ITEM 1. BUSINESS
GENERAL
Optical Coating Laboratory, Inc., together with its consolidated subsidiaries (the "Company"), is the world's largest independent manufacturer of optical thin film coated components used to manage light. At its Company-owned and leased facilities located in Santa Rosa, California, Goslar, Germany, Hillend, Scotland and Isehara, Japan, OCLI designs, develops and manufactures multi-layer thin film coatings which control and enhance light by altering the transmission, reflection and absorption of its various wavelengths to achieve a desired effect such as anti-reflection, anti-glare, electromagnetic shielding, electrical conductivity and abrasion resistance. OCLI markets and distributes components to original equipment manufacturers ("OEMs") of optical and electro-optical systems and sells its Glare/Guard brand ergonomic computer display products through resellers and office retailers. OCLI's products are found in many applications including computer monitors, flat panel displays, telecommunication systems, photocopiers, fax machines, medical/analytical equipment and instruments, projection imaging systems, satellite power systems and aerospace and defense systems. The Company also manufactures precision injection molded plastic optical components that are used in a variety of applications such as inkjet printers, point-of-sale scanners and sunglasses. Precision molded plastic optics allow for the production of aspheric surfaces, have significant cost advantages over similar products made with glass, improve impact resistance and offer a substantial weight advantage over glass components.
The Company has developed many of its thin film coating processes and has designed and fabricated most of the coating equipment used to manufacture its products. The Company believes its ability to design and build this specialized equipment has been an important factor in its ability to compete successfully. The Company maintains an extensive array of thin film coating equipment, glass fabrication equipment, precision injection molding equipment and support facilities to satisfy its customers' requirements for thin film coated products, fabricated glass components and precision injection molded plastic optics components.
Flex Products, Inc. ("Flex"), of which the Company holds a controlling 60% interest, is a manufacturer of thin film coatings on plastic film produced by a proprietary vacuum deposition technology on large-scale, high-speed roll coating equipment developed by OCLI in the 1980's. Flex's principal product, optically variable pigment ("OVP"), was also invented by the Company and is used primarily in currency printing as a security and anti- counterfeiting measure. SICPA Holding S.A., a Swiss company that is OCLI's 40% partner in Flex Products, is the largest manufacturer of printing inks in the world and is currently Flex Products' largest customer. Flex Products also manufactures and sells energy efficient window film used for residential, commercial and automotive energy conservation; printing plates used in offset color printing; photoreceptor ground planes used in copiers; and pigment used in automotive paint.
Through its OCLI/MMG Division in Goslar, Germany and its principal manufacturing facility in Santa Rosa, California, the Company operates fully integrated precision glass fabrication operations with capability for sawing, machining, heat-treating, chemical-treating, silk screening and etching glass products to customer specifications. Fabricated glass product lines include mirrors, platens, filters, panels and an array of optics and components made of glass for use in copiers, cameras and other electro-optical devices and instruments.
The Company also operates a fully integrated coating facility with additional optical fabrication capability at its wholly-owned subsidiary in Hillend, Scotland. From this platform, the Company markets a broad array of coated products with applications in commercial, scientific and military markets and performs research and development under scientific and U.K. Ministry of Defense sponsorships.
Through a contractual joint venture alliance with JDS FITEL Inc. ("JDS"), a publicly held Canadian high technology company, OCLI produces optical filters for use in dense wavelength division multiplexing ("WDM") products that are marketed and distributed by JDS. WDM is the simultaneous transmission of information on different wavelengths along the same optical fiber and is one of the alternative technologies available to telecommunications network providers to satisfy the demand for increased transmission capacity resulting from the growing use of new services such as the Internet, video and other forms of data transmission. WDM components are the key elements in fiber optic systems that facilitate transmission using different wavelengths. Precision thin film optical filters are one of the key elements in a WDM component that permit wavelength discrimination.
Through its joint venture company in Japan, Hakuto-OCLI, Ltd., which is doing business as "OCLI Asia," the Company provides fabrication and applications engineering support for front surface mirrors, anti-reflection panels, optical filters for satellites, dichroic filters, among other products for Asian markets. OCLI Asia was formed in 1997, as a joint venture with Hakuto Co., Ltd. Hakuto has been a major customer and long- term distributor and fabricator of OCLI's products in Japan and several other Asian countries and is an approximate 9% stockholder of the Company. OCLI Asia is consolidated into the Company's results of operations and financial position as the Company has operating control over the joint venture.
The Company has significant investments in Germany, Scotland and Japan. Changes in the value of those countries' currencies relative to the U.S. dollar are recorded as direct charges or credits to equity. The Company also has manufacturing operations in Germany, Scotland and Japan and sales presence in other European and Asian countries. A significant weakening of the currencies in Europe or Asia in relation to the U.S. dollar could reduce the reported results of those operations. In addition, a significant amount of the Company's sales are export sales which could be subject to competitive price pressures if the U.S. dollar was to strengthen compared to the currency of foreign competitors
MARKETS AND PRODUCTS
DISPLAY. The Company is a leading supplier of anti-reflection coatings to OEMs for use on computer terminals and other cathode ray tube ("CRT") displays, flat panel displays, liquid crystal displays ("LCDs") and touch panel displays (among other applications) to improve the readability of the information displayed by reducing glare from reflected light while optimizing the transmission of light from the display. The coatings are produced in several configurations to meet varied customer requirements, including as laminates with conductive qualities to reduce electromagnetic and electrostatic discharge.
The Company also produces ergonomic enhancement products which are sold in the computer end-user market under its Glare/Guard brand and on a private label basis. The filters provide viewing comfort and health and safety protection for computer users by improving the visibility of the information displayed on computer display monitors. Several models are also capable of minimizing electrical and magnetic field radiation and static charge buildup of display devices.
The Company also manufactures a variety of components used in projection display products, such as front surface mirrors used in large screen projection televisions and dichroic color filters used in LCD and digital light processing projector systems.
TELECOMMUNICATIONS. OCLI produces state-of-the-art optical bandpass filters for use in wavelength division multiplexing ("WDM") products that allow simultaneous transmission of many telephone signals on a single optical fiber. WDM is one of the alternative technologies available to telecommunications network providers to satisfy the demand for increased transmission capacity resulting from the growing use of new services such as the Internet, video and other forms of data transmission. WDM components are the key elements in fiber optic systems that facilitate transmission using different wavelengths. Precision thin film optical filters are one of the key elements in WDM components that permit wavelength discrimination. OCLI's filters are marketed and distributed through a contractual joint venture arrangement with JDS FITEL Inc.
OCLI also serves the telecommunications market through the production of glass solar cell covers and thermal control mirrors for use on satellites. The thin glass solar cell covers are coated to provide enhanced performance, reduced temperature and protection for the photovoltaic cells. These covers range from the simplest single layer products that improve solar transmission to complex multi-layer designs that reflect ultraviolet and infrared solar energy. The thermal control mirrors are used to control the temperature of satellites. These highly efficient mirrors are used to reflect solar energy from sensitive instrument areas and to control antenna temperature and performance using proprietary designs on flexible substrates.
OFFICE AUTOMATION. The Company manufactures a complete line of high quality products for office automation OEMs, including front surface mirrors for photocopiers, document scanners, overhead projectors, facsimile machines and laser beam printers; platen glass and photoreceptors for photocopiers; hot and cold mirrors used in micrographic readers and overhead projectors; color separation filters for desktop document scanners; and precision molded plastic components used in inkjet printers.
SECURITY PRODUCTS. Through Flex Products, Inc., the Company manufactures and markets optically variable pigment ("OVP") used in currency printing as an anti-counterfeiting measure. Flex's largest customer for OVP, and OCLI's partner in Flex's ownership, is SICPA Holding S.A., one of the world's leading manufacturers of printing inks. Currently, over 50 countries, including the United States, have adopted the use of ink made with optically variable pigment in the printing of currencies and other valued documents. Sales of this product constituted greater than 10% of the Company's consolidated sales in 1997 and 1996. See "Marketing" discussion.
OTHER MARKETS. The Company manufactures a wide array of filters, reflectors and optical components for use in medical, biochemical, scientific and analytical instruments, manufacturing process control instruments, barcode scanners, point-of-sale scanners, focus devices in cameras and slide projectors, instruments used to monitor blood glucose levels and instruments used to measure color in paint pigment as well as sophisticated, high-precision coated products and optical components to meet the specific performance requirements of advanced scientific, space and defense systems and products for a variety of specialty applications, including dichroic filters for specialty stage lighting; energy control window film for architectural applications; optically variable pigment used in automotive paint; precision molded plastic optics for sunglasses and anti-reflection linear polarizers for viewcams.
MANUFACTURING
The Company's initial growth came from the development of high precision coated products for use primarily in defense and aerospace applications and in sophisticated analytical equipment. These types of coated products are produced by relatively costly batch processes and continue to represent a portion of the Company's revenues. From this base, the Company has expanded into commercial markets by designing and fabricating continuous coating equipment capable of producing a high volume of relatively less complex products at lower unit costs. This large-scale equipment has enabled the Company to serve broad commercial markets with many of its products.
The Company has developed many of its thin film coating processes and has designed, fabricated or significantly customized most of the coating equipment used in production, including its continuous coaters, batch coaters and high speed roll-to-roll coaters. The Company believes its ability to design and build this specialized equipment, and its ability to develop proprietary process technologies, has been an important factor in enabling it to compete successfully. Consequently, the Company maintains an extensive array of thin film coating equipment, glass fabrication equipment and metrology equipment to meet customer requirements for coated products and fabricated glass components.
The Company employs various coating processes which it has developed and established over many years including batch coating by evaporation as its historic coating process and batch coating by reactive metal mode sputtering as a proprietary, patented process. The Company employs similar evaporation and sputtering processes in its continuous in-line coating systems. The Company's Flex Products subsidiary also employs proprietary evaporation processes and sputtering in its high-speed, roll-to-roll coating systems. The Company and its subsidiary operations have extensive auxiliary material preparation and glass fabrication equipment in place which allow the Company to produce a broad array of coated glass and plastic components and coated products for a wide variety of applications.
The Company has developed and procured extensive state-of-the-art metrology and test equipment to allow testing and verification of technological and performance characteristics of its products. This capability, including the expertise of the Company's scientific and technical staff to develop and design specific thin film coatings to meet a customer's application requirements, is frequently an integral aspect sought by customers in selecting the Company as a supplier.
RESEARCH AND DEVELOPMENT
The Company devotes substantial resources to research and development in order to develop new and improve existing thin film products, processes and manufacturing equipment. As a result, the Company has developed a technological leadership position in the thin film coatings industry, and customers rely on the Company's thin film integration services expertise and its products.
In cooperation with its joint venture partner, JDS FITEL Inc., the Company is developing new wavelength division multiplexing ("WDM") products and processes to expand the information carrying capability of fiber optic telecommunication networks. The emerging opportunities in this rapidly growing market require extremely high precision interference coating deposition technology combined with advanced fiber optic assembly and testing technology.
The Company's ongoing research and development commitments also include techniques to improve coating uniformity on plastic substrates for flat panel display applications; automation of the Company's coating equipment to improve product and increase equipment productivity; development of new and improved product configurations for the Glare/Guard market; and reduction and eventual elimination of coating and cleaning materials that may be hazardous to the environment.
Flex Products' major research and development effort has been toward the development and integration of state-of-the-art coating processes for use in new coating machines, which the subsidiary installed during fiscal 1996, and for the qualification of new products, primarily new color shifts for OVP and pigment used for automotive paint.
Company funded research and development expenditures totaled $14.9 million, $11.7 million and $8.4 million, or 6.8%, 6.2% and 5.0% of revenues, during fiscal years 1997, 1996 and 1995. In addition to the research and development funded by the Company, many of the Company's customer contracts involve state-of-the-art coating applications requiring substantial amounts of development in support of specific customer applications.
PATENTS AND LICENSES
The Company believes its proprietary technology, its trade secrets and its patents to be of considerable value to its business. The Company believes that its patents demonstrate and support its technological leadership position, safeguard its competitive position and support existing and potential sales volume.
The Company has 48 patents and 63 patent applications in the United States which cover materials, processes, products and production equipment. The Company also has patents and patent applications pending in various foreign countries covering the same technology. Expiration dates for the Company's various patents range from 1998 to 2016. Flex Products currently has 107 patents and 83 new patent applications pending that are separate from the Company's patents. Expiration dates for Flex Products' patents range from 1998 to 2014. Flex Products also has patents and patent applications pending in various foreign countries covering the same technology. (See Item 3., "Legal Proceedings", for a discussion of the Company's patent infringement lawsuit with BASF Corporation and BASF AG.)
In 1988, at the formation of Flex Products as a joint venture, the Company and Flex Products entered into a License Agreement under which certain of the Company's patents relating to roll coating technology were assigned to Flex Products and Flex Products agreed to make royalty payments to the Company for the use of these patents. The License Agreement provides for royalties of 4% of Flex Products' revenues. The royalty payments are to continue for several years until a total of $13.7 million is paid. At fiscal year end 1997, $6.4 million remained to be paid. In years prior to 1995, and until May 1995, royalties were recorded as revenues. In 1995, after the Company's additional investment in Flex Products, the royalties were eliminated in consolidation.
TECHNOLOGY LICENSING
The Company selectively licenses its coating technology to other companies, primarily for integrated, mass production applications that the Company would not otherwise be able to provide as a manufacturer in the ordinary course of its business. During the past five years, these licenses, together with sales of equipment built for licensees in support of the licenses, have generated revenues to the Company totaling approximately $10 million.
MARKETING
The Company has established strong, long-term customer relationships and serves a wide range of markets, including leading manufacturers of computers, photographic equipment, copier products, medical instrumentation, home entertainment products, and space and defense systems. The Company's Flex Products subsidiary also has long-term relationships with customers in its markets.
The Company's products are sold by its sales organizations, headquartered in Santa Rosa, California and Reinheim, Germany, who communicate directly with customers' engineering, manufacturing and purchasing personnel in determining the design, performance and cost specifications for customer product requirements. The Company has regional sales offices in several major cities throughout the United States and in Germany, France, Spain and the United Kingdom. In Japan and other Asian countries, the Company has established joint venture companies with its former independent distributors and sales representatives to provide more integrated marketing and sales support in these regions.
With the exception of its Glare/Guard product line, the Company markets most of its standard, high volume coated products and fabricated glass components to OEMs. Its customized, technically sophisticated products are also marketed to OEMs in addition to defense and aerospace contractors. The Company exports some of its products to major distributors who perform product conversion and other value-added process steps before resale. The Company's Glare/Guard product line is marketed through distributors and dealers directly to end users.
Flex Products sells into several significant markets with a small, technically oriented sales organization supported by operations and engineering personnel in a sales team approach.
The Company's ten largest customers accounted for 42% of its sales in 1997. The Company's largest customer in 1997, who is also the Company's 40% partner in the ownership of Flex Products, accounted for approximately 14% of total sales for fiscal 1997, 13% of total sales for fiscal 1996 and 12% of total sales for the six months of consolidation of Flex Products in fiscal 1995. The Company's second and third largest customers in 1997 accounted for 7% and 5% of its sales in fiscal year 1997. The Company's second largest customer in 1996 and largest customer in 1995 accounted for 5% and 8% of its sales in fiscal years 1996 and 1995. Because relatively few customers account for a substantial portion of the Company's sales, the loss of their business could have a material adverse effect on the Company's operating results. However, the Company believes that it has the resources and capabilities to replace any lost business over time through the development of new products and new applications for its products. Foreign sales, primarily in Europe and Asia, including foreign sales of Flex Products for fiscal 1997, fiscal 1996 and six months of 1995, represented 48%, 48% and 47% of revenues for fiscal years 1997, 1996 and 1995. Sales by the Company's wholly-owned subsidiary in Scotland represented 5%, 5% and 10% of revenues for fiscal years 1997, 1996 and 1995. Sales by the Company's wholly-owned subsidiary in Germany represented 8%, 13% and 13% of revenues for fiscal years 1997, 1996 and 1995. Sales by these subsidiaries are primarily to customers in European countries. See Note 11 of Notes to Consolidated Financial Statements.
