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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, 2001 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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Common Stock, No Par Value OTC (Nasdaq 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. [ ]
As of December 31, 2001, the last practicable date available with respect to
affiliate holdings, 37,486,249 shares of voting common stock, with a market
value of $61,102,585 were held by non-affiliates of the registrant.
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 December 31, 2001
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COMMON STOCK, NO PAR VALUE 55,431,279 SHARES
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Optical Cable Corporation Proxy Statement for the 2002 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, 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 such differences include, but are not limited
to, the level of sales to key customers or distributors; 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; volume commitments made to certain of our suppliers; an
adverse outcome in litigation, claims and other actions, and potential
litigation, claims and other actions against us, including, but not limited to,
the shareholder litigation that has been filed and other claims related to
actions of our former Chairman, President and Chief Executive Officer; the
effect of sales of common stock by the various brokerage firms alleging that our
former Chairman, President and Chief Executive Officer pledged substantially all
of his personally-held unregistered shares of Optical Cable Corporation (the
"Company") to cover personal margin loans; technological changes and
introductions of new competing products; the current recession; terrorist
attacks or acts of war, particularly given the acts of terrorism against the
United States on September 11, 2001 and subsequent military responses by the
United States; ability to retain key personnel; 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
We are a leading manufacturer of a broad range of tight-buffered fiber optic
cables for the local area network and premise markets, often referred to as the
enterprise market. Our tight-buffered fiber optic cables are well-suited for use
in short to 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 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.
The Company was incorporated 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
Increased Demand for Bandwidth
The number of communications networks and the quantity of information
transmitted over them have increased in recent years due to the growth of data
intensive applications, such as Internet access and e-commerce, e-mail, video
conferencing, multimedia file transfers, and the movement of large blocks of
stored data across networks. Despite the recent slowdown in such growth, we
believe that demand for bandwidth will increase over the long term.
Network service providers have focused on improving the transmission capacity,
or bandwidth, and performance of their networks to keep pace with the increase
in traffic. At the same time, the bandwidth of enterprise
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networks continues to increase with innovations in networking equipment. These
improvements have resulted in additional bandwidth intensive applications,
further increasing the demand for bandwidth. We believe that these ongoing
improvements will continue to generate growth in data, video and voice
communications over networks.
Deployment of Optical Networks
To meet the demand for more bandwidth and better network performance, optical
networks are being deployed because they provide substantially higher data
transmission rates, significantly increased bandwidth and improved reliability.
Compared to copper wire, optical fiber has thousands of times the information
carrying capacity, occupies much less space and operates more reliably over
greater distances. Optical fiber is immune to the electromagnetic interference
that causes static in copper wire transmission, as well as to electrical surges.
Optical fiber is also a safer choice in environments where flammability is an
issue because it does not carry electricity. In addition, communications over
optical fiber networks are more secure than communications over copper wire
networks because tapping into fiber optic cable without detection is difficult.
Optical networks are comprised of a variety of networking equipment and
components required to transmit, process, change, amplify and receive light that
carries data, video and voice communications over fiber optic cables from one
location to another. Optical networks were originally deployed to serve the
needs of large network service providers to carry communications traffic over
long distances between cities and across continents. Improvements in performance
and reductions in the cost of optical networking equipment have made it
economically feasible to deploy optical networks in short to moderate distance
applications such as enterprise networks. To bring the bandwidth and performance
of optical networks to metropolitan markets and end-users, short to moderate
distance fiber optic cabling infrastructure must be deployed in cities and
enterprises and connected to the long-haul fiber optic infrastructure.
Optical fiber is deployed in four primary types of communications networks:
long-haul, enterprise, metropolitan and access.
Long-haul Networks. Long-haul networks are long distance, inter-continental
and inter-city communications systems that typically employ high fiber count
fiber optic cables and advanced, expensive fiber optic networking equipment
for the purpose of transmitting large quantities of data, video and voice
communications over long distances. Until recently, this segment has
historically experienced strong growth as network providers have sought to
improve network infrastructure and support the increased demand for new
services and greater traffic volumes. To date, the telecommunications
industry has mainly focused on the build-out of the long-haul fiber optic
infrastructure. This build-out has slowed substantially recently.
Enterprise Networks. Enterprise networks, often referred to as local area
networks or LANs, are communications systems used to transport data, video
and voice communications within organizations such as businesses, government
agencies and educational institutions. Enterprise networks connect computer
users within an organization and allow users to share computer resources. As
demand for bandwidth has increased, enterprise networks have increasingly
utilized fiber optic technology. Optical fiber was first deployed in the
major data routes or backbones of enterprise networks and is increasingly
deployed to the end-user's desktop for high performance applications.
Metropolitan Networks. Metropolitan networks are communications systems used
to transport data, video and voice communications between major distribution
points in metropolitan areas. These networks connect long-haul networks to
access networks. They are generally rings of optical fiber that circle
metropolitan areas, with branches of optical fiber that transmit information
from the ring to co-location centers, data centers or other major
distribution points located throughout the metropolitan area. These major
distribution points are connected to access networks which in turn connect
end-users to a communications network. Service providers, including
telephone companies and cable television operators, continue to invest in
the metropolitan fiber optic infrastructure to reduce capacity constraints
resulting from the increase in data, video and voice
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communications and demand for enhanced services.
Access Networks. Access networks are communications systems that connect
metropolitan networks to end-users such as businesses, residences and
governmental agencies. Historically, access networks have been built using
copper wire systems due to significant cost advantages over competing
technologies, including fiber optic networks. However, copper wire systems
are becoming increasingly insufficient to meet end-users' demand for new
services that require high bandwidth and fast transmission speeds.
Therefore, fiber optic technology is being increasingly deployed in access
networks. This has only recently become economically feasible due to
technological improvements in information transmission technologies and
significant cost reductions in optical networking equipment and components.
We believe that additional technological improvements and equipment cost
reductions will accelerate the deployment of optical fiber to the end-user.
Historically, the vast majority of optical fiber has been installed in long-haul
networks with the long-haul capacity exceeding current demand. Subject to the
recent economic slowdown and funds for expansion being available, we believe
that over the long term optical fiber installations in metropolitan, access and
enterprise networks will experience growth as a result of several factors. Among
those factors are the increasing demand for bandwidth by commercial and
residential end-users, improvements in information transmission technologies and
significant cost reductions in optical networking equipment and components. We
believe these technological improvements and cost reductions will require the
build-out of optical networks in the metropolitan, access and enterprise
markets.
Fiber Optic Cables
Optical fiber must be processed into fiber optic cables before it can be
installed in a fiber optic network. Fiber optic cables serve several purposes.
Fiber optic cable aggregates multiple strands of optical fiber into a single,
easy to handle package and protects the optical fiber from damage during
installation and from damage that can be caused by a wide variety of
environmental factors after installation. A typical fiber optic cable begins
with one or more optical fibers that are each coated with a very thin layer of
plastic material called a buffer. Groups of buffered optical fiber are further
protected by secondary buffers or grouped into plastic tubes that are stranded
together with aramid yarns, such as Kevlar(TM), which protect the optical fibers
from damage that can occur when the fiber optic cable is pulled and stretched
during installation. This combination of elements is then covered with one or
more layers of plastic or steel that serves as a protective outer jacket, to
make a fiber optic cable.
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Fiber optic cable designs can be grouped into three primary categories: loose
tube, indoor tight-buffered, and indoor/outdoor tight-buffered.
Loose Tube Fiber Optic Cable. A typical loose tube fiber optic cable
consists of optical fibers that have a thin primary buffer coating and are
grouped into one or more thin, rigid tubes that are flooded with gel to
provide moisture protection to the optical fiber. The tubes are stranded
around a strength element, such as a central strand of fiberglass or steel.
This combination of elements is again flooded with gel and covered with one
or more layers of plastic or steel that serves as a protective outer jacket,
resulting in a loose tube fiber optic cable. A single loose tube fiber optic
cable often contains many optical fibers, with groups of optical fibers
contained in the individual tubes within the fiber optic cable. This type of
fiber optic cable is relatively stiff and is primarily used for long,
relatively straight outdoor runs, such as in long-haul networks and in parts
of metropolitan networks. One major drawback to the typical design of loose
tube fiber optic cable is that it is difficult to terminate. Termination is
the point where the optical fiber is either connected to another optical
fiber or to communications equipment. Termination of a loose tube fiber
optic cable requires extensive cleaning of the gel filling and preparation
of the fiber ends. This is a messy, time consuming and expensive process,
which translates into higher installation costs. As a result, we believe
loose tube fiber optic cables are generally less suitable for shorter
distance applications and for applications that have a large number of
termination points. Also, under various environmental conditions, loose tube
fiber optic cables may experience problems with water penetration and
chemical interaction of the gel with fiber buffers that can cause the
optical fiber to become weak and brittle over time. Furthermore, most loose
tube fiber optic cables are not suited for indoor use because they are
flammable.
Tight-Buffered (Indoor) Fiber Optic Cable. Tight-buffered fiber optic cable
consists of optical fibers that have a primary buffer coating and an
additional, heavier secondary tight buffer coating that is placed on each
individual optical fiber for added protection. This combined buffer coating
is typically three times thicker than the buffer used in loose tube fiber
optic cables, providing much greater mechanical and environmental protection
for each individual optical fiber. To form the fiber optic cable, groups of
buffered optical fibers are combined with aramid yarn and sometimes other
strength elements and covered with an outer protective jacket. Since these
fiber optic cables are designed for indoor use, there is no need for gel or
other fillings to protect against moisture. Tight-buffered fiber optic cable
addresses many of the shortfalls presented by loose tube cable. It is
significantly easier and faster to terminate because, without the messy gel,
it requires no cleaning and little preparation. However, due to the amount
of buffer material used in tight-buffered fiber optic cable, it can be too
unwieldy and costly for long-haul, high fiber count applications.
Furthermore, standard indoor tight-buffered fiber optic cable is not
designed to withstand the additional environmental challenges presented by
outdoor use.
Tight-Buffered (Indoor/Outdoor) Fiber Optic Cable. In many fiber optic cable
installations, loose tube fiber optic cables are terminated at building
entrances and spliced to standard indoor tight-buffered fiber optic cable,
which is run indoors. We believe this installation method is not optimal due
to the considerable time and expense associated with these multiple
terminations and the potential for ongoing fiber failures and optical signal
loss at the termination points. The introduction of indoor/outdoor tight-
buffered fiber optic cable alleviated these issues. Indoor/outdoor tight-
buffered fiber optic cable enjoys all of the benefits of standard tight-
buffered fiber optic cable, but its design, fabrication techniques and
materials enable it to survive the range of conditions presented by outdoor
installations. These same characteristics can make indoor/outdoor tight-
buffered cable more rugged and survivable even in indoor only installations
where, for example, there can be long pulling distances through conduits
with a variety of bends and corners. Additional outdoor environmental
challenges might include exposure to moisture, ultra-violet radiation and a
variety of microorganisms, animals and insects.
Indoor/outdoor tight-buffered fiber optic cable can be run directly into
buildings without the need for costly and time-consuming transitions from
loose tube fiber optic cable at building entrances. As a result, we believe
indoor/outdoor tight-buffered fiber optic cable is ideal for use in short
and moderate distance applications in metropolitan, access and enterprise
networks which require a strong, flexible cable and have numerous
termination points and subject to the recent economic slowdown and funds
being available for expansion, such as in installations at universities,
corporate campuses, industrial and office complexes, and in a variety of
other applications where multiple buildings are interconnected. Due to the
significant advantages in moderate distance applications with numerous
termination points and subject to the recent economic slowdown and funds
being available for expansion, we believe that the market for indoor/outdoor
tight-buffered fiber optic cable is poised for growth as fiber optic
technology is increasingly deployed in metropolitan and access networks.
Additionally, indoor/outdoor tight-buffered fiber optic cable is also well
suited and more survivable in enterprise installations.
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OUR SOLUTION
Focus on Indoor/Outdoor Tight-buffered Cable
We manufacture and market a broad range of indoor/outdoor tight-buffered
fiber optic cables for use in a variety of short to moderate distance
applications which are designed to be rugged and more survivable.
Fiber optic cables used for short to 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. We recognized that, for many applications, the stresses on the
cables during installation are similar to those in the military tactical
environment, for which our technology was initially developed. We applied
this technology to commercial products serving a market that could not be
adequately served by loose-tube gel-filled cable or indoors only tight-
buffered fiber optic cable.
We believe our indoor/outdoor tight-buffered fiber optic cables provide
significant advantages to distributors, installers, systems integrators and
most importantly, end-users. We believe installers and systems integrators
find that the multipurpose feature of our fiber optic cables can
significantly reduce installation costs by eliminating the need to
transition from outdoor fiber optic cable to indoor fiber optic cable at a
building entrance. Our products also enhance network reliability by
eliminating splices and reducing potential stress on optical fibers that
could lead to breakage. We believe the simplified installation, lower cost
and enhanced reliability of our products are valued by the end-user because
a long lasting, trouble-free fiber optic cable minimizes down time and
maximizes system availability.
Technological Advantages
As a result of our experience developing tight-buffered fiber optic cables,
in particular to meet the stringent requirements for military applications,
we believe we have a unique technology base that provides significant
advantages in addressing the tight-buffered fiber optic cable market. We
have developed considerable expertise in fiber optic cable design,
manufacturing and production processes that enable us to produce high
performance fiber optic cables cost effectively. Our indoor/outdoor tight-
buffered fiber optic cables are designed to provide superior protection
against exposure to the elements.
