TMCnet News
OPTICAL CABLE CORP - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) 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 our outlook for the future, (ii) statements of belief, anticipation or expectation, (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 known and unknown variables, uncertainties, contingencies and risks that may cause actual events or results to differ materially from our expectations, and such variables, uncertainties, contingencies and risks may also adversely affect Optical Cable Corporation and its subsidiaries (collectively, the "Company" or "OCC®"), the Company's future results of operations and future financial condition, and/or the future equity value of the Company. Factors that could cause or contribute to such differences from our expectations or risks that could adversely affect the Company include, but are not limited to, the level of sales to key customers, including distributors; timing of certain projects and purchases by key customers; the economic conditions affecting network service providers; corporate and/or government spending on information technology; actions by competitors; fluctuations in the price of raw materials (including optical fiber, copper, gold and other precious metals, and plastics and other materials affected by petroleum product pricing); fluctuations in transportation costs; our dependence on customized equipment for the manufacture of our products and our limited number of production facilities; our ability to protect our proprietary manufacturing technology; market conditions influencing prices or pricing; our dependence on a limited number of suppliers; the loss of or conflict with one or more key suppliers or customers; an adverse outcome in litigation, claims and other actions, and potential litigation, claims and other actions against us; an adverse outcome in regulatory reviews and audits and potential regulatory reviews and audits; adverse changes in state tax laws and/or positions taken by state taxing authorities affecting us; technological changes and introductions of new competing products; changes in end-user preferences for competing technologies, relative to our product offering; economic conditions that affect the telecommunications sector, the data communications sector, certain technology sectors and/or certain industry market sectors; economic conditions that affect certain geographic markets and/or the economy as a whole; changes in demand for our products from certain competitors for which we provide private label connectivity products; terrorist attacks or acts of war, and any current or potential future military conflicts; changes in the level of military spending or other spending by the United States government; ability to retain key personnel; inability to recruit needed personnel; poor labor relations; the impact of changes in accounting policies and related costs of compliance, including changes by the Securities and Exchange Commission ("SEC"), the Public Company Accounting Oversight Board ("PCAOB"), the Financial Accounting Standards Board ("FASB"), and/or the International Accounting Standards Board ("IASB"); our ability to continue to successfully comply with, and the cost of compliance with, the provisions of Section 404 of the Sarbanes-Oxley Act of 2002 or any revisions to that act which apply to us; the impact of changes and potential changes in federal laws and regulations adversely affecting our business and/or which result in increases in our direct and indirect costs, including our direct and indirect costs of compliance with such laws and regulations; the impact of the Patient Protection and Affordable Care Act of 2010, the Health Care and Education Reconciliation Act of 2010, and any revisions to those acts that apply to us and the related legislation and regulation associated with those acts, which directly or indirectly results in increases to our costs; the impact of changes in state or federal tax laws and regulations increasing our costs and/or impacting the net return to investors owning our shares; the impact of future consolidation among competitors and/or among customers adversely affecting our position with our customers and/or our market position; actions by customers adversely affecting us in reaction to the expansion of our product offering in any manner, including, but not limited to, by offering products that compete with our customers, and/or by entering into alliances with, making investments in or with, and/or acquiring parties that compete with and/or have conflicts with our customers; voluntary or involuntary delisting of the Company's common stock from any exchange on which it is traded; the deregistration by the Company from SEC reporting requirements, as a result of the small number of holders of the Company's common stock; adverse reactions by customers, vendors or other service providers to unsolicited proposals regarding the ownership or management of the Company; the additional costs of considering and possibly defending our position on such unsolicited proposals; impact of weather or natural disasters in the areas of the world in which we operate, market our products and/or acquire raw materials; an increase in the number of shares of the Company's common stock issued and outstanding; economic downturns generally and/or in one or more of the markets in which we operate; changes in market demand, exchange rates, productivity, or market and economic conditions in the areas of the world in which we operate and market our products; and our success in managing the risks involved in the foregoing. 