance system fully compliant with the requirements of
ISO-9001 (an internationally-recognized quality system standard). In June, 1996,
all operating divisions of the company received certification to the standard.
GOVERNMENT PRODUCTS DIVISION
E/O TECHNOLOGY GROUP
In 1991, the Company developed a winding machine to fabricate coils of optical
fiber wound in very specific configurations for fiber gyro systems for Smiths
Industries. Additional work in this area through 1995 was conducted to develop a
winding machine concept directed toward automated techniques for fabricating
similar fiber gyro coils. The number of companies from which the group obtains
raw materials and optical fiber is limited; however, the Company does not
anticipate any problems with adequate supplies.
LASER ILLUMINATOR TECHNOLOGY GROUP
Optelecom has established a specialized facility adjacent to its headquarters to
support fabrication and repair operations for the GLINT laser illuminator
system. The processes used to fabricate laser modules for this system are
proprietary to Optelecom and depend on sophisticated understanding of specific
semiconductor processing techniques. Proper use of the equipment and materials
associated with these activities depends on highly skilled personnel whose
technical knowledge is key to the successful fabrication of the final product.
The number of companies from which the group obtains raw materials is limited;
however the company does not anticipate any problems with adequate supplies.
COMMUNICATION PRODUCTS DIVISION
The Company performs routine and specialized manufacturing, assembly, and
product testing functions in its corporate headquarters. In past years, routine
fabrication had been subcontracted to other manufacturers. During 1995, the
Company purchased, installed and placed into service equipment which
automatically assembles components onto printed circuit boards at high speed.
This action was taken to lower manufacturing costs and reduce the time-to-market
for new product designs. The success of this decision has been apparent in the
significant manufacturing cost reduction realized on all assemblies produced
using the equipment. The Company also maintains a quality assurance function and
testing area that performs optical and electrical testing, and quality control.
Raw materials and supplies used in the Company's business include optical
materials, plastic products, and various electronic components, most of which
are available from numerous sources. The number of companies from which the
division can obtain optical emitters and detectors for use in its circuit
assemblies is limited; however, Optelecom has negotiated long-term supply
contracts with these vendors and does not anticipate significant supply
problems.
8
COMPETITION
The Company's products fall within three (3) separate and distinct markets. As
such, the characteristics of competition in these markets differ greatly.
Optelecom's Communication Products Division competes mainly with other companies
of roughly equal size, having similar resources. For low technology products,
such as fiber optic data modems, competition is intense, as these products have
reached a commodity status. In the areas of engineering products for specific
applications, Optelecom competes against companies of the same size or larger.
Competitors with larger research staffs have an advantage in these markets.
The market in which the E/O Technology group competes is dominated by larger
Defense prime contractors. These companies have greater marketing,
manufacturing, financial, research, and personnel resources than Optelecom. In
addition, as Department of Defense contracting activity has declined, these
companies have started to compete in markets which were primarily addressed by
companies with resources similar to Optelecom's. As a result, the E/O Technology
group is at a competitive disadvantage when competing against prime contractors.
Optelecom does feel that its IFOG coil winding technology is at least equal to
the technology developed by much larger prime contractors and in this market, it
can compete equally.
The Laser Illuminator Technology group is a sole-source provider of the products
it supplies to the U.S. Air Force. Optelecom is not aware of any competition in
this market.
SEASONALITY
The Company's products are based on fiber optic technology. As such, seasonality
does not materially affect our revenues.
PATENTS
The Company holds certain patents; however, its business as a whole is not
materially dependent upon its ownership of any one patent or group of patents.
The Company does not license any patents from other parties, nor is it aware of
any restrictions on its current business imposed by patents of other parties.
CONTRACT RENEGOTIATION AND TERMINATION
None of the Company's current contracts are subject to price renegotiation.
However, the Company's contracts with the U.S. Government are always subject to
termination, which is a standard clause in any contract with the government. In
February, 1995, a subcontract from Litton Systems was terminated.
9
Item 2. PROPERTIES
In 1992, the Company moved its operations to new leased facilities at 9300
Gaither Road, Gaithersburg, Maryland, near Washington, DC. The facilities
consist of space in two adjacent buildings, one occupying 21,000 square feet,
with a ten-year lease term, beginning September 1, 1992, and the other occupying
4,000 square feet, with a one-year term, beginning in December, 1992, and two
one-year options. Current monthly rent is $16,582.50 on the larger space, and
$2,584.99 on the smaller one. All of the facilities are in good repair and are
adequate for the Company's current production requirements.
Item 3. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of 1996 to a vote of
security-holders.
10
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock, $0.03 par value (Common Stock) is traded in the
over-the-counter market. Set forth below are the highest and lowest closing bid
prices for the Common Stock as reported by the National Association of
Securities Dealers Automated Quotation Service (NASDAQ) during each quarter for
the three years ended December+31, 1996, 1995 and 1994, respectively. Such
quotations do not necessarily reflect actual transactions.
Bid Price
Quarter Ended High/Low
- ------------- ---------
December 31, 1996 12 7/8 - 5 1/8
September 30, 1996 6 3/8 - 3 3/8
June 30, 1996 6 5/8 - 3 5/8
March 31, 1996 5 - 2 3/4
December 31, 1995 3 - 2 1/2
September 30, 1995 4 1/8 - 2 7/8
June 30, 1995 4 3/4 - 2 7/8
March 31, 1995 4 1/8 - 3
December 31, 1994 4 3/4 - 2 7/8
September 30, 1994 4 1/8 - 2 5/8
June 30, 1994 3 3/4 - 2 3/4
March 31, 1994 5 3/8 - 3 1/4
There are approximately 1,209 record-holders of the Common Stock as of March 17,
1997.
The Company has not declared any dividends to date and does not expect to do so
in the foreseeable future.
11
Item 6. SELECTED FINANCIAL DATA
Set forth below is selected financial data for the Company's most recent five
fiscal years.
Year Ended December 31,
1996 1995 1994 1993 1992
---------------------------------------------------------------
Net Revenue $8,910,263 $6,430,136 $7,036,069 $7,083,229 $6,001,057
Net (Loss) Income $722,081 $(208,384) $382,347 $95,633 $400,274
Earnings per Common and
Common Equivalent Share
before Extraordinary Item
and Accounting Change $0.59 $(0.18) $0.33 $0.06 $0.31
Extraordinary Item ------- ------ ------ ------ $0.05
Accounting Change ------- ------ ------ $0.02 ------
Net (Loss) Income per Share $0.59 $(0.18) $0.33 $0.08 $0.36
Total Assets $4,466,463 $3,674,004 $3,617,298 $3,115,032 $2,871,896
Long-Term Obligations $11,607 $46,426 ------ ------ $158,296
Stockholders' Equity $3,041,631 $2,188,777 $2,384,303 $1,981,821 $1,771,833
Cash Dividends Declared
per Common Share ------ ------ ------ ------ ------
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FINANCIAL CONDITION
Due to the nature of the Company's business, the key components of its financial
condition constitute receivables, inventory, fixed assets, accounts payable, and
debt. The Company saw an increase in net worth to $3,041,631 in 1996. Prior
years's trends of key financial indicators show a change in corporate net worth
of $2,188,777 for 1995 compared to $2,384,303 in 1994. The 1996 current ratio
increased to 3.0 from 2.2 in 1995 and 2.8 in 1994.
Year-end 1996 billed accounts receivable was $1,246,388. Billed accounts
receivable at year-end 1995 was $1,378,424, and $1,574,656 in 1994. The 1996
average outstanding days in receivables was 52 days. The days outstanding in
accounts receivable averaged 69 days in 1995, and 66 days in 1994. The reduction
in days receivable was achieved by instituting an aggressive accounts collection
program. Bad debt write-offs represent less than 1/10 of one percent of the
total yearly revenues. The low level of bad debts is due partly to the
percentage of business the Company does with the U.S. Government and Fortune 500
companies. The Company also uses a careful screening process and performs credit
qualification of customers before accepting their orders. For any new account,
credit checks are always conducted, and questionable situations are either
placed on a COD or a letter of credit basis. Accounts receivable are closely
monitored; those that are delinquent are continuously contacted until payment is
received.
