UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to ______________
Commission file number 0-27022
OPTICAL CABLE CORPORATION
(Exact name of registrant as specified in its charter)
VIRGINIA 54-1237042
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5290 CONCOURSE DRIVE
ROANOKE, VIRGINIA 24019
(Address of principal executive offices, including zip code)
(540) 265-0690
(Registrant's telephone number, including area code)
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
----- ------- ----- ------
As of August 28, 2001, 55,996,279 shares of the registrant's Common
Stock, no par value, were outstanding. Of these outstanding shares, 53,660,000
shares were held by Robert Kopstein, Chairman of the Board, President and Chief
Executive Officer of the registrant.
OPTICAL CABLE CORPORATION
FORM 10-Q INDEX
NINE MONTHS ENDED JULY 31, 2001
Page
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Balance Sheets - July 31, 2001 and October 31,
2000................................................2
Condensed Statements of Operations - Three Months and Nine
Months Ended July 31, 2001 and 2000.................3
Condensed Statement of Changes in Stockholders' Equity -
Nine Months Ended July 31, 2001.....................4
Condensed Statements of Cash Flows - Nine Months Ended
July 31, 2001 and 2000..............................5
Condensed Notes to Condensed Financial Statements............6-11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION ..........................12-19
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...20
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS............................................21
ITEM 5. OTHER INFORMATION............................................21
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.............................21
SIGNATURES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
OPTICAL CABLE CORPORATION
Condensed Balance Sheets
July 31, October 31,
Assets 2001 2000
----------------- -----------------
(unaudited)
Current assets:
Cash and cash equivalents $ 888,078 $ 1,458,896
Trading securities 5,804,640 17,982,830
Trade accounts receivable, net of allowance for doubtful accounts
of $186,978 at July 31, 2001 and $1,909,069 at October 31, 2000 12,857,253 11,357,522
Income taxes refundable 479,791 1,162,118
Other receivables 236,857 362,000
Due from employees 1,715 2,890
Inventories 14,016,755 7,572,153
Prepaid expenses 167,858 112,794
Deferred income taxes 346,013 959,665
----------------- -----------------
Total current assets 34,798,960 40,970,868
Other assets, net 471,371 261,937
Property and equipment, net 12,394,679 11,455,372
----------------- -----------------
Total assets $ 47,665,010 $ 52,688,177
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 5,008,491 $ 2,479,116
Accrued compensation and payroll taxes 668,015 847,572
Notes payable 841,000 ----
Payable to investment broker 2,512,557 5,658,574
----------------- -----------------
Total current liabilities 9,030,063 8,985,262
Deferred income taxes 194,616 195,085
----------------- -----------------
Total liabilities 9,224,679 9,180,347
----------------- -----------------
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 56,248,279 shares at July 31, 2001
and 56,391,993 shares at October 31, 2000 2,941,009 5,179,295
Paid-in capital 1,782,669 1,714,284
Retained earnings 33,716,653 36,614,251
----------------- -----------------
Total stockholders' equity 38,440,331 43,507,830
Commitments and contingencies
----------------- -----------------
Total liabilities and stockholders' equity $ 47,665,010 $ 52,688,177
================= =================
See accompanying condensed notes to condensed financial statements.
2
OPTICAL CABLE CORPORATION
Condensed Statements of Operations
(unaudited)
Three Months Ended Nine Months Ended
July 31, July 31,
-------------------------------- --------------------------------
2001 2000 2001 2000
--------------- -------------- -------------- ---------------
Net sales $ 14,085,959 $ 16,650,975 $ 48,458,764 $ 41,025,520
Cost of goods sold 7,980,010 8,998,778 26,646,073 22,259,116
--------------- -------------- -------------- ---------------
Gross profit 6,105,949 7,652,197 21,812,691 18,766,404
Selling, general and administrative expenses 3,822,853 3,546,316 11,496,973 9,277,803
--------------- -------------- -------------- ---------------
Income from operations 2,283,096 4,105,881 10,315,718 9,488,601
--------------- -------------- -------------- ---------------
Other income (expense):
Gains (losses) on trading securities, net (596,238) (416,799) (9,751,494) 1,330,933
Interest income 19,498 16,456 44,328 180,337
Interest expense (33,755) (3,267) (281,838) (3,267)
Other, net (5,562) 358 9,734 7,439
--------------- -------------- -------------- ---------------
Other income (expense), net (616,057) (403,252) (9,979,270) 1,515,442
--------------- -------------- -------------- ---------------
Income before income tax
expense 1,667,039 3,702,629 336,448 11,004,043
Income tax expense 792,096 1,302,500 3,234,046 3,873,352
--------------- -------------- -------------- ---------------
Net income (loss) $ 874,943 $ 2,400,129 $ (2,897,598) $ 7,130,691
=============== ============== ============== ===============
Net income (loss) per share:
Basic and diluted net income (loss) per share $ 0.02 $ 0.04 $ (0.05) $ 0.13
=============== ============== ============== ===============
See accompanying condensed notes to condensed financial statements.
3
OPTICAL CABLE CORPORATION
Condensed Statement of Changes in Stockholders' Equity
(unaudited)
Nine Months Ended July 31, 2001
------------------------------------------------------------------------------------
Common Stock Total
-------------------------------- Paid-in Retained Stockholders'
Shares Amount Capital Earnings Equity
-------------- -------------- -------------- --------------- --------------
Balances at October 31, 2000 56,391,993 $ 5,179,295 $ 1,714,284 $ 36,614,251 $ 43,507,830
Exercise of employee stock
options ($2.08 price per
share) 140,936 292,771 ---- ---- 292,771
Restricted stock award ($6.25
per share) 750 4,687 ---- ---- 4,687
Repurchase of common stock
(at cost) (285,400) (2,535,744) ---- ---- (2,535,744)
Stock-based compensation ---- ---- 68,385 ---- 68,385
Net loss ---- ---- ---- (2,897,598) (2,897,598)
-------------- -------------- -------------- --------------- --------------
Balances at July 31, 2001 56,248,279 $ 2,941,009 $ 1,782,669 $ 33,716,653 $ 38,440,331
============== ============== ============== =============== ==============
See accompanying condensed notes to condensed financial statements.