Export sales by U.S. operations to Asian countries represented 11%, 13%, and 13% and to European countries 19%, 14% and 9% of revenues for fiscal years 1997, 1996 and 1995. Export sales can be affected by adverse currency alignments and economic factors within those countries. In addition, although the Company has not experienced significant overall sales or pricing declines in these countries, economic factors in Europe and Asia could have a material effect on the Company's future results.
Sales of products to the federal government, primarily under subcontracts, accounted for 6%, 9% and 10% of revenues for the fiscal years 1997, 1996 and 1995. The Company's cost-plus-fixed fee ("CPFF") government contracts for fiscal years 1996 and 1995 are subject to pending governmental audit review. The audits entail, primarily, a review of costs and expenses charged to government contracts with the focus on potential adjustments to the allocation of general and administrative expenses. General and administrative expense allocations to CPFF contracts were $274,000 for 1997, $796,000 for 1996 and $1.8 million for 1995. The Company does not expect pending governmental audits to result in adjustments that will have a material impact on future operating results.
RAW MATERIALS AND SUPPLIERS
The primary raw materials used by the Company in its coating operations are various forms of glass, germanium, fused silica and several types of plastic and inorganic coating materials, such as magnesium fluoride, silicon dioxide, aluminum or germanium. The Company has more than one supplier for each of its raw materials and maintains adequate inventories and close working relationships with its suppliers to assure a continuous and adequate supply for production. The Company purchases special grade flat glass under long-term arrangements from one major U.S. glass supplier. The Company has not experienced any significant interruptions in production due to a shortage of raw material. Substrate materials are purchased by the Company or supplied by customers, while coating materials and their composition are generally supplied by the Company, as they are often considered a proprietary element of the manufacturing process.
In the Company's precision molded polymer optics operation, the primary raw material used is high quality granular polycarbonite plastic base stock which the Company procures from one principal supplier. Although the Company has experienced price increases for this raw material, and there is currently product supply allocation, it has been able to maintain its supply because of the long-term customer relationship with the supplier.
Flex Products uses significant quantities of plastic film and inorganic coating materials in the manufacture of its products. There is more than one supplier for both materials, and Flex Products has not experienced production interruptions due to a shortage of raw materials.
SEASONALITY
The Company's business is not seasonal in any material sense. However, the Company customarily shuts down a major portion of its operations between Christmas and New Year's Day. As a result, during the last five fiscal years, normally scheduled work days for the first fiscal quarter have averaged 56 compared to an average of 64 for the other three fiscal quarters. Nonetheless, the Company generally has sufficient manufacturing capacity and the ability to schedule additional production shifts to meet its customers' shipment requirements in any period of the year. The Company believes that its revenues and costs are consistently matched in each fiscal quarter since labor costs during the holiday shutdown period are generally charged to holiday and vacation labor expense categories which are accounted for on a pro rata basis over the fiscal year.
The Company's European subsidiaries customarily shut down their operations for a two week summer vacation. The summer shutdown has historically reduced the Company's fiscal fourth quarter sales in Europe as compared to sales in the other three fiscal quarters. In 1997 and prior years, the decline in sales during the summer in Europe has not been significant to the consolidated operations of the Company. However, such seasonality could become significant in future periods depending upon the overall significance of European sales to total Company sales.
BACKLOG
The Company's backlog of orders at the end of each of the last three fiscal years ended October 31, 1997, 1996 and 1995 was as follows:
1997 1996 1995
(In Millions)
$62.2 $51.6 $47.9
At October 31, 1997, backlog includes $6.2 million from Flex Products, which represents orders and specifically scheduled releases on long-term contracts for delivery within 12 months. Substantially all orders in backlog at October 31, 1997 are scheduled for shipment during 1998. The amount of backlog at October 31, 1997 represents only a portion of anticipated sales in 1998, with new orders historically comprising the major portion of sales in a fiscal year.
Backlog consists of new orders on which shipments have not yet started or unfilled portions of orders which are only partly completed. Some of these orders are completed within several days of receipt, while others are not completed for a number of months. Substantially all orders included in backlog are subject to cancellation without penalty; however, the Company generally has not experienced significant order cancellations. Contractually specified delivery dates on orders sometimes are adjusted at the request of either the customer or the Company.
Flex Products has multi-year supply contracts with two of its customers which include annual buy requirements with take or pay provisions. It is the practice of Flex Products to only include specifically scheduled shipment releases under these contracts in reported backlog.
COMPETITION
The Company believes its ability to compete successfully in its markets depends on a number of factors, both within and outside of its control, including the price, quality and performance of the Company's products, the emergence of new optical standards, the ability to maintain adequate coating capacity and sources of raw materials, the efficiency of its manufacturing and production, the rate at which customers design the Company's products into their products, the number and nature of the Company's competitors in a given market, the assertion of intellectual property rights and general market and economic conditions. The Company attempts to position itself as the exclusive or principal supplier to most of its key customers. To the extent competitors offer similar products to the Company's customers, pricing pressure may result. When the Company is unable to differentiate its product offerings, competition and related pressure on profit margins can be intense.
The Company's competitors include several private companies whose sales of coated products are believed to be considerably less than the Company's, as well as coating operations that comprise only a portion of the total business of other companies. The Company's glass fabrication operation in Germany also has local and foreign competitors. The Company believes none of these competitors has the wide array of technologies or manufacturing capabilities available at OCLI.
The Company has a larger number of domestic and foreign competitors for its Glare/Guard anti-glare optical filters. Companies that purchase coated glass and assemble and sell filters in competition with the Company include Fellows, Polaroid, ACCO and 3M. The Company is the world's largest manufacturer of anti-reflective optical filters, as measured by total number of units produced, manufacturing filters for both Glare/Guard products and private label distributors. Glare/Guard is one of the most recognized brand names in its market, both domestically and internationally.
Flex Products' position in its major market is technologically proprietary and patent protected. In this market, and in the remainder of its business, Flex Products competes through product innovation, customer service and willingness to invest in additional manufacturing capacity.
The Company responds to competition primarily on the basis of the advanced technical characteristics and quality of its products; its ability to meet and exceed individual customer design and performance specifications; its dependability and capability as a manufacturer and supplier; the quality of technical assistance and service furnished to its customers; and the competitive pricing of its products.
EMPLOYEES
At October 31, 1997, the Company, including Flex, had 1,515 employees of whom 1,229 were employed domestically, 103 were employed by the Company's operations in Hillend, Scotland; 125 were employed by the Company's OCLI/MMG Division in Goslar, Germany; 16 were employed in the Company's sales and administrative offices in Europe and 42 were employed by OCLI Asia in Japan. The Company has not experienced a work stoppage due to labor difficulties. The Company believes its employee relations are satisfactory.
None of the Company's employees in its domestic operations, in its operations in Scotland or in its European sales and administrative offices are subject to collective bargaining agreements. Approximately 70% of the Company's employees in Goslar, Germany, are members of the national chemical, paper and ceramic union organization in Germany. The unionized employees work under a collective bargaining agreement.
In 1987, the Board of Directors approved increases in severance benefits for its domestic employees, not including Flex Products employees, in the event of certain changes in control of the Company. These severance arrangements have been extended through November 1999.
OCLI attributes much of its success to its strong relationship with its employees. The Company has instituted several employee oriented programs, including Total Quality Management and high performance work system practices, to enhance the quality and efficiency of its operations while improving employee relations.
JOINT VENTURES, INVESTMENTS AND ACQUISITIONS
Information regarding joint ventures, investments and acquisitions is included in Note 4 to the Consolidated Financial Statements filed as part of this Annual Report on Form 10-K.
COMPUTER SYSTEMS
During 1997, the Company initiated a program to modernize its business processes in order to reduce cycle time and improve profitability. The program has been deployed worldwide with the goal of streamlining, automating and applying best practices to all of the Company's business processes. In conjunction with this initiative, the Company identified the need for, selected and purchased an Enterprise Resource Planning System. Expected total cost of the system, including hardware, software and integration services, is approximately $4.6 million, of which the Company has recorded $2.0 million in 1997. The Company expects to spend the balance of $2.6 million over the next five years. Commencing with the implementation dates of the system modules in 1998, software and implementation costs will be depreciated over six years and hardware will be depreciated over the remaining lease term of approximately three years. Training and software maintenance costs are being expensed when incurred. The vendor has informed us that the Enterprise Resource Planning System is year 2000 compliant and, as it will be implemented at all of the Company's business locations before the year 2000, it is not expected that the year 2000 will have a material effect on the Company's results of operations or financial position.
ITEM 2.
ITEM 2. PROPERTIES
The Company's corporate headquarters and principal manufacturing and research and development facilities are located on a Company-owned campus in Santa Rosa, California. The site consists of approximately 75 acres of land of which approximately 53 acres are occupied by existing operations, with the remaining 22 acres currently held available for development or sale. The site is within an industrial park area and is served by well- developed road access and utilities. In addition, the Company leases offices for its sales personnel located in various cities in the U.S., Europe and the Far East.
The following table sets forth certain information concerning the Company's principal facilities.
NO. OF LEASED/ TOTAL SITE LOCATION BUILDINGS OWNED SQ. FT. (ACRES) USE
Santa Rosa, CA 12 Owned(1) 490,000 75 Optical Coating Laboratory, Inc.and Flex Products, Inc. corporate offices, manufac-turing, engineering and research and development facilities
Santa Rosa, CA 1 Leased 23,000 -- OCLI Precision Polymer Optics adminis-trative offices and manufacturing facilities Santa Rosa, CA 1 Leased 74,000 -- Warehousing facilities
Hillend, Scotland1 Owned(2) 56,000 16 OCLI Optical Coating Laboratory, Ltd. administrative offices, manufacturing and research and development facilities Hillend, Scotland1 Leased 9,000 -- OCLI Optical Coating Laboratory, Ltd. warehousing Goslar, Germany 2 Owned(3) 74,000 22 OCLI/MMG Division administrative offices and manufacturing facilities Reinheim, Germany2 Leased(4) 3,100 -- OCLI Optical Coating Laboratory GmbH administrative and sales offices
Isehara, Japan 2 Leased 794 -- Hakuto-OCLI, Ltd. ("OCLI Asia") admin- istrative offices and manufacturing facilities
(1) During fiscal 1996, the Company entered into two mortgage loan agreements in the amount of $2.6 million and $3.0 million, respectively. The loans are collateralized by the land and buildings of two newly constructed manufacturing and office buildings located on the Company's Santa Rosa, California campus. The term of each non-recourse loan is 15 years, with fixed interest rates of 8% and 7.5%, respectively. Payments of principal and interest for the loans are $25,000 and $28,000 per month, respectively. The Company leases one of the new buildings to Flex Products for its corporate offices and additional manufacturing facilities.
(2) The facility occupied by OCLI Optical Coating Laboratory, Ltd. ("OCLI Ltd.") in Scotland was constructed for the subsidiary by the Scottish Development Agency ("SDA"). The facility consists of a manufacturing and office building on a 16 acre site in an industrial park area. The property is owned by the Company subject to a mortgage held by SDA that has a remaining balance of $3.9 million as of October 31, 1997, with nine years left on the term of the mortgage. At the beginning of 1995, OCLI Ltd. negotiated a three year mortgage interest moratorium, with principal continuing to be payable to Locate in Scotland (formerly SDA), as economic inducement to encourage business and employment growth in this region of Scotland.
(3) The Company's OCLI/MMG Division in Goslar, Germany, occupies two manufacturing buildings totaling approximately 68,000 square feet and an adjacent 6,000 square foot office building located on approximately 22 acres in an industrial park area. The land is held by a wholly-owned subsidiary of the Company under a long-term hereditary rights agreement. The manufacturing facility is pledged as security on loans totaling approximately $1.9 million with repayment terms running through 2020. The office building serves as collateral for an approximately $500,000 mortgage loan payable over eight years through 2005.
(4) The Company leases approximately 3,100 square feet of office space for its European headquarters and sales activities in Reinheim, Germany.
Management believes that the Company's facilities are adequate for its current level of business and the near-term growth requirements of the Company and its subsidiaries.
ENVIRONMENTAL
In 1988, the Company discovered ground water contamination at its facilities in Santa Rosa, California. With the assistance of its environmental consultants and under the regulatory guidance of the California Regional Water Quality Control Board, the Company established a program for reducing contaminant concentration levels to acceptable federal and state levels. In prior years, the Company recorded accruals to cover the future estimated cost of drilling additional extraction and monitoring wells and considers those accruals to be adequate. The Company spent $0, $228,000 and $10,000 in fiscal years 1997, 1996 and 1995 for drilling, extraction and monitoring wells which were charged against those accruals. In addition, the accrual was reduced by a total of $200,000 in 1997 and 1996 as a result of approval of the Company's final remediation plan by the California Regional Water Quality Control Board. Ongoing ground water remediation expenses, and the cost of compliance with environmental standards for years 1995 through 1997, have not been material to the operations of the Company, and the Company does not expect them to be material in the future
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
In 1997, Optical Corporation of America ("OCA") and certain of its directors and officers ("Affiliates") commenced suit against the Company. The complaint arises out of a letter of intent executed by the Company and OCA in March 1996 and an ensuing merger agreement executed by the Company and OCA in June 1996. Under the merger agreement, the Company would acquire OCA. The complaint seeks damages for costs and expenses incurred by OCA in pursuing the merger transaction with the Company due to the Company's alleged negligent misrepresentations to OCA and Affiliates and the Company's alleged breach of its letter of intent with OCA. The Company has filed counterclaims against OCA and the Affiliates based on OCA's breach of the merger agreement and is seeking damages based on the difference between the value of OCA's business to the Company and the agreed upon purchase price under the merger agreement. The Company does not believe that this litigation will have any material adverse effect on its future operating results or financial condition.
In 1997, Flex Products filed a suit in United States District Court for the Eastern District of Michigan alleging that BASF Corporation (BASF) and BASF AG have infringed Flex's patents covering optically variable thin film flakes which, when mixed with paints and inks, produce color shifting visual properties. The complaint requests that the Court enjoin BASF from importing, making, using, selling or offering to sell the infringing pigment in the United States. The complaint also seeks damages for the infringement, including treble damages if the infringement is found to be willful. BASF Corporation has filed a counterclaim seeking a declaration that the patent in question is invalid. Both BASF companies have requested that they be awarded their attorneys' fees and costs. Management remains confident in the validity of Flex Products' patent, and based upon the information currently available, that the BASF product is , in fact, covered by the patent.
During fiscal 1996, SICPA Holding S.A. ("SICPA"), the 40% joint owner of Flex Products, filed suit in Delaware Chancery Court seeking injunctive and other relief against OCLI, Flex Products and certain of Flex Products' directors. In the suit, SICPA alleged that Flex Products could not proceed with an initial public offering of its common stock without the consent of SICPA and that SICPA had the right to purchase OCLI's 60% ownership of Flex Products pursuant to a call option beginning after May 8, 1998. In January 1997, the Delaware Chancery Court rendered a decision that upheld the position of OCLI and Flex Products that a simple majority of Flex Products' Board of Directors had the legal authority to authorize a public offering of Flex Products' securities without the approval of SICPA.
