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, 1998
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 its charter)
Virginia 54-1237042
(State of incorporation) (I.R.S. Employer
Identification No.)
5290 Concourse Drive
Roanoke, Virginia 24019 (540) 265-0690
(Address of principal (Telephone Number)
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 check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. (1) Yes [X] No[ ](2) Yes [X] No[ ]
Indicate by check mark 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. [ ]
The aggregate market value of shares of common stock held by non-affiliates
at January 15, 1999 was $22,453,512.
As of January 15, 1999, 37,862,936 shares of the Registrant's Common Stock
were outstanding.
DOCUMENT INCORPORATED BY REFERENCE
Portions of Optical Cable Corporation's definitive Proxy Statement for its 1999
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.
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. The cost of the necessary electro-optical transmitters and
recorders has been reduced to the point where fiber optic cable is economically
feasible for many moderate distance applications.
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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.
The Long Distance Telephone Market
Private industry initially developed optical fiber systems for long
distance commercial applications, particularly the U.S. telephone networks. For
the long distance telephone market, "single mode" optical fiber is generally
used. To protect the optical fiber without adversely affecting its optical
performance, fiber optic cable producers use a high-density (i.e., high fiber
count) "loose tube" cable construction. This cable design was intended to put
many optical fibers in a small, relatively inexpensive cable. To protect such
cables from water penetration, manufacturers add a water-blocking but flammable
gel, making them unsuitable for indoor use.
U.S. long distance carriers have aggressively installed fiber optic routes
across the United States. Since the late 1980s, optical fiber has 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.
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 have begun to use, on a limited basis,
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
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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.
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 tight-buffered coating that protects the optical fiber and a cable
design that achieves superior mechanical and environmental
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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.
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 January 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, Automated Manufacturing Processes
The Company believes that its customized, internally developed and highly
automated manufacturing processes provide a competitive advantage. The Company
has developed proprietary process control systems to ensure consistency and
uniformity at high throughput rates. Ample capacity, versatile automated
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.
Distribution and Marketing Presence
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 25%, 27% and 22% in
fiscal 1996, 1997 and 1998, respectively. The Company does not separately track
gross profit or expenses attributable to international sales. Substantially, all
of the Company's international sales are denominated in U.S. dollars. The
Company has no material assets located outside of the United States. (See also
Note 9 to the Financial Statments which begin on page 35.)
5
Additionally, in December 1998, the Company announced its plans to
establish an Internet subsidiary to offer one-stop shopping to global purchasers
of communication materials. Working with IBM's E-Commerce division, the Company
is in the initial stages of site design, but expects to be operational sometime
in the spring of 1999. Initially, the venture will be part of the Company's
existing web site, http://www.occfiber.com, and will include only the Company's
product line. The Company intends to look for opportunities to establish
strategic alliances with other leading suppliers of communications equipment to
expand the web-site's future offerings and eventually create an independent
communications superstore.
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.
[The remainder of this page is blank]
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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) o links between electronic equipment
cables and main fiber optic cable
o tight-buffered coating on each o routing connections in patching
optical fiber systems
o aramid yarn strength members o indoor use
o thermoplastic outer jacket
o flame retardant
- -----------------------------------------------------------------------------------------------------------------------
B-Series "Breakout" o 2 to 156 optical fibers o direct termination with connectors
Cables 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 building, where multiple termination
aramid yarn strength members points are needed
(similar to an A-Series simplex o installations where ease of
cable) termination and termination cost are
o Core-LockedTM outer jacket important factors
o rugged o indoor and outdoor use
o flame retardant
o moisture and fungus resistant
- -----------------------------------------------------------------------------------------------------------------------
D-Series "Distribution" o 2 to 156 optical fibers o longer distance runs where size and
Cables o tight-buffered coating on each cable cost are more significant
optical fiber o can be armored for additional
o Core-LockedTM outer jacket protection in buried and overhead
encases the optical fibers and installations
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 o high fiber count systems
Cables various subgroup sizes o subgroups needed to facilitate
o multi-fiber subcables, each organization of large numbers of
similar 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
- -----------------------------------------------------------------------------------------------------------------------
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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 tight-buffered 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 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
modify product 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.
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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 workstations, 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. 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 other types of businesses. 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.
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.
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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.
Additionally, the Company has plans to establish a subsidiary which will offer
the Company's products over the Internet. Distribution methods are adapted to
the particular needs of different types of customers. The decision to purchase
the Company's products may be made 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 1996, 1997 or 1998.
However, in fiscal 1998, 27% of net sales were attributable to two major
domestic distributors. 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).
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Since January 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, 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.
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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 Corning) 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, Corning 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 competition 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.
12
EMPLOYEES
As of October 31, 1998, the Company employed a total of 133 persons, including
34 in sales, marketing and customer service, 12 in engineering, product
development and quality control, 75 in manufacturing, and 12 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.
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. 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, 1998.
13
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". 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. On January 15,
1999, the Company's Common Stock closed at a price of $ 12.125 per share.
FISCAL YEAR ENDED OCTOBER 31, 1998 HIGH LOW
- ---------------------------------- ---- ---
First Quarter (November 1, 1997 to January 31, 1998) $ 12.125 $ 8.125
Second Quarter (February 1 to April 30, 1998) 13.500 9.000
Third Quarter (May 1 to July 31, 1998) 11.250 8.500
Fourth Quarter (August 1 to October 31, 1998) 12.750 6.500
FISCAL YEAR ENDED OCTOBER 31, 1997
- ----------------------------------
First Quarter (November 1, 1996 to January 31, 1997) $ 14.750 $ 10.375
Second Quarter (February 1 to April 30, 1997) 17.750 9.875
Third Quarter (May 1 to July 31, 1997) 13.125 7.125
Fourth Quarter (August 1 to October 31, 1997) 16.250 7.875
- ----------
As of January 15, 1999, there were an estimated 4,279 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 its initial public offering in 1996. While there are no
restrictions on the payment of dividends, the Company does not anticipate paying
any cash dividends on its common stock in the foreseeable future.
14
ITEM 6. SELECTED FINANCIAL DATA
OPTICAL CABLE CORPORATION
SELECTED FINANCIAL DATA
YEARS ENDED OCTOBER 31,
----------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF INCOME DATA:
Net sales $ 50,589 $ 52,189 $ 45,152 $ 36,360 $ 26,217
Cost of goods sold 29,330 30,613 24,907 20,121 14,138
---------- ---------- ---------- ---------- ----------
Gross profit 21,259 21,576 20,245 16,239 12,079
Total operating expenses 9,939 9,572 8,416 7,660 7,967
---------- ---------- ---------- ---------- ----------
Income from operations 11,320 12,004 11,829 8,579 4,112
Other income (expense), net 57 (47) 198 (379) (614)
---------- ---------- ---------- ---------- ----------
Income before income tax expense
and extraordinary item 11,377 11,957 12,027 8,200 3,498
Income tax expense (1) 4,107 4,150 2,806 - -
---------- ---------- ---------- ---------- ----------
Income before extraordinary item 7,270 7,807 9,221 8,200 3,498
Extraordinary item - - - - (149)
---------- ---------- ---------- ---------- ----------
Net income $ 7,270 $ 7,807 $ 9,221 $ 8,200 $ 3,349
========== ========== ========== ========== ==========
Pro forma Income Data (1):
Net income before pro forma income
tax provision, as reported $ 9,221
Pro forma income tax provision 1,747
----------
Pro forma net income $ 7,474
==========
Earnings per common share
(pro forma for 1996) $ .190 $ .202 $ .190
========== ========== ==========
Earnings per common share - assuming
dilution (pro forma for 1996) $ .188 $ .200 $ .189
========== ========== ==========
BALANCE SHEET DATA:
Working capital $ 18,991 $ 19,912 $ 14,377 $ 9,076 $ 10,140
Total assets 32,829 35,214 31,127 18,819 19,056
Long-term debt, less current maturities - - - - 8,000
Total stockholders' equity 29,991 31,379 23,572 14,952 7,832
- ----------
(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.