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Automated Manufacturing Capabilities
We have designed and developed proprietary manufacturing software and
hardware that provides us with automated and technically precise
manufacturing capabilities. The automation of our manufacturing process has
provided us with a number of important benefits. The most important benefit
is that it allows us to produce high-quality fiber optic cable at a low
cost. Another important benefit is that we are able to respond to customer
requests for additional or unique products. Finally, many of our important
technological advances result from our ability to modify and refine our
production process.
Customer Focus
We focus on supporting our customers to enhance their business, and we work
closely with our customers to identify and define their unique requirements.
Sometimes this requires us to create custom fiber optic cables for a variety
of special applications and environments. We have established close
relationships with our customers. We believe these close relationships allow
us to better understand our customers' specific needs, gives our customers
an opportunity to understand how our products can uniquely satisfy their
needs, and allow us to deliver more responsive solutions and support. By
becoming involved early in our customers' network design process, we hope to
have the opportunity to have our products specified as the fiber optic
cables for the customer's network.
Broad Product Offering
We manufacture a broad, state-of-the-art line of tight-buffered fiber optic
cables. We produce what we believe to be the industry's widest array of
indoor/outdoor tight-buffered fiber optic cables with features and
performance characteristics to address the needs of the metropolitan, access
and enterprise markets. Our fiber optic cables range from small single fiber
cables for patch cords to large high fiber count fiber optic cables for
major network trunks and from fiber optic cables used in computer facilities
to those used in underground installations. We also offer aerial self-
supporting fiber optic cables for easy installation on pole lines, military
tactical fiber optic cables, and specialty fiber optic cables for special
markets. This wide range of products makes us attractive as a one-stop
source for customers with unique as well as standard fiber optic cable
requirements.
Our Strategy
Our objective is to be the leading manufacturer and supplier of
indoor/outdoor tight-buffered fiber optic cables for metropolitan, access
and enterprise networks. We intend to expand our business by providing fiber
optic cables that are versatile, reliable, cost effective and responsive to
evolving market requirements.
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PRODUCTS
We manufacture and market a broad array of fiber optic cables that provide
high bandwidth transmission of data, video and voice communications over
short to moderate distances. Our product line is diverse and versatile, in
keeping with evolving application needs of customers within our markets. Our
tight-buffered fiber optic cables address the needs of the metropolitan,
access and enterprise networks.
The following summarizes the various types of fiber optic cables we produce and
their attributes:
A-Series Assembly Fiber Optic Cables. Our A-Series fiber optic cables
contain one or two optical fiber units. A-Series fiber optic cables contain
tight-buffered optical fibers which are surrounded by a layer of Kevlar(TM)
or other aramid yarn strength members to prevent the optical fiber from
being stretched if there is tension on the fiber optic cable. A flexible and
resilient thermoplastic outer jacket is then applied to further strengthen
and protect the
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optical fiber. These fiber optic cables are used for jumpers, which are
short length patch cords, and for pigtails, which are short lengths of fiber
optic 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 fiber optic cables are often privately
labeled and sold to original equipment manufacturers that produce the fiber
optic cable assemblies.
B-Series Breakout Fiber Optic Cables. Our B-Series fiber optic cables
consist of a number of subcables, each consisting of a single optical fiber,
Kevlar(TM) or other aramid yarn strength members and a subcable jacket.
These subcables are tightbound in a pressure extruded, high performance
Core-Locked(TM) PVC outer jacket to form the finished multifiber fiber optic
cables. Like the A-Series fiber optic cables, the subcables are intended to
be terminated directly with connectors. This direct termination feature
makes this fiber optic cable type particularly well suited for shorter
distance installations, where there are many terminations and termination
costs are more significant. The materials and construction of the fiber
optic cable permit its use both indoors and outdoors. These features make
the fiber optic cables cost effective for use in campus and industrial
complex installations and between and within buildings since there is no
need to splice outdoor fiber optic cables to indoor fiber optic cables at
the building entrance.
D-Series Distribution Fiber Optic Cables. Our D-Series fiber optic cables
are made with the same tight-buffered optical fiber as the B-Series fiber
optic cables and with a high performance PVC outer jacket. Our D-Series
fiber optic cables are also available with a Core-Locked jacket. Unlike the
B-Series fiber optic cables, however, each tight-buffered optical fiber in a
D-Series fiber optic cable is not covered with a separate subcable jacket.
D-Series fiber optic cables are intended for longer distance applications,
where termination considerations are less important and often traded off for
size, weight and cost. The tight-buffered optical fiber and high performance
PVC outer jacket make D-Series fiber optic cables rugged and survivable,
with a small, lightweight configuration. They can also be armored for
additional protection for use in buried and overhead installations. The high
strength to weight ratio of these fiber optic cables makes them well suited
for installations where long lengths of fiber optic cables must be pulled
through duct systems. D-Series fiber optic cables are used in relatively
longer length segments of installations, such as trunking, LAN and
distribution applications, optical fiber in the loop, optical fiber to the
curb and drop cables.
G-Series Subgrouping Fiber Optic Cables. Our G-Series fiber optic cables
combine a number of multifiber subcables, each similar to a D-Series fiber
optic 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-
Locked(TM) PVC outer jacket to form the finished fiber optic cable. This
design permits the construction of very high fiber count fiber optic cables.
These fiber optic cables may be used where groups of optical fibers are
routed to different locations. We have developed a subgroup fiber optic
cable containing over 1,000 optical fibers intended for high density,
moderate length routes such as urban telephone distribution systems.
Other Fiber Optic Cable Types. We produce many variations on the basic fiber
optic cable styles discussed above for more specialized installations. For
outdoor applications, we can armor both the B-Series and D-Series fiber
optic cables with corrugated steel tape for further protection in
underground or overhead installations. For overhead installations on utility
poles, we offer several self-supporting versions of the D-Series fiber optic
cables, with higher performance outer jackets. Our fiber optic 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 fiber optic
cables are available for use in enclosed spaces where there is concern over
release of toxic gases during fire. We offer composite fiber optic cables
combining optical fiber and copper wires to facilitate the transition from
copper wire to optical fiber-based systems without further installation of
fiber optic cables. We also offer specialty fiber optic cables, including
military tactical and mining fiber optic cables.
CUSTOMERS
We have a global customer base, including distributors, original equipment
manufacturers, system integrators, electrical contractors, value added resellers
and end-users. The following is a list of representative types of end-users of
our fiber optic cables:
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o Cable Television System Operators. Cable television system operators
continue to upgrade their networks to add optical fiber to their networks.
Similar to other build-outs in the access network, we are supplying lower fiber
count, moderate distance fiber optic cables to these applications.
o Educational Institutions. Colleges, universities, high schools and grade
schools are continually upgrading and improving their networks, with existing
LANs being expanded and upgraded for higher data transmission speeds, optical
fiber to the dorm and other applications. These systems link personal computers
with central file servers. As interactive learning systems require increased
transmission speeds, optical fiber becomes a logical medium.
o Financial Institutions, Insurance Companies and Other Large Businesses.
Banks, stock trading companies, insurance companies, and other large businesses
often need to distribute time critical data among a large number of
workstations. Businesses are increasingly using fiber optic backbones to cable
their enterprise networks to meet these needs.
o Government Agencies. Government agencies tend to have large buildings or
complexes, many people, and the need to access and process large quantities of
data. Like commercial institutions, these routinely include high performance
LANs with fiber optic segments in the backbone. Security may also be desired,
and therefore, optical fiber to the desk or workstation may be implemented.
o Industrial and Manufacturing Facilities. Industrial and manufacturing
facilities typically have a more severe environment than other types of
businesses with heavy electrical equipment. Fiber optic cable in this
environment offers: immunity to electrical noise, ruggedness, high information
carrying capacity and greater distance capability. Our products are installed in
automotive assembly plants, steel plants, chemical and drug facilities,
petrochemical facilities and petroleum refineries, mines and other similar
environments.
o Original Equipment Manufacturers. Original equipment manufacturers
typically manufacture fiber optic cable assemblies, which are short lengths of
fiber optic cable pre-terminated with connectors. Supporting virtually all
segments of the market, these manufacturers consume large quantities of fiber
optic cables, which are often privately labeled.
o Military. Our core technologies enable us to develop and efficiently
produce fiber optic cables for military tactical applications that survive
extreme mechanical and environmental conditions.
o Telephone Companies. We have worked with several regional bell operating
companies and competitive local exchange carriers to help them meet their
business customers' requirements. As high bandwidth services of the information
highway are brought closer to more homes and businesses, the bandwidth provided
by optical fiber becomes more important, and our tight buffer, rugged designs
become the most appropriate fiber optic cable for applications.
o Internet Infrastructure Companies. Fiber optic cables are favored in many
Internet infrastructure applications, including storage area networks and riser
management systems that feed data to multiple clients in a facility by means of
a fiber optic network. Distribution of high bandwidth to support growing
clusters of DSL users and high speed fiber optic cable modems require fiber
optic cables.
Our extensive technology base and versatile manufacturing processes enable us
to respond quickly to diverse customer needs.
SALES AND MARKETING
We use a combination of employee sales staff, dedicated sales representatives,
multi-line sales representatives and distributors to serve and attract customers
both domestically and in over 65 countries. We believe
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it is important to maintain customer diversity in order to avoid dependence
on any particular segment of the economy or area of the world. Our
international net sales in fiscal years 2001, 2000 and 1999 were, $14.1
million, $12.3 million and $10.0 million, respectively, or 23.3%, 21.2% and
19.7% of our net sales. International sales are made primarily through
foreign distributors, system integrators and value-added resellers.
The decision to purchase our products may be made by end-users, distributors,
electrical contractors, system integrators, or specialized installers and
influenced by architects, engineers and consultants. We strive to reach and
influence decision-makers by advertising in fiber optic trade journals and
other communications magazines. We also participate in numerous domestic and
international trade shows attended by customers and prospective customers.
Selling sophisticated and technologically advanced products requires on-going
interaction with customers and a focused effort by the sales and marketing
group during the product selection process. Our field sales force consists of
employees and dedicated and multi-line sales representatives located in
various geographic areas. For more in-depth technical support, the sales
group has access to engineering and quality control with extensive fiber
optic cable expertise and industry experience.
MANUFACTURING AND SUPPLIERS
We have developed considerable expertise in fiber optic cable design,
manufacturing and production processes that enable us to produce high
performance fiber optic cables cost effectively. Our proprietary manufacturing
software and hardware provides us with automated and technically precise
manufacturing capabilities which enable us to rapidly respond to customer
requests for additional or unique products. Many of our important technological
advances result from our ability to closely monitor, modify and refine our
production process.
Our manufacturing operations consist of applying a variety of raw plastic
materials to optical fibers. The key raw material in the manufacture of our
products is optical fiber, which we primarily purchase from four manufacturers
with other sources available. We work closely with our vendors to ensure a
continuous supply. We have two sources for aramid yarns and several suppliers of
plastic coating materials.
An important factor in our success is our ability to deliver product on time.
Therefore, we work to obtain adequate supplies of raw materials in a timely
manner from existing or, when necessary, alternate sources. Any disruption in
the supply of raw materials could adversely affect our fiber optic cable
production capability and our operating results. Some of our suppliers of
optical fiber are also our competitors. We believe that we carry a sufficient
supply of raw materials and finished goods inventory to deal with short-term
disruptions in supply of raw materials and to meet customer orders promptly.
Our quality control procedures have been instrumental in achieving high
performance and reliability in our products. Since January 1994, our 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 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. We
must continue to comply with these standards to maintain our certification.
COMPETITION
The market for fiber optic cable is highly competitive. There are approximately
five leading producers of fiber optic cables in the United States. In general,
these companies primarily supply loose tube fiber optic cables, but they also
produce large volumes of
12
tight-buffered fiber optic cables. Corning Cabling Systems and OFS Brightwave
(formerly Lucent Technologies) are the dominant producers of fiber optic cables
for the long-haul market and are principal suppliers of optical fiber worldwide.
In the market for tight-buffered fiber optic cables supplying the short to
moderate distance market, we compete with Corning Cabling Systems and OFS
Brightwave, as well as other domestic and international companies such as
Alcatel, Draka, General Cable, Pirelli Mohawk/CDT and CommScope.
We also compete with producers of copper wire cable on the basis of cost and
performance tradeoffs. The cost of the electro-optical interfaces required for
the fiber optic networks and higher speed electronics generally associated with
high performance fiber optic networks can make them less desirable for use in
applications where the advantages of fiber optic cables are not required. We
also compete with producers of other alternative transmission media, including
wireless and satellite communications. As fiber optic components continue to
improve in performance while costs decrease, fiber optic networks become a more
cost effective solution, especially with the increasing demand for higher
transmission speeds or bandwidth.
We believe that we compete successfully against our competitors on the basis of:
o breadth of product features;
o quality;
o ability to meet delivery schedules;
o technical support and service; and
o total cost of installation and ownership.
Maintaining these competitive advantages requires continued investment in
product development and sales and marketing. There can be no assurance that we
will have sufficient resources to make these investments or that we will be able
to make the technological advances necessary to maintain our competitive
position. An increase in competition could have a material adverse effect on our
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.
Many of our competitors have substantially greater financial, marketing,
technical, human and other resources than us, and greater brand recognition and
market share which may give them competitive advantages, including the ability
to negotiate lower prices on raw materials than those available to us. We cannot
assure you that we will be able to compete successfully with existing or future
competitors or that competitive pressures will not seriously harm our business,
operating results and financial condition.