Subsequent to fiscal year end 1997, OCLI, Flex Products and SICPA reached settlement of the pending litigation. Under the terms of the settlement agreement, OCLI and SICPA have agreed to modify their co-ownership agreement to allow OCLI to more effectively manage the day-to-day operations of Flex Products, to eliminate the "put" and "call" provisions, to allow for the public financing of Flex's operations and to modify the License and Supply Agreement between Flex Products and SICPA to maintain a competitive price on the sale of optically variable pigment to SICPA but provide for more attractive scheduled pricing discounts on higher volume purchases. In addition, OCLI purchased Flex Products working capital loan of $2.6 million from SICPA.
During the past several years, the Company has been engaged in litigation in the United Kingdom ("U.K.") involving infringement of a Company patent by a U.K. company. The Company won its action at the Patents County Courts level but lost on appeal to the U.K. House of Lords. During the injunction period, the U.K. company submitted a claim for damages totaling approximately $1.6 million for lost profits. The Company and legal counsel are in the process of reviewing the claim. Management believes that the amount of the claim is substantially overstated and that the ultimate settlement will not have a material adverse effect on the financial statements.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the Company's security holders during the three months ended October 31, 1997.
EXECUTIVE OFFICERS OF THE COMPANY
The names, ages and positions of the executive officers of the Company as of January 15, 1998 are listed below, followed by a brief description of their business experience during at least the past five years. Officers are appointed annually by the Board of Directors at the next regularly scheduled meeting of the Board following the Annual Meeting of Stockholders. There are no family relationships among these officers nor any arrangements or understandings between any officer and any other person pursuant to which an officer was selected.
NAME AGE POSITION BUSINESS EXPERIENCE
Herbert M. Dwight,Jr. 67 Chairman of the Board and Chairman of the Chief Executive Officer, Board and Chief OCLI and Flex Products, Inc. Executive Officer of OCLI since August 1991; Chairman of the Board and Chief Executive Officer of Flex Products, Inc. since May 1995; President of OCLI from 1991 to 1997; Chairman, President and Chief Executive Officer, Superconductor Technologies, Inc. from 1988 to 1991; Chief Executive Officer, Spectra Physics from 1967 to
Charles J. Abbe....... 56 President and Director President and Director since November 1997; Vice President and General Manager, Santa Rosa Division from April 1996 to November 1997; various senior management positions with Raychem Corporation from 1989 to 1996
Craig B. Collins...... 42 Vice President, Finance and Vice President, Chief Financial Officer Finance and Chief Financial Officer since September 1997; Senior Vice President of Finance and Chief Financial Officer, Nestle Beverage Company, a division of Nestle Corporation, from 1983 to 1996
Klaus F. Derge........ 60 Vice President, International Vice President, Operations International Operations since July 1992; various senior management positions with Spectra Physics, Sweden from 1969 to
Bryant Hichwa ........ 51 Vice President, Research and Vice President, Development Research and Development since December 1997; Director, Research and Development from 1988 to December
Michael A. Kasper..... 47 Vice President and General Vice President and Manager, Aerospace & General Manager, Instrumentation Division Aerospace & Instrumentation Division since December 1997; Director of Operations from 1996 to December 1997; manufacturing engineering and materials management positions with Procter & Gamble from 1972 to 1996
John McCullough....... 65 Vice President and Director Vice President since January 1992; Director since 1985; Executive Vice President from 1988 to 1992; Senior Vice President from 1978 to 1988; Vice President, Commercial Products and Raytek Divisions from 1976 to 1977; Vice President, Finance and Administration from 1958 to 1967
Stephen E. Myers...... 50 Vice President and General Vice President and Manager, Information General Manager, Industries Division Information Industries Division since December 1997; Director, Information Industries Business Unit from July 1996 to December 1997; various operations and finance management positions with Raychem Corporation from 1978 to 1996
Laurence D. Parson.... 49 Vice President, North America Vice President, and Asia Sales North America and Asia Sales since November 1997; Vice President, Sales from October 1996 to November 1997; Vice President and General Manager, Glare/GuardO Division from 1993 to 1996; General Manager, Glare/GuardDivision from 1992 to 1993; various manufacturing, marketing and sales positions from 1973 to 1992
Kenneth D. Pietrelli.. 49 Vice President, Corporate Vice President, Services Corporate Services since June 1993; Corporate Materials Manager from 1980 to
James W. Seeser, Ph.D. 54 Vice President and Chief Vice President since Technical Officer March 1986 and Chief Technical Officer since November 1993; General Manager, Advanced Products Division from 1987 to 1989; various engineering and engineering management positions from 1983 to 1986
Glenn K. Yamamoto..... 46 Vice President and General Vice President and Manager, Telecommunications General Manager, Division Telecommunications Division since December 1997; various product line, sales and manufacturing management posi- tions from 1973 to
Joseph C. Zils........ 43 President, Chief Financial President, Chief Officer and Director, Flex Financial Officer Products, Inc.; and Director of Flex Vice President, Legal Counsel Products, Inc. since and Corporate Secretary, OCLI November 1997; Vice President of OCLI since June 1993; Corporate Secretary of OCLI since December 1993; Legal Counsel of OCLI since November 1997; General Counsel of OCLI from 1989 to
Information regarding compliance with Section 16(a) of the Securities Exchange Act of 1934 is set forth in the definitive Proxy Statement relating to the Company's 1998 Annual Meeting of Stockholders, which information is incorporated herein by reference.
PART II
ITEM 5.
ITEM 5.MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock trades on The Nasdaq Stock MarketSM under the symbol OCLI. The table below sets forth the high and low prices of the Company's common stock during the two most recent fiscal years ended October 31, 1997 and 1996. 1Q 2Q 3Q 4Q FY
High..............................11-5/8 11-3/8 14-1/4 13-1/4 14-1/4 Low .............................. 9-1/2 9-3/8 9-3/8 12-1/8 9-3/8
High..............................15-3/8 14-3/8 19-1/4 15 19-1/4 Low .............................. 9-1/4 10-1/8 12-1/2 10-1/4 9-1/4
DIVIDEND INFORMATION
Since June 1991, the Company has paid a semiannual cash dividend of $.06 per share on its common stock.
APPROXIMATE NUMBER OF HOLDERS OF COMMON STOCK
There were 962 holders of record of the Company's common stock as of December 31, 1997.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
Years ended October 31, 1997, 1996, 1995, 1994, and 1993
(Amounts in thousands, except per share amounts) 1997 1996 1995 1994 1993
Revenues........................$217,829 $189,195 $169,417 $131,780 $123,013 Net income (loss) before cumulative effect of changes in accounting principles and dividend on preferred stock...........................$7,125 $5,196 $7,391 $4,604 $(5,737)
Net income (loss) applicable to common stock....................$6,432 $4,236 $6,929 $4,604 $(5,737)
Net income (loss) per common and common equivalent share ........$ .60 $ .41 $ .73 $ .51 $ ( .65)
Weighted average common and common equivalent shares outstanding.....................10,673 10,301 9,510 9,023 8,795
Cash dividend paid on common stock.................$ 1,199 $ 1,153 $ 1,083 $ 1,075 $ 1,043
Cash dividend paid per share of common stock.................$ .12 $ .12 $ .12 $ .12 $ .12
Working capital................ $ 41,731 $38,087 $ 28,015 $ 28,692 $16,251
Total assets................... $183,493 $172,771 $169,834 $118,879 $99,226
Long-term debt................. $ 40,975 $ 45,788 $ 47,267 $ 35,441 $23,110 Convertible redeemable preferred stock................ $ 5,559 $11,309 $ 11,357
Stockholders' equity........... $ 86,963 $79,559 $ 73,894 $ 52,037 $47,135
Common stockholders' equity per share......................$ 7.68 $ 6.99 $ 6.59 $ 5.79 $ 5.25
Number of employees............ 1,515 1,362 1,407 1,162 1,107
ITEM 7.
ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
THE INFORMATION CONTAINED IN MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION INCLUDES FORWARD LOOKING STATEMENTS WHICH ARE TYPICALLY IDENTIFIED BY THE WORDS "ANTICIPATES," "BELIEVES," "EXPECTS," "INTENDS," "FORECASTS," "PLANS," "FUTURES," "STRATEGY," OR WORDS OF SIMILAR IMPORT. VARIOUS IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED IN THE FORWARD LOOKING STATEMENTS ARE IDENTIFIED BELOW. ACTUAL RESULTS MAY VARY SIGNIFICANTLY BASED ON A NUMBER OF FACTORS INCLUDING, BUT NOT LIMITED TO, PRODUCT DEVELOPMENT, COMMERCIALIZATION AND TECHNOLOGICAL DIFFICULTIES; MANUFACTURING COSTS AND YIELD ISSUES ASSOCIATED WITH INITIATING PRODUCTION AT NEW FACILITIES; THE IMPACT OF COMPETITIVE PRODUCTS AND PRICING; CHANGING CUSTOMER REQUIREMENTS; AND THE CHANGE IN ECONOMIC CONDITIONS OF THE VARIOUS MARKETS THE COMPANY SERVES.
RESULTS OF OPERATIONS
FISCAL 1997 COMPARED TO FISCAL 1996
REVENUES. Revenues for 1997 were $217.8 million, an increase of $28.6 million, or 15%, over revenues of $189.2 million for 1996. The 1997 revenue increase was due to revenue growth in telecommunications, satellite solar power and office automation markets and increased sales by Flex Products, Inc. ("Flex Products") of optically variable pigment. During 1997, sales in these markets totaled 53% of total Company sales. These revenue increases were partially offset by decreased revenues in the Company's display and other markets. During 1997, sales in these markets totaled 47% of total Company sales. Much of the decrease in the Company's sales in display markets was due to a next generation product in which the Company has elected not to participate in order to focus resources into other markets.
GROSS PROFIT. Gross profit as a percent of revenue was 34.3% in 1997 compared to 33.0% in 1996. The 1997 gross profit improvement is primarily due to yield and throughput improvements including improvements in the performance of the Company's new continuous coating platforms, which had depressed margins in 1996. The comparative improvement in 1997 was partially offset by lower gross margins on the manufacture of wavelength division multiplexing products used in telecommunications applications and the gross profit recognized in 1996 on the sale of a coating machine
RESEARCH AND DEVELOPMENT. Research and development expenditures for 1997 were $14.9 million, an increase of $3.2 million, or 27% over research and development expenditures of $11.7 million for 1996. The 1997 increase is primarily due to increased spending by Flex Products for the qualification of new products and processes incorporating new production equipment. The Company also increased research and development expenditures for product and process development for telecommunications products.
SELLING AND ADMINISTRATIVE. Selling and administrative expenses for 1997 were $42.8 million, an increase of $5.7 million, or 15%, over 1996 selling and administrative expenses of $37.1 million. Slightly over half of this increase was due to increased selling expenses resulting from the establishment of a new joint venture in Japan ("OCLI Asia") and the introduction of new products by Flex Products. The remainder of the increase was primarily due to higher legal expenses in 1997 associated with patent infringement lawsuits and a lawsuit with SICPA Holding S.A. which was settled in November 1997 and a $600,000 restructuring charge recorded by Flex Products pursuant to a plan approved prior to the end of the fiscal year. (See "Acquisition and Investment Transactions" for further discussion.)
The Company recorded amortization of intangibles of $936,000 in 1997 and $1.1 million in 1996, primarily resulting from amortization of goodwill relating to the acquisitions of MMG and Netra.
INCOME FROM OPERATIONS. As a result of the foregoing changes in revenue, gross profit and operating expenses, the Company's income from operations in 1997 was $15.9 million compared to $12.4 million in 1996.
INTEREST INCOME AND EXPENSE. Interest income was $461,000 in 1997 compared to $379,000 in 1996. Net interest expense in 1997 was $4.0 million compared to $3.5 million in 1996. 1997 net interest expense is the net result of interest incurred of $4.2 million net of interest capitalized of $219,000, compared to 1996 interest incurred of $4.7 million net of interest capitalized of $1.2 million. The higher amount of interest capitalized in 1996 was due to the construction of two new buildings and the installation of two new continuous coating machines.
PROVISION FOR INCOME TAXES. The Company's effective tax rate was 37.3% in 1997 compared to 37.0% in 1996. In both years, the lower than statutory effective rate was primarily due to the recognition of state business tax credits arising from the purchase of new manufacturing equipment.
MINORITY INTEREST. In 1997, the Company recorded minority interest of $631,000 compared to minority interest of $636,000 in 1996. 1997 minority interest represents the share of net income of Flex Products accruing to its 40% shareholder and the portion of the operating results of OCLI Asia attributable to its Japanese partner. 1996 minority interest represents the share of net income of Flex Products accruing to its 40% shareholder.
NET INCOME. The Company had net income of $7.1 million in 1997 compared to $5.2 million in 1996. Dividends of $693,000 in 1997 and $960,000 in 1996 were accrued on outstanding Convertible Redeemable Preferred Stock. The 1997 preferred dividend decrease was due to the conversion of 5,750 shares of Convertible Redeemable Preferred Stock into 555,000 shares of Company common stock during 1997.
FISCAL 1996 COMPARED TO FISCAL 1995
REVENUES. Revenues for 1996 were $189.2 million compared to revenues of $169.4 million for 1995. Excluding the revenues of Flex Products, fiscal 1996 revenues would have been $158.6 million, an increase of $4.8 million, or 3%, over 1995 adjusted revenues of $153.8 million. The 1996 revenue increase was due to higher sales of products used for satellite solar power applications and licensing revenue from the sale of a coating machine, partially offset by decreased sales of products used in office automation and computer display applications. Flex Products reported 1996 revenues of $30.6 million compared to six month revenues of $15.6 million in 1995. The Company increased its ownership in Flex Products from 40% to a controlling 60% in May of 1995, resulting in the consolidation of Flex Products' financial results into the Company's financial statements for the last six months of fiscal 1995.
GROSS PROFIT. Gross profit as a percent of revenue was 33.0% in 1996 compared to 37.4% in 1995. Excluding the effect of Flex Products, the 1996 gross profit percentage would have been 31.4% compared to an adjusted gross profit percentage of 36.6% in 1995. The gross profit percentage decrease in 1996 was primarily due to startup costs and additional fixed costs associated with adding new manufacturing facilities and coating capacity in 1996 and the shifting of resources to new products to offset reduced sales of products used in computer display applications. These decreases were partially offset by the gross profit associated with the sale of a coating machine in 1996. In addition, the Company experienced price decreases and lower unit volumes, both domestically and in Europe, in its office automation and computer aftermarket display businesses. These decreases were partially offset by initiatives to shift resources to other markets and initiatives to increase manufacturing efficiencies in order to decrease unit cost. Flex Products' gross profit percentage for 1996 was 41.1% compared to a gross profit percentage of 45.8% for its six months of consolidation in 1995. Flex Products' gross margin reduction was due to start-up costs and throughput issues associated with a new coating machine installed in 1996 which costs include inventory reserve additions of approximately $1 million.
RESEARCH AND DEVELOPMENT. Research and development expenditures for 1996 were $11.7 million, an increase of $3.3 million over research and development expenditures of $8.4 million for 1995. Excluding the results of Flex Products, 1996 research and development expenditures would have increased 3% over expenditures for 1995 and would have been consistent with the research and development expenditures for 1995 of 4.8% of revenues. Flex Products incurred research and development expenses of $4.2 million compared to research and development expenses of $1.1 million for its six months of consolidation in 1995. The 1996 increase is due to the development and integration of state-of-the-art coating processes for use in two new coating machines installed during fiscal 1996.
SELLING AND ADMINISTRATIVE. Selling and administrative expenses for 1996 were $37.1 million, a decrease of $317,000, compared to 1995 selling and administrative expenses of $37.4 million. Excluding the results of Flex Products, 1996 selling and administrative expenses would have decreased $2.9 million, or 8%, compared to 1995. The 1996 decrease is primarily due to higher expenses recorded in 1995 associated with the Company's European sales operations that were not incurred in 1996. Flex Products' selling and administrative expenses for 1996 were $4.8 million which was consistent with its run rate for 1995.
