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 September 30, 2003
Commission File No.
OPTELECOM, INC.
(Exact Name of Registrant as
Specified in its Charter)
DELAWARE
(State or other jurisdiction of incorporation or organization)
52-1010850
(IRS employer identification number)
12920 CLOVERLEAF CENTER DRIVE, GERMANTOWN, MARYLAND 20874
(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
Indicate by check mark whether the registrant is an acclerated filer (as defined in Exchange Act Rule 12b-2). Yes o No ý
At November 7, 2003, the registrant had outstanding 3,114,086 shares of Common Stock, $.03 Par Value.
OPTELECOM, INC.
FORM 10-Q
TABLE OF CONTENTS
2
OPTELECOM, INC.
AS OF SEPTEMBER 30, 2003 and DECEMBER 31, 2002
|
|
|
2003 |
|
2002 |
|
||
|
|
|
(Unaudited) |
|
|
|
||
|
ASSETS |
|
|
|
|
|
||
|
CURRENT ASSETS |
|
|
|
|
|
||
|
Cash and cash equivalents |
|
$ |
1,115,489 |
|
$ |
46,012 |
|
|
Accounts and contracts receivable, net |
|
2,726,905 |
|
3,164,721 |
|
||
|
Inventories, net |
|
3,030,940 |
|
2,453,201 |
|
||
|
Prepaid expenses and other current assets |
|
241,926 |
|
184,876 |
|
||
|
Total current assets |
|
7,115,260 |
|
5,848,810 |
|
||
|
|
|
|
|
|
|
||
|
Property and equipment, net |
|
1,111,263 |
|
522,983 |
|
||
|
Restricted certificate of deposit |
|
129,368 |
|
129,368 |
|
||
|
Other assets |
|
— |
|
126,062 |
|
||
|
TOTAL ASSETS |
|
$ |
8,355,891 |
|
$ |
6,627,223 |
|
|
|
|
|
|
|
|
||
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
|
||
|
CURRENT LIABILITIES |
|
|
|
|
|
||
|
Accounts payable |
|
$ |
896,017 |
|
$ |
971,416 |
|
|
Accrued payroll |
|
372,663 |
|
255,096 |
|
||
|
Commissions payable |
|
165,535 |
|
369,197 |
|
||
|
Bank line-of-credit payable |
|
— |
|
576,079 |
|
||
|
Current portion of notes payable |
|
45,000 |
|
— |
|
||
|
Current portion of leases payable |
|
— |
|
1,006 |
|
||
|
Other current liabilities |
|
867,349 |
|
786,596 |
|
||
|
Total current liabilities |
|
2,346,564 |
|
2,959,390 |
|
||
|
Notes payable |
|
112,500 |
|
— |
|
||
|
Deferred rent liability |
|
45,450 |
|
— |
|
||
|
Total liabilities |
|
2,504,514 |
|
2,959,390 |
|
||
|
|
|
|
|
|
|
||
|
STOCKHOLDERS’ EQUITY: |
|
|
|
|
|
||
|
Common stock, $.03 par value - shares authorized, 15,000,000; issued and outstanding, 3,112,908 and 2,877,891 shares as of September 30, 2003 and December 31, 2002, respectively |
|
93,387 |
|
86,336 |
|
||
|
Additional paid-in capital |
|
10,825,137 |
|
10,152,729 |
|
||
|
Foreign currency translation |
|
(4,600 |
) |
41,538 |
|
||
|
Treasury stock, 162,672 shares, at cost |
|
(1,265,047 |
) |
(1,265,047 |
) |
||
|
Accumulated deficit |
|
(3,797,500 |
) |
(5,347,723 |
) |
||
|
Total stockholders’ equity |
|
5,851,377 |
|
3,667,833 |
|
||
|
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
$ |
8,355,891 |
|
$ |
6,627,223 |
|
See notes to unaudited consolidated financial statements.
