SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
---- EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
---- EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 0-27022
OPTICAL CABLE CORPORATION
(Exact name of registrant as specified in its charter)
Virginia 54-1237042
(State of incorporation) (I.R.S. Employer
Identification No.)
5290 Concourse Drive
Roanoke, Virginia 24019 (540) 265-0690
(Address of principal (Telephone Number)
executive offices)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. (1) Yes X No (2) Yes X No
--- --- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
The aggregate market value of shares of common stock held by
affiliates at January 14, 2000 was $25,400,547.
As of January 14, 2000, 37,465,746 shares of the Registrant's Common Stock
were outstanding.
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DOCUMENT INCORPORATED BY REFERENCE
Portions of Optical Cable Corporation's definitive Proxy Statement for its 2000
Annual Meeting of Shareholders to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A under the Securities Exchange Act of 1934
(the "Proxy Statement") are incorporated by reference into Part III of this Form
10-K.
PART I
ITEM 1. BUSINESS
GENERAL
The Company manufactures and markets a broad range of fiber optic cables
for "high bandwidth" transmission of data, video and audio communications over
moderate distances of up to approximately [10] miles. The Company's cables can
be used both indoors and outdoors, are easy and economical to install, and
provide a high degree of reliability. The Company believes that its products are
widely accepted for use in fiber optic local area networks ("LANs") and are
increasingly accepted in other communications applications. The Company's
products directly address the needs of the moderate distance market by utilizing
a tight-buffered coating that protects the optical fiber and a cable design that
achieves superior mechanical and environmental performance.
The Company was incorporated in Virginia in 1983. The Company's executive
offices are located at 5290 Concourse Drive, Roanoke, Virginia 24019, telephone
number (540) 265-0690.
INDUSTRY BACKGROUND AND MARKETS
Application of Fiber Optic Communications Technology
Fiber optic technology was developed in the mid-1970s as a communications
medium offering numerous technical advantages over metallic conductors such as
copper. Optical fiber is an ultrapure glass structure that has been pulled into
a hair thin strand. Optical fiber's advantages include its high bandwidth, which
permits reliable transmission of complex signals such as multiple high-quality
audio and video channels, high-speed data formats such as Fiber Distributed Data
Interface ("FDDI") and Asynchronous Transfer Mode ("ATM"), other LAN
transmissions, and high-definition television. Relative to copper, optical fiber
has thousands of times the information carrying capacity, occupies much less
space and operates more reliably over greater distances. Furthermore, it is
immune to the electromagnetic interference that causes static in copper wire
transmission, as well as to electrical surges. Because optical fiber does not
carry electricity, it is a safer choice in flammable environments. Additionally,
communicating through optical fiber is more secure than copper because tapping
into fiber optic cable without detection is very difficult. Optical fiber also
enjoys technical advantages over other communications media such as satellite
and microwave communications, particularly in applications over shorter
distances.
Because most of the world's information storage, reception and display
systems (such as computers, telephones and televisions) are electronically
based, various electro-optical hardware components must be attached to each end
of an optical fiber. For instance, a laser or light emitting diode converts
electrically encoded information into light signals, which travel over the
optical fiber to the terminal point of reception. At the terminal point a
photodetector converts the information back to its original form. Other passive
optical components such as optical connectors and splices facilitate the travel
of a light signal from one optical fiber to another or to another
electro-optical component, while couplers and splitters combine or divide
signals, thereby permitting simultaneous distribution of information to or from
multiple locations. The cost of the necessary electro-optical transmitters and
recorders have been reduced to the point where fiber optic-cable is economically
feasible for many moderate distance applications.
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Like copper cable, fiber optic cable is restricted to applications in
which it is possible to lay cable between the point of transmission and the
point of reception. Wireless communication media do not have this limitation.
The Long Distance Telephone Market
Private industry initially developed optical fiber systems for long
distance commercial applications, particularly the U.S. telephone networks. For
the long distance telephone market, "single mode" optical fiber is generally
used. To protect the optical fiber without adversely affecting its optical
performance, fiber optic cable producers use a high-density (i.e., high fiber
count) "loose tube" cable construction. This cable design was intended to put
many optical fibers in a small, relatively inexpensive cable. To protect such
cables from water penetration, manufacturers add a water-blocking but flammable
gel, making them unsuitable for indoor use.
U.S. long distance carriers have aggressively installed fiber optic routes
across the United States. Since the late 1980s, optical fiber has constituted
nearly all of the long distance telephone network, as well as the interoffice
local exchange network connecting central telephone offices in the same area.
The Moderate Distance Market
In the 1970s the U.S. government made available substantial funds for
research and development to determine the viability of optical fiber as a
solution to critical communications problems faced by the military and other
agencies. In the course of addressing these challenging, multiple termination
point applications, which were predominately over moderate distances, engineers
achieved significant technological advances. Such advances included the
introduction of "multimode" optical fiber and the development of an
easy-to-handle "tight-bound" cable structure that afforded the optical fiber
effective protection against mechanical shock, water, extreme temperatures and
other stresses likely to be encountered in a battlefield environment.
High levels of production of optical fiber, cable and components for the
long distance telephone market since the mid-1980s have resulted in cost
reductions that make fiber optic cable economically feasible for a growing
number of potential customers with moderate distance business application needs.
Such applications include data communications, LANs, telecommunications, video
transmission, including cable television, and military tactical communications.
Particularly in data communications, high performance, rugged, and survivable
fiber optic cable is well suited and has become economically attractive for
diverse and often unpredictable installation environments. The Company believes
that the LAN market is particularly attractive. LANs are often installed at
corporate offices, hospitals, utilities, academic campuses, factories and
transportation management facilities.
The increasing standardization of communications technology and the
increasing demand for high bandwidth (i.e., high data capacity or volume) are
expected to facilitate optical fiber's further penetration of the moderate
distance market presently served by copper cable. Fiber optic cable is better
able to maximize the utility of emerging LAN interface standards, such as FDDI
and ATM, and has therefore become a preferred data transmission medium. In
addition, high speed, high bandwidth applications, such as video conferencing,
imaging and Internet access, are growing and are driving increased demand for
fiber optic cable in moderate distance applications.
The large cable television companies, often referred to as Multiple System
Operators, the Regional Bell Operating Companies ("RBOCs"), and other
independent long distance carriers are competing to provide enhanced cable
television, data, and other information highway services to homes and
businesses. Many of these companies have begun to use, on a limited basis,
optical fiber systems in the portion of the U.S. telephone networks which lies
between telephone companies' central offices and subscribers' offices and homes
(the "subscriber loop"). To date, the subscriber loop remains overwhelmingly
copper. Because the subscriber loop represents approximately 90% of the U.S.
telephone system (measured by total length of cable), the potential demand for
fiber optic cable in this application is very large, provided that cost parity
with copper cable systems can be achieved.
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THE COMPANY'S SOLUTION
Fiber optic cables used for moderate distance applications may be
subjected to many different stress environments. Cables installed inside
buildings may be routed through cable trays, floor ducts, conduits and walls and
may encounter sharp corners or edges. They may be pulled without lubricant,
resulting in higher pull tensions, and stressed to the breaking point if care is
not used. In the outdoor and underground environments, cables are often
subjected to moisture, ultra-violet radiation and long pulling distances through
conduits with a variety of bends and corners, resulting in high pulling
tensions. These conditions can be aggravated if installers are not adequately
trained in the installation of fiber optic cable. The Company's founders
recognized that, for many applications, the stresses on the cables during
installation are similar to those in the military tactical environment, for
which the Company's technology was initially developed. The Company applied this
technology to commercial products serving a market that could not be adequately
served by gel-filled, loose tube cable manufactured for the long distance
telephone market.
The Company believes that nearly one-half of the fiber optic cable sold in
the moderate distance market today is the gel-filled, loose tube type, which
requires careful installation and extensive preparation for termination with
connectors. While this cable design has served the long distance telephone
market reasonably well, it was not designed to withstand the stress that cables
undergo during installation in the LAN or subscriber loop environments.
Gel-filled, loose tube cables are difficult to terminate with connectors,
because they cannot be mechanically attached directly to the cable's optical
fibers. Designed for long, straight outdoor runs, the cables are stiff and
difficult to place in complex installations and are flammable and thus not
suited for indoor use. When used for indoor/outdoor installations, these cables
must be spliced near the building entrance to flame retardant cables suitable
for indoor use, adding cost and complexity and reducing reliability. Therefore,
the total installed cost of gel-filled, loose tube cables is high in moderate
distance applications.
In contrast, the Company's products address the needs of the moderate
distance market by utilizing a tight-buffered coating that protects the optical
fiber and a cable design that achieves superior mechanical and environmental
performance. The Company's products are derived from technology originally
developed for military applications requiring very rugged, flexible and compact
fiber optic cables. Unlike gel-filled cables, the Company's cables may be used
indoors and outdoors, are flame resistant, flexible, easy and economical to
install, and provide a high degree of reliability. The Company believes that
because of these features, its products are widely accepted for use in fiber
optic LANs and are increasingly accepted in other applications.
THE COMPANY'S STRATEGY
The Company's primary strategy is to capitalize on its proprietary cable
manufacturing processes and technologies to provide a comprehensive line of
versatile fiber optic cables with superior features and competitive pricing that
appeals to the large, diverse and growing market for high bandwidth
communications over moderate distances.
Focus on the Moderate Distance Market
Optical fiber has become an accepted medium for the transmission of data,
video and audio in moderate distance applications in cities, factories, high
rise buildings, and on campuses. High speed, high bandwidth applications
deployed in LAN environments are growing in both large and small corporations
and are driving increased demand for optical fiber. Increasing deployment of
multimedia systems on LANs that utilize protocols such as FDDI and ATM also
enhances the demand for bandwidth.
The Company's products address the needs of the moderate distance market
by utilizing a tight-buffered coating that protects the optical fiber and a
cable design that achieves superior mechanical and environmental performance.
The Company believes that because of the outstanding features of its fiber optic
cable, including suitability for indoor and outdoor use, easy and economical
installation and a high degree of reliability, the Company's products have
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become well established for optical fiber LANs and are increasingly accepted for
other applications.
Develop High Performance Products and Offer a Broad Product Line
The Company believes that serving both the premium performance and the
price competitive parts of the moderate distance market best utilizes its
development and manufacturing capabilities. The Company's Ultra-FoxTM product
line provides optical fiber products that are competitively priced, with
features that the Company believes are superior to its competitors' offerings.
The Ultra-FoxTM plus product line shares many of the materials and features with
the Company's military tactical cable products and is marketed to customers who
want the most reliable installations for their critical communication or control
processes. Since January 1994, the Company's quality management system has been
certified to the internationally recognized ISO 9001 quality standard.
Leverage Existing Technologies and Knowledge
The Company has extensive expertise in optical fiber packaging and
applications design, which it utilizes for new products. The Company is
responsive to, and works to anticipate the requirements of, its customers. Its
expertise with tight-buffered cable technology facilitates development of new
products and variations of existing products. Products that are developed for a
special application also may be introduced to the broader market.
Capitalize on Proprietary, Automated Manufacturing Processes
The Company believes that its customized, internally developed and highly
automated manufacturing processes provide a competitive advantage. The Company
has developed proprietary process control systems to ensure consistency and
uniformity at high throughput rates. Ample capacity, versatile automated
production processes and a broad range of products are intended to enable the
Company to be flexible and responsive to customer needs.
Offer Cost Effective Solutions to its Customers
The Company believes that its products are rugged, easy to install,
versatile and highly reliable, making them attractive to distributors,
installers, and most importantly, end users. Because the Company's cables are
multipurpose, distributors can stock fewer varieties and therefore less
quantities of cable. For installers and systems integrators, the multipurpose
feature can significantly reduce installation costs by eliminating the need to
transition from indoor cable to outdoor cable at a building entrance. This also
enhances reliability by eliminating splices and possible high stress on optical
fibers that could lead to breakage. This simplified installation, lower cost and
enhanced reliability are also valued by the end user, because a long lasting,
trouble-free cable is the basis for minimizing down time and maximizing system
availability.
