UNITED STATES
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 March 31, 2003
Commission File No.
OPTELECOM, INC.
(Exact Name of Registrant as
Specified in its Charter)
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DELAWARE |
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(State or other jurisdiction of incorporation or organization) |
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52-1010850 |
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(IRS employer identification number) |
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12920 CLOVERLEAF CENTER DRIVE, GERMANTOWN, MARYLAND 20874 |
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(Address of principal executive offices) (Zip code) |
Registrant’s telephone number, including area code: (301) 444-2200.
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 ý No o
At May 12, 2003, the registrant had outstanding 2,994,111 shares of Common Stock, $.03 Par Value.
OPTELECOM, INC.
FORM 10-Q
TABLE OF CONTENTS
2
OPTELECOM, INC.
AS OF MARCH 31, 2003 and DECEMBER 31, 2002
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2003 |
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2002 |
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(Unaudited) |
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ASSETS |
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|
|
||
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CURRENT ASSETS |
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|
|
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|
||
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Cash and cash equivalents |
|
$ |
68,166 |
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$ |
47,988 |
|
|
Accounts and contracts receivable, net |
|
2,109,909 |
|
3,164,721 |
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||
|
Inventories, net |
|
2,659,594 |
|
2,453,201 |
|
||
|
Prepaid expenses and other current assets |
|
220,127 |
|
182,900 |
|
||
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Total current assets |
|
5,057,796 |
|
5,848,810 |
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||
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|
|
|
|
|
|
||
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Property and equipment, net |
|
726,757 |
|
522,983 |
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||
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Restricted certificate of deposit |
|
129,368 |
|
129,368 |
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||
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Other assets |
|
126,062 |
|
126,062 |
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||
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TOTAL ASSETS |
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$ |
6,039,983 |
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$ |
6,627,223 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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CURRENT LIABILITIES |
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Accounts payable |
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$ |
654,001 |
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$ |
971,416 |
|
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Accrued payroll |
|
329,260 |
|
255,096 |
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||
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Commissions payable |
|
203,976 |
|
369,197 |
|
||
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Bank line-of-credit payable |
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— |
|
576,079 |
|
||
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Current portion of notes payable |
|
44,806 |
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— |
|
||
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Current portion of leases payable |
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— |
|
1,006 |
|
||
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Other current liabilities |
|
457,804 |
|
786,596 |
|
||
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Total current liabilities |
|
1,689,847 |
|
2,959,390 |
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||
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Notes payable |
|
135,000 |
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— |
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||
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Deferred rent liability |
|
11,363 |
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— |
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||
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Total liabilities |
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1,836,210 |
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2,959,390 |
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COMMITMENTS AND CONTINGENCIES |
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STOCKHOLDERS’ EQUITY: |
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Common stock, $.03 par value - shares authorized, 15,000,000; issued and outstanding, 2,919,093 and 2,877,891 shares as of March 31, 2003 and December 31, 2002, respectively |
|
87,573 |
|
86,336 |
|
||
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Additional paid-in capital |
|
10,281,981 |
|
10,152,729 |
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||
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Foreign currency translation |
|
78,467 |
|
41,538 |
|
||
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Treasury stock, 162,672 shares, at cost |
|
(1,265,047 |
) |
(1,265,047 |
) |
||
|
Accumulated deficit |
|
(4,979,201 |
) |
(5,347,723 |
) |
||
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Total stockholders’ equity |
|
4,203,773 |
|
3,667,833 |
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||
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TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
$ |
6,039,983 |
|
$ |
6,627,223 |
|
See notes to unaudited consolidated financial statements.
