SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended October 31, 2000 Commission file number 0-27022
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OPTICAL CABLE CORPORATION
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(Exact name of registrant as specified in its charter)
Virginia 54-1237042
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5290 Concourse Drive, Roanoke, VA 24019
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (540) 265-0690
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Name of Each Exchange on
Title of Each Class Which Registered
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OTC (Nasdaq
Common Stock, No Par Value National Market)
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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ X ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of January 24, 2001, was $34,350,550.
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the last practicable date.
Class Outstanding at January 24, 2001
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COMMON STOCK, NO PAR VALUE 56,246,556 SHARES
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Optical Cable Corporation Proxy Statement for the 2001 Annual
Meeting of Shareholders are incorporated by reference into Part III hereof.
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PART I
Item 1. Business.
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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 Optical Cable Corporation's (the "Company") 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,
the deteriorating financial condition of many technology companies in
the United States, 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, an adverse price change
in trading securities held by the Company, an adverse outcome in
litigation, claims and other actions against the Company,
technological changes and introductions of new competing products,
changes in market demand, exchange rates, productivity, weather and
market and economic conditions in the areas of the world in which the
Company operates and markets its products.
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-buffer 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. The Company's telephone number is (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 ultra-pure
glass structure that has been pulled into a hair thin strand. Optical
fiber 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
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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 have been reduced to the
point where fiber optic cable is economically feasible for many
moderate distance applications.
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 does 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 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 tightbound 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, cable television, traffic
signaling, 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.
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The increasing standardization of communications technology and the
increasing demand for high bandwidth (i.e., high data capacity or
volume) are expected to facilitate further penetration by optical fiber
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 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 loose-tube
gel-filled 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 loose-tube gel-filled
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. Loose-tube gel-filled 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 are 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 loose-tube
gel-filled 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-buffer 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 loose-tube
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.
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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-buffer coating that protects the optical
fiber and a cable design that achieves superior mechanical and
environmental performance. The Company believes that because of the
outstanding features of its fiber optic cable, including suitability
for indoor and outdoor use, easy and economical installation and a high
degree of reliability, the Company's products have become well
established for optical fiber LANs and are increasingly accepted for
other applications.
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-buffer 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.
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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
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 22%, 20% and 21% in fiscal 1998, 1999 and 2000,
respectively. The Company does not separately track gross profit or
expenses attributable to international sales. Management of the Company
does not regularly evaluate international sales by region.
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 Statements, which
is included on page 36 herein.)
Working with IBM's E-Commerce division, the Company launched its
E-Commerce website (http://purchasing.occfiber.com) in March 1999.
Initially, the E-Commerce website included 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 website's future offerings and eventually
create an independent communications superstore which would offer
one-stop shopping to global purchasers of communication materials.
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-buffer 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, cost competitive commercial product.
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Product Type Features/Description Applications
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A-Series "Assembly" o simplex (one optical fiber) o short "patch cord" cables
Cables and duplex (two optical links between electronic
fibers) cables equipment and main fiber
o tight-buffer coating on each optic cable
optical fiber o routing connections in
o aramid strength members patching systems
o thermoplastic outer jacket o indoor use
o flame retardant
B-Series "Breakout" o 2 to 156 optical fibers tight- o direct termination with
Cables buffer coating on each optical connectors on each optical
fiber fiber
o elastomeric jacket encases o short and moderate
each optical fiber and distance links between
surrounding aramid strength buildings or within a
members (similar to an A- building, where multiple
Series simplex cable) termination points are
o Core-LockedTM outer jacket needed
o rugged o installations where ease of
o flame retardant termination and
o moisture and fungus resistant o termination cost are
important factors
indoor and outdoor use
D-Series "Distribution" o 2 to 156 optical fibers tight- o longer distance runs where
Cables buffer coating on each optical size and cable cost are
fibers more significant
o Core-LockedTM outer jacket o can be armored for
encases the optical fibers and additional protection in
aramid strength members buried and overhead
o smaller, lighter and less installations
expensive than the B-Series o indoor and outdoor use
cable
o high strength to weight ratio
o compact size
o rugged
o flame retardant
o moisture and fungus resistant
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Product Type Features/Description Applications
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G-Series "Subgrouping" o up to 864 optical fibers in o high fiber count systems
Cables various subgroup sizes o subgroups needed to
o multifiber subcables, each facilitate organization of
similar to a D-Series cable large numbers of optical
Core-LockedTM outer jacket fibers
surrounds subcables o subcables routed to
o high density "micro" different locations
construction o installations requiring
o rugged several different optical
o flame retardant fiber types
o moisture and fungus resistant o indoor and outdoor use
A-Series "Assembly" Cables. Simplex and duplex cables are round single
fiber and "zipcord" two-fiber structures, respectively. Both cables
contain tight-buffer optical fibers, aramid 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
strength members similar to an A-Series simplex cable. These subcables
are tightbound in a pressure extruded, high performance Core-LockedTM
PVC outer jacket to form the finished multifiber 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-buffer optical fiber and high performance
Core-LockedTM PVC outer jacket as the B-Series cable. Unlike the B-
Series cable, however, each tight-buffer 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-buffer 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
multifiber subcables, each similar to a D-Series cable. Each multifiber
subcable is tightbound 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 subgroup 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
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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 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 modified 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.
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 workstations 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
multibuilding 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 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.
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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.
SALES, MARKETING AND CUSTOMER SERVICE
The Company's products are sold to end-users, electrical contractors,
system integrators, value-added resellers ("VARs"), OEMs and
distributors. Distribution methods are adapted to the particular needs
of different types of customers. The decision to purchase the Company's
products may be made by end-users, distributors, electrical
contractors, system integrators or specialized installers. The Company
attempts to reach these decision makers by advertising in fiber optic
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 1998, 1999 or 2000. However, in fiscal 1998, 1999 and 2000,
27.3%, 30.6% and 28.0%, respectively, of net sales were attributable to
two major domestic distributors. As of October 31, 2000, the Company
has specifically reserved approximately $1.8 million for estimated
uncollectible accounts receivable from one of these major distributors.
Subsequent to October 31, 2000, this distributor filed for bankruptcy.
Net sales attributable to this distributor approximated $9 million in
fiscal 2000. 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.
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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 more than 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
strength member and several suppliers of coating materials. The Company
has not experienced difficulty in arranging alternate sources. All
other raw materials have at least one backup source.
The Company believes that by maintaining a consistent relationship with
suppliers, it can obtain better quality control and emergency
deliveries. Being able to deliver product on time has been an important
factor in the Company's success. To date, the Company has been able to
obtain adequate supplies of its raw materials in a timely manner from
existing sources or, when necessary, from alternate sources. However,
any disruption in the supply of raw materials could adversely affect
the Company's cable production capability and its operating results.
The Company believes that other fiber optic cable manufacturers
generally carry minimal amounts of raw materials and finished goods
inventory. The Company generally holds raw materials and finished goods
inventory in amounts greater than that of its competitors to ensure a
quick response after receiving a customer's order.
The Company believes its quality control procedures have been
instrumental in achieving the performance and reliability of its
products. The Company produces cable using the quality control
procedures of MIL- I-45208 (the primary standard applicable to most
government purchasers of cable).
Since 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, distribution and production of
fiber optic cables. The Company's certification was obtained through an
audit by a qualified international certifying agency. In order to
maintain its certification, the Company must continue to comply with
the standards.
PROPRIETARY RIGHTS
None of the Company's current manufacturing processes or products is
protected by patents. The Company relies on a combination of trade
secret, copyright and trademark law, nondisclosure agreements and
technical measures to establish and protect its rights pertaining to
its production technology. Such protection may not deter
misappropriation or preclude competitors from developing production
techniques or equipment with features identical, similar or superior to
the Company's. The Company believes, however, that because of the rapid
pace of technological change in the data communications industry and
particularly in the fiber optic cable segment, legal protection for the
Company's products is less significant to the Company's prospects than
the knowledge, ability and expertise of its management and technical
personnel with respect to the timely development and production of new
products and product enhancements. The Company considers its
proprietary knowledge with respect to the development and manufacture
of fiber optic cable to be a valuable asset. This expertise enables the
Company to formulate new cable compositions, develop special coatings
and coating methods, develop and implement manufacturing improvements
and quality control techniques, and design and construct manufacturing
and quality control equipment. The Company restricts access to its
manufacturing facility and engineering documentation to maintain
security. Employees are required to sign nondisclosure agreements.
12
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. 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
loose-tube gel-filled cables, a significant portion of Lucent
Technologies and Corning's fiber optic cable sales are tight-buffer
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 Corning and
Lucent Technologies, are more established, having a large business base
in the long distance telephone, loose-tub gel-filled 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.
EMPLOYEES
As of October 31, 2000, the Company employed a total of 181 persons,
including 38 in sales, marketing and customer service, 21 in
engineering, product development and quality control, 100 in
manufacturing, and 22 in finance and administration. None of the
Company's employees is represented by a labor union. The Company has
experienced no work stoppages 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 65% of its capacity.
