Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
x
QUARTERLY REPORT PURSUANT
TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period Ended June 30, 2010
OR
o
TRANSITION REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 0-8828
OPTELECOM-NKF, 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)
Registrants
telephone number, including area code:
(301) 444-2200.
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
o
Indicate by check mark
whether the registrant has submitted electronically and posted on its corporate
Web site, if any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files). Yes
o
No
o
Indicate by check mark
whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See definitions of large
accelerated filer, accelerated filer, and smaller reporting company in
Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated filer
o
|
|
Accelerated
filer
o
|
|
|
|
Non-accelerated
filer
o
|
|
Smaller
reporting company
x
|
(Do
not check if a smaller reporting company)
|
|
|
Indicate by check mark
whether registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes
o
No
x
At August 2, 2010
the registrant had outstanding 3,702,409 shares of Common Stock, $0.03 Par
Value.
Table of Contents
PART I FINANCIAL INFORMATION
Item 1.
Financial Statements.
OPTELECOM-NKF, INC.
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2010 AND
DECEMBER 31, 2009
(June 30, 2010
Unaudited)
(Dollars in Thousands,
Except Share and Per Share Amounts)
|
|
June 30,
|
|
December 31,
|
|
|
|
2010
|
|
2009
|
|
|
|
(unaudited)
|
|
|
|
ASSETS
|
|
|
|
|
|
CURRENT ASSETS
|
|
|
|
|
|
Cash & cash equivalents
|
|
$
|
1,794
|
|
$
|
2,344
|
|
Restricted cash
|
|
255
|
|
1,900
|
|
Accounts receivable, net of
allowance for doubtful accounts of $506 and $386
|
|
6,834
|
|
8,209
|
|
Inventories, net
|
|
4,281
|
|
4,343
|
|
Deferred tax assets
|
|
123
|
|
240
|
|
Prepaid expenses and other current
assets
|
|
785
|
|
893
|
|
Total current assets
|
|
14,072
|
|
17,929
|
|
Property & equipment,
less accumulated depreciation of $5,223 and $5,681
|
|
1,040
|
|
1,593
|
|
Intangible assets, net of
accumulated amortization of $3,368 and $3,609
|
|
5,335
|
|
6,609
|
|
Goodwill
|
|
12,647
|
|
14,848
|
|
Other assets
|
|
187
|
|
209
|
|
TOTAL ASSETS
|
|
33,281
|
|
41,188
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY
|
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
Current portion of notes and
interest payable
|
|
11,057
|
|
1,907
|
|
Accounts payable
|
|
2,290
|
|
2,012
|
|
Accrued payroll
|
|
1,228
|
|
1,280
|
|
Accrued warranty reserve
|
|
383
|
|
422
|
|
Other current liabilities
|
|
2,029
|
|
1,233
|
|
Total current liabilities
|
|
16,987
|
|
6,854
|
|
Long term notes and interest
payable
|
|
|
|
12,818
|
|
Deferred tax liabilities
|
|
674
|
|
1,513
|
|
Other liabilities
|
|
170
|
|
188
|
|
Total liabilities
|
|
17,831
|
|
21,373
|
|
STOCKHOLDERS
EQUITY
|
|
|
|
|
|
Common stock, $.03 par
value-shares authorized, 15,000,000; issued and outstanding, 3,697,432 and
3,653,644 shares as of June 30, 2010, and December 31, 2009,
respectively
|
|
111
|
|
110
|
|
Additional paid-in capital
|
|
17,282
|
|
17,036
|
|
Accumulated other comprehensive
income
|
|
503
|
|
2,769
|
|
Treasury stock, 162,672 shares at
cost
|
|
(1,265
|
)
|
(1,265
|
)
|
(Accumulated deficit) retained
earnings
|
|
(1,181
|
)
|
1,165
|
|
Total
stockholders equity
|
|
15,450
|
|
19,815
|
|
TOTAL LIABILITIES
AND STOCKHOLDERS EQUITY
|
|
$
|
33,281
|
|
$
|
41,188
|
|
See
notes to unaudited consolidated financial statements
3
Table of
Contents
OPTELECOM-NKF, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE (LOSS)
INCOME
FOR THE THREE MONTHS ENDED
JUNE 30,
(Unaudited)
(Dollars in Thousands,
Except Share and Per Share Amounts)
|
|
2010
|
|
2009
|
|
Revenue
|
|
$
|
7,703
|
|
$
|
10,010
|
|
Cost of goods sold
|
|
3,984
|
|
3,962
|
|
Gross profit
|
|
3,719
|
|
6,048
|
|
Operating expenses:
|
|
|
|
|
|
Sales and marketing
|
|
2,745
|
|
2,877
|
|
Engineering
|
|
1,170
|
|
1,089
|
|
General and administrative
|
|
1,377
|
|
1,660
|
|
Amortization of intangibles
|
|
154
|
|
164
|
|
Gain on sale of Electro Optics
|
|
(1,150
|
)
|
|
|
Total operating expenses
|
|
4,296
|
|
5,790
|
|
Net (loss) income from operations
|
|
(577
|
)
|
258
|
|
Other expense, net
|
|
316
|
|
142
|
|
Net (loss) income before income
taxes
|
|
(893
|
)
|
116
|
|
(Benefit) provision for income
taxes
|
|
(195
|
)
|
243
|
|
Net loss
|
|
$
|
(698
|
)
|
$
|
(127
|
)
|
Basic loss per share
|
|
$
|
(0.19
|
)
|
$
|
(0.03
|
)
|
Diluted loss per share
|
|
$
|
(0.19
|
)
|
$
|
(0.03
|
)
|
Weighted average common shares
outstanding -basic
|
|
3,685,144
|
|
3,645,037
|
|
Weighted average common shares
outstanding -diluted
|
|
3,685,144
|
|
3,645,037
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(698
|
)
|
$
|
(127
|
)
|
Foreign currency translation
|
|
(1,313
|
)
|
1,008
|
|
Comprehensive (loss) income
|
|
$
|
(2,011
|
)
|
$
|
881
|
|
See
notes to unaudited consolidated financial statements.