The Company recorded amortization of intangibles of $1.1 million in 1996 and $975,000 in 1995 primarily resulting from amortization of goodwill relating to the acquisitions of MMG and Netra.
INCOME FROM OPERATIONS. As a result of the foregoing, the Company had income from operations of $12.4 million in 1996 compared to $16.6 million in 1995. Excluding the effect of Flex Products, income from operations would have been $9.1 million in 1996 compared to income from operations of $12.9 million in 1995. The Flex Products operation contributed income from operations of $3.3 million in 1996 compared to $3.7 million for the six month period of consolidation in 1995.
INTEREST INCOME AND EXPENSE. Interest income decreased $288,000 in 1996 compared to 1995. The 1996 decrease was due to lower average cash equivalents during 1996. Net interest expense was $3.5 million in 1996 and 1995. Adjusted for the effect of Flex Products, net interest expense would have been $3.9 million in 1996 compared to $3.5 million in 1995. Adjusted net interest expense in 1996 was composed of interest incurred of $4.2 million net of capitalized interest of $323,000. Adjusted net interest expense in 1995 was composed of interest incurred of $4.1 million net of capitalized interest of $616,000. Flex Products recorded capitalized interest of $849,000 in 1996 and $163,000 in 1995. Flex Products' 1996 capitalized interest increase was due to a new coating machine and equipment installed in 1996.
PROVISION FOR INCOME TAXES. The Company's effective income tax rate was 37.0% in 1996 and 40.1% 1995. The 1996 effective income tax rate decrease resulted from the recognition of state business tax credits arising from the purchase of new manufacturing equipment partially offset by losses incurred by the Company's subsidiary in Germany for which tax benefits were not provided.
MINORITY INTEREST. In 1996, the Company recorded minority interest of $636,000 compared to minority interest of $816,000 in 1995. Minority interest represents the share of net income of Flex Products accruing to its 40% stockholder.
NET INCOME. The Company had net income of $5.2 million in 1996 compared to net income of $7.4 million in 1995. Adjusted for the results of Flex Products, the 1996 net income would have been $2.9 million compared to 1995 net income of $5.9 million. Dividends of $960,000 in 1996 and $462,000 in 1995 were paid on the 8% Convertible Redeemable Preferred Stock issued in connection with the Flex Products investment transaction. As a result, net income attributable to common stock was $4.2 million for 1996 compared to $6.9 million for 1995. INFLATION EFFECT. Inflation did not have a significant effect on the operations of the Company during fiscal 1997, 1996 or 1995.
IMPACT OF FOREIGN OPERATIONS, EXPORT SALES AND FOREIGN CURRENCY. The Company has significant investments in Germany, Scotland and Japan. Changes in the value of those countries' currencies relative to the U.S. dollar are recorded as direct charges or credits to equity. The Company also has manufacturing operations in Germany, Scotland and Japan and sales presence in other European and Asian countries. A significant weakening of the currencies in Europe or Asia in relation to the U.S. dollar could reduce the reported results of those operations. In addition, a significant amount of the Company's sales are export sales which could be subject to competitive price pressures if the U.S. dollar was to strengthen compared to the currency of foreign competitors.
The Company is exposed to foreign currency risk on a bank loan of approximately $4.6 million which is denominated in German marks, on open intercompany balances between the U.S. and certain of its foreign subsidiaries and on open intercompany balances that some of the foreign subsidiaries have with each other. In addition, the Company and its foreign subsidiaries make some sales and purchase commitments in currencies other than their own which exposes the Company to currency risk on open receivable and payable balances. The Company does not consider its net exposure on these items to be material.
During 1997, 33% of the Company's consolidated sales constituted sales to customers in Europe and 15% of the Company's consolidated sales constituted sales to customers in Asia. Although the Company has not experienced significant overall sales or pricing declines in these regions, economic factors in Europe and Asia could have a material effect on the Company's future results. Sales of the Company's operation in Germany declined 8% in 1997 compared to 1996 but would have showed a slight increase in local currency sales due to the significant decrease in the value of the deutschemark against the U.S. dollar in 1997. The German operation continues to experience intense competitive and pricing pressures and has responded to those pressures with cost controls. The Company continues to explore strategies to increase the sales growth of the German operation.
ENVIRONMENTAL MATTERS. In 1988, the Company discovered ground water contamination at its facilities in Santa Rosa, California. With the assistance of its environmental consultants and under the regulatory guidance of the California Regional Water Quality Control Board, the Company established a program for reducing contaminant concentration levels to acceptable federal and state levels. In prior years, the Company recorded accruals to cover the future estimated cost of drilling additional extraction and monitoring wells and considers those accruals to be adequate. The Company spent $0, $228,000 and $10,000 in fiscal years 1997, 1996 and 1995 for drilling, extraction and monitoring wells which were charged against those accruals. In addition, the accrual was reduced by a total of $200,000 in 1997 and 1996 as a result of approval of the Company's final remediation plan by the California Regional Water Quality Control Board. Ongoing ground water remediation expenses, and the cost of compliance with environmental standards for years 1995 through 1997, have not been material to the operations of the Company, and the Company does not expect them to be material in the future.
LITIGATION. The Company has been engaged, over the past several years, in litigation in the United Kingdom ("U.K.") involving infringement of a Company patent by a U.K. company. The Company won its action at the Patents County Courts level but lost on appeal to the U.K. House of Lords. During the injunction period, the U.K. Company submitted a claim for damages totaling approximately $1.6 million for lost profits. The Company and legal counsel are in the process of reviewing the claim. Management believes that the amount of the claim is substantially overstated and that the ultimate settlement will not have a material adverse effect on its future operating results.
In 1997, Optical Corporation of America ("OCA") and certain of its directors and officers ("Affiliates") commenced suit against the Company. The complaint arises out of a letter of intent executed by the Company and OCA in March 1996 and an ensuing merger agreement executed by the Company and OCA in June 1996. Under the merger agreement, the Company would acquire OCA. The complaint seeks damages for costs and expenses incurred by OCA in pursuing the merger transaction with the Company due to the Company's alleged negligent misrepresentations to OCA and Affiliates and the Company's alleged breach of its letter of intent with OCA. The Company has filed counterclaims against OCA and the Affiliates based on OCA's breach of the merger agreement and is seeking damages based on the difference between the value of OCA's business to the Company and the agreed upon purchase price under the merger agreement. The Company does not believe that this litigation will have any material adverse effect on its future operating results or financial condition.
In 1997, Flex Products filed a suit in United States District Court for the Eastern District of Michigan alleging that BASF Corporation (BASF) and BASF AG have infringed Flex's patents covering optically variable thin film flakes which, when mixed with paints and inks, produce color shifting visual properties. The complaint requests that the Court enjoin BASF from importing, making, using, selling or offering to sell the infringing pigment in the United States. The complaint also seeks damages for the infringement, including treble damages if the infringement is found to be willful. BASF Corporation has filed a counterclaim seeking a declaration that the patent in question is invalid. Both BASF companies have requested that they be awarded their attorneys' fees and costs. Management remains confident in the validity of Flex Products' patent, and based upon the information currently available, that the BASF product is , in fact, covered by the patent.
During 1997 and 1996, the Company was engaged in litigation with SICPA Holding S.A., the 40% joint owner of Flex Products. See "Acquisitions, Joint Ventures and Strategic Allicances."
COMPUTER SYSTEMS AND BUSINESS PROCESSES. During 1997, the Company initiated a program to modernize its business processes in order to reduce cycle time and improve profitability. The program has been deployed worldwide with the goal of streamlining, automating and applying best practices to all of the Company's business processes. In conjunction with this initiative, the Company identified the need for, selected and purchased an Enterprise Resource Planning System. Expected total cost of the system, including hardware, software and integration services, is approximately $4.6 million, of which the Company has recorded $2.0 million in 1997. The Company expects to spend the balance of $2.6 million over the next five years. Commencing with the implementation dates of the system modules in 1998, software and implementation costs will be depreciated over six years and hardware will be depreciated over the remaining lease term of approximately three years. Training and software maintenance costs are being expensed when incurred. The vendor has informed us that the Enterprise Resource Planning System is year 2000 compliant and, as it will be implemented at all of the Company's business locations before the year 2000, it is not expected that the year 2000 will have a material effect on the Company's results of operations or financial position.
ACQUISITIONS, INVESTMENTS, JOINT VENTURES AND STRATEGIC ALLIANCES
ALLIANCE WITH JDS FITEL INC. In 1997, the Company announced that it had entered into an alliance with JDS FITEL Inc. ("JDS") in order to capitalize on the rapidly growing market for Wavelength Division Multiplexing ("WDM") products used in telecommunications applications. The alliance is structured as a contractual joint venture through a series of exclusive supply and distribution contracts under which OCLI will contribute its expertise to provide optical filters for WDM's and JDS will contribute its expertise in the design, manufacture and marketing of WDM products. The first sales under these agreements were recognized in the second quarter of 1997.
OCLI ASIA. In 1997, the Company announced the establishment of a joint venture with Hakuto Co., Ltd. in Japan. The new company, Hakuto-OCLI Co., Ltd., which is doing business as "OCLI Asia", is headquartered in Shinjuku, Tokyo, with manufacturing facilities in Isehara, Kanagawa Prefecture. The joint venture was established to address the rapidly changing market for OCLI's multi-layer thin film coatings that require an expanded presence and more integrated support within Asia. Hakuto, an approximate 9% stockholder of the Company, has been a major customer of OCLI and a long-term distributor and fabricator of OCLI's products in Japan and several other Asian countries. OCLI Asia will assume sales support, fabrication and applications engineering support for several of the Company's products that are being sold into the Asian market. The joint venture began operations in Japan in the second quarter of 1997 and is consolidated into the Company's results of operations and financial position since the Company has operating control over the joint venture.
FLEX PRODUCTS, INC. In 1995, the Company acquired controlling ownership of Flex Products with the purchase of an additional 20% interest in Flex Products from ICI Americas Inc. ("ICIA"), an affiliate of Imperial Chemical Industries PLC. Flex Products was founded as a division of the Company in the early 1980's and subsequently established as a joint venture between the Company and ICIA in 1988, with ICIA owning 60% and the Company owning 40%. In conjunction with the Company's increase in ownership, ICIA's remaining 40% interest in Flex Products was acquired by SICPA Holding S.A. ("SICPA"), a privately-held Swiss Corporation headquartered in Lausanne, Switzerland. SICPA is the world's largest manufacturer of printing inks and a major customer of Flex Products.
Pursuant to the terms of the Stock and Note Purchase Agreement dated May 1, 1995 by and among the Company, SICPA, ICIA and Flex Products, the Company acquired an incremental 20% interest in Flex Products for a cash payment of $8.4 million and paid an affiliate of ICIA approximately $7.0 million in cash to acquire a 60% interest in an $11.7 million promissory note previously issued by Flex Products to ICIA to fund Flex Products' working capital requirements. SICPA acquired a 40% equity interest in Flex Products and the balance of the $11.7 million promissory note.
In July of 1996, SICPA filed a lawsuit in Delaware Chancery Court in order to block an attempted initial public offering by Flex Products arguing that without SICPA's consent such an offering was prohibited by Flex Products' articles of incorporation, as well as by certain contractual provisions between OCLI and SICPA. In November 1997, after the end of fiscal year 1997, the Company announced that it had completed final negotiations for the settlement of the litigation with SICPA. Under the terms of the settlement, OCLI and SICPA have agreed to modify their co-ownership agreement to enable OCLI to more effectively manage the day-to-day operations of Flex Products, to eliminate the "put" and "call" provisions, to allow for public financing of Flex Products' operations and to modify the License and Supply Agreement between Flex Products and SICPA to maintain a competitive price on the sale of optically variable pigment to SICPA but provide for more attractive scheduled pricing discounts on higher volume purchases. In addition, OCLI purchased $2.6 million of Flex Products' working capital loan from SICPA which was recorded as a decrease to minority interest in fiscal 1998. In 1997, the Company approved a restructuring plan which consolidates several of the administrative and senior management functions of Flex Products in order to reduce costs. Pursuant to this plan, Flex Products recorded restructuring expenses in 1997 of $600,000, constituting severance and severance related expenses.
NETRA CORPORATION. In February 1995, the Company acquired the assets and liabilities of Netra Corporation, a precision molded plastic component manufacturer, for a total purchase price of approximately $3.1 million. The purchase price consisted of a cash payment of $1.5 million and the balance of approximately $1.6 million paid by the issuance of 164,735 shares of the Company's common stock to the sellers. Upon completion of the acquisition, Netra was relocated from its facilities in Mountain View, California to a facility immediately adjacent to the Company's principal manufacturing site in Santa Rosa, California.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. Except for historical information contained in this report, matters discussed in this report are forward-looking statements that involve risks and uncertainties. Actual results may vary significantly based on a number of factors including, but not limited to, product development, commercialization and technological difficulties; manufacturing costs and yield issues associated with initiating production at new facilities; the impact of competitive products and pricing; changing customer requirements; and the change in economic conditions of the various markets the Company serves.
FINANCIAL CONDITION AND LIQUIDITY
In 1997, the Company's cash and cash equivalents decreased by $810,000. Net cash provided by operations during 1997 was $20.1 million and stockholders and minority interest holders invested a net of $3.6 million. These were offset by investments in plant and equipment of $17.2 million, net repayments of debt and bank notes of $5.2 million and payment of dividends of $1.9 million. At fiscal year end 1997, the Company had cash and cash equivalents totaling $15.2 million. In addition, the Company has available domestically a $20 million revolving line of credit and separate credit arrangements in place for the operating requirements of its subsidiaries in Germany and Scotland.
During 1997, the Company's working capital, excluding cash and cash equivalents, increased $5.3 million, primarily due to increased accounts receivable and inventory, offset by increased accounts payable. These increases are primarily due to increased sales during the year and to the consolidation of the Company's new joint venture in Japan.
During 1997, the Company replaced its 8%, $5 million note payable to private parties with a 5.6% bank note. Payments of principal and interest under the new note are denominated in German marks and are approximately $300,000 at the end of each calendar quarter through December 2002. Also during 1997, the Company's $15 million unsecured revolving credit facility was increased to $20 million.
During 1997, the Company recorded capital leases totaling $2.0 million to finance the hardware, software and some of the integration costs of a new Enterprise Resource System that is to be implemented in 1998. Lease terms run through February 2002 with payments totaling approximately $50,000 per month.
Management believes that the cash and cash equivalents on hand at October 31, 1997, cash anticipated to be generated from future operations, new lease agreements and the available funds from revolving credit arrangements will be sufficient for the Company to meet its working capital needs, capital expenditures, debt service requirements and payment of dividends as declared for the foreseeable future.