13
Item 3. Legal Proceedings.
- ------- -----------------
On September 27, 2000, the Equal Employment Opportunity Commission (the
"EEOC") filed a lawsuit under Title VII of the Civil Rights Act of 1964
against the Company in the United States District Court for the Western
District of Virginia alleging a pattern or practice of discrimination
on the bases of gender and race. The lawsuit seeks injunctive and other
relief and damages in an unspecified amount. Management intends to
vigorously defend the lawsuit on the merits. While the ultimate
resolution of this lawsuit cannot be determined, management does not
expect that its resolution will have a material adverse effect on the
financial condition or business of the Company.
A charge of discrimination was filed on or about May 1, 2000, with the
EEOC by one of the Company's former employees, John C. Clark, alleging
that the Company denied him a promotion on or about January 12, 2000,
in violation of the Age Discrimination in Employment Act. A charge of
discrimination was filed on or about November 27, 2000, with the EEOC
by one of the Company's former employees, Gary W. Cheatwood, alleging
that the Company denied him merit increases and stock options on the
basis of race, in violation of Title VII of the Civil Rights Act of
1964. A charge of discrimination was filed on or about November 25,
2000, with the EEOC by one of the Company's former employees, Barry D.
Cheatwood, alleging that the Company denied him merit increases and
stock options on the basis of race, in violation of Title VII of the
Civil Rights Act of 1964. A charge of discrimination was filed on or
about November 30, 2000, with the EEOC by Victor W. Gravely, a former
applicant for employment with the Company, alleging that the Company
did not hire him because of his race in violation of Title VII. On each
of these matters, the Company has filed a statement of its position
with the EEOC denying the allegations. The EEOC has yet to issue a
determination on any of these charges. No litigation has been filed
against the Company in connection with any of these charges. While the
ultimate resolution of these four EEOC charges cannot be determined,
management does not expect that their resolution will have a material
adverse effect on the financial condition or business of the Company.
Item 4. Submission of Matters to a Vote of Security Holders.
- ------- ---------------------------------------------------
There were no matters submitted to a vote of security holders during
the fourth quarter of the year ended October 31, 2000.
14
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." On January 24, 2001, the Company's Common
Stock closed at a price of $15.31 per share.
The following table sets forth for the fiscal periods indicated the
high and low bid prices of the Common Stock, as reported on the Nasdaq
National Market, during the two most recent fiscal years:
RANGE OF BID PRICES
----------------------------
FISCAL YEAR ENDED OCTOBER 31, 2000 HIGH LOW
---------- ----------
First Quarter (November 1, 1999 to January 31, 2000) $ 32.147 $ 7.083
Second Quarter (February 1 to April 30, 2000) $ 44.917 $ 12.917
Third Quarter (May 1 to July 31, 2000) $ 25.667 $ 12.500
Fourth Quarter (August 1 to October 31, 2000) $ 30.000 $ 15.938
FISCAL YEAR ENDED OCTOBER 31, 1999
First Quarter (November 1, 1998 to January 31, 1999) $ 11.333 $ 6.833
Second Quarter (February 1 to April 30, 1999) $ 9.000 $ 5.667
Third Quarter (May 1 to July 31, 1999) $ 8.667 $ 6.750
Fourth Quarter (August 1 to October 31, 1999) $ 8.333 $ 6.083
At October 31, 2000, there were approximately 6,017 stockholders of
record. No cash dividends have been declared or paid since the
completion of the initial public offering in April 1996. While there
are no restrictions on the payment of dividends, the Company does not
anticipate the payment of dividends for the foreseeable future.
15
Item 6. Selected Financial Data.
- ------- -----------------------
OPTICAL CABLE CORPORATION
Selected Financial Data
YEARS ENDED OCTOBER 31,
-----------------------------------------------------------------------
2000 1999 1998 1997 1996
----------- ----------- ----------- ----------- -----------
(In Thousands, Except Per Share Data)
STATEMENT OF INCOME DATA:
Net sales $ 58,219 $ 50,699 $ 50,589 $ 52,189 $ 45,152
Cost of goods sold 30,878 27,547 29,330 30,613 24,907
----------- ----------- ----------- ----------- -----------
Gross profit 27,341 23,152 21,259 21,576 20,245
Total operating expenses 15,024 10,799 9,939 9,572 8,416
----------- ----------- ----------- ----------- -----------
Income from operations 12,317 12,353 11,320 12,004 11,829
Other income (expense), net 417 166 57 (47) 198
----------- ----------- ----------- ----------- -----------
Income before income tax expense 12,734 12,519 11,377 11,957 12,027
Income tax expense (1) 4,479 4,214 4,107 4,150 2,806
----------- ----------- ----------- ----------- -----------
Net income $ 8,255 $ 8,305 $ 7,270 $ 7,807 $ 9,221
=========== =========== =========== =========== ===========
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
===========
Net income per common share
(pro forma for 1996) (2) $ 0.147 $ 0.147 $ 0.127 $ 0.135 $ 0.127
=========== =========== =========== =========== ===========
Net income per common share - assuming
dilution (pro forma for 1996) (2) $ 0.145 $ 0.146 $ 0.125 $ 0.133 $ 0.126
=========== =========== =========== =========== ===========
BALANCE SHEET DATA:
Working capital $ 31,986 $ 21,980 $ 18,991 $ 19,912 $ 14,377
Total assets 52,688 37,512 32,829 35,214 31,127
Total stockholders' equity 43,508 32,847 29,991 31,379 23,572
- -------------------
(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. On April 1, 1996, the Company
completed a public offering of 4,013,124 shares of the Company's common
stock from which it received net proceeds of approximately $5.5 million. In
connection with the closing of the Company's initial public offering on
April 1, 1996, 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.
(2) On August 31, 2000, the Company's Board of Directors approved a 3-for-2
stock split effected in the form of a stock dividend of one share paid on
September 28, 2000, upon each two shares held by stockholders of record at
the close of business on September 8, 2000. The Company's stock began
trading ex-dividend on September 29, 2000. All references to share and per
share data, except for references to authorized shares, contained elsewhere
in this annual report have been retroactively adjusted to reflect the
impact of the approved stock dividend.
16
Item 7. Management's Discussion and Analysis of Financial Condition and
- ------- ---------------------------------------------------------------
Results of Operations.
----------------------
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, the deteriorating financial condition
of many technology companies in the United States, 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, an adverse price change in trading securities held by the
Company, an adverse outcome in litigation, claims and other actions
against the Company, technological changes and introductions of new
competing products, changes in market demand, exchange rates,
productivity, weather 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 increased 14.8 percent to $58.2 million in
fiscal 2000 from $50.7 million in fiscal 1999. This increase was
attributable to increased sales volume. Total fiber meters shipped
during fiscal 2000 increased 18.5 percent to 199.3 million from 168.2
million fiber meters shipped for the same period in 1999. This increase
in fiber meters shipped was a result of a 13.8 million increase in
multimode fiber meters shipped and an 17.3 million increase in
single-mode fiber meters shipped. Multimode fiber generally has a
higher selling price than single-mode cable. Management believes there
is a trend in the marketplace of an accelerated pace of fiber
deployment, particularly of the type sold by the Company. Management
believes this trend resulted in increased sales volume during fiscal
2000 and could continue to positively affect net sales in the future.
Net sales increased to $50.7 million in fiscal 1999 from $50.6 million
in fiscal 1998. This slight increase was primarily attributable to
reduced selling price and a change in product mix. Total fiber meters
shipped during fiscal 1999 increased 7.5 percent to 168.2 million from
156.5 million fiber meters shipped for the same period in 1998. This
increase in fiber meters shipped was a result of a 3.3 million increase
in multimode fiber meters shipped and an 8.4 million increase in
single-mode fiber meters shipped.
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
17
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.
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 47.0 percent in fiscal 2000 from 45.7 percent in
fiscal 1999. This slight increase was due to reduced raw fiber prices
and the impact of the decrease in the ratio of large orders and the
decrease in the ratio of net sales attributable to the Company's
distributors during the year. During fiscal 2000, net sales to
distributors approximated 58 percent versus 63 percent for the same
period in 1999. During fiscal 2000, sales from orders $50,000 or more
approximated 11 percent of net sales compared to 15 percent for fiscal
1999. Discounts on large orders and on sales to distributors are
generally greater than for sales to the rest of the Company's customer
base.