12-------------------------------------------------------------------------------- Table Of Contents We caution readers that the foregoing list of important factors is not exclusive. Furthermore, we incorporate by reference those factors included in current reports on Form 8-K, and/or in our other filings. Dollar amounts presented in the following discussion have been rounded to the nearest hundred thousand, except in the case of amounts less than one million and except in the case of the table set forth in the "Results of Operations" section, the amounts in which both cases have been rounded to the nearest thousand. Overview of Optical Cable Corporation Optical Cable Corporation (or OCC®) is a leading manufacturer of a broad range of fiber optic and copper data communication cabling and connectivity solutions primarily for the enterprise market, offering an integrated suite of high quality, warranted products which operate as a system solution or seamlessly integrate with other providers' offerings. Our product offerings include designs for uses ranging from commercial, enterprise network, datacenter, residential and campus installations to customized products for specialty applications and harsh environments, including military, industrial, mining and broadcast applications. Our products include fiber optic and copper cabling, fiber optic and copper connectors, specialty fiber optic and copper connectors, fiber optic and copper patch cords, pre-terminated fiber optic and copper cable assemblies, racks, cabinets, datacom enclosures, patch panels, face plates, multi-media boxes, and other cable and connectivity management accessories, and are designed to meet the most demanding needs of end-users, delivering a high degree of reliability and outstanding performance characteristics. OCC® is internationally recognized for pioneering the design and production of fiber optic cables for the most demanding military field applications, as well as of fiber optic cables suitable for both indoor and outdoor use, and creating a broad product offering built on the evolution of these fundamental technologies. OCC also is internationally recognized for its role in establishing copper connectivity data communications standards, through its innovative and patented technologies. Founded in 1983, Optical Cable Corporation is headquartered in Roanoke, Virginia with offices, manufacturing and warehouse facilities located in Roanoke, Virginia, near Asheville, North Carolina, and near Dallas, Texas. We primarily manufacture our fiber optic cables at our Roanoke facility which is ISO 9001:2008 registered and MIL-STD-790F certified, our enterprise connectivity products at our Asheville facility which is ISO 9001:2008 registered, and our military and harsh environment connectivity products and systems at our Dallas facility which is ISO 9001:2008 registered and MIL-STD-790F certified. OCC designs, develops and manufactures fiber optic cables for a broad range of commercial and specialty markets and applications. We refer to these products as our fiber optic cable offering. OCC designs, develops and manufactures fiber and copper connectivity products for the commercial market, including a broad range of commercial and residential applications. We refer to these products as our enterprise connectivity product offering. OCC designs, develops and manufactures a broad range of specialty fiber optic connectors and connectivity solutions principally for use in military and other harsh environment applications. We refer to these products as our applied interconnect systems product offering. 