INTELLECTUAL PROPERTY
Our current manufacturing processes and products are not protected by patents.
We rely on a combination of trade secret and technical measures to establish and
protect our production technology rights. This protection may not deter
misappropriation or stop competitors from developing production techniques or
equipment with features identical, similar, or even superior to us.
We consider our proprietary knowledge of the development and manufacture of
fiber optic cables to be a valuable asset. This expertise enables us to
formulate new fiber optic 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. We restrict access to our manufacturing facility and engineering
documentation to maintain security.
We believe that none of our products, trademarks or other proprietary rights
infringes upon the proprietary rights of others. There can be no assurance,
13
however, that third parties will not assert infringement claims against us in
the future with respect to our present or future products, which may require us
to enter into license agreements or result in protracted and costly litigation,
regardless of the merits of these claims.
EMPLOYEES
As of October 31, 2001, we employed a total of 201 persons on a full-time basis,
including 40 in sales, marketing and customer service, 25 in engineering,
product development and quality control, 113 in manufacturing, and 23 in finance
and administration. None of our employees is represented by a labor union. We
have experienced no work stoppages and believe our employee relations are good.
Item 2. Properties
- ------------------
Our principal administration, marketing, manufacturing, and product development
facilities are located in a 148,000 square foot building adjacent to the
Roanoke, Virginia airport and major trucking company facilities. We also lease a
385 square foot sales office in Fort Wayne, Indiana. We believe that we are
currently operating at approximately 60% of our production capacity.
14
Item 3. Legal Proceedings.
- ---------------------------
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 sought injunctive and other relief and damages in an
unspecified amount. On December 13, 2001, the parties reached an
agreement as to the amount of a settlement (subject to final
documentation and judicial review and approval), that affords both
individual and class relief, without any admission of liability.
Pursuant to this agreement, the Company will pay $500,000 upon entry
of a consent decree by the court, $175,000 on the first anniversary
and $175,000 on the second anniversary of the consent decree, to
satisfy any gender and race class claims, $75,000 to one individual
specifically named in the complaint, and at least $75,000 for the
Company's planned diversity, recruitment and human resource
management programs over the term of the consent decree.
The Company, Mr. Robert Kopstein, our former Chairman, President and
Chief Executive Officer, and various John Does (officers and/or
directors of the Company during the class period) were named as
defendants in three class action lawsuits filed in the United States
District Court for the Western District of Virginia (the "Suits").
The first class action lawsuit was filed on November 26, 2001, by
Charles S. Farrell, Jr., on behalf of himself and others similarly
situated. The second class action lawsuit was filed on December 14,
2001, by Lerner Group, on behalf of itself and others similarly
situated. The third class action lawsuit was filed on December 27,
2001, by Richard Simone, on behalf of himself and others similarly
situated. In each of the substantially similar suits, the plaintiffs
purport to represent purchasers of the Company's common stock during
the period ranging from July 31, 2000, through October 8, 2001, (the
"class period") and allege that the Company violated federal
securities laws and made fraudulent and/or negligent
misrepresentations and/or omissions. The plaintiffs in each of the
Suits seek compensatory and exemplary damages in an unspecified
amount, as well as reasonable costs and expenses incurred in the
cause of action, including attorneys' fees and expert fees.
Management intends to vigorously defend the Suits. The Company may,
however, incur substantial costs in defending itself against the
Suits, regardless of their merit or outcome.
The Company was named as a defendant in two lawsuits filed in the
United States District Court for the Southern District of New York
seeking to compel the Company to authorize the transfer agent to
transfer unregistered, restricted stock on the Company's stock
ledger. The first suit was filed on October 22, 2001 by Bear, Stearns
& Co. Inc. and Bear, Stearns Securities Corporation, (collectively,
"Bear Stearns"). The second suit was filed on October 26, 2001 by UBS
PaineWebber Inc. ("PaineWebber"). In each case the plaintiffs sought
injunctive relief with respect to transfers of shares of
unregistered, restricted common stock of the Company sold in the
course of liquidating brokerage accounts or repossessed shares of the
former Chairman, President and Chief Executive Officer to cover
personal margin loans to him. Each of the lawsuits contains a claim
for damages caused by the alleged wrongful refusal by the Company to
authorize the transfers in connection with the liquidations. On
October 31, 2001, the Court in the Bear Stearns case entered an order
directing the Company to authorize the stock transfers in connection
with such transfers. In early November, the Company reached agreement
with UBS PaineWebber pursuant to which the Company would authorize
stock transfers in connection with the liquidation of unregistered,
restricted stock of the Company held by PaineWebber upon the
foreclosure of a brokerage account of the former officer. Neither of
the cases has been dismissed; however, the Company believes that they
will be resolved without any material liability on the part of the
Company.
15
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, 2001.
16
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
- -------------------------------------------------------------------------------
Our Common Stock is traded on the Nasdaq National Market under the
symbol "OCCF." As of October 31, 2001, there were approximately 7,841
shareholders of record. On January 25, 2002, our Common Stock
closed at a price of $1.26 per share.
The following table sets forth for the fiscal periods indicated the
high and low bid prices of our 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, 2001
HIGH LOW
---- ---
First Quarter (November 1, 2000 to January 31, 2001) $17.94 $8.50
Second Quarter (February 1 to April 30, 2001) $14.25 $9.06
Third Quarter (May 1 to July 31, 2001) $14.05 $7.10
Fourth Quarter (August 1 to October 31, 2001) $9.35 $1.06
RANGE OF BID PRICES
-------------------
FISCAL YEAR ENDED OCTOBER 31, 2000
HIGH LOW
---- ---
First Quarter (November 1, 1999 to January 31, 2000) $32.15 $7.08
Second Quarter (February 1 to April 30, 2000) $44.92 $12.92
Third Quarter (May 1 to July 31, 2000) $25.67 $12.50
Fourth Quarter (August 1 to October 31, 2000) $24.88 $11.14
We have not paid or declared any cash dividends on our common stock
since our initial public offering in April 1996 and do not expect to do
so in the foreseeable future. We currently intend to retain future
earnings, if any, to finance the expansion of our business.
We did declare a rights dividend in connection with the adoption of our
shareholders' rights plan on November 2, 2001. See Note 12 to the
financial statements for additional details.
17
Item 6. Selected Financial Data.
- ---------------------------------
OPTICAL CABLE CORPORATION
Selected Financial Information
(in thousands, except per share data and footnotes)
Years Ended October 31,
-------------------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- --------- --------
Statement of Operations Information:
Net sales $ 60,405 $ 58,219 $ 50,699 $ 50,589 $ 52,189
Cost of goods sold 35,983 30,878 27,547 29,330 30,613
-------- -------- -------- --------- --------
Gross profit 24,422 27,341 23,152 21,259 21,576
Selling, general and administrative
expenses 17,131 15,024 10,799 9,939 9,572
-------- -------- -------- --------- --------
Income from operations 7,291 12,317 12,353 11,320 12,004
Other income (expense):
Gains (losses) on trading
securities, net (1) (11,414) 289 -- -- --
Interest income (expense), net (318) 173 202 55 (3)
Other, net 9 (45) (36) 2 (44)
-------- -------- -------- --------- --------
Income (loss) before income
tax expense (4,432) 12,734 12,519 11,377 11,957
Income tax expense (2) 2,297 4,479 4,214 4,107 4,150
-------- -------- -------- --------- --------
Net income (loss) $ (6,729) $ 8,255 $ 8,305 $ 7,270 $ 7,807
======== ======== ======== ========= ========
Net income (loss) per share:
Basic $ (0.12) $ 0.15 $ 0.15 $ 0.13 $ 0.14
======== ======== ======== ========= ========
Diluted $ (0.12) $ 0.15 $ 0.15 $ 0.13 $ 0.13
======== ======== ======== ========= ========
Weighted average shares:
Basic 56,156 56,307 56,504 57,431 58,013
======== ======== ======== ========= ========
Diluted 56,346 56,758 56,865 57,863 58,526
======== ======== ======== ========= ========
Balance Sheet Information:
Cash and cash equivalents $ 2,088 $ 1,459 $ 6,817 $ 1,122 $ 986
Trading securities -- 17,983 -- -- --
Working capital 14,205 31,986 21,980 18,991 19,912
Total assets 42,798 52,688 37,512 32,829 35,214
Short-term borrowings 8,271 5,659 -- -- --
Total stockholders' equity 27,865 43,508 32,847 29,991 31,379
_________________
(1) In January 2000, 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. Our active trading in the
Nasdaq 100 Trust continued through May 14, 2001, the date of the last
purchase of these shares. On October 3, 2001, as part of a policy to
invest future excess funds only in short-term interest-bearing
investments, we sold all of our remaining investment in the Nasdaq 100
Trust and paid off the outstanding margin borrowings. For accounting
purposes, we categorized our investment in the Nasdaq 100 Trust as trading
securities, and we recorded the investment on our balance sheet at fair
value, which was based on quoted market prices. Realized and unrealized
net gains or losses were included in other income (expense), net.
(2) The effect of establishing a valuation allowance against our deferred tax
assets relating to the capital loss carryforward generated by the sale of
our trading securities during fiscal year 2001 resulted in an increase in
income tax expense of approximately $4.1 million for fiscal year 2001. See
note 9 of the notes to the financial statements for further information on
income taxes.
18
Item 7. Management's Discussion and Analysis of Financial Condition and Result
- -------------------------------------------------------------------------------
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, 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 such differences
include, but are not limited to, the level of sales to key customers or
distributors; 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; volume
commitments made to certain of our suppliers; an adverse outcome in litigation,
claims and other actions, and potential litigation, claims and other actions
against us, including, but not limited to, the shareholder litigation that has
been filed and other claims related to actions of our former Chairman, President
and Chief Executive Officer; the effect of sales of common stock by the various
brokerage firms alleging that our former Chairman, President and Chief Executive
Officer pledged substantially all of his personally-held unregistered shares of
the Company to cover personal margin loans; technological changes and
introductions of new competing products; the current recession; terrorist
attacks or acts of war, particularly given the acts of terrorism against the
United States on September 11, 2001 and subsequent military responses by the
United States; ability to retain key personnel; 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.
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 tight-buffered fiber optic
cables primarily for the local area network and premise markets, often referred
to as the enterprise market. Our tight-buffered fiber optic cables are well-
suited for use in short to 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 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. In fiscal years 2001, 2000 and 1999, 49.6%, 58.0% and 63.2% of
our net sales were from sales to our distributors. International net sales were
23.3%, 21.2% and 19.7% in fiscal years 2001, 2000 and 1999. Substantially all
of our international sales are denominated in U.S. dollars.
19
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 and the customer takes ownership and assumes risk of loss, based on
shipping terms. In fiscal year 2001, 13.6% of our net sales were attributable to
one major domestic distributor. In fiscal years 2000 and 1999, this same
distributor accounted for 12.5% and 15.8% of our net sales, respectively.
Subsequent to October 31, 2001, this distributor advised us that it will no
longer stock our products as part of its regular product offering. In fiscal
years 2000 and 1999, 15.5% and 14.8% of our net sales were attributable to a
second major distributor. This second distributor filed for protection from its
creditors under bankruptcy laws in January 2001. As of October 31, 2000, we
reserved and expensed approximately $1.8 million for estimated uncollectible
accounts receivable from this second distributor. As of January 31, 2001, we
wrote off that $1.8 million reserve as well as expensed an additional $419,000,
for a total expense of $2.2 million for estimated uncollectible accounts
receivable from this distributor over fiscal years 2001 and 2000. Other than
these two distributors, no single customer accounted for more than 10% of our
net sales in fiscal years 2001, 2000 or 1999.
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, and that increasingly, single-mode fiber is also being used for
other short to moderate distance installations. To the extent that our product
mix shifts toward single-mode cables (whether or not as a result of a shift in
our sales mix shifts toward the metropolitan and access markets), we will have
to increase the volume of our sales to maintain our current level of net sales.
Although we currently have excess capacity, 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, 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. We utilized short-term margin borrowings payable to an
investment broker to finance our position in these trading securities. Our
margin borrowings were collateralized by the trading securities and were subject
to margin provisions, which could have resulted in the sale of some or all of,
and on certain occasions did result in the sale of some of, the trading
securities to meet margin calls. Our active trading in the Nasdaq 100 Trust
continued through May 14, 2001, the date of the last purchase of these shares.
On October 3, 2001, as part of a policy to invest future excess funds only in
short-term interest bearing investments, we sold all of our remaining investment
in the Nasdaq 100 Trust and paid off the outstanding margin borrowings. 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. 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.
20
For accounting purposes, we categorized our investment in the Nasdaq 100 Trust
as trading securities, and we recorded the investment on our balance sheet at
fair value, which was based on quoted market prices. Purchases and sales of
trading securities were recognized on a trade-date basis, the date the order to
buy or sell is executed. Net realized gains or losses were determined on the
first-in, first-out cost method. We marked our investment to market on each
balance sheet date. Any decline in fair value was recorded as an unrealized
loss, while any increase in fair value was recorded as an unrealized gain.
Realized gains and losses and unrealized holding gains and losses for trading
securities were included in other income (expense), net.
In fiscal year 2001, we recognized realized net losses of $11.4 million in
connection with our securities trading activities in other expense, net. In
fiscal year 2001, we incurred interest expense of $305,000 on the margin
borrowings. As of October 31, 2001, we held no trading securities in accordance
with our current investment policy and had no outstanding margin borrowings.
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. As of
October 31, 2000, we had short-term margin borrowings of $5.7 million payable to
an investment broker related to the trading securities. We incurred interest
expense of $57,000 on the margin borrowings in fiscal year 2000.