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
OPTICAL CABLE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
FORWARD-LOOKING INFORMATION
This report may contain certain "forward-looking" information within the meaning
of the federal securities laws. The forward-looking information may include,
among other information, (i) statements concerning the Company's outlook for the
future, (ii) statements of belief, (iii) future plans, strategies or anticipated
events, and (iv) similar information and statements concerning matters that are
not historical facts. Such forward-looking information is subject to risks and
uncertainties that may cause actual events to differ materially from the
expectations of the Company. Factors that could cause or contribute to such
differences include, but are not limited to, the level of sales to key
customers, actions by competitors, fluctuations in the price of raw materials
(including optical fiber), the Company's dependence on a single manufacturing
facility, the ability of the Company to protect its proprietary manufacturing
technology, the Company's dependence on a limited number of suppliers,
technological changes and introductions of new competing products, changes in
market demand, and market and economic conditions in the areas of the world in
which the Company operates and markets its products.
RESULTS OF OPERATIONS
Net Sales
Net sales consists of gross sales of products, less discounts, refunds and
returns. Net sales decreased 3.1 percent to $50.6 million in fiscal 1998 from
$52.2 million for fiscal 1997. This decrease was primarily attributable to
reduced raw fiber prices resulting in some downward pressure on selling prices
as well as reduced demand in the Far and Middle East as a result of volatile
economic conditions in those regions. In addition, weather conditions and delays
in large projects, as well as a reallocation of capital spending by the
Company's customers away from communications expenditures towards Year 2000
projects contributed to the decrease.
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.
Management believes that the Company's business will grow as the global market
for fiber optic cable used for moderate distance applications expands.
Management anticipates that new electronic communication devices will continue
to become more reliant on fiber optic technology to achieve improved
performance. Additionally, the Company expects new markets for fiber optic cable
to emerge as fiber optic sensors are developed for production plant automation,
smart highways, security applications, and other specialty applications.
Management believes the Company's unique technological background and specialty
market expertise should assist the Company in capturing its share of any
increase in the global market for fiber optic cable used for moderate distance
applications and contribute to future earnings growth for the Company. The
Company also intends to use its existing product line to make inroads into other
markets such as moderate distance applications for single-mode
telecommunications and cable television.
16
OPTICAL CABLE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
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) increased to 42.0
percent in fiscal 1998 from 41.3 percent in fiscal 1997. This slight increase
was due to reduced raw fiber prices, partially offset by some downward pressure
on selling prices, by the impact of the increase in the ratio of large orders
and the increase in the ratio of net sales attributable to the Company's
distributors during the year. During fiscal 1998, sales from orders $50,000 or
more approximated 18 percent of net sales compared to 20 percent for fiscal
1997. Discounts on large orders are generally greater than for sales from orders
less than $50,000. In addition, for fiscal 1998, net sales to distributors
approximated 62 percent of net sales versus 57 percent for fiscal 1997.
Discounts on sales to distributors are generally greater than for sales to the
Company's other customer base.
The Company's gross profit margin decreased to 41.3 percent in fiscal 1997 from
44.8 percent in fiscal 1996. This decrease was due to increased raw 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. In addition, for fiscal 1997, net
sales to distributors approximated 57 percent of net sales versus 49 percent for
fiscal 1996.
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 19.6 percent in fiscal 1998 compared
to 18.3 percent in fiscal 1997. This higher percentage was primarily the result
of the fact that net sales for fiscal 1998 decreased while selling, general and
administrative expenses increased 3.8 percent compared to fiscal 1997. The ratio
of selling, general and administrative expenses as a percentage of net sales was
also impacted due to incurring approximately $130,000 of expenses to develop and
distribute a new catalog during fiscal 1998 in an effort to improve
international sales.
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.
Income Before Income Tax Expense
Income before income tax expense of $11.3 million in fiscal 1998 decreased
$579,000 compared to fiscal 1997. This decrease was primarily due to decreased
sales volume and decreasing sales prices resulting from reduced raw fiber costs
offset by the slight increase in gross profit margin.
17
OPTICAL CABLE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
Income before income tax expense of $12.0 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 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 statements of income for
the years ended October 31, 1998 and 1997 includes income taxes, at effective
tax rates of 36.1 percent and 34.7 percent, respectively, 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
higher effective tax rate for fiscal 1998 compared to fiscal 1997 is due
primarily to a reduced benefit of the Company's foreign sales corporation due to
lower international sales. The lower effective tax rate for fiscal 1997 compared
to fiscal 1996 is due primarily to the benefit of the Company's foreign sales
corporation.
Net Income
Net income for fiscal 1998 was $7.3 million compared to $7.8 million for fiscal
1997. Net income decreased $537,000 due primarily to decreased sales volume and
decreasing sales prices resulting from reduced raw fiber costs offset by the
slight increase in gross profit margin.
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 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 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.
FINANCIAL CONDITION
Total assets at October 31, 1998 were $32.8 million, a decrease of $2.4 million,
or 6.8 percent from October 31, 1997. This decrease was primarily due to
management's efforts to decrease inventories, which resulted in a $2.1 million
reduction in inventories.
Total stockholders' equity at October 31, 1998 decreased $1.4 million, or 4.4
percent from October 31, 1997. This decrease was primarily due to net income
retained, offset by the repurchase of approximately $9 million of the Company's
common stock.
18
OPTICAL CABLE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
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, (iv) repurchase its common stock and (v) 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.
Under a loan agreement with its bank dated April 27, 1997, as amended, the
Company has a $5 million secured revolving line of credit available for general
corporate purposes as well as 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, 1999, unless
renewed or extended. As of the date hereof, the Company has no additional
material sources of financing.
The Company's Board of Directors has authorized the repurchase of up to $10
million of the Company's common stock in the open market or in privately
negotiated transactions. Through October 31, 1998, approximately $9 million of
common stock had been repurchased by the Company under this authorization.
Cash flows from operations were approximately $9.6 million, $4.0 million and
$4.1 million in fiscal 1998, 1997 and 1996, respectively. Cash flows from
operations in fiscal 1998 were primarily provided by operating income and a
decrease in inventory of $2.1 million. In 1998, the Company reduced its
inventory of optical fiber due to anticipated continued reductions in raw fiber
prices. 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.
Net cash used in investing activities was for expenditures related to facilities
and equipment and was $622,000, $3.6 million and $3.1 million in fiscal 1998,
1997 and 1996, respectively. The Company's expansion of its headquarters
facilities was completed in fiscal 1997.
Net cash provided by (used in) financing activities was $(8.8) million, $(1.1)
million and $193,000 in fiscal 1998, 1997 and 1996, respectively. The net cash
used in financing activities in fiscal 1998 consisted of a repurchase of common
stock in the amount of $9 million, offset by proceeds received from the exercise
of employee stock options of $198,000. 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.
19
OPTICAL CABLE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
DERIVATIVES
The Company does not use derivatives or off-balance sheet instruments such as
future contracts, forward obligations, interest rate swaps, or option contracts.
YEAR 2000
The "Year 2000" problem will affect many computers and other electronic devices
that are not programmed to properly recognize a year that begins with "20"
instead of "19." Some devices may recognize dates on or after January 1, 2000 as
a date during the 1900s, or may not recognize the date at all. If not corrected,
many devices could fail or create erroneous results.
Since 1997, the Company has been actively assessing, planning and responding to
the risks to the Company created by the Year 2000 problem. In assessing the
risks, the Company has focused on both (i) its internal information technology
("IT") and non-IT systems, including, but not limited to, computer hardware and
software, manufacturing equipment, printers, facsimile machines, and other
control and accounting devices, and (ii) its interfaces with third parties with
which the Company has material relationships, such as suppliers, customers and
financial institutions.