13-------------------------------------------------------------------------------- Table Of Contents We market and sell the products manufactured at our Dallas facility through our wholly owned subsidiary Applied Optical Systems, Inc. ("AOS") under the names Optical Cable Corporation and OCC by the efforts of our integrated OCC sales team. Optical Cable Corporation owns 70% of the authorized membership interests of Centric Solutions LLC ("Centric Solutions"). Centric Solutions is a business founded in 2008 to provide turnkey cabling and connectivity solutions for the datacenter market. Centric Solutions operates and goes to market independently from Optical Cable Corporation; however, in some cases, Centric Solutions may offer products from OCC's product offering. Optical Cable Corporation, OCC®, Procyon®, Superior Modular Products, SMP Data Communications, Applied Optical Systems, and associated logos are trademarks of Optical Cable Corporation. Summary of Company Performance for Second Quarter and first half of Fiscal Year 2014 ? Consolidated net sales for the second quarter of fiscal year 2014 were $20.2 million, an increase of 5.6% when compared to net sales of $19.1 million for the second quarter of fiscal year 2013. Sequentially, net sales increased 22.1% in the second quarter of fiscal year 2014, compared to net sales of $16.5 million for the first quarter of fiscal year 2014. ? Consolidated net sales for the six months ended April 30, 2014 increased approximately one percent to $36.7 million, compared to consolidated net sales of $36.4 million for the first six months of fiscal year 2013. ? Gross profit for each of the second quarters of fiscal years 2014 and 2013 was $6.7 million. Gross profit was $12.1 million for the first half of fiscal year 2014 compared to $13.2 million for the same period last year. ? Gross profit margin (gross profit as a percentage of net sales) was 33.0% during the second quarter of fiscal year 2014, compared to 34.9% during the same period last year. Gross profit margin decreased to 32.9% during the first half of fiscal year 2014, compared to 36.2% for the six months ended April 30, 2013. ? We reported a net loss attributable to OCC of $143,000, or $0.02 per share, during the second quarter of fiscal year 2014, compared to net income of $42,000, or $0.01 per share, for the comparable period last year. We reported a net loss attributable to OCC of $555,000, or $0.09 per share, during the first half of fiscal year 2014, compared to net income of $172,000, or $0.03 per share, for the comparable period last year. ? OCC generated $406,000 of cash flow from operating activities during the first half of fiscal year 2014. ? OCC continued to provide returns to shareholders in the form of a quarterly dividend during the second quarter of fiscal year 2014. OCC's current regular dividend rate is $0.02 per share per quarter, implying an annual dividend rate of $0.08 per share. Results of Operations We sell our products internationally and domestically through our sales force to our customers, which include major distributors, various regional and smaller distributors, original equipment manufacturers and value-added resellers. All of our sales to customers outside of the United States are denominated in U.S. dollars. We can experience fluctuations in the percentage of net sales to customers outside of the United States and in the United States from period to period based on the timing of large orders, coupled with the impact of increases and decreases in sales to customers in various regions of the world. 14-------------------------------------------------------------------------------- Table Of Contents Net sales consist of gross sales of products less discounts, refunds and returns. Revenue is recognized at the time of product shipment or delivery to the customer (including distributors) provided that the customer takes ownership and assumes risk of loss (based on shipping terms), collection of the relevant receivable is probable, persuasive evidence of an arrangement exists and the sales price is fixed or determinable. Our customers generally do not have the right of return unless a product is defective or damaged and is within the parameters of the product warranty in effect for the sale. Cost of goods sold consists of the cost of materials, product warranty costs and compensation costs, and overhead and other costs related to our manufacturing operations. The largest percentage of costs included in cost of goods sold is attributable to costs of materials. Our gross profit margin percentages are heavily dependent upon product mix on a quarterly basis and may vary based on both anticipated and unanticipated changes in product mix. Additionally, gross profit margins tend to be higher when we achieve higher net sales levels, as certain fixed manufacturing costs are spread over higher sales. Selling, general and administrative expenses ("SG&A expenses") consist of the compensation costs for sales and marketing personnel, shipping costs, trade show expenses, customer support expenses, travel expenses, advertising, bad debt expense, the compensation costs for administration and management personnel, legal and accounting fees, costs incurred to settle litigation or claims and other actions against us, and other costs associated with our operations. Royalty (income) expense, net consists of royalty income earned on licenses associated with our patented products, net of royalty and related expenses. Amortization of intangible assets consists primarily of the amortization of intellectual property and customer list acquired in the acquisition of AOS on October 31, 2009. For fiscal years prior