3
OPTELECOM, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
(Unaudited)
|
|
|
2003 |
|
2002 |
|
||
|
Revenues |
|
$ |
4,498,752 |
|
$ |
3,726,282 |
|
|
Cost of goods sold |
|
1,992,054 |
|
1,557,689 |
|
||
|
Gross profit |
|
2,506,698 |
|
2,168,593 |
|
||
|
|
|
|
|
|
|
||
|
Operating expenses: |
|
|
|
|
|
||
|
Engineering |
|
386,847 |
|
308,660 |
|
||
|
Selling and marketing |
|
706,108 |
|
493,185 |
|
||
|
General and administrative |
|
753,859 |
|
833,699 |
|
||
|
Total operating expenses |
|
1,846,814 |
|
1,635,544 |
|
||
|
|
|
|
|
|
|
||
|
Income from operations |
|
659,884 |
|
533,049 |
|
||
|
|
|
|
|
|
|
||
|
Interest income (expense), net |
|
(3,480 |
) |
(17,887 |
) |
||
|
|
|
|
|
|
|
||
|
Income before income taxes |
|
656,404 |
|
515,162 |
|
||
|
Provision for income taxes |
|
11,027 |
|
— |
|
||
|
Net income |
|
$ |
645,377 |
|
$ |
515,162 |
|
|
|
|
|
|
|
|
||
|
Foreign currency translation |
|
8,657 |
|
(37,450 |
) |
||
|
Comprehensive income |
|
$ |
654,034 |
|
$ |
477,712 |
|
|
|
|
|
|
|
|
||
|
Basic earnings per share |
|
$ |
0.21 |
|
$ |
0.18 |
|
|
|
|
|
|
|
|
||
|
Diluted earnings per share |
|
$ |
0.20 |
|
$ |
0.18 |
|
|
|
|
|
|
|
|
||
|
Weighted average common shares outstanding — basic |
|
3,088,340 |
|
2,848,036 |
|
||
|
Weighted average common shares outstanding — diluted |
|
3,235,752 |
|
2,922,167 |
|
||
See notes to unaudited consolidated financial statements.
4
OPTELECOM, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
(Unaudited)
|
|
|
2003 |
|
2002 |
|
||
|
Revenues |
|
$ |
12,163,431 |
|
$ |
10,360,330 |
|
|
Cost of goods sold |
|
5,200,726 |
|
4,585,182 |
|
||
|
Gross profit |
|
6,962,705 |
|
5,775,148 |
|
||
|
|
|
|
|
|
|
||
|
Operating expenses: |
|
|
|
|
|
||
|
Engineering |
|
1.013,818 |
|
834,288 |
|
||
|
Selling and marketing |
|
1,880,493 |
|
1,668,184 |
|
||
|
General and administrative |
|
2,488,714 |
|
2,256,178 |
|
||
|
Total operating expenses |
|
5,383,025 |
|
4,758,650 |
|
||
|
|
|
|
|
|
|
||
|
Income from operations |
|
1,579,680 |
|
1,016,498 |
|
||
|
|
|
|
|
|
|
||
|
Interest income (expense), net |
|
(9,890 |
) |
(72,203 |
) |
||
|
|
|
|
|
|
|
||
|
Income before income taxes |
|
1,569,790 |
|
944,295 |
|
||
|
Provision for income taxes |
|
19,567 |
|
— |
|
||
|
Net income |
|
$ |
1,550,223 |
|
$ |
944,295 |
|
|
|
|
|
|
|
|
||
|
Foreign currency translation |
|
(46,138 |
) |
(128,859 |
) |
||
|
Comprehensive income |
|
$ |
1,504,085 |
|
$ |
815,436 |
|
|
|
|
|
|
|
|
||
|
Basic earnings per share |
|
$ |
0.52 |
|
$ |
0.33 |
|
|
|
|
|
|
|
|
||
|
Diluted earnings per share |
|
$ |
0.49 |
|
$ |
0.33 |
|
|
|
|
|
|
|
|
||
|
Weighted average common shares outstanding — basic |
|
2,987,376 |
|
2,842,333 |
|
||
|
Weighted average common shares outstanding — diluted |
|
3,135,656 |
|
2,903,762 |
|
||
See notes to unaudited consolidated financial statements.