OPTICAL COATING LABORATORY, INC. AND SUBSIDIARIES
ITEM 8.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTAL FINANCIAL INFORMATION
INDEX
PAGE(S)
Report of Independent Auditors of Optical Coating Laboratory, Inc........................................... 24
Report of Independent Auditors of Flex Products, Inc..................................................... 25
Consolidated Balance Sheets as of October 31, 1997 and 1996............... 26
Consolidated Statements of Income for the years ended October 31, 1997, 1996 and 1995..................................... 27
Consolidated Statements of Cash Flows for the years ended October 31, 1997, 1996 and 1995...............................28-29
Consolidated Statements of Stockholders' Equity for the years ended October 31, 1997, 1996 and 1995....................... 30
Notes to Consolidated Financial Statements................................ 31
INDEPENDENT AUDITORS' REPORT
Board of Directors Optical Coating Laboratory, Inc. Santa Rosa, California
We have audited the accompanying consolidated balance sheets of Optical Coating Laboratory, Inc. and subsidiaries (the "Company") as of October 31, 1997 and 1996, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended October 31, 1997. 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 did not audit the financial statements of Flex Products, Inc., who became a consolidated subsidiary effective May 1, 1995 and whose assets represent 12% and 10%, respectively, of consolidated total assets at October 31, 1997 and 1996, and whose total revenues for each of the two years in the period ended October 31, 1997 and for the period from May 1, 1995 to October 31, 1995, represent 18%, 15% and 9%, respectively, of consolidated total revenues. The financial statements of Flex Products, Inc. for the two years ended October 31, 1997 and for the ten months ended October 31, 1995 were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for Flex Products, Inc., is based solely on the report of such other auditors. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of the other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of the other auditors, such consolidated financial statements present fairly, in all material respects, the financial position of Optical Coating Laboratory, Inc. and its subsidiaries at October 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended October 31, 1997 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP
San Jose, California December 19, 1997
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders Flex Products, Inc. Santa Rosa, California We have audited the balance sheets of Flex Products, Inc. (the "Company"), a joint venture of Optical Coating Laboratory, Inc. and SICPA Holding S.A., as of November 2, 1997 and November 3, 1996 and the related statements of operations, stockholders' equity and cash flows for the years ended November 2, 1997, November 3, 1996 and ten months ended October 29, 1995. 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 audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of the other auditors provide a reasonable basis for our opinion. These financial statements have been prepared on a historical basis of accounting and do not reflect any purchase accounting adjustments recorded by Optical Coating Laboratory, Inc. as a result of their acquisition of a majority interest in Flex Products, Inc. as of May 8, 1995.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Flex Products, Inc. as of November 2, 1997 and November 3, 1996, and the results of its operations and its cash flows for the years then ended and for the ten months ended October 29, 1995 in conformity with generally accepted accounting principles. KPMG PEAT MARWICK LLP
San Francisco, California November 26, 1997
OPTICAL COATING LABORATORY, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
As of October 31, 1997 and 1996 (Dollars in thousands) ASSETS 1997 1996
CURRENT Cash and cash equivalents....................... $15,217 $16,027 ASSETS Accounts receivable, net of allowance for doubtful accounts of $1,884 and $1,775......... 34,923 27,700 Inventories..................................... 22,829 18,701 Income taxes receivable......................... 504 1,248 Deferred income tax assets...................... 6,853 5,165 Other current assets............................ 1,707 1,230
Total Current Assets.................... 82,033 70,071 OTHER Deferred income tax assets...................... 4,451 ASSETS Other assets and investments.................... 8,243 10,680 PROPERTY, Land and improvements........................... 9,225 9,200 PLANT AND Buildings and improvements...................... 41,944 40,953 EQUIPMENT Machinery and equipment ........................ 121,717 112,326 Construction-in-progress........................ 9,525 6,190
182,411 168,669 Less accumulated depreciation................... (89,194)(81,100)
Property, plant and equipment-net ........... 93,217 87,569
Total Assets............................ $183,493$172,771
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT Accounts payable................................ $14,301 $7,199 LIABILITIES Accrued expenses................................ 6,854 6,566 Accrued compensation expenses................... 8,752 7,057 Income taxes payable............................ 339 1,823 Current maturities on long-term debt............ 7,888 4,981 Notes payable................................... 381 3,112 Deferred revenue................................ 900 1,246
Total Current Liabilities .............. 39,415 31,984 NONCURRENT Accrued postretirement health benefits LIABIL- and pension liabilities........................ 2,040 2,308 ITIES Deferred income tax liabilities................. 785 1,804 Long-term debt ................................. 40,975 45,788 Minority interest............................... 13,315 11,328 Commitments and contingencies (Note 10)......... STOCK- Preferred stock - Series C; HOLDERS' 8% cumulative, convertible, redeemable; EQUITY issued and outstanding 6,250 and 12,000 shares; aggregate liquidation value at October 31, 1997 $6,250..................... 5,559 11,309 Common stock, $.01 par value; authorized 30,000,000 shares; issued and outstanding 10,599,000 and 9,761,000 shares................ 106 98 Paid-in capital................................. 55,723 47,219 Retained earnings............................... 26,217 20,984 Cumulative foreign currency translation adjustment ....................... (642) (51)
Stockholders' Equity.......................... 86,963 79,559
Total Liabilities and Stockholders' Equity ..................$ 183,493 $172,771
The accompanying notes are an integral part of these financial statements.
OPTICAL COATING LABORATORY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
Years ended October 31, 1997, 1996 and 1995 (Amounts in thousands, except per share amounts) 1997 1996 1995
REVENUES Revenues............................ $217,829 $189,195 $169,417 Cost of sales....................... 143,207 126,769 106,009
Gross Profit..................... 74,622 62,426 63,408
COSTS AND Operating Expenses: EXPENSES Research and development .......... 14,903 11,733 8,401 Selling and administrative......... 42,836 37,145 37,462 Amortization of intangibles........ 936 1,146 975
Total Operating Expenses.......... 58,675 50,024 46,838
Income from Operations........... 15,947 12,402 16,570
Nonoperating Income (Expense): Interest income ................... 461 379 667 Interest expense.................... (4,030) (3,524) (3,547)
EARNINGS Income Before Provision for Income Taxes and Minority Interest........... 12,378 9,257 13,690
Provision for income taxes........... 4,622 3,425 5,483 Minority interest.................... 631 636 816
Net Income........................ 7,125 5,196 7,391
Dividend on convertible redeemable preferred stock..................... 693 960 462
Net Income Applicable to Common Stock ................ $ 6,432 $ 4,236 $ 6,929
Net Income Per Common and Common Equivalent Share.................... $ .60 $ .41 $ .73
Weighted average number of common and common equivalent shares used to compute earnings per share.................. 10,673 10,301 9,510
The accompanying notes are an integral part of these financial statements.
OPTICAL COATING LABORATORY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended October 31, 1997, 1996 and 1995 (Amounts in thousands, except per share amounts) 1997 1996 1995
OPERATIONS Cash Flows From Operations: Cash received from customers....... $194,375 $191,665 $162,568 Interest received.................. 455 258 733 Cash paid to suppliers and employees (164,654)(165,565) (139,489) Cash paid to ESOP+.................. (379) (406) Interest paid....................... (5,345) (5,196) (3,730) Income taxes paid, net of refunds... (4,316) (954) (6,625)
Net Cash Provided By Operations 20,136 20,208 13,051
INVESTMENTS Cash Flows From Investments: Purchase of plant and equipment..... (17,231) (30,530) (30,911) Proceeds from sale-leaseback of new equipment.................... 18,940 Purchase of additional equity interest and note of Flex Products, net of cash from consolidation................. (15,185) Cash portion of payment for purchase of Netra, net of cash acquired..... (1,477)
Net Cash Used For Investments (17,231) (11,590) (47,573)
FINANCING Cash Flows From Financing: Net proceeds from issuance of preferred stock..................... 11,357 Proceeds from long-term debt........ 5,416 8,596 21,542 Proceeds from notes payable......... 6 8 494 Proceeds from exercise of stock options.................. 2,247 1,713 1,627 Investment by minority interest holder................... 1,440 Repayment of long-term debt......... (8,311) (7,019) (11,700) Repayment of notes payable.......... (2,400) (388) Repayment of note to minority interest holder, net of amounts borrowed................... (76) (413) Payment of dividend on preferred stock..................... (693) (960) (462) Payment of dividend on common stock. (1,199) (1,153) (1,083)
Net Cash Provided By Financing................. (3,570) 772 21,387
Effect of exchange rate changes on cash................... (145) 35 74
Increase (decrease) in cash and cash equivalents............ (810) 9,425 (13,061) Cash and cash equivalents at beginning of year............... 16,027 6,602 19,663
Cash and cash equivalents at end of year..................... $5,217 $16,027 $ 6,602
OPTICAL COATING LABORATORY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended October 31, 1997, 1996 and 1995 (Amounts in thousands) 1997 1996 1995
ADJUST- Reconciliation of Net Income MENTS to Cash Flows From Operations: Net income............................. $ 7,125 $ 5,196 $ 7,391 Adjustments to reconcile net income to net cash provided by operations: Depreciation and amortization ...... 12,784 13,669 10,261 Minority interest in earnings of subsidiaries..................... 631 636 816 Net book value of coating machine sold........................ 880 Loss on disposal or abandonment of equipment ....................... 1,412 1,356 Accrued postretirement health benefits............................ (226) 184 238 Deferred income tax liabilities..... (1,014) (468) 2,515 Other non-cash adjustments to net income....................... (97) (681) 46 Changes in: Accounts receivable............... (8,012) 1,378 (3,792) Inventories....................... (4,623) (3,030) (2,391) Income tax receivable ............ 957 (719) (76) Deferred income tax assets........ 2,715 1,645 (2,237) Other current assets and other assets and investments.................. 136 716 (1,547) Accounts payable, accrued expenses and accrued compensation expenses.... 9,979 (3,094) 2,807 Deferred revenue.................. (346) 464 (538) Income taxes payable.............. (1,285) 2,076 (1,356)
Total adjustments................ 13,011 15,012 5,660
Net Cash Provided By Operations ................ $20,136 $20,208 $13,051
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: During 1997, the Company recorded capital leases totaling $2.0 million to finance the hardware and some of the integration service costs of a new Enterprise Resource System that is to be implemented in 1998. Lease terms run through February 2002 with payments totaling approximately $50,000 per month.
During 1995, the Company acquired Netra Corporation for approximately $1.5 million in cash and the issuance of approximately $1.6 million in Company common stock. Cash and non-cash components of the acquisition were as follows:
(Amounts in thousands)
Fair value of assets acquired, including intangibles...............................................$3,529 Cash acquired....................................................... (188) Liabilities assumed................................................. (279)
$3,062
Cash paid to sellers, net of cash acquired......................... $1,477 OCLI common stock issued to sellers................................ 1,585
$3,062
In 1997, 1996 and 1995, common stock, with an aggregate fair market value of $51,000, $52,000 and $30,000 was awarded to the Company's outside directors as remuneration. During 1997, 1996 and 1995, the Company issued 14,601, 39,880 and 0 shares of common stock to the OCLI 401(k)/Employee Stock Ownership Plan at fair market value to satisfy a portion of its Company contribution.
The accompanying notes are an integral part of these financial statements.
OPTICAL COATING LABORATORY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended October 31, 1997, 1996 and 1995
FOREIGN PREFERRED STOCK COMMON STOCK PAID-IN RETAINED CURRENCY SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS TRANSLATION
(Amounts in thousands) BALANCE AT NOVEMBER 1, 1994 8,978 $ 90 $39,967 $12,055 $ (75) Shares issued on purchase of Netra 165 1 1,584 Shares issued to Employee Stock Ownership Plan 82 1 794 Exercise of stock options, including tax benefit and shares issued to directors 264 3 2,116 Series C preferred stock issued for cash net of issuance expenses 12 $11,357 Foreign currency translation adjustment for the year 155 Net income for the year 7,391 Dividend on preferred stock (462) Dividend on common stock (1,083) BALANCE AT OCTOBER 31, 1995 12 11,357 9,489 95 44,461 17,901 80 Shares issued to Employee Stock Ownership Plan 39 1 439 Exercise of stock options, including tax benefit and shares issued to directors 233 2 2,319 Foreign currency translation adjustment for the year (131) Net income for the year 5,196 Series C preferred stock issuance expenses (48) Dividend on preferred stock (960) Dividend on common stock (1,153) BALANCE AT OCTOBER 31, 1996 12 11,309 9,761 98 47,219 20,984 (51) Shares issued to Employee Stock Ownership Plan 15 159 Exercise of stock options, including tax benefit and shares issued to directors 268 3 2,524 Conversion of Series C preferred stock to common stock (6) (5,750) 555 5 5,821 Foreign currency translation adjustment for the year (591) Net income for the year 7,125 Dividend on preferred stock (693) Dividend on common stock (1,199) BALANCE AT OCTOBER 31, 1997 6 $ 5,559 10,599 $ 106 $55,723 $26,217 $(642)
The accompanying notes are an integral part of these statements.
OPTICAL COATING LABORATORY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended October 31, 1997, 1996 and 1995 (Amounts in thousands, except per share amounts) 1. GENERAL
NATURE OF OPERATIONS. OCLI designs, develops and manufactures multi-layer thin film coatings which control and enhance light by altering the transmission, reflection and absorption of its various wavelengths to achieve a desired effect such as anti-reflection, anti-glare, electromagnetic shielding, electrical conductivity and abrasion resistance. OCLI markets and distributes components to original equipment manufacturers ("OEMs") of optical and electro-optical systems and sells its Glare/Guard brand ergonomic computer display products through resellers and office retailers. OCLI's products are found in many applications including computer monitors, flat panel displays, telecommunication systems, photocopiers, fax machines, medical/analytical equipment and instruments, projection imaging systems, satellite power systems and aerospace and defense systems. Through its 60% owned subsidiary, Flex Products, Inc. ("Flex Products"), the Company designs and manufactures thin film coatings on flexible substrates using high vacuum roll-to-roll processes. Flex supplies critical pigments for use in anti-counterfeiting applications, energy conserving window film for residential, commercial, and automotive applications, photoreceptor components for copiers and ChromaFlair light interference pigments for commercial paints.
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 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 may differ from those estimates.
CERTAIN SIGNIFICANT 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 revenues and expenses during the reporting period. Actual results could differ from those estimates.
2. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include the accounts of the Company and its wholly and majority owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. The Company's fiscal year ends on the Sunday closest to the last day in October. For convenience purposes, the Company has designated October 31 as its fiscal year end. Fiscal year 1997 was a 52 week year, fiscal year 1996 was a 53 week year and fiscal year 1995 was a 52 week year.
INVESTMENTS. Cash and cash equivalents are comprised of cash, bank repurchase agreements and short-term commercial paper readily convertible to cash. Cash equivalents are carried at cost which approximates market value. For purposes of the Statements of Cash Flows, all highly liquid cash equivalents with an original maturity of three months or less are considered cash equivalents. REVENUE RECOGNITION. Revenue from sales of manufactured products is recognized when products are shipped to the customer. Revenue from fixed price service and supply contracts and cost reimbursement contracts is recognized on a percentage of completion basis based on cost incurred to total estimated cost.
INVENTORIES. Inventories are stated at the lower of cost, on a first-in, first-out basis, or market. Work-in-process inventories related to fixed- price contracts are stated at the accumulated cost of material, labor and manufacturing overhead, less the estimated cost of units delivered. To the extent total costs under fixed-price contracts are estimated to exceed the total sales price, charges are made to current operations to reduce inventoried costs to net realizable value. In addition, if future costs are estimated to exceed future revenues, an allowance for losses equal to the excess is provided by a charge to current operations. The Company did not have any estimated loss contracts in the periods presented.
PROPERTY, PLANT AND EQUIPMENT. Property, plant and equipment are stated at cost. Estimated service lives range from 5 to 45 years for buildings and improvements and from 3 to 8 years for all other property, plant and equipment. Buildings and improvements and substantially all equipment are depreciated using accelerated methods.
RESEARCH AND DEVELOPMENT. Research and development costs are charged to operations in the period incurred. The cost of equipment used in research and development activities which has alternative uses is capitalized as equipment and not treated as an expense of the period. Such equipment is depreciated over estimated lives of 5 years.
FOREIGN OPERATIONS. The financial position and operating results of foreign operations are consolidated using the local currency as the functional currency. Local currency assets and liabilities are translated at the rate of exchange to the U.S. dollar on the balance sheet date, and the local currency revenues and expenses are translated at average rates of exchange to the U.S. dollar during the period. Resulting translation gains or losses are included in stockholders' equity as cumulative foreign currency translation adjustment. Foreign currency transaction gains and losses, which have not been material, are reflected in operating results.