The Company has completed its assessment and response planning with respect to
its internal IT and non-IT systems. Additionally, the Company has substantially
completed necessary remediation measures with respect to those internal systems.
The Company's remediation has included updating various computer hardware and
software and printers to be Year 2000 compliant. The Company has also determined
that the Year 2000 problem will not have a material adverse affect on its
manufacturing machinery. To date, the Company has expended less than $100,000 on
its remediation measures and believes future remediation expenditures with
respect to its internal systems to be less than $50,000. With respect to the
Company's internal systems, the Company believes it will complete its planned
remediation and any testing in time to ensure the Year 2000 problem will not
have a material adverse affect on the Company or its business. The Company does
not believe contingency plans are necessary for its internal systems at this
time.
The Company has completed its assessment of potential Year 2000 problems which
may arise from failures of third parties to be Year 2000 compliant. However,
many of the Company's suppliers and customers are still engaged in executing
their Year 2000 readiness efforts and, as a result, the Company cannot fully
evaluate the Year 2000 risks to its supply chain and its distribution channels
at this time. The Company's assessment efforts included sending questionnaires
to major third party suppliers and reviewing responses, and taking other steps
to assess risks as deemed appropriate.
The Company has not been made aware of any Year 2000 issues of third parties
that are expected to be unresolved prior to December 31, 1999 and that would
have a material adverse effect on the Company. Nonetheless, the Company is
considering contingency plans, as appropriate, including relying on raw material
inventory on hand and identification of alternative suppliers. The Company will
continue to monitor the Year 2000 status of third parties with which it has
material relationships to minimize its risk from failures of such parties to be
Year 2000 compliant.
20
OPTICAL CABLE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
The most likely worst case scenario for the Company with respect to the Year
2000 problem is the failure of a supplier, including an energy supplier, to be
Year 2000 compliant such that its supply of needed products or services to the
Company's manufacturing facility is interrupted temporarily. This could result
in the Company not being able to produce fiber optic cable for a period of time,
which in turn could result in lost sales and gross profit.
While the Company believes that it is taking the necessary steps to resolve its
Year 2000 issues in a timely manner, there can be no assurance that the Company
will not have any Year 2000 problems. If any such problems occur, the Company
will work to solve them as quickly as possible. At present, the Company does not
expect that such problems related to the Company's internal IT and non-IT
systems will have a material adverse affect on its business. The failure,
however, of one or more of the Company's major suppliers, customers or financial
institutions to be Year 2000 compliant could have a material adverse effect on
the Company.
NEW ACCOUNTING STANDARDS
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.
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. The
adoption of SFAS No. 130 during the 1998 fiscal year did not have any 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
21
OPTICAL CABLE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
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. The Company will adopt SFAS
No. 131 as of November 1, 1998. It is not anticipated that SFAS No. 131 will
have any material effect on current or prior period segment disclosures
presented by the Company.
22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
OPTICAL CABLE CORPORATION
INDEX TO
FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
PAGE
----
FINANCIAL STATEMENTS:
Independent Auditors' Report .................................................. 24
Balance Sheets as of October 31, 1998 and 1997................................. 25
Statements of Income for the Years Ended October 31, 1998, 1997 and 1996....... 26
Statements of Stockholders' Equity for the Years Ended October 31, 1998, 1997
and 1996....................................................................... 27
Statements of Cash Flows for the Years Ended October 31, 1998, 1997 and 1996... 28
Notes to Financial Statements.................................................. 29
FINANCIAL STATEMENT SCHEDULES:
No financial statement schedules have been included since they are not required,
not applicable, or the information is otherwise included in the financial
statements of the Company.
23
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, 1998 and 1997, and the related statements of income,
stockholders' equity, and cash flows for each of the years in the three-year
period ended October 31, 1998. 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, 1998 and 1997, and the results of its operations and its cash flows
for each of the years in the three-year period ended October 31, 1998, in
conformity with generally accepted accounting principles.
KPMG LLP
Roanoke, Virginia
December 11, 1998
24
OPTICAL CABLE CORPORATION
Balance Sheets
October 31, 1998 and 1997
OCTOBER 31,
----------------------------------
ASSETS 1998 1997
-------------- ---------------
Current assets:
Cash and cash equivalents $ 1,122,277 $ 985,807
Trade accounts receivable, net of allowance for doubtful
accounts of $311,500 in 1998 and $307,400 in 1997 10,012,699 9,931,276
Other receivables 295,199 540,102
Due from employees 5,589 3,534
Inventories 9,967,012 12,019,443
Prepaid expenses 95,766 121,046
Deferred income taxes 212,738 81,484
----------- -----------
Total current assets 21,711,280 23,682,692
Other assets, net 33,950 50,953
Property and equipment, net 11,083,921 11,480,433
=========== ===========
Total assets $32,829,151 $35,214,078
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 1,952,360 $ 2,593,256
Accrued compensation and payroll taxes 656,028 612,736
Income taxes payable 111,449 564,999
----------- -----------
Total current liabilities 2,719,837 3,770,991
Deferred income taxes 118,121 64,382
----------- -----------
Total liabilities 2,837,958 3,835,373
----------- -----------
Stockholders' equity:
Preferred stock, no par value, authorized 1,000,000 shares;
none issued and outstanding -- --
Common stock, voting; no par value, authorized 100,000,000
shares in 1998 and 50,000,000 shares in 1997; issued and
outstanding 37,879,036 shares in 1998 and 38,675,416
shares in 1997 9,786,281 18,594,116
Paid-in capital 150,359 --
Retained earnings 20,054,553 12,784,589
----------- -----------
Total stockholders' equity 29,991,193 31,378,705
Commitments and contingencies
=========== ===========
Total liabilities and stockholders' equity $32,829,151 $35,214,078
=========== ===========
See accompanying notes to financial statements.
25
OPTICAL CABLE CORPORATION
Statements of Income
Years Ended October 31, 1998, 1997 and 1996
YEARS ENDED OCTOBER 31,
----------------------------------------------------------
1998 1997 1996
---------------- ---------------- ----------------
Net sales $ 50,588,893 $ 52,188,850 $ 45,152,299
Cost of goods sold 29,329,822 30,612,690 24,907,373
------------ ------------ ------------
Gross profit 21,259,071 21,576,160 20,244,926
Selling, general and administrative expenses 9,939,258 9,572,061 8,415,798
------------ ------------ ------------
Income from operations 11,319,813 12,004,099 11,829,128
Other income (expense):
Interest income 56,260 15,351 94,888
Interest expense (505) (17,930) (9,595)
Other, net 1,891 (44,580) 112,988
------------ ------------ ------------
Other income (expense), net 57,646 (47,159) 198,281
------------ ------------ ------------
Income before income tax expense 11,377,459 11,956,940 12,027,409
Income tax expense 4,107,495 4,149,794 2,806,849
============ ============ ============
Net income $ 7,269,964 $ 7,807,146 $ 9,220,560
============ ============ ============
Pro forma income data (unaudited):
Net income before pro forma income
tax provision, as reported $ 9,220,560
Pro forma income tax provision 1,746,513
============
Pro forma net income $ 7,474,047
============
Earnings per share:
Earnings per common share (unaudited
pro forma for 1996) $ .190 $ .202 $ .190
============ ============ ============
Earnings per common share - assuming
dilution (unaudited pro forma for 1996) $ .188 $ .200 $ .189
============ ============ ============
See accompanying notes to financial statements.