3
OPTELECOM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31,
(Unaudited)
|
|
|
2003 |
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2002 |
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||
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Revenues |
|
$ |
3,488,386 |
|
$ |
3,306,191 |
|
|
Cost of goods sold |
|
1,522,235 |
|
1,555,925 |
|
||
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Gross profit |
|
1,966,151 |
|
1,750,266 |
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||
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|
|
|
|
|
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||
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Operating expenses: |
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|
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|
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Engineering |
|
302,005 |
|
226,400 |
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Selling and marketing |
|
513,154 |
|
578,242 |
|
||
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General and administrative |
|
775,151 |
|
713,627 |
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Total operating expenses |
|
1,590,310 |
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1,518,269 |
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||
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|
|
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|
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Income from operations |
|
375,841 |
|
231,997 |
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||
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|
|
|
|
|
|
||
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Other income (expense): |
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|
|
|
|
||
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Interest expense, net |
|
(7,319 |
) |
(27,769 |
) |
||
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Total other income (expense) |
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(7,319 |
) |
(27,769 |
) |
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|
|
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|
|
|
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Income before income taxes |
|
368,522 |
|
204,228 |
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||
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Provision for income taxes |
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— |
|
— |
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||
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Net income |
|
$ |
368,522 |
|
$ |
204,228 |
|
|
|
|
|
|
|
|
||
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Foreign currency translation |
|
36,929 |
|
28,254 |
|
||
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Comprehensive income |
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$ |
405,451 |
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$ |
232,482 |
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|
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Basic earnings per share |
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$ |
0.13 |
|
$ |
0.07 |
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|
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|
|
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Diluted earnings per share |
|
$ |
0.12 |
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$ |
0.07 |
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|
|
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|
|
|
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Weighted average common shares outstanding — basic |
|
2,892,695 |
|
2,836,341 |
|
||
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Weighted average common shares outstanding — diluted |
|
3,067,053 |
|
2,893,392 |
|
||
See notes to unaudited consolidated financial statements.
4
OPTELECOM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31,
(Unaudited)
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2003 |
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2002 |
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Cash Flows From Operating Activities: |
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|
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Net income |
|
$ |
368,522 |
|
$ |
204,228 |
|
|
Adjustments to reconcile net income to net cash provided by operating activities: |
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|
|
|
|
||
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Depreciation and amortization |
|
66,919 |
|
101,762 |
|
||
|
Accounts receivable provision |
|
880 |
|
— |
|
||
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Inventory provision |
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(15,926 |
) |
— |
|
||
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Stock based compensation |
|
— |
|
1,524 |
|
||
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Change in operating assets and liabilities: |
|
|
|
|
|
||
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Accounts and contracts receivable |
|
1,053,932 |
|
297,539 |
|
||
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Inventories |
|
(190,467 |
) |
158,202 |
|
||
|
Prepaid expenses and other current assets |
|
(37,227 |
) |
(34,904 |
) |
||
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Other assets |
|
— |
|
(25,979 |
) |
||
|
Accounts payable |
|
(317,415 |
) |
(245,518 |
) |
||
|
Other current liabilities and accrued payroll |
|
(419,851 |
) |
105,105 |
|
||
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Deferred rent liability |
|
11,363 |
|
(12,261 |
) |
||
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Net cash provided by operating activities |
|
520,730 |
|
549,698 |
|
||
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Cash Flows From Investing Activities: |
|
|
|
|
|
||
|
Capital expenditures |
|
(270,692 |
) |
(46,810 |
) |
||
|
Net cash used in investing activities |
|
(270,692 |
) |
(46,810 |
) |
||
|
Cash Flows From Financing Activities: |
|
|
|
|
|
||
|
Borrowings on bank line-of-credit payable |
|
2,020,551 |
|
2,917,160 |
|
||
|
Payments on bank line-of-credit payable |
|
(2,596,630 |
) |
(3,237,827 |
) |
||
|
Borrowings on notes payable |
|
180,000 |
|
— |
|
||
|
Payments on notes payable and capital leases |
|
(1,200 |
) |
(199,516 |
) |
||
|
Proceeds from issuance of common stock |
|
17,839 |
|
8,770 |
|
||
|
Proceeds from exercise of stock options |
|
112,651 |
|
2,000 |
|
||
|
Net cash used in financing activities |
|
(266,789 |
) |
(509,413 |
) |
||
|
Effect of currency translations |
|
36,929 |
|
28,254 |
|
||
|
Net increase in cash and cash equivalents |
|
20,178 |
|
21,729 |
|
||
|
Cash and cash equivalents - beginning of period |
|
47,988 |
|
58,869 |
|
||
|
Cash and cash equivalents - end of period |
|
$ |
68,166 |
|
$ |
80,598 |
|
|
Supplemental Disclosures of Cash Flow Information: |
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|
|
|
|
||
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Cash paid during the period for interest |
|
$ |
9,996 |
|
$ |
29,962 |
|
|
Cash paid during the period for income taxes |
|
$ |
15,200 |
|
$ |
— |
|
See notes to unaudited consolidated financial statements.
