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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
COMMISSION FILE NUMBER 0-27022
OPTICAL CABLE CORPORATION
(Exact name of registrant as specified in it charter)
Virginia 54-1237042
(State of incorporation) (I.R.S. Employer Identification No.)
5290 Concourse Drive (540) 265-0690
Roanoke, Virginia 24019 (Telephone Number)
(Address of principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
Indicate by checkmark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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. (1) Yes [X] No [ ] (2) Yes [X] No [ ]
Indicate by checkmark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of shares of common stock held by non-affiliated
at January 15, 1998 was $24,444,504.
As of January 15, 1998, 38,559,288 shares of the Registrant's Common Stock
were outstanding.
DOCUMENT INCORPORATED BY REFERENCE
Portions of Optical Cable Corporation's definitive Proxy Statement for its 1998
Annual Meeting of Shareholders to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A under the Securities Exchange Act of 1934
(the "Proxy Statement") are incorporated by reference into Part III of this Form
10-K.
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PART I
ITEM 1. BUSINESS
GENERAL
The Company manufactures and markets a broad range of fiber optic cables
for "high bandwidth" transmission of data, video and audio communications over
moderate distances of up to approximately 10 miles. The Company's cables can be
used both indoors and outdoors, are easy and economical to install, and provide
a high degree of reliability. The Company believes that its products are widely
accepted for use in fiber optic local area networks ("LANs") and are
increasingly accepted in other communications applications. The Company's
products directly address the needs of the moderate distance market by utilizing
a tight-buffered coating that protects the optical fiber and a cable design that
achieves superior mechanical and environmental performance.
The Company was incorporated in Virginia in 1983. The Company's executive
offices are located at 5290 Concourse Drive, Roanoke, Virginia 24019, telephone
number (540) 265-0690.
INDUSTRY BACKGROUND AND MARKETS
Application of Fiber Optic Communications Technology
Fiber optic technology was developed in the mid-1970s as a communications
medium offering numerous technical advantages over metallic conductors such as
copper. Optical fiber is an ultrapure glass structure that has been pulled into
a hair thin strand. Optical fiber's advantages include its high bandwidth, which
permits reliable transmission of complex signals such as multiple high-quality
audio and video channels, high-speed data formats such as Fiber Distributed Data
Interface ("FDDI") and Asynchronous Transfer Mode ("ATM"), other LAN
transmissions, and high-definition television. Relative to copper, optical fiber
has thousands of times the information carrying capacity, occupies much less
space and operates more reliably over greater distances. Furthermore, it is
immune to the electromagnetic interference that causes static in copper wire
transmission, as well as to electrical surges. Because optical fiber does not
carry electricity, it is a safer choice in flammable environments. Additionally,
communicating through optical fiber is more secure than copper because tapping
into fiber optic cable without detection is very difficult. Optical fiber also
enjoys technical advantages over other communications media such as satellite
and microwave communications, particularly in applications over shorter
distances.
Because most of the world's information storage, reception and display
systems (such as computers, telephones and televisions) are electronically
based, various electro-optical hardware components must be attached to each end
of an optical fiber. For instance, a laser or light emitting diode converts
electrically encoded information into light signals, which travel over the
optical fiber to the terminal point of reception. At the terminal point a
photodetector converts the information back to its original form. Other passive
optical components such as optical connectors and splices facilitate the travel
of a light signal from one optical fiber to another or to another
electro-optical component, while couplers and splitters combine or divide
signals, thereby permitting simultaneous distribution of information to or from
multiple locations. Despite early and widespread appreciation of optical fiber's
superior technical characteristics, until the late 1970s the costs associated
with the necessary electro-optical transmitters and receivers rendered
commercial applications prohibitively expensive.
The Company believes there is a perception that fiber optic cable, because
it is different from copper cable, is difficult to install and maintain. This
perception is being overcome as fiber optic cable is more widely used. Also,
like copper cable, fiber optic cable is restricted to applications in which it
is possible to lay cable between the point of transmission and the point of
reception. Wireless communication media do not have this limitation.
2
The Long Distance Telephone Market
In the 1970s private industry began to develop optical fiber systems for
long distance commercial applications, particularly the U.S. telephone networks.
For this application, the expense of electro-optical components posed a lower
cost barrier because relatively few terminal components were required for long
distance transmissions. For the long distance telephone market, "single mode"
optical fiber was developed. To protect this early generation of fiber without
adversely affecting its optical performance, fiber optic cable producers chose a
high density (i.e., high fiber count) "loose tube" cable construction. This
cable design was developed to put minimal stress on the optical fibers, which
initially were particularly fragile, and to put many optical fibers in a small,
relatively inexpensive cable. When such cables proved vulnerable to water
penetration, manufacturers added a water-blocking but flammable gel, making them
unsuitable for indoor use.
Once fiber optic technology achieved cost parity with copper for the long
distance telephone application, U.S. long distance carriers aggressively
installed fiber optic routes across the United States. By the late 1980s,
optical fiber constituted nearly all of the long distance telephone network, as
well as the interoffice local exchange network connecting central telephone
offices in the same area.
The Moderate Distance Market
In the 1970s the U.S. government made available substantial funds for
research and development to determine the viability of optical fiber as a
solution to critical communications problems faced by the military and other
agencies. In the course of addressing these challenging, multiple termination
point applications, which were predominately over moderate distances, engineers
achieved significant technological advances. Such advances included the
introduction of "multimode" optical fiber and the development of an
easy-to-handle "tight-bound" cable structure that afforded the optical fiber
effective protection against mechanical shock, water, extreme temperatures and
other stresses likely to be encountered in a battlefield environment.
High levels of production of optical fiber, cable and components for the
long distance telephone market since the mid-1980s have resulted in cost
reductions that make fiber optic cable economically feasible for a growing
number of potential customers with moderate distance business application needs.
Such applications include data communications, LANs, telecommunications, video
transmission, including cable television, and military tactical communications.
Particularly in data communications, high performance, rugged, and survivable
fiber optic cable is well suited and has become economically attractive for
diverse and often unpredictable installation environments. The Company believes
that the LAN market is particularly attractive. LANs are often installed at
corporate offices, hospitals, utilities, academic campuses, factories and
transportation management facilities.
The increasing standardization of communications technology and the
increasing demand for high bandwidth (i.e., high data capacity or volume) are
expected to facilitate optical fiber's further penetration of the moderate
distance market presently served by copper cable. Fiber optic cable is better
able to maximize the utility of emerging LAN interface standards, such as FDDI
and ATM, and has therefore become a preferred data transmission medium. In
addition, high speed, high bandwidth applications, such as video conferencing,
imaging and Internet access, are growing and are driving increased demand for
fiber optic cable in moderate distance applications.
With the movement toward deregulation and competition, the large cable
television companies, often referred to as Multiple System Operators, the
Regional Bell Operating Companies ("RBOCs"), and other independent long distance
carriers are competing to provide enhanced cable television, data, and other
information highway services to homes and businesses. Many of these companies
are conducting field trials of optical fiber systems in the portion of the U.S.
telephone networks which lies between telephone companies' central offices and
subscribers' offices and homes (the "subscriber loop"). To date, the subscriber
loop remains overwhelmingly copper. Because the subscriber loop represents
approximately 90% of the U.S. telephone system (measured by total length of
cable), the potential demand for fiber optic cable in this application is very
large, provided that cost parity with copper cable systems can be achieved.
3
THE COMPANY'S SOLUTION
Fiber optic cables used for moderate distance applications may be subjected
to many different stress environments. Cables installed inside buildings may be
routed through cable trays, floor ducts, conduits and walls and may encounter
sharp corners or edges. They may be pulled without lubricant, resulting in
higher pull tensions, and stressed to the breaking point if care is not used. In
the outdoor and underground environments, cables are often subjected to
moisture, ultra-violet radiation and long pulling distances through conduits
with a variety of bends and corners, resulting in high pulling tensions. These
conditions can be aggravated if installers are not adequately trained in the
installation of fiber optic cable. The Company's founders recognized that, for
many applications, the stresses on the cables during installation are similar to
those in the military tactical environment, for which the Company's technology
was initially developed. The Company applied this technology to commercial
products serving a market that could not be adequately served by gel-filled,
loose tube cable manufactured for the long distance telephone market.
The Company believes that nearly one-half of the fiber optic cable sold in
the moderate distance market today is the gel-filled, loose tube type, which
requires careful installation and extensive preparation for termination with
connectors. While this cable design has served the long distance telephone
market reasonably well, it was not designed to withstand the stress that cables
undergo during installation in the LAN or subscriber loop environments.
Gel-filled, loose tube cables are difficult to terminate with connectors,
because they cannot be mechanically attached directly to the cable's optical
fibers. Designed for long, straight outdoor runs, the cables are stiff and
difficult to place in complex installations and are flammable and thus not
suited for indoor use. When used for indoor/outdoor installations, these cables
must be spliced near the building entrance to flame retardant cables suitable
for indoor use, adding cost and complexity and reducing reliability. Therefore,
the total installed cost of gel-filled, loose tube cables is high in moderate
distance applications.
In contrast, the Company's products address the needs of the moderate
distance market by utilizing a tight-buffered coating that protects the optical
fiber and a cable design that achieves superior mechanical and environmental
performance. The Company's products are derived from technology originally
developed for military applications requiring very rugged, flexible and compact
fiber optic cables. Unlike gel-filled cables, the Company's cables may be used
indoors and outdoors, are flame resistant, flexible, easy and economical to
install, and provide a high degree of reliability. The Company believes that
because of these features, its products are widely accepted for use in fiber
optic LANs and are increasingly accepted in other applications.
THE COMPANY'S STRATEGY
The Company's primary strategy is to capitalize on its proprietary cable
manufacturing processes and technologies to provide a comprehensive line of
versatile fiber optic cables with superior features and competitive pricing that
appeals to the large, diverse and growing market for high bandwidth
communications over moderate distances.
Focus on the Moderate Distance Market
Optical fiber has become an accepted medium for the transmission of data,
video and audio in moderate distance applications in cities, factories, high
rise buildings, and on campuses. High speed, high bandwidth applications
deployed in LAN environments are growing in both large and small corporations
and are driving increased demand for optical fiber. Increasing deployment of
multimedia systems on LANs that utilize protocols such as FDDI and ATM also
enhances the demand for bandwidth.
The Company's products address the needs of the moderate distance market by
utilizing a tightbuffered coating that protects the optical fiber and a cable
design that achieves superior mechanical and environmental performance. The
Company believes that because of the outstanding features of its fiber optic
cable, including suitability for indoor and outdoor use, easy and economical
installation and a high degree of reliability, the Company's products have
become well established for optical fiber LANs and are increasingly accepted for
other applications.
4
Develop High Performance Products and Offer a Broad Product Line
The Company believes that serving both the premium performance and the
price competitive parts of the moderate distance market best utilizes its
development and manufacturing capabilities. The Company's Ultra-FoxTM product
line provides optical fiber products that are competitively priced, with
features that the Company believes are superior to its competitors' offerings.
The Ultra-FoxTM plus product line shares many of the materials and features with
the Company's military tactical cable products and is marketed to customers who
want the most reliable installations for their critical communication or control
processes. Since March 1994, the Company's quality management system has been
certified to the internationally recognized ISO 9001 quality standard.
Leverage Existing Technologies and Knowledge
The Company has extensive expertise in optical fiber packaging and
applications design, which it utilizes for new products. The Company is
responsive to, and works to anticipate the requirements of, its customers. Its
expertise with tight-buffered cable technology facilitates development of new
products and variations of existing products. Products that are developed for a
special application also may be introduced to the broader market.
Capitalize on Proprietary, Flexible Manufacturing Processes
The Company believes that its customized, internally developed
manufacturing processes provide a competitive advantage. The Company has
developed proprietary process control systems to ensure consistency and
uniformity at high throughput rates and intends to continue the upgrade of its
manufacturing capability. Through construction completed in January 1997, the
Company expanded its facilities to increase its manufacturing capacity. Ample
capacity, versatile production processes and a broad range of products are
intended to enable the Company to be flexible and responsive to customer needs.
Offer Cost Effective Solutions to its Customers
The Company believes that its products are rugged, easy to install,
versatile and highly reliable, making them attractive to distributors,
installers, and most importantly, end users. Because the Company's cables are
multipurpose, distributors can stock fewer varieties and therefore less
quantities of cable. For installers and systems integrators, the multipurpose
feature can significantly reduce installation costs by eliminating the need to
transition from indoor cable to outdoor cable at a building entrance. This also
enhances reliability by eliminating splices and possible high stress on optical
fibers that could lead to breakage. This simplified installation, lower cost and
enhanced reliability are also valued by the end user, because a long lasting,
trouble-free cable is the basis for minimizing down time and maximizing system
availability.
Expand Distribution and Marketing Presence
The Company intends to increase its sales and marketing activities both
domestically and internationally. The Company distributes its products through
independent distributors to supplement the Company's existing distribution
channels and to provide the Company with access to a greater number of potential
customers in the United States. Revenues from international sales were
approximately 24%, 25% and 27% in fiscal 1995, 1996 and 1997, respectively. The
Company intends to hire more sales personnel to manage and expand its
international distribution network. However, there can be no assurance that the
Company will have the financial resources required to increase its sales and
marketing activities domestically or internationally, or to hire additional
sales personnel.
5
PRODUCTS AND TECHNOLOGY
Products
The Company manufactures and markets a broad range of fiber optic cables
that provide a high bandwidth transmission for data, video and audio
communications over moderate distances. The Company's products are derived from
technology originally developed for military applications requiring very rugged,
flexible and compact fiber optic cables. The Company's method of applying a
tight-buffered coating on each optical fiber before it is encased minimizes
microbending, the primary cause of signal loss in optical fibers.
The Company has pioneered a pressure-extrusion technique for applying a
cable jacket directly over the fiber optic cable core elements, resulting in
high cable tensile strength and lateral stress resistance. Such Core-LockedTM
jackets allow the cable to operate as a single mechanical unit, maximizing
resistance to tears during installation pulls through narrow spaces. The
Company's product line is deliberately diverse and flexible, in keeping with the
evolving application needs within the moderate distance market. Most of the
Company's cable designs are available in both the Ultra-FoxTM Plus premium
product and the Ultra-FoxTM highly featured but cost competitive commercial
product.
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6
PRODUCT TYPE FEATURES/DESCRIPTION APPLICATIONS
- ----------------------------- --------------------------------------- -------------------------------------
A-Series Simplex and Duplex o simplex (one optical fiber) and o short "patch cord" cables
"Assembly" Cables duplex (two optical fibers) cables o links between electronic
o tight-buffered coating on each equipment and main fiber optic
optical fiber cable
o aramid yarn strength members o routing connections in patching
o thermoplastic outer jacket systems
o flame retardant o indoor use
B-Series "Breakout" Cables o 2 to 156 optical fibers o direct termination with connectors
o tight-buffered coating on each on each optical fiber
optical fiber o short and moderate distance links
o elastomeric jacket encases each between buildings or within a
optical fiber and surrounding ara- building, where multiple termina-
mid yarn strength members (simi- tion points are needed
lar to an A-Series simplex cable) o installations where ease of termi-
o Core-LockedTM outer jacket nation and termination cost are
o rugged important factors
o flame retardant o indoor and outdoor use
o moisture and fungus resistant
D-Series "Distribution" o 2 to 156 optical fibers o longer distance runs where size
Cables o tight-buffered coating on each and cable cost are more significant
optical fiber o can be armored for additional pro-
o Core-LockedTM outer jacket tection in buried and overhead in-
encases the optical fibers and stallations
aramid yarn strength members o indoor and outdoor use
o smaller, lighter and less expensive
than the B-Series cable
o high strength to weight ratio
o compact size
o rugged
o flame retardant
o moisture and fungus resistant
G-Series "Subgrouping" o up to 864 optical fibers in various o high fiber count systems
Cables subgroup sizes o subgroups needed to facilitate
o multi-fiber subcables, each similar organization of large numbers of
to a D-Series cable optical fibers
o Core-LockedTM outer jacket o subcables routed to different
surrounds subcables locations
o high density "micro" construction o installations requiring several
o rugged different optical fiber types
o flame retardant o indoor and outdoor use
o moisture and fungus resistant
7
A-Series Simplex and Duplex "Assembly" Cables. Simplex and duplex cables
are round single fiber and "zip cord" two-fiber structures, respectively. Both
cables contain tight-buffered optical fibers, aramid yarn strength members and a
thermoplastic outer jacket for each fiber. They are used for "jumpers" (short
length patch cords) and for "pigtails" (short lengths of cable with a connector
on one end). Various outer jacket materials are offered to provide flammability
ratings and handling characteristics tailored to customers' needs. These cables
are often privately labeled and sold to original equipment manufacturers
("OEMs") who produce the cable assemblies.
B-Series "Breakout" Cables. The B-Series cables consist of a number of
subcables, each consisting of a single optical fiber and aramid yarn strength
members similar to an A-Series simplex cable. These subcables are tight-bound in
a pressure-extruded, high performance Core-LockedTM PVC outer jacket to form the
finished multi-fiber cable. Like the A-Series cables, the subcables are intended
to be terminated directly with connectors. This direct termination feature makes
this cable type particularly suited for shorter distance installations, where
there are many terminations and termination costs are more significant. The
materials and construction of the cable permit its use both indoors and
outdoors. These features make the cable cost effective for use in campus and
industrial complex installations, between and within buildings.
D-Series "Distribution" Cables. The Company's D-Series cables are made with
the same tight-buffered optical fiber and high performance Core-LockedTM PVC
outer jacket as the B-Series cable. Unlike the B-Series cable, however, each
tight-buffered optical fiber in a D-Series cable is not covered with a separate
subcable jacket. D-Series cable is intended for longer distance applications,
where termination considerations are less important and often traded off for
size, weight and cost. The tightbuffered optical fiber and Core-LockedTM PVC
outer jacket make D-Series cables rugged and survivable, with a small,
lightweight configuration. The high strength to weight ratio of these cables
makes them well suited for installations where long lengths of cables must be
pulled through duct systems. D-Series cable is used in relatively longer length
segments of installations.
G-Series "Subgrouping" Cables. This cable design combines a number of
multi-fiber subcables, each similar to a D-Series cable. Each multi-fiber
subcable is tight-bound with an elastomeric jacket, providing excellent
mechanical and environmental performance. These subcables are contained in a
pressure extruded, high performance Core-LockedTM PVC outer jacket to form the
finished cable. This design permits the construction of very high fiber count
cables. These cables may be used where groups of optical fibers are routed to
different locations. The Company has fabricated a developmental sub-group cable
containing over 1,000 fibers intended for high density, moderate length routes
such as urban telephone distribution systems.
Other Cable Types. The Company produces many variations on the basic cable
styles presented above for more specialized installations. For outdoor
applications, both the B-Series and D-Series cables may be armored with
corrugated steel tape for further protection in underground or overhead
installations. For overhead installations on utility poles, the Company offers
several self-supporting versions of the D-Series cables, with higher performance
outer jackets. One contains additional aramid yarn strength members, to support
its weight with wind and ice loading over long unsupported lengths. Another
style has a separate strength member, either metallic or non-metallic, in a
figure eight configuration, to reduce installation costs. The Company's cables
are available in several flammability ratings, including "plenum" for use in
moving air spaces in buildings, and "riser" for less critical flame retardant
requirements. "Zero halogen" versions of the B-Series and D-Series cables are
available for use in enclosed spaces where there is concern over release of
toxic gases during fire. Composite cables combining optical fiber and copper are
offered to facilitate the transition from copper-based to optical fiber-based
systems without further installation of cable.
Product Development
The Company continues to develop enhancements to its fully automated,
computer-controlled production processes that it believes increase product
quality and reduce costs. Many of the Company's technological advances are the
result of refinements and improvements made during production runs.
Occasionally, potential customers contact the Company to develop new products or
modified product
8
designs for them, which ultimately may appeal to other customers. The
development costs associated with new products and modified product designs
requested by the customer are included in the price charged to that customer. By
utilizing these new products and modified product designs, the Company continues
to improve its product line with minimal direct expenditures for research and
development.
MAJOR MARKET APPLICATIONS
The most common application of the Company's products is in LANs, where
optical fiber is widely used as the "backbone" or "trunk," connecting groups of
work stations and central file servers. In its typical implementation, the fiber
optic cable may be installed between wiring closets in a building, or installed
between buildings in a multi-building complex. Fiber optic cable runs between
electronic equipment that combines the signals of many workstations. Because the
combined signals may carry a large volume of critical information, fiber optic
cable, which is immune to electrical interference, is often desired. In
comparison, copper wires carry less information, or the same amount of
information for a shorter distance, in either case remaining susceptible to
electrical noise and interference. The following are typical applications for
the Company's fiber optic cable:
Office Facilities. Banks, stock trading companies, insurance companies, and
other businesses often have a need to distribute information among a large
number of work stations, have time-critical data and would incur severe costs as
a result of system failures. A LAN connected with fiber optic cable has in the
past several years been an increasingly common way of implementing management
information systems for these businesses.
Educational Institutions. Colleges and universities have been leaders in
implementing large fiber optic networks. More recently, many states have
undertaken large scale projects to install networks in high schools and even
grade schools. These systems link personal computers with central file servers.
As interactive learning systems require increased transmission speeds, optical
fiber becomes a logical medium.
Manufacturing and Mining Facilities. Manufacturing and mining facilities
are typically not air conditioned, are less clean and otherwise have a less
controlled environment than businesses generally. They often contain heavy
electrical equipment, which causes electromagnetic interference if conventional
copper cable is used. The advantages of fiber optic cable in this environment
include immunity to electrical noise, ruggedness, high information carrying
capacity and greater distance capability. The Company's products are installed
in automotive assembly plants, steel plants, chemical and drug facilities,
petroleum refineries, mines and other similar environments.
Health Care Facilities. Hospitals have extensive data transfer needs for
medical records, patient monitoring, inventory, billing and payroll functions.
More recently, the transfer of electronically stored images of x-rays, MRIs and
CAT scans has increased to facilitate analysis and diagnosis at multiple
locations. These applications require high data transfer rates. Optical fiber is
a preferred solution, especially in electromagnetic environments with heavy
electrical equipment such as x-ray machines.
Traffic Control Systems. Traffic system applications range from
surveillance and control of traffic flow in cities to installation of sensors,
automatic toll collection, video monitoring and control of signs in "smart"
highway programs. These applications often require transmission of high
bandwidth signals such as video monitoring, for which optical fiber is well
suited. The Company's cables offer ruggedness, reliability and cost savings for
termination in systems that are near the vibrations of traffic and require many
termination points.
Telephone Companies. The Company has worked with several RBOCs for their
business customers' requirements. As high bandwidth services of the information
highway are brought closer to more homes and businesses, the bandwidth of
optical fiber becomes more important.
SALES, MARKETING AND CUSTOMER SERVICE
The Company's products are sold to end users, electrical contractors,
system integrators, value-added resellers ("VARs"), OEMs and distributors.
Distribution methods are adapted to the particular needs of different types of
customers. The decision to purchase the Company's products may be made
9
by end users, distributors, electrical contractors, system integrators or
specialized installers. The Company attempts to reach these decision makers by
advertising in fiber optics trade journals and other communications magazines.
The Company also participates in numerous domestic and international trade shows
attended by customers and prospective customers. International sales are made
primarily through foreign distributors, system integrators and VARs.
The Company's field sales force consists of independent sales
representatives located in various geographic areas. The field sales force
provides sales support for distributors, system integrators and VARs and
communicates with the customer's purchase decision makers. The field sales force
is supported by inside sales personnel and supervised by regional sales
managers. The inside sales group provides quotations and customer service. The
regional sales managers provide on-site sales support with major customers and
are responsible for major customers and opportunities. For more in-depth
technical support, the sales group has access to engineering, quality control
and management personnel who have extensive fiber optic cable expertise and
industry experience.