26
OPTICAL CABLE CORPORATION
Statements of Stockholders' Equity
Years Ended October 31, 1998, 1997 and 1996
COMMON STOCK TOTAL
-------------------------------- PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
-------------- --------------- ------------- --------------- ---------------
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
Exercise of employee stock
options ($2.50 per share) 79,350 198,375 -- -- 198,375
Tax benefit of disqualifying
disposition of stock options
exercised -- -- 150,359 -- 150,359
Repurchase of common stock
(at cost) (875,730) (9,006,210) -- -- (9,006,210)
Net income -- -- -- 7,269,964 7,269,964
============ ============ ============ ============ ============
Balances at October 31, 1998 37,879,036 $ 9,786,281 $ 150,359 $ 20,054,553 $ 29,991,193
============ ============ ============ ============ ============
See accompanying notes to financial statements.
27
OPTICAL CABLE CORPORATION
Statements of Cash Flows
Years Ended October 31, 1998, 1997 and 1996
YEARS ENDED OCTOBER 31,
------------------------------------------------
1998 1997 1996
-------------- -------------- ---------------
Cash flows from operating activities:
Net income $ 7,269,964 $ 7,807,146 $ 9,220,560
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 787,674 706,076 533,445
Bad debt expense (recovery) 88,005 (10,778) 266,366
Deferred income taxes (77,515) 88,975 (106,077)
Loss on disposal of property and equipment 2,669 -- --
(Increase) decrease in:
Trade accounts receivable (169,428) (552,022) (3,447,954)
Other receivables 244,903 (186,061) (255,744)
Due from employees (2,055) (2,059) 1,750
Inventories 2,052,431 (1,758,006) (4,228,395)
Prepaid expenses 25,280 (56,183) 21,690
Other assets -- 39 116,237
Increase (decrease) in:
Accounts payable and accrued expenses (395,330) (2,260,416) 1,881,379
Accrued compensation and payroll taxes 43,292 (63,989) (154,472)
Income taxes payable (303,191) 327,073 237,926
----------- ----------- -----------
Net cash provided by operating activities 9,566,699 4,039,795 4,086,711
----------- ----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (622,394) (3,628,727) (3,137,421)
----------- ----------- -----------
Net cash used in investing activities (622,394) (3,628,727) (3,137,421)
----------- ----------- -----------
Cash flows from financing activities:
Net borrowings (payments) on notes payable -- (1,103,000) 794,000
Proceeds from issuance of common stock, net of
issuance costs -- -- 5,549,214
Cash distributions to previously sole stockholder -- -- (6,150,000)
Repurchase of common stock (9,006,210) -- --
Proceeds from exercise of employee stock options 198,375 -- --
----------- ----------- -----------
Net cash provided by (used in) financing activities (8,807,835) (1,103,000) 193,214
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 136,470 (691,932) 1,142,504
Cash and cash equivalents at beginning of year 985,807 1,677,739 535,235
=========== =========== ===========
Cash and cash equivalents at end of year $ 1,122,277 $ 985,807 $ 1,677,739
=========== =========== ===========
Supplemental Disclosure of Cash Flow Information:
Cash payments for interest $ 505 $ 17,930 $ 9,595
=========== =========== ===========
Income taxes paid $ 4,488,201 $ 3,733,746 $ 2,675,000
=========== =========== ===========
Noncash investing and financing activities:
Capital expenditures accrued in accounts payable $ -- $ 245,566 $ 880,659
=========== =========== ===========
Income tax benefit from exercise of stock options $ 150,359 $ -- $ --
=========== =========== ===========
See accompanying notes to financial statements.
28
OPTICAL CABLE CORPORATION
Notes to Financial Statements
Years Ended October 31, 1998, 1997 and 1996
(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
At October 31, 1998 and 1997, cash equivalents consist of $1,381,790
and $763,000, respectively, of overnight repurchase agreements and
money market mutual funds. 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.
29
OPTICAL CABLE CORPORATION
Notes to Financial Statements (Continued)
Years Ended October 31, 1998, 1997 and 1996
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
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 reviews long-lived assets and certain identifiable
intangibles 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.
(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.
30
OPTICAL CABLE CORPORATION
Notes to Financial Statements (Continued)
Years Ended October 31, 1998, 1997 and 1996
(I) EARNINGS PER SHARE
Effective November 1, 1997, the Company adopted 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.
Unaudited pro forma earnings 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.
(K) RECLASSIFICATIONS
Certain reclassifications have been made in the notes to the 1997
financial statements to conform with the 1998 presentation.
31
OPTICAL CABLE CORPORATION
Notes to Financial Statements (Continued)
Years Ended October 31, 1998, 1997 and 1996
(2) ALLOWANCE FOR DOUBTFUL ACCOUNTS RECEIVABLE
A summary of changes in the allowance for doubtful accounts receivable for
the years ended October 31, 1998, 1997 and 1996 follows:
YEARS ENDED OCTOBER 31,
----------------------------------------------------
1998 1997 1996
-------------- -------------- ---------------
Balance at beginning of year $ 307,400 $ 300,000 $ 200,000
Bad debt expense (recovery) 88,005 (10,778) 266,366
Losses charged to allowance (90,147) (26,592) (176,512)
Recoveries added to allowance 6,242 44,770 10,146
--------- --------- ---------
Balance at end of year $ 311,500 $ 307,400 $ 300,000
========= ========= =========
(3) INVENTORIES
Inventories at October 31, 1998 and 1997 consist of the following:
OCTOBER 31,
----------------------------------
1998 1997
--------------- ---------------
Finished goods $ 4,152,094 $ 4,854,697
Work in process 1,896,858 1,976,970
Raw materials 3,873,824 5,125,044
Production supplies 44,236 62,732
----------- -----------
$ 9,967,012 $12,019,443
=========== ===========
(4) PROPERTY AND EQUIPMENT
Property and equipment at October 31, 1998 and 1997 consists of the
following:
OCTOBER 31,
-----------------------------------
1998 1997
--------------- ----------------
Land $ 2,745,327 $ 2,745,327
Building and improvements 6,888,444 6,853,527
Machinery and equipment 5,007,050 4,783,764
Furniture and fixtures 729,341 732,963
Construction in progress 69,938 33,619
------------ ------------
Total property and equipment, at cost 15,440,100 15,149,200
Less accumulated amortization and depreciation (4,356,179) (3,668,767)
------------ ------------
Property and equipment, net $ 11,083,921 $ 11,480,433
============ ============
32
OPTICAL CABLE CORPORATION
Notes to Financial Statements (Continued)
Years Ended October 31, 1998, 1997 and 1996
(5) NOTES PAYABLE
Under a loan agreement with its bank dated April 27, 1997, as amended, the
Company has a $5 million secured revolving line of credit available for
general corporate purposes and 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 (6.72 percent as of
October 31, 1998) 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, 1999, 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 $21,527 for the year ended October 31,
1998, and $25,030 for the years ended October 31, 1997 and 1996.
(7) RELATED PARTY AGREEMENTS
Since February 1, 1995, the Company has entered into employment agreements
with the individual who is the Company's Chairman, President and Chief
Executive Officer and its previously sole stockholder which typically have
a term of less than two years. Annual compensation under the agreements
consists of salary payments equal to 1 percent of the previous fiscal
year's net sales 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 this agreement amounted
to $521,889, $521,889 and $451,523 for the years ended October 31, 1998,
1997 and 1996, respectively.
(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,
1998, 1997 and 1996, total claims expense of $725,535, $872,582 and
$876,481, respectively, was incurred, which represents claims processed and
an estimate for claims incurred but not reported.
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 7 percent of their annual
compensation on a pretax basis during the 1998 fiscal year and up to 6
percent of their annual
33
OPTICAL CABLE CORPORATION
Notes to Financial Statements (Continued)
Years Ended October 31, 1998, 1997 and 1996
compensation on a pretax basis during the 1997 and 1996 fiscal years.