4
OPTICAL CABLE CORPORATION
Condensed Statements of Cash Flows
(unaudited)
Nine Months Ended
July 31,
-------------------------------------
2001 2000
----------------- -----------------
Cash flows from operating activities:
Net income (loss) $ (2,897,598) $ 7,130,691
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization 713,789 579,752
Bad debt expense 544,222 128,268
Deferred income tax expense (benefit) 613,183 (12,489)
Tax benefit of disqualifying disposition of stock options
exercised ---- 1,295,556
Stock-based compensation expense 73,072 14,063
Unrealized losses on trading securities, net 413,047 782,785
(Increase) decrease in:
Trading securities 11,765,143 (13,849,785)
Trade accounts receivable (2,043,953) (2,548,366)
Income taxes refundable 682,327 (609,942)
Other receivables 125,143 97,719
Due from employees 1,175 6,618
Inventories (6,444,602) 1,596,468
Prepaid expenses (55,064) (68,420)
Increase (decrease) in:
Accounts payable and accrued expenses 2,610,984 (892,259)
Accrued compensation and payroll taxes (179,557) (60,584)
Payable to investment broker (3,146,017) 668,772
Income taxes payable ---- (421,803)
----------------- -----------------
Net cash provided by (used in) operating activities 2,775,294 (6,162,956)
----------------- -----------------
Cash flows from investing activities:
Purchase of property and equipment (1,734,705) (976,146)
Cash surrender value of life insurance (82,434) (63,536)
----------------- -----------------
Net cash used in investing activities (1,817,139) (1,039,682)
----------------- -----------------
Cash flows from financing activities:
Deferred stock issuance costs (127,000) ----
Repurchase of common stock (2,535,744) ----
Proceeds from exercise of employee stock options 292,771 814,098
Proceeds from notes payable, net 841,000 150,000
----------------- -----------------
Net cash provided by (used in) financing activities (1,528,973) 964,098
----------------- -----------------
Net decrease in cash and cash equivalents (570,818) (6,238,540)
Cash and cash equivalents at beginning of period 1,458,896 6,816,678
----------------- -----------------
Cash and cash equivalents at end of period $ 888,078 $ 578,138
================= =================
See accompanying condensed notes to condensed financial statements.
5
OPTICAL CABLE CORPORATION
Condensed Notes to Condensed Financial Statements
Nine Months Ended July 31, 2001
(unaudited)
(1) GENERAL
The accompanying unaudited condensed financial statements of Optical
Cable Corporation (the "Company") have been prepared in accordance with
accounting principles generally accepted in the United States of
America for interim financial reporting information and the
instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and notes
required by accounting principles generally accepted in the United
States of America for complete financial statements. In the opinion of
management, all material adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been
included. Operating results for the nine months ended July 31, 2001 are
not necessarily indicative of the results that may be expected for the
fiscal year ending October 31, 2001. The unaudited condensed financial
statements and condensed notes are presented as permitted by Form 10-Q
and do not contain certain information included in the Company's annual
financial statements and notes. For further information, refer to the
financial statements and notes thereto included in the Company's annual
report on Form 10-K for the fiscal year ended October 31, 2000.
(2) 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. In addition to realized
gains and losses, unrealized holding gains and losses for trading
securities are included in the determination of net income or net
loss. The amount of net unrealized holding gain (loss) that has been
included in net income (loss) for the three months ended July 31, 2001
and 2000 was $(596,238) and $358,251, respectively. The amount of net
unrealized holding gain (loss) that has been included in net income
(loss) for the nine months ended July 31, 2001 and 2000 was $(413,047)
and $782,785, respectively. As of July 31, 2001, the Company's trading
securities consist of shares in the Nasdaq 100 Trust, which is
designed to closely track the price and yield performance of the
Nasdaq 100 stock index.
As of July 31, 2001, the Company's trading securities, valued at
$5,804,640, have experienced a 15.7% decline in value since the date of
purchase. Subsequent to July 31, 2001 through August 28, 2001, the
value of the Company's trading securities held as of July 31, 2001
decreased by approximately 8.7%, or approximately $506,000. It is
possible that the price of the Company's trading securities could
continue to experience an adverse change in the near term.
As of July 31, 2001 and October 31, 2000, the Company had short-term
margin borrowings of $2,512,557 and $5,658,574, respectively, payable
to investment broker related to the trading securities. The margin
account incurs interest at rates ranging from the Call Money rate plus
.25% to the Call Money rate plus 2.50%, depending on the outstanding
balance of margin borrowings (7.25% as of July 31, 2001). Obligations
of the Company to the investment broker are collateralized by the
trading securities and are subject to certain margin provisions, which
may result in the sale of some or all of the trading securities to meet
margin calls.
(Continued)
6
OPTICAL CABLE CORPORATION
Condensed Notes to Condensed Financial Statements
Nine Months Ended July 31, 2001
(unaudited)
(3) ALLOWANCE FOR DOUBTFUL ACCOUNTS RECEIVABLE
A summary of changes in the allowances for doubtful accounts and notes
receivable for the nine months ended July 31, 2001 and 2000 follows:
Nine Months Ended
July 31,
-------------------------------------------
2001 2000
----------------- ------------------
Balance at beginning of period $ 1,909,069 $ 316,000
Bad debt expense 544,222 128,268
Losses charged to allowance (2,271,419) (260,657)
Recoveries added to allowance 5,106 25,279
----------------- ------------------
Balance at end of period $ 186,978 $ 208,890
================= ==================
One of the Company's two major distributors filed for liquidation under
bankruptcy laws in January 2001. As of October 31, 2000, the Company
reserved approximately $1,772,000 for estimated uncollectible accounts
receivable from this distributor. As of January 31, 2001, the Company
wrote off that $1,772,000 reserve, as well as an additional bad debt
reserve related to this distributor of approximately $419,000 incurred
during the first quarter of fiscal year 2001, for a total write-off of
approximately $2,191,000 for estimated uncollectible accounts
receivable from this distributor for the nine months ended July 31,
2001. Net sales attributed to this distributor approximated 0.9% and
15.7% of total net sales for the nine months ended July 31, 2001 and
2000. There were no net sales attributed to this distributor for the
three months ended April 30, 2001 or July 31, 2001.