4
Table of
Contents
OPTELECOM-NKF, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
FOR THE SIX MONTHS ENDED
JUNE 30,
(Unaudited)
(Dollars in Thousands,
Except Share and Per Share Amounts)
|
|
2010
|
|
2009
|
|
Revenue
|
|
$
|
14,856
|
|
$
|
18,596
|
|
Cost of goods sold
|
|
7,203
|
|
7,832
|
|
Gross profit
|
|
7,653
|
|
10,764
|
|
Operating expenses:
|
|
|
|
|
|
Sales and marketing
|
|
5,618
|
|
5,492
|
|
Engineering
|
|
2,255
|
|
2,437
|
|
General and administrative
|
|
2,836
|
|
3,204
|
|
Amortization of intangibles
|
|
321
|
|
322
|
|
Gain on sale of Electro Optics
|
|
(1,150
|
)
|
|
|
Total operating expenses
|
|
9,880
|
|
11,455
|
|
Loss from operations
|
|
(2,227
|
)
|
(691
|
)
|
Other expense, net
|
|
619
|
|
433
|
|
Loss before income taxes
|
|
(2,846
|
)
|
(1,124
|
)
|
Benefit for income taxes
|
|
(500
|
)
|
(232
|
)
|
Net loss
|
|
$
|
(2,346
|
)
|
$
|
(892
|
)
|
Basic loss per share
|
|
$
|
(0.64
|
)
|
$
|
(0.24
|
)
|
Diluted loss per share
|
|
$
|
(0.64
|
)
|
$
|
(0.24
|
)
|
Weighted average common shares
outstanding -basic
|
|
3,680,067
|
|
3,643,333
|
|
Weighted average common shares
outstanding -diluted
|
|
3,680,067
|
|
3,643,333
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(2,346
|
)
|
$
|
(892
|
)
|
Foreign currency translation
|
|
(2,266
|
)
|
(48
|
)
|
Comprehensive loss
|
|
$
|
(4,612
|
)
|
$
|
(940
|
)
|
See
notes to unaudited consolidated financial statements.
5
Table
of Contents
OPTELECOM-NKF, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED
JUNE 30,
(Unaudited)
(Dollars in Thousands)
|
|
2010
|
|
2009
|
|
Cash flows from operating
activities:
|
|
|
|
|
|
Net loss
|
|
$
|
(2,346
|
)
|
$
|
(892
|
)
|
Adjustments to reconcile net loss
to net cash used in operating activities:
|
|
|
|
|
|
Depreciation and amortization
|
|
673
|
|
764
|
|
Impairment of fixed assets
|
|
124
|
|
|
|
Accounts receivable provision
|
|
174
|
|
152
|
|
Change in allowance for inventory
obsolescence
|
|
167
|
|
131
|
|
Stock based compensation
|
|
240
|
|
409
|
|
Deferred tax provision
|
|
(533
|
)
|
(291
|
)
|
Other
|
|
(19
|
)
|
(10
|
)
|
Change in assets and liabilities:
|
|
|
|
|
|
Accounts receivable
|
|
173
|
|
655
|
|
Inventories
|
|
(419
|
)
|
187
|
|
Prepaid expenses and other current
assets
|
|
47
|
|
265
|
|
Accounts payable and other accrued
expenses
|
|
442
|
|
(1,161
|
)
|
Taxes payable
|
|
|
|
(928
|
)
|
Other liabilities
|
|
915
|
|
(936
|
)
|
Interest payable
|
|
148
|
|
94
|
|
Net cash used in operating
activities
|
|
(214
|
)
|
(1,561
|
)
|
Cash flows from investing
activities:
|
|
|
|
|
|
Capital expenditures
|
|
(24
|
)
|
(408
|
)
|
Net cash used in investing
activities
|
|
(24
|
)
|
(408
|
)
|
Cash flows from financing
activities:
|
|
|
|
|
|
Payments on notes payable
|
|
(1,624
|
)
|
(751
|
)
|
Net Decrease in Restricted Cash
|
|
1,645
|
|
|
|
Proceeds from issuance of stock
under equity plans
|
|
6
|
|
5
|
|
Net cash used in financing
activities
|
|
27
|
|
(746
|
)
|
Effect of exchange rates on cash
and cash equivalents
|
|
(339
|
)
|
(83
|
)
|
Net decrease in cash and cash
equivalents
|
|
(550
|
)
|
(2,798
|
)
|
Cash and cash equivalents
beginning of period
|
|
2,344
|
|
5,671
|
|
Cash and cash equivalents end of
period
|
|
$
|
1,794
|
|
$
|
2,873
|
|
|
|
|
|
|
|
Supplemental disclosures of cash
flow information:
|
|
|
|
|
|
Cash paid during the period for
interest
|
|
$
|
504
|
|
$
|
249
|
|
Cash paid during the period for
income taxes
|
|
$
|
87
|
|
$
|
1,127
|
|
See
notes to unaudited consolidated financial statements.
6
Table of Contents
OPTELECOM-NKF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 BASIS OF PRESENTATION
The accompanying unaudited consolidated financial
statements, including the accounts of Optelecom-NKF, Inc. and its wholly
owned subsidiaries (collectively referred to as we, us, our, the Company,
or the Registrant), have been prepared in accordance with accounting
principles generally accepted in the United States of America (U.S. GAAP) for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in financial
statements prepared in accordance with U.S. GAAP have been condensed or omitted
pursuant to those rules. The Company believes that the disclosures made are
adequate to make the information presented not misleading.
The preparation of the financial statements
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingencies at the
date of the financial statements as well as the reported amounts of revenue and
expenses during the reporting period. Estimates have been prepared on the basis
of the most current and best available information. Actual results could differ
materially from those estimates.
In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Certain prior amounts have been reclassified
to conform to the current period presentation. The results for the interim
periods presented are not necessarily indicative of the results to be expected
for future quarters or the fiscal year as a whole. It is suggested that these
unaudited financial statements be read in conjunction with the financial
statements and the footnotes included in the Companys latest annual report to
the Securities and Exchange Commission on Form 10-K for the year ended
December 31, 2009.
We have evaluated material events and transactions
that occurred after the balance sheet date and concluded no subsequent events
have occurred that require adjustment to or disclosure in this Form 10-Q.
NOTE 2 COMPREHENSIVE (LOSS) INCOME
Comprehensive (loss) income on our Consolidated
Statements of Operations is comprised of net (loss) income from operations and
other comprehensive (loss) income. Other comprehensive loss (income)
refers to revenue, expenses, gains and losses that under U.S. GAAP are included
as a component of stockholders equity within the consolidated balance sheets,
rather than on the statement of operations. Other comprehensive (loss)
income for the Company primarily reflects fluctuations of foreign currency
translation of the assets and liabilities of our non-U.S. operations.
NOTE 3 INVENTORIES
Production materials are valued at the lower of
cost or market applied on an actual cost first in-first out (FIFO) basis.
Work-in-process and finished goods inventory includes direct labor, materials
and overhead and are valued at the lower of cost or market, cost being
determined using actual costs on a specific identification basis. The
Company writes down its inventory for estimated obsolescence or unmarketable
inventory based upon assumptions about future demand and market conditions as
well as historical inventory turnover. If actual market conditions are
less favorable than those projected by management, additional inventory
write-downs may be required.
Inventories consist of the following (in
thousands):
|
|
June 30,
|
|
December 31,
|
|
|
|
2010
|
|
2009
|
|
Production materials
|
|
$
|
2,801
|
|
$
|
2,948
|
|
Work in process
|
|
876
|
|
236
|
|
Finished goods
|
|
1,627
|
|
2,101
|
|
Allowance for excess and obsolete
inventory
|
|
(1,023
|
)
|
(942
|
)
|
Total inventories, net
|
|
$
|
4,281
|
|
$
|
4,343
|
|
NOTE 4 WARRANTY RESERVE
In the ordinary course of business, the Company
warrants its products against defect in design, materials, and workmanship over
various time periods. Warranty reserve and allowance for product returns
is established based upon managements best estimates of amounts
7
Table of Contents
necessary to settle future and existing claims on
products sold as of the balance sheet date. Management determines the
liability based on known product failures, historical experience, and other
currently available evidence. Management evaluates the warranty reserve on at
least a quarterly basis.