Distribution and Marketing Presence
The Company distributes its products through independent distributors to
supplement the Company's existing distribution channels and to provide the
Company with access to a greater number of potential customers in the United
States. Revenues from international sales were approximately 27%, 22% and 20% in
fiscal 1997, 1998 and 1999, respectively. The Company does not separately track
gross profit or expenses attributable to international sales. Management of the
Company does not regularly evaluate international sales by region.
Substantially, all of the Company's international sales are denominated in U.S.
dollars. The Company has no material assets located outside of the United
States. (See also Note 9 to the Financial Statements which begins on page 34.
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Working with IBM's E-Commerce division, the Company launched its
E-Commerce website (http://purchasing.occfiber.com) in March 1999. Initially,
the E-commerce site will include only the Company's product line. The Company
intends to look for opportunities to establish strategic alliances with other
leading suppliers of communications equipment to expand the web-site's future
offerings and eventually create an independent communications superstore which
would offer one-stop shopping to global purchasers of communication materials.
PRODUCTS AND TECHNOLOGY
Products
The Company manufactures and markets a broad range of fiber optic cables
that provide a high bandwidth transmission for data, video and audio
communications over moderate distances. The Company's products are derived from
technology originally developed for military applications requiring very rugged,
flexible and compact fiber optic cables. The Company's method of applying a
tight-buffered coating on each optical fiber before it is encased minimizes
microbending, the primary cause of signal loss in optical fibers.
The Company has pioneered a pressure-extrusion technique for applying a
cable jacket directly over the fiber optic cable core elements, resulting in
high cable tensile strength and lateral stress resistance. Such Core-LockedTM
jackets allow the cable to operate as a single mechanical unit, maximizing
resistance to tears during installation pulls through narrow spaces. The
Company's product line is deliberately diverse and flexible, in keeping with the
evolving application needs within the moderate distance market. Most of the
Company's cable designs are available in both the Ultra-FoxTM Plus premium
product and the Ultra-FoxTM highly featured but cost competitive commercial
product.
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<TABLE>
<CAPTION>
Product Type Features/Description Applications
------------ -------------------- ------------
<S> <C> <C>
A-Series Simplex and Duplex simplex (one optical fiber) short "patch cord" cables
"Assembly" Cables and duplex (two optical links between electronic
fibers) cables equipment and main fiber
tight-buffered coating on optic cable
each optical fiber routing connections in
aramid yarn strength patching systems
members indoor use
thermoplastic outer jacket
flame retardant
B-Series "Breakout" 2 to 156 optical fibers direct termination with
Cables tight-buffered coating on connectors on each optical
each optical fiber fiber
elastomeric jacket short and moderate distance
encases each optical fiber links between buildings or
and surrounding aramid within a building, where
yarn strength members multiple termination points
(similar to an A-Series are needed
simplex cable) installations where ease of
Core-LockedTM outer termination and termination
jacket cost are important factors
rugged indoor and outdoor use
flame retardant
moisture and fungus
resistant
D-Series "Distribution" 2 to 156 optical fibers longer distance runs where
Cables tight-buffered coating on size and cable cost are
each optical fiber more significant
Core-LockedTM outer can be armored for
jacket encases the optical additional protection in
fibers and aramid yarn buried and overhead
strength members installations
smaller, lighter and less indoor and outdoor use
expensive than the B-
Series cable
high strength to weight
ratio
compact size
rugged
flame retardant
moisture and fungus
resistant
G-Series "Subgrouping" up to 864 optical fibers in high fiber count systems
Cables various subgroup sizes subgroups needed to
multi-fiber subcables, each facilitate organization of
similar to a D-Series cable large numbers of optical
Core-LockedTM outer fibers
jacket surrounds subcables routed to different
subcables locations
high density "micro" installations requiring
construction several different optical fiber
rugged types
flame retardant indoor and outdoor use
moisture and fungus
resistant
</TABLE>
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A-Series Simplex and Duplex "Assembly" Cables. Simplex and duplex cables are
round single fiber and "zip cord" two-fiber structures, respectively. Both
cables contain tight-buffered optical fibers, aramid yarn strength members and a
thermoplastic outer jacket for each fiber. They are used for "jumpers" (short
length patch cords) and for "pigtails" (short lengths of cable with a connector
on one end). Various outer jacket materials are offered to provide flammability
ratings and handling characteristics tailored to customers' needs. These cables
are often privately labeled and sold to original equipment manufacturers
("OEMs") who produce the cable assemblies.
B-Series "Breakout" Cables. The B-Series cables consist of a number of
subcables, each consisting of a single optical fiber and aramid yarn strength
members similar to an A-Series simplex cable. These subcables are tight-bound in
a pressure-extruded, high performance Core-LockedTM PVC outer jacket to form the
finished multi-fiber cable. Like the A-Series cables, the subcables are intended
to be terminated directly with connectors. This direct termination feature makes
this cable type particularly suited for shorter distance installations, where
there are many terminations and termination costs are more significant. The
materials and construction of the cable permit its use both indoors and
outdoors. These features make the cable cost effective for use in campus and
industrial complex installations, between and within buildings.
D-Series "Distribution" Cables. The Company's D-Series cables are made with
the same tight-buffered optical fiber and high performance Core-LockedTM PVC
outer jacket as the B-Series cable. Unlike the B-Series cable, however, each
tight-buffered optical fiber in a D-Series cable is not covered with a separate
subcable jacket. D-Series cable is intended for longer distance applications,
where termination considerations are less important and often traded off for
size, weight and cost. The tight-buffered optical fiber and Core-LockedTM PVC
outer jacket make D-Series cables rugged and survivable, with a small,
lightweight configuration. The high strength to weight ratio of these cables
makes them well suited for installations where long lengths of cables must be
pulled through duct systems. D-Series cable is used in relatively longer length
segments of installations.
G-Series "Subgrouping" Cables. This cable design combines a number of
multi-fiber subcables, each similar to a D-Series cable. Each multi-fiber
subcable is tight-bound with an elastomeric jacket, providing excellent
mechanical and environmental performance. These subcables are contained in a
pressure extruded, high performance Core-LockedTM PVC outer jacket to form the
finished cable. This design permits the construction of very high fiber count
cables. These cables may be used where groups of optical fibers are routed to
different locations. The Company has fabricated a developmental sub-group cable
containing over 1,000 fibers intended for high density, moderate length routes
such as urban telephone distribution systems.
Other Cable Types. The Company produces many variations on the basic cable
styles presented above for more specialized installations. For outdoor
applications, both the B-Series and D-Series cables may be armored with
corrugated steel tape for further protection in underground or overhead
installations. For overhead installations on utility poles, the Company offers
several self-supporting versions of the D-Series cables, with higher performance
outer jackets. One contains additional aramid yarn strength members, to support
its weight with wind and ice loading over long unsupported lengths. Another
style has a separate strength member, either metallic or non-metallic, in a
figure eight configuration, to reduce installation costs. The Company's cables
are available in several flammability ratings, including "plenum" for use in
moving air spaces in buildings, and "riser" for less critical flame retardant
requirements. "Zero halogen" versions of the B-Series and D-Series cables are
available for use in enclosed spaces where there is concern over release of
toxic gases during fire. Composite cables combining optical fiber and copper are
offered to facilitate the transition from copper-based to optical fiber-based
systems without further installation of cable.
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Product Development
The Company continues to develop enhancements to its automated,
computer-controlled production processes that it believes increase product
quality and reduce costs. Many of the Company's technological advances are the
result of refinements and improvements made during production runs.
Occasionally, potential customers contact the Company to develop new products or
modified product designs for them, which ultimately may appeal to other
customers. The development costs associated with new products and modified
product designs requested by the customer are included in the price charged to
that customer. By utilizing these new products and modified product designs, the
Company continues to improve its product line with minimal direct expenditures
for research and development.
MAJOR MARKET APPLICATIONS
The most common application of the Company's products is in LANs, where
optical fiber is widely used as the "backbone" or "trunk," connecting groups of
work stations and central file servers. In its typical implementation, the fiber
optic cable may be installed between wiring closets in a building, or installed
between buildings in a multi-building complex. Fiber optic cable runs between
electronic equipment that combines the signals of many workstations. Because the
combined signals may carry a large volume of critical information, fiber optic
cable, which is immune to electrical interference, is often desired. In
comparison, copper wires carry less information, or the same amount of
information for a shorter distance, in either case remaining susceptible to
electrical noise and interference. The following are typical applications for
the Company's fiber optic cable:
Office Facilities. Banks, stock trading companies, insurance companies, and
other businesses often have a need to distribute information among a large
number of workstations, have time-critical data and would incur severe costs as
a result of system failures. A LAN connected with fiber optic cable has in the
past several years been an increasingly common way of implementing management
information systems for these businesses.
Educational Institutions. Colleges and universities have been leaders in
implementing large fiber optic networks. Many states have undertaken large-scale
projects to install networks in high schools and even grade schools. These
systems link personal computers with central file servers. As interactive
learning systems require increased transmission speeds, optical fiber becomes a
logical medium.
Manufacturing and Mining Facilities. Manufacturing and mining facilities are
typically not air conditioned, are less clean and otherwise have a less
controlled environment than other types of businesses. They often contain heavy
electrical equipment, which causes electromagnetic interference if conventional
copper cable is used. The advantages of fiber optic cable in this environment
include immunity to electrical noise, ruggedness, high information carrying
capacity and greater distance capability. The Company's products are installed
in automotive assembly plants, steel plants, chemical and drug facilities,
petroleum refineries, mines and other similar environments.
Health Care Facilities. Hospitals have extensive data transfer needs for
medical records, patient monitoring, inventory, billing and payroll functions.
The transfer of electronically stored images of x-rays, MRIs and CAT scans has
increased to facilitate analysis and diagnosis at multiple locations. These
applications require high data transfer rates. Optical fiber is a preferred
solution, especially in electromagnetic environments with heavy electrical
equipment such as x-ray machines.
Traffic Control Systems. Traffic system applications range from surveillance
and control of traffic flow in cities to installation of sensors, automatic toll
collection, video monitoring and control of signs in "smart" highway programs.
These applications often require transmission of high bandwidth signals such as
video monitoring, for which optical fiber is well suited. The Company's cables
offer ruggedness, reliability and cost savings for termination in systems that
are near the vibrations of traffic and require many termination points.
Telephone Companies. The Company has worked with several RBOCs for their
business customers' requirements. As high bandwidth services of the information
highway are brought closer to more homes and businesses, the bandwidth of
optical fiber becomes more important.
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SALES, MARKETING AND CUSTOMER SERVICE
The Company's products are sold to end users, electrical contractors, system
integrators, value-added resellers ("VARs"), OEMs and distributors.
Additionally, the Company has plans to establish a subsidiary which will offer
the Company's products over the Internet. Distribution methods are adapted to
the particular needs of different types of customers. The decision to purchase
the Company's products may be made by end users, distributors, electrical
contractors, system integrators or specialized installers. The Company attempts
to reach these decision makers by advertising in fiber optics trade journals and
other communications magazines. The Company also participates in numerous
domestic and international trade shows attended by customers and prospective
customers. International sales are made primarily through foreign distributors,
system integrators and VARs.
The Company's field sales force consists of independent sales
representatives located in various geographic areas. The field sales force
provides sales support for distributors, system integrators and VARs and
communicates with the customer's purchase decision makers. The field sales force
is supported by inside sales personnel and supervised by regional sales
managers. The inside sales group provides quotations and customer service. The
regional sales managers provide on-site sales support with major customers and
are responsible for major customers and opportunities. For more in-depth
technical support, the sales group has access to engineering, quality control
and management personnel who have extensive fiber optic cable expertise and
industry experience.
Furthermore, the Company believes that it has a reputation for product
excellence based on its success with large projects for end users such as
Chrysler Corporation, 3M, Virginia Polytechnic Institute and State University,
Bankers Trust and Salomon Brothers Inc, and for integrators such as Ameritech
Information Systems and US WEST. The Company had no single customer that
accounted for more than 5% of its net sales in fiscal 1997, 1998 or 1999.
However, in fiscal 1997, 1998 and 1999, 21.7%, 27.3% and 30.6%, respectively, of
net sales were attributable to two major domestic distributors. Most of the
Company's revenue in each quarter results from orders received in that quarter.