Results of Operations
The following table sets forth selected line items from our statements of
operations as a percentage of net sales for the periods indicated:
- --------------------------------------------------------------------------------------
Years Ended October 31,
------------------------------------
2001 2000 1999
------------------------------------
Net sales 100.0 % 100.0% 100.0%
Cost of goods sold 59.6 53.0 54.3
------- ------- --------
Gross profit 40.4 47.0 45.7
Selling, general and administrative expenses 28.3 25.8 21.3
------- ------- --------
Income from operations 12.1 21.2 24.4
Other income (expense), net (19.4) 0.7 0.3
------- ------- --------
Income (loss) before income tax
expense (7.3) 21.9 24.7
Income tax expense 3.8 7.7 8.3
------- ------- --------
Net income (loss) (11.1)% 14.2% 16.4%
======= ======= ========
- --------------------------------------------------------------------------------------
Net Sales. Net sales increased 3.8% from $58.2 million in fiscal year 2000 to
$60.4 million in fiscal year 2001. This increase was attributable to record net
sales during our first and second quarters of fiscal year 2001, substantially
offset by lower sales in the third and fourth quarters. The decrease in net
sales in the third and fourth quarters resulted from the impact of weak economic
conditions on market demand, as the industries we serve reduced or delayed
capital spending. During fiscal year 2001, 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 increased 9.8% from 199.3 million fiber meters shipped in fiscal year
2000, to 218.8 million fiber meters shipped in fiscal year 2001. This net
increase in fiber meters shipped was a result of a 5.2 million decrease in
multimode fiber meters shipped and a 24.7 million increase in single-mode fiber
meters shipped. Cable containing multimode fiber is generally used for
communications over shorter distances where the higher bandwidth capacity and
the higher transmission equipment cost of single-mode fiber is not required.
Multimode fiber cable is often used in datacom applications. Cable containing
single-
21
mode fiber is generally used for communications over longer distances and
where higher bandwidth capacity is required. Single-mode fiber cable is often
used in telecom, CATV and various internet applications. Net sales increased
14.8% from $50.7 million in fiscal 1999 to $58.2 million in fiscal 2000. This
increase was attributable to increased sales volume. Total fiber meters shipped
increased 18.5% from 168.2 million during fiscal year 1999 to 199.3 million
shipped for the same period in 2000. This increase in fiber meters shipped was
a result of a 13.8 million increase in multimode fiber meters shipped and a 17.3
million increase in single-mode fiber meters shipped.
Gross Profit. Gross profit decreased 10.7% from $27.3 million in fiscal year
2000 to $24.4 million in fiscal year 2001. Gross margin, or gross profit as a
percentage of net sales, was 47.0% in fiscal year 2000 compared to 40.4% in
fiscal year 2001. This decrease in gross margin is primarily attributable to
adjustments booked in the fourth quarter of fiscal year 2001 that increased cost
of goods sold. These adjustments included a $1.2 million write-down of slow
moving and impaired inventory to net realizable value, the disposal of $197,000
of impaired finished goods inventory during the fourth quarter of fiscal year
2001, and adjustments of approximately $1.3 million caused by book to physical
variances resulting from year-end physical inventory counts, a substantial
portion of which related to work-in-process inventories. Net sales to
distributors were 58.0% of net sales in fiscal year 2000 compared to 49.6% in
fiscal year 2001, while during fiscal year 2001 there was an increase in the
ratio of large orders to total orders. Gross profit increased 18.1% from $23.2
million in fiscal year 1999 to $27.3 million in fiscal year 2000. Gross margin
was 45.7% in fiscal year 1999 compared to 47.0% in fiscal year 2000. This slight
increase was due to the impact of the decrease in the ratio of large orders, the
decrease in the ratio of net sales attributable to our distributors and reduced
raw fiber prices during the year. Net sales to distributors were 63.2% of total
net sales in fiscal year 1999 compared to 58.0% in fiscal year 2000.
Selling, General and Administrative. Selling, general and administrative
expenses increased 14.0% from $15.0 million in fiscal year 2000 to $17.1 million
in fiscal year 2001. Selling, general and administrative expenses as a
percentage of net sales were 25.8% in fiscal year 2000 compared to 28.3% in
fiscal year 2001. This increase is partly attributable to various charges
incurred during the fourth quarter of fiscal year 2001, including a $902,000
charge for an anticipated settlement with the Equal Opportunity Commission
(EEOC) for alleged prior discriminatory practices and related complaints (on
December 13, 2001 we reached an agreement with the EEOC as to the amount of a
settlement, but it is subject to final documentation and judicial review and
approval), a $411,000 charge to write off deferred costs related to the aborted
securities offering previously anticipated during fiscal year 2001, and a
$102,000 charge for costs related to a business development project. In
addition, legal expenses for fiscal year 2001 totaled $705,000 compared to
$250,000 in fiscal year 2000. Also contributing to the increase in selling,
general and administrative expenses in fiscal year 2001 were higher other
professional fees. Bad debt expense for fiscal year 2001 totaled $1.1 million,
of which $508,000 related to an increase in the bad debt reserve in the fourth
quarter and $419,000 related to one of our distributors that filed for
protection from its creditors under the bankruptcy laws in January 2001. By
comparison bad debt expense for fiscal year 2000 totaled $2 million, of which
$1.8 million related to a specific reserve for estimated uncollectible accounts
receivable from that same bankrupt distributor. Selling, general and
administrative expenses increased 39.1% from $10.8 million in fiscal year 1999
to $15.0 million in fiscal year 2000. Selling, general and administrative
expenses as a percentage of net sales were 21.3% in fiscal year 1999 compared to
25.8% in fiscal year 2000. This increase was primarily the result of an increase
in bad debt expense of $2 million. This increase is primarily attributable to a
$1.8 million specific reserve for estimated uncollectible accounts receivable
from one of our distributors that filed for protection from its creditors under
the bankruptcy laws in January 2001. Other factors that contributed to the
increase in selling, general and administrative expenses in fiscal year 2000
include an increase in our sales force, the continued expansion of marketing
efforts and an increase in legal fees associated with the EEOC litigation and
related complaints that had been filed against us with the EEOC.
22
Income from Operations. Income from operations decreased 40.8% from $12.3
million in fiscal year 2000 to $7.3 million in fiscal year 2001. This decrease
was due to the $2.9 million decrease in gross profit and the $2.1 million
increase in selling, general and administrative expenses. Income from
operations decreased 0.3% from $12.4 million in fiscal year 1999 to $12.3
million in fiscal year 2000. This slight decrease was due to the $4.2 million
increase in gross profit, offset by the $4.2 million increase in selling,
general and administrative expenses.
Other Income (Expense), Net. Other income, net decreased from $417,000 in
fiscal year 2000 to other expense, net of $(11.7) million in fiscal year 2001.
This decrease was primarily due to losses on our trading securities. We
recognized gains on trading securities, net of $289,000 in fiscal year 2000
compared to losses on trading securities, net of $11.4 million in fiscal year
2001. In addition, in fiscal year 2000, we incurred interest expense of
$57,000, compared to $363,000 in fiscal year 2001. Also, interest income was
$184,000 lower in fiscal year 2001 when compared to fiscal year 2000. Please
see our discussion of trading securities in "Overview" above. Other income, net
increased 151.3% from $166,000 in fiscal year 1999 to $417,000 in fiscal year
2000. We began investing in trading securities and recognized related gains on
trading securities, net of $289,000 in other income, net for fiscal year 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 related to the trading securities.
Income (Loss) Before Income Tax Expense. Income (loss) before income tax
expense decreased from $12.7 million in fiscal year 2000 to $(4.4) million in
fiscal year 2001. This decrease was primarily due to the $11.4 million losses
on trading securities, net and the $2.1 million increase in selling, general and
administrative expenses, and the $2.9 million decrease in gross profit. Income
before income tax expense increased 1.7% from $12.5 million in fiscal year 1999
to $12.7 million in fiscal year 2000. This increase was primarily due to
increases in sales volume, gross profit and other income, net, partially offset
by the $4.2 million increase in selling, general and administrative expenses.
Income Tax Expense. Income tax expense decreased 48.7% from $4.5 million in
fiscal year 2000 to $2.3 million in fiscal year 2001. Notwithstanding the loss
before income taxes during fiscal year 2001, we reported income tax expense in
fiscal year 2001 rather than an income tax benefit, due to the establishment of
a valuation allowance for deferred tax assets in the amount of $4.1 million
relating to the capital loss carryforward generated by the sale of our trading
securities during fiscal year 2001. As of October 31, 2001, this valuation
allowance was established because we believe it is more likely than not that we
will not be able to generate future taxable capital gains to realize the benefit
of our deferred tax asset related to the capital loss carryforward generated by
our securities trading losses. In addition, the capital loss carryforward may be
limited due to certain stock ownership changes. In order to fully realize this
deferred tax asset, we would need to generate future taxable capital gains of
approximately $11.1 million prior to the expiration of the capital loss
carryforward in 2006. Income tax expense increased 6.3% from $4.2 million in
fiscal year 1999 to $4.5 million in fiscal year 2000. Our effective tax rate was
33.7% in fiscal year 1999 compared to 35.2% in fiscal year 2000. Fluctuations in
our effective tax rates are due primarily to the amount and timing of the tax
benefits related to our Extraterritorial Income Exclusion and foreign sales
corporation which exempts from federal income taxation a portion of the net
profit realized from sales outside of the United States of products manufactured
in the United States.
Net Income (Loss). Net income decreased from $8.3 million in fiscal year 2000
to a net loss of $(6.7) million in fiscal year 2001. This decrease was
primarily due to the $11.4 million in losses on trading securities, net and the
$2.1 million increase in selling, general and administrative expenses, the $2.9
million decrease in gross profit, partially offset by the $2.2 million decrease
in income tax expense. Net income decreased $50,000 from fiscal year 1999 to
$8.3 million in fiscal year 2000. This slight decrease was 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
margin and other income, net.
23
Liquidity and Capital Resources
Our primary capital needs have been to fund working capital requirements and
capital expenditures. Our primary source of capital for these purposes has been
cash provided from operations and borrowings under our bank lines of credit
described below. The outstanding balance under our lines of credit totaled $8.3
million as of the end of fiscal year 2001. There was no balance outstanding
under our lines of credit as of the end of fiscal year 2000. During the course
of fiscal year 2001, we also used $9.3 million to repurchase shares of our
common stock under our share repurchase program described below.
Our cash and cash equivalents totaled $2.1 million as of October 31, 2001, an
increase of $629,000, compared to $1.5 million as of October 31, 2000. The cash
and cash equivalents increase in fiscal year 2001 was primarily due to cash
provided by operating activities of $3.9 million (which includes the liquidation
of all trading securities on October 3, 2001, as part of a policy to invest
future excess funds only in short-term interest-bearing investments and the pay
off of all margin borrowings in connection with the securities trading), and
borrowings under our bank lines of credit in the amount of $8.3 million, which
was partially offset by the purchase of property and equipment totaling $2.5
million and the repurchase of common stock totaling $9.3 million related to our
common stock repurchase program.
On October 31, 2001, we had working capital of $14.2 million, compared to $32.0
million as of October 31, 2000, a decrease of $17.8 million. The ratio of
current assets to current liabilities as of October 31, 2001, was 2.0 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 $18.0 million, a
decrease in trade accounts receivable, net of $679,000, an increase in the
amount payable under our bank lines of credit of $8.3 million and an increase in
accounts payable and accrued expenses of $3.1 million, partially offset by an
increase in inventories of $6.5 million and a decrease in the amount payable to
investment broker of $5.7 million.
Net cash provided by operating activities was $3.9 million in fiscal year 2001.
Net cash used in operating activities was $5 million in fiscal year 2000. Net
cash provided by operating activities was $11.9 million for fiscal year 1999.
Net cash provided by operating activities in fiscal year 2001 was primarily
affected by the sale of approximately $18.0 million in trading securities
resulting in a realized loss of $11.4 million, cash provided by operating
income, and an increase in accounts payable and accrued expenses and other
liabilities of $3.6 million, partially offset by an increase in inventories of
$6.5 million and a decrease in the amount payable to investment broker of $5.7
million. For fiscal year 2000, net cash used in operating activities was
primarily affected by the net 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 amounts payable to investment broker of $5.7 million. Net cash
provided by operating activities in fiscal year 1999 was 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. We have entered into
written agreements to purchase raw optical fiber. These commitments total $12.2
million, $14.1 million, $8.6 million, and $1.2 million in fiscal years 2002,
2003, 2004 and 2005, respectively.
Net cash used in investing activities totaled $2.6 million, $1.4 million and
$553,000 for fiscal years 2001, 2000 and 1999. Net cash used in investing
activities was mainly for expenditures related to facilities and equipment for
fiscal years 2001, 2000 and 1999. There are no material commitments for capital
expenditures as of October 31, 2001.
Net cash used in financing activities was $715,000 for fiscal year 2001. Net
cash provided in financing activities was $1 million for fiscal year 2000. Net
cash used in financing activities was $5.7 million for fiscal
24
year 1999. Net cash used in financing activities for the fiscal year 2001 was
primarily the result of $9.3 million used to repurchase shares of our common
stock, partially offset by an $8.3 million increase in our bank lines of credit.
Net cash provided by financing activities for fiscal year 2000 was primarily
related to proceeds received from the exercise of employee stock options. Net
cash used in financing activities for fiscal year 1999 was primarily related to
the repurchase of shares of our common stock.