(4) INVENTORIES
Inventories at July 31, 2001 and October 31, 2000, consisted of the
following:
July 31, October 31,
2001 2000
----------------- -----------------
Finished goods $ 4,464,254 $ 808,271
Work in process 3,712,068 3,487,611
Raw materials 5,784,616 3,194,393
Production supplies 55,817 81,878
----------------- -----------------
$ 14,016,755 $ 7,572,153
================= =================
(Continued)
7
OPTICAL CABLE CORPORATION
Condensed Notes to Condensed Financial Statements
Nine Months Ended July 31, 2001
(unaudited)
(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% above the monthly LIBOR rate (5.25% as of July 31,
2001) 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
have been extended and will expire on March 31, 2002, unless they are
further 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) STOCK OPTION PLAN
The Company applies the provisions of Accounting Principles Board (APB)
Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, for employee
stock option grants and SFAS No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION and EITF Issue No. 96-18, ACCOUNTING FOR EQUITY
INSTRUMENTS THAT ARE ISSUED TO OTHER THAN EMPLOYEES FOR ACQUIRING, OR
IN CONJUNCTION WITH SELLING, GOODS OR SERVICES, for nonemployee stock
option grants. Stock option activity during the nine months ended July
31, 2001 was as follows:
Number of Weighted-average
Shares Exercise Price
----------------- -------------------
Balance at October 31, 2000 428,999 $ 4.53
Granted 500,000 10.69
Exercised (140,936) 2.08
Forfeited (8,000) 10.69
-----------------
Balance at July 31, 2001 780,063 $ 8.89
=================
Included in the 500,000 options granted during the nine months ended
July 31, 2001 were 100,000 options to nonemployees.
As of July 31, 2001, there were 5,219,937 additional shares available
for grant under the Plan.
The options granted during the nine months ended July 31, 2001 were
granted with an exercise price equal to the fair market value of the
Company's common stock on the date of grant, and vest 25% after two
years, 50% after three years, 75% after four years and 100% after five
years.
(Continued)
8
OPTICAL CABLE CORPORATION
Condensed Notes to Condensed Financial Statements
Nine Months Ended July 31, 2001
(unaudited)
(7) INCOME TAXES
As of July 31, 2001, the Company has assessed the realizability of its
deferred tax assets relating to the capital loss carryforward and
unrealized net loss generated by the Company's trading securities
during the nine months ended July 31, 2001. The Company has determined
that it is more likely than not that these deferred tax assets
totaling approximately $3,373,000 as of July 31, 2001, will not be
realized. Accordingly, the Company has established a valuation
allowance for deferred tax assets in the amount of approximately
$3,373,000 as of July 31, 2001, which is included in income tax
expense for the nine months ended July 31, 2001. In order to fully
realize these deferred tax assets, the Company will need to generate
future capital gains of approximately $9.0 million prior to the
expiration of the capital loss carryforward in 2006.
(8) NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share excludes dilution and is computed by
dividing income available to common stockholders by the
weighted-average number of common shares outstanding for the period.
Diluted net income (loss) per share 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 (loss) of
the Company. The following is a reconciliation of the numerators and
denominators of the net income (loss) per common share computations for
the periods presented:
Net Income Shares Per Share
Three Months Ended July 31, 2001 (Numerator) (Denominator) Amount
- -------------------------------- --------------- ---------------- ----------------
Basic net income per share $ 874,943 56,346,105 $ 0.02
================
Effect of dilutive stock options ---- 130,983
--------------- ----------------
Diluted net income per share $ 874,943 56,477,088 $ 0.02
=============== ================ ================
Net Income Shares Per Share
Three Months Ended July 31, 2000 (Numerator) (Denominator) Amount
- -------------------------------- --------------- ---------------- ----------------
Basic net income per share $ 2,400,129 56,357,064 $ 0.04
================
Effect of dilutive stock options ---- 351,738
--------------- ----------------
Diluted net income per share $ 2,400,129 56,708,802 $ 0.04
=============== ================ ================
Net Loss Shares Per Share
Nine Months Ended July 31, 2001 (Numerator) (Denominator) Amount
- ------------------------------- --------------- ---------------- ----------------
Basic net loss per share $ (2,897,598) 56,327,229 $ (0.05)
================
Effect of dilutive stock options ---- 232,984
--------------- ----------------
Diluted net loss per share $ (2,897,598) 56,560,213 $ (0.05)
=============== ================ ================
(Continued)
9
OPTICAL CABLE CORPORATION
Condensed Notes to Condensed Financial Statements
Nine Months Ended July 31, 2001
(unaudited)
Net Income Shares Per Share
Nine Months Ended July 31, 2000 (Numerator) (Denominator) Amount
- ------------------------------- ---------------- ---------------- ----------------
Basic net income per share $ 7,130,691 56,282,045 $ 0.13
================
Effect of dilutive stock options ---- 451,950
--------------- ----------------
Diluted net income per share $ 7,130,691 56,733,995 $ 0.13
================ ================ ================
Stock options that could potentially dilute net income per share in the
future that were not included in the computation of diluted net income
per share (because to do so would have been antidilutive for the
periods presented) totaled 492,000 for the three months ended July 31,
2001. No such antidilutive stock options existed with respect to the
diluted net income (loss) per share calculation for the nine months
ended July 31, 2001 or for the three months and nine months ended July
31, 2000.
(9) STOCKHOLDERS' EQUITY
The Company's Board of Directors has authorized the repurchase of up to
$25 million of the Company's common stock in the open market or in
privately negotiated transactions. Through July 31, 2001, the Company
has repurchased 2,589,143 shares of its common stock for $18,977,528 in
such transactions since the inception of the Company's share repurchase
program in October 1997. For the period from November 1, 2000 through
July 31, 2001, the Company has purchased 285,400 shares of its common
stock for $2,535,744 in such transactions. Subsequent to July 31, 2001
and through August 28, 2001, the Company has purchased an additional
464,300 shares of its common stock for $3,940,698 in such transactions.