Accordingly, the Company does not believe that its backlog at any particular
point in time is indicative of future sales. The Company believes that its
customer base is diverse, crossing over many markets and regions worldwide and
believes that it is important to maintain that diversity to avoid dependence on
any particular segment of the economy or area of the world.
MANUFACTURING AND SUPPLIERS
The Company's manufacturing operations consist of applying a variety of raw
plastic materials to optical fibers. The key raw material in the manufacture of
the Company's products is optical fiber, which the Company currently purchases
from four manufacturers. The Company works with its vendors in an effort to
ensure a continuous supply. The Company utilizes two sources for the cable's
aramid yarn strength member and several suppliers of coating materials. The
Company has not experienced difficulty in arranging alternate sources. All other
raw materials have at least one backup source.
The Company believes that by maintaining a consistent relationship with
suppliers, it can obtain better quality control and emergency deliveries. Being
able to deliver product on time has been an important factor in the Company's
success. To date, the Company has been able to obtain adequate supplies of its
raw materials in a timely manner from existing sources or, when necessary, from
alternate sources. However, any disruption in the supply of raw materials could
adversely affect the Company's cable production capability and its operating
results.
The Company believes that other fiber optic cable manufacturers generally
carry minimal amounts of raw materials and finished goods inventory. The Company
generally holds raw materials and finished goods inventory in amounts greater
than that of its competitors to ensure a quick response after receiving a
customer's order.
The Company believes its quality control procedures have been instrumental
in achieving the performance and reliability of its products. The Company
produces cable using the quality control procedures of MIL-I-45208 (the primary
standard applicable to most government purchasers of cable).
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Since January 1994, the Company's quality management system has been
certified to the internationally recognized ISO 9001 quality standard. ISO 9000
is a series of standards agreed to by the International Organization for
Standardization (ISO). ISO 9001 is the highest level of accreditation and
includes an assessment of 20 elements covering various aspects of design
development, procurement, production, installation and servicing. The Company's
certification was obtained through an audit by a qualified international
certifying agency. In order to maintain its certification, the Company must
continue to comply with the standards.
PROPRIETARY RIGHTS
None of the Company's current manufacturing processes or products is
protected by patents. The Company relies on a combination of trade secret,
copyright and trademark law, nondisclosure agreements and technical measures to
establish and protect its rights pertaining to its production technology. Such
protection may not deter misappropriation or preclude competitors from
developing production techniques or equipment with features identical, similar
or superior to the Company's. The Company believes, however, that because of the
rapid pace of technological change in the data communications industry and
particularly in the fiber optic cable segment, legal protection for the
Company's products is less significant to the Company's prospects than the
knowledge, ability and expertise of its management and technical personnel with
respect to the timely development and production of new products and product
enhancements. The Company considers its proprietary knowledge with respect to
the development and manufacture of fiber optic cable to be a valuable asset.
This expertise enables the Company to formulate new cable compositions, develop
special coatings and coating methods, develop and implement manufacturing
improvements and quality control techniques, and design and construct
manufacturing and quality control equipment. The Company restricts access to its
manufacturing facility and engineering documentation to maintain security.
Employees are required to sign nondisclosure agreements.
The Company believes that none of its products, trademarks or other
proprietary rights infringes upon the proprietary rights of others. There can be
no assurance, however, that third parties will not assert infringement claims
against the Company in the future with respect to the Company's present or
future products which may require the Company to enter into license agreements
or result in protracted and costly litigation, regardless of the merits of such
claims.
COMPETITION
The market for fiber optic cable, including the moderate distance market in
which the Company's products are concentrated, is highly competitive. Siecor
Corp. (a joint venture of Siemens AG and Coming) and Lucent Technologies are the
leading manufacturers of fiber optic cable for both the long distance telephone
market and the moderate distance market. Although both manufacture gel-filled,
loose tube cables, a significant portion of Lucent Technologies and Siecor
Corp.'s fiber optic cable sales are tight-buffered fiber optic cable products in
the moderate distance market. Also, Coming and Lucent Technologies are principal
suppliers of optical fiber worldwide. The Company's competitors, including
Siecor Corp. and Lucent Technologies, are more established, having a large
business base in the long distance telephone, gel-filled, loose tube cable
market. Those companies can benefit from greater market recognition and have
greater financial, research and development, production and marketing resources
than the Company.
Additionally, fiber optic cable competes with copper wire cable on the basis
of cost and performance tradeoffs. The cost of the electro-optical interfaces
required for fiber optic systems and higher speed electronics generally
associated with high performance fiber optic systems can make them uncompetitive
in applications where the advantages of optical fiber are not required. Fiber
optic cable also competes with other alternative transmission media including
wireless and satellite communications.
11
<PAGE>
The Company believes that it competes successfully against its competitors
on the basis of breadth of product features, quality, ability to meet delivery
schedules, technical support and service, breadth of distribution channels and
price. Maintaining such competitive advantages will require continued investment
by the Company in product development, sales and marketing. There can be no
assurance that the Company will have sufficient resources to make such
investments or that the Company will be able to make the technological advances
necessary to maintain its competitive position. An increase in competition could
have a material adverse effect on the Company's business and operating results
because of price reductions and loss of market share. Competition could increase
if new companies enter the market or if existing competitors expand their
product lines.
EMPLOYEES
As of October 31, 1999, the Company employed a total of 140 persons, including
30 in sales, marketing and customer service, 12 in engineering, product
development and quality control, 84 in manufacturing, and 14 in finance and
administration. None of the Company's employees is represented by a labor union.
The Company has experienced no work stoppage and believes its employee relations
are excellent.
ITEM 2. PROPERTIES
The Company's principal administration, marketing, manufacturing, and
product development facilities are located in a 148,000 square foot building
located adjacent to the Roanoke, Virginia airport and major trucking company
facilitates. The Company believes that its production equipment is presently
operating at approximately 50% of its capacity.
ITEM 3. LEGAL PROCEEDINGS
In the opinion of the Company's management, there are no legal proceedings
pending to which the Company is a party or to which any of its properties is
subject, other than ordinary, routine litigation incidental to the business
which is not expected to have a material adverse effect on the results of
operations, financial condition or cash flows of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no issues or matters submitted to a vote of security holders
during the fourth quarter of the fiscal year ended October 31, 1999.
12
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the Nasdaq National Market under the
symbol "OCCF". The following table sets forth for the fiscal periods indicated
the high and low sales prices of the Common Stock, as reported on the Nasdaq
National Market, during the two most recent fiscal years. On January 14, 2000,
the Company's Common Stock closed at a price of $17.375 per share.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED OCTOBER 31, 1999 HIGH LOW
---------------------------------- ---- ---
<S> <C> <C>
First Quarter (November 1, 1998 to January 31, 1999) $ 17.000 $10.250
Second Quarter (February 1 to April 30, 1999) 13.500 8.500
Third Quarter (May 1 to July 31, 1999) 13.000 10.125
Fourth Quarter (August 1 to October 31, 1999) 12.500 9.125
FISCAL YEAR ENDED OCTOBER 31, 1998
----------------------------------
First Quarter (November 1, 1997 to January 31, 1998) $12.125 $ 8.125
Second Quarter (February 1 to April 30, 1998) 13.500 9.000
Third Quarter (May 1 to July 31, 1998) 11.250 8.500
Fourth Quarter (August 1 to October 31, 1998) 12.750 6.500
</TABLE>
As of January 14, 2000, there were an estimated 2,700 holders of record of
the Common Stock.
The Company has not paid or declared any cash dividends on its common stock
since the completion of its initial public offering in 1996. While there are no
restrictions on the payment of dividends, the Company does not anticipate paying
any cash dividends on its common stock in the foreseeable future.
13
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
OPTICAL CABLE CORPORATION
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
----------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net sales $ 50,699 $ 50,589 $ 52,189 $ 45,152 $ 36,360
Cost of goods sold 27,547 29,330 30,613 24,907 20,121
------ ------ ------ ------ ------
Gross profit 23,152 21,259 21,576 20,245 16,239
Total operating expenses 10,799 9,939 9,572 8,416 7,660
------ ------ ------ ------ ------
Income from operations 12,353 11,320 12,004 11,829 8,579
Other income (expense), net 166 57 (47) 198 (379)
------ ------ ------ ------ ------
Income before income tax expense 12,519 11,377 11,957 12,027 8,200
Income tax expense (1) 4,214 4,107 4,150 2,806 --
------ ------ ------ ------ ------
Net income $ 8,305 $ 7,270 $ 7,807 $ 9,221 $ 8,200
====== ====== ====== ======= ======
Pro forma Income Data (1):
Net income before pro forma income
tax provision, as reported $ 9,221
Pro forma income tax provision 1,747
------
Pro forma net income $ 7,474
=====
Net income per common share
(pro forma for 1996) $ 0.220 $ 0.190 $ 0.202 $ 0.190
====== ====== ====== =======
Net income per common share -
assuming dilution (pro forma for 1996) $ 0.219 $ 0.188 $ 0.200 $ 0.189
====== ====== ====== =======
BALANCE SHEET DATA:
Working capital $ 21,980 $ 18,991 $ 19,912 $ 14,377 $ 9,076
Total assets 37,512 32,829 35,214 31,127 18,819
Total stockholders' equity 32,847 29,991 31,379 23,572 14,952
</TABLE>
- ----------------------
(1) Through March 31, 1996, the Company was not subject to federal and state
income taxes since it had elected, under provisions of the Internal
Revenue Code, to be taxed as an S Corporation. On April 1, 1996, the
Company completed a public offering of 2,675,416 shares of the Company's
common stock from which it received net proceeds of approximately $5.5
million. In connection with the closing of the Company's initial public
offering on April 1, 1996, the Company terminated its status as an S
Corporation effective March 31, 1996 and became subject to federal and
state income taxes. Accordingly, the statement of income data for the
year ended October 31, 1996 includes income taxes from April 1, 1996, and
for informational purposes, the statement of income data for the year
ended October 31, 1996 includes a pro forma adjustment for income taxes
which would have been recorded if the Company had been subject to income
taxes for the entire fiscal year presented.
14
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
OPTICAL CABLE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
FORWARD-LOOKING INFORMATION
This report may contain certain "forward-looking" information within the meaning
of the federal securities laws. The forward-looking information may include,
among other information, (i) statements concerning the Company's outlook for the
future, (ii) statements of belief, (iii) future plans, strategies or anticipated
events, and (iv) similar information and statements concerning matters that are
not historical facts. Such forward-looking information is subject to risks and
uncertainties that may cause actual events to differ materially from the
expectations of the Company. Factors that could cause or contribute to such
differences include, but are not limited to, the level of sales to key
customers, actions by competitors, fluctuations in the price of raw materials
(including optical fiber), the Company's dependence on a single manufacturing
facility, the ability of the Company to protect its proprietary manufacturing
technology, the Company's dependence on a limited number of suppliers,
technological changes and introductions of new competing products, changes in
market demand, and market and economic conditions in the areas of the world in
which the Company operates and markets its products.
RESULTS OF OPERATIONS
Net Sales
Net sales consists of gross sales of products, less discounts, refunds and
returns. Net sales increased to $50.7 million in fiscal 1999 from $50.6 million
in fiscal 1998. This slight increase was primarily attributable to reduced
selling price and a change in product mix. Total cable meters shipped during
fiscal 1999 increased 7.5 percent to 168.2 million from 156.5 million cable
meters shipped for the same period in 1998. This increase in cable meters
shipped was a result of a 3.3 million increase in multimode cable meters
shipped and an 8.4 million increase in single-mode cable meters shipped.
Multimode cable generally has a higher selling price than single mode cable.
Net sales decreased 3.1 percent to $50.6 million in fiscal 1998 from $52.2
million for fiscal 1997. This decrease was primarily attributable to reduced raw
fiber prices resulting in some downward pressure on selling prices as well as
reduced demand in the Far and Middle East as a result of volatile economic
conditions in those regions. In addition, weather conditions and delays in large
projects, as well as a reallocation of capital spending by the Company's
customers away from communications expenditures towards Year 2000 projects
contributed to the decrease.
Management believes that the Company's business will grow as the global market
for fiber optic cable used for moderate distance applications expands.
