UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 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 or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
5290 CONCOURSE DRIVE
ROANOKE, VIRGINIA 24019
(Address of principal executive offices, including zip code)
(540) 265-0690
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. (1) Yes X No (2) Yes X No
--- --- --- ---
As of March 12, 1999, 37,899,686 shares of the registrant's Common Stock,
no par value, were outstanding. Of these outstanding shares 36,000,000 shares
were held by Robert Kopstein, Chairman of the Board, President and Chief
Executive Officer of the registrant.
OPTICAL CABLE CORPORATION
FORM 10-Q INDEX
THREE MONTHS ENDED JANUARY 31, 1999
PAGE
----
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Balance Sheets - January 31, 1999
and October 31, 1998.......................................................................2
Condensed Statements of Income - Three Months
Ended January 31, 1999 and 1998............................................................3
Condensed Statement of Changes in Stockholders'
Equity - Three Months Ended January 31, 1999...............................................4
Condensed Statements of Cash Flows - Three Months
Ended January 31, 1999 and 1998............................................................5
Condensed Notes to Condensed Financial Statements..........................................6-7
ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.....................................................8-11
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................................................12
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
OPTICAL CABLE CORPORATION
Condensed Balance Sheets
(Unaudited)
JANUARY 31, OCTOBER 31,
ASSETS 1999 1998
----------- -----------
Current assets:
Cash and cash equivalents $ 5,160,812 $ 1,122,277
Trade accounts receivable, net of allowance for doubtful
accounts of $262,500 at January 31, 1999 and $311,500
at October 31, 1998 8,487,598 10,012,699
Other receivables 315,451 295,199
Due from employees 4,639 5,589
Inventories 9,830,055 9,967,012
Prepaid expenses 142,566 95,766
Deferred income taxes 219,826 212,738
----------- -----------
Total current assets 24,160,947 21,711,280
Other assets, net 55,132 33,950
Property and equipment, net 10,915,958 11,083,921
----------- -----------
Total assets $35,132,037 $32,829,151
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 2,984,341 $ 1,952,360
Accrued compensation and payroll taxes 416,722 656,028
Income taxes payable 842,097 111,449
----------- -----------
Total current liabilities 4,243,160 2,719,837
Deferred income taxes 158,311 118,121
----------- -----------
Total liabilities 4,401,471 2,837,958
----------- -----------
Stockholders' equity:
Preferred stock, no par value, authorized 1,000,000 shares;
none issued and outstanding -- --
Common stock, voting; no par value, authorized 100,000,000
shares; issued and outstanding 37,825,636 shares at January 31,
1999 and 37,879,036 shares at October 31, 1998 9,036,741 9,786,281
Paid-in capital 191,037 150,359
Retained earnings 21,502,788 20,054,553
----------- -----------
Total stockholders' equity 30,730,566 29,991,193
Commitments and contingencies
----------- -----------
Total liabilities and stockholders' equity $35,132,037 $32,829,151
=========== ===========
See accompanying condensed notes to condensed financial statements.
2
OPTICAL CABLE CORPORATION
Condensed Statements of Income
(Unaudited)
THREE MONTHS ENDED
JANUARY 31,
---------------------------------------
1999 1998
------------ ------------
Net sales $ 10,841,939 $ 11,873,115
Cost of goods sold 6,119,752 6,804,207
------------ ------------
Gross profit 4,722,187 5,068,908
Selling, general and administrative expenses 2,509,772 2,283,226
------------ ------------
Income from operations 2,212,415 2,785,682
------------ ------------
Other income (expense):
Interest income 33,999 26,609
Other, net 6,249 (3,419)
------------ ------------
Other income, net 40,248 23,190
------------ ------------
Income before income tax expense 2,252,663 2,808,872
Income tax expense 804,428 985,900
------------ ------------
Net income $ 1,448,235 $ 1,822,972
============ ============
Earnings per share:
Earnings per common share $ 0.038 $ 0.047
============ ============
Earnings per common share - assuming
dilution $ 0.038 $ 0.047
============ ============
See accompanying condensed notes to condensed financial statements.