5
OPTELECOM, INC.
Notes to 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 Optelecom, Inc. (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, 2002.
2. Line of Credit
The Company has a revolving credit agreement with a bank whereby it may borrow up to $2,500,000. This agreement consists of two separate facilities as follows:
The first facility is a demand working capital line of credit which will enable the Company to borrow up to the lesser of $2,000,000 or the borrowing base. The borrowing base shall equal the sum of 90% of eligible government billed accounts receivable, 80% of the eligible commercial billed accounts receivable and 20% of eligible related inventory capped at $500,000. In addition, a sublimit was established for the issuance of a standby letter of credit for collateral rent support related to the Company’s new office lease.
The second facility is a $500,000 transaction specific revolving demand export line of credit for short-term financing. The amount available will be the lesser of $500,000 or the borrowing base. The borrowing base shall equal the sum of 75% of the eligible export-related inventory and 90% of the eligible export-related accounts receivable. This facility is guaranteed 90% by the Export-Import Bank of the United States (“Ex-Im Bank”) under Ex-Im Bank’s Working Capital Guarantee Program.
Both facilities carry interest at the rate of PRIME plus 1.25%, floating. Optelecom is required to comply with certain financial ratios including maintaining a minimum current ratio, a maximum debt to worth ratio, a maximum funded debt to EBITDA ratio and a minimum tangible net worth ratio. The Company was in compliance with all of these covenants at March 31, 2003.
3. Note Payable
The Company took delivery of major capital equipment for its manufacturing operations in March 2003 and incurred a promissory note with the vendor. The note principal is $180,000 and is payable in semi-annual installments of $22,500 beginning June 2003 through December 2006, with interest payable at the rate of 4.40%.
4. Accounts and Contracts Receivable
Accounts and contracts receivable consisted of the following:
|
|
|
March 31, 2003 |
|
December 31, 2002 |
|
||
|
Accounts and contracts receivable |
|
$ |
2,267,228 |
|
$ |
3,321,160 |
|
|
Less: Allowance for doubtful accounts |
|
(157,319 |
) |
(156,439 |
) |
||
|
Total |
|
$ |
2,109,909 |
|
$ |
3,164,721 |
|
6
5. Inventory
Inventories consisted of the following:
|
|
|
March 31, 2003 |
|
December 31, 2002 |
|
||
|
Production materials |
|
$ |
1,571,851 |
|
$ |
1,367,886 |
|
|
Work in process |
|
231,512 |
|
210,637 |
|
||
|
Finished goods |
|
1,144,302 |
|
1,178,674 |
|
||
|
Allowance for obsolescence |
|
(288,071 |
) |
(303,996 |
) |
||
|
Net |
|
$ |
2,659,594 |
|
$ |
2,453,201 |
|
6. Property and Equipment
Property and equipment are recorded at historical cost and are reported net of accumulated depreciation. Depreciation of property and equipment is provided under the straight-line method over the estimated useful lives of the assets, generally five to ten years, not to exceed the lease term for leasehold improvements. Accumulated depreciation and amortization was $2,886,951 and $3,381,970 at March 31, 2003 and December 31, 2002, respectively.
7. Income Taxes
The Company has established a full valuation allowance against the deferred tax assets in accordance with FASB No. 109. Based upon the level of current taxable income and projections for future taxable income over the periods in which the temporary differences are anticipated to reverse, management believes that it is more likely than not that the Company will realize the benefits of these deductible differences net of the valuation allowance at December 31, 2003. However, the amount of the deferred tax asset considered realizable could be adjusted in the future if estimates of taxable income are revised.