5
OPTELECOM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
(Unaudited)
|
|
|
2003 |
|
2002 |
|
||
|
Cash Flows From Operating Activities: |
|
|
|
|
|
||
|
Net income |
|
$ |
1,550,223 |
|
$ |
944,295 |
|
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
||
|
Depreciation and amortization |
|
239,323 |
|
288,125 |
|
||
|
Accounts receivable (benefit) / provision |
|
27,999 |
|
15,378 |
|
||
|
Inventory (benefit) / provision |
|
(18,184 |
) |
8,827 |
|
||
|
Loss on sale / disposal of fixed assets |
|
— |
|
8,111 |
|
||
|
Stock based compensation |
|
— |
|
4,571 |
|
||
|
Change in operating assets and liabilities: |
|
|
|
|
|
||
|
Accounts and contracts receivable |
|
409,817 |
|
92,928 |
|
||
|
Inventories |
|
(559,555 |
) |
(133,913 |
) |
||
|
Prepaid expenses and other current assets |
|
(57,050 |
) |
(36,521 |
) |
||
|
Other assets |
|
126,063 |
|
(25,978 |
) |
||
|
Accounts payable |
|
(75,399 |
) |
(233,175 |
) |
||
|
Other current liabilities and accrued payroll |
|
(5,343 |
) |
362,918 |
|
||
|
Deferred rent liability |
|
45,450 |
|
(33,111 |
) |
||
|
Net cash provided by operating activities |
|
1,683,344 |
|
1,262,455 |
|
||
|
Cash Flows From Investing Activities: |
|
|
|
|
|
||
|
Proceeds from sale of equipment |
|
— |
|
5,840 |
|
||
|
Capital expenditures |
|
(827,603 |
) |
(76,389 |
) |
||
|
Net cash used in investing activities |
|
(827,603 |
) |
(70,549 |
) |
||
|
Cash Flows From Financing Activities: |
|
|
|
|
|
||
|
Borrowings on bank line-of-credit payable |
|
2,020,551 |
|
8,892,598 |
|
||
|
Payments on bank line-of-credit payable |
|
(2,596,630 |
) |
(9,482,137 |
) |
||
|
Borrowings on notes payable |
|
180,000 |
|
— |
|
||
|
Payments on notes payable and capital leases |
|
(23,506 |
) |
(487,647 |
) |
||
|
Proceeds from issuance of common stock |
|
66,291 |
|
26,201 |
|
||
|
Proceeds from exercise of stock options |
|
613,168 |
|
27,058 |
|
||
|
Net cash provided by (used in) financing activities |
|
259,874 |
|
(1,023,927 |
) |
||
|
Effect of foreign currency translations |
|
(46,138 |
) |
(128,859 |
) |
||
|
Net increase (decrease) in cash and cash equivalents |
|
1,069,477 |
|
39,120 |
|
||
|
Cash and cash equivalents - beginning of period |
|
46,012 |
|
58,869 |
|
||
|
Cash and cash equivalents - end of period |
|
$ |
1,115,489 |
|
$ |
97,989 |
|
|
Supplemental Disclosures of Cash Flow Information: |
|
|
|
|
|
||
|
Cash paid during the period for interest |
|
$ |
15,436 |
|
$ |
80,679 |
|
|
Cash paid during the period for income taxes |
|
$ |
36,242 |
|
$ |
— |
|
See notes to unaudited consolidated financial statements.
6
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 $3,500,000. 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 $3,000,000 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.
The first facility carries interest at the rate of LIBOR plus 3.50%. The second facility carries 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 September 30, 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:
7
|
|
|
September 30, 2003 |
|
December 31, 2002 |
|
||
|
Accounts and contracts receivable |
|
$ |
2,911,343 |
|
$ |
3,321,160 |
|
|
Less: Allowance for doubtful accounts |
|
(184,438 |
) |
(156,439 |
) |
||
|
Total |
|
$ |
2,726,905 |
|
$ |
3,164,721 |
|
5. Inventory
Inventories consisted of the following:
|
|
|
September 30, 2003 |
|
December 31, 2002 |
|
||
|
Production materials |
|
$ |
1,762,764 |
|
$ |
1,367,886 |
|
|
Work in process |
|
562,774 |
|
210,637 |
|
||
|
Finished goods |
|
991,214 |
|
1,178,674 |
|
||
|
Allowance for obsolescence |
|
(285,812 |
) |
(303,996 |
) |
||
|
Net |
|
$ |
3,030,940 |
|
$ |
2,453,201 |
|
6. Property and Equipment
Property and equipment are recorded at historical cost and are reported net of accumulated depreciation and amortization. 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 $2,924,578 and $3,381,970 at September 30, 2003 and December 31, 2002, respectively.