The Company's gross profit margin increased to 45.7 percent in fiscal
1999 from 42.0 percent in fiscal 1998. This increase was due to reduced
raw fiber prices, partially offset by an increase in the ratio of net
sales attributable to the Company's distributors during the period as
compared to total net sales. During fiscal 1999, net sales to
distributors approximated 63 percent versus 62 percent for the same
period in 1998. During fiscal 1999, sales from orders $50,000 or more
approximated 15 percent compared to 18 percent for fiscal 1998.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist of the
compensation costs (including sales commissions) for sales and
marketing personnel, shipping costs, 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 25.8 percent in fiscal 2000 compared
to 21.3 percent in fiscal 1999. This higher percentage reflects the
fact that net sales for fiscal 2000 increased 14.8 percent while
selling, general and administrative expenses increased 39.1 percent
compared to fiscal 1999. Selling, general and administrative expenses
as a percentage of net sales increased largely as a result of an
increase in the allowance for doubtful accounts of $1.6 million. This
increase in the allowance for doubtful accounts is attributable to a
$1.8 million specific reserve for estimated uncollectible accounts
receivable from one of the Company's major distributors that filed for
bankruptcy subsequent to October 31, 2000. Other factors that
contributed to the increase in selling, general and administrative
expenses as a percentage of net sales in fiscal 2000 include an
increase in the Company's sales force, the continued expansion of
marketing efforts, and an increase in legal fees associated with a
lawsuit filed by the Equal Employment Opportunity Commission (EEOC)
against the Company and with several other EEOC charges.
Selling, general and administrative expenses as a percentage of net
sales were 21.3 percent in fiscal 1999 compared to 19.6 percent in
fiscal 1998. This higher percentage reflects the fact that net sales
for fiscal 1999 were comparable to fiscal 1998, while selling, general
and administrative expenses increased 8.6 percent, due primarily to
increased marketing efforts.
18
Other Income (Expense)
Other income, net increased $251,000 to $417,000 for fiscal 2000
compared to $166,000 for the same period in 1999. During fiscal 2000,
the Company began investing in trading securities and has recognized
related gains on trading securities, net, of $289,000 in other income
for fiscal 2000. The increase in other income, net resulting from gains
on trading securities, net, was partially offset by interest expense of
$57,000 on short-term margin borrowings payable to the investment
broker related to the trading securities. Although the Company actively
purchases and sells trading securities in order to realize such gains,
it should not be expected that these gains will be recurring.
Income Before Income Tax Expense
Income before income tax expense of $12.7 million in fiscal 2000
increased $215,000 compared to fiscal 1999. This 1.7 percent increase
was primarily due to increases in sales volume, gross profit margin,
and other income, net, partially offset by the $4.2 million increase in
selling, general and administrative expenses.
Income before income tax expense of $12.5 million in fiscal 1999
increased $1.1 million compared to fiscal 1998. This 10.0 percent
increase was primarily due to the increase in gross profit margin,
partially offset by the $859,000 increase in selling, general and
administrative expenses.
Income Tax Expense
The statements of income for the years ended October 31, 2000, 1999 and
1998 include income tax expense at effective tax rates of 35.2 percent,
33.7 percent and 36.1 percent, respectively. Fluctuations in the
Company's effective tax rates are due primarily to the amount and
timing of the tax benefit related to the Company's foreign sales
corporation.
Net Income
Net income for fiscal 2000 and 1999 was $8.3 million. Net income
decreased $50,000 due to the increase in selling, general and
administrative expenses and the $265,000 increase in income tax
expense, partially offset by the increases in sales volume, gross
profit margin and other income, net.
Net income for fiscal 1999 was $8.3 million compared to $7.3 million
for fiscal 1998. Net income increased $1.0 million due to the increase
in gross profit margin, partially offset by the increase in selling,
general and administrative expenses and the $107,000 increase in income
tax expense.
FINANCIAL CONDITION
Total assets at October 31, 2000 were $52.7 million, an increase of
$15.2 million, or 40.5 percent from October 31, 1999. This increase was
primarily due to the Company investing its cash and cash equivalents on
hand at October 31, 1999, as well as cash flows from operating income
generated during fiscal 2000 in trading securities. In addition,
realized gains from these trading activities were reinvested during
fiscal 2000. As a result, cash and cash equivalents have decreased $5.4
million and trading securities have increased $18.0 million. Trade
accounts receivable, net increased 11.0 percent from $10.2 million at
October 31, 1999 to $11.4 million at October 31, 2000 and inventories
decreased 13.5 percent from $8.8 million at October 31, 1999 to $7.6
million at October 31, 2000. The increase in trade accounts receivable
and the decrease in inventories are primarily attributable to increased
sales volume. Income taxes refundable increased to $1.2 million at
October 31, 2000. The increase results primarily from the tax benefit
of disqualifying disposition of stock options exercised. Property and
equipment, net, increased 5.8 percent from $10.8 million at October 31,
1999 to $11.5 million at October 31, 2000. This increase
19
results from capital expenditures related to facilities and equipment
totaling $1,462,000, partially offset by depreciation expense of
$825,000.
Total stockholders' equity at October 31, 2000 increased $10.7 million,
or 32.5 percent from October 31, 1999. Net income retained, proceeds
received from the exercise of employee stock options of $1.0 million
and an increase in paid-in capital of $1.4 million resulting from the
tax benefit of disqualifying disposition of stock options exercised
accounted for the majority of this increase. During fiscal 2000,
employees realized gains on the premature disposition of stock options
exercised of approximately $3.6 million. The $1.4 million tax benefit
to the Company of these gains has been reflected as an increase in
paid-in capital.
LIQUIDITY AND CAPITAL RESOURCES
During fiscal 2000 and 1999, the Company's primary capital needs have
been to fund working capital requirements and capital expenditures as
needed. The Company's primary source of financing has been cash
provided from operations; however, the Company does maintain bank lines
of credit as described below. There was no balance outstanding under
the lines of credit as of the end of fiscal 2000 or 1999.
Under a loan agreement with its bank dated March 10, 1999, the Company
has a $5 million secured revolving line of credit available for general
corporate purposes and a $10 million secured revolving line of credit
available to fund potential acquisitions, mergers and joint ventures.
The lines of credit bear interest at 1.50 percent above the monthly
LIBOR rate 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, 2001, unless renewed or extended. As
of the date hereof, the Company has no additional material sources of
financing. The Company believes that its cash flow from operations,
liquidation of trading securities and available lines of credit will be
adequate to fund its operations for at least the next twelve months.
Cash flows used in operations were approximately $5.0 million for
fiscal 2000. Cash flows provided by operations were approximately $11.9
million and $9.6 million for fiscal 1999 and 1998, respectively. For
fiscal 2000, cash flows used in operations were primarily due to the
purchase of approximately $18.5 million in trading securities, an
increase in trade accounts receivable of $3.0 million, and a decrease
in accounts payable and accrued expenses of $1.1 million, partially
offset by cash provided by operating income, realized net gains on
trading securities of $788,000, a decrease in inventories of $1.2
million and an increase in payable to investment broker of $5.7
million. Cash flows from operations in fiscal 1999 were primarily
provided by operating income, a decrease in inventory of $1.2 million
and an increase in accounts payable and accrued expenses of $1.3
million. 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.
Net cash used in investing activities totaled $1.4 million for fiscal
2000 and was primarily for expenditures related to facilities and
equipment of $1.3 million and increase in cash surrender value of life
insurance of $91,000. Net cash used in investing activities in fiscal
1999 totaled $553,000 and was primarily for expenditures related to
facilities and equipment of $401,000 and increase in cash surrender
value of life insurance of $171,000. Net cash used in investing
activities in fiscal 1998 was primarily for expenditures related to
facilities and equipment and was $622,000. In October 2000, the Company
entered into agreements to purchase certain machinery and equipment
totaling approximately $872,000. The machinery and equipment is
expected to be delivered and installed by the end of July 2001. Total
remaining commitments under the machinery and equipment purchase
agreements as of October 31, 2000 approximated $712,000. There are no
other material commitments for capital expenditures as of October 31,
2000.
20
Net cash provided by financing activities was $1.0 million for fiscal
2000 and related to proceeds received from the exercise of employee
stock options. Net cash used in financing activities was $5.7 million
and $8.8 million in fiscal 1999 and 1998, respectively. The net cash
used in financing activities in fiscal 1999 consisted of the repurchase
of common stock in the amount of $5.9 million, offset by proceeds
received from the exercise of employee stock options of $200,000. 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.
On September 27, 2000, the Equal Employment Opportunity Commission
filed a lawsuit under Title VII of the Civil Rights Act against the
Company in the United States District Court for the Western District of
Virginia alleging a pattern or practice of discrimination on the bases
of gender and race. The lawsuit seeks injunctive and other relief and
damages in an unspecified amount. Management intends to vigorously
defend the lawsuit on the merits. While the ultimate resolution of this
lawsuit cannot be determined, management does not expect that its
resolution will have a material adverse effect on the financial
condition or business of the Company.
The Company's Board of Directors has authorized the repurchase of up to
$20 million of the Company's common stock in the open market or in
privately negotiated transactions. Through October 31, 2000, the
Company has repurchased approximately $14.9 million of its common stock
in such transactions since the inception of the Company's share
repurchase program in October 1997. The repurchases were funded through
cash flows from operations. The Company may use excess working capital
and other sources as appropriate to finance the remaining share
repurchase program.
