Third Quarter 1997
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Mark one
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended July 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________to____________
[GRAPHIC OMITTED]
Optical Coating Laboratory, Inc.
(Exact name of registrant as specified in its charter)
Commission File Number 0-2537
Delaware 68-0164244
- -------- ----------
(State or other jurisdiction of (IRS Identification No.)
incorporation or organization)
2789 Northpoint Parkway, Santa Rosa California 95407-7397
- ---------------------------------------------- ----------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (707) 545-6440
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Classes of Common Stock:
COMMON STOCK, $.01 PAR VALUE
Outstanding at August 31, 1997: 10,511,605 shares
This document contains 20 pages.
The Exhibit listing appears on Page 19.
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<TABLE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OPTICAL COATING LABORATORY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<CAPTION>
July 31, October 31,
ASSETS 1997 1996
- --------------------------------------------------------------------------------------------------------------
(Dollars in thousands except share amounts) (Unaudited)
<S> <C> <C>
Current Cash and short-term investments........................... $ 8,821 $ 16,027
Assets Accounts receivable, net of allowance for
doubtful accounts of $2,014 and $1,775................... 38,112 27,700
Inventories............................................... 22,752 18,701
Income taxes receivable................................... 600 1,248
Deferred income tax assets................................ 7,307 5,165
Other current assets...................................... 1,919 1,230
--------- ---------
Total Current Assets........................... 79,511 70,071
Other Deferred income tax assets................................ 1,290 4,451
Assets Other assets.............................................. 8,288 10,680
Property, Land and improvements..................................... 9,277 9,200
Plant and Buildings and improvements................................ 41,222 40,953
Equipment Machinery and equipment .................................. 119,580 112,326
Construction-in-progress.................................. 7,486 6,190
--------- ---------
177,565 168,669
Less accumulated depreciation............................. (88,518) (81,100)
--------- ---------
Property, plant and equipment-net ..................... 89,047 87,569
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Total Assets................................... $ 178,136 $ 172,771
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------------------------------------
Current Accounts payable......................................... $ 9,923 $ 7,199
Liabilities Accrued expenses......................................... 7,941 6,566
Accrued compensation expenses............................ 6,910 7,057
Current maturities on long-term debt..................... 6,203 4,981
Notes payable............................................ 911 3,112
Income taxes payable..................................... 3,320 1,823
Deferred revenue......................................... 699 1,246
--------- ---------
Total Current Liabilities .................... 35,907 31,984
Noncurrent Accrued postretirement health benefits
Liabilities and pension liabilities................................. 2,271 2,308
Deferred income tax liabilities.......................... 735 1,804
Long-term debt .......................................... 42,414 45,788
Minority interest........................................ 14,426 11,328
Convertible redeemable preferred stock................... 5,559 11,309
(liquidation preference $6,295 and $12,080)
Common Common stock, $.01 par value; authorized
Stockholders' 30,000,000 shares; issued and outstanding
Equity 10,512,000 and 9,761,000 shares......................... 105 98
Paid-in capital.......................................... 54,837 47,219
Retained earnings........................................ 23,631 20,984
Cumulative foreign currency translation adjustment ...... (1,749) (51)
--------- ---------
Common Stockholders' Equity............................ 76,824 68,250
--------- ---------
Total Liabilities and Stockholders' Equity.... $ 178,136 $ 172,771
========= =========
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
2
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<TABLE>
OPTICAL COATING LABORATORY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<CAPTION>
For the three and nine months ended July 31, 1997 and 1996 Three Months Nine Months
------------ -----------
(Amounts in thousands, except per share amounts) 1997 1996 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues Revenues............................................ $ 59,997 $ 48,772 $ 159,233 $ 141,134
Cost of sales....................................... 40,207 33,353 105,248 93,500
--------- --------- ---------- ---------