Management anticipates that new electronic communication devices will continue
to become more reliant on fiber optic technology to achieve improved
performance. Additionally, the Company expects new markets for fiber optic cable
to emerge as fiber optic sensors are developed for production plant automation,
smart highways, security applications, and other specialty applications.
Management believes the Company's unique technological background and specialty
market expertise should assist the Company in capturing its share of any
increase in the global market for fiber optic cable used for moderate distance
applications and contribute to future earnings growth for the Company. The
Company also intends to use its existing product line to make inroads into other
markets such as moderate distance applications for single-mode
telecommunications and cable television.
15
<PAGE>
OPTICAL CABLE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
Gross Profit Margin
Cost of goods sold consists of the cost of materials, compensation costs and
overhead related to the Company's manufacturing operations. The Company's gross
profit margin (gross profit as a percentage of net sales) increased to 45.7
percent in fiscal 1999 from 42.0 percent in fiscal 1998. This increase was due
to reduced raw fiber prices partially offset by an increase in the ratio of net
sales attributable to the Company's distributors during the period as compared
to total net sales. During fiscal 1999, net sales to distributors approximated
63 percent versus 62 percent for the same period in 1998. During fiscal 1999,
sales from orders $50,000 or more approximated 15 percent compared to 18 percent
for fiscal 1998. Discounts on large orders and on sales to distributors are
generally greater than for sales to the rest of the Company's customer base.
The Company's gross profit margin increased to 42.0 percent in fiscal 1998 from
41.3 percent in fiscal 1997. This slight increase was due to reduced raw fiber
prices, partially offset by some downward pressure on selling prices, by the
impact of the increase in the ratio of large orders and the increase in the
ratio of net sales attributable to the Company's distributors during the year.
During fiscal 1998, sales from orders $50,000 or more approximated 18 percent of
net sales compared to 20 percent for fiscal 1997. In addition, for fiscal 1998,
net sales to distributors approximated 62 percent of net sales versus 57 percent
for fiscal 1997.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist of the compensation costs
(including sales commissions) for sales and marketing personnel, travel
expenses, customer support expenses, trade show expenses, advertising, the
compensation cost for administration, finance and general management personnel,
as well as legal and accounting fees. Selling, general and administrative
expenses as a percentage of net sales were 21.3 percent in fiscal 1999 compared
to 19.6 percent in fiscal 1998. This higher percentage reflects the fact that
net sales for fiscal 1999 were comparable to fiscal 1998, while selling, general
and administrative expenses increased 8.6 percent, due primarily to increased
marketing efforts.
Selling, general and administrative expenses as a percentage of net sales were
19.6 percent in fiscal 1998 compared to 18.3 percent in fiscal 1997. This higher
percentage was primarily the result of the fact that net sales for fiscal 1998
decreased while selling, general and administrative expenses increased 3.8
percent compared to fiscal 1997. The ratio of selling, general and
administrative expenses as a percentage of net sales was also impacted due to
incurring approximately $130,000 of expenses to develop and distribute a new
catalog during fiscal 1998 in an effort to improve international sales.
Income Before Income Tax Expense
Income before income tax expense of $12.5 million in fiscal 1999 increased $1.1
million compared to fiscal 1998. This 10.0 percent increase was primarily due to
the increase in gross profit margin offset by the increase in selling, general
and administrative expenses.
Income before income tax expense of $11.3 million in fiscal 1998 decreased
$579,000 compared to fiscal 1997. This decrease was primarily due to decreased
sales volume and decreasing sales prices resulting from reduced raw fiber costs
offset by the slight increase in gross profit margin.
16
<PAGE>
OPTICAL CABLE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
Income Tax Expense
The statements of income for the years ended October 31, 1999, 1998 and 1997
include income tax expense at effective tax rates of 33.7 percent, 36.1 percent
and 34.7 percent, respectively. Fluctuations in the Company's effective tax
rates are due primarily to the amount and timing of the tax benefit related to
the Company's foreign sales corporation.
Net Income
Net income for fiscal 1999 was $8.3 million compared to $7.3 million for fiscal
1998. Net income increased $1.0 million due to the increase in gross profit
margin offset by the increase in selling, general and administrative expenses
and the $107,000 increase in income tax expense.
Net income for fiscal 1998 was $7.3 million compared to $7.8 million for fiscal
1997. Net income decreased $537,000 due primarily to decreased sales volume and
decreasing sales prices resulting from reduced raw fiber costs offset by the
slight increase in gross profit margin.
FINANCIAL CONDITION
Total assets at October 31, 1999 were $37.5 million, an increase of $4.7
million, or 14.3 percent from October 31, 1998. This increase was primarily due
to an increase of $5.7 million in cash and cash equivalents, offset by
management's continued efforts to decrease inventories, which resulted in a $1.2
million reduction in inventories.
Total stockholders' equity at October 31, 1999 increased $2.9 million, or 9.5
percent from October 31, 1998. This increase was primarily due to net income
retained, offset by the repurchase of approximately $5.9 million of the
Company's common stock.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary capital needs have been to (i) fund working capital
requirements, (ii) repay indebtedness, (iii) purchase property and equipment for
expansion, (iv) repurchase its common stock and (v) fund distributions to its
previously sole stockholder primarily to satisfy his tax liabilities resulting
from the Company's S Corporation status, which was terminated March 31, 1996.
The Company's primary sources of financing have been cash from operations, bank
borrowings and proceeds from the initial public offering of the Company's common
stock. The Company believes that its cash flow from operations and available
lines of credit will be adequate to fund its operations for at least the next
twelve months.
Under a loan agreement with its bank dated March 10, 1999, the Company has a $5
million secured revolving line of credit and a $10 million secured line of
credit. The Company's intention is that the $5 million line of credit be
available to fund general corporate purposes and that the $10 million line of
credit be available to fund potential acquisitions and joint ventures. The lines
of credit bear interest at 1.50 percent above the monthly LIBOR rate
17
<PAGE>
OPTICAL CABLE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
and are equally and ratably secured by the Company's accounts receivable,
contract rights, inventory, furniture and fixtures, machinery and equipment and
general intangibles. The lines of credit will expire on February 28, 2001,
unless renewed or extended. As of the date hereof, the Company has no additional
material sources of financing.
Cash flows from operations were approximately $11.9 million, $9.6 million and
$4.0 million in fiscal 1999, 1998 and 1997 respectively. Cash flows from
operations in fiscal 1999 were primarily provided by operating income, a
decrease in inventory of $1.2 million and an increase in accounts payable and
accrued expenses of $1.3 million. Cash flows from operations in fiscal 1998 were
primarily provided by operating income and a decrease in inventory of $2.1
million. In 1998, the Company reduced its inventory of optical fiber due to
anticipated continued reductions in raw fiber prices. For fiscal 1997, cash
flows from operations were primarily provided by operating income, offset by an
increase in trade accounts receivable of $552,000, an increase in inventory of
$1.8 million and a decrease in accounts payable and accrued expenses of $2.3
million.
Net cash used in investing activities in fiscal 1999 totaled $553,000 and was
primarily for expenditures related to facilities and equipment of $401,000 and
increase in cash surrender value of life insurance of $171,000. Net cash used in
investing activities in fiscal 1998 and 1997 was primarily for expenditures
related to facilities and equipment and was $622,000 and $3.6 million,
respectively. The Company's expansion of its headquarters facilities was
completed in fiscal 1997.
Net cash used in financing activities was $5.7 million, $8.8 million and $1.1
million in fiscal 1999, 1998 and 1997, respectively. The net cash used in
financing activities in fiscal 1999 consisted of the repurchase of common stock
in the amount of $5.9 million, offset by proceeds received from the exercise of
employee stock options of $200,000. The net cash used in financing activities in
fiscal 1998 consisted of a repurchase of common stock in the amount of $9
million, offset by proceeds received from the exercise of employee stock options
of $198,000. The net cash used in financing activities in fiscal 1997 consisted
of repayment of debt outstanding under the Company's lines of credit of $1.1
million.
The Company's Board of Directors has authorized the repurchase of up to $20
million of the Company's common stock in the open market or in privately
negotiated transactions. Through October 31, 1999, the Company has repurchased
approximately $14.9 million of its common stock in such transactions since the
inception of the Company's share repurchase program in October 1997. The
repurchases were funded through cash flows from operations. The Company intends
to use excess working capital and other sources as appropriate to finance the
remaining share repurchase program.
DERIVATIVES
The Company does not use derivatives or off-balance sheet instruments such as
future contracts, forward obligations, interest rate swaps, or options.
18
<PAGE>
OPTICAL CABLE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
YEAR 2000
The "Year 2000" issue will affect many computers and other electronic devices
that are not programmed to properly recognize a year that begins with "20"
instead of "19." Some devices may recognize dates on or after January 1, 2000 as
a date during the 1900s, or may not recognize the date at all. If not corrected,
many devices could fail or create erroneous results.
Since 1997, the Company has been actively assessing, planning and responding to
the risks to the Company created by the Year 2000 issue. In assessing the risks,
the Company has focused on both (i) its internal information technology ("IT")
and non-IT systems, including, but not limited to, computer hardware and
software, manufacturing equipment, printers, facsimile machines, and other
control and accounting devices, and (ii) its interfaces with third parties with
which the Company has material relationships, such as suppliers, customers and
financial institutions.
The Company has completed its assessment and response planning with respect to
its internal IT and non-IT systems. Additionally, the Company has substantially
completed its planned remediation measures with respect to those internal
systems. The Company's remediation has included updating various computer
hardware and software and printers to be Year 2000 compliant. The Company has
also determined that the Year 2000 issue will not have a material adverse affect
on its manufacturing machinery. To date, the Company has expended less than
$100,000 on its remediation measures and believes substantial future remediation
expenditures with respect to its internal systems will not be necessary. With
respect to the Company's internal systems, the Company has completed its planned
remediation and testing and believes the Year 2000 issue will not have a
material adverse affect on the Company or its business. The Company does not
believe contingency plans are necessary for its internal systems at this time.
The Company has completed its assessment of potential Year 2000 issues which may
arise from failures of third parties to be Year 2000 compliant. However, many of
the Company's suppliers and customers are still engaged in executing their Year
2000 readiness efforts and, as a result, the Company cannot fully evaluate the
Year 2000 risks to its supply chain and its distribution channels at this time.
The Company's assessment efforts included sending questionnaires to major third
party suppliers and reviewing responses, and taking other steps to assess risks
as deemed appropriate.
The Company has not been made aware of any Year 2000 issues of third parties
that are expected to be unresolved prior to December 31, 1999 and that would
have a material adverse effect on the Company. Nonetheless, the Company is
considering contingency plans, as appropriate, including relying on raw material
inventory on hand and identification of alternative suppliers. The Company will
continue to monitor the Year 2000 status of third parties with which it has
material relationships to minimize its risk from failures of such parties to be
Year 2000 compliant.
The most likely worst case scenario for the Company with respect to the Year
2000 issue is the failure of a supplier, including an energy supplier, to be
Year 2000 compliant such that its supply of needed products or services to the
Company's manufacturing facility is interrupted temporarily. This could result
in the Company not being able to produce fiber optic cable for a period of time,
which in turn could result in lost sales and gross profit.
19
<PAGE>
OPTICAL CABLE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
While the Company believes that it is taking the necessary steps to resolve its
Year 2000 issues in a timely manner, there can be no assurance that the Company
will not have any Year 2000 problems. If any such problems occur, the Company
will work to solve them as quickly as possible. At present, the Company does not
expect that such problems related to the Company's internal IT and non-IT
systems will have a material adverse affect on its business. The failure,
however, of one or more of the Company's major suppliers, customers or financial
institutions to be Year 2000 compliant could have a material adverse effect on
the Company.
NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("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.
SFAS No. 131 is effective for financial statements for periods beginning after
December 15, 1997. In the initial year of application, comparative information
for earlier years is to be restated, unless it is impracticable to do so. SFAS
No. 131 need not be applied to interim financial statements in the initial year
of its application, but comparative information for interim periods in the
initial year of application shall be reported in financial statements for
interim periods in the second year of application. The Company adopted SFAS No.
131 as of November 1, 1998.
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 in the notes to the
financial statements in accordance with the provisions of SFAS No. 131. Prior
years' corresponding information has been restated to conform with the
requirements of SFAS No. 131.