On August 31, 2000, the Company's Board of Directors approved a 3-for-2
stock split effected in the form of a stock dividend of one share paid
on September 28, 2000, upon each two shares held by stockholders of
record at the close of business on September 8, 2000. The Company's
stock began trading ex-dividend on September 29, 2000. All references
to share and per share data, except for references to authorized
shares, contained elsewhere in this annual report have been
retroactively adjusted to reflect the impact of the approved stock
dividend.
On November 30, 2000, the Board of Directors approved grants of stock
options for a total of 500,000 shares effective December 1, 2000, under
the Company's 1996 Stock Incentive Plan. The per share exercise price
of $10.688 associated with these stock options was equal to the fair
market value of the Company's common stock on the date of grant.
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, ACCOUNTING
FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. SFAS No. 133
establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. In June 1999, the FASB
issued SFAS No. 137, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES - DEFERRAL OF THE EFFECTIVE DATE OF FASB STATEMENT NO. 133.
SFAS No. 137 defers the effective date of SFAS No. 133 to apply to all
fiscal quarters of all fiscal years beginning after June 15, 2000. In
June 2000, the FASB issued SFAS No. 138, ACCOUNTING FOR CERTAIN
DERIVATIVE INSTRUMENTS AND CERTAIN HEDGING ACTIVITIES, an amendment of
FASB Statement No. 133. SFAS No. 138 amends SFAS No. 133 for a limited
number of issues that have caused application difficulties. The
adoption of SFAS No. 133, as amended, as of November 1, 2000, did not
have any effect on the financial position, results of operations or
liquidity of the Company.
SFAS No. 140, ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL
ASSETS AND EXTINGUISHMENTS OF LIABILITIES, A REPLACEMENT OF FASB
STATEMENT NO. 125, supercedes and replaces the guidance in SFAS No.
21
125, ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND
EXTINGUISHMENTS OF LIABILITIES. SFAS No. 140 revises the standards for
accounting for securitizations and other transfers of financial assets
and collateral and requires certain disclosures, but it carries over
most of the provisions of SFAS No. 125 without reconsideration. SFAS
No. 140 is effective for transfers and servicing of financial assets
and extinguishments of liabilities that occur after March 31, 2001, and
for recognition and reclassification of collateral and for disclosures
relating to securitization transactions and collateral for fiscal years
ending after December 15, 2000. Disclosures about securitization and
collateral accepted need not be reported for periods ending on or
before December 15, 2000 for which financial statements are presented
for comparative purposes. Management believes the adoption of SFAS No.
140 will not have a significant effect on the Company's financial
statements.
As of October 31, 2000, there are no other new accounting standards
issued, but not yet adopted by the Company, which are expected to be
applicable to the Company's financial position, operating results or
financial statement disclosures.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
- -------- ----------------------------------------------------------
The Company does not engage in derivative financial instruments or
derivative commodity instruments. As of October 31, 2000, the Company's
financial instruments are not exposed to significant market risk due to
interest rate risk, foreign currency exchange risk or commodity price
risk. However, as of October 31, 2000, the Company's trading
securities, which consist of shares in a stock index mutual fund
concentrated in the technology industry sector, are exposed to equity
price risk. As of October 31, 2000, the Company's trading securities,
valued at approximately $18.0 million, have experienced a 2.7 percent
decline in value since the date of purchase. In addition, subsequent to
October 31, 2000 through January 24, 2001, the Company has continued to
purchase and sell these trading securities and as a result has recorded
realized and unrealized losses for the period from November 1, 2000
through January 24, 2001 in the amount of approximately $3.3 million.
It is reasonably possible that the price of these trading securities
could continue to experience a further adverse change in the near term.
For illustration purposes, assuming a 30 percent further adverse change
in the fund's equity price subsequent to January 24, 2001, the
Company's trading securities would decrease in value by an additional
$5.0 million, based on the value of the Company's portfolio of
approximately $16.5 million as of January 24, 2001. This assumption is
not necessarily indicative of future performance and actual results may
differ materially.
22
Item 8. Financial Statements and Supplementary Data.
- ------- -------------------------------------------
OPTICAL CABLE CORPORATION
INDEX TO
FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
Financial Statements: PAGE
Independent Auditors' Report....................................24
Balance Sheets as of October 31, 2000 and 1999..................25
Statements of Income for the Years Ended October 31,
2000, 1999 and 1998.........................................26
Statements of Stockholders' Equity for the Years Ended
October 31, 2000, 1999 and 1998.............................27
Statements of Cash Flows for the Years Ended October 31,
2000, 1999 and 1998.........................................28
Notes to Financial Statements...................................29
Financial Statement Schedules:
All schedules are omitted as the required information is inapplicable
or the information is presented in the financial statements or related
notes thereto.
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, 2000 and 1999, and the related statements of income,
stockholders' equity, and cash flows for each of the years in the three-year
period ended October 31, 2000. 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 auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit 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, 2000 and 1999, and the results of its operations and its cash flows
for each of the years in the three-year period ended October 31, 2000, in
conformity with accounting principles generally accepted in the United States of
America.
KPMG LLP
Roanoke, Virginia
December 8, 2000
24
OPTICAL CABLE CORPORATION
Balance Sheets
October 31, 2000 and 1999
OCTOBER 31,
--------------------------------
ASSETS 2000 1999
-------------- --------------
Current assets:
Cash and cash equivalents $ 1,458,896 $ 6,816,678
Trading securities 17,982,830 ----
Trade accounts receivable, net of allowance for doubtful
accounts of $1,909,069 in 2000 and $316,000 in 1999 11,357,522 10,230,717
Income taxes refundable 1,162,118 ----
Other receivables 362,000 280,219
Due from employees 2,890 8,100
Note receivable ---- 61,100
Inventories 7,572,153 8,754,423
Prepaid expenses 112,794 106,536
Deferred income taxes 959,665 206,652
-------------- --------------
Total current assets 40,970,868 26,464,425
Note receivable, noncurrent ---- 32,505
Other assets, net 261,937 188,328
Property and equipment, net 11,455,372 10,826,331
-------------- --------------
Total assets $ 52,688,177 $ 37,511,589
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 2,479,116 $ 3,370,244
Accrued compensation and payroll taxes 847,572 692,678
Payable to investment broker 5,658,574 ----
Income taxes payable ---- 421,803
-------------- --------------
Total current liabilities 8,985,262 4,484,725
Deferred income taxes 195,085 179,789
-------------- --------------
Total liabilities 9,180,347 4,664,514
-------------- --------------
Stockholders' equity:
Preferred stock, no par value, authorized 1,000,000 shares;
none issued and outstanding ---- ----
Common stock, no par value, authorized 100,000,000
shares; issued and outstanding 56,391,993 shares in 2000
and 56,121,407 shares in 1999 5,179,295 4,128,316
Paid-in capital 1,714,284 359,566
Retained earnings 36,614,251 28,359,193
-------------- --------------
Total stockholders' equity 43,507,830 32,847,075
Commitments and contingencies
-------------- --------------
Total liabilities and stockholders' equity $ 52,688,177 $ 37,511,589
============== ==============
See accompanying notes to financial statements.
25
OPTICAL CABLE CORPORATION
Statements of Income
Years Ended October 31, 2000, 1999 and 1998
YEARS ENDED OCTOBER 31,
----------------------------------------------------------
2000 1999 1998
---------------- ---------------- ----------------
Net sales $ 58,218,994 $ 50,698,637 $ 50,588,893
Cost of goods sold 30,877,688 27,547,022 29,329,822
---------------- ---------------- ----------------
Gross profit 27,341,306 23,151,615 21,259,071
Selling, general and administrative expenses 15,024,198 10,798,643 9,939,258
---------------- ---------------- ----------------
Income from operations 12,317,108 12,352,972 11,319,813
Other income (expense):
Gains on trading securities, net 288,667 ---- ----
Interest income 230,038 201,708 56,260
Interest expense (57,084) ---- (505)
Other, net (45,015) (35,944) 1,891
---------------- ---------------- ----------------
Other income, net 416,606 165,764 57,646
---------------- ---------------- ----------------
Income before income tax expense 12,733,714 12,518,736 11,377,459
Income tax expense 4,478,656 4,214,096 4,107,495
---------------- ---------------- ----------------
Net income $ 8,255,058 $ 8,304,640 $ 7,269,964
================ ================ ================
Net income per share:
Net income per common share $ 0.147 $ 0.147 $ 0.127
================ ================ ================
Net income per common share - assuming dilution $ 0.145 $ 0.146 $ 0.125
================ ================ ================
See accompanying notes to financial statements.