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The overall composition of the inventory has changed somewhat over the last
three years as shown in the following chart:
Inventory Composition 1996 1995 1994
Production Materials $ 765,783 $ 549,277 $555,981
Work In Process 397,123 153,203 155,676
Finished Goods 342,062 377,861 65,339
---------- ---------- --------
TOTAL $1,504,968 $1,080,341 $776,996
One of the tools the Company uses for trend analysis is a comparison of our
inventory levels to total sales. In 1996, this level was 17% compared to 17% in
1995 and 11% in 1994. The value of the raw material and work in process
inventory increased by approximately $460,000 in 1996 compared to 1995. The
increase in 1996 work in process reflects orders to be shipped in early 1997.
Although our objective is to reduce inventory levels as much as possible, the
value of finished goods inventory increased substantially in 1995 to provide
products available from stock. This action was taken to meet competitive
pressures as customers are demanding shorter product delivery times. We will
attempt to reduce the amount of raw material inventory to partially offset the
higher level of finished goods inventory. The Company believes that its reserve
for inventory obsolescence is adequate to properly value any excess quantities
of this inventory.
In 1996, fixed asset additions were $219,119 compared to $287,854 in 1995 and
$207,025 in 1994.
RESULTS OF OPERATIONS
Combined 1996 revenues were 39% higher than 1995 and 27% higher than 1994. A
profit of $722,081 which represented 8% of revenue for 1996, compares to a loss
of (3%) for 1995, and profit of 5% for 1994.
GOVERNMENT PRODUCTS DIVISION (GPD)
ELECTRO/OPTICS TECHNOLOGY GROUP
E/O Technology Groupis 1996 revenues increased 50% compared to 1995. The
increase occurred due to additional work from DARPA and Honeywell Systems. The
trend of increase in revenues and decrease in losses has been significant over
the past several years. It appears that the unique work performed by this group
may have enough market potential to achieve break even or profitability. Revenue
for the last three years was $592,981 in 1996, $395,284 in 1995, and $554,542 in
1994. Comparable period losses were $(31,903), $(263,930), and $(175,589).
13
Cost of Sales
The cost of sales as a percent of revenue has decreased significantly due an
increase in revenue as mentioned above and a decrease in overhead costs as
discussed below. Given below are the last three years' results:
Cost Comparison 1996 1995 1994
Cost of Sales $501,148 $440,411 $521,539
Gross Sales $592,981 $395,284 $554,542
Cost as a Percent of Revenue 85% 111% 94%
OVERHEAD AND G&A
Overhead
Overhead costs for the E/O Technology group were $297,862 in 1996, $316,493 in
1995 and $369,342 in 1994. Overhead expenses have decreased due to lower labor
costs within the group and a lower corporate expense allocation. The allocated
costs are apportioned as a percent of floor space assigned to revenue generating
activities and have been reduced as the group's facility space requirements have
declined.
G&A
G&A expenses for the division were $143,982 in 1996, $218,801 in 1995 and
$208,592 in 1994. These numbers reflect a lower expense in 1996, due to a
reassignment of the activities of the Chairman from divisional work to the
corporate area.
LASER ILLUMINATOR TECHNOLOGY GROUP
1996 was another very successful year for this group. The Air Force will require
ongoing support for the GLINT laser illuminator system for at least the next
several years. While it is difficult to quantify the level of potential
business, it is likely that Optelecom will provide products and maintenance
support during that period. Revenue for 1996 was $1,863,596 compared to $715,296
in 1995 and $919,397 in 1994. Net profits were $1,046,577 for 1996, $307,369 for
1995, and $414,195 for 1994. The increase in revenue in 1996 compared to 1995
was due to a change in the composition of the type of business addressed by this
division. In 1996, contract work consisted of refurbishment of complete
illuminator systems; in 1995, work consisted essentially of fabrication of spare
laser arrays, with a small additional effort associated with contract
development work.
14
Cost of Sales
Although overhead costs for the three-year period were relatively constant, the
large increase in revenue in 1996 caused the cost of sales as a percent of
revenue to decrease compared to 1995 and 1994.
Cost Comparison 1996 1995 1994
Cost of Sales $572,142 $305,769 $389,924
Gross Sales $1,863,596 $715,296 $919,397
Cost as a Percent of Revenue 31% 43% 42%
Overhead
Overhead costs for the GLINT Division were $112,099 for 1996 compared to
$118,197 for 1995 and $125,382 for 1994. Overhead expenses have remained
relatively stable for the last several years due to a stable work force and
facility size.
G&A
The general and administrative expenses were $244,875 in 1996, $102,158 in 1995
and $115,278 for 1994. The increase over 1995 reflects higher corporate
allocation which is apportioned on the basis of percent revenue compared to
corporate revenue.
COMMUNICATION PRODUCTS DIVISION (CPD)
1996 Communication Products Division revenues increased by 21% over 1995 and
resulted in a net profit of $60,664. CPD revenues in 1995 decreased by 4% from
1994 revenues and resulted in an operating loss of $(470,866) compared to a
profit of $174,084 in 1994. The product sales mix was more favorable in 1996,
with OEM sales up significantly and low margin products down compared to 1995.
New products in fiber optic trader desks and lower cost designs helped reverse
1995 problems. The Company was successful in implementing product designs
specifically intended to be produced by automatic assembly processes to minimize
direct costs.
Cost of Sales
Cost of Sales is the sum of direct costs to produce the product and overhead
costs.
Cost Comparison 1996 1995 1994
Cost of Sales $3,796,628 $3,595,328 $3,414,309
Gross Sales $6,453,686 $5,319,556 $5,562,130
Cost as a Percent of Revenue 59% 68% 61%
15
Direct Costs
In 1996, direct costs decreased in relation to revenue. As previously mentioned,
one reason for the decrease was the change in the mix of products sales compared
to 1995. For instance, OEM sales were up significantly in 1996 over 1995. These
sales had high margins since engineering costs incurred in 1995 were recovered
in the 1996 sales price and there is no direct competition which would require
price reductions. The second area of improvement was in direct manufacturing
cost for standard products due to automation. Finally, the Company did not have
to discount prices as much as in 1995, since our customers began to realize the
value of the quality of our products. In 1995, direct CPD costs in relation to
sales had increased by 5% over 1994. The 1995 increase was attributed to growing
competition forcing us to lower our prices. However, the cost to produce
products continued to decrease due to the investment in automated manufacturing
facilities. As more of our product designs evolve toward automated assembly, our
ability to successfully compete at lower sale prices will continue to improve.
Direct Costs Versus Sales 1996 1995 1994
Direct Costs $2,773,182 $2,472,318 $2,297,661
Percent of Sales 43% 46% 41%
Overhead
Overhead costs include facilities costs, indirect labor costs in manufacturing,
applied overhead, and inventory writeoffs. In 1996, overhead cost as a percent
of sales fell by 4% due to an increase in sales and lower overhead costs
compared to 1995. Overhead costs fell in 1996 by approximately $80,000 (8%),
compared to 1995. Included below is a comparison of overhead costs for the past
three years:
Cost Comparison 1996 1995 1994
Overhead Costs $1,023,446 $1,103,323 $1,113,798
Overhead Costs as a Percent of Revenue 16% 20% 20%
Applied Overhead
Applied overhead allocates costs in overhead to a final product. The Company
uses a computation method in which overhead costs are divided by direct labor
costs. This establishes the percent of overhead costs to be applied to the final
product. Examples of these costs include rent, utilities, telephone, inventory
variances, and depreciation of production capital equipment costs. Applied
overhead amounts for the past three years were $(593,871) in 1996, $(571,837) in
1995, and $(490,776) in 1994.