3
OPTICAL CABLE CORPORATION
Condensed Statement of Changes in Stockholders' Equity
(Unaudited)
Three Months Ended January 31, 1999
--------------------------------------------------------------------------------------
Common Stock Total
------------------------------ Paid-in Retained Stockholders'
Shares Amount Capital Earnings Equity
------------ ------------ ------------ ------------ ------------
Balances at October 31,
1998 37,879,036 $ 9,786,281 $ 150,359 $ 20,054,553 $ 29,991,193
Net income -- -- -- 1,448,235 1,448,235
Exercise of employee
stock options
($2.50 per share) 9,700 24,250 -- -- 24,250
Tax benefit of disqualifying
disposition of stock
options exercised -- -- 40,678 -- 40,678
Repurchase of common
stock (at cost) (63,100) (773,790) -- -- (773,790)
------------ ------------ ------------ ------------ ------------
Balances at January 31,
1999 37,825,636 $ 9,036,741 $ 191,037 $ 21,502,788 $ 30,730,566
============ ============ ============ ============ ============
See accompanying condensed notes to condensed financial statements.
4
OPTICAL CABLE CORPORATION
Condensed Statements of Cash Flows
(Unaudited)
THREE MONTHS ENDED
JANUARY 31,
-----------------------------------
1999 1998
----------- -----------
Cash flows from operating activities:
Net income $ 1,448,235 $ 1,822,972
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 211,282 187,385
Bad debt recovery (49,000) (37,900)
Deferred income taxes 33,102 (31,355)
(Increase) decrease in:
Trade accounts receivable 1,574,101 1,253,863
Other receivables (20,252) (35,180)
Due from employees 950 (2,925)
Inventories 136,957 (334,424)
Prepaid expenses (46,800) (2,203)
Other assets, net (25,433)
Increase (decrease) in:
Accounts payable and accrued expenses 1,033,635 306,637
Accrued compensation and payroll taxes (239,306) (3,710)
Income taxes payable 771,326 416,255
----------- -----------
Net cash provided by operating activities 4,828,797 3,539,415
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (40,722) (334,309)
----------- -----------
Net cash used in investing activities (40,722) (334,309)
----------- -----------
Cash flows from financing activities:
Repurchase of common stock (773,790) (1,701,187)
Proceeds from exercise of employee stock options 24,250 --
----------- -----------
Net cash used in financing activities (749,540) (1,701,187)
----------- -----------
Net increase (decrease) in cash and cash equivalents 4,038,535 1,503,919
Cash and cash equivalents at beginning of period 1,122,277 985,807
----------- -----------
Cash and cash equivalents at end of period $ 5,160,812 $ 2,489,726
=========== ===========
See accompanying condensed notes to condensed financial statements.
5
OPTICAL CABLE CORPORATION
CONDENSED NOTES TO CONDENSED FINANCIAL STATEMENTS
THREE MONTHS ENDED JANUARY 31, 1999
(Unaudited)
(1) GENERAL
The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles
for interim financial reporting information and the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and notes required by generally accepted
accounting principles for complete financial statements. In the opinion
of management, all material adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been
included. Operating results for the three months ended January 31, 1999
are not necessarily indicative of the results that may be expected for
the fiscal year ending October 31, 1999. The unaudited condensed
financial statements and condensed notes are presented as permitted by
Form 10-Q and do not contain certain information included in the
Company's annual financial statements and notes. For further
information, refer to the financial statements and notes thereto
included in the Company's annual report on Form 10-K for the fiscal
year ended October 31, 1998.
(2) INVENTORIES
Inventories at January 31, 1999 and October 31, 1998 consist of the
following:
JANUARY 31, OCTOBER 31,
1999 1998
----------- -----------
Finished goods $ 4,655,743 $ 4,152,094
Work in process 2,267,117 1,896,858
Raw materials 2,857,992 3,873,824
Production supplies 49,203 44,236
----------- -----------
$ 9,830,055 $ 9,967,012
=========== ===========
(3) NOTES PAYABLE
Under a loan agreement with its bank dated March 10, 1999, the Company
has a $5 million secured revolving line of credit available for general
corporate purposes and a $10 million secured line of credit to fund
potential acquisitions, mergers or joint ventures. The lines of credit
bear interest at 1.50 percent above the monthly LIBOR rate 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.