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 quarterly report have been
retroactively adjusted to reflect the impact of the approved stock
dividend.
(10) EMPLOYEE BENEFITS
Through December 31, 2000, the Company maintained an independently
administered self-insurance program that provided health insurance
coverage for employees and their dependents on a cost-reimbursement
basis. Under the program, the Company was obligated for claims
payments. Effective January 1, 2001, the Company no longer
independently administers the health insurance coverage, but has
contracted for insurance coverage with a third-party administrator.
(Continued)
10
OPTICAL CABLE CORPORATION
Condensed Notes to Condensed Financial Statements
Nine Months Ended July 31, 2001
(unaudited)
(11) SEGMENT INFORMATION
The Company has a single reportable segment for purposes of segment
reporting pursuant to Statement of Financial Accounting Standards
(SFAS) No. 131. In addition, the Company's fiber optic cable products
are similar in nature.
(12) CONTINGENCIES
On September 27, 2000, the Equal Employment Opportunity Commission
(EEOC) 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. The lawsuit alleged 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.
At this early stage in the lawsuit, management cannot make a reasonable
estimate of the monetary amount of its resolution or estimate a range
of reasonably possible loss. If the Company is unsuccessful, it could
be subject to damages that may be substantial and could have a material
adverse effect on the Company's results of operations or liquidity.
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.
(13) 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.
The Company has also adopted Staff Accounting Bulletin (SAB) No. 101,
REVENUE RECOGNITION IN FINANCIAL STATEMENTS, issued by the SEC staff.
Given the nature of the Company's business, the adoption of SAB 101 did
not have any effect on the financial position, results of operations or
liquidity of the Company.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
FORWARD LOOKING INFORMATION
This Form 10-Q may contain certain forward-looking information within the
meaning of the federal securities laws. The forward-looking information may
include, among other information, statements concerning our outlook for the
future; statements of belief; future plans, strategies or anticipated events;
and similar information and statements concerning matters that are not
historical facts. The forward-looking information is subject to risks and
uncertainties that may cause actual events to differ materially from our
expectations. Factors that could cause or contribute to these differences
include, but are not limited to, the level of sales to key customers; the
economic conditions affecting network service providers; the slowdown in
corporate spending on information technology; actions by competitors;
fluctuations in the price of raw materials, including optical fiber; our
dependence on a single manufacturing facility; our ability to protect our
proprietary manufacturing technology; market conditions influencing prices or
pricing; our dependence on a limited number of suppliers; an adverse price
change in trading securities we hold; an adverse outcome in litigation, claims
and other actions against us; technological changes and introductions of new
competing products; and changes in market demand, exchange rates, productivity,
weather and market and economic conditions in the areas of the world in which we
operate and market our products.
Amounts presented in the following discussion have been rounded to the nearest
hundred thousand, unless the amounts are less than one million, in which case
the amounts have been rounded to the nearest thousand.
OVERVIEW
We are a leading manufacturer of a broad range of fiber optic cables for use
both indoors and outdoors. Our tight-buffered fiber optic cables are
well-suited for use in moderate distance applications to connect metropolitan,
access and enterprise networks. Our tight-buffered fiber optic cables are
derived from technology originally developed for military applications requiring
rugged, flexible and compact fiber optic cables. Our tight-buffered fiber optic
cables can be used both indoors and outdoors, are easy and economical to
install, provide a high degree of reliability and offer industry leading
performance characteristics. We have designed and implemented an efficient and
highly automated manufacturing process based on proprietary technologies. This
enables us to produce high quality indoor/outdoor tight-buffered fiber optic
cable rapidly and cost efficiently.
We sell our products through our sales force to original equipment manufacturers
and to major distributors, regional distributors and various smaller
distributors. For the three months ended July 31, 2001 and 2000, approximately
56.5% and 57.8% of our net sales were from sales to our distributors. For the
nine months ended July 31, 2001 and 2000, approximately 47.2% and 58.8% of our
net sales were from sales to our distributors. International net sales were
29.1% and 20.8% of total net sales for the three months ended July 31, 2001 and
2000. International net sales were 25.1% and 21.5% of total net sales for the
nine months ended July 31, 2001 and 2000. Substantially all of our international
sales are denominated in U.S. dollars.
Net sales consist of gross sales of products, less discounts, refunds and
returns. Revenue is recognized at the time of product shipment or delivery to
the customer, based on shipping terms. We typically give greater discounts on
large orders and on sales to distributors than on sales to the rest of our
customer base, including original equipment manufacturers. For the three months
ended July 31, 2001, 18.8% of our net sales were attributable to one domestic
distributor. For the three months ended July 31, 2000, 27.5% of our net sales
were attributable to two domestic distributors. For the nine months ended July
31, 2001 and 2000, 13.3% and 27.6% of our net sales were attributable to two
domestic distributors. For the three months ended July 31, 2001 and 2000, 18.8%
and 11.9% of our net sales were attributable to one of these distributors. For
the nine months ended July 31, 2001 and 2000, 12.4% and 11.9% of our net sales
were attributable to the same distributor. Another distributor accounted for
15.6% of net sales for the three months ended July 31, 2000 and 0.9% and 15.7%
of net sales for the nine months ended July 31, 2001 and 2000. This distributor
filed for liquidation under the bankruptcy laws in January 2001. As of October
31, 2000, we reserved approximately $1.8 million for estimated uncollectible
accounts receivable
12
from this distributor. As of January 31, 2001, we wrote off that $1.8 million
reserve as well as an additional $419,000, for a total write-off of $2.2 million
for estimated uncollectible accounts receivable from this distributor. Other
than these two distributors, no single customer accounted for more than 5.0% of
our net sales for the nine months ended July 31, 2001 or 2000.
A significant percentage of the selling price of our fiber optic cable is based
on the cost of raw materials used. Because single-mode fiber is less expensive
than multimode fiber, single-mode fiber optic cables have a lower per unit
selling price than comparable multimode fiber optic cables. We believe that the
metropolitan and access markets are predominantly users of single-mode fiber
optic cable. To the extent that our sales mix shifts toward the metropolitan and
access markets and our product mix shifts toward single-mode cables, we will
have to increase the volume of our sales to maintain our current level of net
sales. Increased volume may require us to expand our manufacturing capacity more
rapidly.