26
OPTICAL CABLE CORPORATION
Statements of Stockholders' Equity
Years Ended October 31, 2000, 1999 and 1998
COMMON STOCK TOTAL
---------------------------------- PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
--------------- ---------------- -------------- --------------- ---------------
Balances at October 31, 1997 58,013,124 $ 18,594,116 $ ---- $ 12,784,589 $ 31,378,705
Exercise of employee stock
options ($1.67 per share) 119,025 198,375 ---- ---- 198,375
Tax benefit of disqualifying
disposition of stock options
exercised ---- ---- 150,359 ---- 150,359
Repurchase of common stock
(at cost) (1,313,595) (9,006,210) ---- ---- (9,006,210)
Net income ---- ---- ---- 7,269,964 7,269,964
--------------- ---------------- -------------- --------------- ---------------
Balances at October 31, 1998 56,818,554 9,786,281 150,359 20,054,553 29,991,193
Exercise of employee stock
options ($1.67 per share) 119,700 199,500 ---- ---- 199,500
Tax benefit of disqualifying
disposition of stock options
exercised ---- ---- 209,207 ---- 209,207
Repurchase of common stock
(at cost) (816,847) (5,857,465) ---- ---- (5,857,465)
Net income ---- ---- ---- 8,304,640 8,304,640
--------------- ---------------- -------------- --------------- ---------------
Balances at October 31, 1999 56,121,407 4,128,316 359,566 28,359,193 32,847,075
Exercise of employee stock
options ($3.86 per share) 268,336 1,036,916 ---- ---- 1,036,916
Restricted stock award ($6.25
per share) 2,250 14,063 ---- ---- 14,063
Tax benefit of disqualifying
disposition of stock options
exercised ---- ---- 1,354,718 ---- 1,354,718
Net income ---- ---- ---- 8,255,058 8,255,058
--------------- ---------------- -------------- --------------- ---------------
Balances at October 31, 2000 56,391,993 $ 5,179,295 $ 1,714,284 $ 36,614,251 $ 43,507,830
=============== ================ ============== =============== ===============
See accompanying notes to financial statements.
27
OPTICAL CABLE CORPORATION
Statements of Cash Flows
Years Ended October 31, 2000, 1999 and 1998
YEARS ENDED OCTOBER 31,
--------------------------------------------------
2000 1999 1998
--------------- --------------- --------------
Cash flows from operating activities:
Net income $ 8,255,058 $ 8,304,640 $ 7,269,964
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 841,646 764,652 787,674
Bad debt expense 2,018,128 87,490 88,005
Deferred income tax expense (benefit) (737,717) 67,754 (77,515)
Loss on disposal of property and equipment 7,807 ---- 2,669
Tax benefit of disqualifying disposition of stock
options exercised 1,354,718 209,207 150,359
Stock-based compensation expense 14,063 ---- ----
Unrealized loss on trading securities, net 499,755 ---- ----
(Increase) decrease in:
Trading securities (18,482,585) ---- ----
Trade accounts receivable (3,051,328) (417,913) (169,428)
Income taxes refundable (1,162,118) ---- ----
Other receivables (81,781) 14,980 244,903
Due from employees 5,210 (2,511) (2,055)
Inventories 1,182,270 1,212,589 2,052,431
Prepaid expenses (6,258) (10,770) 25,280
Increase (decrease) in:
Accounts payable and accrued expenses (1,053,960) 1,328,540 (395,330)
Accrued compensation and payroll taxes 154,894 36,650 43,292
Payable to investment broker 5,658,574 ---- ----
Income taxes payable (421,803) 310,354 (453,550)
--------------- --------------- --------------
Net cash provided by (used in) operating activities (5,005,427) 11,905,662 9,566,699
--------------- --------------- --------------
Cash flows from investing activities:
Purchase of property and equipment (1,298,717) (400,714) (622,394)
Cash surrender value of life insurance (90,554) (171,382) ----
Collection from note receivable ---- 18,800 ----
--------------- --------------- --------------
Net cash used in investing activities (1,389,271) (553,296) (622,394)
--------------- --------------- --------------
Cash flows from financing activities:
Repurchase of common stock ---- (5,857,465) (9,006,210)
Proceeds from exercise of employee stock options 1,036,916 199,500 198,375
--------------- --------------- --------------
Net cash provided by (used in) financing activities 1,036,916 (5,657,965) (8,807,835)
--------------- --------------- --------------
Net increase (decrease) in cash and cash equivalents (5,357,782) 5,694,401 136,470
Cash and cash equivalents at beginning of year 6,816,678 1,122,277 985,807
--------------- --------------- --------------
Cash and cash equivalents at end of year $ 1,458,896 $ 6,816,678 $ 1,122,277
=============== =============== ==============
Supplemental Disclosure of Cash Flow Information:
Cash payments for interest $ 57,084 $ ---- $ 505
=============== =============== ==============
Income taxes paid $ 5,445,576 $ 3,615,300 $ 4,488,201
=============== =============== ==============
Noncash investing and financing activities:
Capital expenditures accrued in accounts payable $ 162,832 $ 89,344 $ ----
=============== =============== ==============
Trade accounts receivable financed as note receivable $ ---- $ 112,405 $ ----
=============== =============== ==============
See accompanying notes to financial statements.
28
OPTICAL CABLE CORPORATION
Notes to Financial Statements
Years Ended October 31, 2000, 1999 and 1998
(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 70 foreign
countries (also see note 9).
(b) CASH EQUIVALENTS
At October 31, 2000 and 1999, cash equivalents consist of
$1,171,777 and $6,755,814, 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) TRADING SECURITIES
Trading securities are recorded at fair value, which is based
on quoted market prices. Purchases and sales of trading
securities are recognized on a trade-date basis, the date the
order to buy or sell is executed. The Company's trading
securities are bought and held principally for the purpose of
selling them in the near term. Unrealized holding gains and
losses for trading securities are included in net income. The
amount of net unrealized holding loss that has been included
in net income for the year ended October 31, 2000 was
$499,755. Net realized gains or losses are determined on the
first-in, first-out cost method. As of October 31, 2000, the
Company's trading securities consist of shares in a stock
index mutual fund concentrated in the technology sector.
As of October 31, 2000, the Company's trading securities have
experienced a 2.7 percent decline in value since the date of
purchase. In addition, subsequent to October 31, 2000 through
December 8, 2000, the market value of the Company's trading
securities held as of October 31, 2000 has declined
approximately 17 percent, or approximately $3.0 million. It is
reasonably possible that the price of these trading
securities, valued at $17,982,830 as of October 31, 2000,
could continue to experience an adverse change in the near
term.
At October 31, 2000, the Company had short-term margin
borrowings of $5,658,574 payable to investment broker related
to the trading securities. The margin account incurs interest
at rates ranging from the Call Money rate plus .25 percent to
the Call Money rate plus 2.50 percent, depending on the
outstanding balance of margin borrowings (8.50 percent as of
October 31, 2000). Obligations of the Company to the
investment broker are collateralized by the trading
securities.
29
OPTICAL CABLE CORPORATION
Notes to Financial Statements (Continued)
Years Ended October 31, 2000, 1999 and 1998
(d) 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.
(e) 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.
(f) REVENUE RECOGNITION
Revenue is recognized at the time of product shipment or
delivery to the customer, based on shipping terms.
(g) SHIPPING AND HANDLING COSTS
Shipping and handling costs include the costs incurred to
physically move finished goods from the Company's warehouse to
the customers designated location and the costs to store, move
and prepare the finished goods for shipment. All amounts
billed to a customer in a sale transaction related to shipping
and handling is classified as sales revenue. Shipping and
handling costs of approximately $1,948,000, $1,425,000 and
$1,195,000 are included in selling, general and administrative
expenses for the years ended October 31, 2000, 1999 and 1998,
respectively.
(h) INCOME TAXES
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.
(i) 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 undiscounted net cash flows expected to be
generated
30
OPTICAL CABLE CORPORATION
Notes to Financial Statements (Continued)
Years Ended October 31, 2000, 1999 and 1998
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.
(j) 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 Statement of Financial Accounting Standards ("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.
(k) NET INCOME PER SHARE
Net income per common share excludes dilution and is computed
by dividing net income available to common stockholders by the
weighted-average number of common shares outstanding for the
period. Net income per common share - assuming dilution
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 net income of the
Company.
(l) COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued
SFAS 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
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
31
OPTICAL CABLE CORPORATION
Notes to Financial Statements (Continued)
Years Ended October 31, 2000, 1999 and 1998
excluded from the scope of this Statement. SFAS No. 130 does
not have any effect on current or prior period financial
statement displays presented by the Company since the Company
has no items of other comprehensive income in any period
presented.
(m) USE OF ESTIMATES
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
of America 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.
(n) RECLASSIFICATIONS
Certain reclassifications have been made to the prior year's
financial statements to place them on a basis comparable with
the current year's financial statements.