As of October 31, 1999, there are no new accounting standards issued, but not
yet adopted by the Company, which are expected to be applicable to the Company's
financial position, operating results or financial statement disclosures.
20
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not engage in derivative financial instruments or
derivative commodity instruments. As of October 31, 1999, the Company's
financial instruments are not exposed to significant market risk due to interest
rate risk, foreign currency exchange risk or commodity price risk.
21
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
OPTICAL CABLE CORPORATION
INDEX TO
FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS:
PAGE
----
<S> <C>
Independent Auditors' Report ................................................................... 23
Balance Sheets as of October 31, 1999 and 1998.................................................. 24
Statements of Income for the Years Ended October 31, 1999, 1998 and 1997........................ 25
Statements of Stockholders' Equity for the Years Ended October 31, 1999, 1998 and 1997.......... 26
Statements of Cash Flows for the Years Ended October 31, 1999, 1998 and 1997.................... 27
Notes to Financial Statements................................................................... 28
</TABLE>
FINANCIAL STATEMENT SCHEDULES:
No financial statement schedules have been included since they are not required,
not applicable, or the information is otherwise included in the financial
statements of the Company.
22
<PAGE>
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, 1999 and 1998, and the related statements of income,
stockholders' equity, and cash flows for each of the years in the three-year
period ended October 31, 1999. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Optical Cable Corporation as of
October 31, 1999 and 1998, and the results of its operations and its cash flows
for each of the years in the three-year period ended October 31, 1999, in
conformity with generally accepted accounting principles.
KPMG LLP
Roanoke, Virginia
December 10, 1999
23
<PAGE>
OPTICAL CABLE CORPORATION
BALANCE SHEETS
OCTOBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
OCTOBER 31,
-----------------------
ASSETS 1999 1998
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 6,816,678 $ 1,122,277
Trade accounts receivable, net of allowance for doubtful
accounts of $316,000 in 1999 and $311,500 in 1998 10,230,717 10,012,699
Other receivables 280,219 295,199
Due from employees 8,100 5,589
Note receivable 61,100 --
Inventories 8,754,423 9,967,012
Prepaid expenses 106,536 95,766
Deferred income taxes 206,652 212,738
---------- ----------
Total current assets 26,464,425 21,711,280
Note receivable, noncurrent 32,505 --
Other assets, net 188,328 33,950
Property and equipment, net 10,826,331 11,083,921
---------- ----------
Total assets $ 37,511,589 $ 32,829,151
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 3,370,244 $ 1,952,360
Accrued compensation and payroll taxes 692,678 656,028
Income taxes payable 421,803 111,449
---------- ----------
Total current liabilities 4,484,725 2,719,837
Deferred income taxes 179,789 118,121
---------- ----------
Total liabilities 4,664,514 2,837,958
---------- ----------
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 37,414,271 shares in 1999
and 37,879,036 shares in 1998 4,128,316 9,786,281
Paid-in capital 359,566 150,359
Retained earnings 28,359,193 20,054,553
---------- ----------
Total stockholders' equity 32,847,075 29,991,193
Commitments and contingencies
---------- ----------
Total liabilities and stockholders' equity $ 37,511,589 $ 32,829,151
========== ==========
See accompanying notes to financial statements.
</TABLE>
24
<PAGE>
OPTICAL CABLE CORPORATION
STATEMENTS OF INCOME
YEARS ENDED OCTOBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
--------------------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Net sales $ 50,698,637 $ 50,588,893 $ 52,188,850
Cost of goods sold 27,547,022 29,329,822 30,612,690
---------- ---------- ----------
Gross profit 23,151,615 21,259,071 21,576,160
Selling, general and administrative expenses 10,798,643 9,939,258 9,572,061
---------- ---------- ----------
Income from operations 12,352,972 11,319,813 12,004,099
Other income (expense):
Interest income 201,708 56,260 15,351
Interest expense -- (505) (17,930)
Other, net (35,944) 1,891 (44,580)
---------- ---------- ----------
Other income (expense), net 165,764 57,646 (47,159)
---------- ---------- ----------
Income before income tax expense 12,518,736 11,377,459 11,956,940
Income tax expense 4,214,096 4,107,495 4,149,794
---------- ---------- ----------
Net income $ 8,304,640 $ 7,269,964 $ 7,807,146
============ ============ ============
Net income per share:
Net income per common share $ 0.220 $ 0.190 $ 0.202
============ ============ ============
Net income per common share - assuming
dilution $ 0.219 $ 0.188 $ 0.200
============ ============ ============
</TABLE>
See accompanying notes to financial statements.
25
<PAGE>
OPTICAL CABLE CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED OCTOBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
---------------------- PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
------ ------ ------- -------- ------
<S> <C> <C> <C> <C> <C>
Balances at October 31, 1996 38,675,416 $ 18,594,116 $ -- $ 4,977,443 $ 23,571,559
Net income -- -- -- 7,807,146 7,807,146
---------- ---------- -------- ---------- ----------
Balances at October 31, 1997 38,675,416 18,594,116 -- 12,784,589 31,378,705
Exercise of employee stock
options ($2.50 per share) 79,350 198,375 -- -- 198,375
Tax benefit of disqualifying
disposition of stock options
exercised -- -- 150,359 -- 150,359
Repurchase of common stock
(at cost) (875,730) (9,006,210) -- -- (9,006,210)
Net income -- -- -- 7,269,964 7,269,964
---------- ---------- -------- ---------- ----------
Balances at October 31, 1998 37,879,036 9,786,281 150,359 20,054,553 29,991,193
Exercise of employee stock
options ($2.50 per share) 79,800 199,500 -- -- 199,500
Tax benefit of disqualifying
disposition of stock options
exercised -- -- 209,207 -- 209,207
Repurchase of common stock
(at cost) (544,565) (5,857,465) -- -- (5,857,465)
Net income -- -- -- 8,304,640 8,304,640
---------- ---------- -------- ---------- ----------
Balances at October 31, 1999 37,414,271 $ 4,128,316 $359,566 $28,359,193 $ 32,847,075
========== ========== ======== ========== ===========
</TABLE>
See accompanying notes to financial statements.
26
<PAGE>
OPTICAL CABLE CORPORATION
STATEMENTS OF CASH FLOWS
YEARS ENDED OCTOBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
-------------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 8,304,640 $ 7,269,964 $ 7,807,146
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 764,652 787,674 706,076
Bad debt expense (recovery) 87,490 88,005 (10,778)
Deferred income tax expense (benefit) 67,754 (77,515) 88,975
Loss on disposal of property and equipment -- 2,669 --
(Increase) decrease in:
Trade accounts receivable (417,913) (169,428) (552,022)
Other receivables 14,980 244,903 (186,061)
Due from employees (2,511) (2,055) (2,059)
Inventories 1,212,589 2,052,431 (1,758,006)
Prepaid expenses (10,770) 25,280 (56,183)
Other assets -- -- 39
Increase (decrease) in:
Accounts payable and accrued expenses 1,328,540 (395,330) (2,260,416)
Accrued compensation and payroll taxes 36,650 43,292 (63,989)
Income taxes payable 519,561 (303,191) 327,073
---------- --------- ---------
Net cash provided by operating activities 11,905,662 9,566,699 4,039,795
---------- --------- ---------
Cash flows from investing activities:
Purchase of property and equipment (400,714) (622,394) (3,628,727)
Cash surrender value of life insurance (171,382) -- --
Collection from note receivable 18,800 -- --
---------- --------- ---------
Net cash used in investing activities (553,296) (622,394) (3,628,727)
---------- --------- ---------
Cash flows from financing activities:
Net payments on notes payable -- -- (1,103,000)
Repurchase of common stock (5,857,465) (9,006,210) --
Proceeds from exercise of employee stock options 199,500 198,375 --
---------- --------- ---------
Net cash used in financing activities (5,657,965) (8,807,835) (1,103,000)
---------- --------- ---------
Net increase (decrease) in cash and cash
equivalents 5,694,401 136,470 (691,932)
Cash and cash equivalents at beginning of year 1,122,277 985,807 1,677,739
---------- --------- ---------
Cash and cash equivalents at end of year $ 6,816,678 $ 1,122,277 $ 985,807
========== ========= =========
Supplemental Disclosure of Cash Flow Information:
Cash payments for interest $ -- $ 505 $ 17,930
========== ========= =========
Income taxes paid $ 3,615,300 $ 4,488,201 $ 3,733,746
========== ========= =========
Noncash investing and financing activities:
Capital expenditures accrued in accounts payable $ 89,344 $ -- $ 245,566
========== ========= =========
Income tax benefit from exercise of stock options $ 209,207 $ 150,359 $ --
========== ========= =========
Trade accounts receivable financed as note receivable $ 112,405 $ -- $ --
========== ========= =========
</TABLE>
See accompanying notes to financial statements.
27
<PAGE>
OPTICAL CABLE CORPORATION
Notes to Financial Statements
Years Ended October 31, 1999, 1998 and 1997
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) DESCRIPTION OF BUSINESS
Optical Cable Corporation (the "Company") manufactures and markets a broad range
of fiber optic cables for "high bandwidth" transmission of data, video and audio
communications over moderate distances. The Company's fiber optic cables are
sold nationwide and in over 70 foreign countries (also see note 9).
(B) CASH EQUIVALENTS
At October 31, 1999 and 1998, cash equivalents consist of $6,755,814 and
$998,018, respectively, of overnight repurchase agreements and money market
mutual funds. For purposes of the statements of cash flows, the Company
considers all highly liquid debt instruments with original maturities of three
months or less to be cash equivalents.
(C) INVENTORIES
Inventories of raw materials and production supplies are stated at the lower of
cost (specific identification for optical fibers and first-in, first-out for
other raw materials and production supplies) or market. Inventories of work in
process and finished goods are stated at average cost, which includes raw
materials, direct labor and manufacturing overhead.
(D) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization are
provided for using both straight-line and declining balance methods over the
estimated useful lives of the assets. Estimated useful lives are thirty-nine
years for buildings and improvements and five to seven years for machinery and
equipment and furniture and fixtures.
(E) REVENUE RECOGNITION
Revenue is recognized at the time of product shipment or delivery to the
customer, based on shipping terms.
(F) INCOME TAXES
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
28
<PAGE>
OPTICAL CABLE CORPORATION
Notes to Financial Statements (Continued)
Years Ended October 31, 1999, 1998 and 1997
(G) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE
DISPOSED OF
The Company reviews long-lived assets and certain identifiable intangibles for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future 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.
(H) STOCK OPTION PLAN
Prior to November 1, 1996, the Company accounted for its stock option plan in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, Accounting for Stock Issued to Employees, and related interpretations.
As such, compensation expense would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price. On
November 1, 1996, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 123, Accounting for Stock-Based Compensation, which
permits entities to recognize as expense over the vesting period the fair value
of all stock-based awards on the date of grant. Alternatively, SFAS No. 123 also
allows entities to continue to apply the provisions of APB Opinion No. 25 and
provide pro forma net income and pro forma earnings per share disclosures for
employee stock option grants made in 1995 and future years as if the
fair-value-based method defined in SFAS No. 123 had been applied. The Company
has elected to continue to apply the provisions of APB Opinion No. 25 and
provide the pro forma disclosure provisions of SFAS No. 123.
(I) NET INCOME PER SHARE
Effective November 1, 1997, the Company adopted SFAS No. 128, Earnings per
Share. SFAS No. 128 establishes standards for computing and presenting earnings
per share ("EPS") and applies to entities with publicly held common stock or
potential common stock.
Basic EPS (net income per common share) excludes dilution and is computed by
dividing net income available to common stockholders by the weighted-average
number of common shares outstanding for the period. Diluted EPS (net income per
common share - assuming dilution) reflects the potential dilution that could
occur if securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock that
then shared in the net income of the entity.
29
<PAGE>
OPTICAL CABLE CORPORATION
Notes to Financial Statements (Continued)
Years Ended October 31, 1999, 1998 and 1997
(J) COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
Reporting Comprehensive Income. SFAS No. 130 establishes standards for reporting
and display of comprehensive income and its components in a full set of
financial statements. SFAS No. 130 was issued to address concerns over the
practice of reporting elements of comprehensive income directly in equity. This
Statement requires all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed in equal prominence with the other financial
statements. It does not require a specific format for that financial statement
but requires that an enterprise display an amount representing total
comprehensive income for the period in that financial statement.