(Continued)
6
OPTICAL CABLE CORPORATION
CONDENSED NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(4) STOCKHOLDERS' EQUITY
During the three months ended January 31, 1999, the Company repurchased
63,100 shares of its common stock for $773,790.
(5) EARNINGS PER SHARE
Earnings per common share excludes dilution and is computed by dividing
income available to common stockholders by the weighted-average number
of common shares outstanding for the period. Earnings 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 earnings of the entity. The following is a
reconciliation of the numerators and denominators of the earnings per
common share computations for the periods presented:
NET INCOME SHARES PER SHARE
THREE MONTHS ENDED JANUARY 31, 1999 (NUMERATOR) (DENOMINATOR) AMOUNT
- ----------------------------------- ------------ ------------- ----------
Earnings per common share $1,448,235 37,850,680 $ 0.038
==========
Effect of dilutive stock options -- 301,466
---------- ----------
Earnings per common share - assuming dilution $1,448,235 38,152,146 $ 0.038
========== ========== ==========
THREE MONTHS ENDED JANUARY 31, 1998
- -----------------------------------
Earnings per common share $1,822,972 38,607,240 $ 0.047
==========
Effect of dilutive stock options -- 311,728
---------- ----------
Earnings per common share - assuming dilution $1,822,972 38,918,968 $ 0.047
========== ========== ==========
Stock options that could potentially dilute earnings per common share
in the future that were not included in the computation of earnings per
common share - assuming dilution because to do so would have been
antidilutive for the periods presented totaled 238,500 for the three
months ended January 31, 1998.
On March 1, 1999 and March 2, 1999, stock options totaling 21,500
shares of common stock were exercised.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Three Months Ended January 31, 1999
Net Sales
Net sales consists of gross sales of products, less discounts, refunds and
returns. Net sales decreased 8.7 percent to $10.8 million in first quarter 1999
from $11.9 million for the same period in 1998. This decrease was attributable
to decreased volume and a change in product mix. Total cable meters shipped in
first quarter 1999 decreased 1.3 percent to 34.7 million from 35.1 million cable
meters shipped for the same period in 1998. This decline in cable meters shipped
was a result of a 2.8 million decrease in multi mode cable meters shipped,
partially offset by a 2.4 million increase in single mode cable meters shipped.
This change in product mix contributed further to the overall decline in sales
because the single mode cable typically has a lower selling price than the multi
mode cable.
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 slightly to
43.6 percent in first quarter 1999 from 42.7 percent in first quarter 1998.
During first quarter 1999, sales from orders $50,000 or more approximated 20
percent compared to 18 percent for first quarter 1998. In addition, during first
quarter 1999 and 1998, net sales to distributors approximated 55 percent and 52
percent, respectively. Discounts on large orders and on sales to distributors
are generally greater than for sales to the Company's other customer base.
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 23.1 percent in first quarter 1999
compared to 19.2 percent in first quarter 1998. This higher percentage was
primarily the result of the fact that net sales for first quarter 1999 decreased
8.7 percent compared to first quarter 1998, while selling, general and
administrative expenses increased 9.9 percent. Selling, general and
administrative expenses increased largely as a result of increased marketing
efforts.
Income Before Income Tax Expense
Income before income tax expense decreased 2.0 percent to $2.3 million for the
three months ended January 31, 1999 compared to $2.8 million for the three
months ended January 31, 1998. This decrease was primarily due to decreased
sales volume and an increase in selling, general and administrative expenses.
Income Tax Expense
Income tax expense decreased $182,000 to $804,000 for the three months ended
January 31, 1999 compared to $986,000 for the same period in 1998 due to the
decrease in income before income tax expense. The Company's effective tax rate
was 35.7 percent during the three months ended January 31, 1999 compared to 35.1
percent for the same period in 1998.
8
Net Income
Net income for first quarter 1999 was $1.4 million compared to $1.8 million for
first quarter 1998. Net income decreased $374,000 due to the $556,000 decrease
in income before income tax expense partially offset by the decrease in income
tax expense of $182,000.