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. On December 13, 2001, the
parties reached an agreement as to the amount of a settlement (subject to final
documentation and judicial review and approval) that affords both individual and
class relief, without any admission of liability. Pursuant to this agreement, we
will pay $500,000 upon entry of a consent decree by the court, $175,000 on the
first anniversary and $175,000 on the second anniversary of the consent decree
to satisfy any gender and race class claims; $75,000 to one individual
specifically named in the complaint; and at least $75,000 for our planned
diversity, recruitment, and human resource management programs over the term of
the consent decree.
The Company, Mr. Robert Kopstein, our former chairman, president, chief
executive officer and majority shareholder, and various John Does (our officers
and/or directors during the class period) were named as defendants in three
class action lawsuits filed in the United States District Court for the Western
District of Virginia. In each of the substantially similar suits, the plaintiffs
purport to represent purchasers of our common stock during the period ranging
from July 31, 2000 through October 8, 2001, and allege that we violated federal
securities laws and made fraudulent and/or negligent misrepresentations and/or
omissions. The plaintiffs in each of these lawsuits seek compensatory and
exemplary damages in an unspecified amount, as well as reasonable costs and
expenses incurred in the causes of action, including attorneys' fees and expert
fees. Management intends to vigorously defend these lawsuits. We may, however,
incur substantial costs in defending ourselves against the lawsuits, regardless
of their merit or outcome. At this early stage in the lawsuits, management
cannot make a reasonable estimate of the monetary amount of their resolution or
estimate a range of reasonably possible losses, if any. If we are unsuccessful
in defending these lawsuits, we could be subject to damages that may be
substantial and could have a material adverse affect on our financial position,
results of operations or liquidity.
We were named as a defendant in two lawsuits filed in United States District
Court for the Southern District of New York seeking to compel us to authorize
our transfer agent to transfer unregistered, restricted stock on our stock
ledger. The first suit was filed on October 22, 2001, by Bear, Stearns & Co.
Inc. and Bear, Stearns Securities Corporation (collectively, "Bear Stearns").
The second suit was filed on October 26, 2001, by UBS PaineWebber Inc.
("PaineWebber"). In each case the plaintiffs sought injunctive relief with
respect to transfers of shares of unregistered, restricted common stock of
Optical Cable Corporation sold in the course of liquidating brokerage accounts
or repossessed shares of our former Chairman, President, Chief Executive Officer
and majority shareholder to cover personal loans to him. Each of the lawsuits
contains a claim for damages caused by the alleged wrongful refusal by us to
authorize the transfers in connection with the liquidation. On October 31, 2001,
the court in the Bear Stearns case entered an order directing us to authorize
the stock transfers sought by Bear Stearns and imposing certain conditions on
Bear Stearns in connection with such transfers. In early November 2001, we
reached an agreement with PaineWebber pursuant to which we would authorize stock
transfers in connection with the liquidation of unregistered, restricted stock
held by PaineWebber upon the foreclosure of a brokerage account of the former
officer. Neither of the cases has been dismissed; however, management believes
that these
25
suits will be resolved without any material liability. Management also believes
that any claim that we improperly interfered with the sale or transfer of the
unregistered, restricted shares is without merit.
In October 1997, our Board of Directors authorized the initiation of a stock
repurchase program whereby we could repurchase shares of our common stock in
open market or in privately negotiated transactions. From time to time, our
Board of Directors increased the total dollar amount of the stock repurchase
program, which was eventually increased to $25 million. Through October 31,
2001, we had repurchased 3.2 million shares of our common stock for
approximately $24.1 million under this stock repurchase program. The repurchases
were funded through operating cash flow and borrowings under our lines of
credit. During fiscal year 2001, we repurchased 1.1 million shares of our common
stock in open market transactions at a total cost of $9.3 million. Effective
September 20, 2001, we ceased the repurchase of shares of our common stock under
the share repurchase program.
Under a loan agreement with our bank dated March 10, 1999, we had $5 million
secured revolving line of credit and a $10 million secured revolving line of
credit. The lines of credit are subject to certain restrictive covenants. During
fiscal year 2001, we violated certain restrictive covenants. Effective October
30, 2001, the bank waived our defaults under the loan agreement, amended the
loan agreement and reduced the $10 million line of credit to $4.5 million for a
maximum combined availability of $9.5 million. As of October 31, 2001, we had
combined outstanding borrowings under these lines of credit in the amount of
$8.3 million, with $1.2 million unused and available. The lines of credit bear
interest at 1.5% above the monthly LIBOR rate (3.79% at October 31, 2001) and
are equally and ratably collateralized 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. We are currently negotiating potential lines of
credit of $15 to $20 million with a number of financial institutions, including
our bank, to replace our current lines of credit. We believe that our cash flow
from operations, current cash balances, and the lines of credit we are working
to put in place will be adequate to fund our operations for at least the next
twelve months.
26
Recent Developments
On December 3, 2001, the Company issued a press release that announced that,
upon the recommendation of an independent Special Committee of its Board of
Directors (the "Special Committee"), the Board of Directors had removed Robert
Kopstein as the Company's Chairman, President and Chief Executive Officer. We
have offered Mr. Kopstein to consider entering into a consulting arrangement
with us and are currently in discussions with him.
On October 31, 2001, we announced that the Special Committee had retained C.E.
Unterberg, Towbin ("Unterberg") as the exclusive financial advisor to the
Company and the Special Committee. On January 17, 2002, our Board of Directors
dissolved the Special Committee, however, we have continued to retain Unterberg
with respect to certain strategic financial matters.
New Accounting Standards
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.
Neither standard is 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. We
are currently evaluating the impact of SFAS No. 143 on our financial position,
results of operations and liquidity.
In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. SFAS No. 144
supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of; however, it retains many of the
fundamental provisions of that Statement.
27
SFAS No. 144 also supersedes the accounting and reporting provisions of APB
Opinion No. 30, Reporting the Results of Operations--Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions, for the disposal of a segment of a business.
However, it retains the requirement in APB No. 30 to report separately
discontinued operations and extends that reporting to a component of an entity
that either has been disposed of (by sale, abandonment, or in a distribution to
owners) or is classified as held for sale. By broadening the presentation of
discontinued operations to include more disposal transactions, the FASB has
enhanced management's ability to provide information that helps financial
statement users to assess the effects of a disposal transaction on the ongoing
operations of an entity.
SFAS No. 144 is effective for fiscal years beginning after December 15, 2001 and
interim periods within those fiscal years. Early application is encouraged.
The provisions of SFAS No. 144 generally are to be applied prospectively. We
are currently evaluating the impact of SFAS No. 144 on our financial position,
results of operations and liquidity.
As of October 31, 2001, there are no other new accounting standards issued, but
not yet adopted by us, which are expected to be applicable to our financial
position, operating results or financial statement disclosures.
28
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We do not engage in transactions in derivative financial instruments or
derivative commodity instruments. As of October 31, 2001, our financial
instruments were not exposed to significant market risk due to interest rate
risk, foreign currency exchange risk, commodity price risk or equity price risk.
29
Item 8. Financial Statements and Supplementary Data
OPTICAL CABLE CORPORATION
Index to Financial Statements and
Financial Statement Schedules
Page
Financial Statements:
Independent Auditors' Report 31
Balance Sheets as of October 31, 2001 and 2000 32
Statements of Operations for the Years Ended October 31, 2001, 2000
and 1999 33
Statements of Stockholders' Equity for the Years Ended October 31,
2001, 2000 and 1999 34
Statements of Cash Flows for the Years Ended October 31, 2001, 2000
and 1999 35
Notes to Financial Statements 36
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.
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, 2001 and 2000, and the related statements of operations,
stockholders' equity, and cash flows for each of the years in the three-year
period ended October 31, 2001. 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, 2001 and 2000, and the results of its operations and its cash flows
for each of the years in the three-year period ended October 31, 2001, in
conformity with accounting principles generally accepted in the United States of
America.
/s/KPMG LLP
Roanoke, Virginia
December 14, 2001, except as to note 13,
which is as of December 27, 2001
31
OPTICAL CABLE CORPORATION
Balance Sheets
October 31, 2001 and 2000
October 31,
-------------------------
Assets 2001 2000
----------- -----------
Current assets:
Cash and cash equivalents $ 2,087,608 $ 1,458,896
Trading securities -- 17,982,830
Trade accounts receivable, net of allowance for doubtful
accounts of $572,853 in 2001 and $1,909,069 in 2000 10,678,214 11,357,522
Income taxes refundable 1,108,007 1,162,118
Other receivables 371,656 362,000
Due from employees, net of allowance for uncollectible
advances of $70,000 in 2001 35,018 2,890
Inventories 14,084,931 7,572,153
Prepaid expenses 185,831 112,794
Deferred income taxes 260,709 959,665
----------- -----------
Total current assets 28,811,974 40,970,868
Other assets 367,469 261,937
Property and equipment, net 12,685,053 11,455,372
Deferred income taxes 933,801 --
----------- -----------
Total assets $42,798,297 $52,688,177
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable to bank $ 8,271,000 $ --
Accounts payable and accrued expenses 5,537,313 2,479,116
Accrued compensation and payroll taxes 798,203 847,572
Payable to investment broker related to securities trading -- 5,658,574
----------- -----------
Total current liabilities 14,606,516 8,985,262
Other liabilities 326,553 --
Deferred income taxes -- 195,085
----------- -----------
Total liabilities 14,933,069 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 55,431,279 shares in 2001
and 56,391,993 shares in 2000 -- 6,893,579
Retained earnings 27,865,228 36,614,251
----------- -----------
Total stockholders' equity 27,865,228 43,507,830
Commitments and contingencies
----------- -----------
Total liabilities and stockholders' equity $42,798,297 $52,688,177
=========== ===========
See accompanying notes to financial statements.
32
OPTICAL CABLE CORPORATION
Statements of Operations
Years Ended October 31, 2001, 2000 and 1999
Years Ended October 31,
--------------------------------------------
2001 2000 1999
------------ ------------ ------------
Net sales $ 60,405,437 $ 58,218,994 $ 50,698,637
Cost of goods sold 35,983,719 30,877,688 27,547,022
------------ ------------ ------------
Gross profit 24,421,718 27,341,306 23,151,615
Selling, general and administrative expenses 17,130,704 15,024,198 10,798,643
------------ ------------ ------------
Income from operations 7,291,014 12,317,108 12,352,972
Other income (expense):
Gains (losses) on trading securities, net (11,414,151) 288,667 --
Interest income 45,620 230,038 201,708
Interest expense (363,417) (57,084) --
Other, net 9,201 (45,015) (35,944)
------------ ------------ ------------
Other income (expense), net (11,722,747) 416,606 165,764
------------ ------------ ------------
Income (loss) before income
tax expense (4,431,733) 12,733,714 12,518,736
Income tax expense 2,297,466 4,478,656 4,214,096
------------ ------------ ------------
Net income (loss) $ (6,729,199) $ 8,255,058 $ 8,304,640
============ ============ ============
Net income (loss) per share:
Basic and diluted $ (0.12) $ 0.15 $ 0.15
============ ============ ============
See accompanying notes to financial statements.
33
OPTICAL CABLE CORPORATION
Statements of Stockholders' Equity
Years Ended October 31, 2001, 2000 and 1999
Total
Common Stock Retained Stockholders'
----------------------------
Shares Amount Earnings Equity
------------ ------------ ------------ ------------
Balances at October 31, 1998 56,818,554 $ 9,936,640 $ 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 4,487,882 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 6,893,579 36,614,251 43,507,830
Exercise of employee stock
options ($2.07 per share) 142,436 295,261 -- 295,261
Restricted stock award ($6.25 per share) 750 4,687 -- 4,687
Stock-based compensation -- 5,593 -- 5,593
Tax benefit of disqualifying
disposition of stock options exercised -- 62,749 -- 62,749
Repurchase of common stock (at cost) (1,103,900) (7,261,869) (2,019,824) (9,281,693)
Net loss -- -- (6,729,199) (6,729,199)
------------ ------------ ------------ ------------
Balances at October 31, 2001 55,431,279 $ -- $ 27,865,228 $ 27,865,228
============ ============ ============ ============
See accompanying notes to financial statements.