Furthermore, the Company believes that it has a reputation for product
excellence based on its success with large projects for end users such as
Chrysler Corporation, 3M, Virginia Polytechnic Institute and State University,
Bankers Trust and Salomon Brothers Inc, and for integrators such as Ameritech
Information Systems and US WEST. The Company had no single customer that
accounted for more than 5% of its net sales in fiscal 1995, 1996 or 1997.
However, in fiscal 1997, 22% of net sales was attributable to two major domestic
distributors, and in fiscal 1996, 12% of net sales was attributable to one major
domestic distributor. Most of the Company's revenue in each quarter results from
orders received in that quarter. Accordingly, the Company does not believe that
its backlog at any particular point in time is indicative of future sales. The
Company believes that its customer base is diverse, crossing over many markets
and regions worldwide and believes that it is important to maintain that
diversity to avoid dependence on any particular segment of the economy or area
of the world.
MANUFACTURING AND SUPPLIERS
The Company's manufacturing operations consist of applying a variety of raw
plastic materials to optical fibers. The key raw material in the manufacture of
the Company's products is optical fiber, which the Company currently purchases
from four manufacturers. The Company works with its vendors in an effort to
ensure a continuous supply. The Company utilizes two sources for the cable's
aramid yarn strength member and several suppliers of coating materials. The
Company has not experienced difficulty in arranging alternate sources. All other
raw materials have at least one backup source.
The Company believes that by maintaining a consistent relationship with
suppliers, it can obtain better quality control and emergency deliveries. Being
able to deliver product on time has been an important factor in the Company's
success. To date, the Company has been able to obtain adequate supplies of its
raw materials in a timely manner from existing sources or, when necessary, from
alternate sources. However, any disruption in the supply of raw materials could
adversely affect the Company's cable production capability and its operating
results.
The Company believes that other fiber optic cable manufacturers generally
carry minimal amounts of raw materials and finished goods inventory. The Company
generally holds raw materials and finished goods inventory in amounts greater
than that of its competitors to ensure a quick response after receiving a
customer's order.
The Company believes its quality control procedures have been instrumental
in achieving the performance and reliability of its products. The Company
produces cable using the quality control procedures of MIL-I-45208 (the primary
standard applicable to most government purchasers of cable).
Since March 1994, the Company's quality management system has been
certified to the internationally recognized ISO 9001 quality standard. ISO 9000
is a series of standards agreed to by the International Organization for
Standardization (ISO). ISO 9001 is the highest level of accreditation and
includes an assessment of 20 elements covering various aspects of design
development, procurement, production,
10
installation and servicing. The Company's certification was obtained through an
audit by a qualified international certifying agency. In order to maintain its
certification, the Company must continue to comply with the standards.
PROPRIETARY RIGHTS
None of the Company's current manufacturing processes or products is
protected by patents. The Company relies on a combination of trade secret,
copyright and trademark law, nondisclosure agreements and technical measures to
establish and protect its rights pertaining to its production technology. Such
protection may not deter misappropriation or preclude competitors from
developing production techniques or equipment with features identical, similar
or superior to the Company's. The Company believes, however, that because of the
rapid pace of technological change in the data communications industry and
particularly in the fiber optic cable segment, legal protection for the
Company's products is less significant to the Company's prospects than the
knowledge, ability and expertise of its management and technical personnel with
respect to the timely development and production of new products and product
enhancements. The Company considers its proprietary knowledge with respect to
the development and manufacture of fiber optic cable to be a valuable asset.
This expertise enables the Company to formulate new cable compositions, develop
special coatings and coating methods, develop and implement manufacturing
improvements and quality control techniques, and design and construct
manufacturing and quality control equipment. The Company restricts access to its
manufacturing facility and engineering documentation to maintain security.
Employees are required to sign nondisclosure agreements.
The Company believes that none of its products, trademarks or other
proprietary rights infringes upon the proprietary rights of others. There can be
no assurance, however, that third parties will not assert infringement claims
against the Company in the future with respect to the Company's present or
future products which may require the Company to enter into license agreements
or result in protracted and costly litigation, regardless of the merits of such
claims.
COMPETITION
The market for fiber optic cable, including the moderate distance market in
which the Company's products are concentrated, is highly competitive. Siecor
Corp. (a joint venture of Siemens AG and Coming) and Lucent Technologies are the
leading manufacturers of fiber optic cable for both the long distance telephone
market and the moderate distance market. Although both manufacture gel-filled,
loose tube cables, a significant portion of Lucent Technologies and Siecor
Corp.'s fiber optic cable sales are tight-buffered fiber optic cable products in
the moderate distance market. Also, Coming and Lucent Technologies are principal
suppliers of optical fiber worldwide. The Company's competitors, including
Siecor Corp. and Lucent Technologies, are more established, having a large
business base in the long distance telephone, gel-filled, loose tube cable
market. Those companies can benefit from greater market recognition and have
greater financial, research and development, production and marketing resources
than the Company.
Additionally, fiber optic cable competes with copper wire cable on the
basis of cost and performance tradeoffs. The cost of the electro-optical
interfaces required for fiber optic systems and higher speed electronics
generally associated with high performance fiber optic systems can make them
uncompetitive in applications where the advantages of optical fiber are not
required. Fiber optic cable also competes with other alternative transmission
media including wireless and satellite communications.
The Company believes that it competes successfully against its competitors
on the basis of breadth of product features, quality, ability to meet delivery
schedules, technical support and service, breadth of distribution channels and
price. Maintaining such competitive advantages will require continued investment
by the Company in product development, sales and marketing. There can be no
assurance that the Company will have sufficient resources to make such
investments or that the Company will be able to make the technological advances
necessary to maintain its competitive position. An increase in compe-
11
tition could have a material adverse effect on the Company's business and
operating results because of price reductions and loss of market share.
Competition could increase if new companies enter the market or if existing
competitors expand their product lines.
EMPLOYEES
As of October 31, 1997, the Company employed a total of 145 persons,
including 55 in sales, marketing and customer service, 12 in engineering,
product development and quality control, 68 in manufacturing, and 10 in finance
and administration. None of the Company's employees is represented by a labor
union. The Company has experienced no work stoppage and believes its employee
relations are excellent. The Company has a monthly bonus plan for all employees
along with an end of year profit sharing plan.
ITEM 2. PROPERTIES
The Company's principal administration, marketing, manufacturing, and
product development facilities are located in a 148,000 square foot building
located adjacent to the Roanoke, Virginia airport and major trucking company
facilitates. These facilities were expanded from 74,000 to 148,000 square feet
through construction which was completed in January 1997 on land purchased by
the Company in 1994 adjacent to the Company's existing facility. The Company
believes that its production equipment is presently operating at approximately
50% of its capacity.
ITEM 3. LEGAL PROCEEDINGS
In the opinion of the Company's management, there are no legal proceedings
pending to which the Company is a party or to which any of its properties is
subject, other than ordinary, routine litigation incidental to the business
which is not expected to have a material adverse effect on the results of
operations, financial condition or cash flows of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no issues or matters submitted to a vote of security holders
during the fourth quarter of the fiscal year ended October 31, 1997.
12
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the Nasdaq National Market under
the symbol "OCCF" and began trading on April 2, 1996. The following table sets
forth for the fiscal periods indicated the high and low sales prices of the
Common Stock, as reported on the Nasdaq National Market, during the two most
recent fiscal years.
FISCAL YEAR ENDED OCTOBER 31, 1997 HIGH LOW
---------------------------------- ------- ------
First Quarter (November 1, 1996 to January 31, 1997) ...... 14 3/4 10 3/8
Second Quarter (February 1 to April 30, 1997) ............ 17 3/4 9 7/8
Third Quarter (May 1 to July 31, 1997) ..................... 13 1/8 7 1/8
Fourth Quarter (August 1 to October 31, 1997) ............ 16 1/4 7 7/8
FISCAL YEAR ENDED OCTOBER 31, 1996
------------------------------------
Second Quarter (April 2 to April 30, 1996)(1) ............ 4 5/8 2 3/8
Third Quarter (May 1 to July 31, 1996)(1) .................. 34 4 1/4
Fourth Quarter (August 1 to October 31, 1996) ............ 20 8 1/4
- ----------
(1) The Company's stock split 2 for 1 on May 31, 1996 and 2 for 1 on June 21,
1996. All per share amounts reported have need adjusted to give retroactive
effect to these stock splits.
As of January 15, 1998, there were an estimated 5,500 holders of record of
the Common Stock.
The Company has not paid or declared any cash dividends on its common stock
since the completion of the initial public offering in April 1996. While there
are no restrictions on the payment of dividends, the Company does not anticipate
the payment of any cash dividends on its common stock for the foreseeable
future.
13
ITEM 6. SELECTED FINANCIAL DATA
OPTICAL CABLE CORPORATION
SELECTED FINANCIAL DATA
YEARS ENDED OCTOBER 31,
---------------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ---------- ------------ ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF INCOME DATA:
Net sales ....................................... $52,189 $ 45,152 $ 36,360 $ 26,217 $ 24,980
Cost of goods sold .............................. 30,613 24,907 20,121 14,138 13,036
------- -------- -------- -------- --------
Gross profit ................................. 21,576 20,245 16,239 12,079 11,944
Total operating expenses ........................ 9,572 8,416 7,660 7,967 7,724
------- -------- -------- -------- --------
Income from operations ........................ 12,004 11,829 8,579 4,112 4,220
Other income (expense), net ..................... (47) 198 (379) (614) (870)
------- -------- -------- -------- --------
Income before income tax expense and extraordi-
nary item .................................... 11,957 12,027 8,200 3,498 3,350
Income tax expense (1) ........................... 4,150 2,806 -- -- --
------- -------- -------- -------- --------
Income before extraordinary item ............ 7,807 9,221 8,200 3,498 3,350
Extraordinary item .............................. -- -- -- (149) --
------- -------- -------- -------- --------
Net income .................................... $ 7,807 $ 9,221 $ 8,200 $ 3,349 $ 3,350
======= ======== ======== ======== ========
Pro forma Income Data (1):
Net income before pro forma income tax provi-
sion, as reported............................. $ 9,221
Pro forma income tax provision ............... 1,747
--------
Pro forma net income ........................ $ 7,474
========
Net income per share (pro forma for 1996) ...... $ 0.202 $ 0.190
======= ========
Weighted average shares outstanding (pro forma for
1996) .......................................... 38,675 39,361
======= ========
BALANCE SHEET DATA:
Working capital ................................. $19,912 $ 14,377 $ 9,076 $ 10,140 $ 6,322
Total assets .................................... 35,214 31,127 18,819 19,056 16,465
Long-term debt, less current maturities ......... -- -- -- 8,000 2,000
Total stockholders' equity ..................... 31,379 23,572 14,952 7,832 7,161
- ----------
(1) Through March 31, 1996, the Company was not subject to federal and state
income taxes since it had elected, under provisions of the Internal Revenue
Code, to be taxed as an S Corporation. In connection with the closing of the
Company's initial public offering (see note 11 to financial statements), the
Company terminated its status as an S Corporation effective March 31, 1996
and became subject to federal and state income taxes. Accordingly, the
statement of income data for the year ended October 31, 1996 includes income
taxes from April 1, 1996, and for informational purposes, the statement of
income data for the year ended October 31, 1996 includes a pro forma
adjustment for income taxes which would have been recorded if the Company
had been subject to income taxes for the entire fiscal year presented.
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
GENERAL
Except for the historical data set forth herein, the following discussion
contains certain forward-looking information. The Company's actual results may
differ materially from these projected results. Factors that could cause or
contribute to such differences include, but are not limited to, level of sales
to key customers, actions by competitors, fluctuations in the price of raw
materials, the Company's dependence on a single manufacturing facility, ability
to protect its proprietary manufacturing technology, dependence on a limited
number of suppliers and technological changes and introductions of new competing
products.
RESULTS OF OPERATIONS
Net Sales
Net sales consists of gross sales of products, less discounts, refunds and
returns. Net sales increased 15.6 percent to $52.2 million in fiscal 1997 from
$45.2 million for fiscal 1996. This increase was attributable to the Company's
continued effort to reach a broader customer base throughout the United States
and internationally with increased advertising, trade show attendance, and
direct sales presence in more states. This effort resulted in greater sales in
all market segments and product types.
Net sales increased 24.2 percent to $45.2 million in fiscal 1996 from $36.4
million for fiscal 1995. This increase was attributable to the Company's
continued effort to reach a broader customer base throughout the United States
and internationally with increased advertising, trade show attendance and direct
sales presence in more states. This effort resulted in greater sales in all
market segments and product types.
The Company's base business is projected to grow rapidly with increasing
market share potential. Many new markets are expected to emerge as fiber optic
sensors are developed for production plant automation, smart highways and
security applications, along with a host of other specialty markets. Most
electronic communication devices produced by the vast number of global suppliers
are expected to rely more heavily on fiber optic communications to achieve their
performance goals. Management believes the Company's unique technological
background and specialty market expertise should lend itself well to capture an
increasing share of this global market along with expected earnings growth.
Optical Cable Corporation also intends to make inroads into various other
markets such as single-mode telecommunications and cable television.
Gross Profit Margin
Cost of goods sold consists of the cost of materials, compensation costs
and overhead related to the Company's manufacturing operations. The Company's
gross profit margin (gross profit as a percentage of net sales) decreased to
41.3 percent in fiscal 1997 from 44.8 percent in fiscal 1996. This decrease was
due to increased fiber prices, the Company's product mix sold, the ratio of
large orders and the ratio of net sales attributable to the Company's
distributors during the year. During fiscal 1997, sales from orders $50,000 or
more approximated 20 percent of net sales compared to 19 percent for fiscal
1996. Discounts on large orders are generally greater than for sales from orders
less than $50,000. In addition, for fiscal 1997, net sales to distributors
approximated 51 percent of net sales versus 49 percent for fiscal 1996.
Discounts on sales to distributors are generally greater than for sales to the
Company's other customer base.
The Company's gross profit margin increased slightly to 44.8 percent in
fiscal 1996 from 44.7 percent in fiscal 1995.
15
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist of the compensation
costs (including sales commissions) for sales and marketing personnel, travel
expenses, customer support expenses, trade show expenses, advertising, the
compensation cost for administration, finance and general management personnel,
as well as legal and accounting fees. Selling, general and administrative
expenses as a percentage of net sales were 18.3 percent in fiscal 1997 compared
to 18.6 percent in fiscal 1996. This lower percentage was primarily the result
of the fact that net sales for fiscal 1997 increased at a faster rate than
selling, general and administrative expenses compared to fiscal 1996. The ratio
of selling, general and administrative expenses as a percentage of net sales was
also impacted due to incurring approximately $350,000 of shareholder related
expenses during fiscal 1997, such as printing and distribution costs for the
annual report and the proxy statement, and costs for the annual meeting of
shareholders, compared to approximately $141,000 of similar expenses in fiscal
1996.
Selling, general and administrative expenses as a percentage of net sales
were 18.6 percent in fiscal 1996 compared to 21.1 percent in fiscal 1995. This
lower percentage was primarily the result of the fact that net sales for fiscal
1996 increased at a faster rate than selling, general and administrative
expenses compared to fiscal 1995.
Interest Expense
The $369,000 reduction in interest expense in fiscal 1996 compared to
fiscal 1995 is due to the Company generating adequate amounts of cash from
operations to meet its cash needs thereby requiring limited use of its revolving
line of credit during fiscal 1997 and 1996.
Income Before Income Tax Expense
Income before income tax expense of $12 million in fiscal 1997 decreased
$70,000 compared to fiscal 1996. This slight decrease was primarily due to
increased sales volume offset by the decrease in gross profit margin.
Income before income tax expense increased 46.7 percent to $12 million for
fiscal 1996 from $8.2 million for fiscal 1995. This increase was primarily due
to increased sales volume and a reduction in interest expense.
Income Taxes
Through March 31, 1996, the Company was not subject to federal and state
income taxes since it had elected to be taxed as an S Corporation. In connection
with the Company's initial public offering (see note 11 to financial
statements), the Company terminated its status as an S Corporation effective
March 31, 1996 and became subject to federal and state income taxes. The
statement of income for the year ended October 31, 1997 includes income taxes,
at an effective tax rate of 34.7 percent, and the statement of income for the
year ended October 31, 1996 includes income taxes from April 1, 1996, and, for
informational purposes, a pro forma adjustment for income taxes, at an effective
tax rate of 37.9 percent, which would have been recorded if the Company had been
subject to income taxes for the entire period presented. The lower effective tax
rate for fiscal 1997 is due primarily to the benefit of the Company's foreign
sales corporation.
The Company recorded a $114,000 net benefit for deferred income taxes upon
termination of the Company's S Corporation status. The adjustment reflects the
net deferred income tax asset balance at March 31, 1996 in accordance with the
provisions of Statement of Financial Accounting Standards No. 109, Accounting
for Income Taxes, which requires an asset and liability approach for the
accounting and financial reporting of income taxes. See note 10 to financial
statements for further details regarding income taxes.
Net Income
Net income for fiscal 1997 was $7.8 million compared to $9.2 million for
fiscal 1996. Net income decreased $1.4 million due primarily to income tax
expense of $4.1 million for fiscal 1997 compared to $2.8 million for fiscal 1996
as a result of the Company's termination of its S Corporation status effective
16
March 31, 1996. Net income for fiscal 1997 increased $333,000, or 4.5 percent
over pro forma net income for fiscal 1996. This increase resulted primarily from
the decrease in income before income tax expense of $70,000, and by the $404,000
decrease in income tax expense in fiscal 1997 from the pro forma income tax
provision in fiscal 1996.
Net income increased 12.4 percent to $9.2 million for fiscal 1996 from $8.2
million for fiscal 1995. This increase was a result of a $3.8 million increase
in income before income tax expense which was offset by the recording of income
tax expense of $2.8 million for fiscal 1996 as a result of the Company's
termination of its S Corporation status effective March 31, 1996.
FINANCIAL CONDITION
Total assets at October 31, 1997 were $35.2 million, an increase of $4.1
million, or 13.1 percent over October 31, 1996. This increase was primarily due
to an increase of $563,000 in trade accounts receivable, net, resulting from the
increased sales volume during fourth quarter 1997 as compared to fourth quarter
1996, an increase of $1.8 million in inventories, and a $2.3 million increase in
property and equipment, net, due to the Company's expansion of its headquarters
facilities. The expansion was funded in part through the $692,000 decrease in
cash and cash equivalents.
Total stockholders' equity at October 31, 1997 increased $7.8 million, or
33.1 percent from October 31, 1996 with net income retained accounting for the
increase.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary capital needs have been to (i) fund working capital
requirements, (ii) repay indebtedness, (iii) purchase property and equipment for
expansion and (iv) fund distributions to its previously sole stockholder
primarily to satisfy his tax liabilities resulting from the Company's S
Corporation status, which was terminated March 31, 1996. The Company's primary
sources of financing have been cash from operations, bank borrowings and
proceeds from the initial public offering of the Company's common stock. The
Company believes that its cash flow from operations and available lines of
credit will be adequate to fund its operations for at least the next twelve
months.
On February 28, 1997, the Company and its bank executed a loan commitment
letter, which renewed its $5 million secured revolving line of credit available
for general corporate purposes and established a $10 million secured line of
credit to fund potential acquisitions, mergers or joint ventures. The lines of
credit are equally and ratably secured by the Company's accounts receivable,
contract rights, inventory, furniture and fixtures, machinery and equipment and
general intangibles. The lines of credit will expire on February 28, 1998,
unless renewed or extended. As of the date hereof, the Company has no additional
material sources of financing.
On October 29, 1997, the Company's Board of Directors authorized the
repurchase of up to $5 million of the Company's common stock in the open market
or in privately negotiated transactions. The Company intends to use excess
working capital and other sources as appropriate to finance the share repurchase
program.
Cash flows from operations were approximately $4.0 million, $4.1 million
and $11.3 million in fiscal 1997, 1996 and 1995, respectively. For fiscal 1997,
cash flows from operations were primarily provided by operating income, offset
by an increase in trade accounts receivable of $552,000, an increase in
inventory of $1.8 million and a decrease in accounts payable and accrued
expenses of $2.3 million. For fiscal 1996, cash flows from operations were
primarily provided by operating income, offset by an increase in trade accounts
receivable of $3.4 million and an increase in inventory of $4.2 million. Cash
flows from operations in fiscal 1995 were primarily provided by operating income
and a decrease in inventory of $2.8 million. In 1995, the Company reduced its
inventory of optical fiber because it had additional access to ready supplies.
Net cash used in investing activities was for expenditures related to
facilities and equipment and was $3.6 million, $3.1 million and $387,000 in
fiscal 1997, 1996 and 1995, respectively. The Company's expansion of its
headquarters facilities was completed in fiscal 1997, and as of October 31,
1997, there were no material commitments for additional capital expenditures.
17
Net cash provided by (used in) financing activities was $(1.1) million,
$193,000 and $(10.5) million in fiscal 1997, 1996 and 1995, respectively. The
net cash used in financing activities in fiscal 1997 consisted of repayment of
debt outstanding under the Company's lines of credit of $1.1 million compared to
an increase of $794,000 in fiscal 1996. The net cash provided by financing
activities in fiscal 1996 also included net proceeds from the issuance of common
stock of $5.6 million, offset by $6.2 million in cash distributions to the
Company's previously sole stockholder for payment of his income taxes with
respect to the taxable income of the Company prior to the termination of the
Company's S Corporation status. The net cash used in financing activities in
fiscal 1995 consisted of a decrease in debt outstanding under the line of credit
of $5.9 million, payments on long-term debt of $3.5 million and cash
distributions to the Company's previously sole stockholder of $1.1 million.
Given the Company's software and hardware and the nature of its industry,
management does not consider the cost of addressing the Year 2000 issue to be a
material event or uncertainty that would cause reported financial information
not to be indicative of future operating results or financial condition.
NEW ACCOUNTING STANDARDS
SFAS No. 128
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, Earnings per Share. SFAS No. 128
establishes standards for computing and presenting earnings per share (EPS) and
applies to entities with publicly held common stock or potential common stock.
SFAS No. 128 simplifies the standards for computing earnings per share
previously found in APB Opinion No. 15, Earnings per Share, and makes them
comparable to international EPS standards. It replaces the presentation of
primary EPS with a presentation of basic EPS. It also requires dual presentation
of basic and diluted EPS on the face of the income statement for all entities
with complex capital structures and requires a reconciliation of the numerator
and denominator of the basic EPS computation to the numerator and denominator of
the diluted EPS computation.
Basic EPS excludes dilution and is computed by dividing income available to
common stockholders by the weighted-average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity.
SFAS No. 128 is effective for financial statements issued for periods
ending after December 15, 1997, including interim periods; earlier application
is not permitted. SFAS No. 128 requires restatement of all prior-period EPS data
presented. It is not anticipated that SFAS No. 128 will have any material effect
on current or prior period EPS data presented by the Company.
SFAS No. 130
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income. SFAS
No. 130 establishes standards for reporting and display of comprehensive income
and its components in a full set of general purpose financial statements. SFAS
No. 130 was issued to address concerns over the practice of reporting elements
of comprehensive income directly in equity.
This Statement requires all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed in equal prominence with the other
financial statements. It does not require a specific format for that financial
statement but requires that an enterprise display an amount representing total
comprehensive income for the period in that financial statement.
SFAS No. 130 is applicable to all entities that provide a full set of
financial statements. Enterprises that have no items of other comprehensive
income in any period presented are excluded from the scope of this Statement.