INCOME TAXES. Income taxes include provisions for temporary differences between earnings for financial reporting purposes and earnings for income tax purposes under the guidelines of SFAS No. 109, Accounting for Income Taxes. Tax credits are taken as a reduction of current income tax provisions when available.
EARNINGS PER SHARE. Earnings per common and common equivalent share includes the effect of dilutive stock options outstanding. Fully diluted earnings per share are not presented as it is not materially different from primary earnings per share.
RECLASSIFICATIONS. Certain reclassifications have been made to prior year data to conform to the current year presentation.
NEW ACCOUNTING PRINCIPLES. During 1997, the Company adopted the provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," which requires the Company to adopt the fair value method of accounting for employee stock-based transactions or to disclose pro forma net income and earnings per share as if the fair value method of accounting were adopted at the beginning of 1996. The Company elected to continue to account for its stock-based transactions using the intrinsic value method of accounting in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and has provided the pro forma disclosures, and other disclosures required by SFAS No. 123, in Note 6 to its Notes to Consolidated Financial Statements.
At the beginning of fiscal 1997, the Company implemented SFAS 121, "Accounting for the Impairment of Long-Lived Assets," which requires that long-lived assets, certain identifiable intangibles and goodwill related to those assets be reviewed for impairment, measured by comparing the carrying amount of the asset to its fair value, whenever events or changes in circumstances indicate that the carrying amount of a long-lived asset may not be recoverable. There was no financial impact resulting from the Company's adoption of this statement in 1997.
In February 1997, the Financial Accounting Standards Board issued SFAS No. 128, "Earnings Per Share," which requires the Company to replace its presentation of primary earnings per share with a presentation of basic earnings per share and requires dual presentation of basic and diluted earnings per share on the face of the income statement. The principal difference between primary earnings per share under current accounting standards and basic earnings per share under the new statement is that basic earnings per share does not consider common stock equivalents such as stock options and warrants. Diluted earnings per share under the new statement will include potential dilution of convertible securities, stock options and warrants. The statement is effective for the Company's first quarter of fiscal 1998 and requires restatement of all prior periods presented. Basic earnings per share would have been $.63, $.44 and $.76 for 1997, 1996 and 1995. Under the new statement, diluted earnings per share for those periods would have been the same as net income per common and common equivalent share as presented on the income statement.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130, "Reporting Comprehensive Income," which requires enterprises to report, by major component and in total, all changes in equity from nonowner sources; and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information;" which establishes annual and interim reporting standards for a public company's operating segments and related disclosures about its products, services, geographic areas and major customers. Both standards are effective for the Company's fiscal year 1999 with earlier application permitted. The effect of adoption of these statements will be limited to the form and content of the Company's disclosure and will not impact the Company's results of operations, cash flow or financial position.
3. LONG-TERM DEBT
Long-term debt, including current maturities, at October 31, 1997 and 1996 consisted of the following: Amounts in thousands) 1997 1996
Unsecured senior notes. Interest at 8.71% payable semiannually. Principal payable in annual installments of $3.6 million from 1998 through 2002.................................. $14,400 $18,000
Unsecured bank term loan. Variable interest rates averaging 6.8% at October 31, 1997, payable quarterly, with semiannual principal payments of $2 million.......................... 10,000 13,000
Unsecured borrowings under bank line of credit. Variable interest rate averaging 6.7% at October 31, 1997, payable quarterly or specified duration period. Principal due upon expiration on April 28, 2000............. 5,000
Mortgage payable. Interest at 8%. Collateralized by a 72,000 sq. ft. newly constructed building and related land. Principal and interest payments of $25,000 per month through 2011......................................2,422 2,523
Mortgage payable. Interest at 7.5%. Collateralized by a 65,000 sq. ft. newly constructed building and related land leased to Flex Products. Principal and interest payments of $28,000 per month through 2011........ 2,821 2,945
Land improvement assessment. Interest at an average rate of 7.2%. Principal and interest payable in semiannual installments of $77,000 through 1998............ ................. 150 276
Scottish Development Agency building loan, with a conditional interest moratorium from February 1, 1995 through January 31, 1998 with interest at 9.5% thereafter. Semiannual principal payments of approximately $100,000 are payable through January 1998 with subsequent payments of $331,000, comprising principal and interest, through 2006. Collateralized by the land and building of the Company's Scottish subsidiary................. 3,877 3,996
Notes payable to private parties in connection with the purchase of the Company's wholly-owned subsidiary in Germany (OCLI/MMG Division). Principal and interest at 8% payable over ten years in quarterly installments. Refinanced in May 1997............................ 6,188
Unsecured bank note. Interest at 5.6%. Quarterly principal and interest payments of approximately $300,000 through December 2002............................. 4,568
Bank loans of OCLI/MMG Division with interest rates ranging from 4.5% to 7.5%. Payable in semiannual and annual installments through 2020. Partly collateralized by mortgages on OCLI/MMG Division land and buildings and liens on equipment.................. 3,618 3,760
Present value of obligations under capital leases at imputed interest rates from 8.0% to 9.5% payable in monthly installments through 2004..................................... 2,007 81
48,863 50,769 Less current maturities ............................... (7,888) (4,981)
Total long-term debt, net of current maturities. $40,975 $45,788
Annual debt maturities and capital lease payments for the ensuing five years are as follows:
YEAR PAYMENT (Amounts in thousands)
1998 $ 7,888 1999 9,909 2000 12,765 2001 5,710 2002 5,401 Thereafter 7,190
$48,863
The Company has a $32 million unsecured credit facility comprised of a $10 million term loan and a $20 million revolving line of credit (increased from $15 million in 1997). The revolving line of credit carries a commitment fee of .375% per year on the unused portion of the facility and expires on April 28, 2000. The Company has a surety bond for $903,000 to satisfy the Company's workers' compensation self-insurance requirements. The surety bond carries a fee of 1.00% per year.
During 1997, the Company replaced its 8%, $5 million note payable to private parties with a 5.6% bank note. Payments of principal and interest under the new note are denominated in German marks and are approximately $300,000 per quarter through December 2002. In connection with the note payable to private parties, the Company carried an incremental credit facility to cover a surety letter for approximately $2.5 million issued to secure 50% of the Company's obligation arising from the purchase of MMG. As the new note does not require a surety letter, the $2.5 million surety letter was canceled.
During 1997, the Company recorded capital leases totaling $2,037,000 to finance the hardware, software and integration costs of a new computer system that is to be implemented in 1998. Lease terms run through February 2002 with payments totaling approximately $50,000 per month.
The Company's subsidiary in Scotland has a credit arrangement of up to approximately $490,000 at market interest rates and has outstanding letters of credit of approximately $330,000 to guarantee import duties. There were no borrowings under the credit arrangement in fiscal years 1997 or 1996.
The Company's subsidiary in Germany has various credit facilities with local banks totaling approximately $381,000 which are used for working capital requirements. These credit facilities are utilized as part of normal local payment practices.
During 1996, the Company entered into three sale/lease-back arrangements for a newly acquired continuous coating machine and related equipment and for two newly acquired coating machines to be used in the manufacturing operations of Flex Products. Cash proceeds from the sale/lease-back arrangements exceeded the company's cost by approximately $750,000 which was recorded as deferred revenue and is being amortized against lease expenses at the rate of approximately $125,000 per year. The lease terms are six years with monthly payments totaling approximately $290,000 and buyout provisions at the end of each lease.
The Company has certain financial covenants and restrictions under its bank credit arrangements and the unsecured senior notes.
4. ACQUISITIONS
FLEX PRODUCTS, INC. Flex Products was founded as a division of the Company in the early 1980's, and in 1988, was established as a joint venture between the Company and ICI Americas, Inc. ("ICIA"), an affiliate of Imperial Chemical Industries PLC, with ICIA owning 60% and the Company owning 40%. Upon formation of the 1988 joint venture, the Company received proceeds in excess of the carrying amount of the assets contributed to the joint venture. The proceeds were allocated first to reduce the carrying amount of the Company's investment to zero, with the remaining proceeds reported as gain on sale of equity in affiliated company. Since the Company carried its investment in the joint venture at zero and was not obligated to make further investment in the joint venture, it did not recognize losses attributable to its equity position in the joint venture.
In May 1995, the Company acquired controlling ownership of Flex Products with the purchase of an additional 20% interest in Flex Products from ICIA and ICIA sold its remaining 40% interest to SICPA Holdings S.A. ("SICPA"), a privately held Swiss corporation headquartered in Lausanne, Switzerland. SICPA is the largest manufacturer of printing inks in the world and the major customer of Flex Products.
Pursuant to the terms of the Stock and Note Purchase Agreement dated May 1, 1995, by and among the Company, SICPA, ICIA and Flex Products, the Company acquired the incremental 20% interest in Flex Products for a cash payment of $8.4 million and paid ICIAH approximately $7.0 million in cash to acquire a 60% interest in an $11.7 million promissory note previously issued by Flex Products to ICIA to fund Flex Products' working capital requirements. SICPA acquired the balance of the note. The Company's incremental investment in Flex Products was recorded as a purchase transaction.
The following pro forma consolidated results of operations for 1995 assume that the transaction took place at the beginning of 1995.
(Amounts in thousands, except per share amounts) 1995
Revenue.............................................................$181,389 Net income before change in accounting principle................... 7,847 Net income applicable to common stock............................. 6,887 Net income per common and common equivalent share.................. $.72
During fiscal 1996, SICPA, the 40% joint owner of Flex Products, filed suit in Delaware Chancery Court seeking injunctive and other relief against OCLI, Flex Products and certain of Flex Products' directors. In the suit, SICPA alleged that Flex Products could not proceed with an initial public offering of its common stock without the consent of SICPA and that SICPA had the right to purchase OCLI's 60% ownership of Flex Products pursuant to a call option beginning after May 8, 1998. In January 1997, the Delaware Chancery Court rendered a decision that upheld the position of OCLI and Flex Products that a simple majority of Flex Products' Board of Directors had the legal authority to authorize a public offering of Flex Products securities without the approval of SICPA.
Subsequent to fiscal year end 1997, OCLI and SICPA reached settlement of the pending litigation. Under the terms of the settlement agreement, OCLI and SICPA have agreed to modify their co-ownership agreement to allow OCLI to more effectively manage the day-to-day operations of Flex Products, to eliminate the "put" and "call" provisions, to allow for the public financing of Flex Products' operations and to modify the License and Supply Agreement between Flex Products and SICPA to provide for more attractive scheduled pricing discounts on higher volume purchases. In addition, OCLI purchased Flex Products' working capital loan of $2.6 million from SICPA which was recorded as a decrease to minority interest.
NETRA CORPORATION. In February 1995, the Company acquired the assets and liabilities of Netra Corporation, a precision injection molded plastic optics manufacturer, for a total purchase price of approximately $3.1 million. The purchase price consisted of a cash payment of $1.5 million and the balance of approximately $1.6 million paid by the issuance of 164,735 shares of the Company's common stock. The acquisition was recorded as a purchase. If the acquisition of Netra had occurred at the beginning of fiscal 1995, the results of operations would not have been materially different.
GOODWILL. At October 31, 1997, other assets and investments includes $5.2 million of goodwill, of which $4.6 million is attributed to the purchase of MMG and is being amortized over fifteen years and $500,000 is attributed to the purchase of Netra and is being amortized over five years.
5. STOCKHOLDERS' EQUITY
STOCKHOLDER RIGHTS PLAN. On December 16, 1997, the Board of Directors of the Registrant adopted a new Stockholder Rights Plan (the "Plan") to succeed the Stockholder Rights Plan first adopted on November 25, 1987. Under the terms of the Plan, which expires in November 1999, the Company declared a dividend of preferred stock purchase rights which only become exercisable, if not redeemed, ten days after a person or group has acquired 20% or more of the Company's common stock or the announcement of a tender offer which would result in a person or group acquiring 30% or more of the Company's common stock. Under certain circumstances, the plan allows stockholders, other than the acquiring person or group, to purchase the Company's common stock or the common stock of the acquirer at an exercise price of half the market price.
PREFERRED STOCK. The Company has authorized 100,000 shares of preferred stock at $.01 par value of which 10,000 shares were designated Series A Preferred Stock in connection with the Company's Stockholder Rights Plan. None of the Series A Preferred Stock is issued. Additionally, 15,000 shares were designated Series B Preferred Stock, of which 8,350 shares were issued and subsequently converted to common stock on call for redemption. None of the Series B Preferred Stock is currently issued and outstanding.
In 1995, as part of the financing of the acquisition of a controlling interest in Flex Products, Inc., the Company issued 12,000 shares of 8% Series C Convertible Redeemable Preferred Stock (the "Series C Preferred Stock") in consideration for $1,000 per share. The Series C Preferred Stock is convertible into common stock at any time by the holders at a conversion price of $10.50 per common share (subject to adjustment in certain circumstances). The Series C Preferred Stock is redeemable at the option of the Company commencing two years from the date of issuance (if the Company's common stock is trading at $17 per share or more for any 20 consecutive day period) and, after three years, unconditionally, at 108% of the purchase price per share, declining to 100% over four years. The holders of the Series C Preferred Stock are entitled to receive a cumulative annual dividend of $80 per share, which is payable quarterly and has preference to any other dividends being paid by the Company.
The holders of shares of Series C Preferred Stock are not entitled to notice of any stockholders' meetings or to vote on any matter, except as provided by law or as otherwise specified in the Series C Preferred Stock Certificate of Designation, Preferences and Rights. If, however, dividends on the Series C Preferred Stock are in arrears in an amount equal to four quarterly dividends, a default period would begin in which the holders of the Series C Preferred Stock, voting as a class, would have the right to elect the greater of 2 directors or a number of directors not less than 25% of the total number of authorized directors. Such right terminates upon expiration of the default period. The holders of the Series C Preferred Stock are entitled to a liquidation preference equal to $1,000 per share plus accrued and unpaid dividends. The Company may not create any series or class of capital stock ranking prior or equal to the Series C Preferred Stock unless the terms of any such series or class is approved by the holders of not less than sixty-six and two-thirds percent (66-2/3%) of the outstanding shares of Series C Preferred Stock, voting separately as a class.
Pursuant to the terms of a Stock Purchase Agreement entered into with the holders of the Series C Preferred Stock, the Company may not pay any dividends or make any other distributions in respect of, or redeem or repurchase any, securities of the Company to the extent such payments exceed 25% of the difference between (a) aggregate "Net Income" (as such term is defined in the Stock Purchase Agreement) of the Company after January 31, 1995 and (b) all losses suffered by the Company during such period.
During fiscal 1997, 5,750 shares of the Company's 8% Series C Convertible Redeemable Preferred Stock, plus accrued dividends on those shares, were converted into approximately 555,000 shares of common stock at a conversion price of $10.50 per share.
6. INCENTIVE COMPENSATION PLANS, STOCK OPTION PLANS AND WARRANTS
Pursuant to the terms of the Company's employee stock option plans, an aggregate of 2,292,865 shares of Company common stock has been issued or reserved for issuance upon the exercise of options granted to qualified employees. Options are granted with exercise prices equal to the market price of the Company's common stock at the date of grant. Option terms are five years and vesting periods are from one to three years. At October 31, 1997, outstanding option prices ranged from $6.125 to $13.25 per share with weighted average remaining lives of 2.85 years.
In May, 1997, the Board of Directors approved a stock option repricing program under which stock options with exercise prices above $14.00 per share were repriced to the then current market value of the Company's common stock of $9.63. A total of 162,000 shares with exercise prices ranging from $14.13 per share to $17.38 per share were exchanged under this program. The exchange of such options is presented in the following table as cancellations and subsequent grants.