SFAS No. 130 is applicable to all entities that provide a full set of financial
statements. Enterprises that have no items of other comprehensive income in any
period presented are excluded from the scope of this Statement. SFAS No. 130 is
effective for both interim and annual periods beginning after December 15, 1997.
Comparative financial statements provided for earlier periods are required to be
reclassified to reflect the provisions of this Statement.
The adoption of SFAS No. 130 did not have any effect on current or prior period
financial statement displays presented by the Company since the Company has no
items of other comprehensive income in any period presented.
(K) USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from these estimates.
(2) ALLOWANCE FOR DOUBTFUL ACCOUNTS RECEIVABLE
A summary of changes in the allowance for doubtful accounts receivable for the
years ended October 31, 1999, 1998 and 1997 follows:
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
--------------------------------------------------
1999 1998 1997
-------------- -------------- ---------------
<S> <C> <C> <C>
Balance at beginning of year $ 311,500 $ 307,400 $ 300,000
Bad debt expense (recovery) 87,490 88,005 (10,778)
Losses charged to allowance (84,633) (90,147) (26,592)
Recoveries added to allowance 1,643 6,242 44,770
-------------- -------------- ---------------
Balance at end of year $ 316,000 $ 311,500 $ 307,400
============== ============== ===============
</TABLE>
30
<PAGE>
OPTICAL CABLE CORPORATION
Notes to Financial Statements (Continued)
Years Ended October 31, 1999, 1998 and 1997
(3) INVENTORIES
Inventories at October 31, 1999 and 1998 consist of the following:
<TABLE>
<CAPTION>
OCTOBER 31,
--------------------------------
1999 1998
--------------- --------------
<S> <C> <C>
Finished goods $ 2,976,426 $ 4,152,094
Work in process 2,306,209 1,896,858
Raw materials 3,416,046 3,873,824
Production supplies 55,742 44,236
--------------- --------------
$ 8,754,423 $ 9,967,012
=============== ==============
</TABLE>
(4) PROPERTY AND EQUIPMENT
Property and equipment at October 31, 1999 and 1998 consists of the following:
<TABLE>
<CAPTION>
OCTOBER 31,
--------------------------------
1999 1998
--------------- --------------
<S> <C> <C>
Land $ 2,745,327 $ 2,745,327
Building and improvements 6,893,642 6,888,444
Machinery and equipment 5,424,594 5,007,050
Furniture and fixtures 734,404 729,341
Construction in progress 131,008 69,938
--------------- --------------
Total property and equipment, at cost 15,928,975 15,440,100
Less accumulated amortization and depreciation (5,102,644) (4,356,179)
--------------- --------------
Property and equipment, net $ 10,826,331 $ 11,083,921
=============== ==============
</TABLE>
(5) NOTES PAYABLE
Under a loan agreement with its bank dated March 10, 1999, the Company has a $5
million secured revolving line of credit and a $10 million secured line of
credit. The Company's intention is that the $5 million line of credit be
available to fund general corporate purposes and that the $10 million line of
credit be available to fund potential acquisitions and joint ventures. The lines
of credit bear interest at 1.50 percent above the monthly LIBOR rate (6.41
percent as of October 31, 1999) and are equally and ratably secured by the
Company's accounts receivable, contract rights, inventory, furniture and
fixtures, machinery and equipment and general intangibles. The lines of credit
will expire on February 28, 2001, unless renewed or extended. While the lines of
credit do not require a compensating balance that legally restricts the use of
cash amounts, at the bank's request, the Company has agreed to maintain an
unrestricted target cash balance of $125,000.
31
<PAGE>
OPTICAL CABLE CORPORATION
Notes to Financial Statements (Continued)
Years Ended October 31, 1999, 1998 and 1997
(6) LEASES
In August 1994, the Company entered into a four-year operating lease for
computerized mailing and shipping equipment with an unrelated party. Rent
expense under this lease amounted to $21,527 for the year ended October 31, 1998
and $25,030 for the year ended October 31, 1997.
(7) RELATED PARTY AGREEMENTS
Since February 1, 1995, the Company has entered into employment agreements with
the individual who is the Company's Chairman, President and Chief Executive
Officer and its previously sole stockholder which typically have a term of less
than two years. Annual compensation under the agreements consists of salary
payments equal to 1 percent of the previous fiscal year's net sales and provides
for sales commissions equal to 1 percent of the positive difference between the
current fiscal year's net sales and the prior fiscal year's net sales.
Compensation under this agreement amounted to $506,986, $521,889 and $521,889
for the years ended October 31, 1999, 1998 and 1997, respectively.
(8) EMPLOYEE BENEFITS
The Company's independently administered self-insurance program provides health
insurance coverage for employees and their dependents on a cost-reimbursement
basis. Under the program, the Company is obligated for claims payments. A stop
loss insurance contract executed with an insurance carrier covers claims in
excess of $35,000 per covered individual and $769,913 in the aggregate per year.
During the years ended October 31, 1999, 1998 and 1997, total claims expense of
$837,488, $725,535 and $872,582, respectively, was incurred, which represents
claims processed and an estimate for claims incurred but not reported.
Effective January 1, 1994, the Company adopted a 401(k) retirement savings plan.
To become eligible for the plan, an employee must complete six months of service
and be at least 21 years of age. The plan allows participants to contribute
through salary reduction up to 7 percent of their annual compensation on a
pretax basis during the 1999 and 1998 fiscal years and up to 6 percent of their
annual compensation on a pretax basis during the 1997 fiscal year. Company
matching contributions are two dollars for every one dollar contributed by an
employee up to 4 percent of the employees' annual compensation. The Company made
matching contributions to the plan of $365,887, $353,096 and $313,365 for the
years ended October 31, 1999, 1998 and 1997, respectively.
The Company and its previously sole stockholder adopted on March 1, 1996 a stock
incentive plan which is called the Optical Cable Corporation 1996 Stock
Incentive Plan (the "Plan"). The Plan is intended to provide a means for
employees to increase their personal financial interest in the Company, thereby
stimulating the efforts of these employees and strengthening their desire to
remain with the Company through the use of stock incentives. The Company has
reserved 4,000,000 shares of common stock for issuance pursuant to incentive
awards under the Plan. At October 31, 1999, there were 3,528,150 additional
32
<PAGE>
OPTICAL CABLE CORPORATION
Notes to Financial Statements (Continued)
Years Ended October 31, 1999, 1998 and 1997
shares available for grant under the Plan. Although not required under the Plan,
stock options granted to date have been granted at not less than fair market
value on the date of grant. The options have terms ranging from 8.75 to 10 years
and vest 25 percent after two years, 50 percent after three years, 75 percent
after four years and 100 percent after five years.
The per share weighted-average estimated fair value of stock options granted
during 1997 and 1996 was $9.38 and $2.18, respectively, on the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions: 1997 - expected cash dividend yield of zero percent, risk-free
interest rate of 6.08 percent, expected volatility of 85.5 percent and an
expected life of 8.75 years; 1996 - expected cash dividend yield of zero
percent, risk-free interest rate of 6.28 percent, expected volatility of 85.5
percent and an expected life of 10 years.
The Company applies APB Opinion No. 25 in accounting for its Plan and,
accordingly, no compensation cost has been recognized for its stock options in
the financial statements. Had compensation cost for the Company's Plan been
determined consistent with SFAS No. 123, the Company's net income and net income
per share would have been reduced to the SFAS No. 123 pro forma amounts
indicated below:
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
--------------------------------------------------
1999 1998 1997
-------------- -------------- ---------------
<S> <C> <C> <C>
Net income:
As reported $ 8,304,640 $ 7,269,964 $ 7,807,146
============== ============== ===============
Pro forma $ 7,961,412 $ 6,926,736 $ 7,638,186
============== ============== ===============
Net income per share:
Net income per common share:
As reported $ 0.220 $ 0.190 $ 0.202
============== ============== ===============
Pro forma $ 0.211 $ 0.181 $ 0.197
============== ============== ===============
Net income per common share - assuming dilution:
As reported $ 0.219 $ 0.188 $ 0.200
============== ============== ===============
Pro forma $ 0.210 $ 0.180 $ 0.196
============== ============== ===============
</TABLE>
33
<PAGE>
OPTICAL CABLE CORPORATION
Notes to Financial Statements (Continued)
Years Ended October 31, 1999, 1998 and 1997
Stock option activity during the periods indicated is as follows:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED-AVERAGE
SHARES EXERCISE PRICE
-------------- ---------------------
<S> <C> <C>
Balance at October 31, 1996 442,000 $ 2.500
Granted 254,000 11.125
Forfeited (32,500) 6.348
--------------
Balance at October 31, 1997 663,500 5.613
Exercised (79,350) 2.500
Forfeited (15,000) 9.400
--------------
Balance at October 31, 1998 569,150 5.948
Exercised (79,800) 2.500
Forfeited (17,500) 8.910
--------------
Balance at October 31, 1999, (104,125 options exercisable;
257,350 options at exercise price of $2.50 per share
with remaining contractual life of 6.5 years, and 214,500
options at exercise price of $11.125 per share with
remaining contractual life of 6.5 years) 471,850 $ 6.421
==============
</TABLE>
(9) BUSINESS AND CREDIT CONCENTRATIONS, MAJOR CUSTOMERS AND GEOGRAPHIC
INFORMATION
On November 1, 1998, the Company adopted SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information. SFAS No. 131 establishes
standards for the way public business enterprises are to report information
about operating segments in annual financial statements and requires those
enterprises to report selected information about operating segments in interim
financial reports. It also establishes standards for related disclosures about
products and services, geographic areas and major customers.
The Company has a single reportable segment for purposes of segment reporting
pursuant to SFAS No. 131. In addition, the Company's fiber optic cable products
are similar in nature. Therefore, the Company has disclosed enterprise-wide
information about geographic areas and major customers below in accordance with
the provisions of SFAS No. 131. Prior years' corresponding information has been
restated to conform with the requirements 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 at October 31, 1999 and 1998 have been
adequately provided for in the financial statements. As of October 31, 1999 and
1998, there were no significant amounts receivable from any one customer other
than those described below.
34
<PAGE>
OPTICAL CABLE CORPORATION
Notes to Financial Statements (Continued)
Years Ended October 31, 1999, 1998 and 1997
For the year ended October 31, 1999, 30.6 percent or approximately $15,513,000
of net sales were attributable to two major domestic distributors. The combined
related trade accounts receivable for these distributors at October 31, 1999
totaled approximately $3,294,000. No single customer or other distributor
accounted for more than 5 percent of net sales for the year ended October 31,
1999. As of October 31, 1999, no single customer or other distributor had an
outstanding balance payable to the Company in excess of 5 percent of total
stockholders' equity.
For the year ended October 31, 1998, 27.3 percent or approximately $13,817,000
of net sales were attributable to two major domestic distributors. The combined
trade accounts receivable for these distributors at October 31, 1998 totaled
approximately $2,989,000. No single customer or other distributor accounted for
more than 5 percent of net sales for the year ended October 31, 1998. As of
October 31, 1998, one of these major distributors had an outstanding balance
payable to the Company in excess of 5 percent of total stockholders' equity in
the amount of approximately $1,630,000.
For the year ended October 31, 1997, 21.7 percent or approximately $11,338,000
of net sales were attributable to two major domestic distributors. The combined
related trade accounts receivable for these distributors at October 31, 1997
totaled approximately $2,265,000. No single customer or other distributor
accounted for more than 5 percent of net sales for the year ended October 31,
1997.
For the years ended October 31, 1999, 1998 and 1997, 80 percent, 78 percent and
73 percent, respectively, of net sales were from customers located in the United
States, while 20 percent, 22 percent and 27 percent, respectively, were from
international customers. Net sales attributable to the United States and other
foreign countries for the years ended October 31, 1999, 1998 and 1997 were as
follows:
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
------------------------------------------------
1999 1998 1997
--------------- -------------- ---------------
<S> <C> <C> <C>
United States $ 40,687,466 $ 39,621,544 $ 38,197,004
Australia 702,780 1,570,536 1,181,098
Canada 1,756,928 889,702 996,318
England 694,680 987,154 1,018,543
Germany 497,720 695,079 1,598,828
Korea 91,391 -- 1,166,519
Sweden 589,949 633,175 1,076,680
Other foreign countries 5,677,723 6,191,703 6,953,860
--------------- -------------- ---------------
Total net sales $ 50,698,637 $ 50,588,893 52,188,850
=============== ============== ===============
</TABLE>
None of the Company's long-lived assets are located outside the United States.
