UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Mark one
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended OCTOBER 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
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
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE
(Title of each class)
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. [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
At December 31, 1996, the aggregate market value of the registrant's common
stock (based upon the closing price of these shares on the NASDAQ National
Market System) held by non-affiliates, which excludes shares held by
officers and directors and the Employee Stock Ownership Plan of the
registrant (not all of whom claim to be affiliates), was approximately
$86.7 million.
At December 31, 1996, there were 9,787,330 shares of the registrant's
common stock, $.01 par value, issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the Company's Annual Meeting
of Stockholders to be held March 18, 1997 are incorporated by reference
into Part III of this Form 10-K.
The Exhibit index appears on Pages 42-45.
OPTICAL COATING LABORATORY, INC. AND SUBSIDIARIES
INDEX TO ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1996
PART I
Item 1. Business 3
Item 2. Properties 10
Item 3. Legal Proceedings 11
Item 4. Submission of Matters to a Vote of Security Holders 11
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters 14
Item 6. Selected Financial Data 14
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 15
Item 8. Consolidated Financial Statements and
Supplemental Financial Information 21
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 42
PART III
Item 10. Directors and Executive Officers of the Registrant 42
Item 11. Executive Compensation 42
Item 12. Security Ownership of Certain Beneficial
Owners and Management 42
Item 13. Certain Relationships and Related Transactions 42
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 42
THE INFORMATION CONTAINED IN THIS REPORT 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 AND IN PART II, ITEM 7 OF
THIS REPORT. 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.
PART I
ITEM 1. BUSINESS
GENERAL
Optical Coating Laboratory, Inc. and its consolidated subsidiaries (the
"Company" or "OCLI") is the world's largest independent manufacturer of
optical thin film coated components. 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, such as
personal computers, photocopiers, LCD desktop projectors, point-of-sale
scanners, medical instruments and satellites. OCLI sells its Glare/Guard
brand ergonomic computer display products through resellers and office
retailers.
OCLI manufactures its products at Company-owned facilities in Santa Rosa,
California, Goslar, Germany and Hillend, Scotland. 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.
Through its wholly-owned subsidiary 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. OCLI supplies fabricated glass
elements for use as components 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, OCLI markets a broad array of
coated products with applications in commercial, scientific and military
markets. OCLI's Hillend facility also performs research and development
under scientific and U.K. Ministry of Defense sponsorships.
Through its Netra operation, the Company 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 and have significant cost advantages over similar
products made with glass. Plastic optics also improve impact resistance
and offer a substantial weight advantage over glass components.
Flex Products, Inc. ("Flex Products" or "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, which was 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.
MARKETS AND PRODUCTS
DISPLAY-OEM AND AFTERMARKET. The Company is a leading supplier of anti-
reflection coatings to original equipment manufacturers (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.
PROJECTION DISPLAY. The Company 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.
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, OCLI manufactures and markets
optically variable pigment used in currency printing as an anti-
counterfeiting measure. Flex Products' largest customer for OVP, and OCLI's
partner in Flex Products' ownership, is SICPA Holding S.A., one of the
leading manufacturers of printing inks in the world. Currently, over 40
countries have adopted the use of ink made with optically variable pigment
in the printing of currencies and other valued documents, including
Albania, Argentina, Belgium, Bermuda, Czech Republic, France, Germany,
Italy, Kazakhstan, Kenya, Lebanon, Luxembourg, Morocco, Nigeria,
Philippines, Poland, Singapore, Slovak Republic, Slovenia, Switzerland,
Thailand, Tunisia, Turkey, United Arab Emirates, United States and Zaire.
INSTRUMENTATION. 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.
SPECIALTY MARKETS. The Company manufactures 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.
DEFENSE AND AEROSPACE. The Company designs and manufactures many
sophisticated, high precision coated products and optical components to
meet the specific performance requirements of advanced scientific, space
and defense systems. Examples include coated infrared optics for use in
all-weather missile guidance systems, reconnaissance systems and
satellites; coatings to protect photovoltaic solar cells on satellites from
overheating and from harmful ultraviolet energy and micro meteorite damage;
coated thermal control mirrors to regulate spacecraft temperature in areas
of sensitive instrumentation; and coated laser optics for use in defense
applications, the development of alternative energy sources and commercial
high energy laser instrumentation.
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. It employs batch coating by evaporation as
its historic coating process and batch coating by reactive metal mode
sputtering as a proprietary, patented process. In its continuous in-line
coating systems, the Company similarly employs evaporation and sputtering
processes. 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.
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.
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 consulting expertise as well as
its products.
The Company has focused considerable effort over the past several years to
the development of solid-state electrochromic devices using thin film
coating technologies. Electrochromic devices dim or brighten in response
to low level variations in electrical current over their surface, allowing
for regulated changes in reflection or transmission of light. The Company's
research and development efforts in electrochromic coatings envision a
number of product applications, including plano and prescription
electrochromic sunglasses, photographic applications, privacy screens,
energy conserving architectural glass forms and brightness or reflection
controls for display devices.
The Company's ongoing research and development commitments 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.