Gross Profit.................................... 19,790 15,419 53,985 47,634
Costs and Operating Expenses:
Expenses Research and development .......................... 3,943 2,934 10,456 7,944
Selling and administrative......................... 10,774 8,109 31,822 27,310
Amortization of intangibles........................ 232 284 712 849
--------- --------- ---------- ---------
Total Operating Expenses.......................... 14,949 11,327 42,990 36,103
--------- --------- ---------- ---------
Income from Operations.......................... 4,841 4,092 10,995 11,531
Nonoperating Income (Expense):
Interest income ................................... 78 52 335 191
Interest expense................................... (1,007) (829) (3,086) (2,552)
--------- --------- ---------- ---------
Earnings Income Before Provision for Income Taxes
and Minority Interest........................ 3,912 3,315 8,244 9,170
Provision for income taxes.......................... 1,568 1,117 3,301 3,576
Minority interest................................... 350 165 529 750
--------- --------- ---------- ---------
Net Income...................................... 1,994 2,033 4,414 4,844
Dividend on convertible redeemable
preferred stock.................................... 141 240 568 720
--------- --------- ---------- ---------
Net Income Applicable to Common Stock........... $ 1,853 $ 1,793 $ 3,846 $ 4,124
========= ========= ========== =========
Net Income Per Common and Common
Equivalent Share................................... $ .17 $ .17 $ .37 $ .40
========= ========= ========== =========
Weighted average number of common shares used
to compute earnings per share...................... 10,965 10,550 10,517 10,279
========= ========= ========== =========
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
3
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<TABLE>
OPTICAL COATING LABORATORY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
For the three and nine months ended July 31, 1997 and 1996 Three Months Nine Months
------------ -----------
(Amounts in thousands) 1997 1996 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operations Cash Flows From Operations:
Cash received from customers....................... $ 49,548 $ 47,238 $ 138,100 $ 136,806
Interest received.................................. 111 32 346 139
Cash paid to suppliers and employees............... (46,697) (46,339) (127,744) (123,319)
Cash paid to ESOP+................................. (125) (272)
Interest paid...................................... (1,425) (1,514) (3,875) (3,642)
Income taxes paid, net of refunds................. (391) 3,606 (1,298) (1,383)
--------- --------- --------- ---------
Net Cash Provided By Operations.............. 1,021 3,023 5,257 8,601
--------- --------- --------- ---------
Investments Cash Flows From Investments:
Purchase of plant and equipment.................... (5,237) (7,163) (11,862) (23,957)
Proceeds from sale-leaseback of new equipment...... 12,304 18,980
--------- --------- --------- ---------
Net Cash (Used For) Provided by Investments..... (5,237) 5,141 (11,862) (4,977)
Financing Cash Flows From Financing:
Proceeds from long-term debt....................... 1,998 1,998 5,957
Proceeds from notes payable........................ 101 269 108 423
Proceeds from exercise of stock options............ 1,343 1,032 1,510 1,485
Proceeds from note to minority stockholder......... 640 1,124
Investment by minority stockholder................. 426 1,443
Repayment of long-term debt........................ (998) (1,002) (2,916) (3,902)
Repayment of notes payable......................... (298) (1,949) (924)
Repayment of note to minority stockholder.......... (2,090) (1,137)
Payment of dividend on preferred stock............. (141) (240) (568) (720)
Payment of dividend on common stock................ (613) (582) (1,199) (1,153)
--------- --------- --------- ---------
Net Cash Provided By (Used For) Financing....... 2,458 (2,613) (449) 29
--------- --------- --------- ---------
Effect of exchange rate changes on cash............. 117 97 (152) (108)
--------- --------- --------- ---------
(Decrease) increase in cash and
short-term investments.......................... (1,641) 5,648 (7,206) 3,545
Cash and short-term investments
at beginning of period.......................... 10,462 4,499 16,027 6,602
--------- --------- --------- ---------
Cash and short-term investments at end of period... $ 8,821 $ 10,147 $ 8,821 $ 10,147
========= ======== ========= =========
</TABLE>
4
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<TABLE>
OPTICAL COATING LABORATORY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
<CAPTION>
For the three and nine months ended July 31, 1997 and 1996 Three Months Nine Months
------------ -----------
(Amounts in thousands) 1997 1996 1997 1996
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<S> <C> <C> <C> <C>
Adjustments Reconciliation of Net Income To Cash Flows From Operations:
Net income.......................................... $ 1,994 $ 2,033 $ 4,414 $ 4,844