(10) INCOME TAXES
Total income taxes for the years ended October 31, 1999, 1998 and 1997 were
allocated as follows:
35
<PAGE>
OPTICAL CABLE CORPORATION
Notes to Financial Statements (Continued)
Years Ended October 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
--------------------------------------------------
1999 1998 1997
-------------- -------------- ---------------
<S> <C> <C> <C>
Income from operations $ 4,214,096 $ 4,107,495 $ 4,149,794
Stockholders' equity, for disqualifying disposition
of stock options exercised (209,207) (150,359) --
-------------- -------------- ---------------
$ 4,004,889 $ 3,957,136 $ 4,149,794
============== ============== ===============
</TABLE>
Income tax expense attributable to income from operations for the years ended
October 31, 1999, 1998 and 1997 consists of:
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31, 1999 CURRENT DEFERRED TOTAL
-------------- -------------- ---------------
<S> <C> <C> <C>
U.S. Federal $ 3,729,606 $ 60,479 $ 3,790,085
State 416,736 7,275 424,011
-------------- -------------- ---------------
Totals $ 4,146,342 $ 67,754 $ 4,214,096
============== ============== ===============
YEAR ENDED OCTOBER 31, 1998 CURRENT DEFERRED TOTAL
-------------- -------------- ---------------
U.S. Federal $ 3,733,231 $ (69,192) $ 3,664,039
State 451,779 (8,323) 443,456
-------------- -------------- ---------------
Totals $ 4,185,010 $ (77,515) $ 4,107,495
============== ============== ===============
YEAR ENDED OCTOBER 31, 1997 CURRENT DEFERRED TOTAL
-------------- -------------- ---------------
U.S. Federal $ 3,654,654 $ 78,224 $ 3,732,878
State 406,165 10,751 416,916
-------------- -------------- ---------------
Totals $ 4,060,819 $ 88,975 $ 4,149,794
============== ============== ===============
</TABLE>
Reported income tax expense for the years ended October 31, 1999, 1998 and 1997
differs from the "expected" tax expense, computed by applying the U.S. Federal
statutory income tax rate of 35 percent to income before income tax expense, as
follows:
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
--------------------------------------------------
1999 1998 1997
-------------- -------------- ---------------
<S> <C> <C> <C>
"Expected" tax expense $ 4,381,558 $ 3,982,111 $ 4,184,929
Increase (reduction) in income tax expense resulting from:
Foreign Sales Corporation benefit (326,662) (122,282) (248,048)
State income taxes, net of federal benefits 254,359 288,822 254,592
Other differences, net (95,159) (41,156) (41,679)
-------------- -------------- ---------------
Reported income tax expense $ 4,214,096 $ 4,107,495 $ 4,149,794
============== ============== ===============
</TABLE>
36
<PAGE>
OPTICAL CABLE CORPORATION
Notes to Financial Statements (Continued)
Years Ended October 31, 1999, 1998 and 1997
The tax effects of temporary differences that give rise to significant portions
of the Company's net deferred tax asset as of October 31, 1999 and 1998 are
presented below:
<TABLE>
<CAPTION>
OCTOBER 31,
--------------------------------
1999 1998
--------------- --------------
<S> <C> <C>
Deferred tax assets:
Accounts receivable, due to allowance for doubtful accounts $ 118,911 $ 117,205
Inventories, due to additional costs inventoried for tax
purposes pursuant to the Tax Reform Act of 1986 71,564 68,628
Self-insured health care costs, due to accrual for financial
reporting purposes 58,739 41,208
Compensated absences due to accrual for financial reporting
purposes 48,812 37,262
------------- --------------
Total gross deferred tax assets 298,026 264,303
Less valuation allowance -- --
------------- --------------
Net deferred tax assets 298,026 264,303
Deferred tax liabilities:
Plant and equipment, due to differences in depreciation and
capital gain recognition (179,789) (118,121)
Other receivables, due to accrual for financial reporting purposes (91,374) (51,565)
------------- --------------
Total gross deferred tax liabilities (271,163) (169,686)
------------- --------------
Net deferred tax asset $ 26,863 $ 94,617
============= ==============
</TABLE>
Based on the Company's historical and current pretax earnings, management
believes that it is more likely than not that the recorded deferred tax assets
will be realized.
(11) FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, Disclosures About Fair Value of Financial Instruments, requires
the Company to disclose estimated fair values of its financial instruments. SFAS
No. 107 defines the fair value of a financial instrument as the amount at which
the instrument could be exchanged in a current transaction between willing
parties. The carrying amounts reported in the balance sheet for cash, cash
equivalents, trade accounts receivable, other receivables, accounts payable and
accrued expenses approximate fair value because of the short maturity of these
instruments.
As of October 31, 1999, the carrying amount and fair value of the Company's note
receivable were $93,605 and $86,250, respectively. The fair value of the note
receivable was estimated by discounting the future cash flows of the instrument
at an estimated interest rate for loans of similar terms to companies with
comparable credit risk.
(12) NET INCOME PER SHARE
The following is a reconciliation of the numerators and denominators of the net
income per common share computations for the periods presented:
37
<PAGE>
OPTICAL CABLE CORPORATION
Notes to Financial Statements (Continued)
Years Ended October 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
NET INCOME SHARES PER SHARE
YEAR ENDED OCTOBER 31, 1999 (NUMERATOR) (DENOMINATOR) AMOUNT
-------------- --------------- ---------------
<S> <C> <C> <C>
Net income per common share $ 8,304,640 37,669,309 $ 0.220
===============
Effect of dilutive stock options -- 240,622
-------------- --------------
Net income per common share - assuming dilution $ 8,304,640 37,909,931 $ 0.219
============== ============== ===============
NET INCOME SHARES PER SHARE
YEAR ENDED OCTOBER 31, 1998 (NUMERATOR) (DENOMINATOR) AMOUNT
-------------- --------------- ---------------
Net income per common share $ 7,269,964 38,287,271 0.190
===============
Effect of dilutive stock options -- 288,247
-------------- --------------
Net income per common share - assuming dilution $ 7,269,964 38,575,518 $ 0.188
============== ============== ===============
NET INCOME SHARES PER SHARE
YEAR ENDED OCTOBER 31, 1997 (NUMERATOR) (DENOMINATOR) AMOUNT
-------------- -------------- ---------------
Net income per common share $ 7,807,146 38,675,416 $ 0.202
===============
Effect of dilutive stock options -- 341,867
-------------- --------------
Net income per common share - assuming dilution $ 7,807,146 39,017,283 $ 0.200
============== ============== ===============
</TABLE>
Stock options that could potentially dilute net income per common share in the
future that were not included in the computation of net income per common share
- - assuming dilution because to do so would have been antidilutive totaled
227,500 for the year ended October 31, 1998. No such antidilutive stock options
existed with respect to net income per common share - assuming dilution
calculation for the years ended October 31, 1999 and 1997.
(13) STOCKHOLDERS' EQUITY
The Company's Board of Directors has authorized the repurchase of up to $20
million of the Company's common stock in the open market or in privately
negotiated transactions. Through October 31, 1999, the Company has repurchased
1,420,295 shares of its common stock for $14,863,675 in such transactions since
the inception of the Company's share repurchase program in October 1997.
(14) CONTINGENCIES
The Company is involved in various 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.
38
<PAGE>
OPTICAL CABLE CORPORATION
Notes to Financial Statements (Continued)
Years Ended October 31, 1999, 1998 and 1997
(15) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the unaudited quarterly results of operations for
the years ended October 31, 1999 and 1998:
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------------
YEAR ENDED OCTOBER 31, 1999 JANUARY 31 APRIL 30 JULY 31 OCTOBER 31
-------------- --------------- -------------- --------------
<S> <C> <C> <C> <C>
Net sales $ 10,841,939 $ 12,434,733 $ 12,602,659 $ 14,819,306
Gross profit 4,722,187 5,710,552 5,424,127 7,294,749
Income before income taxes 2,252,663 3,057,265 2,899,109 4,309,639
Net income 1,448,235 1,963,327 1,816,583 3,076,495
Net income per common share 0.038 0.052 0.048 0.082
Net income per common share -
assuming dilution 0.038 0.052 0.048 0.082
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------------
YEAR ENDED OCTOBER 31, 1998 JANUARY 31 APRIL 30 JULY 31 OCTOBER 31
-------------- --------------- -------------- --------------
<S> <C> <C> <C> <C>
Net sales $ 11,873,115 $ 11,689,100 $ 13,727,433 $ 13,299,245
Gross profit 5,068,908 5,076,615 5,670,681 5,442,867
Income before income taxes 2,808,872 2,646,442 3,072,777 2,849,368
Net income 1,822,972 1,712,448 1,991,374 1,743,170
Net income per common share 0.047 0.045 0.052 0.046
Net income per common share -
assuming dilution 0.047 0.044 0.052 0.045
</TABLE>
39
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information contained in the Proxy Statement under the captions
"PROPOSAL NO. 1, ELECTION OF DIRECTORS" and "EXECUTIVE OFFICERS AND OTHER
SIGNIFICANT EMPLOYEES, Executive Officers" concerning directors, persons
nominated to become directors, executive officers of the Company is incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information contained in the Proxy Statement under the captions
"EXECUTIVE COMPENSATION", and under the caption "PROPOSAL NO. 1, ELECTION OF
DIRECTORS" concerning compensation of directors, is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained in the Proxy Statement under the caption
"BENEFICIAL OWNERSHIP OF COMMON STOCK" is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained in the Proxy Statement under the caption "CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS" is incorporated herein by reference.
40
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Index of Financial Statements
The Company's financial statements and related information are
included in Part II, Item 8 of this Form 10-K on pages 22
through 39.
2. Index of Financial Statement Schedules
None.
41
<PAGE>
3. Index of Exhibits
The documents filed as exhibits to this Form 10-K pursuant to
Item 601 of Regulation S-K are:
3.1 Amended and Restated Articles of Incorporation of
Optical Cable Corporation (as amended) (filed as
exhibit 3.1 to the Registrant's Annual Report on Form
10-K for the fiscal year ended October 31, 1997 (file
number 0-27022), and incorporated herein by
reference).
3.2 Bylaws of Optical Cable Corporation, as amended
(filed as exhibit 3.2 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended October
31, 1997 (file number 0-27022), and incorporated
herein by reference).
4.1 Form of certificate representing Common Stock (filed
as exhibit 4.1 to the Registrant's Annual Report on
Form 10-K for the fiscal year ended October 31, 1997
(file number 0-27022), and incorporated herein by
reference).
10.1 Royalty Agreement, dated November 1, 1993, by and
between Robert Kopstein and Optical Cable Corporation
(filed as exhibit 10.1 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended October
31, 1997 (file number 0-27022), and incorporated
herein by reference).
10.2 Assignment of Technology Rights from Robert Kopstein
to Optical Cable Corporation, effective as of October
31, 1994 (filed as exhibit 10.2 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended
October 31, 1997 (file number 0-27022), and
incorporated herein by reference).
10.3 Employment Agreement by and between Optical Cable
Corporation and Robert Kopstein, effective November
1, 1999.
10.4 Tax Indemnification Agreement, dated as of October
19, 1995, by and between Optical Cable Corporation
and Robert Kopstein (filed as exhibit 10.4 to the
Registrant's Annual Report on Form 10-K for the
fiscal year ended October 31, 1997 (file number
0-27022), and incorporated herein by reference).
10.6 Loan Agreement dated March 10, 1999 by and between
Optical Cable Corporation and First Union National
Bank (filed as Exhibit 10.6 to the Registrant's
Quarterly Report on Form 10-Q for the fiscal quarter
ended January 31, 1999 (file number 0-27022), and
incorporated herein by reference).