Company funded research and development expenditures totaled $11.7 million,
$8.4 million and $5.2 million, or 6.2%, 5.0% and 4.0% of revenues, during
fiscal years 1996, 1995 and 1994. 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 47 patents and 51 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 1997 to 2012. Flex Products currently has 35
patents and 13 new patent applications pending that are separate from the
Company's patents. Expiration dates for Flex Products' patents range from
1997 to 2013. Flex Products also has patents and patent applications
pending in various foreign countries covering the same technology.
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 1996, $6.6 million remained to be paid. Also, under the
License Agreement, the Company and Flex Products each hold royalty-free
licenses to use certain of the others' underlying technologies that are
applicable to their respective markets. In addition, the Company and Flex
Products hold royalty-free shared use licenses for technologies applicable
to both markets.
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'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, Italy,
Spain and the United Kingdom. In Japan and other Asian countries, the
Company uses independent distributors and sales representatives, supported
by Company sales staff members, for product marketing and sales.
With the exception of its Glare/Guard(R) 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(R) 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 personal in a sales team approach.
The Company's ten largest customers accounted for 36% of its sales in 1996.
The Company's largest customer in 1996, who is also the Company's 40%
partner in the ownership of Flex Products, accounted for approximately 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
largest customer in 1996 and largest customer in 1995 accounted for 5%, 8%
and 7% of its sales in fiscal years 1996, 1995, and 1994. 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 1996 and six months of 1995, represented 48%, 47%
and 45% of revenues for fiscal years 1996, 1995 and 1994. Sales by the
Company's wholly-owned subsidiary in Scotland represented 5%, 10% and 16%
of revenues for fiscal years 1996, 1995 and 1994. Sales by the Company's
wholly-owned subsidiary in Germany represented 13%, 13% and 15% of revenues
for fiscal years 1996, 1995 and 1994. Sales by these subsidiaries are
primarily to customers in European countries.
Export sales by U.S. operations to Asian countries represented 13%, 13% and
11% and to European countries 14%, 9% and 3% of revenues for fiscal years
1996, 1995 and 1994. Export sales can be affected by adverse currency
alignments. Since the Company also manufactures in two European countries
to serve local markets, the Company believes its exposure to fluctuations
in foreign currencies is reduced. In addition, a major portion of export
sales are to long-standing customers of the Company who have participated
in the development of product specifications and standards for their use
and who are, therefore, not relying on competitive pricing alone in their
decision to buy from the Company. Accordingly, the Company believes its
export sales portfolio to be well-balanced and with limited risk of
substantial overall loss.
Sales of products to the federal government, primarily under subcontracts,
accounted for 9%, 10% and 11% of revenues for the fiscal years 1996, 1995
and 1994. 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 $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 allocation arrangements from one major U.S.
glass supplier and cannot routinely increase its supply of such special
grade flat glass. 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 Netra 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 1996 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, 1996, 1995 and 1994 was as follows:
1996 1995 1994
(In Millions)
$51.6 $47.9 $35.0
At October 31, 1996, backlog includes $4.9 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, 1996 are scheduled for shipment during 1997. The
amount of backlog at October 31, 1996 represents only a portion of
anticipated sales in 1997, 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, 1996, the Company, including Flex Products, had 1,362
employees of whom 1,083 were employed domestically, 97 were employed by the
Company's operations in Hillend, Scotland; 156 were employed by the
Company's OCLI/MMG Division in Goslar, Germany; and 26 were employed in the
Company's sales and administrative offices in Europe. 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, in the event of
certain changes in control of the Company. These severance arrangements
have been extended through November 1997.
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.
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) 426,000 75 Optical Coating
Laboratory, Inc. and Flex
Products, Inc. corporate
offices, manufacturing,
engineering, research
and development
Santa Rosa, CA 1 Leased 23,000 -- Netra operations
administrative offices
and manufacturing
Santa Rosa, CA 1 Leased 30,000 -- Glare/Guard warehousing
Hillend, Scotland 1 Owned(2) 56,000 16 OCLI Optical Coating
Laboratory, Ltd.
administrative offices,
manufacturing and
research and development
Hillend, Scotland 1 Leased 9,000 -- OCLI Optical Coating
Laboratory, Ltd.
warehousing
Goslar, Germany 2 Owned(3) 74,000 22 OCLI/MMG Division
administrative offices
and manufacturing
Reinheim, Germany 2 Leased(4) 7,400 -- OCLI Optical Coating
Laboratory GmbH
administrative and sales
offices; European
Glare/Guard distribution
center
(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 $4.0 million as of October 31, 1996, with 10 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 under a long-term
hereditary rights agreement. The manufacturing facility is pledged as
security on loans totaling approximately $2.5 million with repayment terms
running through 2013. The office building is collateralized on an
approximately $617,000 mortgage loan with repayment over ten years by 2005.
(4) The Company leases approximately 3,100 square feet of office space for
its European headquarters and sales activities and approximately 4,300
square feet of warehousing space for its European Glare/Guard distribution
operation in Reinheim, Germany. In December 1996, subsequent to fiscal year
end, the Company began moving its European distribution center activities
to an outside warehousing company in the Netherlands. It is expected that
the transfer will be completed by the end of the second quarter of 1997.