(2) ALLOWANCE FOR DOUBTFUL ACCOUNTS RECEIVABLE
A summary of changes in the allowance for doubtful accounts receivable
for the years ended October 31, 2000, 1999 and 1998 follows (see also
note 9):
YEARS ENDED OCTOBER 31,
--------------------------------------------------
2000 1999 1998
-------------- -------------- --------------
Balance at beginning of year $ 316,000 $ 311,500 $ 307,400
Bad debt expense 2,018,128 87,490 88,005
Losses charged to allowance (453,049) (84,633) (90,147)
Recoveries added to allowance 27,990 1,643 6,242
-------------- -------------- --------------
Balance at end of year $ 1,909,069 $ 316,000 $ 311,500
============== ============== ==============
(3) INVENTORIES
Inventories at October 31, 2000 and 1999 consist of the following:
OCTOBER 31,
-------------------------------
2000 1999
-------------- --------------
Finished goods $ 808,271 $ 2,976,426
Work in process 3,487,611 2,306,209
Raw materials 3,194,393 3,416,046
Production supplies 81,878 55,742
-------------- --------------
$ 7,572,153 $ 8,754,423
============== ==============
32
OPTICAL CABLE CORPORATION
Notes to Financial Statements (Continued)
Years Ended October 31, 2000, 1999 and 1998
(4) PROPERTY AND EQUIPMENT
Property and equipment at October 31, 2000 and 1999 consists of the
following:
OCTOBER 31,
---------------------------------
2000 1999
--------------- ---------------
Land $ 2,745,327 $ 2,745,327
Building and improvements 6,896,842 6,893,642
Machinery and equipment 6,676,960 5,424,594
Furniture and fixtures 735,052 734,404
Construction in progress 236,071 131,008
--------------- ---------------
Total property and equipment, at cost 17,290,252 15,928,975
Less accumulated amortization and depreciation (5,834,880) (5,102,644)
--------------- ---------------
Property and equipment, net $ 11,455,372 $ 10,826,331
=============== ===============
In October 2000, the Company entered into agreements to purchase
certain machinery and equipment totaling approximately $872,000. The
machinery and equipment is expected to be delivered and installed by
the end of July 2001. Total remaining commitments under the machinery
and equipment purchase agreements as of October 31, 2000 approximated
$712,000.
(5) NOTES PAYABLE
Under a loan agreement with its bank dated March 10, 1999, the Company
has a $5 million secured revolving line of credit and a $10 million
secured revolving line of credit. The Company's intention is that the
$5 million line of credit be available to fund general corporate
purposes and that the $10 million line of credit be available to fund
potential acquisitions and joint ventures. The lines of credit bear
interest at 1.50 percent above the monthly LIBOR rate (8.12 percent as
of October 31, 2000) 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, 2001, 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.
33
OPTICAL CABLE CORPORATION
Notes to Financial Statements (Continued)
Years Ended October 31, 2000, 1999 and 1998
(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 $582,190, $506,986 and
$521,889 for the years ended October 31, 2000, 1999 and 1998,
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 $813,716 in the aggregate per year. During the
years ended October 31, 2000, 1999 and 1998, total claims expense of
$925,347, $837,488 and $725,535, respectively, was incurred, which
represents claims processed and an estimate for claims incurred but not
reported. Effective January 1, 2001, the Company will no longer
independently administer the health insurance coverage, but will
contract for insurance coverage with a third-party administrator.
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. 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 $406,934,
$365,887 and $353,096 for the years ended October 31, 2000, 1999 and
1998, 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
6,000,000 shares of common stock for issuance pursuant to incentive
awards under the Plan. At October 31, 2000, there were 5,571,001
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.
34
OPTICAL CABLE CORPORATION
Notes to Financial Statements (Continued)
Years Ended October 31, 2000, 1999 and 1998
The per share weighted-average estimated fair value of stock options
granted during 1997 and 1996 was $6.25 and $1.45, 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 and net income per share would have been reduced
to the SFAS No. 123 pro forma amounts indicated below:
YEARS ENDED OCTOBER 31,
------------------------------------------------
2000 1999 1998
-------------- -------------- --------------
Net income:
As reported $ 8,255,058 $ 8,304,640 $ 7,269,964
============== ============== ==============
Pro forma $ 7,911,830 $ 7,961,412 $ 6,926,736
============== ============== ==============
Net income per share:
Net income per common share:
As reported $ 0.147 $ 0.147 $ 0.127
============== ============== ==============
Pro forma $ 0.141 $ 0.141 $ 0.121
============== ============== ==============
Net income per common share - assuming
dilution:
As reported $ 0.145 $ 0.146 $ 0.125
============== ============== ==============
Pro forma $ 0.139 $ 0.140 $ 0.120
============== ============== ==============
Stock option activity during the periods indicated is as follows:
NUMBER OF WEIGHTED-AVERAGE
SHARES EXERCISE PRICE
-------------- --------------------
Balance at October 31, 1997 995,250 $ 3.742
Exercised (119,025) 1.667
Forfeited (22,500) 6.267
--------------
Balance at October 31, 1998 853,725 3.965
Replacement options issued 3,449 7.250
Exercised (119,700) 1.667
Forfeited (26,250) 5.940
--------------
Balance at October 31, 1999 711,224 4.280
35
OPTICAL CABLE CORPORATION
Notes to Financial Statements (Continued)
Years Ended October 31, 2000, 1999 and 1998
NUMBER OF WEIGHTED-AVERAGE
SHARES EXERCISE PRICE
-------------- --------------------
Replacement options issued 1,500 $ 7.250
Exercised (268,336) 3.864
Forfeited (15,389) 6.018
--------------
Balance at October 31, 2000, (124,499 options exercisable;
215,550 options at exercise price of $1.67 per share
with remaining contractual life of 5.5 years, and
213,449 options at exercise price of $7.42 per share
with remaining contractual life of 5.5 years) 428,999 $ 4.531
==============
No new stock options were granted during the fiscal years ended October
31, 2000, 1999 and 1998. However, prior stock options granted have a
replacement feature, whereby the participant automatically receives a
replacement option to purchase additional shares of the Company's
common stock equal to the number of shares surrendered, if any, to the
Company by the participant in payment of the exercise price with
respect to stock options exercised. Replacement options were issued
under this replacement feature during the fiscal years ended October
31, 1999 and 1998.
On November 30, 2000, the Board of Directors approved grants of stock
options for a total of 500,000 shares effective December 1, 2000 under
the Company's 1996 Stock Incentive Plan. The per share exercise price
of $10.688 associated with these stock options was equal to the fair
market value of the Company's common stock on the date of grant.
(9) BUSINESS AND CREDIT CONCENTRATIONS, MAJOR CUSTOMERS AND GEOGRAPHIC
INFORMATION
On November 1, 1998, the Company adopted SFAS No. 131, DISCLOSURES
ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. SFAS No. 131
establishes standards for the way public business enterprises are to
report information about operating segments in annual financial
statements and requires those enterprises to report selected
information about operating segments in interim financial reports. It
also establishes standards for related disclosures about products and
services, geographic areas and major customers.
The Company has a single reportable segment for purposes of segment
reporting pursuant to SFAS No. 131. In addition, the Company's fiber
optic cable products are similar in nature. Therefore, the Company has
disclosed enterprise-wide information about geographic areas and major
customers below in accordance with the provisions of SFAS No. 131.
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.
36
OPTICAL CABLE CORPORATION
Notes to Financial Statements (Continued)
Years Ended October 31, 2000, 1999 and 1998
Management believes that credit risks at October 31, 2000 and 1999 have
been adequately provided for in the financial statements. As of October
31, 2000 and 1999, there were no significant amounts receivable from
any one customer other than those described below.
For the year ended October 31, 2000, 28.0 percent or approximately
$16,241,000 of net sales were attributable to two major domestic
distributors. The combined related trade accounts receivable for these
distributors at October 31, 2000 totaled approximately $3,468,000. The
Company has specifically reserved $1,772,000 for estimated
uncollectible accounts receivable from one of these major distributors
that filed for bankruptcy subsequent to October 31, 2000. Bad debt
expense related to this distributor has been included in selling,
general and administrative expenses on the statement of income for the
year ended October 31, 2000. Net sales attributable to this distributor
approximated $8,995,000 for the year ended October 31, 2000. No single
customer or other distributor accounted for more than 5 percent of net
sales for the year ended October 31, 2000. As of October 31, 2000, 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, 1999, 30.6 percent or approximately
$15,513,000 of net sales were attributable to two major domestic
distributors. The combined related trade accounts receivable for these
distributors at October 31, 1999 totaled approximately $3,294,000. No
single customer or other distributor accounted for more than 5 percent
of net sales for the year ended October 31, 1999. As of October 31,
1999, 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, 1998, 27.3 percent or approximately
$13,817,000 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.