7. Warranties
The Company offers a lifetime warranty on its products. Prior to July 2002, the warranty period was four years. The Company recognizes the expense associated with these warranties ratably over the expected lives of the products in proportion to the actual returns experienced. Changes in the Company’s deferred extended warranty reserves during the nine months ended September 30, 2003 are as follows:
|
Balance, December 31, 2002 |
|
$ |
44,512 |
|
|
Actual warranties processed through September 30, 2003 |
|
23,583 |
|
|
|
Changes in liability for pre-existing warranties during the period, including expirations |
|
(14,473 |
) |
|
|
Balance, September 30, 2003 |
|
$ |
53,622 |
|
8. 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.
9. 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.
8
|
|
|
Three Months ended |
|
||||
|
|
|
2003 |
|
2002 |
|
||
|
Basic Earnings per Share: |
|
|
|
|
|
||
|
Income available to common stockholders |
|
$ |
645,377 |
|
$ |
515,162 |
|
|
Weighted average common shares – basic |
|
3,088,340 |
|
2,848,036 |
|
||
|
Basic income per share |
|
$ |
0.21 |
|
$ |
0.18 |
|
|
|
|
|
|
|
|
||
|
Diluted Earnings per Share: |
|
|
|
|
|
||
|
Income available to common stockholders |
|
$ |
645,377 |
|
$ |
515,162 |
|
|
Weighted average common shares – basic |
|
3,088,340 |
|
2,848,036 |
|
||
|
Assumed conversion of: |
|
|
|
|
|
||
|
Stock options |
|
147,412 |
|
35,293 |
|
||
|
Warrants |
|
— |
|
38,838 |
|
||
|
Weighted average common shares – diluted |
|
3,235,752 |
|
2,922,167 |
|
||
|
Diluted income per share |
|
$ |
0.20 |
|
$ |
0.18 |
|
|
|
|
Nine Months ended September 30, |
|
||||
|
|
|
2003 |
|
2002 |
|
||
|
Basic Earnings per Share: |
|
|
|
|
|
||
|
Income available to common stockholders |
|
$ |
1,550,223 |
|
$ |
944,295 |
|
|
Weighted average common shares – basic |
|
2,987,376 |
|
2,842,333 |
|
||
|
Basic income per share |
|
$ |
0.52 |
|
$ |
0.33 |
|
|
|
|
|
|
|
|
||
|
Diluted Earnings per Share: |
|
|
|
|
|
||
|
Income available to common stockholders |
|
$ |
1,550,223 |
|
$ |
944,295 |
|
|
Weighted average common shares – basic |
|
2,987,376 |
|
2,842,333 |
|
||
|
Assumed conversion of: |
|
|
|
|
|
||
|
Stock options |
|
148,280 |
|
27,874 |
|
||
|
Warrants |
|
— |
|
33,555 |
|
||
|
Weighted average common shares – diluted |
|
3,135,656 |
|
2,903,762 |
|
||
|
Diluted income per share |
|
$ |
0.49 |
|
$ |
0.33 |
|
10. 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:
9
|
|
|
Three Months ended September 30, |
|
||||
|
|
|
2003 |
|
2002 |
|
||
|
Net income, as reported |
|
$ |
645,377 |
|
$ |
515,162 |
|
|
Deduct: Total stock-based compensation expense |
|
(97,437 |
) |
(37,450 |
) |
||
|
Pro-forma net income |
|
$ |
547,940 |
|
$ |
477,712 |
|
|
|
|
|
|
|
|
||
|
Net income per share: |
|
|
|
|
|
||
|
Basic, as reported |
|
$ |
0.21 |
|
$ |
0.18 |
|
|
Basic, pro-forma |
|
0.18 |
|
0.17 |
|
||
|
|
|
|
|
|
|
||
|
Diluted, as reported |
|
$ |
0.20 |
|
$ |
0.18 |
|
|
Diluted, pro-forma |
|
0.17 |
|
0.16 |
|
||
|
|
|
Nine Months ended September 30, |
|
||||
|
|
|
2003 |
|
2002 |
|
||
|
Net income, as reported |
|
$ |
1.550,223 |
|
$ |
944,295 |
|
|
Deduct: Total stock-based compensation expense |
|
(295,498 |
) |
(128,859 |
) |
||
|
Pro-forma net income |
|
$ |
1,254,725 |
|
$ |
815,436 |
|
|
|
|
|
|
|
|
||
|
Net income per share: |
|
|
|
|
|
||
|
Basic, as reported |
|
$ |
0.52 |
|
$ |
0.33 |
|
|
Basic, pro-forma |
|
0.42 |
|
0.29 |
|
||
|
|
|
|
|
|
|
||
|
Diluted, as reported |
|
$ |
0.49 |
|
$ |
0.33 |
|
|
Diluted, pro-forma |
|
0.40 |
|
0.13 |
|
||
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.