Stock option activity for the three years ended October 31, 1995, 1996 and 1997 was:
WEIGHTED AVERAGE NUMBER OF EXERCISE SHARES PRICE
BALANCE AT NOVEMBER 1, 1994 1,343,595 $7.38 Granted 459,500 7.11 Exercised (261,295) 6.23 Canceled (25,000) 8.85
BALANCE AT OCTOBER 31, 1995 1,531,800 7.47 Granted 546,450 11.81 Exercised (229,800) 7.45 Canceled (13,770) 9.16
BALANCE AT OCTOBER 31, 1996 1,835,250 8.75 Granted 708,800 10.48 Exercised (268,849) 8.52 Canceled (272,792) 12.53
BALANCE AT OCTOBER 31, 1997 2,002,409 8.88 EXERCISABLE AT OCTOBER 31, 1997 1,176,346 $7.77
The Company's 60% owned subsidiary, Flex Products, has a non-qualified stock option plan under which it has authorized for issuance 10,000 shares of common stock against 100,000 shares outstanding of Flex Products, Inc., a non-public company, to key members of Flex Products' management. The options have vesting periods from two to four years with five year terms. During 1996, options were granted to purchase 10,271 shares at their calculated market value on the date of grant (weighted average exercise price of $444.37 per share) and options to purchase 446 shares at a weighted average exercise price of $443.52 were cancelled during 1997. At October 31, 1997, Flex Products had shares under option of 9,825 at an average exercise price of $444.41 and weighted average remaining lives of 3.6 years with 3,180 options exercisable at a weighted average exercise price of $445.69. The assets of Flex Products represent 12% and 10% of consolidated total assets of the Company at the end of fiscal years 1997 and 1996.
In 1997, the Company adopted the disclosure requirements of SFAS 123 which provide for the disclosure of pro forma net earnings and net earnings per share as if the fair value method of accounting were adopted at the beginning of fiscal 1996. If compensation expense had been determined for stock options granted in 1997 and 1996 using the fair value method at the date of grant, consistent with the provisions of SFAS 123, the Company's pro forma net earnings and earnings per share would have been as follows:
(Amounts in thousands) 1997 1996
Net income as reported ..................................... $ 7,125 $5,196 Pro forma compensation adjustment........................... (2,812) (1,642) Pro forma net income...................................... $4,313 $3,554
Net income per share, as reported........................... $ 0.60 $ 0.41 Pro Forma compensation adjustment........................... (0.15) (0.09)
Pro forma net income per share............................ $ 0.45 $ 0.32
Because SFAS 123 is applicable only to options granted subsequent to October 31, 1995, its pro forma effects will not be fully reflected until 1998. The weighted average fair value of options granted during 1997 and 1996 was $5.60 and $6.25, respectively. The weighted average fair value of Flex Products' options granted during 1996, which was the only year of grant, was $68.82. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants in 1997 and 1996:
Expected dividend yield.................................................0.7% Expected volatility..................................................... 59% Risk-free interest rate.................................................5.6% Expected term following vest date (years) .87
7. INCOME TAXES
The provision for income taxes consisted of: (Amounts in thousands) 1997 1996 1995
CURRENT: Federal ...........................................$2,537 $ 2,120 $ 3,617 State.............................................. 225 309 964 Foreign ........................................... 116 (149) 609
2,878 2,280 5,190 DEFERRED: Federal............................................ 1,061 1,535 626 State.............................................. 598 (369) (586) Foreign............................................ 85 (21) 253
1,744 1,145 293 $4,622 $3,425 $5,483
The reconciliation of the effective income tax rates to the federal statutory rates was as follows: 1997 1996 1995
Statutory federal income tax rate..................... 34.0% 34.0% 34.0% State taxes, net of federal tax benefit .............. 5.7 7.1 6.3 Foreign income taxes at rates different than U.S. statutory rates........................... (0.5) 4.8 .8 Business tax credits (state tax credits net of federal tax effect).................. (2.9) (10.3) (3.1) Tax benefit from foreign sales corporation ........... (2.7) (1.7) (1.0) Non-deductible expenses, primarily foreign losses..... 4.2 3.3 3.0 Other................................................. (0.5) (0.2) 0.1
Effective tax rate.................................. 37.3% 37.0% 40.1%
DEFERRED TAX ASSETS (LIABILITIES). The Company's deferred tax assets and liabilities at October 31, 1997 and 1996 under SFAS 109 arise from the following temporary differences in accounting for financial versus tax reporting purposes:
(Amounts in thousands) 1997 1996
CURRENT: Valuation reserves and accruals not deductible for tax purposes until paid or utilized .................. $5,527 $ 4,112 Intercompany profit eliminated for financial reporting purposes which is taxable currently............. 266 440 Domestic net operating losses available for carryforward.......................................... 983 521 Asset valuation difference between financial and tax reporting basis due to purchase accounting............ 131 189 State tax credits eligible for carryforward related to purchased equipment.................................... 118 Other (54) (215)
Total deferred tax assets (liabilities)................... 6,853 5,165
NONCURRENT: Domestic net operating losses available for carryforward.... 2,678 4,655 Foreign net operating losses available for carryforward..... 2,686 2,273 Tax depreciation greater than financial reporting depreciation.................................... (4,045) (2,825) Intangible assets, difference between financial and tax reporting basis and periods....................... (816) (858) Burden and interest on self-constructed assets expensed for tax purposes and depreciated for financial reporting purposes........................................ (555) (548) Plant and equipment written off for financial reporting purposes, depreciable for tax purposes.......... 125 308 Costs required to be capitalized under the uniform capitalization tax rules which are deducted for financial reporting purposes.......................... 169 389 Liability for postretirement health benefits not deductible for tax purposes until paid................ 747 690 State tax credits eligible for carryforward related to purchased equipment............................ 614 678 Other....................................................... 296 77
1,899 4,839 Less valuation allowance.................................... (2,684) (2,192)
(785) 2,647
Total deferred tax balances............................... $ 6,068 $ 7,812
The Company has provided a valuation allowance related to the deferred tax asset resulting from the operating loss carryforwards of certain of its foreign subsidiaries until the realization of the loss carryforwards is more likely than not. The 1997 valuation allowance increase is primarily due to losses reported in 1997 by certain of those subsidiaries.
The Company has recognized benefits in 1997, 1996 and 1995 for research and development tax credits and in 1997 and 1996 for California manufacturers' investment credits.
Income taxes have not been provided on approximately $7.1 million of unremitted earnings of the Company's subsidiary in Scotland. The Company intends to continue to reinvest these amounts in the subsidiary's operations. Should any of these amounts be distributed to the Company, any taxes on these distributions would be substantially offset by foreign tax credits.
During 1995, the Company recorded $873,000 of deferred tax assets related to the purchase of Netra and $4.7 million of deferred tax assets with the consolidation of Flex Products. These deferred tax assets have been recorded under the guidelines of SFAS No. 109, Accounting for Income Taxes, on the premise that future taxable income will more likely than not be adequate to realize future tax benefits of the available net operating loss carryforwards giving rise to these deferred tax assets.
8. EMPLOYEE BENEFIT PLANS
U.S. OPERATIONS. The Company has a 401(k)/Employee Stock Ownership Plan ("ESOP") defined contribution retirement plan for its non-Flex Products employees and a 401(k) plan with a Company match for the employees of Flex Products. Company contributions for non-Flex Products employees are a combination of a 401(k) matching contribution of 25% of the first 6% of employee contributions plus a contribution to the ESOP plan based on the Company's proportional share of pre-tax profits. Prior to fiscal 1997, all Company contributions to non-Flex employees were to the ESOP and were determined under a profit sharing formula. Company contributions for Flex Products employees are 75% of the first 6% of employee contributions. Company matching contributions to the 401(k) plans are funded in cash. Company contributions to the ESOP are contributed in cash for the purchase of Company common stock or are contributed in the form of original issued shares of Company common stock. In fiscal 1997, 1996 and 1995, the Company contributed and charged to operations $1,211,000, $787,000 and $1,309,000 as contributions to its U.S. retirement plans. The 1995 U.S. retirement plan contribution includes Flex Products' six month contribution of $84,000 from the date the Company began consolidating Flex Products.
SCOTTISH OPERATIONS. The Company's Scottish subsidiary maintains a contributory defined benefit pension program covering most of its employees. Benefits are primarily based on years of service and compensation. The program is funded in conformity with the requirements of applicable U.K. government regulations. Plan assets are invested in fixed interest and balanced fund units which are primarily comprised of corporate equity securities.
The funded status of the plan at October 31, 1997, 1996 and 1995 is as follows:
(Amounts in thousands) 1997 1996 1995
Plan assets at fair value ...................... $ 7,617 $ 6,704 $5,464 Projected benefit obligation.................... (8,856) (6,250) (5,575)
Plan assets greater (less) than projected benefit obligation.................. (1,243) 454 (111) Unrecognized net loss........................... 1,842 301 870 Unrecognized transition asset being amortized over 19 years....................... (423) (453) (473)
Prepaid pension cost included in other assets......................... $ 176 $ 302 $ 286
At October 31, 1997, 1996 and 1995, the projected benefit obligations include accumulated benefit obligations of $8,043,000, $5,658,000 and $5,344,000 of which $8,006,000, $5,643,000 and $5,323,000 are vested.
A discount rate of 7% was used in determining the present value of the projected benefit obligation. The expected long-term rate of return on assets was 9% and the assumed rate of increase in future compensation levels was 5%.
The net pension expense for the Company's Scottish subsidiary recorded in 1997, 1996 and 1995 included the following components: (Amounts in thousands) 1997 1996 1995
Service-cost benefits earned during the period...... $ 415 $ 364 $ 313 Interest cost on projected benefit obligation....... 506 474 439 Actual return on plan assets........................ (616) (674) (318) Net amortization and deferral....................... (13) 163 (160) Net pension expense................................. $292 $327 $ 274
9. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company sponsors a contributory defined benefit postretirement plan for its U.S. operations which provides medical, dental and life insurance benefits to employees who meet age and years of service requirements prior to retirement and who agree to contribute a portion of the cost. The Company has the right to modify or terminate these benefits at any time.
The Company's contribution is a set amount per retiree depending on the retiree's years of service and dependent status at the date of retirement and the age of the retiree and dependents when benefits are provided. Cost increases are paid by the retiree.
The postretirement plan's benefit obligation was as follows for the years ended October 31, 1997, 1996 and 1995:
(Amounts in thousands) 1997 1996 1995
Accumulated postretirement benefit obligation: Retirees............................................$1,017 $1,058 $1,012 Fully eligible plan participants ................... 341 336 243 Other active plan participants...................... 810 756 744
Total accumulated postretirement benefit obligation unfunded................. 2,168 2,150 1,999 Unrecognized loss................................... (168) (279) (227)
Accrued postretirement benefit obligation.... $2,000 $1,871 $1,772
The following components were included in net periodic postretirement benefit cost for the years ended October 31, 1997, 1996 and 1995:
(Amounts in thousands) 1997 1996 1995
Service-cost benefits earned during the period......$ 71 $ 69 $ 50 Interest cost on accumulated post retirement benefit obligation..................... 165 141 133 Net amortization and deferral....................... 10 55
Net postretirement benefit cost................... $246 $265 $183
Because the Company has established a maximum amount it will pay per retiree under the plan, health care cost trends do not affect the calculation of the accumulated benefit obligation or the net postretirement benefit cost. The weighted average discount rate used in determining the accumulated benefit obligation was 8.0% in 1997 and 1996 and 7.25% in 1995.
10. CONTINGENCIES AND COMMITMENTS
LITIGATION. During the past several years, the Company has been engaged in litigation in the United Kingdom (U.K.) involving infringement of a Company patent by a U.K. company. The Company won its action at the Patents County Courts level but lost on appeal to the U.K. House of Lords. During the injunction period, the U.K. company submitted a claim for damages totaling approximately $1.6 million for lost profits. The Company and legal counsel are in the process of reviewing the claim. Management believes that the amount of the claim is substantially overstated and that the ultimate settlement will not have a material adverse effect on the financial statements.
In 1997, Optical Corporation of America (OCA) and certain of its directors and officers (Affiliates) commenced suit against the Company. The complaint arises out of a letter of intent executed by the Company and OCA in March 1996 and an ensuing merger agreement executed by the Company and OCA in June 1996. Under the merger agreement, the Company would acquire OCA. The complaint seeks damages for costs and expenses incurred by OCA in pursuing the merger transaction with the Company due to the Company's alleged negligent misrepresentations to OCA and Affiliates and the Company's alleged breach of its letter of intent with OCA. The Company has filed counterclaims against OCA and the Affiliates based on OCA's breach of the merger agreement and is seeking damages based on the difference between the value of OCA's business to the Company and the agreed upon purchase price under the merger agreement. The Company does not believe that this litigation will have any material adverse effect on its future operating results or financial condition.
In 1997, Flex Products filed a suit in United States District Court for the Eastern District of Michigan alleging that BASF Corporation (BASF) and BASF AG have infringed Flex's patents covering optically variable thin film flakes. The complaint requests that the Court enjoin BASF from importing, making, using, selling or offering to sell the infringing pigment in the United States. The complaint also seeks damages for the infringement, including treble damages if the infringement is found to be willful. BASF Corporation has filed a counterclaim seeking a declaration that the patent in question is invalid. Both BASF companies have requested that they be awarded their attorneys' fees and costs. Management remains confident in the validity of Flex Products' patent, and based upon the information currently available, that the BASF product is , in fact, covered by the patent.
During 1997 and 1996, the Company was engaged in litigation with SICPA Holding S.A., the 40% joint owner of Flex Products. See Note 4.
CONCENTRATIONS OF CREDIT RISK. The Company grants credit to customers, subject to credit approval, for most of its sales. At October 31, 1997, accounts receivable from customers in foreign countries, was $16.6 million, or 47%, of accounts receivable with approximately $5.7 million receivable from customers in Asia and approximately $10.9 million receivable from customers in Europe and other countries.
OPERATING LEASE AGREEMENTS. The Company and its subsidiaries lease computer equipment, manufacturing space and warehouse space. The operating lease payments are recorded as rental expense and totaled $6,351,000, $4,881,000 and $2,481,000 for 1997, 1996 and 1995. Future minimum operating lease payments amount to $23.1 million, and for the years 1998 through 2002 are $5,595,000, $5,110,000, $4,253,000, $3,864,000 and $1,973,000 under operating lease agreements in effect at October 31, 1997. During 1996, the Company entered into three operating lease arrangements to finance the cost of a continuous coating machine and related equipment and to finance the cost of two coating machines to be used in the manufacturing operations of Flex Products. The lease terms are six years with monthly payments totaling approximately $290,000 and buyout provisions at the end of each lease term.
EMPLOYMENT AGREEMENTS. The Company has approved employment agreements for officers and employment assurance agreements for certain management and technical employees, as well as increases in severance benefits for full- time employees, to be effective in the event of certain changes in control of the Company. These agreements are currently effective through 1999.
11. INFORMATION ON OPERATIONS
INVENTORIES. Inventories as of October 31, 1997 and 1996 consisted of:
(Amounts in thousands) 1997 1996
Raw materials and supplies ............................... $ 7,541 $ 7,483 Work-in-process .......................................... 12,308 8,797 Finished goods............................................ 2,980 2,421
Total inventories..................................... $22,829 $18,701
ACCRUED EXPENSES. Accrued expenses at October 31, 1997 and 1996 consisted of the following:
(Amounts in thousands) 1997 1996
Workers' compensation reserve .............................. $ 555 $ 659 Ground water remediation reserve............................ 759 659 Other accrued liabilities................................... 5,540 5,248
Total accrued expenses................................ $6,854 $6,566
INTEREST. Interest expense and amounts capitalized were as follows for the years ended October 31, 1997, 1996 and 1995:
(Amounts in thousands) 1997 1996 1995
Interest costs incurred.......................... $4,249 $4,696 $4,326 Less amounts capitalized......................... 219 1,172 779
Net interest expense....................... $4,030 $3,524 $3,547
SALES INFORMATION. Significant customers and sales to the federal government were as follows:
The Company's largest customer in 1997 is also a 40% owner of Flex Products. Sales to this customer were 14% of consolidated sales for 1997, 13% of consolidated sales for 1996 and 12% of consolidated sales for the six months of 1995 in which Flex Products' sales were consolidated. The Company's fifth largest customer in 1997 is also an approximate 10% common stockholder. Sales to this customer accounted for approximately 3% of sales in 1997, 5% of sales in 1996 and 8% of sales in 1995.