34
OPTICAL CABLE CORPORATION
Statements of Cash Flows
Years Ended October 31, 2001, 2000 and 1999
Years Ended October 31,
--------------------------------------------
2001 2000 1999
------------ ------------ ------------
Cash flows from operating activities (including securities trading):
Net income (loss) $ (6,729,199) $ 8,255,058 $ 8,304,640
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,058,489 841,646 764,652
Bad debt expense 1,052,447 2,018,128 87,490
Deferred income tax expense (benefit) (429,930) (737,717) 67,754
Loss on disposal of property and equipment -- 7,807 --
Tax benefit of disqualifying disposition of stock options exercised 62,749 1,354,718 209,207
Stock-based compensation expense 10,280 14,063 --
Unrealized losses on trading securities, net -- 499,755 --
(Increase) decrease in trading securities 17,982,830 (18,482,585) --
Increase (decrease) in payable to investment broker
related to securities trading (5,658,574) 5,658,574 --
(Increase) decrease in:
Trade accounts receivable (before bad debt expense) (303,139) (3,051,328) (417,913)
Income taxes refundable 54,111 (1,162,118) --
Other receivables (9,656) (81,781) 14,980
Due from employees (102,128) 5,210 (2,511)
Inventories (6,512,778) 1,182,270 1,212,589
Prepaid expenses (73,037) (6,258) (10,770)
Increase (decrease) in:
Accounts payable and accrued expenses and other liabilities 3,578,276 (1,053,960) 1,328,540
Accrued compensation and payroll taxes (49,369) 154,894 36,650
Income taxes payable -- (421,803) 310,354
------------ ------------ ------------
Net cash provided by (used in) operating activities
(including securities trading) 3,931,372 (5,005,427) 11,905,662
------------ ------------ ------------
Cash flows from investing activities:
Purchase of property and equipment (2,481,696) (1,298,717) (400,714)
Increase in cash surrender value of life insurance (105,532) (90,554) (171,382)
Advances on note receivable from former officer 500,000 -- --
Collection from note receivable from former officer (500,000) -- --
Collection from note receivable -- -- 18,800
------------ ------------ ------------
Net cash used in investing activities (2,587,228) (1,389,271) (553,296)
------------ ------------ ------------
Cash flows from financing activities:
Repurchase of common stock (9,281,693) -- (5,857,465)
Proceeds from exercise of employee stock options 295,261 1,036,916 199,500
Proceeds from notes payable to bank, net 8,271,000 -- --
------------ ------------ ------------
Net cash provided by (used in) financing activities (715,432) 1,036,916 (5,657,965)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 628,712 (5,357,782) 5,694,401
Cash and cash equivalents at beginning of year 1,458,896 6,816,678 1,122,277
------------ ------------ ------------
Cash and cash equivalents at end of year $ 2,087,608 $ 1,458,896 $ 6,816,678
============ ============ ============
Supplemental disclosure of cash flow information:
Cash payments for interest $ 320,750 $ 57,084 $ --
============ ============ ============
Income taxes paid $ 2,610,536 $ 5,445,576 $ 3,615,300
============ ============ ============
Noncash investing and financing activities:
Capital expenditures accrued in accounts payable $ 58,650 $ 252,176 $ 89,344
============ ============ ============
Trade accounts receivable financed as note receivable $ -- $ -- $ 112,405
============ ============ ============
See accompanying notes to financial statements.
35
OPTICAL CABLE CORPORATION
Notes to Financial Statements
Years Ended October 31, 2001, 2000 and 1999
(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 tight-buffered fiber optic cables for high bandwidth
transmission of data, video and audio communications over short to
moderate distances. The Company utilizes a tight-buffer coating
process that protects each optical fiber. The Company's fiber optic
cables are sold nationwide and in over 65 foreign countries. Also see
note 8.
(b) Cash and Cash Equivalents
The Company maintains its primary cash accounts at two commercial
banks located in Virginia. Accounts in these banks are insured by the
Federal Deposit Insurance Corporation (FDIC) up to $100,000. As of
October 31, 2001, the Company had bank deposits in excess of $100,000
totaling $1,795,243. As of October 31, 2000, the Company had no
domestic bank deposits in excess of $100,000.
As of October 31, 2000, cash equivalents consist of $1,171,777 of
overnight repurchase agreements. As of October 31, 2001, the Company
had no cash equivalents. 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 were recorded at fair value, which was based on
quoted market prices. Purchases and sales of trading securities were
recognized on a trade-date basis, the date the order to buy or sell
was executed. The Company's trading securities were 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 were included in net income. The amount
of net unrealized holding loss that was included in net income for the
year ended October 31, 2000 was $499,755. Net realized gains or losses
were determined on the first-in, first-out cost method. As of October
31, 2000, the Company's trading securities consisted of shares in the
Nasdaq 100 Trust, which is designed to closely track the price and
yield performance of the Nasdaq stock index.
As of October 31, 2000, the Company had short-term margin borrowings
of $5,658,574 payable to an investment broker related to the trading
securities. The margin account incurred interest at rates ranging from
the Call Money rate plus .025% to the Call Money rate plus 2.50%,
depending on the outstanding balance of margin borrowings (8.50% as of
October 31, 2000). Obligations of the Company to the investment broker
were collateralized by the trading securities and were subject to
margin provisions, which could have resulted in the sale of some or
all of the trading securities to meet margin calls.
36
OPTICAL CABLE CORPORATION
Notes to Financial Statements (Continued)
Years Ended October 31, 2001, 2000 and 1999
In fiscal year 2000, the Company recognized realized and unrealized
net gains on trading securities of $288,667 and incurred interest
expense on margin borrowings of $57,084. Subsequent to October 31,
2000, the Company 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 resulting in the sale of some of
the trading securities to meet margin calls. The Company's last
purchase of shares in the Nasdaq 100 Trust was on May 14, 2001. On
October 3, 2001, the Company sold all of its remaining investment in
the Nasdaq 100 Trust and paid off the outstanding margin borrowings as
part of a policy to invest future excess funds only in short-term
interest-bearing investments. In fiscal year 2001, the Company
recognized realized net losses on trading securities of $11,414,151
and incurred interest expense on margin borrowings of $304,595.
(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. Also see note 3.
(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. Also see note 4.
(f) Revenue Recognition
Revenue is recognized at the time of product shipment or delivery to
the customer, and the customer takes ownership and assumes risk of
loss 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 are classified as
sales revenue. Shipping and handling costs of approximately
$2,155,000, $1,948,000 and $1,425,000 are included in selling, general
and administrative expenses for the years ended October 31, 2001, 2000
and 1999, 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
37
OPTICAL CABLE CORPORATION
Notes to Financial Statements (Continued)
Years Ended October 31, 2001, 2000 and 1999
bases and operating loss, capital 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. Also see note 9.
(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 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
The Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board ("APB") Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations
including Financial Accounting Standards Board ("FASB") Interpretation
No. 44, Accounting for Certain Transactions involving Stock
Compensation an interpretation of APB Opinion No. 25, issued in March
2000, to account for its fixed plan stock options granted to
employees. Under this method, compensation expense is recorded on the
date of grant only if the current market price of the underlying stock
exceeded the exercise price. Statement of Financial Accounting
Standards ("SFAS") No. 123, Accounting for Stock-Based Compensation,
established accounting and disclosure requirements using a fair value-
based method of accounting for stock-based employee compensation
plans. As allowed by SFAS No. 123, the Company has elected to continue
to apply the intrinsic value-based method of accounting described
above, and has adopted the disclosure requirements of SFAS No. 123.
The Company applies the provisions of SFAS No. 123 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. Also see note 7.
(k) Net Income (Loss) Per Share
Basic net income (loss) per share excludes dilution and is computed by
dividing net income (loss) 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. Also see note 11.
38
OPTICAL CABLE CORPORATION
Notes to Financial Statements (Continued)
Years Ended October 31, 2001, 2000 and 1999
(l) Comprehensive Income
SFAS No. 130, Reporting Comprehensive Income, establishes
standards for reporting and display of comprehensive income and
its components in a full set of financial statements. Enterprises
that have no items of other comprehensive income in any period
presented are excluded from the scope of this Statement. The
Company has no items of other comprehensive income in any period
presented.
(m) Commitments and Contingencies
Liabilities for loss contingencies arising from product warranties
and defects, claims, assessments, litigation, fines and penalties
and other sources are recorded when it is probable that a
liability has been incurred and the amount of the assessment can
be reasonably estimated.
(n) 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.
(o) Reclassifications
Certain reclassifications have been made to the prior years'
financial statements to place them on a basis comparable with the
current year's financial statements.
(2) Allowance for Doubtful Accounts for Trade Accounts Receivable
A summary of changes in the allowances for doubtful accounts for trade
accounts receivable for the years ended October 31, 2001, 2000 and 1999
follows:
Years Ended October 31,
----------------------------------------
2001 2000 1999
----------- ----------- -----------
Balance at beginning of year $ 1,909,069 $ 316,000 $ 311,500
Bad debt expense 982,447 2,018,128 87,490
Losses charged to allowance (2,327,753) (453,049) (84,633)
Recoveries added to allowance 9,090 27,990 1,643
----------- ----------- -----------
Balance at end of year $ 572,853 $ 1,909,069 $ 316,000
=========== =========== ===========
39
OPTICAL CABLE CORPORATION
Notes to Financial Statements (Continued)
Years Ended October 31, 2001, 2000 and 1999
One of the Company's two major distributors filed for protection from its
creditors under bankruptcy laws in January 2001. As of October 31, 2000,
the Company specifically 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 year ended October 31,
2001. There were no net sales attributed to this distributor subsequent
to the first quarter of fiscal year 2001. Also see note 8.
(3) Inventories
Inventories as of October 31, 2001 and 2000 consist of the following:
October 31,
--------------------------
2001 2000
------------ -----------
Finished goods $ 4,328,379 $ 808,271
Work in process 3,064,975 3,487,611
Raw materials 6,641,985 3,194,393
Production supplies 49,592 81,878
------------ -----------
$ 14,084,931 $ 7,572,153
============ ===========
During fiscal year 2001, the Company entered into separate long-term
supply agreements with two raw optical fiber suppliers. One agreement
expires on December 31, 2003 and the other on December 31, 2004.
The aggregate purchases related to these agreements totaled approximately
$9.5 million for the year ended October 31, 2001. The aggregate purchases
related to these agreements (subject to certain annual price adjustments)
for each of the fiscal years subsequent to October 31, 2001 are
approximated as follows:
Fiscal Year Ending October 31, Amount
------------------------------ ----------------
2002 $ 12,207,000
2003 14,104,000
2004 8,641,000
2005 1,247,000
----------------
Total $ 36,199,000
================
Additionally, one of the supply agreements requires that one-half of all
single-mode fiber purchases through December 31, 2004 above the committed
amounts be purchased from that supplier at market prices.
40
OPTICAL CABLE CORPORATION
Notes to Financial Statements (Continued)
Years Ended October 31, 2001, 2000 and 1999
(4) Property and Equipment
Property and equipment as of October 31, 2001 and 2000 consists of the
following:
October 31,
--------------------------
2001 2000
------------ ------------
Land $ 2,745,327 $ 2,745,327
Building and improvements 6,896,842 6,896,842
Machinery and equipment 8,193,773 6,676,960
Furniture and fixtures 794,418 735,052
Construction in progress 948,062 236,071
------------ ------------
Total property and equipment, at cost 19,578,422 17,290,252
Less accumulated amortization and depreciation (6,893,369) (5,834,880)
------------ ------------
Property and equipment, net $ 12,685,053 $ 11,455,372
============ ============
As of October 31, 2001, construction in progress represents machinery and
equipment purchased for expansion in 2001, which is ready for service but
has not yet been placed into service due to a reduction in product
demand.
(5) Notes Payable to Bank
Under a loan agreement with its bank dated March 10, 1999, the Company
had a $5 million secured revolving line of credit and a $10 million
secured revolving line of credit. The lines of credit are subject to
certain restrictive covenants with the bank. During fiscal year 2001, the
Company violated certain restrictive covenants. Effective October 30,
2001, the bank waived the Company's defaults under the loan agreement,
amended the loan agreement and reduced the $10 million line of credit to
$4.5 million for a maximum combined availability of $9.5 million. As of
October 31, 2001, the Company had combined outstanding borrowings under
these lines of credit in the amount of $8,271,000, with $1,229,000 unused
and available. As of October 31, 2000, no borrowings were outstanding
under these lines of credit.
The lines of credit bear interest at 1.50% above the monthly LIBOR rate
(3.79% as of October 31, 2001 and 8.12% as of October 31, 2000) and are
equally and ratably collateralized 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.
41
OPTICAL CABLE CORPORATION
Notes to Financial Statements (Continued)
Years Ended October 31, 2001, 2000 and 1999
The Company is seeking to obtain $15 to $20 million in new credit (part
revolving line of credit and part term loan) to be collateralized by all of
the assets of the Company. This planned credit facility would replace the
current credit facilities described above.
(6) Related Party Transactions
Since February 1, 1995, the Company had entered into employment agreements
with the individual who was the Company's former Chairman, President and
Chief Executive Officer and its previously sole stockholder, which
typically had a term of less than two years. Annual compensation under the
agreements consisted of a base salary equal to one percent of the previous
fiscal year's net sales and a sales commission or incentive bonus of one
percent of any increase between the current fiscal year's net sales and the
prior fiscal year's net sales. The Company calculated and paid this
individual's incentive bonus on a monthly basis by comparing the prior
month's net sales with the net sales for the corresponding month in the
prior fiscal year. Such calculations were not cumulative, so, depending on
monthly net sales fluctuations during any given fiscal year, the individual
might receive monthly incentive bonuses with respect to net sales increases
in certain months even though annual cumulative net sales decreased when
compared to the prior fiscal year. Compensation under this arrangement,
which terminated on October 31, 2001, amounted to $681,546, $586,981 and
$539,997 for the years ended October 31, 2001, 2000 and 1999, respectively.
On December 3, 2001, the Company issued a press release that announced
that, upon the recommendation of the independent Special Committee of its
Board of Directors (the "Special Committee"), the Board of Directors had
removed this individual as the Company's Chairman, President and Chief
Executive Officer. Also see note 13.
During the year ended October 31, 2001, the Company paid $90,000 to
Serendipity Motorsports, a company owned by the daughter of the Company's
former Chairman, President and Chief Executive Officer. The payments were
for the sponsorship of a NASCAR Goody's Dash Series Team involving a race
car driven by the daughter.
(7) 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. During the years ended October 31, 2001, 2000 and
1999, total expense of $1,682,107, $925,347 and $837,488,
42
OPTICAL CABLE CORPORATION
Notes to Financial Statements (Continued)
Years Ended October 31, 2001, 2000 and 1999
respectively, was incurred under the Company's current insured and
previous self-insured health care program.