The following table presents changes in the Companys
warranty liability, which is included in accrued expenses on the balance sheets
(in thousands):
|
|
For the six months
ended
|
|
|
|
June 30,
2010
|
|
June 30,
2009
|
|
Balance, beginning of period
|
|
$
|
422
|
|
$
|
410
|
|
Expense accrued
|
|
19
|
|
86
|
|
Warranty cost incurred
|
|
(58
|
)
|
(78
|
)
|
Balance, end of period
|
|
$
|
383
|
|
$
|
418
|
|
NOTE 5 GOODWILL AND OTHER INTANGIBLE ASSETS
As of the dates indicated, goodwill and other
intangible assets are comprised of the following (in thousands):
|
|
June 30,
|
|
December 31,
|
|
|
|
2010
|
|
2009
|
|
Description
|
|
Purchase
value
|
|
Accumulated
Amortization
|
|
Net value
|
|
Purchase
value
|
|
Accumulated
Amortization
|
|
Net value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
12,647
|
|
|
|
$
|
12,647
|
|
$
|
14,848
|
|
|
|
$
|
14,848
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible
indefinite life:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tradenames
|
|
1,953
|
|
|
|
1,953
|
|
2,293
|
|
|
|
2,293
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible
amortizable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer Relationships
|
|
6,470
|
|
3,088
|
|
3,382
|
|
7,596
|
|
3,280
|
|
4,316
|
|
Non-Compete Agreement
|
|
280
|
|
280
|
|
|
|
328
|
|
328
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Intangibles
|
|
$
|
21,350
|
|
$
|
3,368
|
|
$
|
17,982
|
|
$
|
25,065
|
|
$
|
3,608
|
|
$
|
21,457
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate amortization expense of intangible
assets was $154 thousand and $164 thousand for the three months ended June 30,
2010 and 2009, respectively. The aggregate amortization expense of
intangible assets was $321 thousand and $322 thousand for the six months ended June 30,
2010 and 2009, respectively. Changes in the purchase value of goodwill
and intangible assets from the date of acquisition to June 30, 2010 are a
result of foreign currency exchange fluctuations. Intangibles which are subject
to amortization are amortized on a straight-line basis over their expected lives
of three to eleven years. Estimated annual amortization expense for intangible
assets over the next five years is as follows (in thousands):
Year ended
December 31,
|
|
2011
|
|
$
|
588
|
|
2012
|
|
588
|
|
2013
|
|
588
|
|
2014
|
|
588
|
|
2015
|
|
588
|
|
|
|
|
|
|
8
Table of
Contents
NOTE 6 NOTES PAYABLE AND LINE OF CREDIT
Notes payable and bank line of credit consist of
the following (in thousands):
|
|
June 30,
|
|
December 31,
|
|
|
|
2010
|
|
2009
|
|
Senior term loan with a bank
|
|
$
|
|
|
$
|
1,907
|
|
Subordinated note due
March 2011 (1)
|
|
11,057
|
|
12,818
|
|
|
|
$
|
11,057
|
|
$
|
14,725
|
|
Less: Current portion
|
|
(11,057
|
)
|
(1,907
|
)
|
Long term notes and interest
payable
|
|
$
|
|
|
$
|
12,818
|
|
|
|
|
|
|
|
Line of Credit Outstanding
|
|
$
|
|
|
$
|
|
|
(1) Includes deferred interest payable on the
subordinated note on December 31, 2009.
On March 5, 2010, the Company entered into an
amended and restated subordinated promissory note (the Note) with Draka Holding
N.V. (Draka). Draka agreed to extend the term of the Note to March 8, 2011
at an annual interest rate of 10%. The principal amount under the Note at June 30,
2010 is 9.0 million ($11.1 million U.S. Dollars). In consideration of Drakas
agreement to extend the term of the Note, the Company agreed to make quarterly
interest payments starting in June 2010. Additionally, the Company agreed
that if it has consolidated cash on hand in excess of $2.5 million at the end
of any calendar quarter, it will pay this excess cash to Draka as a prepayment
on the Note.
The Companys obligations under the Note are
secured by the assets of the Company and a pledge of 65% of the shares of
Optelecom-NKF Holding B.V., the Companys Dutch holding company. The Company is
permitted under the Note to obtain up to a $1.0 million revolving line of
credit that will be senior in priority to the Note. Immediately prior to
the amendment and restatement of the Note, the Company paid-off its senior term
loan and line of credit facilities with Manufacturers and Traders Trust
Company.
The Note is denominated in Euros and the U.S.
Dollar amount of the liability increases or decreases due to the impact of
foreign currency exchange rate changes. Any payment made when due in
March 2011 will result in a cash payment at the prevailing exchange rate
on that date. The impact from the change in foreign currency exchange rates on
the Note is included in the other expense, net on our consolidated statements
of operations as the Note is not in the individual entitys functional
currency. As of June 30, 2010 the Note is classified as a current
liability because it is due within one year.
On April 6, 2010, the Company and Presidential
Financial Corporation entered a Loan and Security Agreement where Presidential
agreed to provide the Company with a revolving line of credit of $750 thousand.
Available funding under this line of credit is based on eligible accounts
receivable of the U.S. legal entity. The Loan Agreement is for a term of one
year and the obligations are secured by substantially all of the assets of the
U.S. legal entity. The Company pays a monthly service charge of 0.65% based on
the average daily loan balance outstanding and an annual facility fee equal to
$7,500. The interest rate is calculated on the outstanding balance of the line
based on the Wall Street Journal Prime Rate plus 0.45% (a total of 3.70% at June 30,
2010).
The revolving line of credit provides for certain
affirmative covenants including the right of the lender to inspect collateral,
review or audit the Companys books and records, and for the Company to provide
certain audited or unaudited financial information, pay all taxes prior to the
date on which such taxes become delinquent, comply in all material respects
with all applicable laws, carry property, liability and other insurance,
and promptly notify the lender of all relevant disputes or claims. The line of
credit also provides for a financial covenant requiring the U.S. legal entity
to maintain a minimum tangible net worth including its investment in
subsidiaries of $6.0 million. The line of credit provides for certain negative
covenants including that the Company will not merge or consolidate, acquire any
assets except in the ordinary course of business, sell or transfer any
collateral except in the ordinary course of its business, incur any debt
outside the ordinary course of business, guarantee or otherwise become liable
with respect to the obligations of another entity, pay any principal or
interest on any indebtedness or enter into any transaction with an affiliate
other than on arms-length terms, compromise or settle any account for less than
the full amount, grant any extension of time for payment of any account, and
release any account from payment other than in the ordinary course of business.