Cost of goods sold consists of the cost of materials, compensation costs,
product warranty costs and overhead related to our manufacturing operations. The
largest percentage of costs included in cost of goods sold is attributable to
costs of materials which are variable as opposed to fixed costs. As a result,
cost of goods sold typically changes in proportion to increases and decreases in
net sales.
Selling, general and administrative expenses consist of the compensation costs
for sales and marketing personnel, shipping costs, travel expenses, customer
support expenses, trade show expenses, advertising, bad debt expense, the
compensation cost for administration, finance and general management personnel,
as well as legal and accounting fees.
Other income (expense), net consists primarily of realized and unrealized net
gains (losses) on trading securities, interest income and interest expense. In
January 2000, with a view to obtaining a better investment return on our excess
cash, we began actively buying and selling shares in the Nasdaq 100 Trust, which
is designed to closely track the price and yield performance of the Nasdaq 100
stock index. These 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. Net realized gains or losses are determined on the first-in, first-out
cost method. We mark our investment to market on each balance sheet date. Any
decline in fair value is recorded as an unrealized loss, while any increase in
fair value is recorded as an unrealized gain. Unrealized holding gains and
losses for trading securities are included in other income (expense), net.
In fiscal year 2000, we recognized realized and unrealized net gains of $289,000
in other income, net and continued to hold approximately $18.0 million of these
trading securities as of October 31, 2000. The amount of net unrealized holding
loss included in other income, net in fiscal year 2000 was $500,000. We utilized
short-term margin borrowings payable to an investment broker to finance our
position. As of October 31, 2000, the outstanding margin borrowings totaled $5.7
million. We incurred interest expense of $57,000 on the margin borrowings in
fiscal year 2000. Our margin borrowings are collateralized by the trading
securities and are subject to margin provisions, which may result in the sale of
some or all of the trading securities to meet margin calls.
Subsequent to October 31, 2000, we continued to purchase and sell shares in the
Nasdaq 100 Trust, and during this period the fair value of those shares
continued to decline substantially. During the three months ended January 31,
2001, we recognized realized and unrealized net losses of $4.0 million; during
the three months ended April 30, 2001, we recognized an additional realized and
unrealized net loss of $5.2 million; and during the three months ended July 31,
2001, we recognized an additional realized and unrealized net loss of $596,000,
for a total realized and unrealized net loss of $9.8 million included in other
expense, net for the nine months ended July 31, 2001. As of July 31, 2001, our
trading securities totaled $5.8 million and the outstanding margin borrowings
totaled $2.5 million. For the nine months ended July 31, 2001, we incurred
interest expense of $282,000 on the margin borrowings. The amount of net
unrealized holding loss included in other expense, net for the nine months ended
July 31, 2001 was $413,000.
13
Our last purchase of shares in the Nasdaq 100 Trust was on May 14, 2001.
Subsequent to July 31, 2001 through August 28, 2001, the value of our trading
securities held as of July 31, 2001 decreased by $506,000. It is possible that
the price of our trading securities could continue to experience an adverse
change in the near term.
Our active trading in the Nasdaq 100 Trust continued through May 14, 2001. Our
Board of Directors has adopted an Investment Objectives and Guidelines policy,
in which we state that we will make no additional cash investments in the
above-mentioned Nasdaq 100 Trust or in stocks of other companies, and that any
margin calls relating to the above-mentioned margin borrowings will be met
solely through the sale of securities purchased on margin and not by further
cash contributions. In addition, our Investment Objectives and Guidelines policy
states that any future investments will be in U.S. dollar denominated
short-term, interest-bearing, investment-grade securities.
RESULTS OF OPERATIONS
The following table sets forth selected line items from our condensed statements
of operations as a percentage of net sales for the periods indicated:
Three Months Ended Nine Months Ended
July 31, July 31,
-------------------------------- --------------------------------
2001 2000 2001 2000
-------------- -------------- -------------- --------------
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of goods sold 56.7 54.0 55.0 54.3
-------------- -------------- -------------- --------------
Gross profit 43.3 46.0 45.0 45.7
Selling, general and administrative expenses 27.1 21.3 23.7 22.6
-------------- -------------- -------------- --------------
Income from operations 16.2 24.7 21.3 23.1
Other income (expense), net (4.4) (2.5) (20.6) 3.7
-------------- -------------- -------------- --------------
Income before income tax expense 11.8 22.2 0.7 26.8
Income tax expense 5.6 7.8 6.7 9.4
-------------- -------------- -------------- --------------
Net income (loss) 6.2 % 14.4 % (6.0)% 17.4 %
============== ============== ============== ==============
THREE MONTHS ENDED JULY 31, 2001 AND 2000
NET SALES
Net sales decreased 15.4% from $16.7 million for the three months ended July 31,
2000 to $14.1 million for the three months ended July 31, 2001. The decrease in
net sales resulted from the impact of weak economic conditions on market demand,
as the industries we serve reduced or delayed capital spending. In addition, a
decrease in demand for cable containing multimode fiber (which typically has a
higher relative sales price) was partially offset by an increase in demand for
cable containing single-mode fiber (which typically has a lower relative sales
price). Total fiber meters shipped in the third quarter was down 1.8% from the
same period last year as a result of a 5.5 million meter decrease in multimode
fiber shipped. This was partially offset by a 4.5 million meter increase in
single mode fiber shipped. Cable containing multimode fiber is generally used
for datacom applications, while cable containing singlemode fiber is generally
used for telecom/CATV/internet applications.
During the first week of September 2001, we reacted to the impact of weak
economic conditions on market demand by announcing the layoff of 27 employees (2
of which were part-time employees), or approximately 12% of our total workforce.
We had added 49 new positions and production capacity during the first and
second quarters of the fiscal year ending October 31, 2001, in response to
record product demand. Most of the employees included in the workforce
reduction were hired during this period, and some were still in various stages
of training.