to fiscal year 2014, amortization of intangible assets also included the amortization of developed technology acquired in the acquisition of Superior Modular Products Incorporated, doing business as SMP Data Communications ("SMP Data Communications" or "SMP") on May 30, 2008 (these assets were fully amortized by the end of fiscal year 2013). Amortization of intangible assets is calculated using an accelerated method and the straight line method over the estimated useful lives of the intangible assets. Other income (expense), net consists of interest expense and other miscellaneous income and expense items not directly attributable to our operations. The following table sets forth and highlights fluctuations in selected line items from our condensed consolidated statements of operations for the periods indicated: Three Months Ended Six Months Ended April 30, Percent April 30, Percent 2014 2013 Change 2014 2013 Change Net sales $ 20,191,000 $ 19,125,000 5.6 % $ 36,726,000 $ 36,420,000 0.8 % Gross profit 6,660,000 6,666,000 (0.1 )% 12,068,000 13,190,000 (8.5 )% SG&A expenses 6,836,000 6,405,000 6.7 % 12,882,000 12,593,000 2.3 %Net income (loss) attributable to OCC (143,000 ) 42,000 (437.2 )% (555,000 ) 172,000 (422.3 )% 15-------------------------------------------------------------------------------- Table Of Contents Three Months Ended April 30, 2014 and 2013 Net Sales Consolidated net sales for the second quarter of fiscal year 2014 increased 5.6% to $20.2 million compared to net sales of $19.1 million for the same period last year. We experienced an increase in net sales in our commercial markets in the second quarter of fiscal year 2014 compared to the same period last year, but this increase was partially offset by a decrease in net sales in our specialty markets. Net sales to customers in the United States increased 14.1% in the second quarter of fiscal year 2014, compared to the same period last year, while net sales to customers outside of the United States decreased 14.3%. Gross Profit Our gross profit for each of the second quarters of fiscal years 2014 and 2013 was $6.7 million. Gross profit margin, or gross profit as a percentage of net sales, was 33.0% in the second quarter of fiscal year 2014 compared to 34.9% in the second quarter of fiscal year 2013. Our gross profit margin percentages are heavily dependent upon product mix on a quarterly basis and may vary based on both anticipated and unanticipated changes in product mix. During the second quarter of fiscal year 2014, we experienced an increase in sales of certain products that negatively impacted our gross profit margin. At this time, we do not believe this is indicative of a trend; however, variations in product mix and the resulting impact on gross profit margin from quarter to quarter are difficult to predict. Selling, General, and Administrative Expenses SG&A expenses increased 6.7% to $6.8 million during the second quarter of fiscal year 2014, compared to $6.4 million for the same period last year. SG&A expenses as a percentage of net sales were 33.9% in the second quarter of fiscal year 2014 compared to 33.5% in the second quarter of fiscal year 2013. The increase in SG&A expenses during the second quarter of fiscal year 2014 compared to the same period last year was primarily due to increased legal and professional fees. We do not believe the increased SG&A expenses indicate a trend toward higher SG&A expenses generally. Royalty (Income) Expense, Net We recognized royalty expense, net of royalty income, totaling $17,000 during the second quarter of fiscal year 2014, compared to royalty income, net of royalty and related expenses, totaling $44,000 during the same period last year. We expect the trend of royalty expense largely or completely offsetting royalty income to continue in fiscal year 2014 as a result of the decline in royalty income due to the expiration of patents for licensed products. Amortization of Intangible Assets We recognized $10,000 of amortization expense, associated with intangible assets, for the second quarter of fiscal year 2014, compared to amortization expense of $23,000 during the second quarter of fiscal year 2013. The decrease in amortization expense, when comparing the two periods, is primarily due to the fact that the purchased developed technology asset, acquired in connection with the acquisition of SMP Data Communications in 2008, was fully amortized during fiscal year 2013. 