8. 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 and warrants, provided they are not antidilutive. The following is a reconciliation of the basic and diluted earnings per share.
|
|
|
Three Months ended March 31, |
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||||
|
|
|
2003 |
|
2002 |
|
||
|
Basic Earnings per Share: |
|
|
|
|
|
||
|
Income available to common stockholders |
|
$ |
368,522 |
|
$ |
204,228 |
|
|
Weighted average common shares – basic |
|
2,892,695 |
|
2,836,341 |
|
||
|
Basic income per share |
|
$ |
0.13 |
|
$ |
0.07 |
|
|
|
|
|
|
|
|
||
|
Diluted Earnings per Share: |
|
|
|
|
|
||
|
Income available to common stockholders |
|
$ |
368,522 |
|
$ |
204,228 |
|
|
Weighted average common shares – basic |
|
2,892,695 |
|
2,836,341 |
|
||
|
Assumed conversion of: |
|
|
|
|
|
||
|
Stock options |
|
107,416 |
|
25,544 |
|
||
|
Warrants |
|
66,942 |
|
31,507 |
|
||
|
Weighted average common shares – diluted |
|
3,067,053 |
|
2,893,392 |
|
||
|
Diluted income per share |
|
$ |
0.12 |
|
$ |
0.07 |
|
7
9. Stock-based Compensation
The Company recognizes expense for stock-based compensation arrangements in accordance with the provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. Accordingly, compensation cost is recognized for the excess of the estimated fair value of the stock at the grant date over the exercise price, if any. The Company accounts for equity instruments issued to non-employees in accordance with EITF 96-18, Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods, or Services.
In accordance with Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure, the effect on net income and net income per share if the Company had applied the fair value recognition provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation is as follows:
|
|
|
Three Months ended March 31, |
|
||||
|
|
|
2003 |
|
2002 |
|
||
|
Net income, as reported |
|
$ |
368,522 |
|
$ |
204,228 |
|
|
Deduct: Total stock-based compensation expense determined under fair value based method for all awards |
|
88,389 |
|
32,354 |
|
||
|
Pro-forma net income |
|
$ |
280,133 |
|
$ |
171,874 |
|
|
|
|
|
|
|
|
||
|
Net income per share: |
|
|
|
|
|
||
|
Basic, as reported |
|
$ |
0.13 |
|
$ |
0.07 |
|
|
Basic, pro-forma |
|
0.10 |
|
0.06 |
|
||
|
|
|
|
|
|
|
||
|
Diluted, as reported |
|
$ |
0.12 |
|
$ |
0.07 |
|
|
Diluted, pro-forma |
|
0.09 |
|
0.06 |
|
||
These pro forma amounts are not necessarily indicative of future effects of applying the fair value-based method due to, among other things, the vesting period of the stock options and the fair value of the additional stock options issued in future years.
10. Business Unit Information
Beginning in 2003, Optelecom restructured its operations from three business segments into two segments: the Communication Products Division (CPD) and the Electro-Optics Division (EOD). The CPD develops, manufactures, and sells optical fiber-based data communication equipment to both commercial and government clients. In addition, the CPD now includes the previously-reported Copper Products Division (Paragon) which had been focused on the delivery and distribution of video systems over Category5 (CAT5) copper cabling as the transmission medium. The EOD is focused on Interferometric Fiber Optic Gyro coils and engineering contract services for development of electro-optic devices and sub-systems for defense applications. These divisions reflect the manner in which management analyzes internal reportable information and indicates Optelecom’s strategic business units’ financial results reported before income taxes. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. Prior year information has been presented to reflect the new segments. Optelecom does not allocate income taxes or interest expense to segments.