The Company believes it is in compliance with all covenants at June 30,
2010.
In June 2008, through a legal restructuring, the
Company transferred our Dutch operating subsidiary from the U.S. parent company
to a European holding company. Consideration for the transfer included an
intercompany note to the U.S. parent from the European holding company. The
intercompany note is in U.S. Dollars and had a balance of $7.9 million on June 30,
2010. The impact from the fluctuations in foreign currency exchange on the
intercompany note payable is included in other expense, net on our consolidated
statements of operations.
9
Table of Contents
The Company maintained a cash collateral balance of
$255 thousand at June 30, 2010 for a letter of credit with its bank.
The letter of credit is related to the lease of the Companys U.S. headquarters
and is recorded as restricted cash on our Consolidated Balance Sheet.
The Company needs to secure additional financing to
meet its debt obligations and is working to secure financing. However, the
current economic environment is marked by limited availability of credit in the
business sector and we may be required to pursue refinancing of the debt on
less than favorable terms. Further, uncertainty about our current operating
performance and global economic conditions impact our ability to secure
financing. If demand for our products continues to decline, it will adversely
impact our financial results and negatively impact our ability to secure
additional financing. There can be no assurance that additional financing will
be available in a timely manner or on acceptable terms.
NOTE 7 EARNINGS PER SHARE
Basic earnings per share is computed using the
weighted average number of common shares outstanding. Diluted earnings per
share is computed using the weighted average number of shares outstanding plus
the impact of dilutive potential common shares using the treasury stock method.
There were 26,329 potentially dilutive shares excluded for the second quarter
of 2010 and 26,053 potentially dilutive shares excluded for the second quarter
of 2009 as their impact would be anti-dilutive. The earnings per share for
the three months ended June 30, 2010 was $(0.19) compared to $(0.03) per
share at June 30, 2009. There were 30,978 potentially dilutive shares
excluded for the six months ended June 30, 2010 and 28,179 potentially
dilutive shares excluded for the six months ended June 30, 2009 as their
impact would be anti-dilutive. The earnings per share for the six months ended June 30,
2010 was $(0.64) compared to $(0.24) per share at June 30, 2009.
NOTE 8 SHARE BASED COMPENSATION
Share-based compensation expense recognized for the
six months ended June 30, 2010 and 2009 was $240 thousand and $409
thousand. As of June 30, 2010, total unamortized compensation
expense related to non-vested share-based compensation was $144 thousand and is
expected to be recognized over an average weighted period of 1.1
years. Compensation expense is recorded in the consolidated statements of
operations and the Company did not recognize any income tax benefits from
stock-based payment plans for the six months ended June 30, 2010 and 2009.
Stock Option Plans
The 2008 Stock Incentive Plan replaced the 2002
Stock Option Plan and provides for awards to employees. The 2008 Plan provides
for the grant of shares of common stock to participants, including the grant of
stock options, restricted stock and restricted stock units. The exercise price
of each option is the ending quoted fair market value of the stock at the
grant date. Options are generally exercisable two years from the grant date.
Options issued under the 2008 Plan expire 10 years from the date of grant and,
in most cases, upon termination of employment. During the quarter ended June 30,
2010, the Company granted 25,200 options to purchase stock. At June 30,
2010, there were 541,456 thousand shares available for grant. At June 30,
2010, there were an aggregate of 317,737 options outstanding with 273,913 of
these shares exercisable.
The 2001 Nonqualified Director Stock Option Plan
provides for up to 178,000 shares available for grant. Shares under this
plan are granted to non-employee directors at fair market value on the date of
grant and are non-transferable for a period of two years after the grant date.
There were 76,298 awards available for future grant at June 30, 2010.
NOTE 9 INCOME TAXES
The Company has estimated its annual effective tax
rate for the year and applied that rate to its income before income taxes in
determining its provision for income taxes for the periods ended June 30,
2010. The Company also records discrete items in each respective period as
appropriate. In determining the Companys
provision for income taxes, net deferred tax assets, liabilities, valuation
allowances, and uncertain tax positions, management is required to make
judgments and estimates related to projections of domestic and foreign
profitability, the timing and extent of the utilization of loss carryforwards,
applicable tax rates, transfer pricing methods, expected tax authority
positions on audit, and prudent and feasible tax planning strategies. Judgments and estimates related to the
Companys projections and assumptions are inherently uncertain and therefore,
actual results could differ materially from projections.
In the second quarter of 2010 we continued to
provide a full valuation allowance against net U.S. deferred tax assets and
therefore, we did not record income tax benefits against U.S. operating losses
in the second quarter of 2010. These
deferred tax assets are still available for tax purposes to offset potential
U.S. tax expense in the future with certain limitations. As of June 30,
2010, and December 31, 2009, the Company had a valuation allowance of $3.8
million and $3.5 million, respectively, related to its U.S. net deferred tax
assets, which consisted of research and development tax credits, foreign tax
credits, net operating losses and other deferred tax assets.
10
Table of
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NOTE 10 FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts approximate fair value of the
Companys cash and short term financial instruments. It is not
practicable to estimate the fair value of the Note, which had a carrying value
of $11.1 million and an interest rate of 10% at June 30, 2010. We are
unable to estimate the fair value of the Note due to lack of available
financing and because the debt is not traded.
NOTE 11 ELECTRO OPTICS SALE
On April 12, 2010, the Company and Nufern, a
wholly owned subsidiary of Rofin-Sinar Technologies, Inc., entered into an
Asset Purchase Agreement where the Company sold to Nufern the assets of its
Electro Optics coil manufacturing operations. The purchase price for the sale
of the Electro Optics assets was $1.4 million. Nufern paid the Company $1.15
million in cash at closing and deposited the remaining $250 thousand in escrow.
One-half of the escrow amount will be released to the Company on or before the
one-year anniversary of the closing and the remainder of the escrow will be
released to the Company on or before the second anniversary of the closing,
both subject to the completion of a technology transfer as set forth in the
Purchase Agreement. The Electro Optic assets include certain technology,
equipment and purchase orders relating to the manufacture of fiber optic
gyroscope coils, primarily for U.S. government defense industry customers. The
impact of the Electro Optics sale is included in the Companys financial
statements in the second quarter of 2010. No gain has been recognized with
respect to the escrow amount. Any gain will be recorded if and when realized.
NOTE 12 LIQUIDITY
In recent periods, our financial performance
includes lower levels of revenue and operating cash flows and increased
operating losses compared to the prior periods. The principal amount due
in March 2011 on our subordinated note is 9.0 million ($11.1 million U.S.
Dollars on June 30, 2010). Prior to the maturity date, management
intends to attempt to repay this debt from the proceeds of new debt and/or
equity financings, seek additional extensions of the maturity date from the
current lender and evaluate other strategic options. However, there can
be no assurance that adequate additional financing will be available to the
Company to repay the subordinated debt or that the current lender will be
willing to provide additional extensions of the maturity date, and therefore
that we will be able to continue as a going concern.