16-------------------------------------------------------------------------------- Table Of Contents Other Expense, Net We recognized other expense, net in the second quarter of fiscal year 2014 of $110,000 compared to $124,000 in the second quarter of fiscal year 2013. Other expense, net is comprised of interest expense and other miscellaneous items which may fluctuate from period to period. Income (Loss) Before Income Taxes We reported a loss before income taxes of $313,000 for the second quarter of fiscal year 2014 compared to income before income taxes of $158,000 for the second quarter of fiscal year 2013. This change was primarily due to the increase in SG&A expenses of $431,000, compared to the same period in 2013. Income Tax Expense (Benefit) Income tax benefit totaled $156,000 in the second quarter of fiscal year 2014 compared to income tax expense of $82,000 for the same period in fiscal year 2013. Our effective tax rate for the second quarter of fiscal year 2014 was 50.0% compared to 52.1% for the second quarter of fiscal year 2013. Generally, fluctuations in our effective tax rates are primarily due to permanent differences in U.S. GAAP and tax accounting for various tax deductions and benefits, but can also be significantly different from the statutory tax rate when income or loss before taxes is at a level such that permanent differences in U.S. GAAP and tax accounting treatment have a disproportional impact on the projected effective tax rate. Net Income (Loss) Net loss attributable to OCC for the second quarter of fiscal year 2014 was $143,000 compared to net income attributable to OCC of $42,000 for the second quarter of fiscal year 2013. This change was due primarily to the decrease in income before taxes of $470,000, partially offset by the decrease in income taxes of $239,000, in the second quarter of fiscal year 2014, compared to the same period in fiscal year 2013. Six Months Ended April 30, 2014 and 2013 Net Sales Consolidated net sales for the first half of fiscal year 2014 increased approximately 1.0% to $36.7 million compared to net sales of $36.4 million for the same period last year. We experienced an increase in net sales during the first half of fiscal year 2014 in our commercial markets compared to the same period last year, but this increase was offset by decreases in net sales in our specialty markets. Net sales to customers in the United States increased 10.2% in the first half of fiscal year 2014 compared to the same period last year, while net sales to customers outside of the United States decreased 19.3%. Gross Profit Our gross profit was $12.1 million in the first half of fiscal year 2014, a decrease of 8.5% compared to $13.2 million in the first half of fiscal year 2013. Gross profit margin, or gross profit as a percentage of net sales, decreased to 32.9% in the first half of fiscal year 2014 from 36.2% in the first half of fiscal year 2013. Our gross profit margin percentages are heavily dependent upon product mix on a quarterly basis and may vary based on both anticipated and unanticipated changes in product mix. The lower gross profit margin in the first half of fiscal year 2014 when compared to the same period in fiscal year 2013 is attributable to (i) the negative impact of lower net sales during the first quarter of fiscal year 2014, as certain fixed manufacturing costs were spread over lower sales during that period, and (ii) an increase in sales of certain products that negatively impacted our gross profit margin during the second quarter of fiscal year 2014. 17-------------------------------------------------------------------------------- Table Of Contents Selling, General, and Administrative Expenses SG&A expenses increased 2.3% to $12.9 million for the first half of fiscal year 2014 from $12.6 million for the same period last year. SG&A expenses as a percentage of net sales were 35.1% in the first half of fiscal year 2014 compared to 34.6% in the first half of fiscal year 2013. The increase in SG&A expenses during the first half of 2014 compared to the same period last year was primarily due to increased legal and professional fees. We do not believe the increased SG&A expenses indicate a trend toward higher SG&A expenses generally. Royalty Expense, Net We recognized royalty expense, net of royalty income, totaling $46,000 during the first half of fiscal year 2014, compared to $4,000 during the same period last year. We expect the trend of royalty expense largely or completely offsetting royalty income to continue in fiscal year 2014 as a result of the decline in royalty income due to the expiration of patents for licensed products. Amortization of Intangible Assets We recognized $19,000 of amortization expense, associated with intangible assets, for the first half of fiscal year 2014, compared to amortization expense of $47,000 during the first half of fiscal year 2013. The decrease in amortization expense, when comparing the two periods, is primarily due to the fact that the purchased developed technology asset, acquired in connection with the acquisition of SMP Data Communications in 2008, was fully amortized during fiscal year 2013. Other Expense, Net We recognized other expense, net in the first half of fiscal year 2014 of $201,000 compared to $236,000 in the first half of fiscal year 2013. Other expense, net is comprised of interest expense and other miscellaneous items which may fluctuate from period to period. Income (Loss) Before Income Taxes We reported a loss