16
Inventory Write-offs
Direct inventory write-offs increased slightly in 1996 to $113,250 compared to
$92,119 in 1995 and $42,870 in 1994. Generally, these write-offs are due to
engineering changes which result in obsolete raw materials and subassemblies
used on products we no longer intend to sell and also to overstocking of
particular items. Although we make every attempt to minimize obsolete inventory,
the rapid engineering evolution of our product line and the changes in our
product mix makes some obsolescence unavoidable.
G&A
General and Administrative costs consist primarily of expenses related to sales,
marketing and engineering activities and other administrative operational costs.
Commercial Product engineering development costs have remained constant,
reflecting stable staff size and workload. During 1996, development focussed on
additions to the product line for highway traffic monitoring equipment. Also, a
new effort to develop video technology was initiated, which will result in new
product introductions in 1997. The three-year record of these engineering costs
(exclusive of fringe) is $475,399 in 1996, $489,771 in 1995, and $469,449 in
1994. The company implemented changes to the sales and marketing staff to more
closely align the technical aspects of the selling process with customer
requirements and also changed the corporate management staff to strengthen the
divisions efforts. The cost of this effort, as well as profit sharing expenses
and reserves for bad debt are reflected in the increased G&A expenses for this
year, which were $2,596,398. Prior-year costs were $2,205,094 in 1995 and
$1,976,637 in 1994.
OTHER OPERATING EXPENSES
Corporate
Income tax expense (benefit) was $310,136 in 1996, $(233,756) in 1995 and
$188,000 in 1994. This reflects the Companyis return to profitability. The
effective tax rate was 30% in 1996. The effective tax rate was (53%) in 1995
primarily as a result of realizing the tax benefit of carrying back the then
current year loss to the prior year. In the prior year, the Company recorded a
$215,693 income tax refund receivable in 1995 for amounts expected to be
received in 1996.
Interest expense of $19,460 increased in 1996 compared to $3,763 in 1995 and
$22,643 in 1994. The operating loss in 1995 forced the Company to borrow funds
from it's line of credit in 1996.
Advertising costs decreased substantially in 1996. These costs include
advertising in trade magazines, participation in trade shows, and product
literature, including catalogs and specification sheets. Compared to prior
years, the type of advertising changed as a result of a redirection of our
advertising emphasis. Advertising expenditure decreases occurred mainly in the
areas of magazines and trade shows. The costs of advertising for the last three
years were $115,073 in 1996, $225,675 in 1995 and $162,706 in 1994.
17
Impact of Inflation
Inflation has not had any significant effect on the operations of the Company
during 1996, and we do not expect it to have any significant effect during 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity requirements are largely generated by working capital
needs. These needs are primarily focussed on financing inventories and accounts
receivable. In 1996, net cash provided by operating activities was $387,304. In
1995, as a result of a net operating loss and increases in inventory balances,
net cash used in operational activities was $(110,497). Non-cash costs such as
depreciation and amortization were $235,431 in 1996. Cash used in investing
activities in 1996 was $(219,119), and included expenditures for capital
equipment for manufacturing operations, facility upgrades, and general office
equipment. To finance these activities, Optelecom used existing cash flows,
borrowing in short term notes and long term borrowings for equipment. No other
material changes in cash flow are expected. The Company has the ability,
provided there are sufficient eligible receivables, to borrow up to $1,000,000
under its line of credit as of December+31, 1996. The Company also has the
ability to borrow funds for specific capital asset purchases to a maximum of
$150,000 from a local bank. Loans for these assets are collateralized by the
specific equipment asset and payable over no more than 5 years. At the end of
1996, the outstanding balance on this loan was $46,426.
18
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and
Stockholders of Optelecom, Inc.:
We have audited the accompanying balance sheets of Optelecom, Inc. as of
December 31, 1996 and 1995, and the related statements of operations,
stockholders' equity, and cash flows for the two years then ended. Our audits
also included the financial statement schedule listed in the accompanying index.
These financial statements and schedule as of and for the years ended December
31, 1996 and 1995 are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements and
schedule. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Optelecom, Inc. at December 31, 1996 and
1995, and the results of its operations and its cash flows for the years then
ended in conformity with generally accepted accounting principles. Also, in
our opinion, such financial statement schedules as of and for the years ended
December 31, 1996 and 1995, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
Washington, D.C.
February 28, 1997
20
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
Optelecom, Inc.
We have audited the balance sheet of Optelecom, Inc. as of December 31,1994 and
the related statements of income, stockholders' equity and cash flows for the
year then ended. We have also audited the schedule listed in the accompanying
index as of and for the year ended December 31, 1994. These financial statements
and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and schedules are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements and schedule.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of
the financial statements and schedule. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Optelecom, Inc. at December 31,
1994, and the results of its operations and its cash flows for the year then
ended in conformity with generally accepted accounting principles.
Also, in our opinion, the schedule presents fairly, in all material respects,
the information set forth therein as of and for the year ended December 31,
1994.
BDO Seidman, LLP
Washington, D.C.
March 10, 1995
21
OPTELECOM, INC.
BALANCE SHEETS
DECEMBER 31,1996 AND 1995
- --------------------------------------------------------------------------------
ASSETS 1996 1995
CURRENT ASSETS:
Cash and cash equivalents $ 266,575 $ 62,436
Contract receivables 1,463,426 1,411,209
Inventories 1,504,968 1,080,341
Prepaid expenses and other assets 306,620 108,960
Income tax refund receivable - 215,693
Deferred tax asset 66,145 -
---------- ----------
Total current assets 3,607,734 2,878,639
PROPERTY AND EQUIPMENT - At cost less accumulated
depreciation and amortization 779,053 795,365
DEFERRED TAX ASSET 79,676 -
---------- ----------
TOTAL ASSETS $4,466,463 $3,674,004
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Demand note payable to bank $ - $ 60,000
Accounts payable 591,682 800,409
Accrued payroll 127,172 95,956
Accrued annual leave 104,788 89,210
Other current liabilities 362,808 152,962
Current portion of note payable 34,819 34,819
---------- ----------
Total current liabilities 1,221,269 1,233,356
---------- ----------
LONG-TERM LIABILITIES:
Note payable 11,607 46,426
Deferred rent liability 191,956 205,445
---------- ----------
Total long-term liabilities 203,563 251,871
---------- ----------
COMMITMENTS AND CONTINGENCIES - -
Total liabilities 1,424,832 1,485,227
---------- ----------
STOCKHOLDERS' EQUITY:
Common stock, $.03 par value - shares authorized, 5,000,000;
issued and outstanding, 1,207,574 and 1,171,042 shares 36,227 35,131
Discount on common stock (11,161) (11,161)
Additional paid-in capital 2,027,916 1,898,239
Retained earnings 988,649 266,568
---------- ----------
Total stockholders' equity 3,041,631 2,188,777
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $4,466,463 $3,674,004
========== ==========
See notes to financial statements.