Effective January 1, 1994, the Company adopted a 401(k) retirement
savings plan. To become eligible for the plan, an employee must complete
at least six months of service and be at least 21 years of age. Employees
are eligible to enter the plan on January 1 or July 1 each year. The plan
allows participants to contribute through salary reduction up to 7% 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% of the employees' annual compensation. The Company made
matching contributions to the plan of $454,825, $406,934 and $365,887 for
the years ended October 31, 2001, 2000 and 1999, 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. As of
October 31, 2001, there were 4,986,438 additional shares available for
grant under the Plan. The options have terms ranging from 5.41 to 10
years, and generally vest 25% after two years, 50% after three years, 75%
after four years and 100% after five years, with certain option grants
vesting in equal monthly installments over four years.
The per share weighted-average estimated fair value of stock options
granted during 2001 was $4.22 on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions: no expected cash dividend yield, risk-free interest rate of
5.57%, expected volatility of 106.8% and an expected life of 4.87 years.
No new stock options were granted during the fiscal years ended October
31, 2000 and 1999; however, certain replacement options were granted as
further described below.
The Company applies APB Opinion No. 25 in accounting for its Plan and,
accordingly, no compensation cost has been recognized for its stock
options granted to employees in the financial statements. Had
compensation cost for the Company's Plan been determined consistent with
SFAS No. 123, the Company's net income (loss) and net income (loss) per
share would have been reduced to the SFAS No. 123 pro forma amounts
indicated below:
Years Ended October 31,
----------------------------------------
2001 2000 1999
------------ ----------- -----------
Net income (loss):
As reported $ (6,729,199) $ 8,255,058 $ 8,304,640
============ =========== ===========
Pro forma $ (7,295,776) $ 7,911,830 $ 7,961,412
============ =========== ===========
43
OPTICAL CABLE CORPORATION
Notes to Financial Statements (Continued)
Years Ended October 31, 2001, 2000 and 1999
Years Ended October 31,
----------------------------------------
2001 2000 1999
------------ ----------- -----------
Net income (loss) per share:
Basic:
As reported $ (0.12) $ 0.15 $ 0.15
============ =========== ===========
Pro forma $ (0.13) $ 0.14 $ 0.14
============ =========== ===========
Diluted:
As reported $ (0.12) $ 0.15 $ 0.15
============ =========== ===========
Pro forma $ (0.13) $ 0.14 $ 0.14
============ =========== ===========
Stock option activity for the years ended October 31, 2001, 2000 and 1999
is as follows:
Number of Weighted-Average
Shares Exercise Price
--------- ----------------
Balance at October 31, 1998 853,725 $ 3.97
Replacement options issued 3,449 7.25
Exercised (119,700) 1.67
Forfeited (26,250) 5.94
---------
Balance at October 31, 1999 711,224 4.28
Replacement options issued 1,500 $ 7.25
Exercised (268,336) 3.86
Forfeited (15,389) 6.02
---------
Balance at October 31, 2000 428,999 4.53
Granted 750,000 $ 7.54
Exercised (142,436) 2.07
Forfeited (23,001) 10.26
---------
Balance at October 31, 2001, (283,562 options
exercisable; 83,200 options at exercise
price of $1.67 per share with remaining
contractual life of 4.5 years, and 200,362
options at exercise price of $7.42 per share
with remaining contractual life of 4.5 years) 1,013,562 $ 6.97
=========
Included in the 750,000 options granted during the fiscal year ended
October 31, 2001 were 100,000 options to nonemployee sales
representatives. The Company recorded compensation expense of $5,593
related to these options for the fiscal year ended October 31, 2001.
No new stock options were granted during the fiscal years ended October
31, 2000 and 1999. However, prior stock options granted have a
replacement feature contained in the original terms of the award, 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.
44
OPTICAL CABLE CORPORATION
Notes to Financial Statements (Continued)
Years Ended October 31, 2001, 2000 and 1999
Replacement options were issued under this replacement feature during the
fiscal years ended October 31, 2000 and 1999.
Subsequent to October 31, 2001, the Board of Directors approved grants of
stock options for a total of 250,000 shares effective November 16, 2001
under the Company's 1996 Stock Incentive Plan. The per share exercise price
of $1.25 associated with these stock options was equal to the closing price
of the Company's common stock on the date of grant.
(8) 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. Management believes that credit
risks as of October 31, 2001 and 2000 have been adequately provided for in
the financial statements. As of October 31, 2001 and 2000, there were no
significant amounts receivable from any one customer other than those
described below.
For the year ended October 31, 2001, 13.6% or approximately $8,213,000 of
net sales were attributable to one major domestic distributor. Subsequent
to October 31, 2001, this distributor advised the Company that it will no
longer stock the Company's product line as part of its regular product
offering. The related trade accounts receivable for this distributor as of
October 31, 2001 totaled approximately $1,916,000. No single customer or
other distributor accounted for more than 10% of net sales for the year
ended October 31, 2001. As of October 31, 2001, no single customer or other
distributor had an outstanding balance payable to the Company in excess of
5% of total stockholders' equity.
For the year ended October 31, 2000, 28.0% or approximately $16,241,000 of
net sales were attributable to two major domestic distributors (12.5% or
approximately $7,246,000 to one of these major distributors and 15.5% or
approximately $8,995,000 to the other major distributor that filed for
protection from its creditors under the bankruptcy laws in January 2001).
The combined related trade accounts receivable for these distributors as of
October 31, 2000 totaled approximately $3,468,000. The Company specifically
reserved $1,772,000 for estimated uncollectible accounts receivable from
45
OPTICAL CABLE CORPORATION
Notes to Financial Statements (Continued)
Years Ended October 31, 2001, 2000 and 1999
one of these major distributors that filed for protection from its
creditors under the bankruptcy laws in January 2001 (see note 2). No
single customer or other distributor accounted for more than 10% 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% of total stockholders' equity.
For the year ended October 31, 1999, 30.6% or approximately $15,513,000
of net sales were attributable to two major domestic distributors (15.8%
or approximately $8,002,000 to one of these major distributors and 14.8%
or approximately $7,511,000 to the other major distributor that filed for
protection from its creditors under the bankruptcy laws in January 2001).
The combined related trade accounts receivable for these distributors as
of October 31, 1999 totaled approximately $3,294,000. No single customer
or other distributor accounted for more than 10% 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% of total stockholders' equity.
For the years ended October 31, 2001, 2000 and 1999, approximately 77%,
79% and 80%, respectively, of net sales were from customers located in
the United States, while approximately 23%, 21% and 20% , respectively,
were from international customers. Net sales attributable to the United
States and other foreign countries for the years ended October 31, 2001,
2000 and 1999 were as follows:
Years Ended October 31,
-----------------------------------------------
2001 2000 1999
------------- ------------ -------------
United States $ 46,342,042 $ 45,878,300 $ 40,687,466
Australia 828,006 801,641 702,780
Brazil 877,559 924,122 741,962
Canada 2,564,758 1,808,469 1,756,928
England 1,404,508 1,163,587 694,680
Japan 1,040,509 871,423 740,987
Other foreign countries 7,348,055 6,771,452 5,373,834
------------- ------------ -------------
Total net sales $ 60,405,437 $ 58,218,994 $ 50,698,637
============= ============ =============
None of the Company's long-lived assets are located outside the United
States.
(9) Income Taxes
Total income taxes for the years ended October 31, 2001, 2000 and 1999
were allocated as follows:
Years Ended October 31,
-----------------------------------------------
2001 2000 1999
------------- ------------ -------------
Income from continuing operations $ 2,297,466 $ 4,478,656 $ 4,214,096
Stockholders' equity, for disqualifying disposition
of stock options exercised (62,749) (1,354,718) (209,207)
------------- ------------ -------------
$ 2,234,717 $ 3,123,938 $ 4,004,889
============= ============ =============
46
OPTICAL CABLE CORPORATION
Notes to Financial Statements (Continued)
Years Ended October 31, 2001, 2000 and 1999
Income tax expense (benefit) attributable to income from continuing
operations for the years ended October 31, 2001, 2000 and 1999 consists
of:
Fiscal Year Ended October 31, 2001 Current Deferred Total
- ---------------------------------- -------------- -------------- --------------
U.S. Federal $ 2,458,680 $ (381,647) $ 2,077,033
State 268,716 (48,283) 220,433
-------------- -------------- --------------
Totals $ 2,727,396 $ (429,930) $ 2,297,466
============== ============== ==============
Fiscal 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
============= ============= ==============
Fiscal 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
============= ============= ==============
Reported income tax expense for the years ended October 31, 2001, 2000 and 1999
differs from the "expected" tax expense (benefit), computed by applying the U.S.
Federal statutory income tax rate of 35% to income (loss) before income tax
expense, as follows:
Years Ended October 31,
--------------------------------------------------
2001 2000 1999
-------------- -------------- -------------
"Expected" tax expense (benefit) $ (1,551,107) $ 4,456,800 $ 4,381,558
Increase (reduction) in income tax expense resulting from:
Benefits from Extraterritorial Income Exclusion
and Foreign Sales Corporation (155,846) (201,098) (326,662)
State income taxes, net of federal benefit (expense) (145,804) 295,853 254,359
Increase in the valuation allowance for deferred tax
assets 4,059,822 -- --
Other differences, net 90,401 (72,899) (95,159)
-------------- -------------- -------------
Reported income tax expense $ 2,297,466 $ 4,478,656 $ 4,214,096
============== ============== =============
47
OPTICAL CABLE CORPORATION
Notes to Financial Statements (Continued)
Years Ended October 31, 2001, 2000 and 1999
The significant components of deferred income tax expense (benefit) attributable
to income from continuing operations for the years ended October 31, 2001, 2000
and 1999 are as follows:
Years Ended October 31,
--------------------------------------------------
2001 2000 1999
-------------- --------------- ---------------
Deferred tax expense (benefit) (exclusive of the
effects of the other component below) $ (4,489,752) $ (737,717) $ 67,754
Increase in the valuation allowance for deferred
tax assets 4,059,822 -- --
------------ ------------- ------------
$ (429,930) $ (737,717) $ 67,754
============ ============= ============
The tax effects of temporary differences that give rise to significant portions
of the Company's deferred tax assets and deferred tax liabilities as of October
31, 2001 and 2000 are presented below:
October 31,
-------------------------------
2001 2000
-------------- --------------
Deferred tax assets:
Accounts receivable, due to allowance for doubtful accounts and
allowance for sales returns $ 561,400 $ 718,312
Inventories, due to allowance for damaged and slow-moving
inventories and additional costs inventoried for tax purposes
pursuant to the Tax Reform Act of 1986 527,770 66,070
Self-insured health care costs, due to accrual for financial reporting
purposes -- 44,780
Compensated absences due to accrual for financial reporting purposes 48,118 49,594
Capital loss carryforward and unrealized net loss on trading securities 4,059,822 187,368
Liabilities recorded for loss contingencies, deductible for tax purposes
when paid 413,002 --
Other 2,042 4,205
---------- ----------
Total gross deferred tax assets 5,612,154 1,070,329
Less valuation allowance (4,059,822) --
---------- ----------
Net deferred tax assets 1,552,332 1,070,329
Deferred tax liabilities:
Plant and equipment, due to differences in depreciation and capital
(222,130) (195,085)
Other receivables, due to accrual for financial reporting purposes (135,692) (110,664)
---------- ----------
Total gross deferred tax liabilities (357,822) (305,749)
---------- ----------
Net deferred tax asset $ 1,194,510 $ 764,580
========== ==========
As of October 31, 2001, the Company has assessed the realizability of its
deferred tax asset relating to the capital loss carryforward generated by the
sale of the Company's trading securities during the fiscal year ended October
31, 2001. The Company has determined that it is more likely than not that this
deferred tax asset totaling $4,059,822 as of October 31, 2001, will not be
realized. In addition, the capital loss carryforward may be limited due to
certain stock ownership changes. Accordingly, the
48
OPTICAL CABLE CORPORATION
Notes to Financial Statements (Continued)
Years Ended October 31, 2001, 2000 and 1999
Company has established a valuation allowance for deferred tax assets in
the amount of $4,059,822 as of October 31, 2001, which is included in
income tax expense for the fiscal year ended October 31, 2001. In order to
fully realize this deferred tax asset, the Company would need to generate
future taxable capital gains of approximately $11.1 million prior to the
expiration of the capital loss carryforward in 2006.
Based on the Company's historical and projected pretax earnings, management
believes that it is more likely than not that the Company's other deferred
tax assets will be realized.
(10) Fair Value of Financial Instruments
The carrying amounts reported in the balance sheet for cash, cash
equivalents, trade accounts receivable, other receivables, notes payable to
bank, accounts payable and accrued expenses, and payable to investment
broker related to securities trading approximate fair value because of the
short maturity of these instruments. For trading securities, fair value was
based on quoted market prices. The fair value for other noncurrent
liabilities is estimated by discounting the future cash flows at an
estimated interest rate of similar instruments of comparable maturities and
approximates the carrying amount reported in the balance sheet.