For the years ended October 31, 2000, 1999 and 1998, approximately 79
percent, 80 percent and 78 percent, respectively, of net sales were
from customers located in the United States, while approximately 21
percent, 20 percent and 22 percent, respectively, were from
international customers. Net sales attributable to the United States
and other foreign countries for the years ended October 31, 2000, 1999
and 1998 were as follows:
YEARS ENDED OCTOBER 31,
--------------------------------------------------
2000 1999 1998
---------------- --------------- ---------------
United States $ 45,878,300 $ 40,687,466 $ 39,621,544
Australia 801,641 702,780 1,570,536
Canada 1,808,469 1,756,928 889,702
England 1,163,587 694,680 987,154
Other foreign countries 8,566,997 6,856,783 7,519,957
---------------- --------------- ---------------
Total net sales $ 58,218,994 $ 50,698,637 $ 50,588,893
================ =============== ===============
None of the Company's long-lived assets are located outside the United
States.
37
OPTICAL CABLE CORPORATION
Notes to Financial Statements (Continued)
Years Ended October 31, 2000, 1999 and 1998
(10) INCOME TAXES
Total income taxes for the years ended October 31, 2000, 1999 and 1998
were allocated as follows:
YEARS ENDED OCTOBER 31,
--------------------------------------------------
2000 1999 1998
-------------- -------------- --------------
Income from operations $ 4,478,656 $ 4,214,096 $ 4,107,495
Stockholders' equity, for disqualifying disposition
of stock options exercised (1,354,718) (209,207) (150,359)
-------------- -------------- --------------
$ 3,123,938 $ 4,004,889 $ 3,957,136
============== ============== ==============
Income tax expense (benefit) attributable to income from operations for
the years ended October 31, 2000, 1999 and 1998 consists of:
YEAR ENDED OCTOBER 31, 2000 CURRENT DEFERRED TOTAL
-------------- -------------- --------------
U.S. Federal $ 4,667,627 $ (658,506) $ 4,009,121
State 548,746 (79,211) 469,535
-------------- -------------- --------------
Totals $ 5,216,373 $ (737,717) $ 4,478,656
============== ============== ==============
YEAR ENDED OCTOBER 31, 1999 CURRENT DEFERRED TOTAL
-------------- -------------- --------------
U.S. Federal $ 3,729,606 $ 60,479 $ 3,790,085
State 416,736 7,275 424,011
-------------- -------------- --------------
Totals $ 4,146,342 $ 67,754 $ 4,214,096
============== ============== ==============
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
============== ============== ==============
Reported income tax expense for the years ended October 31, 2000, 1999
and 1998 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,
--------------------------------------------------
2000 1999 1998
-------------- -------------- --------------
"Expected" tax expense $ 4,456,800 $ 4,381,558 $ 3,982,111
Increase (reduction) in income tax expense
resulting from:
Foreign Sales Corporation benefit (201,098) (326,662) (122,282)
State income taxes, net of federal benefits 295,853 254,359 288,822
Other differences, net (72,899) (95,159) (41,156)
-------------- -------------- --------------
Reported income tax expense $ 4,478,656 $ 4,214,096 $ 4,107,495
============== ============== ==============
38
OPTICAL CABLE CORPORATION
Notes to Financial Statements (Continued)
Years Ended October 31, 2000, 1999 and 1998
The tax effects of temporary differences that give rise to significant
portions of the Company's net deferred tax asset as of October 31, 2000
and 1999 are presented below:
OCTOBER 31,
-------------------------------
2000 1999
-------------- --------------
Deferred tax assets:
Accounts receivable, due to allowance for doubtful accounts $ 718,312 $ 118,911
Inventories, due to additional costs inventoried for tax
purposes pursuant to the Tax Reform Act of 1986 66,070 71,564
Self-insured health care costs, due to accrual for financial
reporting purposes 44,780 58,739
Compensated absences due to accrual for financial reporting
purposes 49,594 48,812
Unrealized loss on trading securities, net 187,368 ----
Other 4,205 ----
-------------- --------------
Total gross deferred tax assets 1,070,329 298,026
Less valuation allowance ---- ----
-------------- --------------
Net deferred tax assets 1,070,329 298,026
Deferred tax liabilities:
Plant and equipment, due to differences in depreciation and
capital gain recognition (195,085) (179,789)
Other receivables, due to accrual for financial reporting
purposes (110,664) (91,374)
-------------- --------------
Total gross deferred tax liabilities (305,749) (271,163)
-------------- --------------
Net deferred tax asset $ 764,580 $ 26,863
============== ==============
Based on the Company's historical and current pretax earnings,
management believes that it is more likely than not that the recorded
deferred tax assets will be realized.
(11) FAIR VALUE OF FINANCIAL INSTRUMENTS
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. For trading securities, fair value
is based on quoted market prices.
As of October 31, 1999, the carrying amount and fair value of the
Company's note receivable were $93,605 and $86,250, respectively. The
fair value of the note receivable was estimated by discounting the
future cash flows of the instrument at an estimated interest rate for
loans of similar terms to companies with comparable credit risk.
39
OPTICAL CABLE CORPORATION
Notes to Financial Statements (Continued)
Years Ended October 31, 2000, 1999 and 1998
(12) NET INCOME PER SHARE
The following is a reconciliation of the numerators and denominators of
the net income per common share computations for the periods presented:
NET INCOME SHARES PER SHARE
YEAR ENDED OCTOBER 31, 2000 (NUMERATOR) (DENOMINATOR) AMOUNT
-------------- ---------------- ---------------
Net income per common share $ 8,255,058 56,306,679 $ 0.147
===============
Effect of dilutive stock options ---- 451,503
-------------- ----------------
Net income per common share - assuming dilution $ 8,255,058 56,758,182 $ 0.145
============== ================ ===============
NET INCOME SHARES PER SHARE
YEAR ENDED OCTOBER 31, 1999 (NUMERATOR) (DENOMINATOR) AMOUNT
-------------- ---------------- ---------------
Net income per common share $ 8,304,640 56,503,964 $ 0.147
===============
Effect of dilutive stock options ---- 360,933
-------------- ----------------
Net income per common share - assuming dilution $ 8,304,640 56,864,897 $ 0.146
============== ================ ===============
NET INCOME SHARES PER SHARE
YEAR ENDED OCTOBER 31, 1998 (NUMERATOR) (DENOMINATOR) AMOUNT
-------------- ---------------- ---------------
Net income per common share $ 7,269,964 57,430,907 $ 0.127
===============
Effect of dilutive stock options ---- 432,370
-------------- ----------------
Net income per common share - assuming dilution $ 7,269,964 57,863,277 $ 0.125
============== ================ ===============
Stock options that could potentially dilute net income per common share
in the future that were not included in the computation of net income
per common share - assuming dilution because to do so would have been
antidilutive totaled 341,250 for the year ended October 31, 1998. No
such antidilutive stock options existed with respect to net income per
common share - assuming dilution calculation for the years ended
October 31, 2000 and 1999. See note 8 for discussion of stock options
granted subsequent to October 31, 2000.
(13) STOCKHOLDERS' EQUITY
On August 31, 2000, the Company's Board of Directors approved a 3-for-2
stock split effected in the form of a stock dividend of one share paid
on September 28, 2000, upon each two shares held by stockholders of
record at the close of business on September 8, 2000. The Company's
stock began trading ex-dividend on September 29, 2000. All references
to share and per share data, except for references to authorized
shares, contained elsewhere in this annual report have been
retroactively adjusted to reflect the impact of the approved stock
dividend.
40
OPTICAL CABLE CORPORATION
Notes to Financial Statements (Continued)
Years Ended October 31, 2000, 1999 and 1998
The Company's Board of Directors has authorized the repurchase of up to
$20 million of the Company's common stock in the open market or in
privately negotiated transactions. Through October 31, 2000, the
Company has repurchased 2,130,443 shares of its common stock for
$14,863,675 in such transactions since the inception of the Company's
share repurchase program in October 1997.
(14) CONTINGENCIES
On September 27, 2000, the Equal Employment Opportunity Commission
filed a lawsuit under Title VII of the Civil Rights Act against the
Company in the United States District Court for the Western District of
Virginia alleging a pattern or practice of discrimination on the bases
of gender and race. The lawsuit seeks injunctive and other relief and
damages in an unspecified amount. Management intends to vigorously
defend the lawsuit on the merits. While the ultimate resolution of this
lawsuit cannot be determined, management does not expect that its
resolution will have a material adverse effect on the financial
condition or business of the Company.
From time to time, the Company is involved in various other claims and
legal actions arising in the ordinary course of business. In the
opinion of management, the ultimate disposition of these matters will
not have a material adverse effect on the Company's financial position,
results of operations or liquidity.