18
SFAS No. 130 is effective for both interim and annual periods beginning
after December 15, 1997. Comparative financial statements provided for earlier
periods are required to be reclassified to reflect the provisions of this
Statement. It is not anticipated that SFAS No. 130 will have any material effect
on current or prior period financial statement displays presented by the
Company.
SFAS No. 131
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information. SFAS No. 131 establishes standards for the
way public business enterprises are to report information about operating
segments in annual financial statements and requires those enterprises to report
selected information about operating segments in interim financial reports
issued to shareholders. It also establishes standards for related disclosures
about products and services, geographic areas and major customers.
SFAS No. 131 is effective for financial statements for periods beginning
after December 15, 1997. In the initial year of application, comparative
information for earlier years is to be restated, unless it is impracticable to
do so. SFAS No. 131 need not be applied to interim financial statements in the
initial year of its application, but comparative information for interim periods
in the initial year of application shall be reported in financial statements for
interim periods in the second year of application. It is not anticipated that
SFAS No. 131 will have any material effect on current or prior period segment
disclosures presented by the Company.
19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO
FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
PAGE
-----
FINANCIAL STATEMENTS:
Independent Auditors' Report ................................................... 21
Balance Sheets as of October 31, 1997 and 1996 ................................. 22
Statements of Income for the Years ended October 31, 1997, 1996 and 1995 ...... 23
Statements of Stockholders' Equity for the Years ended October 31, 1997, 1996 and
1995 ........................................................................ 24
Statements of Cash Flows for the Years ended October 31, 1997, 1996 and 1995 ... 25
Notes to Financial Statements ................................................... 26
FINANCIAL STATEMENT SCHEDULES:
Financial statement schedules have been omitted since they are not required, not
applicable, or the information is otherwise included in the financial statements
of the Company.
20
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Optical Cable Corporation:
We have audited the accompanying balance sheets of Optical Cable
Corporation as of October 31, 1997 and 1996, and the related statements of
income, stockholders' equity, and cash flows for each of the years in the
three-year period ended October 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Optical Cable Corporation as
of October 31, 1997 and 1996, and the results of its operations and its cash
flows for each of the years in the three-year period ended October 31, 1997, in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Roanoke, Virginia
December 12, 1997
21
OPTICAL CABLE CORPORATION
BALANCE SHEETS
OCTOBER 31, 1997 AND 1996
OCTOBER 31,
----------------------------
1997 1996
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents ....................................... $ 985,807 $ 1,677,739
Trade accounts receivable, net of allowance for doubtful accounts
of $307,400 in 1997 and $300,000 in 1996 ..................... 9,931,276 9,368,476
Other receivables ............................................. 540,102 354,041
Due from employees ............................................. 3,534 1,475
Inventories ................................................... 12,019,443 10,261,437
Prepaid expenses ................................................ 121,046 64,863
Deferred income taxes .......................................... 81,484 155,304
----------- -----------
Total current assets .......................................... 23,682,692 21,883,335
Other assets, net ................................................ 50,953 67,996
Property and equipment, net .................................... 11,480,433 9,175,871
----------- -----------
Total assets ................................................ $35,214,078 $31,127,202
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable ................................................... $ -- $ 1,103,000
Accounts payable and accrued expenses ........................... 2,593,256 5,488,765
Accrued compensation and payroll taxes ........................ 612,736 676,725
Income taxes payable .......................................... 564,999 237,926
----------- -----------
Total current liabilities .................................... 3,770,991 7,506,416
Deferred income taxes .......................................... 64,382 49,227
----------- -----------
Total liabilities ............................................. 3,835,373 7,555,643
----------- -----------
Stockholders' equity:
Preferred stock, no par value, authorized 1,000,000 shares; none
issued and outstanding ....................................... -- --
Common stock, voting; no par value, authorized 50,000,000 shares;
issued and outstanding 38,675,416 shares ..................... 18,594,116 18,594,116
Retained earnings ............................................. 12,784,589 4,977,443
----------- -----------
Total stockholders' equity .................................... 31,378,705 23,571,559
Commitments and contingencies ----------- -----------
Total liabilities and stockholders' equity .................. $35,214,078 $31,127,202
=========== ===========
See accompanying notes to financial statements.
22
OPTICAL CABLE CORPORATION
STATEMENTS OF INCOME
YEARS ENDED OCTOBER 31, 1997, 1996 AND 1995
YEARS ENDED OCTOBER 31,
---------------------------------------------------
1997 1996 1995
--------------- --------------- ---------------
Net sales .......................................... $52,188,850 $45,152,299 $36,359,953
Cost of goods sold ................................. 30,612,690 24,907,373 20,121,355
----------- ----------- -----------
Gross profit .................................... 21,576,160 20,244,926 16,238,598
Selling, general and administrative expenses ...... 9,572,061 8,415,798 7,660,100
----------- ----------- -----------
Income from operations ........................ 12,004,099 11,829,128 8,578,498
Other income (expense):
Interest income ................................. 15,351 94,888 175
Interest expense ................................. (17,930) (9,595) (378,205)
Other, net ....................................... (44,580) 112,988 (377)
----------- ----------- -----------
Other income (expense), net ..................... (47,159) 198,281 (378,407)
----------- ----------- -----------
Income before income tax expense ............... 11,956,940 12,027,409 8,200,091
Income tax expense ................................. 4,149,794 2,806,849 --
----------- ----------- -----------
Net income .................................... $ 7,807,146 $ 9,220,560 $ 8,200,091
=========== =========== ===========
Pro forma income data (unaudited):
Net income before pro forma income tax pro-
vision, as reported ............................. $ 9,220,560
Pro forma income tax provision .................. 1,746,513
-----------
Pro forma net income .............................. $ 7,474,047
===========
Net income per share (pro forma for 1996) ......... $ 0.202 $ 0.190
=========== ===========
Weighted average shares outstanding (pro forma
for 1996) ....................................... 38,675,416 39,360,659
=========== ===========
See accompanying notes to financial statements.
23
OPTICAL CABLE CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED OCTOBER 31, 1997, 1996 AND 1995
COMMON STOCK ADDITIONAL TOTAL
---------------------------- PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
------------ ------------- ------------- --------------- --------------
Balances at October 31, 1994 ......... 36,000,000 $ 596 $ 767,849 $ 7,063,249 $ 7,831,694
Cash distributions to previously sole
stockholder ........................ -- -- -- (1,080,000) (1,080,000)
Net income ........................... -- -- -- 8,200,091 8,200,091
---------- ----------- ---------- ----------- ------------
Balances at October 31, 1995 ......... 36,000,000 596 767,849 14,183,340 14,951,785
Net income -- five months ended
March 31, 1996 ..................... -- -- -- 4,243,117 4,243,117
Issuance of common stock for cash
($2.50 per share, less issuance
costs of $1,139,326).................. 2,675,416 5,549,214 -- -- 5,549,214
Cash distributions to previously sole
stockholder ........................ -- -- -- (6,150,000) (6,150,000)
Recapitalization ..................... -- 13,044,306 (767,849) (12,276,457) --
Net income -- seven months ended
October 31, 1996 ..................... -- -- -- 4,977,443 4,977,443
---------- ----------- ---------- ----------- ------------
Balances at October 31, 1996 ......... 38,675,416 18,594,116 -- 4,977,443 23,571,559
Net income ........................... -- -- -- 7,807,146 7,807,146
---------- ----------- ---------- ----------- ------------
Balances at October 31, 1997 ......... 38,675,416 $18,594,116 $ -- $12,784,589 $ 31,378,705
========== =========== ========== =========== ============
See accompanying notes to financial statements.
24
OPTICAL CABLE CORPORATION
STATEMENTS OF CASH FLOWS
YEARS ENDED OCTOBER 31, 1997, 1996 AND 1995
YEARS ENDED OCTOBER 31,
-------------------------------------------------
1997 1996 1995
-------------- -------------- ---------------
Cash flows from operating activities:
Net income ................................................ $7,807,146 $9,220,560 $ 8,200,091
Adjustments to reconcile net income to net cash pro-
vided by operating activities:
Depreciation and amortization ........................ 706,076 533,445 404,469
Bad debt expense (recovery) ........................... (10,778) 266,366 87,652
Deferred income taxes ................................. 88,975 (106,077) --
Loss on sale of property and equipment ............... -- -- 381
(Increase) decrease in:
Trade accounts receivable ........................... (552,022) (3,447,954) (1,921,238)
Other receivables .................................... (186,061) (255,744) (45,514)
Due from employees ................................. (2,059) 1,750 (2,800)
Inventories .......................................... (1,758,006) (4,228,395) 2,813,002
Prepaid expenses .................................... (56,183) 21,690 (80,721)
Other assets ....................................... 39 116,237 (201,237)
Increase (decrease) in:
Accounts payable and accrued expenses ............... (2,260,416) 1,881,379 1,594,951
Accrued compensation and payroll taxes ............... (63,989) (154,472) 450,928
Income taxes payable ................................. 327,073 237,926 --
---------- ---------- -----------
Net cash provided by operating activities ......... 4,039,795 4,086,711 11,299,964
---------- ---------- -----------
Cash flows from investing activities:
Purchase of property and equipment ........................ (3,628,727) (3,137,421) (387,231)
Proceeds from sale of property and equipment ............ -- -- 20
---------- ---------- -----------
Net cash used in investing activities ............... (3,628,727) (3,137,421) (387,211)
---------- ---------- -----------
Cash flows from financing activities:
Net borrowings (payments) on notes payable ............... (1,103,000) 794,000 (5,903,238)
Payments on long-term debt .............................. -- -- (3,500,000)
Proceeds from issuance of common stock, net of issu-
ance costs .............................................. -- 5,549,214 --
Cash distributions to previously sole stockholder ......... -- (6,150,000) (1,080,000)
---------- ---------- -----------
Net cash provided by (used in) financing ac-
tivities.......................................... (1,103,000) 193,214 (10,483,238)
---------- ---------- -----------
Net increase (decrease) in cash and cash equivalents ...... (691,932) 1,142,504 429,515
Cash and cash equivalents at beginning of year ............ 1,677,739 535,235 105,720
---------- ---------- -----------
Cash and cash equivalents at end of year .................. $ 985,807 $1,677,739 $ 535,235
========== ========== ===========
Supplemental Disclosure of Cash Flow Information:
Cash payments for interest .............................. $ 17,930 $ 9,595 $ 386,663
========== ========== ===========
Income taxes paid ....................................... $3,733,746 $2,675,000 $ --
========== ========== ===========
Noncash investing activities - capital expenditures
accrued in accounts payable ........................... $ 245,566 $ 880,659 $ --
========== ========== ===========
See accompanying notes to financial statements.
25
OPTICAL CABLE CORPORATION
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED OCTOBER 31, 1997, 1996 AND 1995
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Description of Business
Optical Cable Corporation (the Company) manufactures and markets a broad
range of fiber optic cables for "high bandwidth" transmission of data, video and
audio communications over moderate distances. The Company's fiber optic cables
are sold nationwide and in over 68 foreign countries (also see note 9).
(b) Cash Equivalents
Cash equivalents of $763,000 and $1,397,510 at October 31, 1997 and 1996,
respectively, consist of overnight repurchase agreements at October 31, 1997 and
money market mutual funds at October 31, 1996. For purposes of the statements of
cash flows, the Company considers all highly liquid debt instruments with
original maturities of three months or less to be cash equivalents.
(c) Inventories
Inventories of raw materials and production supplies are stated at the
lower of cost (specific identification for optical fibers and first-in,
first-out for other raw materials and production supplies) or market.
Inventories of work in process and finished goods are stated at average cost,
which includes raw materials, direct labor and manufacturing overhead.
(d) Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization
are provided for using both straight-line and declining balance methods over the
estimated useful lives of the assets. Estimated useful lives are thirty-nine
years for buildings and improvements and five to seven years for machinery and
equipment and furniture and fixtures.
(e) Revenue Recognition
Revenue is recognized at the time of product shipment or delivery to the
customer, based on shipping terms.
(f) Income Taxes
Through March 31, 1996, the Company was not subject to federal and state
income taxes since it had elected, under provisions of the Internal Revenue
Code, to be taxed as an S Corporation. In lieu of corporation income taxes, the
stockholders of an S Corporation are taxed on their proportionate share of the
Company's taxable income.
In connection with the closing of the Company's initial public offering
(see note 11), the Company terminated its status as an S Corporation effective
March 31, 1996 and became subject to federal and state income taxes.
Accordingly, the statement of income for the year ended October 31, 1996
includes income taxes from April 1, 1996, and for informational purposes, the
statement of income for the year ended October 31, 1996 includes a pro forma
adjustment for income taxes which would have been recorded if the Company had
been subject to income taxes for the entire fiscal year presented.
Effective March 31, 1996, income taxes are accounted for under the asset
and liability method. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carryforwards. Deferred
tax assets and liabilities are
26
OPTICAL CABLE CORPORATION
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED OCTOBER 31, 1997, 1996 AND 1995 - (CONTINUED)
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
(g) Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
The Company adopted the provisions of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, on
November 1, 1996. This Statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell. Adoption of this Statement did not have a material impact on the Company's
financial position, results of operations, or liquidity.
(h) Stock Option Plan
Prior to November 1, 1996, the Company accounted for its stock option plan
in accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, Accounting for Stock Issued to Employees, and related interpretations.
As such, compensation expense would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price. On
November 1, 1996, the Company adopted SFAS No. 123, Accounting for Stock-Based
Compensation, which permits entities to recognize as expense over the vesting
period the fair value of all stock-based awards on the date of grant.
Alternatively, SFAS No. 123 also allows entities to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma net income and pro forma
earnings per share disclosures for employee stock option grants made in 1995 and
future years as if the fair-value-based method defined in SFAS No. 123 had been
applied. The Company has elected to continue to apply the provisions of APB
Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123.
(i) Pro Forma Net Income Per Share
Pro forma net income per share was computed by dividing pro forma net
income by the pro forma weighted average number of common shares outstanding
during the period (as adjusted for the recapitalization) and by deeming to be
outstanding the number of shares (1,800,000) the Company would have needed to
issue at the initial public offering price per share ($2.50) to pay a $1 million
cash distribution to the previously sole stockholder in December 1995 and a $3.5
million cash distribution to the previously sole stockholder out of the proceeds
of the initial public offering.
(j) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
27
OPTICAL CABLE CORPORATION
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED OCTOBER 31, 1997, 1996 AND 1995 - (CONTINUED)
(2) ALLOWANCE FOR DOUBTFUL ACCOUNTS RECEIVABLE
A summary of changes in the allowance for doubtful accounts receivable for
the years ended October 31, 1997, 1996 and 1995 follows:
YEARS ENDED OCTOBER 31,
---------------------------------------------
1997 1996 1995
------------- ------------- -------------
Balance at beginning of year ...... $ 300,000 $ 200,000 $ 250,000
Bad debt expense (recovery) ......... (10,778) 266,366 87,652
Losses charged to allowance ......... (26,592) (176,512) (170,070)
Recoveries added to allowance ...... 44,770 10,146 32,418
--------- ---------- ----------
Balance at end of year ............ $ 307,400 $ 300,000 $ 200,000
========= ========== ==========
(3) INVENTORIES
Inventories at October 31, 1997 and 1996 consist of the following:
OCTOBER 31,
----------------------------
1997 1996
------------- ------------
Finished goods ............ $ 4,854,697 $ 2,465,659
Work in process ......... 1,976,970 3,104,339
Raw materials ............ 5,125,044 4,645,843
Production supplies ...... 62,732 45,596
----------- -----------
$12,019,443 $10,261,437
=========== ===========
(4) PROPERTY AND EQUIPMENT
Property and equipment at October 31, 1997 and 1996 consists of the
following:
OCTOBER 31,
---------------------------------
1997 1996
--------------- ---------------
Land ................................................ $ 2,745,327 $ 2,745,327
Building and improvements ........................... 7,058,660 3,401,997
Machinery and equipment .............................. 4,578,631 3,982,889
Furniture and fixtures .............................. 732,963 428,742
Construction in progress ........................... 33,619 1,596,611
------------ ------------
Total property and equipment, at cost ............ 15,149,200 12,155,566
Less accumulated amortization and depreciation ...... (3,668,767) (2,979,695)
------------ ------------
Property and equipment, net ........................ $ 11,480,433 $ 9,175,871
============ ============
28
OPTICAL CABLE CORPORATION
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED OCTOBER 31, 1997, 1996 AND 1995 - (CONTINUED)
(5) NOTES PAYABLE
On February 28, 1997, the Company and its bank executed a loan commitment
letter, which renewed its $5 million secured revolving line of credit available
for general corporate purposes and established a $10 million secured line of
credit to fund potential acquisitions, mergers or joint ventures. The lines of
credit bear interest at 1.50 percent above the monthly LIBOR rate (5.80 percent
as of October 31, 1997) and are equally and ratably secured by the Company's
accounts receivable, contract rights, inventory, furniture and fixtures,
machinery and equipment and general intangibles. The lines of credit will expire
on February 28, 1998, unless renewed or extended. While the lines of credit do
not require a compensating balance that legally restricts the use of cash
amounts, at the bank's request, the Company has agreed to maintain an
unrestricted target cash balance of $125,000.
(6) LEASES
In August 1994, the Company entered into a four-year operating lease for
computerized mailing and shipping equipment with an unrelated party. Rent
expense under this lease amounted to $25,030 for the years ended October 31,
1997, 1996 and 1995. Future minimum rental payments required under the lease are
$23,680 payable in fiscal year 1998.
(7) RELATED PARTY AGREEMENTS
Effective November 1, 1994, the Company entered into two separate one-year
employment agreements with its previously sole stockholder. Total compensation
under the agreements consisted of salary payments equal to 6 percent of the
previous fiscal year's net sales. Effective February 1, 1995, these agreements
were replaced by an employment agreement that reduces the salary payment
percentage from 6 percent to 1 percent and provides for sales commissions equal
to 1 percent of the positive difference between the current fiscal year's net
sales and the prior fiscal year's net sales. Compensation under these agreements
amounted to $521,889, $451,523 and $672,371 for the years ended October 31,
1997, 1996 and 1995, respectively.
Effective November 2, 1994, the Company entered into a services agreement
to pay sales commissions of 4 percent of net foreign sales to OCC-VI, Inc., a
foreign sales corporation. All of the outstanding shares of common stock of
OCC-VI, Inc. are beneficially owned by the Company's previously sole
stockholder. For the year ended October 31, 1995, the Company recorded
commissions expense of $343,290 related to the services agreement. As of
September 28, 1995, the Company terminated this services agreement.
(8) EMPLOYEE BENEFITS
The Company's independently administered self-insurance program provides
health insurance coverage for employees and their dependents on a
cost-reimbursement basis. Under the program, the Company is obligated for claims
payments. A stop loss insurance contract executed with an insurance carrier
covers claims in excess of $35,000 per covered individual and $763,255 in the
aggregate per year. During the years ended October 31, 1997, 1996 and 1995,
total claims expense of $872,582, $876,481 and $545,543, respectively, was
incurred, which represents claims processed and an estimate for claims incurred
but not reported.
29
OPTICAL CABLE CORPORATION
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED OCTOBER 31, 1997, 1996 AND 1995 - (CONTINUED)
Effective January 1, 1994, the Company adopted a 401(k) retirement savings
plan. To become eligible for the plan, an employee must complete six months of
service and be at least 21 years of age. The plan allows participants to
contribute through salary reduction up to 6 percent of their annual compensation
on a pretax basis. Company matching contributions are two dollars for every one
dollar contributed by an employee up to 4 percent of the employees' annual
compensation. The Company made matching contributions to the plan of $313,365,
$233,072 and $205,011 for the years ended October 31, 1997, 1996 and 1995,
respectively.
The Company and its previously sole stockholder adopted on March 1, 1996 a
stock incentive plan which is called the Optical Cable Corporation 1996 Stock
Incentive Plan (the "Plan"). The Plan is intended to provide a means for
employees to increase their personal financial interest in the Company, thereby
stimulating the efforts of these employees and strengthening their desire to
remain with the Company through the use of stock incentives. The Company has
reserved 4,000,000 shares of common stock for issuance pursuant to incentive
awards under the Plan. At October 31, 1997, there were 3,336,500 additional
shares available for grant under the Plan. Under the Plan, stock options may be
granted at not less than fair market value on the date of grant. The options
have terms ranging from 8.75 to 10 years and vest 25 percent after two years, 50
percent after three years, 75 percent after four years and 100 percent after
five years.
The per share weighted-average fair value of stock options granted during
1997 and 1996 was $9.38 and $2.18, respectively, on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions: 1997 -- expected cash dividend yield of zero percent, risk-free
interest rate of 6.08 percent, expected volatility of 85.5 percent and an
expected life of 8.75 years; 1996 -- expected cash dividend yield of zero
percent, risk-free interest rate of 6.28 percent, expected volatility of 85.5
percent and an expected life of 10 years.
The Company applies APB Opinion No. 25 in accounting for its Plan and,
accordingly, no compensation cost has been recognized for its stock options in
the financial statements. Had compensation cost for the Company's Plan been
determined consistent with SFAS No. 123, the Company's net income (pro forma for
1996) and net income per share (pro forma for 1996) would have been reduced to
the SFAS No. 123 pro forma amounts indicated below:
YEARS ENDED OCTOBER 31,
---------------------------
1997 1996
------------- -----------
Net income:
As reported (pro forma for 1996 - unaudited) ...... $ 7,807,146 $7,474,047
=========== ==========
Pro forma .......................................... $ 7,638,186 $7,400,134
=========== ==========
Net income per share:
As reported (pro forma for 1996 - unaudited) ...... $ 0.202 $ 0.190
=========== ==========
Pro forma .......................................... $ 0.197 $ 0.188
=========== ==========
30
OPTICAL CABLE CORPORATION
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED OCTOBER 31, 1997, 1996 AND 1995 - (CONTINUED)
Stock option activity during the periods indicated is as follows:
NUMBER OF WEIGHTED-AVERAGE
SHARES EXERCISE PRICE
----------- -----------------
Balance at October 31, 1995 .............................. -- $ --
Granted ................................................ 460,000 2.500
Forfeited ............................................. (18,000) 2.500
-------
Balance at October 31, 1996 (no options exercisable) . 442,000 2.500
Granted ................................................ 254,000 11.125
Forfeited ............................................. (32,500) 6.348
-------
Balance at October 31, 1997 (no options exercisable,
424,000 options at exercise price of $2.50 per
share with remaining contractual life of 8.5
years, and 239,500 options at exercise price of
$11.125 per share with remaining contractual life
of 8.5 years) ......................................... 663,500 5.613
=======
(9) BUSINESS AND CREDIT CONCENTRATIONS
The Company provides credit, in the normal course of business, to various
commercial enterprises, governmental entities and not-for-profit organizations.
Concentration of credit risk with respect to trade receivables is limited due to
the Company's large number of customers. The Company also manages exposure to
credit risk through credit approvals, credit limits and monitoring procedures.
Management believes that credit risks at October 31, 1997 and 1996 have been
adequately provided for in the financial statements.
For the years ended October 31, 1997, 1996 and 1995, 73 percent, 75 percent
and 76 percent, respectively, of net sales were from customers located in the
United States, while 27 percent, 25 percent and 24 percent, respectively, were
from international customers. Europe accounted for approximately 10 percent of
net sales for the year ended October 31, 1997 while no foreign geographic areas
accounted for more than 10 percent of net sales for the years ended October 31,
1996 and 1995. As of October 31, 1997 and 1996, there were no significant
amounts receivable from any one customer other than those described below.