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
$353,096, $313,365 and $233,072 for the years ended October 31, 1998, 1997
and 1996, 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, 1998, there were
3,430,850 additional shares available for grant under the Plan. Although
not required under the Plan, stock options granted to date have been
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 estimated 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 - unaudited) and earnings per share (pro forma for 1996 -
unaudited) would have been reduced to the SFAS No. 123 pro forma amounts
indicated below:
YEARS ENDED OCTOBER 31,
-------------------------------------------------
1998 1997 1996
------------- ------------- -------------
Net income:
As reported (pro forma for 1996 - unaudited) $7,269,964 $7,807,146 $7,474,047
========== ========== ==========
Pro forma $6,926,736 $7,638,186 $7,400,134
========== ========== ==========
YEARS ENDED OCTOBER 31,
-------------------------------------------------
1998 1997 1996
------------- ------------- -------------
Earnings per share:
Earnings per common share:
As reported (pro forma for 1996 - unaudited) $.190 $.202 $.190
===== ===== =====
Pro forma $.181 $.197 $.188
===== ===== =====
34
OPTICAL CABLE CORPORATION
Notes to Financial Statements (Continued)
Years Ended October 31, 1998, 1997 and 1996
YEARS ENDED OCTOBER 31,
-------------------------------------------------
1998 1997 1996
------------- ------------- -------------
Earnings per common share - assuming dilution:
As reported (pro forma for 1996 - unaudited) $.188 $.200 $.189
===== ===== =====
Pro forma $.180 $.196 $.187
===== ===== =====
Stock option activity during the periods indicated is as follows:
NUMBER OF WEIGHTED-AVERAGE
SHARES EXERCISE PRICE
--------------- --------------------
Balance at October 31, 1996 442,000 $ 2.500
Granted 254,000 11.125
Forfeited (32,500) 6.348
-------
Balance at October 31, 1997 663,500 5.613
Exercised (79,350) 2.500
Forfeited (15,000) 9.400
-------
Balance at October 31, 1998 (31,150 options exercisable;
341,650 options at exercise price of $2.50 per share
with remaining contractual life of 7.5 years, and
227,500 options at exercise price of $11.125 per share
with remaining contractual life of 7.5 years) 569,150 5.948
=======
(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, 1998 and 1997 have been adequately provided for in the
financial statements.
For the years ended October 31, 1998, 1997 and 1996, 78 percent, 73 percent
and 75 percent, respectively, of net sales were from customers located in
the United States, while 22 percent, 27 percent and 25 percent,
respectively, were from international customers. No foreign geographic
areas accounted for more than 10 percent of net sales for the years ended
October 31, 1998 and 1996 while Europe accounted for approximately 10
percent of net sales for the year ended October 31, 1997. As of October 31,
1998 and 1997, there were no significant amounts receivable from any one
customer other than those described below.
35
OPTICAL CABLE CORPORATION
Notes to Financial Statements (Continued)
Years Ended October 31, 1998, 1997 and 1996
For the year ended October 31, 1998, 27 percent of net sales were
attributable to two major domestic distributors. The combined trade
accounts receivable for these distributors at October 31, 1998 totaled
approximately $2,989,000. No single customer or other distributor accounted
for more than 5 percent of net sales for the year ended October 31, 1998.
As of October 31, 1998, one of these major distributors had an outstanding
balance payable to the Company in excess of 5 percent of total
stockholders' equity in the amount of approximately $1,630,000.
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.
(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.
Income tax expense for the years ended October 31, 1998, 1997 and 1996
consists of:
YEAR ENDED OCTOBER 31, 1998 CURRENT DEFERRED TOTAL
--------------- -------------- --------------
U.S. Federal $3,733,231 $ (69,192) $3,664,039
State 451,779 (8,323) 443,456
---------- ---------- ----------
Totals $4,185,010 $ (77,515) $4,107,495
========== ========== ==========
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
========== ========== ==========
36
OPTICAL CABLE CORPORATION
Notes to Financial Statements (Continued)
Years Ended October 31, 1998, 1997 and 1996
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, 1998, 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,
-----------------------------------------------
1998 1997 1996
-------------- -------------- --------------
"Expected" tax expense $ 3,982,111 $ 4,184,929 $ 4,209,593
Increase (reduction) in income tax expense resulting from:
Foreign Sales Corporation benefit (122,282) (164,459) (98,473)
State income taxes, net of federal benefits 288,822 254,592 215,967
S Corporation taxable income for the five months ended
March 31, 1997 -- -- (1,485,091)
Net deferred income tax asset balance at March 31, 1997 -- -- (114,045)
Other differences, net (41,156) (125,268) 78,898
----------- ----------- -----------
Reported income tax expense $ 4,107,495 $ 4,149,794 $ 2,806,849
=========== =========== ===========
The tax effects of temporary differences that give rise to significant
portions of the Company's net deferred tax asset as of October 31, 1998 and
1997 are presented below:
OCTOBER 31,
----------------------------------
1998 1997
--------------- ---------------
Deferred tax assets:
Accounts receivable, due to allowance for doubtful accounts $ 117,205 $ 115,662
Inventories, due to additional costs inventoried for tax
purposes pursuant to the Tax Reform Act of 1986 68,628 64,671
Self-insured health care costs, due to accrual for financial
reporting purposes 41,208 45,986
Compensated absences due to accrual for financial reporting
purposes 37,262 25,076
--------- ---------
Total gross deferred tax assets 264,303 251,395
Less valuation allowance -- --
--------- ---------
Net deferred tax assets 264,303 251,395
Deferred tax liabilities:
Plant and equipment, due to differences in depreciation and
capital gain recognition (118,121) (64,381)
Other receivables, due to accrual for financial reporting purposes (51,565) (169,912)
--------- ---------
Total gross deferred tax liabilities (169,686) (234,293)
--------- ---------
Net deferred tax asset $ 94,617 $ 17,102
========= =========
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.
37
OPTICAL CABLE CORPORATION
Notes to Financial Statements (Continued)
Years Ended October 31, 1998, 1997 and 1996
(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, 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.
(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, accounts payable
and accrued expenses approximate fair value because of the short maturity
of these instruments.
(13) EARNINGS PER SHARE
As discussed in note 1, SFAS No. 128 was adopted by the Company on November
1, 1997. SFAS No. 128 requires restatement of all prior period EPS data
previously presented. The following is a reconciliation of the numerators
and denominators of the basic and diluted EPS computations for the periods
presented:
NET INCOME SHARES PER SHARE
YEAR ENDED OCTOBER 31, 1998 (NUMERATOR) (DENOMINATOR) AMOUNT
------------- ---------------- ---------------
Earnings per common share $ 7,269,964 38,287,271 $ .190
===========
Effect of dilutive stock options -- 288,247
------------- --------------
Earnings per common share -
assuming dilution $ 7,269,964 38,575,518 $ .188
============= ============== ============
38
OPTICAL CABLE CORPORATION
Notes to Financial Statements (Continued)
Years Ended October 31, 1998, 1997 and 1996
NET INCOME SHARES PER SHARE
YEAR ENDED OCTOBER 31, 1997 (NUMERATOR) (DENOMINATOR) AMOUNT
---------------- ---------------- ---------------
Earnings per common share $ 7,807,146 38,675,416 $ .202
===============
Effect of dilutive stock options -- 341,867
------------- --------------
Earnings per common share - assuming dilution $ 7,807,146 39,017,283 $ .200
============= ============== ===============
NET INCOME SHARES PER SHARE
YEAR ENDED OCTOBER 31, 1996 (NUMERATOR) (DENOMINATOR) AMOUNT
------------- -------------- ---------------
Unaudited pro forma earnings per common share $ 7,474,047 39,360,659 $ .190
===============
Effect of dilutive stock options -- 247,459
------------- --------------
Unaudited pro forma earnings per comon share -
assuming dilution $ 7,474,047 39,608,118 $ .189
================ ================ ===============
Stock options that could potentially dilute basic EPS in the future that
were not included in the computation of diluted EPS because to do so would
have been antidilutive totaled 227,500 for the year ended October 31, 1998.