8
|
|
|
Quarter ended March 31, 2003 |
|
|||||||
|
|
|
Communication |
|
Electro– |
|
Total |
|
|||
|
Revenues |
|
$ |
2,755,525 |
|
$ |
732,861 |
|
$ |
3,488,386 |
|
|
Depreciation and amortization |
|
66,919 |
|
— |
|
66,919 |
|
|||
|
Income from operations |
|
26,041 |
|
349,800 |
|
375,841 |
|
|||
|
Assets |
|
5,749,983 |
|
290,000 |
|
6,039,983 |
|
|||
|
Capital expenditures |
|
270,692 |
|
— |
|
270,692 |
|
|||
|
|
|
Quarter ended March 31, 2002 |
|
|||||||
|
|
|
Communication |
|
Electro– |
|
Total |
|
|||
|
Revenues |
|
$ |
3,031,067 |
|
$ |
275,124 |
|
$ |
3,306,191 |
|
|
Depreciation and amortization |
|
101,762 |
|
— |
|
101,762 |
|
|||
|
Income from operations |
|
162,801 |
|
69,196 |
|
231,997 |
|
|||
|
Assets |
|
5,782,501 |
|
163,097 |
|
5,945,598 |
|
|||
|
Capital expenditures |
|
46,810 |
|
— |
|
46,810 |
|
|||
Optelecom is engaged primarily in the development, manufacture, and sale of integrated multi-media products for communicating video, audio, and other data over both copper wire and optical network systems. Revenues represent shipments and services provided to third parties. Contract costs and operating expenses directly traceable to individual segments were deducted from revenues to arrive at income from operations. Identifiable assets by segment are those assets that are used in the Company’s operations in each segment.
11. New Accounting Pronouncements
In June 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations.” SFAS 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS 143 is effective for fiscal years beginning after June 15, 2002. The Company believes this standard will have no impact on its financial position or results of operations.
9
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.
Optelecom offers integrated multi-media products for communicating video, audio, and other data over both copper wire and optical network systems. Optelecom has two business segments: the Communication Products Division (CPD) and the Electro-Optics Division (EOD). The primary focus of the CPD is the design, manufacture and sale of optical fiber-based data communication equipment to both commercial and Government clients as well as the delivery and distribution of video systems over Category5 (CAT5) copper cabling as the transmission medium. This Division is now managing the processes previously reported under the Optical Products Unit and the Copper Products Unit. The EOD develops and manufactures innovative optical devices under contract, primarily to government and defense industry customers
The CPD addresses business opportunities in the worldwide optical communication equipment marketplace, specializing in optical fiber transmission technologies. The majority of its current and future revenues are and will be derived from several niche markets that leverage the advantages of fiber optic telecommunications to address their transmission requirements. Presently, the vertical markets served include communications systems for highway traffic monitoring, advanced air traffic control video monitor displays, security surveillance and control systems, and manufacturing process and control communications. Verticals that offer future sources of revenue include video teleconferencing, healthcare, and broadcasting market opportunities. The CPD also includes the operations of the previously-named Copper Products Unit which addresses worldwide markets in financial market data information and business television services. The products include multi-media applications utilizing unshielded twisted-pair copper or “structured” Category 5 (CAT5) cabling for in-house computer data networking applications.
In the EOD, emphasis has been placed on fabrication of precision-wound coils of optical fiber used as the sensing elements of fiber optic gyroscopes. During the past decade, Optelecom has received U.S. Government contracts to investigate advanced manufacturing technology related to gyro coil winding. Optelecom currently pursues this tradition of business development and continues to seek out technology development opportunities with potential for production follow-on. The EOD also produces precision wound coils for applications ranging from optical fiber dispensers used in remote vehicle control systems to precision optical fiber coils for communications systems.
THREE MONTHS ENDED MARCH 31, 2003 COMPARED TO THREE MONTHS ENDED MARCH 31, 2002
Consolidated revenues for the three months ended March 31, 2003 were $3,488,386 compared to $3,306,191 for the same period of 2002, representing an increase of $182,195 or 6% when compared to the prior year.
Revenues for the Communication Products Division for the first quarter of 2003 were $2,755,525 as compared to $3,031,067 for the same period in 2002. This decrease of $275,542 or 9% is attributable to a decline in sales of copper-based products to European customers as a result of the depressed financial market sector. Additionally, the recently announced formation of Optelecom Europe Limited from the UK operation has
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resulted in a greater emphasis towards the promotion of fiber products by the former Paragon operation.
The Electro-Optics Division reported revenues of $732,861 for the first quarter of 2003 as compared to $275,124 for the same period in 2002. This 166% increase of $457,737 is primarily attributable to the delivery of product associated with a major contract that occurred during the first quarter of 2003.