NOTE 13 RESTRUCTURING AND IMPAIRMENT
During the second quarter of 2010, the Company
implemented a restructuring plan in its U.S. operations. The three key
components of the restructuring are the transition of U.S. sales to a sector
alignment focused on three distinct markets; the consolidation of the U.S.
manufacturing operations into a combination of the Companys current
manufacturing facility in the Netherlands plus U.S. contract manufacturing; and
streamlining the Companys corporate headquarters in the U.S.
The
Company will record pre-tax charges of $945 thousand related to these actions
of which $868 thousand is included in the second quarter 2010 with the
remaining $77 thousand expected to be charged in the third quarter 2010. The
restructuring costs charged in the second quarter 2010 include $592 thousand of
severance, $152 thousand of health care benefits, and $124 of fixed asset write-downs,
primarily manufacturing equipment. The severance and benefit charges will be
paid out in the second half of 2010 while the fixed asset write-downs are
non-cash charges. The charges are spread through multiple line items on the
income statement, primarily with the second quarter charges of $307 thousand in
costs of goods sold, $252 thousand in sales and marketing, $109 thousand in
engineering and $76 thousand of general and administrative expense.
Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations.
The following discussion should be read along with
the unaudited condensed consolidated financial statements included in this
Form 10-Q, as well as the Companys 2009 Annual Report on Form 10-K
filed with the Securities and Exchange Commission, including Managements
Discussion and Analysis of Financial Condition and Results of Operations.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED
JUNE 30, 2010 COMPARED TO THE THREE MONTHS ENDED JUNE 30, 2009
Our
international operations include the impact from foreign currency translation
in the quarter. On average, the Dollar was stronger in the second quarter of
2010 compared to 2009. The result of a strengthening U.S. Dollar impacted our
results on a consolidated basis because the Company translates Euro and Pound
Sterling sales and related expenses at proportionally lower U.S. Dollar
equivalents in its financial statements.
REVENUE
Revenue
for the second quarter of 2010 was $7.7 million, a decrease of 23% compared to
the second quarter of 2009. Excluding the impact of foreign currency
exchange rates, revenue decreased approximately 19% in the second quarter of
2010 when compared to 2009. The decline is the result of a general economic
decline, a transition in the market from Fiber Optic based products to
IP/Ethernet products,
11
Table of Contents
with
IP sales slower than expected, and a continuing decline in U.S. sales.
Information regarding the Companys U.S. and international based operations is
included in the following table. For the purposes of this table and the
following discussion, revenue classified as U.S. based includes Canada, Mexico
and South America (in thousands):
|
|
2010
|
|
2009
|
|
|
|
U.S.
|
|
International
|
|
Total
|
|
U.S.
|
|
International
|
|
Total
|
|
Revenue
|
|
$
|
1,749
|
|
$
|
5,954
|
|
$
|
7,703
|
|
$
|
3,102
|
|
$
|
6,908
|
|
$
|
10,010
|
|
Less: Cost of Goods Sold
|
|
1,507
|
|
2,477
|
|
3,984
|
|
1,191
|
|
2,771
|
|
3,962
|
|
Gross Profit
|
|
$
|
242
|
|
$
|
3,477
|
|
$
|
3,719
|
|
$
|
1,911
|
|
$
|
4,137
|
|
$
|
6,048
|
|
Less: Operating Expenses
|
|
1,220
|
|
3,076
|
|
4,296
|
|
2,344
|
|
3,446
|
|
5,790
|
|
(Loss) income from Operations
|
|
$
|
(978
|
)
|
$
|
401
|
|
$
|
(577
|
)
|
$
|
(433
|
)
|
$
|
691
|
|
$
|
258
|
|
Our
U.S. based sales declined $1.4 million or 44% in the second quarter of 2010.
The decline is primarily from a reduction of $1.1 million in U.S. fiber optic
based product sales with no meaningful increase in IP revenue. The U.S.
business had a loss from operations of $1.0 million in the second quarter of
2010 compared to a loss of $433 thousand in the second quarter of 2009. The
increase in the U.S. loss is from the decline in revenue combined with a
reduction in the gross profit margin from 62% to 14%. The U.S. gross profit
margin declined in the current quarter due to excess capacity in the U.S.
manufacturing facility, inventory obsolescence write-downs totaling $139
thousand and severance and other restructuring charges of $307 thousand.
Revenue
in our international operations decreased by 14% during the second quarter 2010
compared to 2009. Our international operations represented 77% of the Companys
total revenue in the current period. International revenue includes the
negative impact from foreign currency exchange rates of approximately $519 thousand
in the second quarter of 2010 as the Euro weakened against the U.S. Dollar. The
decline in revenue is primarily from a reduction of $1.1 million in
international fiber optic based product sales and a slight increase in IP
revenue. As a result of the reduction in revenue combined with reduced
operating expenses our international based operations recorded a modest
decrease in Income from Operations in the second quarter of 2010.
Information
regarding the Companys revenue by product category is included in the
following table (in thousands):
|
|
Three Months
Ending
|
|
Three Months
Ending
|
|
|
|
June 30,
2010
|
|
June 30,
2009
|
|
Fiber Optic
|
|
$
|
4,037
|
|
$
|
6,246
|
|
IP Video
|
|
3,606
|
|
3,522
|
|
Electro Optics
|
|
60
|
|
242
|
|
Total Revenue
|
|
$
|
7,703
|
|
$
|
10,010
|
|
In
the second quarter of 2010, sales of fiber optic products were down 35% to $4.0
million while IP video revenue increased 2% to $3.6 million. The Company
planned for a market shift toward IP video products and invested in the
development of new products in prior periods. However, the decline in fiber
optic sales during the period was significantly more than the increase in IP
video revenue leading to a decline in total revenue. While our sales teams
internationally have made progress in marketing and selling our IP solutions
for the critical infrastructure, transportation and government market segments,
our history as a fiber-based product supplier in the U.S. continues to
demonstrate a slower than anticipated transition to IP video solutions in the
Americas. A contributing factor has been a historically geographical-oriented
sales approach in the U.S., which inhibited the ability of our sales teams to
properly focus on the unique needs of customers within individual market
sectors. The Company continues to focus its product development efforts toward
IP products in 2010 to address the overall market shift from Fiber Optic to IP
products.
GROSS PROFIT
Consolidated
gross profit was $3.7 million or 48% of revenues for the quarter ended June 30,
2010, compared to $6.0 million or 60% of revenues in 2009. Gross profit in
our domestic business was down $1.7 million in the second quarter of 2010 while
gross profit in our international business declined $660 thousand.
The
U.S. gross profit margin declined in the current quarter due to excess capacity
in the U.S. manufacturing facility, inventory write-downs and restructuring
charges. Lower revenue levels result in relatively higher costs of goods sold
on a per unit basis as the costs for personnel in direct labor positions and
other fixed costs are spread over a smaller revenue base. The gross profit
margin in our international business was 58% in the second quarter of 2010
compared to 60% for the second quarter of 2009.