10.7 Security Agreement, dated April 25, 1997, by and
between Optical Cable Corporation and First Union
National Bank of Virginia (filed as exhibit 10.7 to
the Registrant's Annual Report on Form 10-K for the
fiscal year ended October 31, 1997 (file number
0-27022), and incorporated herein by reference).
10.8 Promissory Note dated March 10, 1999 issued by
Optical Cable Corporation to First Union National
Bank in the amount of $5,000,000 and the Promissory
Note dated March 10, 1999 issued by Optical Cable
Corporation to First Union National Bank in the
amount of $10,000,000 (filed as Exhibit 10.8 to the
Registrant's Quarterly Report on form 10-Q for the
fiscal quarter ended January 31, 1999 (file number
0-27022), and incorporated herein by reference).
10.9 Optical Cable Corporation Employee Stock Purchase
Plan (filed as exhibit 10.9 to the Registrant's
Quarterly Report on Form 10-Q for the fiscal quarter
ended July 31, 1998 (file number 0-27022), and
incorporated herein by reference).
23 Consent of KPMG LLP to incorporation by reference of
independent auditors' report included in this Form
10-K, into registrant's registration statement on
Form S-8.
27 Financial Data Schedule.
42
<PAGE>
(b) Reports on Form 8-K
None
(c) Exhibits
The documents set forth in the index of exhibits above are filed as
exhibits to this Form 10-K pursuant to Item 601 of Regulation S-K
and, if not incorporated by reference, are attached hereto.
43
<PAGE>
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 24, 2000 By /s/ Robert Kopstein
-------------------------------
Robert Kopstein
Chairman of the Board
President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated as of January 24, 2000.
/s/ Robert Kopstein
- ----------------------- Chairman of the Board, President,
Robert Kopstein Chief Executive Officer and Director
(principal executive officer)
/s/ Luke J. Huybrechts
- ----------------------- Senior Vice President of Sales
Luke J. Huybrechts and Director
/s/ Kenneth W. Harber
- ----------------------- Vice President of Finance, Treasurer,
Kenneth W. Harber Secretary and Director
(principal financial and accounting officer)
/s/ Randall H. Frazier
- ----------------------- Director
Randall H. Frazier
/s/ John M. Holland
- ----------------------- Director
John M. Holland
44
<PAGE>
INDEX TO ATTACHED EXHIBITS
Exhibit No. Description
10.3 Employment Agreement by and between
Optical Cable Corporation and Robert
Kopstein, effective November 1,
1999.
23 Consent of KPMG LLP to incorporation
by reference of independent
auditors' report included in this
Form 10-K, into registrant's
registration statement on Form S-8.
27 Financial Data Schedule.
45
EXHIBIT 10.3
OPTICAL CABLE CORPORATION
EMPLOYMENT AGREEMENT
This agreement made effective November 1, 1999 by and between Optical Cable
Corporation, having a place of business at 5290 Concourse Drive, Roanoke,
Virginia (hereinafter referred to as OCC), and Robert Kopstein, (hereinafter
referred to as Kopstein).
WHEREAS, OCC desires to employ Kopstein and Kopstein desires to accept such
employment upon the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual covenants and agreements herein
contained, OCC employs Kopstein and Kopstein accepts employment upon the terms
and conditions:
1. EMPLOYMENT AND DUTIES: Kopstein is employed as President & Chief
Executive Officer of OCC. Kopstein hereby agrees to abide by the terms
and conditions of this Agreement.
2. TERM: The term of this Agreement shall begin on November 1, 1999 and
shall terminate on the 31st day of October, 2000.
3. STARTING DATE: This Agreement becomes effective November 1, 1999.
4. COMPENSATION: For all services rendered by Kopstein, OCC shall pay
Kopstein a salary, payable monthly, equal to 1.0% of the previous
fiscal year net sales and in order to stimulate the growth of OCC, OCC
shall pay Kopstein a sales commission equal to 1.0% of the positive
difference between the current fiscal year net sales and the prior year
net sales. Said sales commission shall be paid monthly and paid within
15 days after the end of the month. Said sales commission shall be
based on the difference in net sales between the period of employment
in the current fiscal year and the corresponding period of the previous
fiscal year.
5. PATENT RIGHTS: Kopstein's interest in any and all inventions or
improvements made or conceived by him, or which he may make or conceive
at any time after the commencement of and until the termination of his
employment or OCC, either individually or jointly with others, shall be
the exclusive property of OCC, its successors, assignees or nominees.
He will make full and prompt disclosure in writing to an officer or
official of OCC, or to anyone designated for that purpose by OCC, of
all inventions or improvements made or conceived by him during the term
of his employment. At the request and expense of OCC, and without
further compensation to him, Kopstein will for all inventions or
improvements which may be patentable, do all lawful acts and execute
and acknowledge any and all letters and/or patents in the United States
of America and foreign countries for any of such inventions and
improvements, set forth herein, and for vesting in OCC the entire
right, title and interest thereto. As used in this Agreement,
"inventions or improvements" means discoveries, concepts, and ideas,
whether patentable or not, relating to any present or prospective
activities of OCC, including, but not limited to, devices, processes,
methods, formulae, techniques, and any improvements to the foregoing.
<PAGE>
6. CONFIDENTIALITY; DISCLOSURE OF INFORMATION: Since the work for which
Kopstein is employed and upon which he shall be engaged, will include
trade secrets and confidential information of OCC or its customers,
Kopstein shall receive such trade secrets and confidential information
in confidence and shall not, except as required in the conduct of OCC's
business, publish or disclose, or make use of or authorize anyone else
to publish, disclose, or make use of any such secrets or information
unless and until such secrets or information shall have ceased to be
secret or confidential as evidenced by public knowledge. This
prohibition as to publication and disclosures shall not restrict him in
the exercise of his technical skill, provided that the exercise of such
skill does not involve the disclosure to others not authorized to
receive trade secret or confidential information of OCC or its
customers. As used in this Agreement, "trade secrets and confidential
information" means any formula, pattern device or compilation of
information used in the business of OCC or its customers which gives
OCC or its customers an opportunity to obtain advantage over
competitors who do not know or use such information; the term includes,
but is not limited to, devices and processes, whether patentable or
not, compilations of information such as customer lists, business and
marketing plans, and pricing information where much of the information
involved is generally known or available but where the compilation,
organization or use of the information is not generally known and is of
significance to the business of OCC or its customers. The provisions of
this paragraph (six) 6 shall apply throughout the period of Kopstein's
employment with OCC, and for twelve (12) successive months immediately
following termination of that employment by either party for any
reason.
7. NON-COMPETE: Kopstein covenants and agrees that during the term of his
employment with OCC (as employee, consultant or otherwise) and for the
twelve (12) consecutive months immediately following termination of
that employment by either party for any reason he will not own or have
an ownership interest in, or render services to or work for any
business which competes with OCC or is engaged in the same or similar
business conducted by OCC during the period of Kopstein's employment
with OCC, or wishing three (3) months following termination of that
employment; nor will he call on, solicit or deal with any customers or
prospective customer of OCC learned about or developed during
Kopstein's employment with OCC. This Agreement shall apply to Kopstein
as an individual for his own account, as a partner or joint venturer,
as an employee, agent salesman or consultant for any person or entity,
as an officer, director or shareholder.
2
<PAGE>
8. RETURN OF OCC PROPERTY: Immediately upon the termination of his
employment with OCC, Kopstein will turn over to OCC all notes,
memoranda, notebooks, drawings, records, documents, and all computer
program source listings, object files, and executable images obtained
from OCC or developed or modified by him as part of his work for OCC
which are in his possession or under his control, whether prepared by
him or others, relating to any work done for OCC or relating in any way
to the business of OCC or its customers, it being acknowledged that all
such items are the sole property of OCC.
9. BENEFITS: Kopstein shall be entitled to such vacation and benefits of
OCC; may from time to time establish for employees of similar
positions, responsibilities and seniority.
10. BINDING ON OTHER PARTIES: This Agreement shall be binding upon and
inure to the benefit of Kopstein, his heirs, executors and
administrators, and shall be binding upon and inure to the benefit of
OCC and its successors and assigns.
11. ENFORCEMENT AND REMEDIES: This Agreement shall be enforced and
construed in accordance with the laws of the Commonwealth of Virginia.
Each party acknowledges that in the event of a breach or threatened
breach of the confidentiality or non-compete provisions set out in
paragraphs 6 and 7 of the Agreement, damages at law will be inadequate
and injunctive relief is appropriate in addition to whatever damages
may be recoverable. Kopstein agrees to pay the costs, including
attorneys fees incurred by OCC in enforcing the provisions of
paragraphs 6 and 7.
Each and all of the several rights and remedies contained in or arising
by reason of this Agreement shall be construed as cumulative and no one
of them shall be exclusive of any other or of any right or priority
allowed by law or equity. Nothing in this Agreement is intended to be
in derogation of the rights of either party under or pursuant to any
federal or state statute.
12. NOTICES: Any notice required or desired to be given under this
Agreement shall be deemed given if in writing sent by U.S. Mail to his
last known residence in the case of Kopstein or to its principal office
in the case of OCC.
13. SEVERABILITY AND LIMITED ENFORCEABILITY: It is understood and agreed
that, should any portion of any clause or paragraph of this Agreement
be deemed too broad to permit enforcement to its full extent, then such
restriction shall be enforced to the maximum extent permitted by law,
and the parties hereby consent and agree that such scope may be
modified accordingly in a proceeding brought to enforce such
restriction. Further, it is agreed that, should any provision
3
<PAGE>
in the Agreement be entirely unenforceable, the remaining provisions of
this Agreement shall not be affected.
14. ASSIGNMENT: This Agreement and the rights and obligations hereunder
shall be deemed unique and personal to Kopstein and Kopstein may not
transfer, pledge, encumber, assign, anticipate, or alienate all or any
part of this Agreement.
15. PRIOR AGREEMENT; MODIFICATION: No modifications or waiver of this
Agreement, or of any provision thereof, shall be valid or binding,
unless in writing and executed by both of three parties hereto. No
waiver by either party of any breach of any term or provision of this
Agreement shall be construed as a waiver of any succeeding breach of
the same or any other term or provision.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and
year first written above.
/s/ Deborah B. Stokes /s/ Robert Kopstein
- --------------------- -------------------
WITNESS Robert Kopstein
Optical Cable Corporation
By: /s/ Kenneth W. Harber
---------------------
Kenneth W. Harber
Vice President of Finance
4
EXHIBIT 23
ACCOUNTANTS' CONSENT
The Board of Directors
Optical Cable Corporation
We consent to incorporation by reference in Registration Statement No. 33-09433
on Form S-8 of Optical Cable Corporation of our report dated December 10, 1999,
relating to the balance sheets of Optical Cable Corporation as of October 31,
1999 and 1998, and the related statements of income, stockholders' equity, and
cash flows for each of the years in the three-year period ended October 31,
1999, which report appears in the October 31, 1999 Annual Report on Form 10-K of
Optical Cable Corporation.
KPMG LLP
Roanoke, Virginia
January 27, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS FOR THE YEAR ENDED OCTOBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001000230
<NAME> OPTICAL CABLE CORPORATION
<MULTIPLIER> 1,000
<CURRENCY> US-DOLLAR
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-START> NOV-01-1998
<PERIOD-END> OCT-31-1999
<EXCHANGE-RATE> 1
<CASH> 6,817
<SECURITIES> 0
<RECEIVABLES> 10,608
<ALLOWANCES> 316
<INVENTORY> 8,754
<CURRENT-ASSETS> 26,464
<PP&E> 15,929
<DEPRECIATION> 5,103
<TOTAL-ASSETS> 37,512
<CURRENT-LIABILITIES> 4,485
<BONDS> 0
0
0
<COMMON> 4,128
<OTHER-SE> 28,719
<TOTAL-LIABILITY-AND-EQUITY> 37,512
<SALES> 50,699
<TOTAL-REVENUES> 50,900
<CGS> 27,547
<TOTAL-COSTS> 10,826
<OTHER-EXPENSES> 36
<LOSS-PROVISION> 87
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 12,519
<INCOME-TAX> 4,214
<INCOME-CONTINUING> 8,305
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,305
<EPS-BASIC> 0.220
<EPS-DILUTED> 0.219
</TABLE>