Adjustments to reconcile net income to net cash
provided by operations:
Depreciation and amortization .................. 3,113 3,544 9,425 10,040
Minority interest in earnings of subsidiaries... 350 165 529 750
Net book value of coating machine sold.......... 880 880
Loss on disposal or abandonment of equipment ... (17) 334 193 389
Accrued postretirement health benefits.......... (61) 10 25 65
Deferred income tax liabilities................. (2) (1,076) (1,054) (967)
Other non-cash adjustments to net income........ (37) (292) 4 (512)
Change in:
Accounts receivable.......................... (6,473) (1,000) (11,562) (3,748)
Inventories.................................. (612) (458) (4,676) (3,217)
Income tax receivable ....................... 429 147 539 (31)
Deferred income tax assets and liabilities... (24) 2,334 924 2,742
Other current assets and other assets........ 268 (1,551) (237) (1,610)
Accounts payable, accrued expenses and
accrued compensation expenses.............. 1,272 (1,201) 5,275 (626)
Deferred revenue............................. (16) 289 (547) 484
Income taxes payable......................... 837 (1,135) 2,005 (882)
-------- -------- -------- --------
Total adjustments.......................... (973) 990 843 3,757
-------- -------- -------- --------
Net Cash Provided By Operations.............. $ 1,021 $ 3,023 $ 5,257 $ 8,601
======== ======== ======== ========
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
5
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<TABLE>
OPTICAL COATING LABORATORY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
(Unaudited)
<CAPTION>
For the nine months ended July 31, 1997 Common Stock Foreign
------------------- Pain-in Retained Currency
(Amounts in thousands) Shares Amount Capital Earnings Translation
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at November 1, 1996 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 181 2 1,638
Conversion of Preferred Stock
to common stock555 5 5,821
Foreign currency translation
adjustment (1,698)
Net income 4,414
Dividend on preferred stock (568)
Dividend on common stock (1,199)
- -------------------------------------------------------------------------------------------------------------------
Balance at July 31, 1997 10,512 $105 $ 54,837 $23,631 $ (1,749)
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<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
6
<PAGE>
OPTICAL COATING LABORATORY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three and Nine Months Ended July 31, 1997 and 1996
(Unaudited)
1. GENERAL
Optical Coating Laboratory, Inc. (OCLI) designs, develops, manufactures and
sells thin film coated products. Thin film coatings control and enhance light by
altering the transmission, reflection and absorption of the various wavelengths
of light energy to achieve a desired effect such as anti-reflection, shielding,
conductivity or abrasion resistance. OCLI markets and sells its products
worldwide to original equipment manufacturers (OEMs) who utilize thin film
coated components or devices for optical and electro-optical systems for
computers, photocopiers, LCD desktop projectors, scanners, instruments and
satellites. OCLI sells its Glare/Guard(R) ergonomic computer display products
through distributors and office supply retailers. Flex Products, Inc. (Flex
Products), OCLI's 60% owned subsidiary, develops and manufactures thin film
coatings on plastic film with a proprietary high speed process.
The Condensed Consolidated Balance Sheet as of July 31, 1997, the Condensed
Consolidated Statements of Income for the three and nine month periods ended
July 31, 1997 and 1996, the Condensed Consolidated Statement of Common
Stockholders' Equity for the nine month period ended July 31, 1997 and the
Condensed Consolidated Statements of Cash Flows for the three and nine month
periods ended July 31, 1997 and 1996 have been prepared by the Company without
audit. In the opinion of management, all adjustments necessary to present fairly
the financial position, results of operations and cash flows at July 31, 1997,
and for all periods presented, have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that these condensed
consolidated financial statements be read in conjunction with the financial
statements and notes included in the Company's Annual Report on Form 10-K for
the year ended October 31, 1996.
The results of operations for the period ended July 31, 1997 are not necessarily
indicative of the operating results anticipated for the full year.
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
under the new statement, basic earnings per share would have been $.18 and $.19
for the three months ended July 31, 1997 and 1996 and $.38 and $.43 for the nine
months ended July 31, 1997 and 1996. 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 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 companys'
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 disclosures and will not impact the Company's results of operations,
cash flow or financial position.