12
Table of Contents
At
the end of the second quarter of 2010, Optelecom-NKF completed a major
initiative where the Company consolidated its U.S. manufacturing operations
into the existing Dutch manufacturing facility and to a U.S. based contract
manufacturer. This initiative is intended to provide the Company with
opportunity for flexibility in manufacturing during future periods.
OPERATING EXPENSE
Consolidated
operating expenses were $4.3 million for the quarter ended June 30,
2010, compared to $5.8 million in the second quarter of 2009. The overall
decrease was $1.5 million and represented a 26% reduction in the second quarter
of 2010. Results for the second quarter of 2010 include $1.15 million from the
sale of the Companys Electro Optics coil manufacturing operations.
At
the end of April 2010, the Company adopted a series of restructuring
initiatives designed to strengthen the Companys ability to become a global
provider of advanced video-over-IP solutions. The three key components of the
changes and restructuring initiatives include the transition of U.S. sales to a
sector alignment, focused on three distinct markets; the consolidation of the
U.S. manufacturing operations into a combination of the Companys current
Netherlands based manufacturing facility and U.S. contract manufacturing; and
third the streamlining of the Companys corporate headquarters in the U.S.
The
Company will record pre-tax charges of $945 thousand related to these actions
of which $868 thousand is included in the second quarter 2010 and the remaining
$77 thousand is expected as a charge in the third quarter of 2010. Total
restructuring costs are expected to total $945 thousand including $653 thousand
in severance costs, $168 thousand in health care benefits and payroll taxes and
$124 of fixed asset write-downs.
As
a result of the U.S. business restructuring the Company is attempting to
sublease its corporate office and manufacturing facility located in Germantown,
Maryland. The building is leased by the Company with no provision for
termination prior to the end of the lease term in August 2013. Rent
expense is recognized on a straight-line basis during the lease term.
Excluding
the change in foreign currency exchange rates of $218 thousand, the
restructuring charge of $437 thousand and the gain on sale of Electro-Optics of
$1,150 thousand, our operating expenses decreased approximately 10%. The
decrease in operating expenses is a result of reductions in personnel and continued
cost control measures due to ongoing declines in revenue levels and a difficult
economic environment. The cost control effort includes the U.S. restructuring
effort, day to day decisions to lower expenses and our reduction in force in
the second half of 2009, which eliminated personnel including those in mature
fiber optic product areas.
OTHER EXPENSE, NET
Other
expense, net increased from $142 thousand in the second quarter of 2009 to $316
thousand in the second quarter of 2010. The Companys other expense includes
interest expense and foreign currency exchange transaction gains/losses on
notes payable. The note payable is a Euro-based subordinated note that resides
on the parent companys books and a U.S. Dollar intercompany note payable that
resides on the foreign holding companys books. The increase is from higher
interest cost realized on our subordinated note and fluctuations in foreign
currency exchange translation.
INCOME
TAX EXPENSE
The
benefit for income taxes in the second quarter of 2010 was $195 thousand
compared to an expense of $243 thousand in the second quarter of 2009. The
increase in our tax benefit in 2010 was attributed to our international
operations due to changes in foreign currency exchange rates for which we
recognize a tax benefit. In the second quarter of 2010 we continued to provide
a full valuation allowance against U.S. deferred tax assets and therefore, we
did not record the impact of income tax benefits against U.S. operating losses
and other deferred tax assets in the first half of 2010. As of June 30,
2010 and December 31, 2009, the Company had a valuation allowance of $3.8
million and $3.5 million, respectively, related to its U.S. deferred tax
assets.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2010
COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2009
The
results of our international operations include the impact from foreign
currency translation in the quarter. On average, the U.S. Dollar was stronger
in the first six months of 2010 compared to 2009. The result of a strengthening
U.S. Dollar impacted our results on a consolidated basis because the Company
translates Euro and Pound Sterling sales and related expenses at proportionally
lower U.S. Dollar equivalents in its financials.
REVENUE
Revenue
for the first six months of 2010 was $14.9 million, a decrease of 20% compared
to the first six months of 2009. The decline is the result of a general
economic decline, a transition in the market from Fiber Optic based products to
IP/Ethernet products, with IP sales slower than expected, and a continuing
decline in U.S. sales. Information regarding the Companys U.S. and
international based operations is included in the following table. For
the purposes of this table and the following discussion, revenue classified as
U.S. or domestic based includes Canada, Mexico, Central and South America (in
thousands):
13
Table of Contents
|
|
2010
|
|
2009
|
|
|
|
U.S.
|
|
International
|
|
Total
|
|
U.S.
|
|
International
|
|
Total
|
|
Revenue
|
|
$
|
3,760
|
|
$
|
11,096
|
|
$
|
14,856
|
|
$
|
5,595
|
|
$
|
13,001
|
|
$
|
18,596
|
|
Less: Cost of Goods Sold
|
|
2,569
|
|
4,634
|
|
7,203
|
|
2,480
|
|
5,352
|
|
7,832
|
|
Gross Profit
|
|
$
|
1,191
|
|
$
|
6,462
|
|
$
|
7,653
|
|
$
|
3,115
|
|
$
|
7,649
|
|
$
|
10,764
|
|
Less: Operating Expenses
|
|
3,324
|
|
6,556
|
|
9,880
|
|
4,448
|
|
7,007
|
|
11,455
|
|
(Loss) income from Operations
|
|
$
|
(2,133
|
)
|
$
|
(94
|
)
|
$
|
(2,227
|
)
|
$
|
(1,333
|
)
|
$
|
642
|
|
$
|
(691
|
)
|
Our
U.S. based sales declined $1.8 million or 33% in the first six months of 2010
compared to the first half of 2009. The decline is from a reduction of $1.5
million in fiber optic based product sales and limited growth in IP product
sales. Our IP revenue increased $8 thousand in the first six months of 2010 in
the U.S. The U.S. business had a loss from operations of $2.1 million in the
first six months of 2010 compared to a loss of $1.3 million in 2009. The
increase in the U.S. based loss from operations is due to the significant
decline in revenue partially offset by a reduction of $1.1 million in U.S.
operating expenses during the first six months of 2010. The expense reductions
are from the Companys sale of its Electro Optics assets.
Revenue
for the first six months of 2010 decreased $1.9 million in our international
operations when compared to the first six months of 2009. Our international
operations represented 75% of the Companys total revenue in the first half of
2010. As a result of the reported reduction in revenue, our international based
operations had a loss from operations of $94 thousand for the first six months
of 2010 compared to income from operations of $642 thousand in 2009.
Information
regarding the Companys revenue by product category is included in the
following table (in thousands):
|
|
Six Months Ending
|
|
Six Months Ending
|
|
|
|
June 30, 2010
|
|
June 30, 2009
|
|
Fiber Optic
|
|
$
|
8,185
|
|
$
|
11,647
|
|
IP Video
|
|
6,523
|
|
6,436
|
|
Electro Optics
|
|
148
|
|
513
|
|
Total Revenue
|
|
$
|
14,856
|
|
$
|
18,596
|
|
In
the first six months of 2010, sales of Fiber Optic products were down 30% to
$8.2 million while IP Video revenue increased 1% to $6.5 million. The Company
has planned for a market shift toward IP Video products as it invested in the development
of a new product set in recent periods. The decline in Fiber Optic sales during
the period was in line with an overall trend away from these products in the
market. The decline in IP product sales was significantly less than the decline
in Fiber Optic sales in the first six months of 2010. The Company continues to
focus its product development efforts toward the IP products in 2010 to address
the overall market shift from Fiber Optic to IP products.