FINANCIAL CONDITION
Total assets at January 31, 1999 were $35.1 million, an increase of $2.3
million, or 7.0 percent from October 31, 1998. This increase was primarily due
to an increase of $4.0 million in cash and cash equivalents partially offset by
a decrease of $1.5 million in trade accounts receivable resulting from the
decreased sales volume during the quarter as compared to fourth quarter 1998.
Total stockholders' equity at January 31, 1999 increased $739,000 in first
quarter 1999 with net income retained, offset by the repurchase of common stock
in the amount of $774,000, accounting for the majority of the increase.
LIQUIDITY AND CAPITAL RESOURCES
During the first quarter of fiscal years 1999 and 1998, the Company's primary
capital needs have been to fund working capital requirements and capital
expenditures as needed. The Company's primary source of financing has been cash
provided from operations. The Company maintains bank lines of credit; however,
there were no balances outstanding under the lines as of the end of fiscal year
1998 or the first quarter of fiscal year 1999.
Under a loan agreement with its bank dated March 10, 1999, the Company has a $5
million secured revolving line of credit available for general corporate
purposes and a $10 million secured line of credit to fund potential
acquisitions, mergers and joint ventures. The lines of credit bear interest at
1.50 percent above the monthly LIBOR rate and are equally and ratably secured by
the Company's accounts receivable, contract rights, inventory, furniture and
fixtures, machinery and equipment and general intangibles. The lines of credit
will expire on February 28, 2001, unless renewed or extended. As of the date
hereof, the Company has no additional material sources of financing. The Company
believes that its cash flow from operations and available lines of credit will
be adequate to fund its operations for at least the next twelve months.
Cash flows from operations were approximately $4.8 million and $3.5 million in
first quarter 1999 and 1998, respectively. Cash flows from operations in first
quarter 1999 were primarily provided by operating income and a decrease in trade
accounts receivable of $1.6 million. For first quarter 1998, cash flows from
operations were primarily provided by operating income and a decrease in trade
accounts receivable of $1.3 million.
Net cash used in investing activities was for expenditures related to facilities
and equipment and was $41,000 and $334,000 in first quarter 1999 and 1998,
respectively. As of January 31, 1999, there are no material commitments for
additional capital expenditures.
Net cash used in financing activities was $750,000 and $1.7 million in first
quarter 1999 and 1998, respectively. The net cash used in financing activities
is primarily related to the Company's common stock repurchase program.
9
During the period from October 1997 through January 1999, the Company has
repurchased $9.8 million of the Company's common stock in the open market or in
privately negotiated transactions. The repurchases were funded through cash
flows from operating activities. 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 option contracts.
YEAR 2000
The "Year 2000" problem will affect many computers and other electronic devices
that are not programmed to properly recognize a year that begins with "20"
instead of "19." Some devices may recognize dates on or after January 1, 2000 as
a date during the 1900s, or may not recognize the date at all. If not corrected,
many devices could fail or create erroneous results.
Since 1997, the Company has been actively assessing, planning and responding to
the risks to the Company created by the Year 2000 problem. In assessing the
risks, the Company has focused on both (i) its internal information technology
("IT") and non-IT systems, including, but not limited to, computer hardware and
software, manufacturing equipment, printers, facsimile machines, and other
control and accounting devices, and (ii) its interfaces with third parties with
which the Company has material relationships, such as suppliers, customers and
financial institutions.
The Company has completed its assessment and response planning with respect to
its internal IT and non-IT systems. Additionally, the Company has substantially
completed necessary remediation measures with respect to those internal systems.
The Company's remediation has included updating various computer hardware and
software and printers to be Year 2000 compliant. The Company has also determined
that the Year 2000 problem will not have a material adverse affect on its
manufacturing machinery. To date, the Company has expended less than $100,000 on
its remediation measures and believes future remediation expenditures with
respect to its internal systems to be less than $50,000. With respect to the
Company's internal systems, the Company believes it will complete its planned
remediation and any testing in time to ensure the Year 2000 problem will not
have a material adverse affect on the Company or its business. The Company does
not believe contingency plans are necessary for its internal systems at this
time.
The Company has completed its assessment of potential Year 2000 problems which
may arise from failures of third parties to be Year 2000 compliant. However,
many of the Company's suppliers and customers are still engaged in executing
their Year 2000 readiness efforts and, as a result, the Company cannot fully
evaluate the Year 2000 risks to its supply chain and its distribution channels
at this time. The Company's assessment efforts included sending questionnaires
to major third party suppliers and reviewing responses, and taking other steps
to assess risks as deemed appropriate.