For the year ended October 31, 1997, 22 percent of net sales were
attributable to two major domestic distributors. The combined related trade
accounts receivable for these distributors at October 31, 1997 totaled
approximately $2,265,000. No single customer or other distributor accounted for
more than 5 percent of net sales for the year ended October 31, 1997. As of
October 31, 1997, no single customer or other distributor had an outstanding
balance payable to the Company in excess of 5 percent of total stockholders'
equity.
For the year ended October 31, 1996, 12 percent of net sales were
attributable to one major domestic distributor. The related trade accounts
receivable for this distributor at October 31, 1996 totaled approximately
$2,468,000. No single customer or other distributor accounted for more than 5
percent of net sales for the year ended October 31, 1996. As of October 31,
1996, no single customer or other distributor had an outstanding balance payable
to the Company in excess of 5 percent of total stockholders' equity.
For the year ended October 31, 1995, 10 percent of net sales were
attributable to one major domestic distributor. No single customer or other
distributor accounted for more than 5 percent of net sales for the year ended
October 31, 1995.
31
OPTICAL CABLE CORPORATION
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED OCTOBER 31, 1997, 1996 AND 1995 - (CONTINUED)
(10) INCOME TAXES
The Company recorded a $114,045 net benefit for deferred income taxes upon
termination of the Company's S Corporation status. The adjustment reflects the
net deferred income tax asset balance at March 31, 1996 in accordance with the
provisions of Statement of Financial Accounting Standards No. 109, Accounting
for Income Taxes, which requires an asset and liability approach for the
accounting and financial reporting of income taxes. The components of the net
deferred tax asset at March 31, 1996 were substantially the same as the October
31, 1996 components presented below.
Income tax expense for the years ended October 31, 1997 and 1996 consists
of:
YEAR ENDED OCTOBER 31, 1997 CURRENT DEFERRED TOTAL
- ----------------------------- ------------- ---------- ------------
U.S. Federal ............... $ 3,654,654 $ 78,224 $ 3,732,878
State ..................... 406,165 10,751 416,916
----------- -------- -----------
Totals ..................... $ 4,060,819 $ 88,975 $ 4,149,794
=========== ======== ===========
YEAR ENDED OCTOBER 31, 1996 CURRENT DEFERRED TOTAL
- ----------------------------- ------------- --------- ------------
U.S. Federal ............... $ 2,556,601 $ (93,490) $ 2,463,111
State ..................... 356,325 (12,587) 343,738
----------- --------- -----------
Totals ..................... $ 2,912,926 $(106,077) $ 2,806,849
=========== ========= ===========
Reported income tax expense for the years ended October 31, 1997 and 1996
differs from the "expected" tax expense, computed by applying the U.S. Federal
statutory income tax rate of 35 percent to income before income tax expense, as
follows:
YEARS ENDED OCTOBER 31,
-------------------------------
1997 1996
-------------- --------------
"Expected" tax expense ................................. $ 4,184,929 $4,209,593
Increase (reduction) in income tax expense resulting from:
Foreign Sales Corporation benefit ..................... (164,459) (98,473)
State income taxes, net of federal benefits ............ 254,592 215,967
S Corporation taxable income for the five months ended
March 31, 1996 ....................................... -- (1,485,091)
Net deferred income tax asset balance at March 31, 1996. -- (114,045)
Other differences, net ................................. (125,268) 78,898
----------- ----------
Reported income tax expense ........................... $ 4,149,794 $2,806,849
=========== ==========
32
OPTICAL CABLE CORPORATION
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED OCTOBER 31, 1997, 1996 AND 1995 - (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the Company's net deferred tax asset as of October 31, 1997 and 1996
are presented below:
OCTOBER 31,
----------------------------
1997 1996
------------- ------------
Deferred tax assets:
Accounts receivable, due to allowance for doubtful accounts ......... $ 115,662 $ 113,775
Inventories, due to additional costs inventoried for tax purposes pur-
suant to the Tax Reform Act of 1986.................................. 64,671 91,781
Self-insured health care costs, due to accrual for financial reporting
purposes ............................................................ 45,986 43,780
Compensated absences due to accrual for financial reporting pur-
poses ............................................................... 25,076 --
---------- ---------
Total gross deferred tax assets .................................... 251,395 249,336
Less valuation allowance ............................................. -- --
---------- ---------
Net deferred tax assets ............................................. 251,395 249,336
Deferred tax liabilities:
Plant and equipment, due to differences in depreciation and capital
gain recognition ................................................... (64,381) (49,227)
Other receivables, due to accrual for financial reporting purposes ... (169,912) (94,032)
---------- ---------
Total gross deferred tax liabilities .............................. (234,293) (143,259)
---------- ---------
Net deferred tax asset, including current net tax asset of $81,484 in 1997
and $155,304 in 1996, and noncurrent net tax liability of
$64,382 in 1997 and $49,227 in 1996................................. $ 17,102 $ 106,077
========== =========
Based on the Company's historical and current pretax earnings, management
believes that it is more likely than not that the recorded deferred tax assets
will be realized.
(11) RECAPITALIZATION AND INITIAL PUBLIC OFFERING
During fiscal year 1996, the Company's Board of Directors authorized the
filing of a registration statement for a public offering of the Company's common
stock. In connection with the public offering, the Board and the previously sole
stockholder approved an increase in the number of authorized shares of common
stock from 50,000 shares to 50,000,000 shares, a recapitalization involving an
exchange of all outstanding $1 par value common stock (596 shares) on a
60,403-for-1 basis for no par value common stock (36,000,000 shares) and the
authorization of 1,000,000 shares of preferred stock, no par value, issuable in
multiple series.
On April 1, 1996, the Company completed a public offering of 2,675,416
shares of the Company's common stock from which it received net proceeds of
approximately $5.5 million.
In connection with the recapitalization, additional paid-in capital as of
March 31, 1996 has been reclassified to no par value common stock, and the
amount of the undistributed taxable S Corporation earnings remaining as of March
31, 1996 has been reclassified to no par value common stock.
33
OPTICAL CABLE CORPORATION
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED OCTOBER 31, 1997, 1996 AND 1995 - (CONTINUED)
(12) FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, Disclosures About Fair
Value of Financial Instruments ("SFAS No. 107"), requires the Company to
disclose estimated fair values of its financial instruments. SFAS No. 107
defines the fair value of a financial instrument as the amount at which the
instrument could be exchanged in a current transaction between willing parties.
The carrying amounts reported in the balance sheet for cash, cash equivalents,
trade accounts receivable, other receivables, notes payable, accounts payable
and accrued expenses approximate fair value because of the short maturity of
these instruments.
(13) FUTURE ACCOUNTING CONSIDERATION -- EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, Earnings per Share (SFAS No. 128).
SFAS No. 128 establishes standards for computing and presenting earnings per
share (EPS) and applies to entities with publicly held common stock or potential
common stock. SFAS No. 128 simplifies the standards for computing earnings per
share previously found in APB Opinion No. 15, Earnings per Share, and makes them
comparable to international EPS standards. It replaces the presentation of
primary EPS with a presentation of basic EPS. It also requires dual presentation
of basic and diluted EPS on the face of the income statement for all entities
with complex capital structures and requires a reconciliation of the numerator
and denominator of the basic EPS computation to the numerator and denominator of
the diluted EPS computation.
Basic EPS excludes dilution and is computed by dividing income available to
common stockholders by the weighted-average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity.
SFAS No. 128 is effective for financial statements issued for periods
ending after December 15, 1997, including interim periods; earlier application
is not permitted. SFAS No. 128 requires restatement of all prior-period EPS data
presented. It is not anticipated that SFAS No. 128 will have any material effect
on current or prior period EPS data presented by the Company.
34
OPTICAL CABLE CORPORATION
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED OCTOBER 31, 1997, 1996 AND 1995 - (CONTINUED)
(14) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the unaudited quarterly results of operations
for the years ended October 31, 1997 and 1996:
QUARTER ENDED
------------------------------------------------------------
YEAR ENDED OCTOBER 31, 1997 JANUARY 31 APRIL 30 JULY 31 OCTOBER 31
- ---------------------------------- ------------- ------------- ------------- ------------
Net sales ........................ $12,491,311 $10,645,571 $14,285,834 $14,766,134
Gross profit ..................... 5,351,665 4,292,588 5,616,809 6,315,098
Income before income taxes ...... 3,203,870 2,035,806 3,102,845 3,614,419
Net income ..................... 2,080,361 1,312,523 2,016,683 2,397,579
Net income per share ............ 0.054 0.034 0.052 0.062
QUARTER ENDED
------------------------------------------------------------
YEAR ENDED OCTOBER 31, 1996 JANUARY 31 APRIL 30 JULY 31 OCTOBER 31
- -------------------------------------- ------------- ------------- ------------- ------------
Net sales ........................... $10,342,472 $10,183,960 $10,862,064 $13,763,803
Gross profit ........................ 4,707,021 4,096,839 4,953,023 6,488,043
Income before income taxes ......... 2,774,994 2,252,228 2,983,232 4,016,955
Net income ........................... 2,774,994 2,068,288 1,858,823 2,518,455
Pro forma net income ............... 1,709,397 1,387,372 1,858,823 2,518,455
Pro forma net income per share ...... 0.045 0.036 0.046 0.063
35
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information contained in the Proxy Statement under the captions
"PROPOSAL NO. 1, ELECTION OF DIRECTORS" and "EXECUTIVE OFFICERS AND OTHER
SIGNIFICANT EMPLOYEES" concerning directors, persons nominated to become
directors, executive officers and certain other significant employees of the
Company is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information contained in the Proxy Statement under the captions
"EXECUTIVE COMPENSATION", and under the caption "PROPOSAL NO. 1, ELECTION OF
DIRECTORS" concerning compensation of directors, is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained in the Proxy Statement under the caption
"BENEFICIAL OWNERSHIP OF COMMON STOCK" is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained in the Proxy Statement under the caption "CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS" is incorporated herein by reference.
36
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Index of Financial Statements
The Company's financial statements and related information are included
in Part II, Item 8 of this Form 10-K on pages 20 through 35.
2. Index of Financial Statement Schedules
None.
3. Index of Exhibits
The documents filed as exhibits to this Form 10-K pursuant to Item 601 of
Regulation S-K are:
EXHIBIT
NUMBER DESCRIPTION
- ------------ ----------------------------------------------------------------------------------
3.1 Amended and Restated Articles of Incorporated of Optical Cable Corporation
3.2 Bylaws of Optical Cable Corporation, as amended
4.1 Form of certificate representing Common Stock
10.1 Royalty Agreement, dated November 1, 1993, by and between Robert
Kopstein and Optical Cable Corporation
10.2 Assignment of Technology Rights from Robert Kopstein to Optical
Cable Corporation, effective as of October 31, 1994
10.3 Employment Agreement by and between Optical Cable Corporation and
Robert Kopstein, effective March 12, 1997
10.4 Tax Indemnification Agreement, dated as of October 19, 1995, by
and between Optical Cable Corporation and Robert Kopstein
10.5 Optical Cable Corporation 1996 Stock Incentive Plan (filed as
exhibit 28.1 to the registrant's Registration Statement on Form
S-8 filed on August 2, 1996 (file no. 333-09433), and
incorporated herein by reference thereto)
10.6 Loan Agreement, dated April 25, 1997, by and between Optical Cable Corpora-
tion and First Union National Bank of Virginia
10.7 Security Agreement, dated April 25, 1997, between Optical Cable Corporation
and First Union National Bank of Virginia
23 Consent of KPMG Peat Marwick LLP to incorporation by reference of
independent auditors' report included in this Form 10-K, into
registrant's registration statement on Form S-8
27 Financial Data Schedule
(b) Reports on Form 8-K
A Form 8-K dated October 30, 1997 was filed announcing that the Board of
Directors of the Company had authorized the repurchase of up to $5 million
of the Company's common stock.
(c) Exhibits
The documents set forth in the index of exhibits above are filed as
exhibits to this Form 10-K pursuant to Item 601 of Regulation S-K and, if
not incorporated by reference, are attached hereto.
37
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
OPTICAL CABLE CORPORATION
Date: January 29, 1998 By /s/ Robert Kopstein
-------------------------
Robert Kopstein
Chairman of the Board
President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated as of January 29, 1998.
/s/ Robert Kopstein Chairman of the Board, President, Chief Executive
- --------------------------------- Officer and Director
Robert Kopstein (principal executive officer)
/s/ Luke J. Huybrechts Senior Vice President of Sales and Director
- ---------------------------------
Luke J. Huybrechts
/s/ Kenneth W. Harber Vice President of Finance, Treasurer, Secretary and
- --------------------------------- Director
Kenneth W. Harber (principal financial and accounting officer)
/s/ Randall H. Frazier Director
- ---------------------------------
Randall H. Frazier
/s/ John M. Holland Director
- ---------------------------------
John M. Holland
38
EXHIBIT 3.1
OPTICAL CABLE CORPORATION
AMENDED AND RESTATED ARTICLES OF INCORPORATION
ARTICLE I
NAME
The name of the corporation is Optical Cable Corporation (the
"Corporation").
ARTICLE II
PURPOSE
The Corporation is organized to engage in the development, manufacture
and sale of optical fiber cables, specialty cables and cable assemblies. In
addition, the Corporation shall have the power to engage in any lawful business
not required by the Virginia Stock Corporation Act to be stated in the Articles
of Incorporation.
ARTICLE III
AUTHORIZED SHARES
3.1 Number and Designation. The aggregate number and designation of
shares that the Corporation shall have authority to issue are as follows:
Class Number of Shares
----- ----------------
Preferred, no par value 1,000,000
Common, no par value 50,000,000
-1-
3.2 Preemptive Rights. No holder of outstanding shares shall have any
preemptive right with respect to (i) any shares of any class of the Corporation,
whether now or hereafter authorized, (ii) any warrants, rights or options to
purchase any such shares, or (iii) any obligations convertible into any such
shares or into warrants, rights or options to purchase any such shares.
ARTICLE IV
PREFERRED SHARES
4.1 Issuance in Series. (a) The Board of Directors is authorized to
issue Preferred Shares from time to time in one or more series and to provide
for the designation, preferences, limitations and relative rights of the shares
of each series by the adoption of Articles of Amendment to the Articles of
Incorporation of the Corporation setting forth:
(i) The maximum number of shares in the series and the
designation of the series, which designation shall distinguish the
shares thereof from the shares of any other series or class;
(ii) Whether shares of the series shall have special,
conditional or limited voting rights, or no right to vote, except to
the extent prohibited by law;
(iii) Whether shares of the series are redeemable or
convertible (x) at the option of the Corporation, a shareholder or
another person or upon the occurrence of a designated event, (y) for
cash, indebtedness, securities or other property, and (z) in a
designated amount or in an
-2-
amount determined in accordance with a designated formula or
by reference to extrinsic data or events;
(iv) Any right of holders of shares of the series to
distributions, calculated in any manner, including the rate or rates of
dividends, and whether dividends shall be cumulative, noncumulative or
partially cumulative;
(v) The amount payable upon the shares of the series in the
event of voluntary or involuntary liquidation, dissolution or winding
up of the affairs of the Corporation; and
(vi) Any other preferences, limitations or specified rights
(including a right that no transaction of a specified nature shall be
consummated while any shares of such series remain outstanding except
upon the assent of all or a specified portion of such shares) now or
hereafter permitted by the laws of the Commonwealth of Virginia and not
inconsistent with the provisions of this Section 4.1.
(b) All Preferred Shares, regardless of series, shall rank on a parity
with all other Preferred Stock as to dividends (whether or not the dividend
rates or payment dates are different) and as to rights in the liquidation,
dissolution or winding up of affairs of the Corporation (whether or not the
redemption or liquidation prices are different).
4.2 Articles of Amendment. Before the issuance of any shares of a
series, Articles of Amendment establishing such series shall be filed with and
made effective by the State Corporation Commission of Virginia, as required by
law.
-3-
ARTICLE V
COMMON SHARES
5.1 Voting Rights. The holders of outstanding Common Shares shall, to
the exclusion of the holders of any other class of shares of the Corporation,
have the sole power to vote for the election of directors and for all other
purposes without limitation, except (i) as otherwise provided in the Articles of
Amendment establishing any series of Preferred Shares or (ii) as may be required
by law.
5.2 Distributions. Subject to the rights of the holders of shares, if
any, ranking senior to the Common Shares as to dividends or rights in the
liquidation, dissolution or winding up of the affairs of the Corporation, the
holders of the Common Shares shall be entitled to distributions, including
dividends, when declared by the Board of Directors and to the net assets of the
Corporation upon the liquidation, dissolution or winding up of the affairs of
the Corporation.
ARTICLE VI
LIMIT ON LIABILITY AND INDEMNIFICATION
6.1 Definitions. For purposes of this Article the follow ing
definitions shall apply:
(i) "Corporation" means this Corporation only and no
predecessor entity or other legal entity;
-4-
(ii) "expenses" include counsel fees, expert witness fees,
and costs of investigation, litigation and appeal, as well as any
amounts expended in asserting a claim for indemnification;
(iii) "liability" means the obligation to pay a judg ment,
settlement, penalty, fine, or other such obligation, including, without
limitation, any excise tax assessed with respect to an employee benefit
plan;
(iv) "legal entity" means a corporation, partnership, joint
venture, trust, employee benefit plan or other enter prise;
(v) "predecessor entity" means a legal entity the existence
of which ceased upon its acquisition by the Corporation in a merger or
otherwise; and
(vi) "proceeding" means any threatened, pending, or completed
action, suit, proceeding or appeal whether civil, criminal,
administrative or investigative and whether formal or informal.
6.2 Limit on Liability. In every instance in which the Virginia Stock
Corporation Act, as it exists on the date hereof or may hereafter be amended,
permits the limitation or elimi nation of liability of directors or officers of
a corporation to the corporation or its shareholders, the directors and officers
of this Corporation shall not be liable to the Corporation or its shareholders.
6.3 Indemnification of Directors and Officers. The Corpo ration shall
indemnify any individual who is, was or is
-5-
threatened to be made a party to a proceeding (including a proceeding by or in
the right of the Corporation) because such individual is or was a director or
officer of the Corporation or because such individual is or was serving the
Corporation, or any other legal entity in any capacity at the request of the
Corpo ration while a director or officer of the Corporation, against all
liabilities and reasonable expenses incurred in the proceed ing except such
liabilities and expenses as are incurred because of such individual's willful
misconduct or knowing violation of the criminal law. Service as a director or
officer of a legal entity controlled by the Corporation shall be deemed service
at the request of the Corporation. The determination that indemnification under
this Section 6.3 is permissible and the evaluation as to the reasonableness of
expenses in a specific case shall be made, in the case of a director, as
provided by law, and in the case of an officer, as provided in Section 6.4 of
this Article; provided, however, that if a majority of the directors of the
Corporation has changed after the date of the alleged conduct giving rise to a
claim for indemnification, such determination and evaluation shall, at the
option of the person claiming indemnification, be made by special legal counsel
agreed upon by the Board of Directors and such person. Unless a deter mination
has been made that indemnification is not permissible, the Corporation shall
make advances and reimbursements for expenses incurred by a director or officer
in a proceeding upon receipt of an undertaking from such director or officer to
repay
-6-
the same if it is ultimately determined that such director or officer is not
entitled to indemnification. Such undertaking shall be an unlimited, unsecured
general obligation of the director or officer and shall be accepted without
reference to such director's or officer's ability to make repayment. The
termination of a proceeding by judgment, order, settlement, conviction, or upon
a plea of nolo contendere or its equivalent shall not of itself create a
presumption that a director or officer acted in such a manner as to make such
director or officer ineligible for indemnification. The Corporation is
authorized to contract in advance to indemnify and make advances and
reimbursements for expenses to any of its directors or officers to the same
extent provided in this Section 6.3.
6.4 Indemnification of Others. The Corporation may, to a lesser extent
or to the same extent that it is required to provide indemnification and make
advances and reimbursements for expenses to its directors and officers pursuant
to Section 6.3, provide indemnification and make advances and reimbursements for
expenses to its employees and agents, the directors, officers, employees and
agents of its subsidiaries and predecessor entities, and any person serving any
other legal entity in any capacity at the request of the Corporation, and may
contract in advance to do so. The determination that indemnification under this
Section 6.4 is permissible, the authorization of such indemnification and the
evaluation as to the reasonableness of expenses in a specific case shall be made
as authorized from time
-7-
to time by general or specific action of the Board of Directors, which action
may be taken before or after a claim for indemnifi cation is made, or as
otherwise provided by law. No person's rights under Section 6.3 of this Article
shall be limited by the provisions of this Section 6.4.
6.5 Miscellaneous. The rights of each person entitled to
indemnification under this Article shall inure to the benefit of such person's
heirs, executors and administrators. Special legal counsel selected to make
determinations under this Article may be counsel for the Corporation.
Indemnification pursuant to this Article shall not be exclusive of any other
right of indemnifi cation to which any person may be entitled, including indemni
fication pursuant to a valid contract, indemnification by legal entities other
than the Corporation and indemnification under policies of insurance purchased
and maintained by the Corporation or others. However, no person shall be
entitled to indemni fication by the Corporation to the extent such person is
indem nified by another, including an insurer. The Corporation is authorized to
purchase and maintain insurance against any liability it may have under this
Article or to protect any of the persons named above against any liability
arising from their service to the Corporation or any other legal entity at the
request of the Corporation regardless of the Corporation's power to indemnify
against such liability. The provisions of this Article shall not be deemed to
preclude the Corporation from entering into contracts otherwise permitted by law
with any
-8-
individuals or legal entities, including those named above. If any provision of
this Article or its application to any person or circumstance is held invalid by
a court of competent jurisdic tion, the invalidity shall not affect other
provisions or appli cations of this Article, and to this end the provisions of
this Article are severable.
6.6 Application; Amendments. The provisions of this Article shall be
applicable from and after its adoption even though some or all of the underlying
conduct or events relating to a proceeding may have occurred before its
adoption. No amendment, modification or repeal of this Article shall diminish
the rights provided hereunder to any person arising from conduct or events
occurring before the adoption of such amendment, modification or repeal.