Seasonality
affects our revenues to the extent that normal contracting activities are
affected by capital budgets. We are also impacted in areas with colder
climates as some outdoor projects are planned to avoid the winter months. This
seasonality has periodically resulted in generally lower levels of revenue in
the first half of the year when compared to revenue in the second half of the
year.
GROSS PROFIT
Consolidated
gross profit was $7.7 million or 52% of revenues for the six months ended
June 30, 2010, compared to $10.8 million or 58% of revenues in 2009.
The gross profit percentage was 6% lower in 2010 which is below the Companys
ongoing target. Gross profit was down a total of $3.1 million and 29% primarily
because of the decrease in revenue combined with lower profit margins in our
U.S. businesses. The U.S. gross profit margin declined due to excess
capacity in the U.S. manufacturing facility, from inventory write-downs related
primarily to product obsolescence and as a result of restructuring charges. The
gross profit margin in our international business was 58% in the first six
months of 2010 compared to 59% in the first six months of 2009.
OPERATING EXPENSE
Consolidated
operating expenses were $9.9 million for the six months ended
June 30, 2010, compared to $11.5 million in 2009. The overall
decrease was $1.6 million representing a 14% reduction in operating expenses in
the first half of 2010. Results for the first six months of 2010 include $1.15
million from the sale of the Companys Electro Optics coil manufacturing
operations.
14
Table of Contents
The
decrease in operating expenses is a result of reductions in personnel and
continued cost control measures due to ongoing declines in revenue levels and a
difficult economic environment. The Company recorded pre-tax charges of $868
thousand in the first half of 2010 in connection with the restructuring
initiatives adopted at the end of April.
OTHER EXPENSE, NET
Other
expense, net increased from $433 thousand in the first six months of 2009 to
$619 thousand in the first half of 2010. The Companys other expense includes
interest expense, and foreign currency exchange transaction gains/losses from
notes payable. The notes payable include a U.S. Dollar senior term loan which
resided on the foreign holding companys books before being paid off in March
2010, a Euro-based subordinated note that resides on the parent companys
books, and a U.S. Dollar intercompany note payable that resides on the foreign
holding companys books. The increase in other expense, net in the first six
months of 2010 is the result of several factors including an increase from
higher interest cost realized on our amended subordinated note and fluctuations
in foreign currency exchange translation.
INCOME
TAX EXPENSE
The
benefit for income taxes in the first six months of 2010 was $500 thousand
compared to a benefit of $232 thousand in the first six months of 2009. The
increase in our tax benefit in 2010 was attributed to our international
operations due to changes in foreign currency exchange rates for which we
recognize a tax benefit. During 2009 and for the first six months of 2010, we
continued to provide a full valuation allowance against net U.S. deferred tax
assets and, therefore, we did not record the impact of income tax benefits
against U.S. operating losses and other deferred tax assets in 2010. These
deferred tax assets are still available for tax purposes to offset potential
U.S. tax expense in the future.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Total
assets of the Company were $33.3 million at June 30, 2010, compared to $41.2
million at December 31, 2009, a decline of 19%. The Company had a decline
in cash and equivalents, excluding restricted cash, of $550 thousand, a decline
in accounts receivable of $1.4 million, and a decline in combined intangible
assets and goodwill of $3.5 million. The reduced cash level is the result of
losses from operating activities in the first six months of 2010 combined with
full payment of our senior term debt offset by cash received from the sale of
certain assets. The decrease in accounts receivable is attributable to the
reduction in sales in 2010 compared to the later part of 2009. The decline in
intangible assets and goodwill is primarily from the change in foreign currency
rates and amortization of intangible assets.
The
Companys total liabilities decreased to $17.8 million at June 30, 2010
from $21.4 million at December 31, 2009. This decrease is primarily from a
decline in our level of debt totaling $3.7 million with full payment of $2.6
million on our senior term loan in early 2010. The decline in debt is also the
result of a lower foreign currency exchange rate in 2010. The Company has
outstanding debt totaling $11.1 million at June 30, 2010 from the subordinated
note to Draka Holding N.V. due in March 2011.
The
Companys stockholders equity decreased from $19.8 million at
December 31, 2009 to $15.5 million at June 30, 2010. The decrease in
total stockholders equity resulted from a net loss in the first six months of
2010 of $2.3 million and a $2.3 million decrease in accumulated other
comprehensive income. The decrease in accumulated other comprehensive
income is primarily from the impact of foreign currency exchange rates as the
U.S. Dollar strengthened in the first half of 2010 and the Company translated
its net assets at a relatively lower level based on the rate of the Euro at
June 30, 2010. At June 30, 2010, the exchange rate for the Euro to the U.S.
Dollar was 1.22 compared to 1.43 at December 31, 2009.
The
Company provides reserves for accounts receivable, inventory obsolescence and
warranty against product defects. For the six months ended June 30, 2010,
the Company had $177 thousand of additional expense related to the accounts
receivable reserve, $58 thousand related to the warranty reserve and $139
thousand of additional expense related to inventory. The accounts receivable
reserve is predominately from slower payment on international receivables while
the increased reserve on inventory is the result of write-downs from U.S.
product obsolescence.
Cash
used in our operating activities was $214 thousand for the first six months of
2010 compared to $1.6 million in the first half of 2009. Our cash from
operations is the result of our net loss, adjusted for depreciation,
amortization and other non-cash items, and changes in our operating assets and
liabilities. The net cash used in operating activities during the first six
months of 2010 is from a combination of factors including a net loss of $2.3
million plus an increase in other liabilities of $915 thousand from
restructuring charges.
Cash
used in investing activities was $24 thousand for the six months ended June 30,
2010 while cash used for investing activities was $408 thousand for the six
months ended 2009. Investing activities are from capital expenditures in the
current and prior periods.
15
Table of Contents
Cash
used in financing activities was $27 thousand during the first six months of
2010 compared to cash used during the first half of 2009 totaling $746
thousand. The current period includes reductions in notes payable as we paid
off our senior term loan and refinanced our subordinated debt. The Company also
used restricted cash to pay off the senior term loan.
On March 5, 2010, the Company entered into an
amended and restated subordinated promissory note (the Note) with Draka Holding
N.V. (Draka). Draka agreed to extend the term of the Note to March 8, 2011
at an annual interest rate of 10%. The principal amount under the Note at June
30, 2010 is 9.0 million ($11.1 million U.S. Dollars). In consideration of Drakas
agreement to extend the term of the Note, the Company agreed to make quarterly
interest payments starting in June 2010. Additionally, the Company agreed
that if it has consolidated cash on hand in excess of $2.5 million at the end
of any calendar quarter; it will pay this excess cash to Draka as a prepayment
on the Note.