(14) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the unaudited quarterly results of operations
for the years ended October 31, 1998 and 1997:
QUARTER ENDED
---------------------------------------------------------------------------
YEAR ENDED OCTOBER 31, 1998 JANUARY 31 APRIL 30 JULY 31 OCTOBER 31
---------------- ---------------- ---------------- -----------------
Net sales $11,873,115 $11,689,100 $13,727,433 $13,299,245
Gross profit 5,068,908 5,076,615 5,670,681 5,442,867
Income before income taxes 2,808,872 2,646,442 3,072,777 2,849,368
Net income 1,822,972 1,712,448 1,991,374 1,743,170
Earnings per common share .047 .045 .052 .046
Earnings per common share -
assuming dilution .047 .044 .052 .045
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
Earnings per common share .054 .034 .052 .062
Earnings per common share -
assuming dilution .053 .034 .052 .061
39
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, Executive Officers" concerning directors, persons
nominated to become directors, executive officers 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.
40
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 23
through 39.
2. Index of Financial Statement Schedules
---------------------------------------
None.
41
3. Index of Exhibits
------------------
The documents filed as exhibits to this Form 10-K pursuant to Item 601 of
Regulation S-K are:
3.1 Amended and Restated Articles of Incorporation of Optical Cable
Corporation (as amended) (filed as exhibit 3.1 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended October 31, 1997
(file number 0-27022), and incorporated herein by reference).
3.2 Bylaws of Optical Cable Corporation, as amended (filed as exhibit 3.2
to the Registrant's Annual Report on Form 10-K for the fiscal year
ended October 31, 1997 (file number 0-27022), and incorporated herein
by reference).
4.1 Form of certificate representing Common Stock (filed as exhibit 4.1 to
the Registrant's Annual Report on Form 10-K for the fiscal year ended
October 31, 1997 (file number 0-27022), and incorporated herein by
reference).
10.1 Royalty Agreement, dated November 1, 1993, by and between Robert
Kopstein and Optical Cable Corporation (filed as exhibit 10.1 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
October 31, 1997 (file number 0-27022), and incorporated herein by
reference).
10.2 Assignment of Technology Rights from Robert Kopstein to Optical Cable
Corporation, effective as of October 31, 1994 (filed as exhibit 10.2
to the Registrant's Annual Report on Form 10-K for the fiscal year
ended October 31, 1997 (file number 0-27022), and incorporated herein
by reference).
10.3 Employment Agreement by and between Optical Cable Corporation and
Robert Kopstein, effective November 1, 1998.
10.4 Tax Indemnification Agreement, dated as of October 19, 1995, by and
between Optical Cable Corporation and Robert Kopstein (filed as
exhibit 10.4 to the Registrant's Annual Report on Form 10-K for the
fiscal year ended October 31, 1997 (file number 0-27022), and
incorporated herein by reference).
10.6 Loan Agreement dated April 25, 1997, by and between Optical Cable
Corporation and First Union National Bank of Virginia, as amended by
Modification Number One to the Loan Agreement, dated March 8, 1998, as
amended by Modification Number Two to the Loan Agreement, dated August
11, 1998, and as extended, the confirmation of which is set forth in a
letter from First Union National Bank of Virginia, dated January 25,
1999.
10.7 Security Agreement, dated April 25, 1997, by and between Optical Cable
Corporation and First Union National Bank of Virginia (filed as
exhibit 10.7 to the Registrant's Annual Report on Form 10-K for the
fiscal year ended October 31, 1997 (file number 0-27022), and
incorporated herein by reference).
10.8 Promissory Note, dated April 25, 1997, issued by Optical Cable
Corporation to First Union National Bank of Virginia in the amount of
$5 million, as amended by Modification Number One to the ($5 million)
Promissory Note, dated March ___, 1998, and the related Sweep Plus
Loan/Investment Services Description, and Promissory Note, dated April
25, 1997, issued by Optical Cable Corporation to First Union National
Bank of Virginia in the amount of $10 million, as amended by
Modification Number One to the ($10 million) Promissory Note, dated
March ___, 1998 (filed as exhibit 10.8 to the Registrant's Quarterly
Report on Form 10-Q for the fiscal quarter ended April 30, 1998 (file
number 0-27022), and incorporated herein by reference).
10.9 Optical Cable Corporation Employee Stock Purchase Plan (filed as
exhibit 10.9 to the Registrant's Quarterly Report on Form 10-Q for the
fiscal quarter ended July 31, 1998 (file number 0-27022), and
incorporated herein by reference).
23 Consent of KPMG 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.
42
(b) Reports on Form 8-K
-------------------
None
(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.
43
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 28, 1999 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 28, 1999.
/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
44
INDEX TO ATTACHED EXHIBITS
Exhibit No. Description
- ----------- -----------
10.3 Employment Agreement by and between Optical Cable Corporation and
Robert Kopstein, effective November 1, 1998.
10.6 Loan Agreement dated April 25, 1997, by and between Optical Cable
Corporation and First Union National Bank of Virginia, as amended by
Modification Number One to the Loan Agreement, dated March 8, 1998,
as amended by Modification Number Two to the Loan Agreement, dated
August 11, 1998, and as extended, the confirmation of which is set
forth in a letter from First Union National Bank of Virginia, dated
January 25, 1999.
23 Consent of KPMG 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.
EXHIBIT 10.3
[OPTICAL CABLE CORPORATION LOGO]
OPTICAL CABLE CORPORATION
EMPLOYMENT AGREEMENT
This agreement made effective November 1, 1998 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 November 1, 1998 and shall
terminate on the 31st day of October, 1999.
3. STARTING DATE: This Agreement becomes effective November 1, 1998.
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 will, for all inventions or improvements which may be patentable,
do all lawful acts and execute and acknowledge any and all letters and/or
patents in the United States of America and foreign countries for any such
inventions and improvements, 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 or prospective activities of OCC, including,
but not limited to, devices, processes, methods, formulae, techniques, and
any improvements to the foregoing.
6. CONFIDENTIALLY; DISCLOSURE OF INFORMATION: Since the work for which
Kopstein is employed and upon which he shall be engaged, will include trade
secrets and confidential
- ------------------------------------------------------------------------------
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
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 anyone else to publish, disclose, or make use of any such
secrets or information unless and until such secrets or information shall
have ceased to be secret or confidential as evidenced by 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 customers 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 is 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 his
employment by either party for any reason (i) 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
such business OCC wishes to conduct within three (3) months following
termination of his employment; and (ii) he will not 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 sole property
of OCC.
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 and 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 or 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
2
recoverable. Kopstein agrees to pay the costs, including reasonable
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 by law, and the parties
hereby consent and agree that such scope may be modified accordingly in a
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 (with a person
other than Kopstein acting on behalf of OCC). 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.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and
year first written above.
/s/ Deborah R. Griffith /s/ Robert Kopstein
- ---------------------------- ----------------------------
WITNESS Robert Kopstein
Optical Cable Corporation
By: /s/ Kenneth W. Harber
--------------------------
Kenneth W. Harber
Vice President of Finance
3
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
MODIFICATION NUMBER ONE
TO THE LOAN AGREEMENT
Optical Cable Corporation
5290 Concourse Drive N.W.
Roanoke, Virginia 24019
(Individually and collectively, "Borrower")
First Union National Bank
201 South Jefferson Street
Roanoke, Virginia 24011
(Hereinafter referred to as the "Bank")
THIS AGREEMENT is entered into as of March 5, 1998 by and between Bank and
Borrower.