22
OPTELECOM, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,1996, 1995 AND 1994
- -------------------------------------------------------------------------------
1996 1995 1994
REVENUE:
Product sales $ 8,317,282 $6,034,852 $6,481,527
Engineering services 592,981 395,284 554,542
----------- ---------- ----------
Total revenue 8,910,263 6,430,136 7,036,069
----------- ---------- ----------
COSTS AND EXPENSES:
Direct labor 267,509 211,419 299,470
Other direct costs 3,169,004 2,582,075 2,414,880
Overhead 1,433,410 1,538,015 1,608,522
General and administrative 2,965,002 2,526,054 2,300,507
----------- ---------- ----------
Total costs and expenses 7,834,925 6,857,563 6,623,379
----------- ---------- ----------
Income (loss) from operations 1,075,338 (427,427) 412,690
----------- ---------- ----------
OTHER (EXPENSE) INCOME:
Gain from claims settlement - - 209,012
Loss on sale of investment - - (20,000)
Interest (19,460) (3,763) (22,643)
Other (23,661) (10,950) (8,712)
----------- ---------- ----------
Total other (expense) income (43,121) (14,713) 157,657
----------- ---------- ----------
INCOME (LOSS) BEFORE PROVISION (BENEFIT)
FOR INCOME TAXES 1,032,217 (442,140) 570,347
PROVISION (BENEFIT) FOR INCOME TAXES 310,136 (233,756) 188,000
----------- ---------- ----------
NET INCOME (LOSS) $ 722,081 $ (208,384) $ 382,347
=========== ========== ==========
EARNINGS (LOSS) PER COMMON
AND COMMON EQUIVALENT SHARE $ 0.59 $ (0.18) $ 0.33
=========== ========== ==========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES AND COMMON SHARE
EQUIVALENTS OUTSTANDING 1,218,893 1,177,048 1,163,012
=========== ========== ==========
See notes to financial statements.
23
OPTELECOM, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
- --------------------------------------------------------------------------------
Additional Capital
------------------------------------------
Number Discount Total
of Common on Common Paid-in Retained Stockholders'
Shares Stock Stock Capital Earnings Equity
------ ------ --------- ------- -------- -------------
BALANCE, JANUARY 1, 1994 1,159,029 $ 34,771 $ (11,161) $ 1,865,606 $ 92,605 $ 1,981,821
Common stock issued 7,643 229 - 19,906 - 20,135
Net income - - - - 382,347 382,347
--------- ---------- ---------- ------------- ----------- -------------
BALANCE, DECEMBER 31, 1994 1,166,672 35,000 (11,161) 1,885,512 474,952 2,384,303
Common stock issued 4,370 131 - 12,727 - 12,858
Net loss - - - - (208,384) (208,384)
--------- ---------- ---------- ------------- ----------- -------------
BALANCE, DECEMBER 31, 1995 1,171,042 35,131 (11,161) 1,898,239 266,568 2,188,777
Common stock issued 36,532 1,096 - 129,677 - 130,773
Net income - - - - 722,081 722,081
--------- ---------- ---------- ------------- ----------- -------------
BALANCE, DECEMBER 31, 1996 1,207,574 $ 36,227 $ (11,161) $ 2,027,916 $ 988,649 $ 3,041,631
========= ========== ========== ============= =========== =============
See notes to financial statements.
24
OPTELECOM, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,1996, 1995 AND 1994
- --------------------------------------------------------------------------------
1996 1995 1994
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 722,081 $(208,384) $ 382,347
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 235,431 212,470 201,187
Loss on sale of assets - 1,821 -
Deferred taxes (145,821) 18,000 12,000
Deferred rent (13,489) (7,806) 39,817
Common stock issued for services - 9,497 8,113
Provision for inventory obsolescence 92,494 105,722 83,803
Reserve for HydraLite, Inc. - - (71,000)
Loss on sale of HydraLite, Inc. - - 20,000
(Increase) decrease in assets:
Contract receivables (52,217) 304,480 (99,777)
Income tax refund receivable 215,693 (215,693) -
Inventories (517,121) (409,066) (129,630)
Prepaid expenses and other assets (197,660) (40,331) (16,888)
Increase (decrease) in liabilities:
Accounts payable (208,727) 424,904 134,591
Accrued payroll 31,216 (4,728) 8,569
Accrued annual leave 15,578 (17,394) (1,449)
Accrued income taxes - (45,000) 5,038
Other current liabilities 209,846 (238,989) 298,218
--------- --------- ---------
Net cash provided by (used in) operating
activities 387,304 (110,497) 874,939
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (219,119) (287,854) (207,025)
Investment in and advances to HydraLite, Inc. - - (21,000)
Cash proceeds from sale of investment - - 30,000
--------- --------- ---------
Net cash used in investing activities (219,119) (287,854) (198,025)
--------- --------- ---------
(Continued)
25
OPTELECOM, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,1996, 1995 AND 1994 (continued)
- --------------------------------------------------------------------------------
1996 1995 1994
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Borrowings on note payable to bank 340,000 60,000 -
Payment on note payable to bank (400,000) - (385,000)
Proceeds from exercise of stock options 130,773 3,359 12,022
Repayments of long-term debt (34,819) (23,212) -
Borrowings of long-term debt - 104,457 -
-------- --------- --------
Net cash provided by (used in) financing activities 35,954 144,604 (372,978)
-------- --------- --------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 204,139 (253,747) 303,936
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 62,436 316,183 12,247
-------- --------- --------
CASH AND CASH EQUIVALENTS,
END OF YEAR $266,575 $ 62,436 $316,183
======== ========= ========
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid for interest $ 24,731 $ 6,497 $ 22,646
Cash paid for income taxes (net of refunds) $276,477 $ 59,653 $170,962
(Concluded)
See notes to financial statements
26
OPTELECOM, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business - Optelecom, Inc. (the Company) is a Delaware
corporation that was organized in 1972. The Company's business consists
primarily of the development, manufacture, and sale of fiber optic
communications products and laser systems for commercial and military
customers.
The Company is organized into three operating 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 the Research and Development
Division, which addresses technology development business opportunities.
GPD is composed of two operating groups, Electro/Optics (E/O) Technology
and Laser Illuminator Technology. This Division was formed in 1996 from two
former divisions, R&D and GLINT. These divisions were combined into one to
provide a natural grouping of similar operations and functions.
Currently, the business addressed by the individual groups is essentially
the same as in prior years. The principal markets for the Companyis
products and services are located in California and several Southeastern
and Southwestern regions of the United States. Additionally, the
Company generates a portion of its revenues from several countries in
Europe.
Use of Estimates - Certain estimates used by management are particularly
susceptible to significant changes in the economic environment. These
include estimates of percentage-of-completion on long-term contracts,
inventory obsolescence, and valuation allowances for contract receivables
and deferred tax assets. Each of these estimates, as well as the related
amounts reported in the financial statements, are sensitive to near-term
changes in the factors used to determine them. A significant change in any
one of those factors could result in the determination of amounts
different than those reported in the accompanying financial statements.
Management believes that as of December 31, 1996, the estimates used in
the financial statements are adequate based on the information currently
available.
Revenue Recognition - Revenues from cost-plus-fixed-fee contracts are
recognized to the extent of costs incurred during the period plus a
proportionate amount of the fee earned. Revenues from fixed-price
contracts are recognized on the percentage-of-completion method
based on costs incurred in relation to total estimated costs. Revenues
from time-and-materials contracts and sales orders are recognized at the
time completed units are delivered.
Contract costs include all direct labor and material costs, all
indirect costs related to contract performance, such as indirect labor,
rent, depreciation and supplies, and selling, general and
administrative costs, such as officers' salaries and professional fees.
Provisions for estimated losses on uncompleted contracts are made in the
period in which such losses are determined.
Inventories - Production materials are valued at the lower of cost or
market applied on a weighted average cost basis. Work-in-process
represents direct labor, materials, and overhead incurred on products not
delivered to date. Finished goods inventories are valued at the lower of
cost or market, cost being determined using standards that approximate
actual costs on a specific identification basis.
27
Property, Equipment, and Depreciation - Property and equipment is
stated at cost and includes additions and major replacements and
betterments. Depreciation is computed using the straight-line method
over the estimated useful lives of the assets, which range from 5 to 10
years. Leasehold improvements are amortized over the terms of the
respective leases or the service lives of the assets, whichever is
shorter.
Research and Development Costs - Research and development costs are expensed
as incurred. The Company incurred research and development costs of
$517,654, $538,977, and $479,888 for the years ended December 31, 1996,
1995, and 1994, respectively.