14
GROSS PROFIT
Gross profit decreased 20.2% from $7.7 million for the three months ended July
31, 2000 to $6.1 million for the three months ended July 31, 2001. Gross margin,
or gross profit as a percentage of net sales, was 46.0% for the three months
ended July 31, 2000 compared to 43.3% for the three months ended July 31, 2001.
The lower gross margin percentage was attributable to manufacturing costs not
decreasing proportionally to the decrease in net sales, which was partially
offset by an increase in the proportion of sales to original equipment
manufacturers (OEMs) compared to distributors. Sales to OEM's generally have a
higher profit margin than sales to distributors. Net sales to distributors were
58.0% of net sales for the three months ended July 31, 2000 compared to 56.5%
for the three months ended July 31, 2001.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased 7.8% from $3.5 million
for the three months ended July 31, 2000 to $3.8 million for the three months
ended July 31, 2001. Selling, general and administrative expenses as a
percentage of net sales were 21.3% for the three months ended July 31, 2000
compared to 27.1% for the three months ended July 31, 2001. This increase was
primarily a result of increased marketing efforts.
INCOME FROM OPERATIONS
Income from operations decreased 44.4% from $4.1 million for the three months
ended July 31, 2000 to $2.3 million for the three months ended July 31, 2001.
This decrease was due to the $1.5 million decrease in gross profit and the
$277,000 increase in selling, general and administrative expenses.
OTHER EXPENSE, NET
Other expense, net increased 52.8% from $403,000 for the three months ended July
31, 2000 to $616,000 for the three months ended July 31, 2001. This increase was
due to increased losses on our trading securities. We recorded losses on trading
securities, net of $417,000 for the three months ended July 31, 2000 compared to
losses on trading securities, net of $596,000 for the three months ended July
31, 2001. In addition, for the three months ended July 31, 2001, we incurred
interest expense of $34,000 on short-term margin borrowings related to our
trading securities. Please see our discussion of these trading securities in
"Overview" above.
INCOME BEFORE INCOME TAX EXPENSE
Income before income tax expense decreased 55.0% from $3.7 million for the three
months ended July 31, 2000 to $1.7 million for the three months ended July 31,
2001. This decrease was primarily due to the $1.5 million decrease in gross
profit, the $277,000 increase in selling, general and administrative expenses,
and the $213,000 increase in other expense, net.
INCOME TAX EXPENSE
Income tax expense decreased 39.2% from $1.3 million for the three months ended
July 31, 2000 to $792,000 for the three months ended July 31, 2001. Our reported
income tax expense for the three months ended July 31, 2001, differed from the
expected income tax expense, computed based on an expected effective tax rate of
35.0%, due primarily to the increase in our valuation allowance for deferred tax
assets in the amount of $225,000. As of July 31, 2001, we have assessed the
realizability of our deferred tax assets relating to the capital loss
carryforward and unrealized net loss from our trading securities totaling $3.4
million and have determined that it is more likely than not that these deferred
tax assets will not be realized. In order to fully realize these deferred tax
assets, we would need to generate future capital gains of approximately $9.0
million prior to the expiration of the capital loss carryforward in 2006. For
the three months ended July 31, 2000, our effective tax rate was 35.2%.
15
NET INCOME
Net income decreased 63.5% from $2.4 million for the three months ended July 31,
2000 to $875,000 for the three months ended July 31, 2001. This decrease was due
to the $2.0 million decrease in income before income tax expense, partially
offset by the $510,000 decrease in income tax expense.
NINE MONTHS ENDED JULY 31, 2001 AND 2000
NET SALES
Net sales increased 18.1% from $41.0 million for the nine months ended July 31,
2000 to $48.5 million for the nine months ended July 31, 2001. This increase was
attributable to record net sales during our first and second quarters of fiscal
year 2001, partially offset by lower sales in the current quarter. Total fiber
meters shipped increased 25.2% from 139.9 million fiber meters shipped in the
nine months ended July 31, 2000, to 175.1 million fiber meters shipped in the
nine months ended July 31, 2001. This increase in fiber meters shipped was a
result of a 6.9 million increase in multimode fiber meters shipped and a 28.3
million increase in single-mode fiber meters shipped.
GROSS PROFIT
Gross profit increased 16.2% from $18.8 million for the nine months ended July
31, 2000 to $21.8 million for the nine months ended July 31, 2001. Gross margin,
or gross profit as a percentage of net sales, was 45.7% for the nine months
ended July 31, 2000 compared to 45.0% for the nine months ended July 31, 2001.
This decrease in gross margin was attributable to a decrease in the proportion
of sales to original equipment manufacturers compared to distributors and was
partially offset by a decrease in the ratio of sales from large orders which are
typically at lower gross margins. Net sales to distributors were 59.7% of net
sales for the nine months ended July 31, 2000 compared to 47.2% for the nine
months ended July 31, 2001.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased 23.9% from $9.3 million
for the nine months ended July 31, 2000 to $11.5 million for the nine months
ended July 31, 2001. Selling, general and administrative expenses as a
percentage of net sales were 22.6% for the nine months ended July 31, 2000
compared to 23.7% for the nine months ended July 31, 2001. This increase was
primarily a result of increased marketing efforts and the increase in bad debt
expense in the amount of $419,000 related to one of our distributors that filed
for liquidation under the bankruptcy laws in January 2001.
INCOME FROM OPERATIONS
Income from operations increased 8.7% from $9.5 million for the nine months
ended July 31, 2000 to $10.3 million for the nine months ended July 31, 2001.
This increase was due to the $3.0 million increase in gross profit, partially
offset by the $2.2 million increase in selling, general and administrative
expenses.
OTHER INCOME (EXPENSE), NET
Other income, net decreased from $1.5 million for the nine months ended July 31,
2000 to other expense, net of $10.0 million for the nine months ended July 31,
2001. This decrease was primarily due to losses on our trading securities. We
recorded gains on trading securities, net of $1.3 million for the nine months
ended July 31, 2000 compared to losses on trading securities, net of $9.8
million for the nine months ended July 31, 2001. In addition, for the nine
months ended July 31, 2001, we incurred interest expense of $282,000 on
short-term margin borrowings related to our trading securities. Please see our
discussion of trading securities in "Overview" above.