7
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<TABLE>
2. INVENTORIES
Inventories consisted of the following:
<CAPTION>
July 31, October 31,
(Amounts in thousands) 1997 1996
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Raw materials and supplies $ 8,538 $ 7,483
Work-in-process 11,646 8,797
Finished goods 2,568 2,421
-------- ---------
Total inventories $ 22,752 $ 18,701
======== =========
</TABLE>
8
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<TABLE>
3. ACCRUED EXPENSES
Accrued expenses at July 31, 1997 and October 31, 1996 consisted of the
following:
<CAPTION>
July 31, October 31,
(Amounts in thousands) 1997 1996
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Workers' compensation reserve $ 516 $ 659
Ground water remediation reserve 759 659
Other accrued liabilities 6,666 5,248
-------- ---------
$ 7,941 $ 6,566
======== =========
</TABLE>
<TABLE>
4. LONG-TERM DEBT
Long-term debt, including current maturities, at July 31, 1997 and October 31,
1996 consisted of the following:
<CAPTION>
July 31, October 31,
(Amounts in thousands) 1997 1996
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Unsecured senior notes. Interest at 8.71% payable semiannually.
Principal payable in annual installments of $3.6 million from
1998 through 2002.......................................................... $18,000 $18,000
Unsecured bank term loan. Variable interest rate averaging 7.0% at July 31,
1997, payable quarterly, with semiannual principal
payments of $2 million..................................................... 12,000 13,000
Unsecured borrowings under bank line of credit. Variable interest rate averaging
6.7% at July 31, 1997, payable quarterly or specified
duration period. Principal due upon expiration on April 28, 2000........... 2,000
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......................................................... 2,448 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................................. 2,858 2,945
Land improvement assessment. Interest at an average rate of 6.75%.
Principal and interest payable in semiannual installments of
$77,000 through 1998....................................................... 150 276
Scottish Development Agency (SDA) 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
Note payable to private parties in connection with the purchase of the Company's
wholly-owned subsidiary in Germany (MMG). Principal and interest at 8%
payable over ten years in quarterly
installments. Refinanced in May 1997....................................... 6,188
9
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Unsecured bank note. Interest at 5.6%. Quarterly
principal and interest payments of approximately $300,000
through December 2002...................................................... 4,455
Bank loans of MMG with interest rates ranging from 4.5% to 8.0%. Payable in
semiannual and annual installments through 2013. Partly collateralized by
mortgages on MMG land and buildings
and liens on equipment..................................................... 2,795 3,760
Present value of obligations under capital leases at an imputed interest
rate of 8.0% payable in monthly installments through 2004................. 34 81
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48,617 50,769
Less current maturities ........................................................ (6,203) (4,981)
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Total long-term debt, net of current maturities........................ $42,414 $45,788
======= =======
</TABLE>
The Company has a $32 million unsecured credit facility comprised of a $12
million term loan and a $20 million revolving line of credit. 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 letter of credit
for approximately $903,000 to satisfy the Company's workers' compensation
self-insurance requirements. The letter of credit facility carries a fee of
1.25% per year.
During the third quarter of 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
cancelled. During the third quarter of 1997, the Company's $15 million line of
credit was increased to $20 million.
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 $3.1 million 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 expense 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.
5. STOCK OPTIONS
During the third quarter of 1997, 232,500 option shares were granted under the
Company's incentive compensation and employee stock option plans, including
162,000 shares that were regranted for the purpose of repricing the options. At
July 31, 1997, 2,062,800 shares were subject to outstanding options, of which
1,202,337 options were exercisable. Options to purchase 317,289 shares of common
stock were available for future grants under the plans.
10
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6. CONVERTIBLE REDEEMABLE PREFERRED STOCK
In June 1997, 1,750 shares of the Company's 8% Series C Convertible Redeemable
Preferred Stock were converted into approximately 169,000 shares of common stock
at the conversion price of $10.50 per share. In February 1997, 4,000 shares of
the Company's 8% Series C Convertible Redeemable Preferred Stock were converted
into approximately 386,000 shares of common stock at the conversion price of
$10.50 per share.