WHEREAS, Bank is the holder of a Promissory Note executed and delivered by
Borrower, dated April 25, 1997, in the original principal amount of
$10,000,000.00 (the "Note Number 1"); and Bank is the holder of a Promissory
Note executed and delivered by Borrower, dated April 25, 1997, in the original
principal amount of $5,000,000.00 (the "Note Number 2");
WHEREAS, in connection with execution of the Note, Borrower also executed and
delivered to Bank certain other Loan Documents, including a Loan Agreement,
dated April 25, 1997 (the "Loan Agreement"); and
WHEREAS, Borrower and Bank have agreed to modify the terms of the Loan
Agreement.
NOW, THEREFORE, in consideration of the premises contained herein and other good
and valuable consideration, receipt and sufficiency of which is acknowledged,
the parties agree as follows:
OUTSTANDING BALANCE. The total outstanding unpaid principal balance under the
Note Number 1 as of March 6, 1998 is $0.00 and total outstanding unpaid
principal balance under the Note Number 2 as of March 6, 1998 is $0.00. The
parties acknowledge that interest on the obligations under Note 1 and Note
Number 2 are paid through March 6, 1998.
MODIFICATIONS.
1. The section entitled FINANCIAL STATEMENTS of the Loan Agreement is
hereby amended by deleting the subparagraph(s) entitled PERIODIC FINANCIAL
STATEMENTS and adding the following in its place and stead:
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 60 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.
2. The section entitled NEGATIVE COVENANTS of the Loan Agreement is hereby
amended by deleting the subparagraph(s) entitled Retire or Repurchase
Capital Stock and adding the following in its place and stead:
Page 1 of 4
RETIRE OR REPURCHASE CAPITAL STOCK. Retire or otherwise acquire its capital
stock in an amount greater than $5,000,000.00. Any such acquisition of
capital stock must be paid for from available cash on hand.
3. The section entitled NEGATIVE COVENANTS of the Loan Agreement is hereby
amended by adding the subparagraph(s) entitled Guarantees:
GUARANTEES. Guarantee or otherwise become responsible for obligations of
any other person or persons other than the endorsement of check and drafts
for collection in the ordinary course of business.
4. The section entitled AFFIRMATIVE CONVENANTS of the Loan Agreement is
hereby amended by deleting the subparagraph(s) entitled Change of Control
and adding the following it its place and stead as a Negative Covenant
paragraph.
CHANGE OF CONTROL. Make a material change of ownership that effectively
changes control of Borrower.
ACKNOWLEDGEMENTS. Borrower acknowledges and represents that the Note and other
Loan Documents, as amended hereby, are in full force and effect and are binding
upon it, its successors, assigns, administrators and heirs without any defense,
counterclaim, right or claim of set-off or of other sum due; that, after giving
effect to this Agreement, no default or event that with the passage of time or
giving of notice would constitute a default under the Loan Documents has
occurred; that all representations and warranties contained in the Loan
Documents are true and correct as of this date; that there have been no changes
in the ownership of any collateral pledged to secure the Obligations since the
dates of the instruments originally pledging such collateral; and that Borrower
has taken all necessary action (corporate or otherwise) to authorize the
execution and delivery of this Agreement. This Agreement constitutes only a
modification of an existing obligation owing by Borrower to Bank, and is not a
novation.
LIENS. Borrower acknowledges and confirms the extent, validity and priority of
the Bank's security interests and liens in the collateral pledged, if any,
pursuant to the Loan Documents, and agrees that such security interest and liens
shall secure the Borrower's Obligations to Bank, including any modification of
the Note or Loan Agreement, and all future modifications, extensions, renewals
and/or replacements of the Loan Documents.
MISCELLANEOUS. This Agreement shall be construed in accordance with and governed
by the laws of the applicable state as originally provided in the Loan
Documents, without reference to the state's conflicts of laws principles. This
Agreement and the other Loan Documents constitute the sole agreement of the
parties with respect to the subject matter thereof and supersede all oral
negotiations and prior writings with respect to the subject matter thereof. No
amendment of this Agreement, and no waiver of any one or more of the provisions
hereof shall be effective unless set forth in writing and signed by the parties
hereto. The illegality, unenforceability or inconsistency of any provision of
this Agreement shall not in any way affect or impair the legality,
enforceability or consistency of the remaining provisions of this Agreement or
the other Loan Documents. This Agreement and the other Loan Documents are
intended to be consistent. However, in the event of any inconsistencies among
this Agreement and by any of the Loan Documents, the terms of this Agreement,
and then the Note, shall control. This Agreement may be executed in any number
of counterparts and by the different parties on separate counterparts. Each such
counterpart shall be deemed an original, but all such counterparts shall
together constitute one and the same agreement.
DEFINITIONS. The term "Loan Documents" used in this Agreement and other Loan
Documents refers to all documents, agreements, and instruments executed in
connection with any of the Obligations (as defined herein), and may include,
without limitation, modification agreements, a commitment letter that survives
closing, a loan agreement, any note, guaranty agreements, security agreements,
security instruments, financing statements, mortgage instruments, letters of
credit and any renewals or modifications, whenever any of the foregoing are
executed, but does not include swap agreements (as defined in 11 U.S.C. ss.
101). The term "Obligations" used in this Agreement refers to any and all
indebtedness and other obligations of every kind and description of the Borrower
to the Bank or to any Bank affiliate, whether or not under the Loan Documents,
and whether such debts or obligations are primary or secondary, direct or
indirect, absolute or contingent, sole, joint or several, secured or unsecured,
due or to become due, contractual, including, without limitation, swap
agreements (as defined in 11 U.S.C. ss. 101), arising by tort, arising by
operation of law, by overdraft or otherwise, or now or hereafter existing,
including, without limitation, principal, interest, fees, late fees, expenses,
attorneys' fees and costs that have been or may hereafter be contracted or
Page 2 of 4
incurred. Terms used in this Agreement which are capitalized and not otherwise
defined herein shall have the meanings ascribed to such terms in the Note and/or
other Loan Documents.
ARBITRATION. Upon demand of any party hereto, whether made before or after
institution of any judicial proceeding, any dispute, claim or controversy
arising out of, connected with or relating to this Agreement and other Loan
Documents ("Disputes") between or among parties to this Agreement shall be
resolved by binding arbitration as provided herein. Institution of judicial
proceeding by a party does not waive the right of that party to demand
arbitration hereunder. Disputes may include, without limitations, tort claims,
counterclaims, disputes as to whether a matter is subject to arbitration, claims
brought as class actions, claims arising from Loan Documents executed in the
future, or claims arising out of or connected with the transaction reflected by
this Agreement.
Arbitration shall be conducted under and governed by the Commercial Financial
Disputes Arbitration Rules (the "Arbitration Rules") of the American Arbitration
Association (the "AAA") and Title 9 of the U.S. Code. All arbitration hearings
shall be conducted in the city in which the office of Bank first stated above is
located. The expedited procedures set forth in Rule 51 et seq. of the
Arbitration Rules shall be applicable to claims of less than $1,000,000.00. All
applicable statutes of limitation shall apply to any Dispute. A judgment upon
the award may be entered in any court having jurisdiction. The panel from which
all arbitrators are selected shall be comprised of licensed attorneys. The
single arbitrator selected for expedited procedure shall be a retired judge from
the highest court of general jurisdiction, state or federal, of the state where
the hearing will be conducted or if such person is not available to serve, the
single arbitrator may be a licensed attorney. Notwithstanding the foregoing,
this arbitration provision does not apply to disputes under or related to swap
agreements.