Earnings Per Share - The computation of earnings per share is based on the
weighted average number of outstanding common shares during the period
plus, when their effect is dilutive, common stock equivalents consisting of
certain stock options. The primary weighted average number of common
and equivalent shares outstanding was 1,218,893, 1,177,048, and 1,163,012 at
December 31, 1996, 1995, and 1994, respectively. The fully diluted
weighted average number of common and equivalent shares outstanding
was 1,223,429, 1,178,607, and 1,163,012 at December 31, 1996, 1995, and
1994, respectively.
Income Taxes - The Company recognizes income tax expense for financial
statement purposes following the asset and liability approach for
computing deferred income taxes. Under this method, deferred tax
assets and liabilities are determined based on the difference between
financial reporting and tax basis of assets and liabilities based on
enacted tax rates. Deferred tax assets are reduced by a valuation
allowance when, in the opinion of management, it is more likely than not
that some portion or all of the deferred tax assets will not be realized.
Stock-Based Compensation - In 1996, the Company adopted Statement of
Financial Accounting Standard No. 123 ("SFAS 123"), Accounting for
Stock-Based Compensation. Upon adoption of SFAS 123, the Company
continues to measure compensation expense for its stock-based employee
compensation plans using the intrinsic value method prescribed by APB No.
25, Accounting for Stock Issued to Employees, and has provided in Note 7 pro
forma disclosures of the effect on net income (loss) and earnings (loss)
per share as if the fair value-based method prescribed by SFAS 123 had
been applied in measuring compensation expense.
Forward Exchange Contracts - The Company enters into forward exchange
contracts to hedge certain firm purchase commitments denominated in
foreign currencies. The purpose of the Company's foreign currency hedging
activity is to protect the Company from the risk that the eventual cash
flows resulting from the purchases from foreign suppliers will be adversely
affected by changes in exchange rates. Gains and losses resulting from the
forward exchange contracts are deferred and accounted for as part of the
underlying transactions. In entering into these contracts, the Company
has assumed the risk that might arise from the possible inability of
counterparties to meet the terms of the contracts. The Company does not
expect any losses as a result of counterparty defaults.
Cash and Cash Equivalents - For the purpose of presentation in the
statements of cash flows, cash and cash equivalents are defined as cash
and investments with original maturities of three months or less.
28
2. CONTRACT RECEIVABLES
Contract receivables at December 31, 1996 and 1995, consisted of the
following:
1996 1995
---- ----
Billed $1,246,388 $1,378,424
Unbilled - net of cumulative progress billings of
$283,746 for 1996 and $210,820 for 1995 217,038 32,785
---------- ----------
$1,463,426 $1,411,209
========== ==========
Approximately 40%, 26% and 26% of the Company's revenues in 1996, 1995,
and 1994, respectively, were derived from contracts with agencies of
the United States Government and their prime contractors. The Company
performs the services and ships equipment according to the specific contract
terms. Contracts with the United States Department of Defense allow the
Defense Contract Audit Agency (DCAA) to audit the contract costs and the
Company's compliance with the Federal Acquisition Regulations. The DCAA
has audited the costs under contracts for years through 1993. The
Company believes that the ultimate outcome of DCAA audits for subsequent
years will not have a material effect on the financial statements.
Generally, the contract terms for both government and commercial customers
require payment of invoices in 30 days.
On January 25, 1995, the Company was notified that a contract with a
prime contractor in the amount of $1,020,232 was terminated for
convenience. As a result of the termination, the Company recorded an
allowance for uncollectible costs of $34,711 in 1994. During 1995 the
Company collected all amounts due under this contract, and accordingly
reversed the allowance for uncollectible costs.
Included in the billed receivables at December 31, 1996, is a retainage
receivable of approximately $62,000, which is expected to be received
upon completion of the project in 1997.
3. INVENTORIES
Inventories at December 31, 1996 and 1995, consist of the following:
1996 1995
---- ----
Production materials $ 765,783 $ 549,277
Work in process 397,123 153,203
Finished goods 342,062 377,861
---------- ----------
$1,504,968 $1,080,341
========== ==========
29
4. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1996 and 1995, consist of the
following:
1996 1995
---- ----
Laboratory equipment $ 1,113,530 $ 1,034,058
Office equipment 695,490 576,675
Furniture and fixtures 26,366 26,366
Leasehold improvements 388,708 367,876
----------- -----------
2,224,094 2,004,975
Less accumulated depreciation and amortization (1,445,041) (1,209,610)
----------- -----------
Net property and equipment $ 779,053 $ 795,365
=========== ===========
5. DEMAND NOTE PAYABLE TO BANK
The Company has a credit agreement with a bank whereby it may borrow up
to $ 1,000,000 with interest at the bank's prime rate plus 3/4% (9% at
December 31, 1996). The total amount of borrowings that may be outstanding
at any given time is based upon a percentage of certain eligible
receivables. The amount available under the credit agreement as of December
31, 1996, was $ 1,000,000.
6. NOTE PAYABLE
During 1995, Optelecom entered into a promissory note agreement to
finance the purchase of equipment. The equipment serves as collateral on
the promissory note. The principal amount of the note was $104,458, and
the amount outstanding at December 31, 1996, was $46,426. The promissory
note is payable at $2,902 a month until April 1998. Principal amounts due
under the note in 1997 and 1998 are $34,819 and $11,607, respectively.
Interest is payable at prime plus 3/4%. The fair value of this note
payable is approximately equal to its carrying value. The note can be
prepaid without penalty.
30
7. STOCK OPTIONS
In May 1996, the 1991 Stock Option Plan (the "1991 Plan") was
amended to increase the number of options available to purchase shares of
common stock from 133,333 shares to 533,333. The options may be granted
to officers (including officers who are directors), other key employees
of, and consultants to, the Company. The 1991 Plan superseded and
replaced the Incentive Stock Option Plan and the Non-Qualified Stock Option
Plan that the Company had in operation prior to the adoption of the 1991
Plan. Options outstanding in prior years for the previous plans are
included in the 1991 Plan information as presented below.
The exercise price of each option may not be less than 100% of the fair
market value of the stock on the date of grant for incentive stock
options or 85% of such fair market value for nonqualified stock options,
as determined by the Board. Options issued prior to April 1, 1996 are
exercisable in whole or in part any time after one year from the date of
grant. As amended in May 1996, options issued after April 1, 1996 are
exercisable after one year from the date of grant and in equal increments
over four years. Options issued prior to April 1, 1996 expire three years
after the date of grant and, in most cases, upon termination of
employment. Options issued after April 1, 1996 expire five years from the
date of grant and, in most cases, upon termination of employment. The 1991
Plan will terminate on May 31, 2001, unless terminated sooner by the Board.
A summary of stock option activity during the years ended December 31,
1996, 1995, and 1994 is as follows:
1996 1995 1994
----------------------------- --------------------------- -------------------------
Exercise Exercise Exercise
Number Price Number Price Number Price
of Shares Range of Shares Range of Shares Range
--------- -------- --------- --------- --------- --------
Outstanding, January 1 42,500 $2.88 - 6.50 41,250 $2.88 - 6.50 37,300 $2.88 - 6.50
Granted 100,723 2.88 - 10.88 7,500 3.00 - 3.63 38,750 2.88 - 3.38
Exercised 17,000 2.88 - 3.81 - - - -
Canceled 9,250 3.81 - 6.50 6,250 3.13 - 6.50 34,800 6.50
------- ------------- ------ ------------ ------ ------------
Outstanding, December 31 116,973 $2.88 - 10.88 42,500 $2.88 - 6.50 41,250 $2.88 - 6.50
======= ============= ====== ============ ====== ============
Exercisable options 19,250 $3.00 - 3.81 34,500 $2.88 - 6.50 40,750 $2.88 - 6.50
======= ============= ====== ============ ====== ============
On December 19, 1988, the Board of Directors approved the Directors Stock
Option Plan (1988 Directors Plan) under which each nonemployee director
who attends a meeting of the Board of Directors is, at his election,
granted an option to purchase 333 shares of common stock in lieu of
receiving a certain dollar value of common stock. The options have an
exercise price equivalent to the market value of the stock on the date
of such Board meeting. The options are exercisable upon grant and
expire three years thereafter. This plan was terminated as of December
31, 1992, and accordingly, no more options will be granted under this
plan. All options granted under this plan either expired or were exercised
in 1995. There were no outstanding options at December 31, 1995.