16
INCOME BEFORE INCOME TAX EXPENSE
Income before income tax expense decreased from $11.0 million for the nine
months ended July 31, 2000 to $336,000 for the nine months ended July 31, 2001.
This decrease was primarily due to the $9.8 million losses on trading
securities, net and the $2.2 million increase in selling, general and
administrative expenses, partially offset by increases in sales volume and gross
profit.
INCOME TAX EXPENSE
Income tax expense decreased 16.5% from $3.9 million for the nine months ended
July 31, 2000 to $3.2 million for the nine months ended July 31, 2001. Our
reported income tax expense for the nine months ended July 31, 2001 differed
from the expected income tax benefit, computed based on an expected effective
tax rate of 35.0%, due primarily to the establishment of a valuation allowance
for deferred tax assets in the amount of $3.4 million. As of July 31, 2001, we
have assessed the realizability of our deferred tax assets relating to the
capital loss carryforward and unrealized net loss from our trading securities
and have determined that it is more likely than not that these deferred tax
assets will not be realized. In order to fully realize these deferred tax
assets, we would need to generate future capital gains of approximately $9.0
million prior to the expiration of the capital loss carryforward in 2006. For
the nine months ended July 31, 2000, our effective tax rate was 35.2%.
NET INCOME (LOSS)
Net income decreased from $7.1 million for the nine months ended July 31, 2000
to a net loss of $2.9 million for the nine months ended July 31, 2001. This
decrease was due to the $10.7 million decrease in income before income tax
expense, partially offset by the $639,000 decrease in income tax expense.
LIQUIDITY AND CAPITAL RESOURCES
Our primary capital needs have been to fund working capital requirements and
capital expenditures. Our primary source of capital has been cash provided from
operations. Our bank lines of credit described below provide us with an
additional source of liquidity. There was no balance outstanding under the lines
of credit as of the end of fiscal year 2000. As of July 31, 2001, $841,000 was
outstanding under the line of credit.
Our cash and cash equivalents totaled $888,000 as of July 31, 2001, a decrease
of $571,000, compared to $1.5 million as of October 31, 2000. The cash and cash
equivalents decrease for the nine months ended July 31, 2001 was primarily due
to the purchase of property and equipment totaling $1.7 million and the
repurchase of common stock totaling $2.5 million related to our common stock
repurchase program, partially offset by net cash provided by operating
activities of $2.8 million and proceeds from notes payable of $841,000.
Our working capital was $25.8 million on July 31, 2001, compared to $32.0
million on October 31, 2000, a decrease of $6.2 million. The ratio of current
assets to current liabilities as of July 31, 2001, was 3.9 to 1, compared to 4.6
to 1 as of October 31, 2000. The change in working capital was primarily caused
by a decrease in trading securities of $12.2 million, partially offset by an
increase in trade accounts receivable, net of $1.5 million, an increase in
inventories of $6.4 million and a decrease in payable to investment broker of
$3.1 million. The increase in inventories resulted from the buildup of finished
goods inventory, an increase in fiber shipments by our suppliers and delayed
shipment of our products to customers due to a reduction in their capital
spending.
Net cash provided by operating activities was $2.8 million for the nine months
ended July 31, 2001 compared to net cash used in operating activities of $6.2
million for the nine months ended July 31, 2000. Net cash provided by operating
activities for the nine months ended July 31, 2001 was primarily provided by a
decrease in trading securities of $11.8 million and an increase in accounts
payable and accrued expenses of $2.6 million, partially offset by an increase in
trade accounts receivable of $2.0 million, an increase in inventories of $6.4
million and a decrease in amounts payable to investment broker of $3.1 million.
For the nine months ended July 31, 2000, net
17
cash used in operating activities was due to the purchase of $13.8 million in
trading securities, an increase in trade accounts receivable of $2.5 million,
and a decrease in accounts payable and accrued expenses of $892,000, partially
offset by cash provided by operating income, realized net gains on trading
securities of $2.1 million, a decrease in inventories of $1.6 million and an
increase in payable to investment broker of $669,000.
Net cash used in investing activities totaled $1.8 million and $1.0 million for
the nine months ended July 31, 2001 and 2000. Net cash used in investing
activities was mainly for expenditures related to facilities and equipment for
the nine months ended July 31, 2001 and 2000. In October 2000, we entered into
agreements to purchase certain machinery and equipment totaling approximately
$872,000. Total remaining commitments under the machinery and equipment purchase
agreements as of July 31, 2001 approximated $240,000. There are no other
material commitments for capital expenditures as of July 31, 2001.
Net cash used in financing activities was $1.5 million for the nine months ended
July 31, 2001, compared to net cash provided by financing activities of $964,000
for the nine months ended July 31, 2000. Net cash used in financing activities
for the nine months ended July 31, 2001 was primarily related to the repurchase
of shares of our common stock. Net cash provided by financing activities for the
nine months ended July 31, 2000 was primarily related to proceeds from the
exercise of employee stock options.
On September 27, 2000, the EEOC filed a lawsuit under Title VII of the Civil
Rights Act against us in the United States District Court for the Western
District of Virginia. The lawsuit alleges 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. We intend to vigorously
defend the EEOC's lawsuit on its merits. We may incur substantial costs in
defending ourselves against this claim, regardless of its merit or outcome. At
this early stage in the lawsuit, we cannot make a reasonable estimate of the
monetary amount of its resolution or estimate a range of reasonably possible
loss. If we are unsuccessful, we could be subject to damages that may be
substantial and could have a material adverse affect on our results of
operations or liquidity.
Commencing in October 1997, our Board of Directors authorized the repurchase of
up to $25 million of our common stock in the open market or in privately
negotiated transactions. Through July 31, 2001, we had repurchased 2.6 million
shares of our common stock for approximately $19.0 million. Subsequent to July
31, 2001 and through August 28, 2001, we have repurchased an additional 464,300
shares of our common stock for approximately $3.9 million. The repurchases have
been funded through cash flows from operations.