Consolidated gross profit was $1,966,151, or 56% for the three months ended March 31, 2003 as compared to $1,750,266, or 53% for the first quarter of 2002. The Communication Products Division’s gross profit was $1,484,457 for the first quarter of 2003 compared to $1,636,964 in the first quarter of 2002. The decrease of $152,507 or 9% was due to the lower level of sales of copper-based products during the first quarter of 2003 as the gross profit percentages were 54% during both periods. The Electro-Optic Division experienced an increase of $368,392 or 325% in its gross profit from $113,302 in the first quarter of 2002 to $481,694 in the first quarter of 2003 primarily as a result of the delivery of product associated with a major contract that occurred during the first quarter of 2003.
Engineering costs for the first quarter of 2003 were $302,005 compared to $226,400 in the same period in 2002. The increase of $75,605 or 33% is due to higher engineering personnel and laboratory expenses.
Selling and marketing costs were $513,154 for the first quarter of 2003 compared to $578,242 for the same period in 2002. This decrease of $65,088 or 11% was primarily a result of lower sales commissions and lower demo equipment expenditures. The first quarter of 2002 had higher commission expense due a higher level of international sales which typically have higher than average commission rates.
General and administrative costs were $775,151 for the first quarter of 2003 compared to $713,627 for the same period in 2002. This increase of $61,524 or 9% is primarily attributable to increases in employee costs and facility expenses related to the relocation of the U.S. operations.
OTHER EXPENSE
Interest expense of $7,319 for the first quarter of 2003 compared to $27,769 for the same period last year. Interest expense was lower primarily due to the lower principal balance of the Company’s bank line of credit.
Stockholders’ equity increased from $3,667,833 at December 31, 2002 to $4,203,773 at March 31, 2003. The increase is primarily attributable to net earnings of $368,522 as well as an increase in common stock and paid-in-capital due to the exercise of stock options and purchase of shares pursuant to the employee stock purchase plan.
Other key components of Optelecom’s financial condition include accounts receivable, inventory, fixed assets, accounts payable and debt. The Company’s current ratio has increased to 2.99 at March 31, 2003 compared to 1.98 at December 31, 2002. This increase is primarily attributed to the decrease in the Company’s borrowings under the bank line of credit and a reduction in accounts payable.
Accounts receivable, net decreased from $3,164,721 at December 31, 2002 to $2,109,909 at March 31, 2003 due to lower sales in the first quarter of 2003 as compared to the fourth quarter of 2002. Inventories increased
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slightly from $2,453,201 at December 31, 2002 to $2,659,594 as of March 31, 2003 primarily due to management’s decision to increase stocking levels of higher volume products in an effort to increase its penetration of the security and surveillance market.
The Company’s current liabilities decreased from $2,959,390 at December 31, 2002 to $1,689,847 at March 31, 2003 primarily as a result of a decrease of $576,079 in the bank line-of-credit payable. As of March 31, 2003, the line of credit had been completely paid down. Additionally, accounts payable decreased $317,415 from 2002 to 2003 and other current liabilities were reduced by $328,792.
Cash provided by operating activities was $520,730 during the first three months of 2003 compared to $549,698 in the same period of 2002. After adding back non-cash adjustments such as depreciation and amortization to reconcile the net income to net cash used by operating activities, the net cash provided was $420,395 for the first quarter of 2003 as compared to $307,514 in the first three months of 2002. Working capital provided by operating activities was $100,335 for the three months ended March 31, 2003. The working capital provided was due primarily to a decrease of $1,053,932 in accounts receivable which was partially offset by decreases in accounts payable of $317,415 and other current liabilities and accrued payroll of $419,851.
Cash used in investing activities during the three months ended March 31, 2003 was $270,692 compared to $46,810 in 2002. The Company increased its level of capital asset acquisitions during the first quarter of 2003 to improve its manufacturing capabilities.
Cash used in financing activities during the first three months of 2003 was $266,789 compared to $509,413 in 2002. The Company’s net bank line-of-credit payable was reduced by $576,079 as compared to a net reduction of $320,667 in the same period of 2002. The Company also incurred $180,000 of bank note indebtedness as a result of its capital acquisitions during the first quarter of 2003.