The Company has not been made aware of any Year 2000 issues of third parties
that are expected to be unresolved prior to December 31, 1999 and that would
have a material adverse effect on the Company. Nonetheless, the Company is
considering contingency plans, as appropriate, including relying on raw material
inventory on hand and identification of alternative suppliers. The Company will
continue to monitor the Year 2000 status of third parties with which it has
material relationships to minimize its risk from failures of such parties to be
Year 2000 compliant.
10
The most likely worst case scenario for the Company with respect to the Year
2000 problem is the failure of a supplier, including an energy supplier, to be
Year 2000 compliant such that its supply of needed products or services to the
Company's manufacturing facility is interrupted temporarily. This could result
in the Company not being able to produce fiber optic cable for a period of time,
which in turn could result in lost sales and gross profit.
While the Company believes that it is taking the necessary steps to resolve its
Year 2000 issues in a timely manner, there can be no assurance that the Company
will not have any Year 2000 problems. If any such problems occur, the Company
will work to solve them as quickly as possible. At present, the Company does not
expect that such problems related to the Company's internal IT and non-IT
systems will have a material adverse affect on its business. The failure,
however, of one or more of the Company's major suppliers, customers or financial
institutions to be Year 2000 compliant could have a material adverse effect on
the Company.
NEW ACCOUNTING STANDARDS
SFAS No. 131
- ------------
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information. SFAS No. 131 establishes standards for the
way public business enterprises are to report information about operating
segments in annual financial statements and requires those enterprises to report
selected information about operating segments in interim financial reports
issued to shareholders. It also establishes standards for related disclosures
about products and services, geographic areas and major customers.
SFAS No. 131 is effective for financial statements for periods beginning after
December 15, 1997. In the initial year of application, comparative information
for earlier years is to be restated, unless it is impracticable to do so. SFAS
No. 131 need not be applied to interim financial statements in the initial year
of its application, but comparative information for interim periods in the
initial year of application shall be reported in financial statements for
interim periods in the second year of application. The Company adopted SFAS No.
131 as of November 1, 1998; however, interim disclosures are not required during
the initial year of application.
FORWARD LOOKING INFORMATION
This Form 10-Q may contain certain "forward-looking" information within the
meaning of the federal securities laws. The forward-looking information may
include, among other information, (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, and market and economic conditions in the areas of the world in which
the Company operates or markets its products.
11
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required by Item 601 of Regulation S-K for the three
months ended January 31, 1999.
10.6 Loan Agreement, dated March 10, 1999, between Optical Cable
Corporation and First Union National Bank (the "Loan
Agreement").
10.8 Promissory Note, dated March 10, 1999, issued by Optical
Cable Corporation to First Union National Bank in the amount
of $5 million in connection with the Loan Agreement, and
Promissory Note, dated March 10, 1999, issued by Optical
Cable Corporation to First Union National Bank in the amount
of $10 million in connection with the Loan Agreement.
27 Financial Data Schedule
(b) Reports on Form 8-K filed during the three months ended January
31, 1999.
None.
12
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OPTICAL CABLE CORPORATION
(Registrant)
Date: March 17, 1999 /s/Robert Kopstein
---------------------------------
Robert Kopstein
Chairman of the Board, President and
Chief Executive Officer
Date: March 17, 1999 /s/Kenneth W. Harber
---------------------------------
Kenneth W. Harber
Vice President of Finance, Treasurer
and Secretary
(principal financial and accounting officer)
INDEX TO ATTACHED EXHIBITS
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
10.6 Loan Agreement, dated March 10, 1999,
between Optical Cable Corporation and
First Union National Bank (the "Loan
Agreement").
10.8 Promissory Note, dated March 10, 1999,
issued by Optical Cable Corporation to
First Union National Bank in the amount
of $5 million in connection with the
Loan Agreement, and Promissory Note,
dated March 10, 1999, issued by Optical
Cable Corporation to First Union
National Bank in the amount of $10
million in connection with the Loan
Agreement.
27 Financial Data Schedule