Under a loan agreement with our bank dated March 10, 1999, we have a $5.0
million secured revolving line of credit available for general corporate
purposes and a $10.0 million secured revolving line of credit available to fund
potential acquisitions, mergers and joint ventures. The lines of credit bear
interest at 1.5% above the monthly LIBOR rate (5.25% as of July 31, 2001) and
are equally and ratably secured by our accounts receivable, contract rights,
inventory, furniture and fixtures, machinery and equipment and general
intangibles. The lines of credit will expire on March 31, 2002, unless they are
further renewed or extended. As of July 31, 2001, we also had margin borrowings
outstanding of $2.5 million related to our trading securities in the Nasdaq 100
Trust. If there are further declines in the fair value of the Nasdaq 100 Trust,
we may be required to liquidate our position in the Nasdaq 100 Trust to meet
margin calls. We believe that our cash flow from operations, liquidation of
trading securities and available lines of credit will be adequate to fund our
operations for at least the next twelve months.
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board, also known as the FASB,
issued Statement of Financial Accounting Standards, referred to as SFAS No. 133,
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including 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
18
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 our financial position, results of operations or liquidity.
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. 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. The adoption of
SFAS No. 140 did not have any effect on our financial statements.
We also adopted Staff Accounting Bulletin, or SAB, No. 101, REVENUE RECOGNITION
IN FINANCIAL STATEMENTS, issued by the SEC staff. Given the nature of our
business, the adoption of SAB 101 did not have any effect on our financial
position, results of operations or liquidity.
In July 2001, the FASB issued SFAS No. 141, BUSINESS COMBINATIONS, and SFAS No.
142, GOODWILL AND OTHER INTANGIBLE ASSETS. SFAS No. 141 requires the use of the
purchase method of accounting for all business combinations. The use of the
pooling-of-interests method is prohibited for business combinations initiated
after June 30, 2001. SFAS No. 142 requires that goodwill and certain intangible
assets would no longer be amortized, but rather be tested for impairment
annually or whenever an event occurs indicating that the asset may be impaired.
SFAS No. 142 is effective for fiscal years beginning after December 15, 2001.
The adoption of SFAS No. 142 is not expected to have a material effect on our
financial position, results of operations or liquidity.
In August 2001, the FASB issued SFAS No. 143, ACCOUNTING FOR ASSET RETIREMENT
OBLIGATIONS, which addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. The standard applies to legal obligations associated
with the retirement of long-lived assets that result from the acquisition,
construction, development and (or) normal use of the asset.
SFAS No. 143 requires that the fair value of a liability for an asset retirement
obligation be recognized in the period in which it is incurred if a reasonable
estimate of fair value can be made. The fair value of the liability is added to
the carrying amount of the associated asset and this additional carrying amount
is depreciated over the life of the asset. The liability is accreted at the end
of each period through charges to operating expense. If the obligation is
settled for other than the carrying amount of the liability, an entity would
recognize a gain or loss on settlement.
SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. The
adoption of SFAS No. 143 is not expected to have a material effect on our
financial position, results of operations or liquidity.
As of August 28, 2001, there are no 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.
19
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not engage in transactions in derivative financial instruments or
derivative commodity instruments. As of July 31, 2001 and October 31, 2000, our
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 July 31, 2001 and October 31, 2000, our trading securities, which consist of
shares in the Nasdaq 100 Trust, are exposed to equity price risk. The Nasdaq 100
Trust is designed to track closely the price and yield performance of the Nasdaq
100 stock index. As of July 31, 2001 and October 31, 2000, our trading
securities, valued at approximately $5.8 million and $18.0 million, have
experienced a 15.7% and 2.7% decline in value since the date of purchase.
Subsequent to July 31, 2001 through August 28, 2001, the value of the Company's
trading securities held as of July 31, 2001 decreased by approximately 8.7%, or
approximately $506,000.
The price of these trading securities could continue to experience a further
adverse change in the near term. For illustration purposes, assuming a 30.0%
further adverse change in the market price of the Nasdaq 100 Trust subsequent to
July 31, 2001, our trading securities would decrease in value by an additional
$1.7 million, based on the value of our portfolio of approximately $5.8 million
as of July 31, 2001. This assumption is not necessarily indicative of future
performance and actual results may differ materially.
20
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On September 27, 2000, the Equal Employment Opportunity Commission filed a
lawsuit under Title VII of the Civil Rights Act against us in the United States
District Court for the Western District of Virginia. The lawsuit alleged 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.
We intend to vigorously defend the EEOC's lawsuit on its merits. We may incur
substantial costs in defending ourselves against this claim, regardless of its
merit or outcome.
At this early stage in the lawsuit, we cannot make a reasonable estimate of the
monetary amount of its resolution or estimate a range of reasonably possible
loss. If we are unsuccessful, we could be subject to damages that may be
substantial and that could have a material adverse effect on our results of
operations or liquidity.
In addition, four charges of discrimination were filed with the EEOC in May and
November of 2000, by three of our former employees and an applicant for
employment, alleging age and race related claims under the Age Discrimination in
Employment Act and Title VII of the Civil Rights Act of 1964. On each of these
matters, we filed with the EEOC a statement of our position denying the
allegations. The EEOC has dismissed three of these charges but has yet to issue
a determination on the fourth charge. No litigation has been filed against us in
connection with these charges.
ITEM 5. OTHER INFORMATION
We have increased the number of members of our Board of Directors from five to
seven. Our Board has appointed Thomas R. Brock and Neil Wilkin as the new
members. In addition, Mr. Wilkin has been hired to serve as our Senior Vice
President and Chief Financial Officer.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required by Item 601 of Regulation S-K for the nine
months ended July 31, 2001.
None.
(b) Reports on Form 8-K filed during the three months ended
July 31, 2001.
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OPTICAL CABLE CORPORATION
(Registrant)
Date: September 14, 2001 /s/Robert Kopstein
-------------------------------
Robert Kopstein
Chairman of the Board, President and
Chief Executive Officer
Date: September 14, 2001 /s/Neil D. Wilkin, Jr.
-------------------------------
Neil D. Wilkin, Jr.
Senior Vice President and Chief
Financial Officer
(principal financial officer)
Date: September 14, 2001 /s/Kenneth W. Harber
-------------------------------
Kenneth W. Harber
Vice President of Finance, Treasurer
and Secretary
(principal accounting officer)
22