-9-
EXHIBIT 3.2
As adopted August 31, 1995
BYLAWS
OF
OPTICAL CABLE CORPORATION
TABLE OF CONTENTS
ARTICLE I
MEETINGS OF SHAREHOLDERS
1.1 PLACE AND TIME OF MEETINGS................................ 1
1.2 ORGANIZATION AND ORDER OF BUSINESS........................ 1
1.3 ANNUAL MEETING............................................ 2
1.4 SPECIAL MEETINGS.......................................... 4
1.5 RECORD DATES.............................................. 4
1.6 NOTICE OF MEETINGS........................................ 4
1.7 WAIVER OF NOTICE; ATTENDANCE AT MEETING................... 6
1.8 QUORUM AND VOTING REQUIREMENTS............................ 7
1.9 PROXIES................................................... 7
1.10 VOTING LIST............................................... 9
1.11 ACTION WITHOUT MEETING.................................... 10
ARTICLE II
DIRECTORS
2.1 GENERAL POWERS............................................ 11
2.2 NUMBER AND TERM........................................... 11
2.3 NOMINATION OF DIRECTORS................................... 11
2.4 ELECTION.................................................. 13
2.5 REMOVAL; VACANCIES........................................ 13
2.6 ANNUAL AND REGULAR MEETINGS............................... 14
2.7 SPECIAL MEETINGS.......................................... 15
2.8 NOTICE OF MEETINGS........................................ 15
2.9 WAIVER OF NOTICE; ATTENDANCE AT MEETING................... 15
2.10 QUORUM; VOTING............................................ 16
2.11 TELEPHONIC MEETINGS....................................... 16
2.12 ACTION WITHOUT MEETING.................................... 17
2.13 COMPENSATION.............................................. 17
ARTICLE III
COMMITTEES OF DIRECTORS
3.1 COMMITTEES................................................ 17
3.2 AUTHORITY OF COMMITTEES................................... 18
3.3 AUDIT COMMITTEE........................................... 18
3.4 COMPENSATION COMMITTEE.................................... 19
3.5 COMMITTEE MEETINGS; MISCELLANEOUS......................... 19
ARTICLE IV
OFFICERS
4.1 OFFICERS.................................................. 19
4.2 ELECTION; TERM............................................ 19
4.3 REMOVAL OF OFFICERS....................................... 20
4.4 DUTIES OF THE CHAIRMAN.................................... 20
4.5 DUTIES OF THE PRESIDENT................................... 20
4.6 DUTIES OF THE SECRETARY................................... 21
4.7 DUTIES OF THE CHIEF FINANCIAL OFFICER..................... 21
4.8 DUTIES OF THE TREASURER................................... 21
4.9 DUTIES OF OTHER OFFICERS.................................. 22
4.10 VOTING SECURITIES OF OTHER CORPORATIONS................... 22
4.11 BONDS..................................................... 23
ARTICLE V
SHARE CERTIFICATES
5.1 FORM...................................................... 23
5.2 TRANSFER.................................................. 24
5.3 RESTRICTIONS ON TRANSFER.................................. 24
5.4 LOST OR DESTROYED SHARE CERTIFICATES...................... 24
ARTICLE VI
MISCELLANEOUS PROVISIONS
6.1 CORPORATE SEAL............................................ 25
6.2 FISCAL YEAR............................................... 25
6.3 AMENDMENTS................................................ 25
OPTICAL CABLE CORPORATION
BYLAWS
ARTICLE I
MEETINGS OF SHAREHOLDERS
1.1 PLACE AND TIME OF MEETINGS. Meetings of shareholders shall be held
at such place, either within or without the Commonwealth of Virginia, and at
such time as may be provided in the notice of the meeting and approved by the
Chairman of the Board of Directors (the "Chairman"), the President or the Board
of Directors.
1.2 ORGANIZATION AND ORDER OF BUSINESS. The Chairman or, in his
absence, the President shall serve as chairman at all meetings of the
shareholders. In the absence of both of the foregoing officers or if both of
them decline to serve, a majority of the shares entitled to vote at a meeting
may appoint any person entitled to vote at the meeting to act as chairman. The
Secretary or, in his absence, an Assistant Secretary shall act as secretary at
all meetings of the shareholders. In the event that neither the Secretary nor an
Assistant Secretary is present, the chairman of the meeting may appoint any
person to act as secretary of the meeting.
The Chairman shall have the authority to make such rules and
regulations, to establish such procedures and to take such steps as he may deem
necessary or desirable for the proper conduct of each meeting of the
shareholders, including, without limitation, the authority to make the agenda
and to establish procedures for
-1-
(i) dismissing of business not properly presented, (ii) maintaining of order and
safety, (iii) placing limitations on the time allotted to questions or comments
on the affairs of the Corporation, (iv) placing restrictions on attendance at a
meeting by persons or classes of persons who are not shareholders or their
proxies, (v) restricting entry to a meeting after the time prescribed for the
commencement thereof and (vi) commencing, conducting and closing voting on any
matter.
1.3 ANNUAL MEETING. The annual meeting of shareholders shall be held on
the second Tuesday in March of each year. If such date is a legal holiday, then
the annual meeting of shareholders shall be held on the next succeeding business
day.
At each annual meeting of shareholders, only such business shall be
conducted as is proper to consider and has been brought before the meeting (i)
pursuant to the Corporation's notice of the meeting, (ii) by or at the direction
of the Board of Directors or (iii) by a shareholder who is a shareholder of
record of a class of shares entitled to vote on the business such shareholder is
proposing, both at the time of the giving of the shareholder's notice
hereinafter described in this Section 1.3 and on the record date for such annual
meeting, and who complies with the notice procedures set forth in this Section
1.3.
In order to bring before an annual meeting of shareholders any business
which may properly be considered and which a shareholder has not sought to have
included in the Corporation's proxy statement for the meeting, a shareholder who
meets the
-2-
requirements set forth in the preceding paragraph must give the Corporation
timely written notice. To be timely, a shareholder's notice must be given,
either by personal delivery to the Secretary or an Assistant Secretary at the
principal office of the Corporation or by first class United States mail, with
postage thereon prepaid, addressed to the Secretary at the principal office of
the Corporation. Any such notice must be received not less than 60 days nor more
than 90 days before the date of the meeting.
Each such shareholder's notice shall set forth as to each matter the
shareholder proposes to bring before the annual meeting (i) the name and
address, as they appear on the Corporation's stock transfer books, of the
shareholder proposing business, (ii) the class and number of shares of stock of
the Corporation beneficially owned by such shareholder, (iii) a representation
that such shareholder is a shareholder of record at the time of the giving of
the notice and intends to appear in person or by proxy at the meeting to present
the business specified in the notice, (iv) a brief description of the business
desired to be brought before the meeting, including the complete text of any
resolutions to be presented and the reasons for wanting to conduct such business
and (v) any interest which the shareholder may have in such business.
The Secretary or Assistant Secretary shall deliver each shareholder's
notice that has been timely received to the Chairman for review.
-3-
Notwithstanding the foregoing provisions of this Section 1.3, a
shareholder seeking to have a proposal included in the Corporation's proxy
statement for an annual meeting of shareholders shall comply with the
requirements of Regulation 14A under the Securities Exchange Act of 1934, as
amended from time to time, or with any successor regulation.
1.4 SPECIAL MEETINGS. Special meetings of the shareholders may be
called only by the Chairman, the President or the Board of Directors. Only
business within the purpose or purposes described in the notice for a special
meeting of shareholders may be conducted at the meeting.
1.5 RECORD DATES. The Board of Directors shall fix, in advance, a
record date to make a determination of shareholders for any purpose, such date
to be not more than 70 days before the meeting or action requiring a
determination of shareholders.
When a determination of shareholders entitled to notice of or to vote
at any meeting of shareholders has been made, such determination shall be
effective for any adjournment of the meeting unless the Board of Directors fixes
a new record date, which it shall do if the meeting is adjourned to a date more
than 120 days after the date fixed for the original meeting.
1.6 NOTICE OF MEETINGS. Written notice stating the place, day and hour
of each meeting of shareholders and, in the case of a special meeting, the
purpose or purposes for which the meeting is called, shall be given not less
than 10 nor more than 60 days before the date of the meeting (except when a
different time is
-4-
required in these Bylaws or by law) either personally or by mail, telephone,
telegraph, teletype, telecopy or other form of wire or wireless communication or
by private courier to each shareholder of record entitled to vote at such
meeting and to such nonvoting shareholders as may be required by law. If mailed,
such notice shall be deemed to be effective when deposited in first class United
States mail with postage thereon prepaid and addressed to the shareholder at his
address as it appears on the share transfer books of the Corporation.
Notice of a shareholder's meeting to act on (i) an amendment of the
Articles of Incorporation, (ii) a plan of merger or share exchange, (iii) the
sale, lease, exchange or other disposition of all or substantially all the
property of the Corporation otherwise than in the usual and regular course of
business or (iv) the dissolution of the Corporation, shall be given, in the
manner provided above, not less than 25 nor more than 60 days before the date of
the meeting. Any notice given pursuant to this section shall state that the
purpose, or one of the purposes, of the meeting is to consider such action and
shall be accompanied by (x) a copy of the proposed amendment, (y) a copy of the
proposed plan of merger or share exchange or (z) a summary of the agreement
pursuant to which the proposed transaction will be effected. If only a summary
of the agreement is sent to the shareholders, the Corporation shall also send a
copy of the agreement to any shareholder who requests it.
-5-
If a meeting is adjourned to a different date, time or place, notice
need not be given if the new date, time or place is announced at the meeting
before adjournment. However, if a new record date for an adjourned meeting is
fixed, notice of the adjourned meeting shall be given to shareholders as of the
new record date unless a court provides otherwise.
Notwithstanding the foregoing, no notice of a meeting of shareholders
need be given to a shareholder if (i) an annual report and proxy statements for
two consecutive annual meetings of shareholders or (ii) all, and at least two,
checks in payment of dividends or interest on securities during a 12-month
period, have been sent by first-class United States mail, with postage thereon
prepaid, addressed to the shareholder at his address as it appears on the share
transfer books of the Corporation, and returned undeliverable. The obligation of
the Corporation to give notice of meetings of shareholders to any such
shareholder shall be reinstated once the Corporation has received a new address
for such shareholder for entry on its share transfer books.
1.7 WAIVER OF NOTICE; ATTENDANCE AT MEETING. A shareholder may waive
any notice required by law, the Articles of Incorporation or these Bylaws before
or after the date and time of the meeting that is the subject of such notice.
The waiver shall be in writing, be signed by the shareholder entitled to the
notice and be delivered to the Secretary for inclusion in the minutes or filing
with the corporate records.
-6-
A shareholder's attendance at a meeting (i) waives objection to lack of
notice or defective notice of the meeting unless the shareholder, at the
beginning of the meeting, objects to holding the meeting or transacting business
at the meeting and (ii) waives objection to consideration of a particular matter
at the meeting that is not within the purpose or purposes described in the
meeting notice unless the shareholder objects to considering the matter when it
is presented.
1.8 QUORUM AND VOTING REQUIREMENTS. Unless otherwise required by law, a
majority of the votes entitled to be cast on a matter constitutes a quorum for
action on that matter. Once a share is represented for any purpose at a meeting,
it is deemed present for quorum purposes for the remainder of the meeting and
for any adjournment of that meeting unless a new record date is or shall be set
for that adjourned meeting. If a quorum exists, action on a matter, other than
the election of directors, is approved if the votes cast favoring the action
exceed the votes cast opposing the action unless a greater number of affirmative
votes is required by law. Directors shall be elected by a plurality of the votes
cast by the shares entitled to vote in the election at a meeting at which a
quorum is present. Less than a quorum may adjourn a meeting.
1.9 PROXIES. A shareholder may vote his shares in person or by proxy. A
shareholder may appoint a proxy to vote or otherwise act for him by signing an
appointment form, either personally or by his attorney-in-fact. An appointment
of a proxy
-7-
is effective when received by the Secretary or other officer or agent authorized
to tabulate votes and is valid for eleven (11) months unless a longer period is
expressly provided in the appointment form. An appointment of a proxy is
revocable by the shareholder unless the appointment form conspicuously states
that it is irrevocable and the appointment is coupled with an interest.
The death or incapacity of the shareholder appointing a proxy does not
affect the right of the Corporation to accept the proxy's authority unless
notice of the death or incapacity is received by the Secretary or other officer
or agent authorized to tabulate votes before the proxy exercises his authority
under the appointment. An irrevocable appointment is revoked when the interest
with which it is coupled is extinguished. A transferee for value of shares
subject to an irrevocable appointment may revoke the appointment if he did not
know of its existence when he acquired the shares and the existence of the
irrevocable appointment was not noted conspicuously on the certificate
representing the shares. Subject to any legal limitations on the right of the
Corporation to accept the vote or other action of a proxy and to any express
limitation on the proxy's authority appearing on the face of the appointment
form, the Corporation is entitled to accept the proxy's vote or other action as
that of the shareholder making the appointment. Any fiduciary who is entitled to
vote any shares may vote such shares by proxy.
-8-
1.10 VOTING LIST. The officer or agent having charge of the share
transfer books of the Corporation shall make, at least ten days before each
meeting of shareholders, a complete list of the shareholders entitled to vote at
such meeting or any adjournment thereof, with the address of and the number of
shares held by each. For a period of ten days prior to the meeting, such list
shall be kept on file at the registered office of the Corporation or at its
principal office or at the office of its transfer agent or registrar and shall
be subject to inspection by any shareholder at any time during usual business
hours. Such list shall also be produced and kept open at the time and place of
the meeting and shall be subject to the inspection of any shareholder during the
whole time of the meeting for the purpose thereof. The original share transfer
books shall be prima facie evidence as to which shareholders are entitled to
examine such list or transfer books or to vote at any meeting of the
shareholders. The right of a shareholder to inspect such list prior to the
meeting shall be subject to the conditions and limitations set forth by law. If
the requirements of this section have not been substantially complied with, the
meeting shall, on the demand of any shareholder in person or by proxy, be
adjourned until such requirements are met. Refusal or failure to prepare or make
available the shareholders' list does not affect the validity of action taken at
the meeting prior to the making of any such demand, but any action taken by the
shareholders
-9-
after the making of any such demand shall be invalid and of no effect.
1.11 ACTION WITHOUT MEETING. Action required or permitted to be taken
at a meeting of shareholders may be taken without a meeting and without action
by the Board of Directors if the action is taken by all the shareholders
entitled to vote on the action. The action shall be evidenced by one or more
written consents describing the action taken, signed by all the share holders
entitled to vote on the action and delivered to the Secretary for inclusion in
the minutes or filing with the corporate records. Action taken by unanimous
written consent shall be effective according to its terms when all consents are
in the possession of the Corporation unless the consent specifies a different
effective date, in which event the action taken under this section shall be
effective as of the date specified therein, provided the consent states the date
of execution by each shareholder. A shareholder may withdraw a consent only by
delivering a written notice of withdrawal to the Corporation prior to the time
that all consents are in the possession of the Corporation.
If not otherwise fixed pursuant to the provisions of Section 1.5 the
record date for determining shareholders entitled to take action without a
meeting is the date the first shareholder signs the consent described in the
preceding paragraph.
-10-
ARTICLE II
DIRECTORS
2.1 GENERAL POWERS. The Corporation shall have a Board of Directors.
All corporate powers shall be exercised by or under the authority of, and the
business and affairs of the Corporation managed under the direction of, its
Board of Directors, subject to any limitation set forth in the Articles of
Incorporation.
2.2 NUMBER AND TERM. The Board of Directors of the Corporation shall
consist of not less than three (3) nor more than nine (9) members, the exact
number of which shall be determined from time to time by the Board of Directors
or the shareholders. A decrease in number shall not shorten the term of any
incumbent director. Each director shall hold office until his death, resignation
or removal or until his successor is elected.
2.3 NOMINATION OF DIRECTORS. No person shall be eligible for election
as a director at a meeting of shareholders unless nominated (i) by the Board of
Directors or (ii) by a shareholder who is a shareholder of record of a class of
shares entitled to vote for the election of directors, both at the time of the
giving of the shareholder's notice hereinafter described in this Section 2.3 and
on the record date for the meeting at which directors will be elected, and who
complies with the notice procedures set forth in this Section 2.3.
In order to nominate any persons who are not listed as nominees in the
Corporation's proxy statement for a shareholders'
-11-
meeting for election as directors at such meeting, a shareholder who meets the
requirements set forth in the preceding paragraph must give the Corporation
timely written notice. To be timely, a shareholder's notice must be given either
by personal delivery to the Secretary or an Assistant Secretary at the principal
office of the Corporation or by first class United States mail, with postage
thereon prepaid, addressed to the Secretary at the principal office of the
Corporation. Any such notice must be received (i) not less than 60 days nor more
than 90 days before an annual meeting or (ii) not later than the close of
business on the tenth day following the day on which notice of a special meeting
of shareholders called for the purpose of electing directors is first given to
shareholders.
Each such shareholder's notice shall set forth the following: (i) as to
the shareholder giving the notice, (a) the name and address of such shareholder
as they appear on the Corporation's stock transfer books, (b) the class and
number of shares of the Corporation beneficially owned by such shareholder, (c)
a representation that such shareholder is a shareholder of record at the time of
giving the notice and intends to appear in person or by proxy at the meeting to
nominate the person or persons specified in the notice and (d) a description of
all arrangements or understandings, if any, between such shareholder and each
nominee and any other person or persons (naming such person or persons) pursuant
to which the nomination or nominations are to be made; and (ii) as to each
person whom the
-12-
shareholder wishes to nominate for election as a director, (a) the name, age,
business address and residence address of such person, (b) the principal
occupation or employment of such person, (c) the class and number of shares of
the Corporation which are beneficially owned by such person and (d) all other
information that is required to be disclosed about nominees for election as
directors in solicitations of proxies for the election of directors under the
rules and regulations of the Securities and Exchange Commission. In addition,
each such notice shall be accompanied by the written consent of each proposed
nominee to serve as a director if elected and such consent shall contain a
statement from the proposed nominee to the effect that the information about him
contained in the notice is correct.
2.4 ELECTION. Except as provided in Section 2.5 and in the Articles of
Incorporation, the directors (other than initial directors) shall be elected by
the holders of the common shares at each annual meeting of shareholders and
those persons who receive the greatest number of votes shall be deemed elected
even though they do not receive a majority of the votes cast. No individual
shall be named or elected as a director without his prior consent.
2.5 REMOVAL; VACANCIES. The shareholders may remove one or more
directors with or without cause. If a director is elected by a voting group,
only the shareholders of that voting group may elect to remove him. Unless the
Articles of Incorporation
-13-
require a greater vote, a director may be removed if the number of votes cast to
remove him constitutes a majority of the votes entitled to be cast at an
election of directors of the voting group or voting groups by which such
director was elected. A director may be removed by the stockholders only at a
meeting called for the purpose of removing him and the meeting notice must state
that the purpose, or one of the purposes of the meeting, is removal of the
director.
A vacancy on the Board of Directors, including a vacancy resulting from
the removal of a director or an increase in the number of directors, may be
filled by (i) the shareholders, (ii) the Board of Directors or (iii) the
affirmative vote of a majority of the remaining directors though less than a
quorum of the Board of Directors and may, in the case of a resignation that will
become effective at a specified later date, be filled before the vacancy occurs
but the new director may not take office until the vacancy occurs.
2.6 ANNUAL AND REGULAR MEETINGS. An annual meeting of the Board of
Directors, which shall be considered a regular meeting, shall be held
immediately following each annual meeting of shareholders for the purpose of
electing officers and carrying on such other business as may properly come
before the meeting. The Board of Directors may also adopt a schedule of
additional meetings which shall be considered regular meetings. Regular meetings
shall be held at such times and at such places, within or without the
Commonwealth of Virginia, as the Chairman, the
-14-
President or the Board of Directors shall designate from time to time. If no
place is designated, regular meetings shall be held at the principal office of
the Corporation.
2.7 SPECIAL MEETINGS. Special meetings of the Board of Directors may be
called by the Chairman, the President or a majority of the Directors of the
Corporation and shall be held at such times and at such places, within or
without the Commonwealth of Virginia, as the person or persons calling the
meetings shall designate. If no such place is designated in the notice of a
meeting, it shall be held at the principal office of the Corporation.
2.8 NOTICE OF MEETINGS. No notice need be given of regular meetings of
the Board of Directors.
Notices of special meetings of the Board of Directors shall be given to
each director in person or delivered to his residence or business address (or
such other place as he may have directed in writing) not less than twenty-four
(24) hours before the meeting by mail, messenger, telecopy, telegraph or other
means of written communication or by telephoning such notice to him. Any such
notice shall set forth the time and place of the meeting and state the purpose
for which it is called.
2.9 WAIVER OF NOTICE; ATTENDANCE AT MEETING. A director may waive any
notice required by law, the Articles of Incorporation or these Bylaws before or
after the date and time stated in the notice and such waiver shall be equivalent
to the giving of such notice. Except as provided in the next paragraph
-15-
of this section, the waiver shall be in writing, signed by the director entitled
to the notice and filed with the minutes or corporate records.
A director's attendance at or participation in a meeting waives any
required notice to him of the meeting unless the director, at the beginning of
the meeting or promptly upon his arrival, objects to holding the meeting or
transacting business at the meeting and does not thereafter vote for or assent
to action taken at the meeting.
2.10 QUORUM; VOTING. A majority of the number of directors as
determined pursuant to Section 2.2 of these Bylaws shall constitute a quorum for
the transaction of business at a meeting of the Board of Directors. If a quorum
is present when a vote is taken, the affirmative vote of a majority of the
directors present is the act of the Board of Directors. A director who is
present at a meeting of the Board of Directors or a committee of the Board of
Directors when corporate action is taken is deemed to have assented to the
action taken unless (i) he objects, at the beginning of the meeting or promptly
upon his arrival, to holding it or transacting specified business at the meeting
or (ii) he votes against or abstains from the action taken.
2.11 TELEPHONIC MEETINGS. The Board of Directors may permit any or all
directors to participate in a regular or special meeting by, or conduct the
meeting through the use of, any means of communication by which all directors
participating may simultaneously hear each other during the meeting. A director
participating in a meeting by this means is deemed to be present in person at
the meeting.
-16-
2.12 ACTION WITHOUT MEETING. Action required or permitted to be taken
at a meeting of the Board of Directors may be taken without a meeting if the
action is taken by all members of the Board. The action shall be evidenced by
one or more written consents stating the action taken, signed by each director
either before or after the action is taken and included in the minutes or filed
with the corporate records. Action taken under this section shall be effective
when the last director signs the consent unless the consent specifies a
different effective date in which event the action taken is effective as of the
date specified therein provided the consent states the date of execution by each
director.
2.13 COMPENSATION. The Board of Directors may fix the compensation of
directors and may provide for the payment of all expenses incurred by them in
attending meetings of the Board of Directors.
ARTICLE III
COMMITTEES OF DIRECTORS
3.1 COMMITTEES. The Board of Directors may create one or more
committees and appoint members of the Board of Directors to serve on them.
Unless otherwise provided in these Bylaws, each committee shall have two or
more members who serve at the pleasure of the Board of Directors. The creation
of a committee
-17-
and appointment of members to it shall be approved by a majority of all of the
directors in office when the action is taken.
3.2 AUTHORITY OF COMMITTEES. To the extent specified by the Board of
Directors, each committee may exercise the authority of the Board of Directors,
except that a committee may not (i) approve or recommend to shareholders action
that is required by law to be approved by shareholders, (ii) fill vacancies on
the Board of Directors or on any of its committees, (iii) amend the Articles of
Incorporation, (iv) adopt, amend, or repeal these Bylaws, (v) approve a plan of
merger not requiring shareholder approval, (vi) authorize or approve a
distribution, except according to a general formula or method prescribed by the
Board of Directors or (vii) authorize or approve the issuance or sale or
contract for sale of shares, or determine the designation and relative rights,
preferences, and limitations of a class or series of shares; provided, however,
that the Board of Directors may authorize a committee, or a senior executive
officer of the Corporation, to do so within limits specifically prescribed by
the Board of Directors.
3.3 AUDIT COMMITTEE. The Board of Directors shall appoint an Audit
Committee consisting of not less than two (2) directors, none of whom shall be
officers of the Corporation, which committee shall regularly review the adequacy
of the Corporation's internal financial controls, review with the Corporation's
independent public accountants the annual audit and
-18-
other financial statements and recommend the selection of the Corporation's
independent public accountants.
3.4 COMPENSATION COMMITTEE. The Board of Directors shall appoint a
Compensation Committee consisting of not less than three (3) directors, a
majority of whom shall not be officers of the Corporation, which committee shall
recommend to the Board of Directors the cash and non-cash compensation to be
paid to the officers of the Corporation.
3.5 COMMITTEE MEETINGS; MISCELLANEOUS. The provisions of these Bylaws
which govern meetings, action without meetings, notice and waiver of notice, and
quorum and voting requirements of the Board of Directors shall apply to
committees of directors and their members as well.
ARTICLE IV
OFFICERS
4.1 OFFICERS. The officers of the Corporation shall be a Chairman of
the Board of Directors, a President, a Secretary, a Treasurer, and, in the
discretion of the Board of Directors or the Chairman, a Chief Financial Officer
and one or more Vice- Presidents and such other officers as may be deemed
necessary or advisable to carry on the business of the Corporation. Any two or
more offices may be held by the same person.