31
A summary of stock option activity for 1995 and 1994 is as follows:
1995 1994
---------------------------- ----------------------------
Exercise Exercise
Number Price Number Price
of Shares Range of Shares Range
--------- -------- --------- --------
Outstanding, January 1 2,997 $1.59 - 3.88 9,657 $1.03 - 3.88
Granted - - -
Exercised 1,332 1.59 - 3.00 4,329 1.03 - 3.00
Canceled 1,665 3.00 - 3.88 2,331 1.88 - 3.00
----- ------------ --------- ------------
Outstanding, December 31 - $ - $ 2,997 $1.59 - 3.88
===== ============ ========= ============
Exercisable options - $ - $ 2,997 $1.59 - 3.88
===== ============ ========= ============
On December 7, 1992, the Board of Directors approved the 1993 Directors'
Stock Option Plan (1993 Directors' Plan), which replaces the 1988
Directors' Plan. Under this plan, each nonemployee director who attends a
meeting of the Board of Directors is at his election, granted an option to
purchase 450 shares of common stock at the fair market value at the grant
date in lieu of receiving a certain dollar value of the stock on the date
of such Board meeting. The options are exercisable upon grant and expire
three years thereafter. In February 1995, the Board of Directors
terminated this plan effective December 31, 1995, and accordingly, no
more options will be granted under this plan.
A summary of stock option activity during the years ended December 31,
1996, 1995, and 1994 is as follows:
1996 1995 1994
----------------------- -------------------------- ----------------------
Exercise Exercise Exercise
Number Price Number Price Number Price
of Shares Range of Shares Range of Shares Range
--------- -------- --------- -------- --------- --------
Outstanding, January 1 27,450 $2.88 - 7.25 7,550 $2.88 - 7.25 4,500 $6.12 - 7.25
Granted - - 9,900 2.75 - 4.50 13,050 2.88 - 4.63
Exercised 16,200 2.88 - 7.25 - - - -
Canceled 1,800 5.25 - 6.13 - - - -
------ ------------ ------ ------------ ------ ------------
Outstanding, December 31 9,450 $2.75 - 4.63 27,450 $2.88 - 7.25 17,550 $2.88 - 7.25
====== ============ ====== ============ ====== ============
Exercisable options 9,450 $2.75 - 4.62 27,450 $2.88 - 7.25 17,550 $2.88 - 7.25
====== ============ ====== ============ ====== ============
In February 1996, the Board of Directors approved the 1996 Directors'
Stock Option Plan (1996 Directors' Plan), which replaces the 1993
Directors' Plan. Under this plan, each nonemployee director who attends a
meeting of the Board of Directors is granted an option to purchase 500
shares of common stock at fair market value on the date of such Board
meeting. The options are exercisable upon grant and expire five years
thereafter. A total of 50,000 shares of common stock had been reserved at
December 31, 1996.
32
A summary of stock option activity during the year ended December 31, 1996
is as follows:
Exercise
Number Price
of Shares Range
--------- -------------
Outstanding, January 1 - $ -
Granted 16,000 3.25 - 11.25
Exercised - -
Canceled - -
------ -------------
Outstanding, December 31 16,000 $3.25 - 11.25
====== =============
Exercisable options 16,000 $3.25 - 11.25
====== =============
In June 1990, the Board of Directors adopted a stock option plan (the
Chairman's Plan) under which the Chairman of the Board is the sole
participant. On each January 1, the Participant is granted an option to
purchase 1,666 shares of common stock at fair market value on the grant
date. Each option granted under this plan will expire three years
after the date of grant. On the date of adoption, 3,332 options were
granted to the participant under the plan. The total amount of shares
available under this plan is 13,328. This plan terminated on December 31,
1996, and accordingly, no more options will be granted under this plan.
A total of 1,666 shares of common stock had been reserved at December 31,
1996, under this plan.
A summary of stock option activity for 1996, 1995, and 1994 is as follows:
1996 1995 1994
------------------------ ------------------------ -----------------------
Exercise Exercise Exercise
Number Price Number Price Number Price
of Shares Range of Shares Range of Shares Range
--------- ---------- ---------- --------- ---------- ----------
Outstanding, January 1 4,998 $3.13 - 5.00 3,332 $4.88 - 5.00 3,332 $1.69 - 5.00
Granted - 1,666 3.13 1,666 4.88
Exercised 1,666 3.13 - - 1,666 1.69
Canceled 1,666 3.00 - - -
----- -------------- ----- ------------ ----- -----------
Outstanding, December 31 1,666 $4.88 4,998 $3.13 - 5.00 3,332 4.88 - 5.00
===== ============== ===== ============ ===== ============
Exercisable options 1,666 $4.88 4,998 $3.13 - 5.00 3,332 $4.88 - 5.00
===== ============== ===== ============ ===== ============
In July 1991, the Board of Directors approved a special arrangement for
the granting of a total of 30,000 stock options to the Companyis
president (President's Plan). Under the arrangement, the president receives
10,000 options each year at the market price on the date of grant. The
options expire four years from the date of grant. All options under this
plan were canceled in 1996.
33
A summary of activity in 1996, 1995, and 1994 is as follows:
1996 1995 1994
----------------------------- ---------------------------- ---------------------------
Exercise Exercise Exercise
Number Price Number Price Number Price
of Shares Range of Shares Range of Shares Range
Outstanding, January 1 20,000 $3.00 - 4.50 20,000 $3.00 - 4.50 20,000 $3.00 - 4.50
Granted - - - - - -
Exercised - - - - - -
Canceled 20,000 3.00 - 4.50 - - - -
------ ------------- ------ ------------ ------ ------------
Outstanding, December 31 - $ - 20,000 $3.00 - 4.50 20,000 $3.00 - 4.50
====== ============= ====== ============ ====== ============
Exercisable options - $ - 20,000 $3.00 - 4.50 20,000 $3.00 - 4.50
====== ============= ====== ============ ====== ============
In 1996, the Company adopted the disclosure provisions of Statement of
Financial Accounting Standards No. 123 ("SFAS 123"), Accounting for
Stock Based Compensation. The required disclosures include pro forma net
income (loss) and earnings (loss) per share as if the fair value-based
method of accounting had been used.
If compensation cost for the Company's 1996 and 1995 grants for
stock-based compensation had been determined consistent with the
fair value-based method of accounting per SFAS 123, the Company's pro
forma net income (loss) and pro forma earnings (loss) per share for
the years ended December 31, 1996 and 1995 would be as follows:
1996 1995
---- ----
Net income (loss)
As reported $722,081 $(208,384)
Pro forma $538,647 $(256,467)
Primary earnings (loss) per share
As reported $ 0.59 $ (0.18)
Pro forma $ 0.44 $ (0.22)
The fair value of the option grant is estimated on the date of grant using
the Black-Scholes option pricing models with the following assumptions:
1996 1995
---- ----
Expected dividend yield 0 % 0 %
Expected stock price volatility 244 % 300 %
Risk-free interest rate 6.37 % 5.10 %
Expected option term 3 and 4 years 1 year
34
8. INCOME TAXES
The components of the provision (benefit) for income taxes for the years
ended December 31, 1996, 1995, and 1994 are summarized as follows:
1996 1995 1994
---- ---- ----
Current $455,957 $(251,756) $176,000
Deferred 4,179 18,000 12,000
Change in valuation allowance (150,000) - -
-------- --------- --------
$310,136 $(233,756) $188,000
======== ========= ========
The Company's 1995 tax provision includes the benefit of the carryback
of the current year loss to the prior year. Accordingly, an income
tax refund receivable of $215,693 has been recorded as of December 31, 1995.