7. 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 July 1996, SICPA Holdings S.A. (SICPA), the 40% minority stockholder and
largest customer of Flex, filed a lawsuit in Delaware Chancery Court in order to
block an attempted initial public offering by Flex Products arguing that such an
offering was prohibited by Flex Products' articles of incorporation, as well as
by certain contractual provisions between OCLI and SICPA without SICPA's
consent. In January 1997, the Delaware Chancery Court rendered a decision on one
of the issues in dispute, holding the position of OCLI and Flex Products that a
simple majority of the Flex Products Board of Directors has the authority to
authorize a public offering of Flex Products' securities prior to May 8, 1998,
independent of the rights of either SICPA or OCLI to cause Flex Products to have
an initial public offering of its common stock created under the Put and Call,
Right of First Refusal and Co-Sale Agreement. In May 1997, the Company filed
with the Delaware Courts, for their review and approval, a public ofering in the
form of Flex debt securities with detachable OCLI warrants. The lawsuit did not
have, nor is it expected to have, an impact on Flex Products' operations or on
the sale of product to SICPA given the proprietary nature of the product and a
15 year exclusive supply contract between Flex Products and SICPA which requires
SICPA to make annual minimum purchases from Flex Products or to pay liquidated
damages in the event that such minimum purchases are not satisfied.
11
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND CHANGES IN 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," "FUTURE," "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
Revenue. Revenue for the third quarter of fiscal 1997 was $60.0 million, an
increase of $11.2 million, or 23%, over revenue of $48.8 million in the third
quarter of fiscal 1996. Revenues for the first nine months of fiscal 1997 was
$159.2 million, an increase of $18.1 million, or 13%, over revenue of $141.1
million for the first nine months of 1996. The third quarter and year to date
1997 increase is partly due to sales of Wavelength Division Multiplexing
products (WDM) for telecommunications applications. In addition, 1997 revenues
were higher in the security products business for products produced by the
Company's 60% owned subsidiary, Flex Products Inc. (Flex Products), in the
defense and aerospace business for telecommunications satellites, and in the
display products business for products used in projection display applications.
Revenues for the office automation business decreased in the third quarter of
1997 compared to the prior year.
Gross Profit. Gross profit for the third quarter of fiscal 1997 was $19.8
million, or 33.0% of revenue, compared to $15.4 million, or 31.6% of revenue,
for the third quarter of fiscal 1996. Gross profit for the first nine months of
1997 was $54.0 million, or 33.9%, compared to $47.6 million, or 33.8%, for the
first nine months of 1996. The gross profit improvement in the 1997 third
quarter and year to date periods is due to yield and throughput improvements of
the Company's two new continuous coating platforms. These improvements were
partially offset by higher than Company average material cost percentages in the
manufacture of WDM products and lower margins in the Company's office automation
markets.
Research and Development. Research and development expenditures in the third
quarter of 1997 were $3.9 million compared to $2.9 million in the second quarter
of 1996 and were $10.5 million for the first nine months of 1997 compared to
$7.9 million for the first nine months of 1996. The quarter and year to date
increases were due to increased spending in the Company's Flex Products
operation for the qualification of new products and for product and process
development for telecommunications and display markets.
Selling and Administrative. Selling and administrative expenses in the third
quarter of fiscal 1997 were $10.8 million compared to $8.1 million for the third
quarter of 1996 and were $31.8 million for the first nine months of 1997
compared to $27.3 million for the first nine months of 1996. The 1997 increase
was primarily due to legal expenses associated with the lawsuit with SICPA
holdings S.A, additional expenses associated with the establishment of a new
joint venture in Japan (OCLI Asia) and marketing initiatives at Flex Products.
Income From Operations. As a result of the foregoing changes in revenue, gross
profit and operating expenses, the Company's income from operations was $4.8
million for the third quarter of fiscal 1997 compared to $4.1 million for the
third quarter of fiscal 1996 and $11.0 million for the first nine months of
fiscal 1997 compared to $11.5 million for the first nine months of fiscal 1996.
Interest Income and Expense. Interest income for the third quarter of fiscal
1997 was $78,000 compared to interest income of $52,000 for the third quarter of
fiscal 1996 and was $335,000 for the first nine months of 1997 compared to
$191,000 for the first nine months of 1996. 1997 increases were due to higher
average cash balances. Interest expense, net of capitalized interest, for the
third quarter of 1997 was $1.0 million compared to $829,000 for the third
quarter of fiscal 1996 and was $3.1 million for the first nine months of 1997
compared to $2.6 million for the first nine months of 1996. Interest expense was
lower in 1996 primarily due to higher capitalized interest.