4.2 ELECTION; TERM. The Chairman, the President, the Secretary and the
Treasurer shall be elected by the Board of Directors. The Chairman or the Board
of Directors, may from time
-19-
to time, appoint other officers. Officers elected by the Board of Directors
shall hold office, unless sooner removed, until the next annual meeting of the
Board of Directors or until their successors are elected. Officers appointed by
the Chairman shall hold office, unless sooner removed, until their successors
are appointed. The action of the Chairman in appointing officers shall be
reported to the next regular meeting of the Board of Directors after it is
taken. Any officer may resign at any time upon written notice to the Board of
Directors or the officer appointing him or her and such resignation shall be
effective when notice is delivered unless the notice specifies a later effective
date.
4.3 REMOVAL OF OFFICERS. The Board of Directors may remove any officer
at any time, with or without cause. The Chairman may remove any officer he or
she appoints at any time, with or without cause. Such action shall be reported
to the next regular meeting of the Board of Directors after it is taken.
4.4 DUTIES OF THE CHAIRMAN. The Chairman shall be the Chief Executive
Officer of the Corporation. He or she shall have general charge of and be
charged with the duty of supervision of the business of the Corporation and
shall perform such duties as may, from time to time, be assigned to him or her
by the Board of Directors.
4.5 DUTIES OF THE PRESIDENT. The President shall have such powers and
perform such duties as generally pertain to that
-20-
position or as may, from time to time, be assigned to him or her by the Chairman
or the Board of Directors.
4.6 DUTIES OF THE SECRETARY. The Secretary shall have the duty to see
that a record of the proceedings of each meeting of the shareholders, the Board
of Directors and any committee of the Board of Directors is properly recorded
and that notices of all such meetings are duly given in accordance with the
provisions of these Bylaws or as required by law; may affix the corporate seal
to any document the execution of which is duly authorized, and when so affixed
may attest the same; and, in general, shall perform all duties incident to the
office of secretary of a corporation, and such other duties as, from time to
time, may be assigned to him or her by the Chairman, the President or the Board
of Directors or as may be required by law.
4.7 DUTIES OF THE CHIEF FINANCIAL OFFICER. The Chief Financial Officer,
if there be one, shall have charge of and be responsible for all internal and
external financial accounting functions and treasury functions, and shall render
to the Chairman, the President, or the Board of Directors, whenever requested,
an account of the financial condition of the Corporation; and, shall perform
such duties as may be assigned to him or her by the Chairman, the President or
the Board of Directors.
4.8 DUTIES OF THE TREASURER. The Treasurer shall, subject to the
control of the Board of Directors, the Chairman, the President, and the Chief
Financial Officer, if there be one,
-21-
shall have charge of and be responsible for all securities, funds, receipts and
disbursements of the Corporation and shall deposit or cause to be deposited, in
the name of the Corporation, all monies or valuable effects in such banks, trust
companies or other depositories as shall, from time to time, be selected by or
under authority granted by the Board of Directors; shall be custodian of the
financial records of the Corporation; shall keep or cause to be kept full and
accurate records of all receipts and disbursements of the Corporation and shall
render to the Chairman, the President, the Chief Financial Officer or the Board
of Directors, whenever requested, an account of the financial condition of the
Corporation; and, shall perform such duties as may be assigned to him or her by
the Chairman, the President, the Board of Directors or the Chief Financial
Officer, if there be one.
4.9 DUTIES OF OTHER OFFICERS. The other officers of the Corporation
shall have such authority and perform such duties as shall be prescribed by the
Board of Directors or by officers authorized by the Board of Directors or these
Bylaws to appoint them to their respective offices. To the extent that such
duties are not so stated, such officers shall have such authority and perform
the duties which generally pertain to their respective offices, subject to the
control of the Chairman, the President or the Board of Directors.
4.10 VOTING SECURITIES OF OTHER CORPORATIONS. The Chairman or the
President shall have the power to act for and vote on
behalf of the Corporation at all meetings of the shareholders of any
corporation in which this Corporation holds stock or in connection with
any consent of shareholders in, lieu of any such meeting.
4.11 BONDS. The Board of Directors may require that any or all
officers, employees and agents of the Corporation give bond to the Corporation,
with sufficient sureties, conditioned upon the faithful performance of the
duties of their respective offices or positions.
ARTICLE V
SHARE CERTIFICATES
5.1 FORM. Shares of the Corporation shall, when fully paid, be
evidenced by certificates containing such information as is required by law and
approved by the Board of Directors. Certificates shall be signed by the
President and the Secretary and may (but need not) be sealed with the seal of
the Corpora tion. The seal of the Corporation and any or all of the signatures
on a share certificate may be facsimile. If any officer, transfer agent or
registrar who has signed or whose facsimile signature has been placed upon a
certificate shall have ceased to be such officer, transfer agent or registrar
before such certificate is issued it may be issued by the Corporation with the
same effect as if he were such officer, transfer agent or registrar on the date
of issue.
-23-
5.2 TRANSFER. The Board of Directors may make rules and regulations
concerning the issue, registration and transfer of certificates representing the
shares of the Corporation. Transfers of shares and of the certificates
representing such shares shall be made upon the books of the Corporation by
surrender of the certificates representing such shares accompanied by written
assignments given by the owners or their attorneys-in-fact.
5.3 RESTRICTIONS ON TRANSFER. A lawful restriction on the transfer or
registration of transfer of shares is valid and enforceable against the holder
or a transferee of the holder if the restriction complies with the requirements
of law and its existence is noted conspicuously on the front or back of the
certificate representing the shares. Unless so noted, a restriction is not
enforceable against a person without knowledge of the restriction.
5.4 LOST OR DESTROYED SHARE CERTIFICATES. The Corporation may issue a
new share certificate in the place of any certificate theretofore issued which
is alleged to have been lost or destroyed and may require the owner of such
certificate, or his legal representative, to give the Corporation a bond, with
or without surety, or such other agreement, undertaking or security as the Board
of Directors shall determine is appropriate, to indemnify the Corporation
against any claim that may be made against it on account of the alleged loss or
destruction or the issuance of any such new certificate.
-24-
ARTICLE VI
MISCELLANEOUS PROVISIONS
6.1 CORPORATE SEAL. The corporate seal of the Corporation shall be
circular and shall have inscribed thereon, within and around the circumference
"OPTICAL CABLE CORPORATION". In the center shall be the word "SEAL".
6.2 FISCAL YEAR. The fiscal year of the Corporation shall be determined
in the discretion of the Board of Directors, but in the absence of any such
determination it shall be the twelve months ending October 31.
6.3 AMENDMENTS. These Bylaws may be amended or repealed, and new Bylaws
may be made, at any regular or special meeting of the Board of Directors. Bylaws
made by the Board of Directors may be repealed or changed and new Bylaws may be
made by the shareholders, and the shareholders may prescribe that any Bylaw made
by them shall not be altered, amended or repealed by the Board of Directors.
-25-
Exhibit 4.1
[PAGE]
[OPTICAL CABLE CORPORATION LOGO]
[NUMBER] [SHARES]
INCORPORATED UNDER THE LAWS SEE REVERSE FOR
OF THE COMMONWEALTH OF VIRGINIA DEFINITIONS
THIS CERTIFIES THAT
IS THE OWNER OF
FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK OF
OPTICAL CABLE CORPORATION (the "Corporation") transferable on the books of the
Corporation by the holder hereof in person, or by duly authorized attorney, upon
surrender of this Certificate properly endorsed. This Certificate not valid
unless countersigned by the Transfer Agent and registered by the Registrar.
Witness the facsimile seal of the Corporation of the facsimile signatures of its
duly authorized representatives.
Dated:
/s/ Robert Kopstein
President
/s/ Kenneth W. Harber
Secretary
[OPTICAL CABLE CORPORATION CORPORATE SEAL]
Countersigned and Registered
FIRST UNION NATIONAL BANK OF
NORTH CAROLINA
(Charlotte, North Carolina)
Transfer Agent
and Registrar
By:
Authorized Signature
OPTICAL CABLE CORPORATION
The Corporation will furnish to any stockholder on request and without
charge a full statement of the designations and any preferences, conversion and
other rights, voting powers, restrictions, limitations as to dividends,
qualifications and terms and conditions of redemption of the stock of each class
which the Corporation is authorized to issue, or of the differences in the
relative rights and preferences between the shares of each series of a class in
series which the Corporation is authorized to issue, to the extent they have
been set, and the authority of the Board of Directors to set the relative rights
and preferences of subsequent series or classes. Such request may be made to the
Secretary of the Corporation or to its Transfer Agent.
The following abbreviations, when used in the inscription on the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common
TEN ENT - as tenants by the entireties
JT TEN - as joint tenants with right of survivorship and not as tenants in
common
TOD - transfer on death direction in event of owner's death to person named
on face
UNIF GIFT MIN ACT - ________ as Custodian for _________ under Uniform Gifts to
(Cust) (Minor)
Minors Act ____________
(State)
UNIF TRAN MIN ACT - _______ as Custodian for _________ under Uniform Transfers
(Cust) (Minor)
to Minors Act ___________
(State)
Additional abbreviations may also be used though not in the above list.
For value received, _____________ hereby sell, assign and
transfer unto
Please Insert Social Security or
Other Identification Number of Assignee
- --------------------
- --------------------------------------------------------------------------------
(Please print or typewrite name and address, including zip code, of Assignee)
- -----------------------------------------------------------
- -----------------------------------------------------------
_____________________________________________________shares
of the capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
____________________________________________________Attorney to transfer the
said stock on the books of the written named Corporation with full power of
substitution in the premises.
Dated: --------------- X--------------------------------
X--------------------------------
NOTICE: THE SIGNATURE(S) TO THIS
ASSIGNMENT MUST CORRESPOND WITH
THE NAME AS WRITTEN UPON THE
FACE OF THE CERTIFICATE IN EVERY
PARTICULAR, WITHOUT ALTERATION
OR ENLARGEMENT, OR ANY CHANGE
WHATEVER.
SIGNATURE(S) GUARANTEED: -------------------------------
THE SIGNATURE(S) SHOULD BE
GUARANTEED BY AN ELIGIBLE
GUARANTOR INSTITUTION (BANKS,
STOCKBROKERS, SAVINGS AND LOAN
ASSOCIATIONS AND CREDIT UNIONS
WITH MEMBERSHIP IN AN APPROVED
SIGNATURE GUARANTEE MEDALLION
PROGRAM, PURSUANT TO S.E.C.
RULE 17Ad-15.
EXHIBIT 10.1
[OPTICAL CABLE CORPORATION LOGO]
ROYALTY AGREEMENT
This agreement is made effective this first day of November, 1993, by and
between Robert Kopstein and Optical Cable Corporation (herein referred to as
OCC).
WHEREAS Robert Kopstein as an owner of the rights to certain cable manufacturing
techniques and equipment designs (hereinafter referred to as TECHNOLOGY) granted
him by Cable Technology, Inc., by agreement dated June 30, 1983.
WHEREAS Robert Kopstein desires to receive Royalty Payments for the continued
use of the TECHNOLOGY by OCC.
WHEREAS it is in the best interest of OCC to have the exclusive rights to the
use of the TECHNOLOGY without restriction.
Now THEREFORE the parties do hereby agree as follows:
1. Robert Kopstein hereby grants to OCC the exclusive license to use the
TECHNOLOGY without restriction for a period of one year.
2. Robert Kopstein shall not sell, transfer or further license the
TECHNOLOGY to any other parties for a period of one year.
3. OCC agrees to pay Robert Kopstein in Royalty Payment equal to 4.5% of
its net sales under the license granted herein. For each new
manufacturing facility established outside the continental United
States (utilizing the TECHNOLOGY), OCC agrees to pay Robert Kopstein an
additional 1.5% Royalty Payment. Total Royalty Payment shall be limited
to 10% of net sales generated by OCC and future affiliates utilizing
the TECHNOLOGY.
Example
Optical Cable Corporation Royalty (%)
------------------------- -----------
OCC + 1 additional overseas facilities 4.5
OCC + 2 additional overseas facilities 6.0
OCC + 3 additional overseas facilities 7.5
OCC + 4 additional overseas facilities 10.0
Said Royalty Payments are to be made by the close of each OCC fiscal year.
- --------------------------------------------------------------------------------
Shipping Address: Phone No. (703) 265-0690 Mailing Address:
TELEX 705-290
5290 Concourse Drive FAX (703) 265-0724 P.O. Box 11967
Roanoke, VA 24019 Sales Dept. 1-800-622-7711 Roanoke, VA 24022-1967
/s/ Robert Kopstein /s/ Robert Kopstein
- ------------------------- --------------------------------------
Robert Kopstein Robert Kopstein
Optical Cable Corporation
[Notary Signature] /s/ Kenneth W. Harber
- ------------------------ --------------------------------------
Notary Kenneth W. Harber, Secretary/Treasurer
Optical Cable Corporation
EXHIBIT 10.2
ASSIGNMENT
WHEREAS, Robert Kopstein, an individual ("Assignor") desires to transfer to
Optical Cable Corporation, a Virginia corporation ("Assignee"), all of
Assignor's right, title and interest in and to any and all technology, know-how,
trade secrets and related proprietary information utilized in the field of or
embodied within any and all cable manufacturing techniques and equipment
designs, including, but not limited to, any and all rights that were the subject
of that certain Royalty Agreement, dated November 1, 1993, by and between
Assignor and Assignee (collectively, the "Technology"); and
WHEREAS, Assignee is desirous of acquiring the Technology from Assignor;
NOW, THEREFORE, for One Dollar ($1.00) and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
Assignor hereby sells, assigns, transfers and sets over unto Assignee and its
successors and assigns Assignor's entire right, title and interest in and to the
Technology by this assignment (the "Assignment") to be held and enjoyed by
Assignee for its own use and benefit and for the use and benefit of its
subsidiaries, successors, assigns and legal representatives, for the full extent
of the life of the Technology, to be used as fully and entirely as such rights
would have been held and enjoyed by Assignor had the Assignment not been made.
Assignor covenants that Assignor has full power and authority to make this
Assignment, that there is no claim, suit, action or proceeding pending or
threatened against Assignor asserting that his use, or the Assignee's use, of
the Technology infringes upon the rights of any third parties, that Assignor has
agreed to execute such further assignments and
1
related documents with respect to the Technology as may be necessary or
desirable in order to complete the Assignment contemplated hereby, that Assignor
has no knowledge of any third party use of the Technology that infringes upon
the rights to the Technology, that the Technology is free and clear of any
liens, charges, pledges, security interests or other encumbrances, and that
Assignor did not misappropriate any proprietary third party information when
developing the Technology.
In reliance upon the foregoing, the Assignee hereby accepts the Assignment.
IN WITNESS WHEREOF, Assignor has executed the Assignment as of the 31st day
of October, 1994.
/s/ Robert Kopstein
-------------------
ROBERT KOPSTEIN, an individual
OPTICAL CABLE CORPORATION
By /s/ Robert Kopstein
-------------------
Robert Kopstein
Chairman of the Board, President
and Chief Executive Officer
2
EXHIBIT 10.3
OPTICAL CABLE CORPORATION
EMPLOYMENT AGREEMENT
This agreement made effective March 12, 1997 by and between Optical Cable
Corporation, having a place of business at 5290 Concourse Drive, Roanoke,
Virginia (hereinafter referred to as OCC), and Robert Kopstein, (hereinafter
referred to as Kopstein).
WHEREAS, OCC desires to employ Kopstein and Kopstein desires to accept such
employment upon the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual covenants and agreements herein
contained, OCC employs Kopstein and Kopstein accepts employment upon the
following terms and conditions:
1. EMPLOYMENT AND DUTIES: Kopstein is employed as President & Chief
Executive Officer of OCC. Kopstein hereby agrees to abide by the terms
and conditions of this Agreement.
2. TERM: The term of this Agreement shall begin on March 12, 1997
and shall terminate on the 31st day of October, 1998.
3. STARTING DATE: This Agreement becomes effective March 12, 1997.
4. COMPENSATION: For all services rendered by Kopstein, OCC shall pay
Kopstein a salary, payable monthly, equal to 1.0% of the previous
fiscal year net sales and in order to stimulate the growth of OCC, OCC
shall pay Kopstein a sales commission equal to 1.0% of the positive
difference between the current fiscal year net sales and the prior year
net sales. Said sales commission shall be paid monthly and paid within
15 days after the end of the month. Said sales commission shall be
based on the difference in net sales between the period of employment
in the current fiscal year and the corresponding period of the previous
fiscal year.
5. PATENT RIGHTS: Kopstein's interest in any and all inventions or
improvements made or conceived by him, or which he may make or conceive
at any time after the commencement of and until the termination of his
employment by OCC, either individually or jointly with others, shall be
the exclusive property of OCC, its successors, assignees or nominees.
He will make full and prompt disclosure in writing to an officer or
official of OCC, or to anyone designated for that purpose by OCC, of
all inventions or improvements made or conceived by him during the term
of his employment. At the request and expense of OCC, and without
further compensation to him, Kopstein for all inventions or
improvements which may be patentable, will do all lawful acts and
execute and acknowledge any and all letters patents in the United
States of America and foreign
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Shipping Address: Phone No. (540) 265-0690 Mailing Address:
5290 Concourse Drive FAX (540) 265-0724 P.O. Box 11967
Roanoke, VA 24019 Sales Dept 1-800-622-7711 Roanoke, VA 24022-1967
USA Internet http://www.occfiber.com USA
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countries for any and all of the inventions and improvements set forth
herein, and for vesting in OCC the entire right, title and interest
thereto. As used in this Agreement, "inventions or improvements" means
discoveries, concepts, and ideas, whether patentable or not, relating
to any present of prospective activities of OCC, including, but not
limited to, devices, processes, methods, formulae, techniques and any
improvements to the foregoing.
6. CONFIDENTIALLY; DISCLOSURE OR INFORMATION: Since the work for which
Kopstein is employed and upon which he shall be engaged will include
trade secrets and confidential information of OCC or its customers,
Kopstein shall receive such trade secrets and confidential information
in confidence and shall not, except as required in the conduct of OCC's
business publish or disclose, or make use of or authorize any else to
publish, disclose, or make use of any such secrets of information
unless and until such secrets or information shall have ceased to be
secret or confidential as evidenced by general public knowledge. This
prohibition as to publication and disclosures shall not restrict him in
the exercise of his technical skill, provided that the exercise of such
skill does not involve the disclosure to others not authorized to
receive secret or confidential information of OCC or its customers. As
used in this Agreement, "trade secrets and confidential information"
means any formula, pattern device or compilation of information used in
the business of OCC or its customers which gives OCC or its customer an
opportunity to obtain advantage over competitors who do not know or use
such information; the term includes, but is not limited to, devices and
processes, whether patentable or not, compilations of information such
as customer lists, business and marketing plans, and pricing
information where much of the information involved by be generally
known or available but where the compilation, organization or use of
the information is not generally known and is of significance to the
business of OCC or its customers. The provisions of this paragraph 6
shall apply throughout the period of Kopstein's employment with OCC and
for twelve (12) successive months immediately following termination of
that employment by either party for any reason.
7. NON-COMPETE: Kopstein covenants and agrees that during the term of his
employment with OCC (as employee, consultant or otherwise) and for the
twelve (12) consecutive months immediately following termination of
that employment by either party for any reason he will not own or have
an ownership interest in, or render services to, or work for any
business which competes with OCC or is engaged in the same or similar
business conducted by OCC during the period of Kopstein's employment
with OCC or wishing three (3) months following termination of that
employment; nor will he call on, solicit or deal with any customers or
prospective customers of OCC learned about or developed during
Kopstein's employment with OCC. This Agreement shall apply to Kopstein
as an individual for his own account, as a partner or joint venturer,
as an employee, agent salesman or consultant for any person or entity,
as an officer, director or shareholder.
8. RETURN OF OCC PROPERTY: Immediately upon the termination of his
employment with OCC, Kopstein will turn over to OCC all notes,
memoranda, notebooks, drawings, records, documents, and all computer
program source listings, object files, and executable images obtained
from OCC or developed or modified by him as part of his work for OCC
which are in his possession or under his control, whether prepared by
him or others, relating to any work done for OCC or relating in any way
to the business of OCC or its customers, it being acknowledged that all
such items are the sold property of OCC.
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9. BENEFITS: Kopstein shall be entitled to such vacation and benefits as
OCC may from time to time establish for employees of similar positions,
responsibilities and seniority.
10. BINDING ON OTHER PARTIES: This Agreement shall be binding upon and
inure to the benefit of Kopstein, his heirs, executors and
administrators, and shall be binding upon an inure to the benefit of
OCC and its successors and assigns.
11. ENFORCEMENT AND REMEDIES: This Agreement shall be enforced and
construed in accordance with the laws of the Commonwealth of Virginia.
Each party acknowledges that in the event of a breach or threatened
breach of the confidentiality of non-compete provisions set out in
paragraphs 6 and 7 of the Agreement, damages at law will be inadequate
and injunctive relief is appropriate in addition to whatever damages
may be recoverable. Kopstein agrees to pay the costs, including
attorneys fees, incurred by OCC in enforcing the provisions of
paragraphs 6 and 7.
Each and all of the several rights and remedies contained in or arising
by reason of this Agreement shall be construed as cumulative and no one
of them shall be exclusive of any other or of any right or priority
allowed by law or equity. Nothing in this Agreement is intended to be
in derogation of the rights of either party under or pursuant to any
federal or state statute.
12. NOTICES: Any notice required or desired to be given under this
Agreement shall be deemed given if in writing sent by U.S. Mail to his
last known residence in the case of Kopstein or to its principal office
in the case of OCC.
13. SEVERABILITY AND LIMITED ENFORCEABILITY: It is understood and agreed
that, should any portion of any clause or paragraph of this Agreement
be deemed too broad to permit enforcement to its full extent, then such
restriction shall be enforced to the maximum extent permitted bylaw,
and the parties hereby consent and agree that such scope may be
modified accordingly in an proceeding brought to enforce such
restriction. Further, it is agreed that, should any provision in the
Agreement be entirely unenforceable, the remaining provisions of this
Agreement shall not be affected.
14. ASSIGNMENT: This Agreement and the rights and obligations hereunder
shall be deemed unique and personal to Kopstein and Kopstein may not
transfer, pledge, encumber, assign, anticipate, or alienate all or any
part of this Agreement.
15. PRIOR AGREEMENTS; MODIFICATION: No modifications or waiver of this
Agreement, or of any provision thereof, shall be valid or binding,
unless in writing and executed by both of three parties hereto. No
waiver by either party of any breach of any term or provision of this
Agreement shall be construed as a waiver of any succeeding breach of
the same or any other term or provision.
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IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and
year first written above.
/s/ Kenneth W. Harber /s/ Robert Kopstein
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WITNESS NAME
/s/ Robert Kopstein
---------------------------
Robert Kopstein, President
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EXHIBIT 10.4
TAX INDEMNIFICATION AGREEMENT
THIS TAX INDEMNIFICATION AGREEMENT (the "Agreement") is made and
entered into as of this 19th day of October, 1995, by and between Optical Cable
Corporation, a Virginia corporation (the "Company"), and Robert Kopstein, the
current sole shareholder of the Company (the "Shareholder"), to be effective as
of the date of the closing of the initial public offering of the Company's
common stock (the "Closing Date") pursuant to the Registration Statement No.
33-96476 on Form S-1 filed with the Securities and Exchange Commission under the
Securities Act of 1933, as amended.