The difference between the Federal income tax expense (benefit) and
the amount computed applying the statutory Federal income tax rate for the
years ended December 31, 1996, 1995, and 1994, are summarized as follows:
1996 1995 1994
---- ---- ----
Federal income tax (benefit) at statutory rates 34% (34)% 34%
Increase (reduction) of taxes:
State taxes, net of federal benefit 4 (7) 5
Utilization of tax credits - - (6)
Valuation allowance related to net deferred tax assets (15) (8) -
Other 7 (4) -
--- --- --
Effective income tax rate 30% (53)% 33%
=== === ==
35
Deferred income taxes reflect the net tax effects of temporary
differences between the amount of assets and liabilities for income
tax and financial reporting purposes. The components of deferred income tax
liabilities and assets as of December 31, 1996 and 1995, are as follows:
1996 1995
---- ----
Deferred liabilities:
Retainage receivable on long-term contracts $ (36,831) $ (67,275)
---------- ----------
Gross deferred tax liabilities (36,831) (67,275)
---------- ----------
Deferred tax assets:
Excess book depreciation 17,482 5,389
Capitalized overhead and inventory
obsolescence reserve 40,410 58,874
Accrued vacation 38,592 27,386
Deferral of rent expense 77,742 77,309
General business tax credits and capital losses - 48,317
Warranty reserve 8,426 -
---------- ----------
Gross deferred tax assets 182,652 217,275
---------- ----------
Less: Valuation allowance - 150,000
---------- ----------
Net deferred tax assets $ 145,821 $ -
========== ==========
A valuation allowance of $150,000 at December 31, 1995 was reversed in
1996 because it is more likely than not the deferred tax asset will be
realized.
9. EMPLOYEE BENEFIT PLANS
The Company has a noncontributory Profit-Sharing Retirement Plan covering
substantially all employees. Vesting occurs over a period of six years from
the date of entry into the plan. Under the plan, the Company's contribution
is determined annually by the Board of Directors and is funded as accrued.
The expense for 1996, 1995, and 1994 was $113,329, $-0-, and $115,354,
respectively.
The Company has established a combined tax-qualified cash and deferred
profit sharing plan under Section 401(k) of the Internal Revenue Code
for all of the Company's full-time employees. The Company matches
employee contributions to the plan up to a maximum of 2.5%. Total
contributions were $62,827, $60,163 and $52,139 in 1996, 1995 and 1994,
respectively.
10. COMMITMENTS AND CONTINGENCIES
Operating Lease - During 1992, the Company moved its corporate office and
manufacturing facilities and entered into a new 10-year noncancelable
operating lease expiring August 31, 2002. As an inducement to enter the
new lease, the Company received certain incentives such as a rent
abatement and assumption of existing lease obligations. Additionally,
the new lease provided for scheduled rent increases. These lease incentives
are being amortized over the new lease period. Rent expense is being
recognized on a straight-line basis. In addition to the basic rentals, the
lease agreement provides for increases based on payment by the Company of
its share of real estate and insurance taxes.
36
As of December 31, 1996, future net minimum rental payments required
under operating leases that have initial or remaining noncancelable
terms in excess of one year are as follows:
Year Ended December 31,
1997 $ 200,980
1998 207,009
1999 213,220
2000 219,616
2001 226,205
Later years 153,789
-----------
$ 1,220,819
===========
Rental expense was $221,651, $216,566, and $211,867 in 1996, 1995, and
1994, respectively.
Employment Agreement - The Company has an employment agreement with an
officer. In the event of his death while employed, the officeris salary is
to be paid to his beneficiaries for one year. Through December 31, 1995,
the officer earned a bonus of 1,666 shares of common stock for each
twelve-month period of the term of employment (which began January 1,
1984), but no such stock shall be issued directly to him until January 2,
1999. A total of 13,329 shares has been issued in trust through December
31, 1996. All of the shares earned through December 31, 1995, are to be
transferred to the officer in the future. The Company recorded expense
of $4,948 and $4,998 in 1995 and 1994, respectively, in connection
with this agreement.
Employee Cash/Stock Bonus Plan - In 1980, the Company adopted an employee
cash/stock bonus plan for which 8,333 shares of the Company's common stock
have been set aside to be issued to employees at the discretion of
management. Through 1989, 1,533 shares had been issued. No shares were
issued in 1996, 1995, and 1994.
11. INVESTMENT IN HYDRALITE, INC.
In May, 1993, the Company agreed to make a 14% equity investment in
HydraLite, Inc., a start-up telecommunications company under a stock
purchase agreement. As of December 31, 1993, the Company had paid a
total of $50,000 for the stock and provided an additional $75,345 in
administrative, research and development, and marketing support to
HydraLite of which $21,000 was recorded as a receivable. The Company had a
commitment at December 31, 1993, to pay an additional $21,000 for
administrative assistance until HydraLite's first-round equity financing was
completed. Due to delays in the completion of HydraLite's financing,
management recorded a valuation reserve for the entire receivable and
investment at December 31, 1993.
In April 1994, HydraLite received its first-round equity financing and
the Company reversed the reserve for the investment and receivable.
The Company also recorded a $42,000 receivable for repayment of the amounts
advanced to HydraLite for administrative support. In December 1994, the
Company sold its stock to the individual investors of HydraLite for $30,000
and recorded a loss on the sale of $20,000. In addition, the Company and
HydraLite settled various claims against each other and, as a result,
the Company recognized a gain of $209,012.
37
12. SEGMENT INFORMATION
Segment information by major business segment is presented below:
Year Ended December 31, 1996
------------------------------------------------------------------
Government Products Division
Electro/ Laser
Communication Optics Illuminator
Products Technology Technology
Division Group Group Total
------------- ----------- ------------ ----------
Revenues $6,453,686 $592,981 $1,863,596 $8,910,263
Operating income (loss) 60,664 (31,903) 1,046,577 1,075,338
Identifiable assets 3,186,605 262,915 247,363 3,696,883
Corporate assets - - - 769,580
---------- -------- ---------- ----------
Total assets $3,186,605 $262,915 $ 247,363 $4,466,463
========== ======== ========== ==========
Gross additions to property and equipment:
Identifiable $ 219,119 $ - $ - $ 219,119
Corporate - - - -
---------- -------- ---------- ----------
Total $ 219,119 $ - $ - $ 219,119
========== ======== ========== ==========
Depreciation and amortization:
Identifiable $ 235,431 $ - $ - $ 235,431
Corporate - - - -
---------- -------- ---------- ----------
Total $ 235,431 $ - $ - $ 235,431
========== ======== ========== ==========
38
Year Ended December 31, 1995
------------------------------------------------------------------
Government Products Division
Electro/ Laser
Communication Optics Illuminator
Products Technology Technology
Division Group Group Total
Revenues $5,319,556 $ 395,284 $715,296 $6,430,136
Operating income (loss) (470,866) (263,930) 307,369 (427,427)
Identifiable assets 3,117,177 101,103 68,635 3,286,915
Corporate assets - - - 387,089
---------- --------- -------- ----------
Total assets $3,117,177 $ 101,103 $ 68,635 $3,674,004
========== ========= ======== ==========
Gross additions to property and equipment:
Identifiable $ 287,854 $ - $ - $ 287,854
Corporate - - - -
---------- --------- -------- ----------
Total $ 287,854 $ - $ - $ 287,854
========== ========= ======== ==========
Depreciation and amortization:
Identifiable $ 212,470 $ - $ - $ 212,470
Corporate - - - -
---------- --------- -------- ----------
Total $ 212,470 $ - $ - $ 212,470
========== ========= ======== ==========
39
Year Ended December 31, 1994
------------------------------------------------------
Government Products Division
Electro/ Laser
Communication Optics Illuminator
Products Technology Technology
Division Group Group Total
------------- ---------- ----------- -----
Revenues $5,562,130 $ 554,542 $919,397 $7,036,069
Operating income (loss) 174,084 (175,589) 414,195 412,690
Identifiable assets 2,538,970 488,915 189,501 3,217,386
Corporate assets - - - 399,912
---------- --------- -------- ----------
Total assets $2,538,970 $ 488,915 $189,501 $3,617,298
========== ========= ======== ==========
Gross additions to property
and equipment:
Identifiable $ 124,215 $ 82,810 $ - $ 207,025
Corporate - - - -
---------- --------- -------- ----------
Total 124,215 82,810 - 207,025
========== ========= ======== ==========
Depreciation and amortization:
Identifiable $ 120,712 $ 80,475 $ - $ 201,187
Corporate - - - -
---------- --------- -------- ----------
Total $ 120,712 $ 80,475 $ - $ 201,187
========== ========= ======== ==========
All of the revenues from Research and Development and GLINT divisions are
from U.S. Government agencies and their prime contractors.