12
<PAGE>
Income Taxes and Minority Interest. The effective income tax rate was 40% for
the third quarter and first nine months of 1997, 34% for the third quarter of
1996 and 39% for the first nine months of 1996. The lower tax rates for the
prior year periods were due to the recognition of new tax credit provisions and
the utilization of net operating loss carryforwards by foreign operations for
which tax benefits had not been provided in prior years. Minority interest,
primarily representing the 40% share of Flex Products' net income accruing to
the minority stockholder and the minority interest in OCLI Asia, was $350,000 in
the third quarter of 1997 compared to $165,000 in the third quarter of 1996 and
was $529,000 in the first nine months of 1997 compared to $750,000 in the first
nine months of 1996.
Net Income. The Company had net income applicable to common stock of $1.9
million, or $.17 per share, for the third quarter of fiscal 1997 compared to
$1.8 million, or $.17 per share, for the third quarter of fiscal 1996. The
Company had net income applicable to common stock of $3.8 million, or $.37 per
share, for the first nine months of 1997 compared to $4.1 million, or $.40 per
share for the first nine months of 1996.
JOINT VENTURES AND STRATEGIC ALLIANCES
During 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.
Also in 1997, the Company announced the establishment of a 50/50 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 to provide more integrated
support within Asia. Hakuto has been 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 as
the Company has operating control over the joint venture.
FINANCIAL CONDITION
During the third quarter and first nine months of 1997, the Company's cash and
short-term investments decreased by $1.6 million and $7.2 million. Net cash
provided by operations for the third quarter and nine month periods was $1.0
million and $5.3 million, offset by investments in plant and equipment of $5.2
million and $11.9 million and payment of dividends of $754,000 and $1.8 million.
Long-term debt and notes payable borrowings exceeded repayments by $803,000 in
the third quarter and were $2.8 million below repayments in the first nine
months of 1997. $1.1 million and $2.6 million were contributed in the quarter
and year to date periods by minority stockholders, constituting additional
investments in Flex Products and the minority interest investment in OCLI Asia,
and the Company received $1.3 million and $1.5 million from the exercise of
employee stock options.
During the first nine months of 1997, the Company's working capital, excluding
cash and short-term investments, increased $12.7 million, primarily due to
increased accounts receivable (resulting primarily from customer late payments
that were resolved after the balance sheet date and the impact of consolidation
of OCLI Asia) and increased inventory (to satisfy anticipated customer demand
for the remainder of the year), offset by increased accounts payable (primarily
resulting from the impact of consolidation of OCLI Asia).
During the first nine months of 1997, as part of an innovative program to
modernize its business processes, the Company purchased a state-of-the-art
Enterprise Resource Planning System. Total cost of the system, including
hardware, software, training and consulting, is approximately $4.3 million of
which $2.0 million for hardware, software and consulting was financed under a
five year lease with monthly payments of approximately $50,000 commencing in the
fourth quarter of 1997.
During the third quarter of 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 the third quarter of 1997, the Company's $15 million unsecured
revolving credit facility was increased to $20 million.
13
<PAGE>
Management believes that the cash on hand at July 31, 1997, cash anticipated to
be generated from future operations and the available funds from revolving
credit arrangements will be sufficient to meet the Company's working capital,
capital expenditure, debt service and dividend payment requirements for the
foreseeable future.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1996
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.
14
<PAGE>
INDEPENDENT ACCOUNTANTS' REVIEW
The July 31, 1997 condensed consolidated financial statements included in this
filing on Form 10-Q have been reviewed by Deloitte & Touche LLP independent
accountants, in accordance with established professional standards and
procedures for such a review.
The report of Deloitte & Touche LLP commenting on their review (which makes
reference to the report of other accountants), follows.
15
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors
and Stockholders of
Optical Coating Laboratory, Inc.