INTRODUCTION
The Company elected to be taxed as an S Corporation pursuant to Section
1362 of the Internal Revenue Code of 1986, as amended (the "Code"), on November
1, 1987, and will be an S Corporation until the day before the date on which
such status terminates pursuant to Code Section 1362(d) (the "Termination
Date"). Accordingly, for the period from November 1, 1987, until the Termination
Date (the "S Corporation Period"), the Company incurred no federal income tax
liability and no state income tax liability in those states where the S election
was in force. Rather, the Company's items of income, loss and deductions were
passed through to the Shareholder. As a result of the public offering of the
Company's stock on the Closing Date, the Company will no longer be eligible to
be treated as an S Corporation for federal and state income tax purposes.
Therefore, the Company will elect within one week prior to the Closing Date to
terminate its status as an S Corporation
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pursuant to Code Section 1362(d), after which the Company will be a C
Corporation. Accordingly, the parties to this Agreement desire to set forth
their agreement with respect to certain income taxes which may be imposed upon
the Company after the Termination Date as a result of the conduct of the
Company's business during the S Corporation Period.
The Company and the Shareholder agree to the following:
1. Indemnification of Company.
a. In the event that any governmental taxing authority, including,
without limitation, the Internal Revenue Service and any state or
local taxing authority (a "Taxing Authority") in any jurisdiction
in which an S election was made or deemed to have been made by
operation of law, adjusts, for any reason whatsoever, the
Company's net income tax liability, tax credits or recapture of
tax credits for the S Corporation Period (a "Company
Adjustment"), the Shareholder shall pay on demand to the Company
a contribution to its capital which equals (i) the additional
federal, state and local income taxes payable by the Company in
connection with, or as a result of, a Company Adjustment, plus
(ii) the amount of any interest expense, penalties and additions
to tax payable by the Company in connection with, or as a result
of, a Company Adjustment, plus (iii) the amount of all expenses,
attorneys' fees and accountants' fees incurred by the Company in
connection with, or as a result of, a Company Adjustment, less
(iv) the amount of any reductions in tax payable by the Company
in connection with, or as a result of, the Company incurring any
such additional federal, state and local income taxes, any such
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interest expense, penalties and additions to tax payable by the
Company, and any such expenses, attorneys' fees and accountants'
fees incurred by the Company.
b. To the extent that it is determined that a payment to the Company
pursuant to Section 1(a) is taxable to the Company, the
Shareholder shall pay on demand to the Company an amount which,
after reduction for all additional federal, state and local
income taxes payable by the Company as a result of the payment
made under this Section 1(b), equals the sum of (i) the
additional federal, state and local income taxes payable by the
Company as a result of the payment pursuant to Section 1(a), plus
(ii) the aggregate amount of any interest, penalties or additions
to tax payable by the Company as a result of the taxation of the
payment pursuant to Section 1(a).
c. Notwithstanding any provision in this Agreement to the contrary,
the total liability of the Shareholder under this Agreement shall
not exceed an amount equal to the sum of all income tax refunds
and reductions to income tax otherwise currently payable received
by the Shareholder (collectively, "Shareholder Refunds") from all
Taxing Authorities attributable to the events causing a Company
Adjustment, decreased by any income tax liability incurred or to
be incurred by the Shareholder attributable to the events causing
a Company Adjustment. If the Shareholder does not receive a
Shareholder Refund attributable to a Company Adjustment then the
Shareholder shall have no liability under this Agreement.
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d. The Company shall make a demand for payment on the Shareholder
only upon the occurrence of both (1) the Company becoming
Obligated to Pay (as defined in Section 3 the amounts described
in Section 1(a)(i), (ii), (iii) or 1(b) and (2) upon the
Shareholder's receipt of a Shareholder Refund. The Company's
demand for payment shall not exceed the sum of Shareholder
Refunds actually received by the Shareholder prior to the time
demand for payment is made, less the sum of any prior demands for
payment made by the Company.
e. The Shareholder shall take such reasonable steps necessary to
claim Shareholder Refunds from any Taxing Authority that are
attributable to the events causing a Company Adjustment.
2. Contests; No Settlement.
a. The Shareholder shall be required to notify the Company in
writing and the Company shall be required to notify the
Shareholder in writing of all audits, examinations or other
investigations by any Taxing Authority of the Shareholder's or
the Company's income taxes for tax periods which include the S
Corporation Period. Additionally, the Shareholder shall be
required to notify the Company in writing and the Company shall
be required to notify the Shareholder in writing of any
adjustments proposed as a result of such audit, examination or
other investigation to the extent any such proposed adjustment
may constitute or affect any Company Adjustment within the
contemplation of this Agreement. Any notification required by
this Section 2(a) must be sent to
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the party to be notified within ten days from the occurrence of
the event giving rise to the obligation to notify.
b. The Shareholder may, upon written notice to the Company, demand
that the Company contest any Company Adjustment proposed by a
Taxing Authority (including pursuing all remaining administrative
proceedings and judicial appeals). Subject to the provisions of
Section 1(c), the Shareholder shall pay to the Company, on the
Company's demand, a contribution to its capital which equals (i)
the amount of any interest expense, penalties and additions to
tax payable by the Company in connection with, or as a result of,
contesting any proposed Company Adjustment, plus (ii) all costs,
damages and expenses (including attorneys' and accountants' fees)
in connection with, or as a result of, contesting any proposed
Company Adjustment, less (iii) the amount of any reductions in
tax payable by the Company in connection with, or as a result of,
the Company incurring any such costs, damages and expenses, and
any such interest expense, penalties and additions to tax payable
by the Company.
c. The Company shall not make, accept or enter into a settlement or
other compromise with respect to any Company Adjustment, or
forego or terminate any administrative proceeding or judicial
appeal involving any Company Adjustment, without the consent of
the Shareholder which shall not be unreasonably withheld.
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d. The Shareholder shall not make, accept or enter into a settlement
or other compromise with respect to a Shareholder Refund from any
Taxing Authority attributable to the events causing a Company
Adjustment, or an income tax liability incurred or to be incurred
by the Shareholder attributable to the events causing a Company
Adjustment, or forego or terminate any administrative proceeding
or judicial appeal involving any such Shareholder Refund or
income tax liability, without the consent of the Company which
shall not be unreasonably withheld.
3. Determination of Obligation to Pay.
a. The Shareholder shall be deemed Obligated to Pay for purposes of
Section 1 upon the earliest to occur of the following: (i) the
date on which the parties agree to a Company Adjustment proposed
by a Taxing Authority; (ii) the date on which the time to pursue
an appeal of the proposed Company Adjustment expires without the
Shareholder having requested a contest of the Company Adjustment
pursuant to Section 2(b); or (iii) the date on which payment is
required to be made in order to be able to litigate in the forum
selected for the contest, or in order to avoid some other
detrimental effect to the Company.
4. Cooperation.
a. Each party shall provide the other with such cooperation as may
reasonably be requested in connection with any contest,
proceeding, audit or appeal relating to any matter concerning
this Agreement, including, without limitation, making available
all relevant books, records and all employees having knowledge of
the matters concerned.
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b. The Company and the Shareholder shall retain all books and
records pertaining to any event which might relate to a Company
Adjustment until the expiration of the statute of limitations
applicable to a possible adjustment, audit or proceeding by any
Taxing Authority relating to the S Corporation Period.
5. Miscellaneous.
a. NOTICES. All notices, requests, demands and other communications
which are required or which may be given under this Agreement
shall be in writing.
b. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
between the parties with respect to all liabilities between the
Shareholder and the Company resulting from any income tax
adjustments by a Taxing Authority for the S Corporation Period
and supersedes all prior agreements and understandings, oral and
written, between the Shareholder and the Company relating to the
subject matter of this Agreement.
c. BINDING EFFECT. This Agreement shall inure to the benefit of and
be binding upon the Shareholder and the Company, and their
respective successors and assigns.
d. AMENDMENTS. No provision of this Agreement may be amended, waived
or otherwise modified without the prior written consent of the
Shareholder and the Company.
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e. GOVERNING LAW. This Agreement shall be governed by, and construed
in accordance with, the laws of the Commonwealth of Virginia.
f. COUNTERPARTS. This Agreement may be executed by any number of
counterparts, each of which shall be deemed to be an original and
all of which together shall be deemed to be one and the same
instrument.
g. CONSTRUCTION OF TERMS. Nothing expressed or implied in this
Agreement is intended, or shall be construed, to confer upon or
give any person, firm or corporation, other than the Shareholder,
the Company and their respective assigns and successors, any
rights or remedies under or by reason of this Agreement.
OPTICAL CABLE CORPORATION
BY: /s/ Robert Kopstein
------------------------------------
Robert Kopstein
Chairman of the Board, President
and Chief Executive Officer
/s/ Robert Kopstein
____________________________________
Robert Kopstein, Individual
EXHIBIT 10.6
[FIRST UNION LOGO]
LOAN AGREEMENT
First Union National Bank of Virginia
201 South Jefferson Street
Roanoke, Virginia 24011
(Hereinafter referred to as the "Bank")
Optical Cable Corporation, a Virginia Corporation
5290 Concourse Drive
Roanoke, Virginia 24019
(Individually and collectively "Borrower")
This Loan Agreement ("Agreement") is entered into April 25, 1997, by and between
Bank and Borrower.
Borrower has applied to Bank for a loan or loans (individually and collectively,
the "Loan") evidenced by one or more promissory notes (whether one or more, the
"Note") as follows:
Line of Credit - in the principal amount of $10,000,000.00 which is evidenced by
the Promissory Note of even date herewith ("Line of Credit Note 1"), under which
Borrower may borrow, repay, and reborrow, from time to time, so long as the
total indebtedness outstanding at any one time does not exceed the principal
amount. The Loan proceeds are to be used by Borrower solely to provide funding
for mergers, acquisitions and/or joint ventures of entities in a business
related to that of Borrower. Upon consummation of any of the above, Borrower
will provide Bank proforma financial statements on the resulting entity with
detail satisfactory to Bank. Bank's obligation to advance or readvance under the
Line of Credit Note 1 shall terminate if a default in the payment of the
Obligations occurs or the Borrower is in Default (as defined in the Loan
Documents) under any Loan Document, or in any event, on February 28, 1998 unless
renewed or extended by Bank in writing upon such terms then satisfactory to
Bank.
Line of Credit - in the principal amount of $5,000,000.00 which is evidenced by
the Promissory Note of even date herewith ("Line of Credit Note 2"), under which
Borrower may borrow, repay, and reborrow, from time to time, so long as the
total indebtedness outstanding at any one time does not exceed the principal
amount. The Loan proceeds are to be used by Borrower solely for working capital
and general corporate expenses. Bank's obligation to advance or readvance under
the Line of Credit Note 2 shall terminate if a default in the payment of the
Obligations occurs or the Borrower is in Default (as defined in the Loan
Documents) under any Loan Document, or in any event, on February 28, 1998 unless
renewed or extended by Bank in writing upon such terms then satisfactory to
Bank.
This Agreement also amends and restates in its entirety that certain Loan
Agreement dated March 13, 1996 and applies to govern all of the loans thereby.
This Agreement applies to the Loan and all Loan Documents. The terms "Loan
Documents" and "Obligations," as used in this Agreement, are defined in the
Note. The term "Borrower" shall include its Subsidiaries and Affiliates. As used
in this Agreement as to Borrower, "Subsidiary" shall mean any corporation of
which more than 50% of the issued and outstanding voting stock is owned directly
or indirectly by Borrower. As to Borrower, "Affiliate" shall have the meaning as
defined in 11 U.S.C. ss. 101, except that the term "debtor" therein shall be
substituted by the term "Borrower" herein.
Relying upon the covenants, agreements, representations and warranties contained
in this Agreement, Bank is willing to extend credit to Borrower upon the terms
and subject to the conditions set forth herein, and Bank and Borrower agree as
follows:
REPRESENTATIONS. Borrower represents that from the date of this Agreement and
until final payment in full of the Obligations: ACCURATE INFORMATION. All
information now and hereafter furnished to Bank is and will be true, correct and
complete. Any such information relating to Borrower's financial condition will
accurately reflect Borrower's financial condition as of the date(s) thereof,
(including all contingent liabilities of every type), and Borrower further
represents that its financial condition has not changed materially or adversely
since the date(s) of such documents. AUTHORIZATION; NON-CONTRAVENTION. The
execution, delivery and performance by Borrower and any guarantor, as
applicable, of this Agreement and other Loan Documents to which it is a party
are within its power, have been duly authorized by all necessary action taken by
the duly authorized officers of Borrower and any guarantors and, if necessary,
by making appropriate filings with any governmental agency or unit and are the
legal, binding, valid and enforceable obligations of Borrower and any
guarantors; and do not (i) contravene, or constitute (with or without the giving
of notice or lapse of time or both) a violation of any provision of applicable
law, a violation of the organizational documents of Borrower or any guarantor,
or a default under any agreement, judgment, injunction, order, decree or other
instrument binding upon or affecting Borrower or any guarantor, (ii) result in
the creation or imposition of any lien (other than the lien(s) created by the
Loan Documents) on any of Borrower's or guarantor's assets, or (iii) give cause
for the acceleration of any obligations of Borrower or any guarantor to any
other creditor. ASSET OWNERSHIP. Borrower has good and marketable title to all
of the properties and assets reflected on the balance sheets and financial
statements supplied Bank by Borrower, and all such properties and assets are
free and clear of mortgages, security deeds, pledges, liens, charges, and all
other encumbrances, except as otherwise disclosed to Bank by Borrower in writing
("Permitted Liens"). To Borrower's knowledge, no default has occurred under any
Permitted Liens and no claims or interests adverse to Borrower's present rights
in its properties and assets have arisen. DISCHARGE OF LIENS AND TAXES. Borrower
has duly filed, paid and/or discharged all taxes or other claims which may
become a lien on any of its property or assets, except to the extent that such
items are being appropriately contested in good faith and an adequate reserve
for the payment thereof is being maintained. SUFFICIENCY OF CAPITAL. Borrower is
not, and after consummation of this Agreement and after giving effect to all
indebtedness incurred and liens created by Borrower in connection with the Loan,
will not be, insolvent within the meaning of 11 U.S.C. ss. 101(32). COMPLIANCE
WITH LAWS. Borrower is in compliance in all respects with all federal, state and
local laws, rules and regulations applicable to its properties, operations,
business, and finances, including, without limitation, any federal or state laws
relating to liquor (including 18 U.S.C. ss. 3617, et seq.) or narcotics
(including 21 U.S.C.ss. 801, et seq.) and/or any commercial crimes; all
applicable federal, state and local laws and regulations intended to protect the
environment; and the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), if applicable. ORGANIZATION AND AUTHORITY. Each corporate or limited
liability company Borrower and any guarantor, as applicable, is duly created,
validly existing and in good standing under the laws of the state of its
organization, and has all powers, governmental licenses, authorizations,
consents and approvals required to operate its business as now conducted. Each
corporate or limited liability company Borrower and any guarantor, if any, is
duly qualified, licensed and in good standing in each jurisdiction where
qualification or licensing is required by the nature of its business or the
character and location of its property, business or customers, and in which the
failure to so qualify or be licensed, as the case may be, in the aggregate,
could have a material adverse effect on the business, financial position,
results of operations, properties or prospects of Borrower or any such
guarantor. NO LITIGATION. There are no pending or threatened suits, claims or
demands against Borrower or any guarantor that have not been disclosed to Bank
by Borrower in writing.
Page 2
AFFIRMATIVE COVENANTS. Borrower agrees that from the date of this Agreement and
until final payment in full of the Obligations, unless Bank shall otherwise
consent in writing, Borrower will: BUSINESS CONTINUITY. Conduct its business in
substantially the same manner and locations as such business is now and has
previously been conducted. MAINTAIN PROPERTIES. Maintain, preserve and keep its
property in good repair, working order and condition, making all needed
replacements, additions and improvements thereto, to the extent allowed by this
Agreement. ACCESS TO BOOKS & RECORDS. Allow Bank, or its agents, during normal
business hours, access to the books, records and such other documents of
Borrower as Bank shall reasonably require, and allow Bank to make copies thereof
at Bank's expense. INSURANCE. Maintain adequate insurance coverage with respect
to its properties and business against loss or damage of the kinds and in the
amounts customarily insured against by companies of established reputation
engaged in the same or similar businesses including, without limitation,
commercial general liability insurance, workers compensation insurance, and
business interruption insurance; all acquired in such amounts and from such
companies as Bank may reasonably require. NOTICES. Promptly notify Bank in
writing of (i) any material adverse change in its financial condition or its
business; (ii) any default under any material agreement, contract or other
instrument to which it is a party or by which any of its properties are bound,
or any acceleration of the maturity of any indebtedness owing by Borrower; (iii)
any material adverse claim against or affecting Borrower or any part of its
properties; (iv) the commencement of, and any material determination in, any
litigation with any third party or any proceeding before any governmental agency
or unit affecting Borrower; and (v) at least 30 days prior thereto, any change
in Borrower's name or address as shown above, and/or any change in Borrower's
structure. COMPLIANCE WITH OTHER AGREEMENTS. Comply with all terms and
conditions contained in this Agreement, and any other Loan Documents, and swap
agreements, if applicable, as defined in the Note. PAYMENT OF DEBTS. Pay and
discharge when due, and before subject to penalty or further charge, and
otherwise satisfy before maturity or delinquency, all obligations, debts, taxes,
and liabilities of whatever nature or amount, except those which Borrower in
good faith disputes. REPORTS AND PROXIES. Deliver to Bank, promptly, a copy of
all financial statements, reports, notices, and proxy statements, sent by
Borrower to stockholders, and all regular or periodic reports required to be
filed by Borrower with any governmental agency or authority. OTHER FINANCIAL
INFORMATION. Deliver promptly such other information regarding the operation,
business affairs, and financial condition of Borrower which Bank may reasonably
request. ESTOPPEL CERTIFICATE. Furnish, within 15 days after request by Bank, a
written statement duly acknowledged of the amount due under the Loan and whether
offsets or defenses exist against the Obligations. CHANGE OF CONTROL. Ensure
that Robert Kopstein maintains at least a 51% ownership interest in Borrower.
LIFE INSURANCE. Maintain no less than $2.0 million of life insurance on Robert
Kopstein.
NEGATIVE COVENANTS. Borrower agrees that from the date of this Agreement and
until final payment in full of the Obligations, unless Bank shall otherwise
consent in writing, Borrower will not: NONPAYMENT; NONPERFORMANCE. Fail to pay
or perform the Obligations or Default (as defined in the Loan Documents) under
any of the Loan Documents. CROSS DEFAULT. Default in payment or performance of
any obligation under any other loans, contracts or agreements of Borrower, any
Subsidiary or Affiliate of Borrower ("Affiliate" shall have the meaning as
defined in 11 U.S.C. ss. 101, except that the term "debtor" therein shall be
substituted by the term "BORROWER" herein; "Subsidiary" shall mean any
corporation of which more than 50% of the issued and outstanding voting stock is
owned directly or indirectly by Borrower), any general partner of or the
holder(s) of the majority ownership interests of Borrower with Bank or its
affiliates; MATERIAL CAPITAL STRUCTURE OR BUSINESS ALTERATION. Materially alter
the type or kind of Borrower's business or that of its Subsidiaries or
Affiliates, if any; or suffer or permit the acquisition of substantially all of
Borrower's business or assets, or a material portion (10% or more) of such
business or assets if such a sale is outside Borrower's ordinary course of
business, or more than 50% of its outstanding stock or voting power in a single
transaction or a series of transactions; or acquire substantially all of the
business or assets or more than 50% of the outstanding stock or voting power of
any other entity; or enter into any merger or consolidation without prior
written consent of Bank. DEFAULT ON OTHER
Page 3
CONTRACTS OR OBLIGATIONS. Default on any material contract with or obligation
when due to a third party or default in the performance of any obligation to a
third party incurred for money borrowed in an amount in excess of $100,000.00.
JUDGMENT ENTERED. Permit the entry of any monetary judgment or the assessment
against, the filing of any tax lien against, or the issuance of any writ of
garnishment or attachment against any property of or debts due Borrower in an
amount in excess of $50,000.00 and that is not discharged or execution is not
stayed within Thirty (30) days of entry. GOVERNMENT INTERVENTION. Permit the
assertion or making of any seizure, vesting or intervention by or under
authority of any government by which the management of Borrower or any guarantor
is displaced of its authority in the conduct of its respective business or such
business is curtailed or materially impaired. PREPAYMENT OF OTHER DEBT. Retire
any long-term debt entered into prior to the date of this Agreement at a date in
advance of its legal obligation to do so. RETIRE OR REPURCHASE CAPITAL STOCK.
Retire or otherwise acquire any of its capital stock. ENCUMBRANCES. Create,
assume, or permit to exist any mortgage, security deed, deed of trust, pledge,
lien, charge or other encumbrance on any of its assets, whether now owned or
hereafter acquired, other than: (i) security interests required by the Loan
Documents; (ii) liens for taxes contested in good faith; (iii) liens accruing by
law for employee benefits; or (iv) Permitted Liens.
FINANCIAL COVENANTS. Borrower, on a consolidated basis, agrees to the following
provisions from the date of this Agreement and until final payment in full of
the Obligations, unless Bank shall otherwise consent in writing: DEPOSIT
RELATIONSHIP. Borrower shall maintain its primary depository account and cash
management account with Bank.
ANNUAL FINANCIAL STATEMENTS. Borrower shall deliver to Bank, within 120 days
after the close of each fiscal year, audited financial statements reflecting its
operations during such fiscal year, including, without limitation, a balance
sheet, profit and loss statement and statement of cash flows, with supporting
schedules; all on a consolidated and consolidating basis and in reasonable
detail, prepared in conformity with generally accepted accounting principles,
applied on a basis consistent with that of the preceding year. All such
statements shall be examined by an independent certified public accountant
acceptable to Bank. The opinion of such independent certified public accountant
shall not be acceptable to Bank if qualified due to any limitations in scope
imposed by Borrower or its Subsidiaries, if any. Any other qualification of the
opinion by the accountant shall render the acceptability of the financial
statements subject to Bank's approval.
PERIODIC FINANCIAL STATEMENTS. Borrower shall deliver to Bank unaudited
management-prepared quarterly financial statements, including, without
limitation, a balance sheet, profit and loss statement and statement of cash
flows, with supporting schedules, as soon as available and in any event within
45 days after the close of each such period; all in reasonable detail and
prepared in conformity with generally accepted accounting principles, applied on
a basis consistent with that of the preceding year. Such statements shall be
certified as to their correctness by a principal financial officer of Borrower.
FINANCIAL AND OTHER INFORMATION. Borrower shall deliver to Bank such information
as Bank may reasonably request from time to time, including without limitation,
financial statements and information pertaining to Borrower's financial
condition. Such information shall be true, complete, and accurate.
CONDITIONS PRECEDENT. The obligations of Bank to make the Loan and any advances
pursuant to this Agreement are subject to the following conditions precedent:
ADDITIONAL DOCUMENTS. Receipt by Bank of such additional supporting documents as
Bank or its counsel may reasonably request.
Page 4
IN WITNESS WHEREOF, Borrower and Bank, on the day and year first written above,
have caused this Agreement to be executed under seal, AND THIS AGREEMENT IS
DEEMED EFFECTIVE AS OF FEBRUARY 28, 1997.