11. 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 (formerly Paragon, now Optelecom Europe, Limited (OEL)) 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.
10
|
|
|
Quarter ended September 30, 2003 |
|
|||||||
|
|
|
Communication |
|
Electro- |
|
Total |
|
|||
|
Revenues |
|
$ |
4,171,084 |
|
$ |
327,668 |
|
$ |
4,498,752 |
|
|
Depreciation and amortization |
|
88,100 |
|
— |
|
88,100 |
|
|||
|
Income from operations |
|
594,620 |
|
65,264 |
|
659,884 |
|
|||
|
Assets |
|
8,025,680 |
|
330,211 |
|
8,355,891 |
|
|||
|
Capital expenditures |
|
43,047 |
|
— |
|
43,047 |
|
|||
|
|
|
Quarter ended September 30, 2002 |
|
|||||||
|
|
|
Communication |
|
Electro- |
|
Total |
|
|||
|
Revenues |
|
$ |
3,153,552 |
|
$ |
572,730 |
|
$ |
3,726,282 |
|
|
Depreciation and amortization |
|
86,741 |
|
— |
|
86,741 |
|
|||
|
Income from operations |
|
287,039 |
|
246,010 |
|
533,049 |
|
|||
|
Assets |
|
5,977,807 |
|
288,584 |
|
6,266,391 |
|
|||
|
Capital expenditures |
|
723 |
|
— |
|
723 |
|
|||
|
|
|
Nine months ended September 30, 2003 |
|
|||||||
|
|
|
Communication |
|
Electro- |
|
Total |
|
|||
|
Revenues |
|
$ |
10,673,909 |
|
$ |
1,489,522 |
|
$ |
12,163,431 |
|
|
Depreciation and amortization |
|
239,323 |
|
— |
|
239,323 |
|
|||
|
Income from operations |
|
1,021,580 |
|
558,100 |
|
1,579,680 |
|
|||
|
Assets |
|
8,025,680 |
|
330,211 |
|
8,355,891 |
|
|||
|
Capital expenditures |
|
827,603 |
|
— |
|
827,603 |
|
|||
|
|
|
Nine months ended September 30, 2002 |
|
|||||||
|
|
|
Communication |
|
Electro- |
|
Total |
|
|||
|
Revenues |
|
$ |
9,235,167 |
|
$ |
1,125,163 |
|
$ |
10,360,330 |
|
|
Depreciation and amortization |
|
288,125 |
|
— |
|
288,125 |
|
|||
|
Income from operations |
|
664,186 |
|
352,312 |
|
1,016,498 |
|
|||
|
Assets |
|
5,977,807 |
|
288,584 |
|
6,266,391 |
|
|||
|
Capital expenditures |
|
76,389 |
|
— |
|
76,389 |
|
|||
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.
12. New Accounting Pronouncements
In November 2002, the FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (FIN 45). FIN 45 establishes accounting and disclosure requirements for a company’s obligations under certain guarantees that it has issued, including product warranty guarantees. A guarantor is required to recognize a liability for the obligation it has undertaken in issuing a guarantee, including the ongoing obligation to stand ready to perform over the term of the guarantee in the event that the specified triggering events or conditions occur. The objective of the initial measurement of that liability is the fair value of the guarantee at its inception. The initial recognition and measurement provisions of this Interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. FIN 45 also requires expanded disclosure of information related to product warranty amounts recorded in the financial statements. The disclosure provisions are effective for interim and annual periods ending after December 15, 2002. The Company’s adoption of this pronouncement has not had a material affect on the company’s consolidated financial position, results of operations or cash flows.