Sales of products and services to the federal government, primarily under subcontracts, were 6%, 9% and 10% of net revenues in 1997, 1996 and 1995. Certain of these contracts are subject to cost review by various governmental agencies. Management believes that adjustments, if any, will not be material to the operating results of the Company.
FOREIGN OPERATIONS. Certain information regarding the Company's domestic and foreign revenues is as follows
UNITED EUROPE (Amounts in thousands) STATES AND OTHER ASIA ELIMINATIONS TOTAL
FISCAL YEAR ENDED OCTOBER 31,1997:
Domestic revenues and revenues of foreign operations $116,720 $31,411 $ 8,296 $(2,709) $153,718 Export sales from the U.S. 47,036 29,718 (12,642) 64,112 Transfers between regions (2,709) (6,669) (5,973) 15,351
Revenues from customers $114,011 $71,778 $32,040 $217,829
FISCAL YEAR ENDED OCTOBER 31,1996:
Domestic revenues and revenues of foreign operations $99,543 $38,795 $ (815) $137,533 Export sales from the U.S. 36,131 $24,911 (9,370) 51,672 Transfers between regions (815) (9,370) 10,185
Revenues from customers $98,728 $65,556 $24,911 $189,195
FISCAL YEAR ENDED OCTOBER 31,1995:
Domestic revenues and revenues of foreign operations $90,529 $42,840 $ (1,269) $132,100 Export sales from the U.S. 23,248 $21,305 (7,236) 37,317 Transfers between regions (1,269) (7,236) 8,505 Revenues from customers $89,260 $58,852 $21,305 $169,417
Transfers between regions represent intercompany sales of products and intercompany compensation for services.
Certain information regarding the Company's operations by region is as follows:
UNITED EUROPE (Amounts in thousands) STATES AND OTHER ASIA ELIMINATIONS TOTAL
FISCAL YEAR ENDED OCTOBER 31,1997
Income from operations $ 16,206 $ 385 $(316) $ (328) $ 15,947
Identifiable assets $170,443 $32,646 $ 5,570 $(25,166) $183,493
FISCAL YEAR ENDED OCTOBER 31,1996:
Income from operations $ 12,812 $ (410) $12,402
Identifiable assets $146,869 $ 9,715 $(33,813) $172,771
FISCAL YEAR ENDED OCTOBER 31,1995:
Income from operations $ 14,284 $ 2,286 $ 16,570
Identifiable assets $137,702 $50,806 $(18,674) $169,834
OPTICAL COATING LABORATORY, INC. AND SUBSIDIARIES SUPPLEMENTAL FINANCIAL INFORMATION
(Unaudited)
Results of operations for each quarter of fiscal 1997 were as follows:
THREE MONTHS ENDED
JAN 31, APR 30, JULY 31, OCT 31, FISCAL (Amounts in thousands, except per share data) 1997 1997 1997 1997 1997
Revenues $ 45,720 $ 53,516 $59,997 $58,596 $217,829 Gross profit 15,521 18,674 19,790 20,637 74,622 Income before provision for income taxes and minority interest 1,573 2,759 3,912 4,134 12,378 Net income 907 1,513 1,994 2,711 7,125 Net income applicable to common stock $ 667 $ 1,326 $ 1,853 $ 2,586 $ 6,432 Net income per common and common equivalent share $ 0.07 $ 0.13 $ 0 .17 $ 0.23 $ 0.60
Weighted average number of common and common equivalent shares outstanding (in thousands) 10,165 10,410 10,965 11,148 10,673
Results of operations for each quarter of fiscal 1996 were as follows:
THREE MONTHS ENDED
JAN 28, APR 28, JUL 28, OCT 31, FISCAL (Amounts in thousands, except per share data) 1996 1996 1996 1996 1996
Revenues $ 43,911 $ 48,451 $48,772 $48,061 $189,195
Gross profit 14,416 17,799 15,419 14,792 62,426 Income before provision for income taxes and minority interest 1,797 4,058 3,315 87 9,257 Net income 740 2,071 2,033 352 5,196 Net income applicable to common stock $ 500 $ 1,831 $ 1,793 $ 112 $ 4,236
Net income per common and common equivalent share $ .05 $ .18 $ .17 $ .01 $ .41
Weighted average number of common and common equivalent shares outstanding (in thousands) 10,119 10,158 10,550 10,358 10,301
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to Paragraph G(3) of the General Instructions to Form 10-K, the information called for in Part III, Items 10, 11, 12 and 13 of Form 10-K is omitted since the Company will file with the Securities and Exchange Commission, not later than 120 days after the close of the fiscal year ended October 31, 1997, a definitive proxy statement pursuant to Regulation 14A in connection with its 1998 Annual Meeting of Stockholders. The information contained under the caption "Executive Officers of the Registrant" in Part I of this Form 10-K is incorporated by reference into Item 10.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) 1. CONSOLIDATED FINANCIAL STATEMENTS: The following consolidated financial statements of Optical Coating Laboratory, Inc. are included in Item 8: PAGE(S) Independent Auditors' Reports.......................24-25 Consolidated Balance Sheets........................ 26 Consolidated Statements of Income......................27 Consolidated Statements of Cash Flows...............28-29 Consolidated Statements of Common Stockholders' Equity ..................................30 Notes to Consolidated Financial Statements.............31 Supplemental Financial Information.....................45
(A) 2. FINANCIAL STATEMENT SCHEDULES
The following consolidated financial statement schedules are included in Item 14(d):
Schedule II - Valuation and Qualifying accounts........50
All other schedules have been omitted since the required information is not present or not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements or the accompanying notes.
(A) 3. LISTING OF EXHIBITS
The following are filed as Exhibits to this Annual Report on Form 10-K. The numbers refer to the Exhibit Table of Item 601 of Regulation S-K.
EXHIBIT NO. DESCRIPTION 3.1 Restated Certificate of Incorporation. Incorporated by reference to Exhibit (4)(a) of the Registrant's Form 10-Q for the quarter ended July 31, 1988.
3.2 By-Laws. Incorporated by reference to Exhibit (3)(b) of the Registrant's Form 8-K under Item 5 dated November 20, 1987.
4.1* Stockholder Rights Agreement between the Registrant and ChaseMellon Shareholder Services L.L.C. dated December 16, 1997.
4.2 Note Purchase Agreement(s) dated as of May 27, 1994 for the private placement of $18,000,000 of 8.71% Senior Notes due June 1, 2002 between the Registrant and Connecticut Mutual Life Insurance Company, Modern Woodman of America and American Life and Casualty Insurance Company. Incorporated by reference to Exhibit (4)(a) of the Registrant's Form 10-Q for the quarter ended July 31, 1994.
4.3 Stock Purchase Agreement dated as of February 8, 1995 by and between the Registrant, Netra Corporation and the Sellers as identified on the signature page of said agreement, each a shareholder of Netra Corporation, for the purchase by the Registrant of all of the shares of common and preferred stock of Netra Corporation. Incorporated by reference to Exhibit (4) of the Registrant's Form 10-Q for the quarter ended April 30, 1995.
4.4 Optical Coating Laboratory, Inc. 12,000 shares of 8% Series C Convertible Redeemable Preferred Stock Purchase Agreement among the Registrant and the investors named therein dated as of May 1, 1995. Incorporated by reference to Exhibit 4(e) of Registrant's Form S-8 dated July 6, 1995. 4.5 Certificate of Designation, Preferences and Rights of Series C Convertible Redeemable Preferred Stock of Optical Coating Laboratory, Inc. dated May 2, 1995. Incorporated by reference to Exhibit 4(f) of Registrant's Form S-8 dated July 6, 1995.
4.6 Credit Agreement dated as of May 24, 1995 among the Registrant, Bank of America NT&SA as agent, and Letter of Credit Issuing Bank and the other Financial Institutions party thereto arranged by BA Securities, Inc. Incorporated by reference to Exhibit (4)(a) of the Registrant's Form 10-Q for the quarter ended July 31, 1995.
4.7 First Amendment to Credit Agreement dated as of May 24, 1995 between Optical Coating Laboratory, Inc., Bank of America, NT&SA, as agent for itself and the Banks, and the several financial institutions party to the Credit Agreement, which amendment is dated as of December 15, 1995. Incorporated by reference to Exhibit 4.9 of the Registrant's Form 10-K for the year ended October 31, 1995.
4.8 Third Amendment to Credit Agreement dated as of May 24, 1995 between Optical Coating Laboratory, Inc. and Bank of America NT&SA, as agent for itself and the Banks, and the several financial institutions party to the Credit Agreement, which amendment is dated as of May 23, 1997. Incorporated by reference to Exhibit (4.1) of the Registrant's Form 10-Q for the quarter ended April 30, 1997.
4.9 Secured Promissory Note between Optical Coating Laboratory, Inc. and Aid Association for Lutherans dated November 8, 1995. Incorporated by reference to Exhibit 4.8 of the Registrant's Form 10-K for the year ended October 31, 1995.
4.10 Capital Equipment Lease Agreement dated as of February 20, 1996 between Optical Coating Laboratory, Inc. and Fleet Credit Corporation. Incorporated by reference to Exhibit 4.10 of the Registrant's Form 10-K for the year ended October 31, 1996.
4.11 Capital Equipment Lease Agreement dated as of June 19, 1996 between Flex Products, Inc. and Fleet Credit Corporation. Incorporated by reference to Exhibit 4.11 of the registrant's Form 10-K for the year ended October 31,1996.
4.12 Credit Agreement dated as of May 20, 1997 between Optical Coating Laboratory, Inc. as Borrower and ABN AMRO Bank N.V. as bank. Incorporated by reference to Exhibit 4.2 of the Registrant's form 10-Q for the quarter ended April 30, 1997.
9 Not applicable.
10.0 Registrant's Employee Stock Ownership Plan (OCLI ESOP+), as amended. Incorporated by reference to Exhibit (10)(c) of the Registrant's Form 10-K for the year ended October 31, 1988.
10.1 Registrant's 1996 Incentive Compensation Plan. Incorporated by reference to Exhibit A of the Registrant's Proxy Statement dated March 8, 1996.(1)
10.2 Registrant's 1995 Incentive Compensation Plan. Incorporated by reference to Exhibit A of the Registrant's Proxy Statement dated March 10, 1995. (1)
10.3 Registrant's 1993 Incentive Compensation Plan. Incorporated by reference to Exhibit A of the Registrant's Proxy Statement dated March 8, 1993. (1)
10.4 Registrant's 1992 Incentive Compensation Plan. Incorporated by reference to Exhibit A of the Registrant's Proxy Statement dated March 8, 1992. (1)
10.5 Registrant's 1991 Incentive Compensation Plan. Incorporated by reference to Exhibit A of the Registrant's Proxy Statement dated February 25, 1991. (1)
10.6 Form of Directors' and Officers' Indemnification Agreement. Incorporated by reference to Exhibit (10)(j) of the Registrant's Form 10-K for the year ended October 31, 1987. (1)
10.7* Form of Change in Control Employment Agreements between the Registrant and its Executive Officers dated November 20, 1997.(1)
10.8* Form of Employment Assurance Agreements between the Registrant and its key technical and professional employees dated as of November 20, 1997. (1)
10.9 Mortgage Agreement between the Scottish Development Agency and Registrant's Scottish Subsidiary. Incorporated by reference to Exhibit (10)(o) of the Registrant's Form 10-K for the year ended October 31, 1987.
EXHIBIT NO. DESCRIPTION
10.10 Stock and Note Purchase Agreement by and among OCLI, SICPA Holding S.A., ICIA, ICIAH and Flex Products, Inc. Incorporated by reference to the Registrant's Form 8-K dated May 23, 1995 and Registrant's Form 8-K/A dated April 11, 1996.
10.11 Employment Agreement Letter between John McCullough and the Registrant dated October 31, 1995. Incorporated by reference to Exhibit 10.18 of the Registrant's Form 10-K for the year ended October 31, 1995. (1)
10.12*1998 Management Incentive Plan (1)
11* Computation of earnings (loss) per share for the years ended October 31, 1997, 1996 and 1995.
12 Not applicable 13 Not applicable 16 Not applicable 18 Not applicable 21* Subsidiaries of the Registrant 22 Not applicable 23* Independent Auditors' Consent and Report on Schedules 24 Not applicable 27* Financial Data Schedule 28 Not applicable 99 Not applicable * Items not previously filed are designated by an asterisk. (1) Designates management contracts or compensatory plan arrangements required to be filed as exhibits pursuant to Item 14(c) of Form 10- K.
(b) REPORTS ON FORM 8-K None
OPTICAL COATING LABORATORY, INC. AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS (S-X, RULE 12-09)
(AMOUNTS IN THOUSANDS) COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E ADDITIONS
BALANCE AT CHARGED TO CHARGED DEDUCTIONS BALANCE BEGINNING COSTS AND TO OTHER AMOUNTS AT END DESCRIPTION OF PERIOD EXPENSES ACCOUNTS CHARGED OFF OF PERIOD
ALLOWANCE FOR DOUBTFUL ACCOUNTS: Year ended October 31, 1997 $1,775 $ 642 $(31)(a) $ 502 $1,884
Year ended October 31, 1996 $1,229 $ 674 $(7)(a) $ 121 $1,775
Year ended October 31, 1995 $1,810 $ 369 $136(a) $1,086 $1,229
VALUATION RESERVES FOR INVENTORY: Year ended October 31, 1997 $2,112 $ 155 $-0- $ -0- $2,267
Year ended October 31, 1996 $ 616 $1,496 $-0- $ -0- $2,112
Year ended October 31, 1995 $ 765 $ -0- $-0- $ 149 $ 616
(a)The 1995 balance consists primarily of amounts recorded in connection with the acquisition of Flex Products. The 1997 and 1996 balances consist of recoveries and foreign currency translation effects.
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.
DATE: JANUARY 29, 1998 OPTICAL COATING LABORATORY, INC.
BY: /S/CRAIG B. COLLINS
Craig B. Collins Chief Financial 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 and on the dates indicated:
SIGNATURE TITLE DATE
CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER /S/HERBERT M. DWIGHT, (Principal Executive Officer) JANUARY 29, 1998
Herbert M. Dwight, Jr.
DIRECTOR, PRESIDENT AND CHIEF OPERATING OFFICER /S/CHARLES J. ABBE (Principal Operating Officer) JANUARY 29, 1998
Charles J. Abbe
VICE PRESIDENT, FINANCE /S/CRAIG B. COLLINS AND CHIEF FINANCIAL OFFICER JANUARY 29, 1998
Craig B. Collins (Principal Financial Officer)
/S/HOLLY D. NEAL CORPORATE CONTROLLER JANUARY 29, 1998
Holly D. Neal (Principal Accounting Officer)
/S/JOHN MCCULLOUGH DIRECTOR AND VICE PRESIDENT JANUARY 29, 1998
John McCullough
/S/ DOUGLAS C. CHANCE DIRECTOR JANUARY 29, 1998
Douglas C. Chance
/S/ SHOEI KATAOKA DIRECTOR JANUARY 29, 1998
Shoei Kataoka
/S/JULIAN SCHROEDER DIRECTOR JANUARY 29, 1998
Julian Schroeder
/S/RENN ZAPHIROPOULOS DIRECTOR JANUARY 29, 1998
Renn Zaphiropoulos