Optical Cable Corporation, a Virginia Corporation
Taxpayer Identification Number: 54-1237042
CORPORATE By: /s/ Robert Kopstein
SEAL --------------------------------
Robert Kopstein, President
First Union National Bank of Virginia
CORPORATE By: /s/ William C. Moses
SEAL ---------------------------------
Title: Vice President
Page 5
[FIRST UNION LOGO]
SECURITY AGREEMENT
April 25, 1997
Optical Cable Corporation, a Virginia Corporation
5290 Concourse Drive
Roanoke, Virginia 24019
(Individually and collectively "Debtor")
First Union National Bank of Virginia
201 South Jefferson Street
Roanoke, Virginia 24011
(Hereinafter referred to as the "Bank")
For value received and to secure the payment and performance of the Promissory
Note executed by the Debtor of even date herewith, in the original principal
amount of $10,000,000.00, payable to Bank, and any extensions, renewals,
modifications or novations thereof (the "Note"), this Security Agreement and the
other Loan Documents, and any other obligations of Debtor to Bank however
created, arising or evidenced, whether direct or indirect, absolute or
contingent, now existing or hereafter arising or acquired, including swap
agreements (as defined in 11 U.S.C. ss. 101), future advances, and all costs and
expenses incurred by Bank to obtain, preserve, perfect and enforce the security
interest granted herein and to maintain, preserve and collect the property
subject to the security interest (collectively, "Obligations"), Debtor hereby
grants to Bank a continuing security interest in and lien upon the following
described property, now owned or hereafter acquired, any additions, accessions,
or substitutions thereof and thereto (including but not limited to investment
property and security entitlements), and all cash and non-cash proceeds and
products thereof (collectively, "Collateral"):
All accounts, contract rights, inventory, furniture, fixtures, machinery,
equipment and general intangibles now existing or hereafter arising and proceeds
and products thereof.
Debtor hereby represents and agrees that:
OWNERSHIP. Debtor owns the Collateral or Debtor will purchase and acquire rights
in the Collateral within ten days of the date advances are made under the Loan
Documents. If Collateral is being acquired with the proceeds of an advance under
the Loan Documents, Debtor authorizes Bank to disburse proceeds directly to the
seller of the Collateral. The Collateral is free and clear of all liens,
security interests, and claims except those previously reported in writing to
Bank, and Debtor will keep the Collateral free and clear from all liens,
security interests and claims, other than those granted to Bank.
NAME AND OFFICES. There has been no change in the name of Debtor, or the name
under which Debtor conducts business, within the 5 years preceding the date of
execution of this Security Agreement and Debtor has not moved its executive
offices or residence within the 5 years preceding the date of execution of this
Security Agreement except as previously reported in writing to Bank. The
taxpayer identification number of Debtor as provided herein is correct.
TITLE/TAXES. Debtor has good and marketable title to Collateral and will warrant
and defend same against all claims. Debtor will not transfer, sell, or lease
Collateral (except in the ordinary course of business). Debtor agrees to pay
promptly all taxes and assessments upon or for the use of Collateral and on this
Security Agreement. At its option, Bank may discharge taxes, liens, security
interests or other encumbrances at any time levied or placed on Collateral.
Debtor agrees to reimburse Bank, on demand, for any such payment made by Bank.
Any amounts so paid shall be added to the Obligations.
WAIVERS. Debtor waives presentment, demand, protest, notice of dishonor, notice
of default, demand for payment, notice of intention to accelerate, and notice of
acceleration of maturity. Debtor further agrees not to assert against Bank as a
defense (legal or equitable), as a set-off, as a counterclaim, or otherwise, any
claims Debtor may have against any seller or lessor that provided personal
property or services relating to any part of the Collateral. Debtor waives all
exemptions and homestead rights with regard to the Collateral. Debtor waives any
and all rights to notice or to hearing prior to Bank's taking immediate
possession or control of any Collateral, and to any bond or security which might
be required by applicable law prior to the exercise of any of Bank's remedies
against any Collateral.
EXTENSIONS, RELEASES. Debtor agrees that Bank may extend, renew or modify any of
the Obligations and grant any releases, compromises or indulgences with respect
to any security for the Obligations, or with respect to any party liable for the
Obligations, all without notice to or consent of Debtor and without affecting
the liability of Debtor or the enforceability of this Security Agreement.
NOTIFICATIONS OF CHANGE. Debtor will notify Bank in writing at least 30 days
prior to any change in: (i) Debtor's chief place of business and/or residence;
(ii) Debtor's name or identity; or (iii) Debtor's corporate/organizational
structure. Debtor will keep Collateral at the location(s) previously provided to
Bank until such time as Bank provides written advance consent to a change of
location. Debtor will bear the cost of preparing and filing any documents
necessary to protect Bank's liens.
COLLATERAL CONDITION AND LAWFUL USE. Debtor represents that Collateral is in
good repair and condition and that Debtor shall use reasonable care to prevent
Collateral from being damaged or depreciating. Debtor shall immediately notify
Bank of any material loss or damage to Collateral. Debtor shall not permit any
item of equipment to become a fixture to real estate or an accession to other
personal property. Debtor represents it is in compliance in all respects with
all federal, state and local laws, rules and regulations applicable to its
properties, Collateral, operations, business, and finances, including without
limitation, any federal or state laws relating to liquor (including 18 U.S.C.
ss. 3617, et seq.) Or narcotics (including 21 U.S.C. ss. 801, et seq.) And all
applicable federal, state and local laws, and regulations intended to protect
the environment.
RISK OF LOSS AND INSURANCE. Debtor shall bear all risk of loss with respect to
the Collateral. The injury to or loss of Collateral, either partial or total,
shall not release Debtor from payment or other performance hereof. Debtor agrees
to obtain and keep in force casualty and hazard insurance on Collateral naming
Bank as loss payee. Such insurance is to be in form and amounts satisfactory to
Bank. All such policies shall provide to Bank a minimum of 30 days written
notice of cancellation. Debtor shall furnish to Bank such policies, or other
evidence of such policies satisfactory to Bank. Bank is authorized, but not
obligated, to purchase any or all insurance or "Single Interest Insurance"
protecting such interest as Bank deems appropriate against such risks and for
such coverage and for such amounts, including either the loan amount or value of
the Collateral, all at its discretion, and at Debtor's expense. In such event,
Debtor agrees to reimburse Bank for the cost of such insurance and Bank may add
such cost to the Obligations. Debtor shall bear the risk of loss to the extent
of any deficiency in the effective insurance coverage with respect to loss or
damage to any of the Collateral. Debtor hereby assigns to Bank to proceeds of
all such insurance and directs any insurer to make payments directly to Bank.
Debtor hereby appoints Bank its attorney-in-fact, which appointment shall be
irrevocable and coupled with any interest for so long as the Obligations are
unpaid, to file proof of loss and/or any other forms required to collect from
any insurer any amount due from any damage or destruction of Collateral, to
agree to and find Debtor as to the amount of said recovery, to designate
payee(s) of such recovery, to grant releases to insurer, to grant subrogation
rights to any insurer, and to endorse any settlement check or draft.
Page 2
Debtor agrees not to exercise any of the foregoing powers granted to Bank
without the Bank's prior written consent.
ADDITIONAL COLLATERAL. If at any time Collateral is unsatisfactory to Bank, then
on demand of Bank, Debtor shall immediately furnish such additional Collateral
satisfactory to Bank to be held by Bank as if originally pledged hereunder and
shall execute such additional security agreements and financing statements as
requested by Bank.
FINANCING STATEMENTS. No financing statement (other than any filed by Bank or
disclosed above) covering any of Collateral or proceeds thereof is on file in
any public filing office. This Security Agreement, or a copy thereof, or any
financing statement executed hereunder may be recorded. On request of Bank,
Debtor will execute one or more financing statements in form satisfactory to
Bank and will pay all costs and expenses of filing the same or of filing this
Security Agreement in all public filing offices, where filing is deemed by Bank
to be desirable. Bank is authorized to file financing statements relating to
Collateral without Debtor's signature where authorized by law. Debtor appoints
Bank as its attorney-in-fact to execute such documents necessary to accomplish
perfection of Bank's security interest. The appointment is coupled with an
interest and shall be irrevocable as long as any Obligations remain outstanding.
Debtor further agrees to take such other actions as might be requested for the
perfection, continuation and assignment, in whole or in part, of the security
interests granted herein. If certificates are issued or outstanding as to any of
the Collateral, Debtor will cause the security interests of Bank to be properly
protected, including perfection of notation thereon.
LANDLORD/MORTGAGE WAIVERS. Debtor shall cause each mortgagee of real property
owned by Debtor and each landlord of real property leased by Debtor to execute
and deliver instruments satisfactory in form and substance to Bank by which such
mortgagee or landlord waives its rights, if any, in the Collateral
STOCK, DIVIDENDS. If, with respect to any security pledged hereunder, a stock
dividend is declared, any stock split made or right to subscribe is issued, all
the certificates for the shares representing such stock dividend, stock split or
right to subscribes will be immediately delivered, duly endorsed, to the Bank as
additional collateral, and any cash or non-cash proceeds and products thereof,
including investment property and security entitlements will be immediately
delivered to Bank. If Debtor has granted to Bank a security interest in
securities, Debtor acknowledges that such grant includes all investment property
and security entitlements, now existing or hereafter arising, relating to such
securities. In addition, Debtor agrees to execute such notices and instructions
to securities intermediaries as Bank may reasonably request.
CONTRACTS, CHATTEL PAPER, ACCOUNTS, GENERAL INTANGIBLES. Debtor warrants that
Collateral consisting of contract rights, chattel paper, accounts, or general
intangibles is (i) genuine and enforceable in accordance with its terms except
as limited by law; (ii) not subject to any defense, set-off, claim or
counterclaim of a material nature against Debtor except as to which Debtor has
notified Bank in writing; and (iii) not subject to any other circumstances that
would impair the validity, enforceability, value, or amount of such Collateral
except as to which Debtor has notified Bank in writing. Debtor shall not amend,
modify or supplement any lease, contract or agreement contained in Collateral or
waive any provision therein, without prior written consent of Bank.
ACCOUNT INFORMATION. From time to time, at the Bank's request, Debtor shall
provide Bank with schedules describing all accounts and contracts, including
customers' addresses, credited or acquired by Debtor and at the Bank's request
shall execute and deliver written assignments of contracts and other documents
evidencing such accounts and contracts to Bank. Together with each schedule,
Debtor shall, if requested by Bank, furnish Bank with copies of Debtor's sales
Page 3
journals, invoices, customer purchase orders or the equivalent, and original
shipping or delivery receipts for all goods sold, and Debtor warrants the
genuineness thereof.
ACCOUNT AND CONTRACT DEBTORS. After a Default occurs, Bank shall have the right
to notify the account and contract debtors obligated on any or all of the
Collateral to make payment thereof directly to Bank and Bank may take control of
all proceeds of any such Collateral, which rights Bank may exercise at any time.
The cost of such collection and enforcement, including attorneys' fees and
expenses, shall be borne solely by Debtor whether the same is incurred by Bank
or Debtor. After a Default occurs, upon demand of Bank, Debtor will, upon
receipt of all checks, drafts, cash and other remittances in payment on
Collateral, deposit the same in a special bank account maintained with Bank,
over which Bank also has the power of withdrawal.
If a Default occurs, no discount, credit, or allowance shall be granted by
Debtor to any account or contract debtor and no return of merchandise shall be
accepted by Debtor without Bank's consent. Bank may, after Default, settle or
adjust disputes and claims directly with account contract debtors for amounts
and upon terms that Bank considers advisable, and in such cases, Bank will
credit the Obligations with the net amounts received by Bank, after deducting
all of the expenses incurred by Bank. Debtor agrees to indemnify and defend Bank
and hold it harmless with respect to any claim or proceeding arising out of any
matter related to collection of Collateral.
GOVERNMENT CONTRACTS. If any Collateral covered hereby arises from obligations
due to Debtor from any governmental unit or organization, Debtor shall
immediately notify Bank in writing and execute all documents and take all
actions demanded by Bank to ensure recognition by such governmental unit or
organization of the rights of Bank in the Collateral.
INVENTORY. So long as no Default has occurred, Debtor shall have the right in
the regular course of business, to process and sell Debtor's inventory, unless
Bank shall hereafter otherwise direct in writing. Upon demand of Bank, Debtor
will, upon receipt of all checks, drafts, ash and other remittances, in payment
of Collateral sold, deposit the same in a special bank account maintained with
Bank, over which Bank also has the power of withdrawal. Debtor shall comply with
all federal, state, and local laws, regulations, rulings, and orders applicable
to Debtor or its assets or business, in all respects. Without limiting the
generality of the previous sentence, Debtor shall comply with all requirements
of the federal Fair Labor Standards Act in the conduct of its business and the
production of inventory. Debtor shall notify Bank immediately of any violation
by Debtor of the Fair Labor Standards Act, and a failure of Debtor to so notify
Bank shall constitute a continuing representation that all inventory then
existing has been produced in compliance with the Fair Labor Standards Act.
INSTRUMENTS, CHATTEL PAPER. Any Collateral that is instruments, chattel paper
and negotiable documents will be properly assigned to, deposited with and held
Bank, unless Bank shall hereafter otherwise direct or consent in writing. Bank
may, without notice, before or after maturity of the Obligations, exercise any
or all rights of collection, conversion, or exchange and other similar rights,
privileges and options pertaining to Collateral, but shall have no duty to do
so.
COLLATERAL DUTIES. Bank shall have no custodial or ministerial duties to perform
with respect to Collateral pledged except as set forth herein; and by way of
explanation and not by way of limitation, Bank shall incur no liability for any
of the following: (i) loss or depreciation of Collateral (unless caused by its
willful misconduct), (ii) its failure to present any paper for payment or
protest, to protest or give notice of nonpayment, or any other notice with
respect to any paper or Collateral, or (iii) its failure to present or surrender
for redemption, conversion or exchange any bond, stock, paper or other security
whether in connection with any merger, consolidation, recapitalization, or
reorganization, arising out of the refunding of the original security, or for
any other reason, or its failure to notify any party hereto that Collateral
should be so presented or surrendered.
Page 4
TRANSFER OF COLLATERAL. The Bank may assign its right in the Collateral or any
part thereof to any assignee who shall thereupon become vested with all the
powers and rights herein given to the Bank with respect to the property so
transferred and delivered, and the Bank shall thereafter be forever relieved and
fully discharged from any liability with respect to such property so
transferred, but with respect to any property not so transferred the Bank shall
retain all rights and powers hereby given.
SUBSTITUTE COLLATERAL. With prior written consent of Bank, other Collateral may
be substituted for the original Collateral herein in which event all rights,
duties, obligations, remedies and security interests provided for, created or
granted shall apply fully to such substitute Collateral.
INSPECTION, BOOKS AND RECORDS. Debtor will at all times keep accurate and
complete records covering each item of Collateral, including the proceeds
therefrom. Bank, or any of its agents, shall have the right, at intervals to be
determined by Bank and without hindrance or delay, to inspect, audit, and
examine the Collateral and to make extracts from the books, records, journals,
orders, receipts, correspondence and other data relating to Collateral, Debtor's
business or any other transaction between the parties hereto. Debtor will at its
expense furnish Bank copies thereof upon request.
CROSS COLLATERALIZATION LIMITATION. As to any other existing or future consumer
purpose loan made by Bank to Debtor, within the meaning of the Federal Consumer
Credit Protection Act, Bank expressly waives any security interest granted
herein in Collateral that Debtor uses as a principal dwelling and household
goods.
ATTORNEY'S FEES AND OTHER COSTS OF COLLECTION. Debtor shall pay all of Bank's
reasonable expenses incurred in enforcing this Agreement and in preserving and
liquidating Collateral, including but not limited to, reasonable arbitration,
paralegals', attorneys' and experts' fees and expenses, whether incurred without
the commencement of a suit, in any trial, arbitration, or administrative
proceeding, or in any appellate or bankruptcy proceeding.
DEFAULT. If any of the following occurs, a default ("Default") under this
Security Agreement shall exist: (i) The failure of timely payment or performance
of any of the Obligations or a default under any Loan Document; (ii) Any breach
of any representation or agreement contained or referred to in this Security
Agreement or other Loan Document; (iii) Any loss, theft, substantial damage, or
destruction of Collateral not fully covered by insurance, or as to which
insurance proceeds are not remitted to Bank within 30 days of the loss; any sale
(except the sale of inventory in the ordinary course of business), lease, or
encumbrance of any of collateral without prior written consent of Bank; or the
making of any levy, seizure, or attachment on or of Collateral which is not
removed within 10 days; or (iv) the death of, appointment of guardian for,
dissolution of, termination of existence of, loss of good standing status by,
appointment of a receiver for, assignment for the benefit of creditors of, or
commencement of any bankruptcy or insolvency proceeding by or against Debtor,
its Subsidiaries or Affiliates ("Affiliate" shall have the meaning as defined in
11 U.S.C. ss. 101; and "Subsidiary" shall mean any corporation of which more
than 50% of the issued and outstanding voting stock is owned directly or
indirectly by Debtor), if any, or any general partner of or the holder(s) of the
majority ownership interests in Debtor or any party to the Loan Documents.
REMEDIES ON DEFAULT (INCLUDING POWER OF SALE). If a Default occurs, all of the
Obligations shall be immediately due and payable, without notice and Bank shall
have all the rights and remedies of a secured party under the Uniform Commercial
Code. Without limitation thereto, Bank shall have the following rights and
remedies: (i) to take immediate possession of Collateral, without notice or
resort to legal process, and for such purpose, to enter upon any premises on
which Collateral or any part thereof may be situated and to remove the same
therefrom, or, at its option, to render the Collateral unusable or dispose of
said Collateral on Debtor's premises; (ii) to require
Page 5
Debtor to assemble the Collateral and make it available to Bank at a place to be
designated by Bank; (iii) to exercise its right of set-off or bank lien as to
any monies of Debtors deposited in demand, checking, time, savings, certificate
of deposit or other accounts of any nature maintained by Debtor with Bank or
Affiliates of Bank, without advance notice, regardless of whether such accounts
are general or special; (iv) to dispose of Collateral, as a unit or in parcels,
separately or with any real property interests also securing the Obligations, in
any county or place to be selected by Bank, at either private or public sale (at
which public sale bank may be the purchaser) with or without having the
Collateral physically present at said sale. Any notice of sale, disposition or
other action by Bank required by law and sent to Debtor at Debtor's address
shown above, or at such other address of debtor as may from time to time be
shown on the records of Bank, at least 5 days prior to such action, shall
constitute reasonable notice to Debtor. Notice shall be deemed given or sent
when mailed postage prepaid to Debtor's address as provided herein. Bank shall
be entitled to apply the proceeds of any sale or other disposition of the
Collateral, and the payments received by Bank with respect to any of the
Collateral, to the Obligations in such order and manner as Bank may determine.
Collateral that is subject to rapid declines in value and is customarily sold in
recognized markets may be disposed of by Bank in a recognized market for such
collateral without providing notice of sale.
REMEDIES ARE CUMULATIVE. No failure on the part of Bank to exercise, and no
delay in exercising, any right, power or remedy hereunder shall operate as a
waiver thereof, nor shall any single or partial exercise by Bank or any right,
power or remedy hereunder preclude any or other further exercise thereof or the
exercise of any right, power or remedy. The remedies herein provided are
cumulative and are not exclusive of any remedies provided by law, in equity, or
in other Loan Documents.
MISCELLANEOUS. (i) AMENDMENTS AND WAIVERS. No waiver, amendment or modification
of any provision of this Security Agreement shall be valid unless in writing and
signed by an officer of Bank. No waiver by Bank of any Default shall operate as
a waiver of any other Default or of the same Default on a future occasion.
Neither the failure of, nor any delay by, Bank in exercising any right, power or
privilege granted pursuant to this Security Agreement shall operate as a waiver
thereof, nor shall a single or partial exercise thereof preclude any other or
further exercise of any other right, power or privilege. (ii) ASSIGNMENT. All
rights of Bank hereunder are freely assignable, in whole or in part, and shall
inure to the benefit of and be enforceable by Bank, its successors, assigns and
affiliates. Debtor shall not assign its rights and interest hereunder without
the prior written consent of Bank, and any attempt by Debtor to assign without
Bank's prior written consent is null and void. Any assignment shall not release
Debtor from the Obligations. This Security Agreement shall be binding upon
Debtor, and the heirs, personal representatives, successors, and assigns of
Debtor. (iii) APPLICABLE LAW: CONFLICT BETWEEN DOCUMENTS. This Security
Agreement shall be governed by and construed under the laws of the state in
which the office of Bank as stated above is located without regard to that
state's conflict of laws principles. If any terms of this Security Agreement
conflict with the terms of any commitment letter or loan proposal, the terms of
this Security Agreement shall control. (iv) JURISDICTION. Debtor irrevocably
agrees to non-exclusive personal jurisdiction in the state in which the office
of Bank as stated above is located. (v) SEVERABILITY. If any provision of this
Security Agreement shall be prohibited by or invalid under applicable law, such
provision shall be ineffective but only to the extent or such prohibition or
invalidity, without invalidating the remainder of such provision or the
remaining provisions of this Security Agreement. (vi) NOTICES. Any notices to
Debtor shall be sufficiently given. If in writing and mailed or delivered to the
address of Debtor shown above or such other address as provided hereunder; and
to Bank, if in writing and mailed or delivered to Bank's office address shown
above or such other address as Bank may specify in writing from time to time. In
the event that the Debtor changes Debtor's mailing address at any time prior to
the date the Obligations are paid in full, Debtor agrees to promptly give
written notice of said change of address by registered or certified mail, return
receipt requested, all charges prepaid. (vii) CAPTIONS. The captions contained
Page 6
herein are inserted for convenience only and shall not affect the meaning or
interpretation of this Security Agreement or any provision thereof. The use of
the plural shall also mean the singular, and vice versa, (viii) LOAN DOCUMENTS.
The term "Loan Documents" refers to all documents, whether now or hereafter
existing, executed in connection with the Obligations and may include, without
limitation and whether executed by Borrower, Debtor or others, commitment
letters, loan agreements, guaranty agreements, other security agreements,
letters of credit, instruments, financing statements, mortgages, deeds of trust,
deeds to secure debt, and any amendments or supplements (excluding swap
agreements as defined in 11 U.S.C. ss. 101). (ix) JOINT AND SEVERAL LIABILITY.
If more than one person has signed this Security Agreement, such parties are
jointly and severally obligated hereunder. (x) BINDING CONTRACT. Debtor by
execution and Bank by acceptance of this Security Agreement, agree that each
party is bound by all terms and provisions of this Security Agreement.
IN WITNESS WHEREOF, Debtor, on the day and year first written above, has caused
this Security Agreement to be executed under seal.
Optical Cable Corporation, a Virginia Corporation
Taxpayer Identification Number: 54-1237042
CORPORATE By: /s/ Robert Kopstein
SEAL -------------------------------
Robert Kopstein, President
Page 7
Exhibit 23
ACCOUNTANTS' CONSENT
The Board of Directors
Optical Cable Corporation
We consent to incorporation by reference in Registration Statement No.
33-09433 on Form S-8 of Optical Cable Corporation of our report dated December
12, 1997, relating to the balance sheets of Optical Cable Corporation as of
October 31, 1997 and 1996, and the related statements of income, stockholders'
equity, and cash flows for each of the years in the three-year period ended
October 31, 1997, which report is included in the October 31, 1997 Annual Report
on Form 10-K of Optical Cable Corporation.
KPMG Peat Marwick LLP
Roanoke, Virginia
January 29, 1998
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
FINANCIAL STATEMENTS FOR THE YEAR ENDED OCTOBER 31, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
5
1,000
US
12-MOS
OCT-31-1997
NOV-01-1996
OCT-31-1997
1
986
0
10,238
307
12,019
23,683
15,149
3,669
35,214
3,771
0
0
0
15,594
12,785
35,214
52,189
52,204
30,613
40,185
(45)
(11)
18
11,957
4,150
7,807
0
0
0
7,807
0.202
0.202