In January 2003, the FASB issued Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities,” which clarifies the application of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” relating to consolidation of certain entities. FIN 46 will require identification of our participation in variable interest
11
entities (“VIEs”), which are defined as entities with a level of invested equity that is not sufficient to fund future activities to permit them to operate on a stand-alone basis, or whose equity holders lack certain characteristics of a controlling financial interest. For entities identified as VIEs, FIN 46 sets forth a model to evaluate potential consolidation based on an assessment of which party to the VIEs, if any, bears a majority of the exposure to its expected losses, or stands to gain from a majority of its expected returns. FIN 46 also sets forth certain disclosure requirements regarding interests in VIEs that are deemed significant, even if consolidation is not required. As we do not maintain any VIEs, the adoption of FIN 46, effective July 1, 2003 for entities acquired before February 1, 2003, will not have a material impact on our consolidated financial position, results of operations or cash flows.
12
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 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 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 SEPTEMBER 30, 2003 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2002
Consolidated revenues for the three months ended September 30, 2003 were $4,498,752 compared to $3,726,282 for the same period of 2002, representing an increase of $772,470 or 21% when compared to the prior year.
Revenues for the Communication Products Division for the third quarter of 2003 were $4,171,084 as compared to $3,153,552 for the same period in 2002. This increase of $1,017,532 or 32% is attributable to a combination of new customers in the security market
13
segment as well as projects from numerous existing customers in both the security and ITS markets. The growth is being fueled by new customer identification resulting from the expansion of trade show attendance over the past two years.
The Electro-Optics Division reported revenues of $327,668 for the third quarter of 2003 as compared to $572,729 for the same period in 2002. This 43% decrease of $245,061 is primarily attributable to above average revenue in the prior year period, including initial revenues under a technology transfer program.
Consolidated gross profit was $2,506,698, or 56% for the three months ended September 30, 2003 as compared to $2,168,593, or 58% for the third quarter of 2002. The Communication Products Division’s gross profit was $2,393,972 for the third quarter of 2003 compared to $1,802,598 in the third quarter of 2002. The increase of $365,995 or 20% was due to higher sales, the shift from analog to digital products, cost reductions and selective price increases. The gross profit of the Electro-Optic Division decreased from $365,995 in the third quarter of 2002 to $112,726 in the third quarter of 2003 primarily as a result of the higher than average revenues realized in 2002 relating to the technology transfer program.
Engineering costs for the third quarter of 2003 were $386,847 compared to $308,660 in the same period in 2002. The increase of $78,187 or 25% is due to higher engineering personnel and laboratory expenses.
Selling and marketing costs were $706,108 for the third quarter of 2003 compared to $493,185 for the same period in 2002. This increase of $212,923 or 43% was primarily a result of higher expenditures for sales commissions, advertising and sales literature.
General and administrative costs were $753,859 for the third quarter of 2003 compared to $833,699 for the same period in 2002. This decrease of $79,840 or 10% is primarily attributable to decreases in consulting fees in the third quarter of 2003 as compared to the prior year.
OTHER INCOME (EXPENSE)
Other income (expense) consisted of net interest expense of $3,480 for the quarter ended September 30, 2003. Other income (expense) for prior year quarter consisted of net interest expense of $17,887. The reduction of interest expense from the prior year to the current year is due to the payoff of the Company’s bank line of credit in the first quarter of 2003.
NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2002
Consolidated revenues for the nine months ended September 30, 2003 were $12,163,431 compared to $10,360,330 for the same period of 2002, representing an increase of $1,803,101 or 17% when compared to the prior year.
Revenues for the Communication Products Division for the first nine months of 2003 were $10,673,909 as compared to $9,235,166 for the same period in 2002. This increase of $1,438,743 or 16% is attributable to new security, transportation and U.S. Government projects. In addition, the Company’s customer base has increased due to the growth in the number of Optelecom integrators, especially overseas.
14
The Electro-Optics Division reported revenues of $1,489,522 for the first nine months of 2003 as compared to $1,125,164 for the same period in 2002. This 32% increase of $364,358 is primarily attributable to the delivery of product associated with a major contract that occurred during the first quarter of 2003 and a significant increase in coil winding revenues.
Consolidated gross profit was $6,962,706, or 57% for the nine months ended September 30, 2003 as compared to $5,775,148, or 56% for the nine months ended September 30, 2002. The Communication Products Division’s gross profit was $6,137,494 for the nine months ended September 30, 2003 compared to $5,200,528 for the first nine months of 2002. The increase of $936,966 or 18% was due to higher sales, the shift from analog to digital products, cost reductions and selective price increases. The gross profit of the Electro-Optic Division increased from $574,620 for the first nine months of 2002 to $825,212 for the nine months ended September 30, 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 nine months ended September 30, 2003 were $1,013,818 compared to $834,288 for the same period in 2002. The increase of $179,530 or 22% is due to higher expenditures for engineering personnel and laboratory costs.