Optelecom has the ability, provided there are sufficient accounts receivable and inventory, to borrow up to $2.5 million under our two-tiered bank line-of-credit. The borrowings, if any, are secured by the assets of the Company.
Optelecom’s future working capital needs will be financed by our operating cash flow and continued use of the line-of-credit. In the event that operating cash flows become insufficient to meet funding needs, the Company may be required to scale back or eliminate product research and development and overhead costs. Additionally, the Company would look to increase its line of credit and/or pursue equity financing. The Company’s strategy will focus on identifying new products that meet the demands of our core markets, expanding our distribution channels and implementing processes which will increase manufacturing efficiencies. Management fully understands the costs required to execute this strategy and will pursue these initiatives in a timely and fiscally prudent manner.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We are subject to market risk associated with changes in foreign currency exchange rates and interest rates. Our foreign currency exchange rate risk comes primarily from our operations in Europe. The net impact of foreign exchange activities on earnings was immaterial for the three-month period ended March 31, 2003 and 2002, respectively, however, we will continue to assess the impact, if any, as we continue to implement the distribution of our products in Europe through our direct infrastructure. Interest rate exposure is primarily limited to the approximately $68,000 of cash owned by us. We do not actively manage the risk of interest rate fluctuations; however, such risk is mitigated by the relatively short-term (less than twelve months) nature of certain investments. We do not consider the present rate of inflation to have a significant impact on our business.
Item 4. Controls and Procedures
As of March 31, 2003, the principal executive officer and principal financial officer evaluated controls and procedures related to its reporting and disclosure obligations, as well as its internal controls. These officers have concluded that the disclosure controls and procedures are sufficient to provide that (a) material information relating to the Company, including its consolidated subsidiaries, is made known to these officers by other employees of the Company and its consolidated subsidiaries, particularly material information related to the period for which this periodic report is being prepared; and (b) this information is recorded, processed,
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summarized, evaluated and reported, as applicable, within the time periods specified in the rules and forms promulgated by the Securities and Exchange Commission.
There have been no significant changes in internal controls or in other factors that could significantly affect these internal controls subsequent to the date of the evaluation.
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ITEM 1 - |
LEGAL PROCEEDINGS |
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.
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ITEM 2 - |
CHANGES IN SECURITIES |
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None. |
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ITEM 3 - |
DEFAULTS UPON SENIOR SECURITIES |
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None |
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ITEM 4 - |
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
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None |
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ITEM 5 - |
OTHER INFORMATION |
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None |
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ITEM 6 - |
EXHIBITS AND REPORTS ON FORM 8-K |
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The Company filed a Form 8-K on March 27, 2003 as a result of changes in the Company’s Board of Directors. For details please see the 8-K. |
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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.
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OPTELECOM, INC. |
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Date: |
May 15, 2003 |
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/s/ Edmund Ludwig |
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Edmund Ludwig, |
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Director, President and Chief Executive Officer |
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May 15, 2003 |
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/s/ James Armstrong |
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James Armstrong, |
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Director, Chief Financial Officer |
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Certification of Chief Executive Officer
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I, Edmund Ludwig, Chief Executive Officer of Optelecom, Inc. (the “Registrant”), certify that: |
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I have reviewed the Quarterly Report on Form 10-Q for the period ended March 31, 2003 of the Registrant (the “Report”) |
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Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; |
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Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; |
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The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: |
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Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; |
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Evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and |
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Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; |
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The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and audit committee of registrant’s board of directors: |
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All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and |
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Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and |
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The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. |
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Date: |
May 15, 2003 |
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/s/ Edmund Ludwig |
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Edmund Ludwig, |
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Director, President and Chief Executive Officer |
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Certification of Chief Financial Officer
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I, James Armstrong, Chief Financial Officer of Optelecom, Inc. (the “Registrant”), certify that: |
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I have reviewed the Quarterly Report on Form 10-Q for the period ended March 31, 2003 of the Registrant (the “Report”) |
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Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; |
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Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; |
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The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: |
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Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; |
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Evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and |
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Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; |
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The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and audit committee of registrant’s board of directors: |
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All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and |
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Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and |
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The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. |
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Date: |
May 15, 2003 |
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/s/ James Armstrong |
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James Armstrong, |
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Director, Chief Financial Officer |
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