before income taxes of $1.1 million for the first half of fiscal year 2014 compared to income before income taxes of $309,000 for the first half of fiscal year 2013. This change was primarily due to the decrease in gross profit of $1.1 million in the first half of fiscal year 2014 and the increase in SG&A expenses of $288,000, compared to the same period in 2013. Income Tax Expense (Benefit) Income tax benefit totaled $480,000 in the first half of fiscal year 2014 compared to income tax expense of $122,000 for the same period in fiscal year 2013. Our effective tax rate for the first half of fiscal year 2014 was 44.5% compared to 39.6% for the first half of fiscal year 2013. Generally, fluctuations in our effective tax rates are primarily due to permanent differences in U.S. GAAP and tax accounting for various tax deductions and benefits, but can also be significantly different from the statutory tax rate when income or loss before taxes is at a level such that permanent differences in U.S. GAAP and tax accounting treatment have a disproportional impact on the projected effective tax rate. Net Income (Loss) Net loss attributable to OCC for the first half of fiscal year 2014 was $555,000 compared to net income attributable to OCC of $172,000 for the first half of fiscal year 2013. The change was due primarily to the decrease in income before taxes of $1.4 million in the first half of fiscal year 2014, partially offset by the decrease in income taxes of $603,000, in the first half of fiscal year 2014, compared to the same period in fiscal year 2013. 18-------------------------------------------------------------------------------- Table Of Contents Financial Condition Total assets increased $2.1 million, or 4.7%, to $47.5 million at April 30, 2014, from $45.4 million at October 31, 2013. This increase was primarily due to a $1.5 million increase in trade accounts receivable, net. The increase in trade accounts receivable, net largely resulted from the increase in net sales in the second quarter of fiscal year 2014 when compared to the fourth quarter of fiscal year 2013 and the timing of collections. Total liabilities increased $2.6 million, or 16.1%, to $18.4 million at April 30, 2014, from $15.9 million at October 31, 2013. The increase in total liabilities was primarily due to a $2.2 million increase in accounts payable and accrued expenses, including accrued compensation and payroll taxes, and a $500,000 increase in note payable to bank under our revolving line of credit. Accounts payable and accrued expenses, including accrued compensation and payroll taxes, increased primarily due to the timing of certain raw material purchases when comparing the two periods and the timing of certain vendor and payroll related payments. Total shareholders' equity attributable to OCC at April 30, 2014 decreased $398,000 in the first half of fiscal year 2014. The decrease resulted from a net loss attributable to OCC of $555,000 and dividends declared of $270,000, partially offset by share-based compensation, net of $420,000. Liquidity and Capital Resources Our primary capital needs during the first half of fiscal year 2014 have been to fund working capital requirements and capital expenditures. Our primary source of capital for these purposes has been existing cash, borrowings under our revolving credit facility and cash provided by operations. As of April 30, 2014 and October 31, 2013, we had outstanding loan balances under our revolving credit facility totaling $3.0 million and $2.5 million, respectively. As of April 30, 2014 and October 31, 2013, we had outstanding loan balances, excluding our revolving credit facility, totaling $7.6 million and $7.8 million, respectively. Our cash totaled $291,000 as of April 30, 2014, a decrease of $460,000, compared to $750,000 as of October 31, 2013. The decrease in cash for the six months ended April 30, 2014 primarily resulted from capital expenditures totaling $868,000, partially offset by cash provided by operating activities of $406,000 and net cash provided by financing activities totaling $73,000. On April 30, 2014, we had working capital of $26.7 million compared to $27.0 million on October 31, 2013. The ratio of current assets to current liabilities as of April 30, 2014 was 4.8 to 1 compared to 6.6 to 1 as of October 31, 2013. The decrease in working capital and in the current ratio was primarily due to the $2.2 million increase in accounts payable and accrued expenses, including accrued compensation and payroll taxes, partially offset by the $1.5 million increase in trade accounts receivable, net. Net Cash Net cash provided by operating activities was $406,000 in the first half of fiscal year 2014, compared to $1.6 million in the first half of fiscal year 2013. Net cash provided by operating activities during the first half of fiscal year 2014 primarily resulted from certain adjustments to reconcile a net loss of $600,000 to net cash provided by operating activities, including depreciation, amortization and accretion of $979,000 and share-based compensation expense of $464,000. Additionally, the cash flow impact of increases in accounts payable and accrued expenses, including accrued compensation and payroll taxes, of $2.1 million further contributed to net cash provided by operating activities. All of the aforementioned factors positively affecting cash provided by operating activities were partially offset by the cash flow impact of increases in trade accounts receivable, net of $1.6 million. 