Selling and marketing costs were $1,880,493 for the nine months ended September 30, 2003 compared to $1,668,184 for the same period in 2002. This 13% increase of $212,309 was primarily a result of slightly higher sales commissions in 2003 offset by lower demo equipment expenditures in 2003.
General and administrative costs were $2,488,714 for the nine months ended September 30, 2003 compared to $2,256,178 for the same period in 2002. This increase of $232,536 or 10% is primarily attributable to increases in employee costs and facility expenses related to the relocation of the U.S. operations.
OTHER INCOME (EXPENSE)
Other income (expense) consisted of net interest expense of $9,890 for the nine months ended September 30, 2003. Other income (expense) for prior year consisted of net interest expense of $72,203. The reduction of interest expense from the prior year to the current year is due to the payoff of the Company’s bank line of credit in the first quarter of 2003.
Stockholders’ equity increased from $3,667,833 at December 31, 2002 to $5,851,377 at September 30, 2003. The increase is primarily attributable to net earnings of $1,504,085 as well as an increase in common stock and paid-in-capital due to the exercise of stock options and warrants, and the 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 3.03 at September 30, 2003 compared to 1.98 at December 31, 2002. This increase is primarily attributed to the increase in cash balances and decreases in the Company’s borrowings under the bank line of credit.
Accounts receivable, net decreased from $3,164,721 at December 31, 2002 to $2,726,905 at September 30, 2003 due to lower sales in the third quarter of 2003 as compared to the fourth quarter of 2002. Inventories increased
15
from $2,453,201 at December 31, 2002 to $3,164,721 as of September 30, 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 $2,346,564 at September 30, 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 $75,399 and commissions payable were reduced by $203,662 from December 31, 2002 to September 30, 2003.
Cash provided by operating activities was $1,683,344 during the first nine months of 2003 compared to $1,262,455 in the same period of 2002. After adjusting for non-cash items such as depreciation and amortization to reconcile the net income to net cash used by operating activities, the net cash provided was $1,799,361 for the first nine months of 2003 as compared to $1,269,307 in the first nine months of 2002. Working capital used in operating activities was $118,018 for the nine months ended September 30, 2003. The working capital used was due primarily to a decrease of $409,817 in accounts receivable which was offset by an increase in inventory of $559,555 and a decrease in accounts payable of $75,399.
Cash used in investing activities during the nine months ended September 30, 2003 was $827,603 compared to $70,549 in 2002. The Company increased its level of capital asset acquisitions during the first nine months of 2003 to improve its manufacturing capabilities through manufacturing equipment and facility expansion.
Cash provided by financing activities during the first nine months of 2003 was $259,874 compared to cash used in financing activities of $1,023,927 in 2002. The Company’s net bank line-of-credit payable was reduced by $576,079 as compared to a net decrease of $546,145 in the same period of 2002. The Company incurred $180,000 of note indebtedness as a result of its capital acquisitions during the first quarter of 2003. During 2002 the Company paid down its notes payable by $487,647. Proceeds from the issuance of stock and the exercise of stock options and warrants increased from $53,259 for the first nine months of 2002 to $679,459 in 2003.
Optelecom has the ability, provided there are sufficient accounts receivable and inventory, to borrow up to $3.5 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 nine-month period ended September 30, 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 company’s cash balances. 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 September 30, 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
16
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, 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.
17
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.
ITEM 2 - CHANGES IN SECURITIES
None.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5 - OTHER INFORMATION
None
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
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.
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
OPTELECOM, INC. |
|
|
|
|
|
|
|
|
|
|
|
|
Date: |
November 10, 2003 |
/s/ Edmund Ludwig |
|
|
|
|
Edmund Ludwig, |
|
|
|
|
Director, President and Chief Executive Officer |
|
|
|
|
|
|
|
|
|
|
|
|
Date: |
November 10, 2003 |
/s/ James Armstrong |
|
|
|
|
James Armstrong, |
|
|
|
|
Director, Chief Financial Officer |
|
19