Santa Rosa, California
We have reviewed the accompanying condensed consolidated balance sheet of
Optical Coating Laboratory, Inc. and subsidiaries as of July 31, 1997, and the
related condensed consolidated statements of income and cash flows for the
three-month and nine-month periods ended July 31, 1997 and July 31, 1996 and the
related condensed consolidated statement of stockholders' equity for the
nine-month period ended July 31, 1997. These financial statements are the
responsibility of the Company's management. We were furnished with the report of
other accountants on their review of the interim financial information of Flex
Products, Inc. (a consolidated subsidiary), whose total assets constituted 12%
of consolidated total assets at July 31, 1997 and whose total revenues
constituted 18% of consolidated total revenues for the nine-month period ended
July 31, 1997.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists of applying analytical review procedures to financial data
and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit in accordance with
generally accepted auditing standards, the objective of which is the expression
of an opinion regarding the financial statements taken as a whole. Accordingly,
we do not express such an opinion.
Based on our review and the report of other accountants, we are not aware of any
material modifications that should be made to such condensed consolidated
financial statements for them to be in conformity with generally accepted
accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Optical Coating Laboratory, Inc.
and subsidiaries as of October 31, 1996, and the related consolidated statements
of income, stockholders' equity, and cash flows for the year then ended (not
presented herein); and in our report dated December 18, 1996, we expressed an
unqualified opinion on those consolidated financial statements based on our
audit and the report of other auditors on their audit of Flex Products, Inc. (a
consolidated subsidiary). In our opinion, based on our audit, and the report of
other auditors, the information set forth in the accompanying condensed
consolidated balance sheet as of October 31, 1996 is fairly stated, in all
material respects, in relation to the consolidated balance sheet from which it
has been derived.
Deloitte & Touche LLP
San Jose, California
August 20, 1997
16
<PAGE>
INDEPENDENT ACCOUNTANTS' REVIEW
The August 2, 1997 financial statements of Flex Products, Inc., the Company's
60% owned subsidiary which are included in the Company's July 31, 1997 condensed
consolidated financial statements included in this filing on Form 10-Q have been
reviewed by KPMG Peat Marwick LLP, independent accountants for Flex Products,
Inc., in accordance with established professional standards and procedures for
such a review.
The Flex Products, Inc. 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.
17
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors
and Stockholders of
Flex Products, Inc.
Santa Rosa, California
We have reviewed the balance sheet of Flex Products, Inc. as of August 2, 1997
and the related statements of operations for the three-month and nine-month
periods ended August 2, 1997 and July 28, 1996 and statements of cash flows for
the nine-month periods ended August 2, 1997 and July 28, 1996. Those financial
statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an 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 the Company as of May 8, 1995.
Based on our review, we are not aware of any material modifications that should
be made to the financial statements referred to above for them to be in
conformity with generally accepted accounting principals.
The balance sheet of November 3, 1996 was audited by us and we expressed an
unqualified opinion on it in our report dated December 18, 1996, but we have not
performed any auditing procedures since that date.
KPMG Peat Marwick LLP
August 15, 1997
18
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Incorporated by reference to Note 7. of the Notes to Condensed
Consolidated Financial Statements.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following are filed as Exhibits to this Quarterly
Report. The numbers refer to the Exhibit Table of Item 601
of Regulation S-K.
(2) None
(3) None
(4) None
(10) None
(11)* Computation of earnings per share for the three
and nine month periods ended July 31, 1997 and
1996.
(15)* Letter of Deloitte & Touche LLP regarding
unaudited interim financial information.
(18) None
(19) None
(22) None
(23) None
(24) None
(27)* Financial Data Schedule for the three months
ended July 31, 1997.
* Items not previously filed are designated by an asterisk.
(b) Reports on Form 8-K filed for the three months ended July 31,
1997.
None
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized and in the capacity indicated.
OPTICAL COATING LABORATORY, INC.