19-------------------------------------------------------------------------------- Table Of Contents Net cash provided by operating activities during the first half of fiscal year 2013 primarily resulted from net income of $187,000 plus net adjustments to reconcile net income to net cash provided by operating activities, including depreciation, amortization and accretion of $1.0 million and share-based compensation expense of $632,000. Additionally, decreases in accounts receivable of $2.2 million further contributed to net cash provided by operating activities. All of the aforementioned factors positively affecting cash provided by operating activities were partially offset by increases in inventories of $1.0 million and the decrease in accrued compensation and payroll taxes of $1.9 million. Net cash used in investing activities totaled $939,000 in the first half of fiscal year 2014 compared to $2.3 million in the first half of fiscal year 2013. Net cash used in investing activities during the first half of fiscal years 2014 and 2013 resulted primarily from purchases of property and equipment and deposits for the purchase of property and equipment. Net cash provided by financing activities totaled $73,000 in the first half of fiscal year 2014 compared to $845,000 in the first half of fiscal year 2013. Net cash provided by financing activities in the first half of fiscal year 2014 resulted primarily from proceeds from a note payable to our bank under our line of credit, net of repayments, of $500,000, partially offset by the $263,000 payment of dividends previously declared. Net cash provided by financing activities in the first half of fiscal year 2013 resulted primarily from proceeds from a note payable to our bank under our line of credit, net of repayments, of $2.0 million, partially offset by the repurchase and retirement of 129,500 shares of our common stock for $543,000. Credit Facilities We have credit facilities consisting of a real estate term loan, as amended (the "Virginia Real Estate Loan"), a supplemental real estate term loan, as amended (the "North Carolina Real Estate Loan") and a revolving credit facility, as amended (the "Commercial Loan"). Both the Virginia Real Estate Loan and the North Carolina Real Estate Loan are with Valley Bank, have a fixed interest rate of 4.25% and are secured by a first priority lien on all of our personal property and assets, except for our inventory, accounts, general intangibles, deposit accounts, instruments, investment property, letter of credit rights, commercial tort claims, documents and chattel paper, as well as a first lien deed of trust on the Company's real property. The Commercial Loan provides us with a revolving line of credit for the working capital needs of the Company. Under the terms of the Commercial Loan, we may borrow an aggregate principal amount at any one time outstanding not to exceed the lesser of (i) $9.0 million, or (ii) the sum of 85% of certain receivables aged 90 days or less plus 35% of the lesser of $1.0 million or certain foreign receivables plus 25% of certain raw materials inventory. Within the revolving loan limit of the Commercial Loan, we may borrow, repay, and reborrow, at any time until August 31, 2015, the extended maturity date of the Commercial Loan. Advances under the Commercial Loan accrue interest at LIBOR plus 2.2% (resulting in a 2.35% rate at April 30, 2014). Accrued interest on the outstanding principal balance is due on the first day of each month, with all then outstanding principal, interest, fees and costs due at the Commercial Loan maturity date of August 31, 2015. The Commercial Loan is secured by a first priority lien on all of our inventory, accounts, general intangibles, deposit accounts, instruments, investment property, letter of credit rights, commercial tort claims, documents and chattel paper. 