The Company is engaged primarily in the development, manufacture, and sale
of optical communications products and laser systems. Revenue represents
shipments and services provided to third parties. Contract costs and
operating expenses directly traceable to individual segments were
deducted from revenue to arrive at operating income. Identifiable assets
by segment are those assets that are used in the Companyis operations in
each segment. Corporate assets consist primarily of cash, prepaid expenses,
deferred taxes, and long-term assets.
13. SIGNIFICANT CUSTOMERS AND FOREIGN EXPORTS
The Companyis primary business activity is with the U.S. Government and its
prime contractors and commercial customers providing communications products
and services. In 1996, three customers accounted for 21%, 8%, and 8% of
sales. During 1995, the Company made sales to two commercial customers that
accounted for approximately 10% and 9% of revenues, respectively. During
1994, the Company made sales to individual commercial customers that
accounted for approximately 12% and 10% of revenues, respectively. In 1996,
1995, and 1994, the Company had export sales to foreign customers totaling
approximately $1,159,000, $860,000 and $923,000, respectively. At December
31, 1996, contract receivables from three customers represented 17%, 13%
and 4%, respectively, of total contract receivables outstanding.
* * * * * *
40
SCHEDULE II
OPTELECOM, INC.
SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
YEAR ENDED DECEMBER 31, 1996, 1995 AND 1994
- --------------------------------------------------------------------------------
Balance Charged to Balance
at Beginning Costs and Other at End
Description of Period Expenses Changes Deductions of Period
- ----------- ------------ ----------- ------- ---------- ---------
Year Ended December 31, 1994
Reserves and allowances deducted
from asset accounts
Obsolescence reserve for
inventory $42,469 $ 83,803 $ - $ (42,870)(1) $83,402
Allowance for uncollectible
contract costs - 34,711 - 34,711
Reserve for investment 71,000 (71,000) - -
Year Ended December 31, 1995
Reserves and allowances deducted
from assets/accounts:
Obsolescence reserve for
inventory $83,402 $105,722 $ - $ (92,119) $97,005
Allowance for uncollectible
contract costs 34,711 (34,711) - - -
Year Ended December 31, 1996
Reserves and allowances deducted
from asset accounts:
Obsolescence reserve for
inventory $97,005 $ 92,494 $ - $(113,250) $76,249
Allowance for uncollectible
contract costs - 78,186 - - 78,186
(1) Scrap inventory
41
EXHIBIT 11
OPTELECOM, INC.
EARNINGS PER SHARE
YEAR ENDED DECEMBER 31, 1996, 1995 AND 1994
- --------------------------------------------------------------------------------
1996 1995 1994
---- ---- ----
Primary Earnings Per Share:
Net earnings (loss) $ 722,081 $ (208,384) $ 382,347
========== ========== ==========
Weighted average common and common
equivalent shares $1,183,253 $1,170,393 $1,162,660
Adjustment to options using average year
price when dilutive 35,640 6,655 352
---------- ---------- ----------
Primary shares 1,218,893 1,177,048 1,163,012
========== ========== ==========
Earnings (loss) per share $ .59 $ (0.18) $ 0.33
========== ========== ==========
Fully Diluted Earnings Per Share:
Net earnings (loss) $ 722,081 $ (208,384) $ 382,347
========== ========== ==========
Weighted average common and common
equivalent shares 1,183,253 1,170,393 1,162,660
Adjustment to options using year
end price when dilutive 40,176 8,214 352
---------- ---------- ----------
Fully diluted shares 1,223,429 1,178,607 1,163,012
========== ========== ==========
Earnings (loss) per share $ 0.59 $ (0.18) $ 0.33
========== ========== ==========
42
Item 9. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
1. Directors of the Company
See the Company's Proxy Statement, incorporated by Reference as Part
III of this Form 10-K, under the heading "Proposal 1 and
Miscellaneous."
2. Executive Officers of the Company
See the Company's Proxy Statement, incorporated by Reference as Part
III of this Form 10-K, under the heading "Proposal 1 and
Miscellaneous."
Item 11. EXECUTIVE COMPENSATION
See the Company's Proxy Statement, incorporated by Reference as Part
III of this Form 10-K, under the heading "Summary Compensation Table."
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
See the Company's Proxy Statement, incorporated by Reference as Part
III of this Form 10-K, under the heading "Proposal 1."
Item 13. CERTAIN RELATIONSHIPS AND RELATED PARTIES
See the Company's Proxy Statement, incorporated by Reference as Part
III of this Form 10-K, under the heading "Miscellaneous."
43
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
1. Financial Statements and Financial Statement Schedules
Report of Independent Certified Public Accountants
Statements
- ----------
Balance Sheets as of December 31, 1996 and 1995
Statements of Operations for the Years Ended December 31, 1996, 1995, and 1994
Statements of Stockholders' Equity for the Years Ended December 31, 1996, 1995,
and 1994
Statements of Cash Flows for the Years Ended December 31, 1996, 1995, and 1994
Summary of Accounting Policies
Notes to Financial Statements
2. Financial Statement Schedules
Schedule II Valuation and Qualifying Accounts, Years Ended
December 31, 1996, 1995, and 1994
Other schedules are omitted because they are not applicable or
information is shown elsewhere in the financial statements or notes
thereto.
3. Exhibits
Item 3(i)(1) Restated Certificate of Articles of Incorporation of
Optelecom, Inc. as in effect March 14, 1994.
Item 3(i)(2) Certificate of Amendment of Articles of Incorporation
Item 11 - Statement Regarding Computations of Per Share Earnings
Item 21 - The significant subsidiaries of the Registrant, as defined in
Section 1-02(w) of regulations S-X are:
Optelecom FSC, Inc., a U.S. Virgin Island Corporation
4. Reports on Form 8-K
No 8-Ks were filed during 1996.
44
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
OPTELECOM, INC.
Date: March 27, 1997 By /s/ William H. Culver
__________________________________________
William H. Culver
Chairman and Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
OPTELECOM, INC.
Date: March 27, 1997 By /s/ William H. Culver
__________________________________________
William H. Culver
Chairman and Treasurer
Date: March 27, 1997 By /s/ Edmund D. Ludwig
__________________________________________
Edmund D. Ludwig
Director and President
Date: March 27, 1997 By /s/ John A. Jamieson
__________________________________________
John A. Jamieson
Director
Date: March 27, 1997 By /s/ Gordon A. Smith
__________________________________________
Gordon A. Smith
Director
Date: March 27, 1997 By /s/ Alexander L. Karpinski
__________________________________________
Alexander L. Karpinski
Director
Date: March 27, 1997 By /s/ Calvin T. Mathews
__________________________________________
Calvin T. Mathews
Director
45