(11) Net Income (Loss) Per Share
The following is a reconciliation of the numerators and denominators of the
net income (loss) per share computations for the periods presented:
Net Loss Shares Per Share
Fiscal Year Ended October 31, 2001 (Numerator) (Denominator) Amount
- ---------------------------------- ----------- ------------- --------------
Basic net loss per share $ (6,729,199) 56,156,379 $ (0.12)
===========
Effect of dilutive stock options -- 189,638
----------- -------------
Diluted net loss per share $ (6,729,199) 56,346,017 $ (0.12)
=========== ============= ===========
Net Income Shares Per Share
Fiscal Year Ended October 31, 2000 (Numerator) (Denominator) Amount
- ---------------------------------- ----------- ------------- ------------
Basic net income per share $ 8,255,058 56,306,679 $ 0.15
============
Effect of dilutive stock options -- 451,503
----------- -------------
Diluted net income per share $ 8,255,058 56,758,182 $ 0.15
=========== ============= ============
Net Income Shares Per Share
Fiscal Year Ended October 31, 1999 (Numerator) (Denominator) Amount
- ---------------------------------- ----------- ------------- ------------
Basic net income per share $ 8,304,640 56,503,964 $ 0.15
==========
Effect of dilutive stock options -- 360,933
----------- -------------
Diluted net income per share $ 8,304,640 56,864,897 $ 0.15
=========== ============= ==========
49
OPTICAL CABLE CORPORATION
Notes to Financial Statements (Continued)
Years Ended October 31, 2001, 2000 and 1999
Stock options that could potentially dilute net income (loss) per share in
the future that were not included in the computation of diluted net income
(loss) per share (because to do so would have been antidilutive for the
periods presented) totaled 480,000 for the year ended October 31, 2001. No
such antidilutive stock options existed with respect to diluted net income
per share calculation for the years ended October 31, 2000 and 1999.
(12) 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 October 31, 2001, the Company has
repurchased 3,234,343 shares of its common stock for $24,145,368 in such
transactions since the inception of the Company's share repurchase program
in October 1997.
Effective September 20, 2001, the Company ceased the repurchase of shares
of its common stock under the share repurchase program.
On November 2, 2001, the Board of Directors of the Company adopted a new
Shareholder Rights Plan (the "Rights Plan") and declared a dividend of one
preferred share purchase right (a "Right") on each outstanding share of
common stock. Under the terms of the Rights Plan, if a person or group
acquires 15% (or other applicable percentage, as provided in the Rights
Plan) or more of the outstanding common stock, each Right will entitle its
holder (other than such person or members of such group) to purchase, at
the Right's then current exercise price, a number of shares of common stock
having a market value of twice such price. In addition, if the Company is
acquired in a merger or other business transaction after a person or group
has acquired such percentage of the outstanding common stock, each Right
will entitle its holder (other than such person or members of such group)
to purchase, at the Right's then current exercise price, a number of the
acquiring company's common shares having a market value of twice such
price.
Upon the occurrence of certain events, each Right will entitle its holder
to buy one one-thousandth of a Series A preferred share ("Preferred
Share"), at an exercise price of $25, subject to adjustment. Each Preferred
Share will entitle its holder to 1,000 votes and will have an aggregate
dividend rate of 1,000 times the amount, if any, paid to holders of common
stock. The Rights will expire on November 2, 2011, unless the date is
extended or unless the Rights are earlier redeemed or exchanged at the
option of the board of directors for $.0001 per Right. Generally, each
share of common stock issued after November 5, 2001 will have one Right
attached. The adoption of the Rights Plan has no impact on the financial
position or results of operations of the Company.
The Company has reserved 100,000 of its authorized preferred stock for
issuance upon exercise of the rights.
(13) 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 sought injunctive and other relief and damages
in an unspecified amount. On December 13, 2001, the parties reached an
agreement as to the amount of a settlement (subject to final documentation
and judicial review and approval), that affords both individual and class
relief, without any admission of liability. Pursuant to this agreement, the
Company wil pay $500,000 upon entry of a consent decree by the court,
$175,000 on the first anniversary and $175,000 on the second anniversary of
the consent decree, to satisfy any gender and race class claims; $75,000 to
one individual specifically named in the complaint; and at least $75,000
for the Company's planned diversity, recruitment and human resource
management programs over the term of the consent decree.
As a result, the Company recorded a charge in the fourth quarter of fiscal
year 2001 in the amount of $901,553 representing $575,000 (current portion)
payable upon entry of a consent decree by the court, as well as $326,553
(noncurrent portion) representing the present value of two equal payments
in the amount of $175,000 payable on the first and second anniversaries of
the entry of a consent decree by the court. The $75,000 to be used for the
Company's planned diversity, recruitment and human resource management
programs will be expensed as incurred.
The Company, the Company's former Chairman, President and Chief Executive
Officer, and various John Does (officers and/or directors of the Company
during the class period) were named as defendants in three class action
lawsuits filed in the United States District Court for the Western District
of Virginia (the "Suits"). The first class action lawsuit was filed on
November 26, 2001, by Charles S. Farrell, Jr., on behalf of himself and
others similarly situated. The second class action lawsuit was filed on
December 14, 2001, by Lerner Group, on behalf of itself and others
50
OPTICAL CABLE CORPORATION
Notes to Financial Statements (Continued)
Years Ended October 31, 2001, 2000 and 1999
similarly situated. The third class action lawsuit was filed on December
27, 2001, by Richard Simone, on behalf of himself and others similarly
situated. In each of the substantially similar suits, the plaintiffs
purport to represent purchasers of the Company's common stock during the
period ranging from July 31, 2000, through October 8, 2001 (the class
period), and allege that the Company violated federal securities laws and
made fraudulent and/or negligent misrepresentations and/or omissions. The
plaintiffs in each of the Suits seek compensatory and exemplary damages in
an unspecified amount, as well as reasonable costs and expenses incurred in
the cause of action, including attorneys' fees and expert fees.
Management intends to vigorously defend the Suits. The Company may,
however, incur substantial costs in defending itself against the Suits,
regardless of their merit or outcome. At this early stage in the Suits,
management cannot make a reasonable estimate of the monetary amount of
their resolution or estimate a range of reasonably possible losses, if any.
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
financial position, results of operations or liquidity.
The Company was named as a defendant in two lawsuits filed in the United
States District Court for the Southern District of New York seeking to
compel the Company to authorize the transfer agent to transfer
unregistered, restricted stock on the Company's stock ledger. The first
suit was filed on October 22, 2001, by Bear, Stearns & Co. Inc. and Bear,
Stearns Securities Corporation (collectively, "Bear Stearns"). The second
suit was filed on October 26, 2001, by UBS PaineWebber Inc.
("PaineWebber"). In each case the plaintiffs sought injunctive relief with
respect to shares of unregistered, restricted common stock of the Company
sold in the course of liquidating brokerage accounts or repossessed shares
of the former Chairman, President and Chief Executive Officer to cover
personal margin loans to him. Each of the lawsuits contains a claim for
damages caused by the alleged wrongful refusal by the Company to authorize
the transfers in connection with the liquidations. On October 31, 2001, the
Court in the Bear Stearns case entered an order directing the Company to
authorize the stock transfers sought by Bear Stearns and imposing certain
conditions on Bear Stearns in connection with such transfers. In early
November, the Company reached agreement with PaineWebber pursuant to which
the Company would authorize stock transfers in connection with the
liquidation of unregistered, restricted stock of the Company held by
PaineWebber upon the foreclosure of a brokerage account of the former
officer. Neither of the cases has been dismissed; however, the Company
believes that they will be resolved without any material liability on the
part 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.
(14) New Accounting Standards
In June 1998, the FASB issued 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
51
OPTICAL CABLE CORPORATION
Notes to Financial Statements (Continued)
Years Ended October 31, 2001, 2000 and 1999
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.
(15) Quarterly Results of Operations (Unaudited)
The following is a summary of the unaudited quarterly results of
operations for the years ended October 31, 2001 and 2000:
Quarter Ended
---------------------------------------------------------------------
Fiscal Year Ended October 31, 2001 January 31 April 30 July 31 October 31
- --------------------------------------- ----------------- ---------------- --------------- ---------------
Net sales $ 16,996,200 $ 17,376,605 $ 14,085,959 $ 11,946,673
Gross profit 7,878,269 7,828,473 6,105,949 2,609,027
Other expense, net (4,126,783) (5,236,430) (616,057) (1,743,477)
Income (loss) before income taxes (176,328) (1,154,263) 1,667,039 (4,768,181)
Net income (loss) (114,613) (3,657,928) 874,943 (3,831,601)
Basic and diluted net income (loss) per share -- (0.06) 0.02 (0.07)
Quarter Ended
-----------------------------------------------------------------
Fiscal 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
Basic and diluted net income per share 0.04 0.05 0.04 0.02
(16) Significant Fourth Quarter Adjustments
During the fourth quarter of fiscal year 2001, the Company recorded the
following significant fourth quarter adjustments, which aggregate to
approximately $5.4 million: a $901,553 charge for an anticipated
settlement with the EEOC for alleged prior discriminatory practices, a
$410,602 charge to
52
OPTICAL CABLE CORPORATION
Notes to Financial Statements (Continued)
Years Ended October 31, 2001, 2000 and 1999
write off deferred costs related to the aborted securities offering previously
anticipated during fiscal year 2001, a charge of approximately $1.2 million to
write down slow-moving and damaged inventory to net realizable value, a $508,225
charge to increase bad debt expense, a $1,662,657 charge to record realized
losses from the disposition of trading securities, and an increase in the
valuation allowance for deferred tax assets of approximately $687,000.
In addition, during the fourth quarter of fiscal year 2001, the Company recorded
an inventory adjustment to increase cost of goods sold by approximately $1.5
million caused by book to physical variances resulting from year-end physical
inventory counts and by the disposal of certain impaired finished goods
inventory during the fourth quarter.
During the fourth quarter of fiscal year 2000, the Company recorded a
significant fourth quarter adjustment to increase the allowance for doubtful
accounts by approximately $1,772,000 for estimated uncollectible accounts
receivable from a major distributor that filed for liquidation under bankruptcy
laws in January 2001. In addition, the Company recorded a $1,042,266 charge to
record realized and unrealized losses on trading securities.
53
Item 9. Changes in and Disagreements with Accountants or 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 2002 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 2002 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 2002 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
2002 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 Company'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
2002 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 Company, which is set forth under the caption "Certain
Relationships and Transactions with Management" in the Proxy
Statement for the 2002 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.
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:
54
Exhibit No. Description
- ----------- -----------
3.1 Articles of Amendment filed November 5, 2001 to the Amended
and Restated Articles of Incorporation, as amended through
November 5, 2001 (incorporated by reference to Exhibit 1 to the
Company's Form 8-A filed with the Commission on November 5,
2001).
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 Neil D. Wilkin, Jr. effective September 1, 2001.
10.4* Employment Agreement by and between Optical Cable Corporation and
Ken Harber, effective November 21, 2001, and amendment thereto.
10.5.* Employment Agreement by and between Optical Cable Corporation and
Luke Huybrechts, effective November 21, 2001, and amendment
thereto.
10.6 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).
10.7 Loan Agreement dated March 10, 1999 by and between Optical
Cable Corporation and First Union National Bank and modification
thereto dated December 15, 1999, and amendments thereto dated
October 3, 2001 and October 30, 2001.
10.8 Security Agreement, dated April 25, 1997, by and between
Optical Cable Corporation and First Union National Bank of
Virginia and Security Agreement, dated March 13, 1996 by and
between Optical Cable Corporation and First Union National Bank
of Virginia.
10.9 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 (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).
55
10.11* 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).
10.12* Optical Cable Corporation 1996 Stock Incentive Plan
(incorporated by reference to Exhibit 28.1 to the
Registrant's Registration Statement on Form S-8 No.
333-09733).
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 was one report on Form 8-K filed by the Company during the fourth
quarter of fiscal year 2001.
Form 8-K dated October 2, 2001, reporting under Item 1.
56
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, 2002 By /s/ Neil D. Wilkin, Jr.
-----------------------
Neil D. Wilkin, Jr.
Acting President, Senior Vice
President, Chief Financial
Officer and Director
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, 2002.
Date: January 29, 2002 /s/ Neil D. Wilkin, Jr.
-----------------------
Neil D. Wilkin, Jr.
Acting President, Senior Vice
President, Chief Financial Officer
(principal executive officer,
principal financial and accounting
officer) and Director
Date: January 29, 2002 /s/ Luke J. Huybrechts
----------------------
Luke J. Huybrechts
Senior Vice President of Sales
and Director
Date: January 29, 2002 /s/ Kenneth W. Harber
----------------------
Kenneth W. Harber
Vice President of Finance,
Treasurer, Secretary and Director
Date: January 29, 2002
----------------------
Randall H. Frazier
Director
Date: January 29, 2002 /s/ John M. Holland
-------------------
John M. Holland
Director
Date: January 29, 2002 /s/ Robert Kopstein
-------------------
Robert Kopstein
Director
57
INDEX TO ATTACHED EXHIBITS
Exhibit No. Description
- ----------- -----------
10.3 Employment Agreement by and between Optical Cable
Corporation and Neil D. Wilkin, Jr. effective
September 1, 2001.
10.4 Employment Agreement by and between Optical Cable
Corporation and Ken Harber, effective November 21, 2001,
and amendment thereto.
10.5 Employment Agreement by and between Optical Cable
Corporation and Luke Huybrechts, effective
November 21, 2001, and amendment thereto.
10.7 Loan Agreement dated March 10, 1999 by and between Optical
Cable Corporation and First Union National Bank and
modification thereto dated December 15, 1999, and
amendments thereto dated October 3, 2001 and October 30,
2001.
10.8 Security Agreement, dated April 25, 1997, by and between
Optical Cable Corporation and First Union National Bank of
Virginia and Security Agreement, dated March 13, 1996 by and
between Optical Cable Corporation and First Union National
Bank of Virginia.
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.
58