PRESERVATION AND LIMITATION OF REMEDIES. Notwithstanding the preceding binding
arbitration provisions, Bank and Borrower agree to preserve, without diminution,
certain remedies that any party hereto may employ or exercise freely,
independently or in connection with an arbitration proceeding or after an
arbitration action is brought. Bank and Borrower shall have the right to proceed
in any court of proper jurisdiction or by self-help to exercise or prosecute the
following remedies, as applicable: (i) all rights to foreclose against any real
or personal property or other security by exercising a power of sale granted
under Loan Documents or under applicable law or by judicial foreclosure and
sale, including a proceeding to confirm the sale; (ii) all rights of self-help
including peaceful occupation of real property and collection of rents, set-off,
and peaceful possession of personal property; (iii) obtaining provisional or
ancillary remedies including injunctive relief, sequestration, garnishment,
attachment, appointment of receiver and filing an involuntary bankruptcy
proceeding; and (iv) when applicable, a judgment by confession of judgment.
Preservation of these remedies does not limit the power of an arbitrator to
grant similar remedies that may be requested by a party in a Dispute.
Borrower and Bank agree that they shall not have a remedy of punitive or
exemplary damages against the other in any Dispute and hereby waive any right or
claim to punitive or exemplary damages they have now or which may arise in the
future in connection with any Dispute whether the Dispute is resolved by
arbitration or judicially.
IN WITNESS WHEREOF, the undersigned have signed and sealed this agreement the
day and year first above written.
Optical Cable Corporation
Taxpayer Identification Number: 54-1237042
Page 3 of 4
CORPORATE By:/s/ Robert Kopstein
SEAL --------------------------------
Robert Kopstein, President
First Union National Bank
CORPORATE By:/s/ Susan K. Doyle
SEAL --------------------------------
Susan K. Doyle, Vice President
Page 4 of 4
MODIFICATION NUMBER TWO
TO THE LOAN AGREEMENT
Optical Cable Corporation
5290 Concourse Drive, N.W.
Roanoke, Virginia 24019
(Individually and collectively, "Borrower")
First Union National Bank
201 South Jefferson Street
Roanoke, Virginia 24011
(Hereinafter referred to as the "Bank")
THIS AGREEMENT is entered into as of August 11, 1998 by and between Bank and
Borrower.
RECITALS
WHEREAS, Bank is the holder of a Promissory Note executed and delivered by
Borrower, dated April 25, 1997, in the original principal amount of
$10,000,000.00 (the "Note Number 1"); and Bank is the holder of a Promissory
Note executed and delivered by Borrower, dated April 25, 1997, in the original
principal amount of $5,000,000.00 (the "Note Number 2").
WHEREAS, in connection with execution of Note Number 1 and Note Number 2,
Borrower also executed and delivered to Bank certain other Loan Documents,
including a Loan Agreement, dated April 25, 1997 and all modification thereafter
(the "Loan Agreement"); and
Borrower and Bank have agreed to modify the terms of the Loan Agreement.
In consideration of Bank's continued extension of credit and the agreements
contained herein, the parties agree as follows:
AGREEMENT
ACKNOWLEDGMENT OF BALANCE. Borrower acknowledges that the most recent Commercial
Loan Invoice sent to Borrower with respect to the Obligations under the Note is
correct.
MODIFICATIONS.
1. The Section entitled NEGATIVE COVENANTS of the Loan Agreement is
hereby amended by deleting the subparagraph(s) entitled Retire or
Repurchase Capital Stock and adding the following in its place and
stead:
NEGATIVE COVENANTS. Borrower agrees that from the date hereof and
until final payment in full of the Obligations, unless Bank shall
otherwise consent in writing, Borrower will not: RETIRE OR REPURCHASE
CAPITAL STOCK. Retire or otherwise acquire its capital stock in an
amount greater than $10,000,000.00. Any such acquisition of capital
stock must be paid for from working capital or other sources deemed
appropriate by the officers of the corporation.
ACKNOWLEGMENTS. Borrower acknowledges and represents that the Note and other
Loan Documents, as amended hereby, are in full force and effect without any
defense, counterclaim, right or claim of set-off; that, after giving effect to
this Agreement, no default or event that with the passage of time or giving of
notice would constitute a default under the Loan Documents has occurred; that
all representations and warranties contained in the
Page 1 of 2
Loan Documents are true and correct as of this date; that Borrower has taken all
necessary action to authorize the execution and delivery of this Agreement; and
that this Agreement is a modification of an existing obligation and is not a
novation.
COLLATERAL. The Borrower acknowledges and confirms that there have been no
changes in the ownership of any collateral pledged to secure the Obligations
(the "Collateral") since the Collateral was originally pledged; that the Bank
has existing, valid first priority security interests and liens in the
Collateral; and that such security interests and liens shall secure the
Borrower's Obligations to Bank, including any modification of the Note or Loan
Agreement, and all future modifications, extension, renewals and/or replacements
of the Loan Documents.
MISCELLANEOUS. This Agreement shall be construed in accordance with and governed
by the laws of the applicable state as originally provided in the Loan
Documents, without reference to that state's conflicts of laws principles. This
Agreement and the other Loan Documents constitute the sole agreement of the
parties with respect to the subject matter thereof and supersede all oral
negotiations and prior writings with respect to the subject matter thereof. No
amendment of this Agreement, and no waiver of any one or more of the provisions
hereof shall be effective unless set forth in writing and signed by the parties
hereto. The illegality, unenforceability or inconsistency of any provision of
this Agreement shall not in any way affect or impair the legality,
enforceability or consistency of the remaining provisions of this Agreement or
the other Loan Documents. This Agreement and the other Loan Documents are
intended to be consistent. However, in the event of any inconsistencies among
this Agreement and any of the Loan Documents, the terms of this Agreement, and
then the Note, shall control. This Agreement may be executed in any number of
counterparts and by the different parties on separate counterparts. Each such
counterpart shall be deemed an original, but all counterparts shall together
constitute one and the same agreement. Terms used in this Agreement which are
capitalized and not otherwise defined herein shall have the meanings ascribed to
such terms in the Loan Documents.
IN WITNESS WHEREOF, the undersigned have signed and sealed this Agreement the
day and year first above written.
Optical Cable Corporation
CORPORATE By: /s/ Robert Kopstein
SEAL --------------------------------
Robert Kopstein, President
First Union National Bank
CORPORATE By: /s/ Susan Doyle
SEAL --------------------------------
Susan Doyle, Vice President
Page 2 of 2
First Union National Bank
of Virginia
Post Office Box 13327
Roanoke, Virginia 24040
[FIRST UNION LOGO]
January 25, 1999
Mr. Neil D. Wilken, Jr.
McGuire, Woods, Battle & Boothe, LLP
One James Center
901 East Cary Street
Richmond, Virginia 23219-4030
RE: Optical Cable Corporation
Dear Mr. Wilkin:
Please accept this letter as confirmation that the Loan Agreement between
Optical Cable Corporation and First Union National Bank dated April 27, 1997 has
been extended as described in the Commitment Letter dated February 25, 1998.
Specifically, advances under the two referenced lines of credit in the amounts
of $10,000,000 and $5,000,000 are permitted through February 28, 1999.
Please call me at (540) 563-6667 or (800) 813-0722 if you need additional
information.
Sincerely,
/s/ William C. Moses
- --------------------------
William C. Moses
Vice President
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 11, 1998,
relating to the balance sheets of Optical Cable Corporation as of October 31,
1998 and 1997, and the related statements of income, stockholders' equity, and
cash flows for each of the years in the three-year period ended October 31,
1998, which report appears in the October 31, 1998 Annual Report on Form 10-K of
Optical Cable Corporation.
KPMG LLP
Roanoke, Virginia
January 28, 1999
5
1,000
U.S. DOLLAR
12-MOS
OCT-31-1998
NOV-01-1997
OCT-31-1998
1
1,122
0
10,324
311
9,967
21,711
15,440
4,356
32,829
2,720
0
0
0
9,786
20,205
32,829
50,589
50,647
29,330
39,269
0
88
1
11,377
4,107
7,270
0
0
0
7,270
0.190
0.188