(Registrant)
September 15, 1997 /s/ JOSEPH C. ZILS
- ------------------ ----------------------------------
Date Joseph C. Zils
Vice President, General Counsel
and Acting Chief Financial Officer
(Principal Financial Officer)
20
<TABLE>
OPTICAL COATING LABORATORY, INC. AND SUBSIDIARIES
EXHIBIT 11. COMPUTATION OF EARNINGS PER SHARE
<CAPTION>
For the three and nine months ended July 31, 1997 and 1996 Three Months Nine Months
------------ -----------
(Amounts in thousands, except per share amounts) 1997 1996 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Primary:
Average common shares outstanding............................. 10,372 9,691 10,076 9,588
Common equivalent shares outstanding.......................... 593 859 441 691
--------- -------- --------- ---------
10,965 10,550 10,517 10,279
========= ======== ========= =========
Net income.................................................... $ 1,994 $ 2,033 $ 4,414 $ 4,844
Less dividend on preferred stock.............................. (141) (240) (568) (720)
--------- ------- ---------- ---------
Net income applicable to common stock......................... $ 1,853 $ 1,793 $ 3,846 $ 4,124
========= ======== ========= =========
Net income per common and common
equivalent share, primary.................................. $ .17 $ .17 $ .37 $ .40
========= ======== ========= =========
Fully Diluted:
Average common shares outstanding............................. 10,372 9,691 10,076 9,588
Common equivalent shares outstanding.......................... 763 859 498 709
Potential dilution of preferred stock......................... 595 1,143 595 1,143
--------- -------- --------- ---------
11,730 11,693 11,169 11,440
========= ======== ========= =========
Net income applicable to common stock......................... $ 1,853 $ 1,793 $ 3,846 $ 4,124
Add back dividend on preferred stock.......................... 141 240 568 720
--------- -------- --------- ---------
Net income for calculating fully diluted
earnings per share......................................... $ 1,994 $ 2,033 $ 4,414 $ 4,844
========= ======== ========= =========
Net income per common and common
equivalent share, fully diluted............................ $ .17 $ .17 $ .40 $ .42
========= ======== ========= =========
<FN>
Note: Fully diluted earnings per share do not result in dilution of three
percent or more or are anti-dilutive and, therefore, are not separately
presented in the consolidated statements of income.
</FN>
</TABLE>
EXHIBIT 15. LETTER RE UNAUDITED INTERIM FINANCIAL INFORMATION
To the Board of Directors and Stockholders
of Optical Coating Laboratory, Inc.
Santa Rosa, California
We have reviewed, in accordance with standards established by the American
Institute of Certified Public Accountants, the unaudited interim financial
information of Optical Coating Laboratory, Inc. and subsidiaries for the periods
ended July 31, 1997 and 1996 as indicated in our report (which report makes
reference to the report of other accountants), dated August 20, 1997. Because we
did not perform an audit, we expressed no opinion on that information.
We are aware that our report referred to above, which is included in your
Quarterly Report on Form 10-Q for the quarter ended July 31, 1997, is
incorporated by reference in Registration Statements No. 33-41050, No. 33-26271,
No. 33-12276, No. 33-48808, No. 33-65132, No. 33-60891 and No. 333-13013 on
Forms S-8, Registration Statement No. 33-61177 and No. 33-65319 on Form S-3.
We are also aware that the aforementioned report, pursuant to Rule 436(c) under
the Securities Act, is not considered a part of the Registration Statement
prepared or certified by an accountant or a report prepared or certified by an
accountant within the meaning of Sections 7 and 11 of that Act.
Deloitte & Touche LLP
San Jose, California
September 15, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> MAY-1-1997
<PERIOD-END> JUL-31-1997
<CASH> 8,821
<SECURITIES> 0
<RECEIVABLES> 38,112
<ALLOWANCES> 2,014
<INVENTORY> 22,752
<CURRENT-ASSETS> 79,511
<PP&E> 177,565
<DEPRECIATION> 88,518
<TOTAL-ASSETS> 178,136
<CURRENT-LIABILITIES> 35,907
<BONDS> 0
<COMMON> 76,824
0
5,559
<OTHER-SE> 21,882
<TOTAL-LIABILITY-AND-EQUITY> 178,136
<SALES> 59,997
<TOTAL-REVENUES> 59,997
<CGS> 40,207
<TOTAL-COSTS> 40,207
<OTHER-EXPENSES> 14,949
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,007
<INCOME-PRETAX> 3,912
<INCOME-TAX> 1,568
<INCOME-CONTINUING> 1,994
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,994
<EPS-PRIMARY> .17
<EPS-DILUTED> .17
</TABLE>