(15) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the unaudited quarterly results of
operations for the years ended October 31, 2000 and 1999:
QUARTER ENDED
------------------------------------------------------------------
YEAR ENDED OCTOBER 31, 2000 JANUARY 31 APRIL 30 JULY 31 OCTOBER 31
--------------- --------------- --------------- ---------------
Net sales $ 11,346,235 $ 13,028,310 $ 16,650,975 $ 17,193,474
Gross profit 5,205,115 5,909,092 7,652,197 8,574,902
Other income (expense), net 532,545 1,386,149 (403,252) (1,098,836)
Income before income taxes 3,138,397 4,163,017 3,702,629 1,729,671
Net income 2,033,120 2,697,442 2,400,129 1,124,367
Net income per common share 0.036 0.048 0.043 0.020
Net income per common share -
assuming dilution 0.036 0.048 0.042 0.019
QUARTER ENDED
------------------------------------------------------------------
YEAR ENDED OCTOBER 31, 1999 JANUARY 31 APRIL 30 JULY 31 OCTOBER 31
--------------- --------------- -------------- ---------------
Net sales $ 10,841,939 $ 12,434,733 $ 12,602,659 $ 14,819,306
Gross profit 4,722,187 5,710,552 5,424,127 7,294,749
Income before income taxes 2,252,663 3,057,265 2,899,109 4,309,639
Net income 1,448,235 1,963,327 1,816,583 3,076,495
Net income per common share 0.025 0.035 0.032 0.055
Net income per common share -
assuming dilution 0.025 0.035 0.032 0.055
41
Item 9. Changes in and Disagreements with Accountants on Accounting and
- ------- ---------------------------------------------------------------
Financial Disclosure.
---------------------
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant.
- -------- --------------------------------------------------
For information with respect to the Directors of the registrant, see
"Election of Directors" in the Proxy Statement for the 2001 Annual
Meeting of Shareholders of the Company, which information is
incorporated herein by reference. For information with respect to the
executive officers and significant employees of the registrant, see
"Executive Officers and Other Significant Employees" in the Proxy
Statement for the 2001 Annual Meeting of Shareholders of the Company,
which information is incorporated herein by reference. The information
with respect to compliance with Section 16(a) of the Securities
Exchange Act of 1934, which is set forth under the caption "Compliance
with Section 16(a) of the Securities Exchange Act of 1934" in the Proxy
Statement for the 2001 Annual Meeting of Shareholders of the Company,
is incorporated herein by reference.
Item 11. Executive Compensation.
- -------- ----------------------
The information set forth under the captions "Executive Compensation,"
"Compensation Committee Report on Executive Compensation",
"Compensation Committee Interlocks and Insider Participation" and
"Performance Graph" in the Proxy Statement for the 2001 Annual Meeting
of Shareholders of the Company is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
- -------- --------------------------------------------------------------
The information pertaining to shareholders beneficially owning more
than five percent of the registrant's common stock and the security
ownership of management, which is set forth under the caption
"Beneficial Ownership of Common Stock" in the Proxy Statement for the
2001 Annual Meeting of Shareholders of the Company, is incorporated
herein by reference.
Item 13. Certain Relationships and Related Transactions.
- -------- ----------------------------------------------
The information with respect to certain transactions with management of
the registrant, which is set forth under the caption "Certain
Relationships and Transactions with Management" in the Proxy Statement
for the 2001 Annual Meeting of Shareholders of the Company, is
incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
- -------- ---------------------------------------------------------------
(a) List of documents filed as part of this report:
1. Financial statements: The Company's financial statements and
related information are included under Item 8 of this
Form 10-K.
42
2. Financial statement schedules:
All schedules are omitted, as the required information is
inapplicable or the information is presented in the financial
statements or related notes thereto.
3. Exhibits to this Form 10-K pursuant to Item 601 of Regulation
S-K are as follows:
Exhibit No. Description
- ----------- -----------
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, 2000.
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 March 10, 1999 by and between Optical
Cable Corporation and First Union National Bank (filed as
Exhibit 10.6 to the Registrant's Quarterly Report on Form 10-Q
for the fiscal quarter ended January 31, 1999 (file number
0-27022), and incorporated herein by reference).
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 March 10, 1999 issued by Optical Cable
Corporation to First Union National Bank in the amount of
$5,000,000 and the Promissory Note dated March 10, 1999 issued
by Optical Cable Corporation to First Union National Bank in
the amount of $10,000,000
43
(filed as Exhibit 10.8 to the Registrant's Quarterly Report on
form 10-Q for the fiscal quarter ended January 31, 1999 (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.
- -------------------------------
* Management contract or compensatory plan or agreement.
(b) Reports on Form 8-K
There were two reports on Form 8-K filed by the Company during
the fourth quarter of fiscal year 2000.
1. Form 8-K dated September 8, 2000, reporting under
Item 5 thereof a three-for-two stock split effected
in the form of a share dividend and attaching under
Item 7 thereof a press release of Optical Cable
Corporation dated September 6, 2000.
2. Form 8-K dated September 27, 2000, reporting under
Item 5 thereof the filing of a lawsuit on such date
against Optical Cable Corporation by the Equal
Employment Opportunity Commission.
44
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
OPTICAL CABLE CORPORATION
Date: January 29, 2001 By /s/ Robert Kopstein
------------------------------
Robert Kopstein
Chairman of the Board
President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated as of January 29, 2001.
/s/ Robert Kopstein January 29, 2001 Chairman of the Board, President
- ----------------------------------------- Chief Executive Officer and Director
Robert Kopstein Date (principal executive officer)
/s/ Luke J. Huybrechts January 29, 2001 Senior Vice President of Sales
- ----------------------------------------- and Director
Luke J. Huybrechts Date
/s/ Kenneth W. Harber January 29, 2001 Vice President of Finance, Treasurer,
- ----------------------------------------- Secretary and Director
Kenneth W. Harber Date (principal financial and accounting
officer)
/s/ Randall H. Frazier January 29, 2001 Director
- -----------------------------------------
Randall H. Frazier Date
/s/ John M. Holland January 29, 2001 Director
- -----------------------------------------
John M. Holland Date
45
INDEX TO ATTACHED EXHIBITS
Exhibit No. Description
- ----------- -----------
10.3 Employment Agreement by and between Optical Cable Corporation
and Robert Kopstein, effective November 1, 2000.
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.
46
Exhibit 10.3
OPTICAL CABLE CORPORATION
EMPLOYMENT AGREEMENT
This agreement made effective November 1, 2000 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, 2000 and shall
terminate on the 31st day of October, 2001.
3. STARTING DATE: This Agreement becomes effective November 1, 2000.
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 of 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 of
such inventions and improvements, set forth herein, and for vesting in OCC
the entire right, title and interest thereto. As used in this Agreement,
"inventions or improvements" means discoveries, concepts, and ideas,
whether patentable or not, relating to any present 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
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
trade 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 (six) 6 shall apply throughout the period of
Kopstein's employment with OCC, and for twelve (12) successive months
immediately following termination of that employment by either party for
any reason.
7. NON-COMPETE: Kopstein covenants and agrees that during the term of his
employment with OCC (as employee, consultant or otherwise) and for the
twelve (12) consecutive months immediately following termination of that
employment by either party for any reason he will not own or have an
ownership interest in, or render services to, or work for any business
which competes with OCC or is engaged in the same or similar business
conducted by OCC during the period of Kopstein's employment with OCC, or
wishing three (3) months following termination of that employment; nor will
he call on, solicit or deal with any customers or prospective customer 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 of 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 recoverable.
Kopstein agrees to pay the costs, including attorneys fees incurred by OCC
in enforcing the provisions of paragraphs 6 and 7.
Each and all of the several rights and remedies contained in or arising by
reason of this Agreement shall be construed as cumulative and no one of
them shall be exclusive of any other or of any right or priority allowed by
law or equity. Nothing in this Agreement is intended to be in derogation of
the rights of either party under or pursuant to any federal or state
statute.
12. NOTICES: Any notice required or desired to be given under this Agreement
shall be deemed given if in writing sent by U.S. Mail to his last known
residence in the case of Kopstein or to its principal office in the case of
OCC.
13. SEVERABILITY AND LIMITED ENFORCEABILITY: It is understood and agreed that,
should any portion of any clause or paragraph of this Agreement be deemed
too broad to permit enforcement to its full extent, then such restriction
shall be enforced to the maximum extent permitted 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 AGREEMENT; MODIFICATION: No modifications or waiver of this
Agreement, or of any provision thereof, shall be valid or binding, unless
in writing and executed by both of three parties hereto. No waiver by
either party of any breach of any term or provision of this Agreement shall
be construed as a waiver of any succeeding breach of the same or any other
term or provision.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year first written above.
s/Deborah B. Stokes s/ Robert Kopstein
- ------------------------- -------------------------
WITNESS Robert Kopstein
Optical Cable Corporation
By: s/Kenneth W. Harber
-------------------
Kenneth W. Harber
Vice President of Finance
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 8, 2000,
relating to the balance sheets of Optical Cable Corporation as of October 31,
2000 and 1999, and the related statements of income, stockholders' equity, and
cash flows for each of the years in the three-year period ended October 31,
2000, which report appears in the October 31, 2000 Annual Report on Form 10-K of
Optical Cable Corporation.
KPMG LLP
Roanoke, Virginia
January 29, 2001