The
Company and Manufacturers and Traders Trust Company ended the line of credit
facility in March 2010 which allowed us to borrow in either U.S. Dollars
or Euros with a maximum amount not to exceed $500 thousand U.S. Dollars at
December 31, 2009. On April 6, 2010, the Company and Presidential
Financial Corporation entered into a Loan and Security Agreement where
Presidential agreed to provide the Company with a revolving line of credit of
$750 thousand based upon the availability of sufficient eligible accounts
receivable in the U.S. legal entity. The Loan Agreement is for a term of one
year and the obligations are secured by substantially all of the assets of the
U.S. legal entity.
The
Company continues to work toward refinancing the Draka note that comes due in
March 2011. However, the current economic environment is marked by limited
availability of credit in the business sector and there is no guarantee that
financing will be available for all or part of the outstanding debt. Further, uncertainty about our current
operating performance and global economic conditions impact our ability to
secure financing. If demand for our
products continues to decline, it will adversely impact our financial results
and negatively impact our ability to secure additional financing. There can be
no assurance that additional financing will be available in a timely manner or
on acceptable terms. The Company previously
announced it has authorized its investment banker, Seale & Associates,
to conduct a broad evaluation of strategic options and this evaluation is
ongoing through June 30, 2010.
FORWARD LOOKING INFORMATION
Statements in this Form 10-Q that are in the
future tense, and all statements accompanied by terms such as believe, project,
expect, estimate, assume, intend, anticipate, and variations or
similar terms are intended to be forward-looking statements as defined by
federal securities law. Forward-looking statements are based upon assumptions,
expectations, plans and projections that are believed valid when made, but that
are subject to the risks and uncertainties identified under Risk Factors in the
companys annual report on Form 10-K for the year ended December 31,
2009, that may cause actual results to differ materially from those expressed
or implied in the forward-looking statements. The Company intends that
all forward-looking statements made will be subject to safe harbor protection
of the federal securities laws pursuant to Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of
1934, as amended (the Exchange Act). Forward-looking statements are based
upon, among other things, the companys assumptions with respect to:
·
restructuring initiatives;
·
future revenue;
·
expected sales levels and cash flows;
·
debt payments and related interest rates;
·
fluctuations in foreign currency amounts and rates;
·
performance issues with key distributors and suppliers;
·
product development and performance and the successful execution of internal
plans;
·
trends in the markets for our products;
·
successful negotiation of major contracts;
·
effective tax rates and timing and amounts of tax payments;
·
acquisitions or divestitures of businesses;
·
the results of any audit or appeal process with the Internal Revenue Service;
·
anticipated costs of capital investments; and
·
the ability to obtain future financing.
You should consider the limitations on, and risks
associated with, forward-looking statements and not unduly rely on the accuracy
of predictions contained in such forward-looking statements. As noted above,
these forward-looking statements speak only as of the date when they are made.
The Company does not undertake any obligation to update forward-looking
statements to reflect events, circumstances, changes in expectations, or the
occurrence of unanticipated events after the date of those statements.
Moreover, in the future, the Company, through senior management, may make
forward-looking statements that involve the risk factors and other matters
described in this Form 10-Q as well as other risk factors subsequently
identified. This includes those identified in the Companys filings with the
Securities and Exchange Commission on Form 10-K, Form 10-Q and
Form 8-K.
16
Table of Contents
Item 3.
Quantitative and Qualitative Disclosures about Market Risk.
FOREIGN CURRENCY EXCHANGE RATE RISK
We are exposed to foreign currency exchange rate
risk on our investment in our European operations and related debt instruments.
We do not hedge our net investment in foreign operations or other transactions
with these operations and we have no derivative financial instruments for the
underlying economic exposure.
In connection with the acquisition from Draka in
March 2005 the Company has a 9.0 million denominated subordinated
Note at June 30, 2010. Upon completion of a legal restructuring in
June 2008, the impact from the fluctuation in foreign currency exchange
rate on the subordinated Note is included in the other expense, net on our consolidated
statements of operations. As part of the 2008 legal restructuring, our European
holding company and the U.S. parent company entered into a Dollar denominated
note payable to the parent company. At June 30, 2010, the balance on this
Dollar denominated intercompany note payable is $7.9 million. Restatement of
these balances at the June 30, 2010 exchange rate resulted in a net foreign
currency exchange gain of $315 thousand which is included in Other Expense,
net. As these principal balances change and become more disparate, the
foreign currency exchange impact may result in additional exposure to the
Company.
For quantitative and qualitative disclosures about
market risk, see Item 7A, Quantitative and Qualitative Disclosures about
Market Risk, of our annual report on Form 10-K for the year ended
December 31, 2009. With the exception of the foreign currency exchange
rate risk noted above, our exposures to market risk have not changed materially
since December 31, 2009.
Item 4.
Controls and Procedures.
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
As of the end of the period covered by this
report, under the direction and with the participation of the Companys
management, including the Companys Chief Executive Officer and Chief Financial
Officer, the Company reviewed and evaluated the effectiveness of the design and
operation of its disclosure controls and procedures pursuant to Exchange Act
Rule 13a-15. Based on that evaluation, the Chief Executive Officer and
Chief Financial Officer concluded that the Companys disclosure controls and
procedures were effective as of June 30, 2010.
CHANGES IN INTERNAL CONTROLS
In connection with the evaluation by management,
including the Chief Executive Officer and Chief Financial Officer, of our
internal controls over financial reporting, pursuant to Exchange Act
Rule 13a-15(d), no changes during the quarter ended June 30, 2010 were
identified that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
17
Table
of Contents
PART II OTHER INFORMATION
Item 1.
Legal Proceedings.
The Company is not involved in legal proceedings or
litigation at this time.
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3.
Defaults Upon Senior Securities.
None.
Item 4.
Other Information.
None.
Item 5.
Exhibits.
3.1
|
|
Certificate of Incorporation, as amended
(incorporated by reference from Form 10-K filed March 31, 1998 and
Form 8-K filed April 19, 2005)
|
|
|
|
3.2
|
|
By-Laws (incorporated by reference from
Form 10-K filed March 31, 1998)
|
|
|
|
31.1
|
|
Certification of Chief Executive Officer
pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the
Securities Exchange Act filed herewith.
|
|
|
|
31.2
|
|
Certification of Chief Financial Officer
pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the
Securities Exchange Act filed herewith.
|
|
|
|
32
|
|
Certification of Chief Executive Officer
and Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 filed herewith.
|
18
Table
of Contents
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-NKF, INC.
|
|
|
|
|
Date: August 12, 2010
|
/s/ David Patterson
|
|
David Patterson,
|
|
President and Chief Executive Officer
|
|
|
Date: August 12, 2010
|
/s/ Steven Tamburo
|
|
Steven Tamburo,
|
|
Executive Vice President and Chief
Financial Officer
|
19
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