20-------------------------------------------------------------------------------- Table Of Contents As of April 30, 2014, we had $3.0 million of outstanding borrowings on our Commercial Loan and $6.0 million in available credit. Capital Expenditures For the six months ended April 30, 2014, we have spent approximately $555,000 to upgrade existing and add new manufacturing equipment at our fiber optic cable production facility in order to further improve our production capabilities. As of April 30, 2014, we have committed an additional $820,000 to support these efforts. We did not have any other material commitments for capital expenditures as of April 30, 2014. During our 2014 fiscal year budgeting process, we included an estimate for capital expenditures of $2.8 million for the year. These expenditures will be funded out of our working capital or borrowings under our credit facilities. Capital expenditures are reviewed and approved based on a variety of factors including, but not limited to, current cash flow considerations, the expected return on investment, project priorities, impact on current or future product offerings, availability of personnel necessary to implement and begin using acquired equipment, and economic conditions in general. Historically, we have spent less than our budgeted capital expenditures in any given year. Corporate acquisitions and other strategic investments are considered outside of our annual capital expenditure budgeting process. Future Cash Flow Considerations We believe that our future cash flow from operations, our cash on hand and our existing credit facilities will be adequate to fund our operations for at least the next twelve months. From time to time, we are involved in various claims, legal actions and regulatory reviews 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 our financial position, results of operations or liquidity. Seasonality Historically, net sales are relatively lower in the first half of each fiscal year and relatively higher in the second half of each fiscal year, which we believe may be partially due to construction cycles and budgetary considerations of our customers. For example, our trend for the last three fiscal years has been that an average of approximately 48%, 47% and 48% of our net sales occurred during the first half of fiscal years 2013, 2012 and 2011, respectively, and an average of approximately 52%, 53% and 52% of our net sales occurred during the second half of fiscal years 2013, 2012 and 2011, respectively. We believe net sales may not follow this pattern in periods when overall economic conditions in the industry and/or in the world are atypical. As a result, we typically expect net sales to be relatively lower in the first half of each fiscal year and relatively higher in the second half of each fiscal year. We believe this historical seasonality pattern is generally indicative of an overall trend and reflective of the buying patterns and budgetary cycles of our customers. However, this pattern may be substantially altered during any quarter or year by the timing of larger projects, other economic factors impacting our industry or impacting the industries of our customers and end-users and macroeconomic conditions. While we believe seasonality may be a factor that impacts our quarterly net sales results, we are not able to reliably predict net sales based on seasonality because these other factors can also substantially impact our net sales patterns during the year. 21-------------------------------------------------------------------------------- Table Of Contents Critical Accounting Policies and Estimates Our discussion and analysis of financial condition and results of operations is based on the condensed consolidated financial statements and accompanying condensed notes that have been prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP") for interim financial reporting information and the instructions to Form 10-Q and Regulation S-X. The preparation of these condensed consolidated financial statements 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 condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Note 1 to the consolidated financial statements filed with our Annual Report on Form 10-K for fiscal year 2013 provides a summary of our significant accounting policies. Those significant accounting policies detailed in our fiscal year 2013 Form 10-K did not change during the period from November 1, 2013 through April 30, 2014. New Accounting Considerations In July 2013, the FASB issued Accounting Standards Update 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists ("ASU 2013-11"). The amendments in ASU 2013-11 clarify that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward if such settlement is required or expected in the event the uncertain tax position is disallowed. If a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date, then the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. ASU 2013-11 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2013, with early adoption permitted. The adoption of ASU 2013-11 is not expected to have a material impact on our results of operations, financial position or liquidity or our related financial statement disclosures. There are no other new accounting standards issued, but not yet adopted by us, which are expected to be applicable to our financial position, operating results or financial statement disclosures. 22-------------------------------------------------------------------------------- Table Of Contents |