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 principal
facilities in Santa Rosa. The Company conducted extensive investigations to
determine the lateral and vertical extent and the environmental impact of
the contamination. During 1990, the Company substantially completed its
investigation and study and formulated a plan of remediation. The total
cost of the investigation was approximately $5 million which has been
charged to operations in prior periods.
Based upon extensive tests conducted to date, it has not been demonstrated
that contaminant levels pose a current public health hazard. The Company
has established a program for reducing contaminant concentration levels to
acceptable federal and state levels with the assistance of its
environmental consultants and under the regulatory guidance of the
California Regional Water Quality Control Board. In 1996, the California
Regional Water Quality Control Board approved the Company's final
remediation plan, thus establishing the extent of the Company's
responsibility for ground water remediation. 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 is continuing to evaluate the effectiveness of its
monitoring, extraction and remediation systems.
Based upon the extensive tests conducted and advice of environmental
consultants, the Company believes the accruals it has previously
established to complete the remediation plan are sufficient and that the
annual cost of maintaining compliance with environmental standards related
to the above matter will not have a material adverse effect on the
Company's business, financial position or prospects.
ITEM 3. LEGAL PROCEEDINGS
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.
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 the Registrant, Flex Products and certain of Flex
Products' directors. In the suit, SICPA alleges that Flex Products cannot
proceed with an initial public offering of its common stock without the
consent of SICPA and that SICPA has the right to purchase the Registrant'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 the Flex Products' Board of Directors has the legal authority
to authorize a public offering of Flex Products' securities without the
approval of SICPA. The Court's decision did not address the specific
requirements of any future public offering by Flex Products which may still
need to be addressed by the Court.
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, 1996.
EXECUTIVE OFFICERS OF THE COMPANY
The names, ages and positions of the executive officers of the Company as
of January 15, 1997 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. 66 Chairman of the Board, Chairman of the Board,
President and Chief President and Chief
Executive Officer Executive Officer since
August 1991; Chairman,
President and Chief
Executive Officer,
Superconductor
Technologies, Inc.
from 1988 to 1991;
Chief Executive
Officer, Spectra Physics
from 1967 to 1988
Charles J. Abbe 55 Vice President and Vice President and
General Manager, General Manager,
Santa Rosa Division Santa Rosa Division
since April 1996;
various senior
management positions
with Raychem Corporation
from 1989 to 1996
William C. Burgess 50 Vice President, Vice President, Human
Human Resources Resources since June
1994; Vice President,
Human Resources and
Administration,
Teknekron Communica-
tion Systems, Inc.
from 1991 to 1994
Klaus F. Derge 59 Vice President, Vice President,
International International
Operations Operations since July
1992; various senior
management positions
with Spectra-Physics,
Sweden from 1969
to 1992.
John McCullough 63 Vice President Vice President since
and Director 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
Laurence D. Parson 48 Vice President, Vice President, Sales
Sales since October 1996;
Vice President and
General Manager,
Glare/Guard Division
from 1993 to 1996;
General Manager,
Glare/Guard Division
from 1992 to 1993;
various manufacturing,
marketing and sales
positions from 1973
to 1992
Kenneth D. Pietrelli 48 Vice President, Vice President,
Corporate Services Corporate Services
since June 1993;
Corporate Materials
Manager from 1980 to
1993
James W. Seeser, Ph.D. 53 Vice President and Vice President since
Chief Technical March 1986 and Chief
Officer Technical Officer since
November 1993; General
Manager, Advanced
Products Division from
1987 to 1989; various
engineering and
engineering management
positions from 1983 to
1986
Joseph C. Zils 42 Vice President, Acting Chief Financial
General Counsel, Officer since January
Corporate Secretary 1997; Vice President
and Acting Chief since June 1993;
Financial Officer Corporate Secretary
since December 1993;
General Counsel
since February 1989
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 1996 Annual Meeting of Stockholders, which
information is incorporated herein by reference.
PART II
ITEM 5.MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the NASDAQ National Market System
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, 1996 and 1995.
1Q 2Q 3Q 4Q FY
1996
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
1995
High 7-7/8 10-1/8 11-3/8 13-7/8 13-7/8
Low 5-3/4 7-1/2 8-3/8 10-1/4 5-3/4
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 806 holders of record of the Company's common stock as of
December 31, 1996.
ITEM 6. SELECTED FINANCIAL DATA
Years ended October 31, 1996, 1995, 1994, 1993 and 1992
(Amounts in thousands,
except per share amounts)
1996 1995 1994 1993 1992
Revenues $189,195 $169,417 $131,780 $123,013 $115,016
Net income (loss) before
cumulative effect of
changes in accounting
principles and dividend
on preferred stock $5,196 $7,391 $4,604 $(5,737) $6,027
Net income (loss)
applicable to
common stock $4,236 $6,929 $4,604 $(5,737) $6,537
Net income (loss)
per common and
common equivalent
share $.41 $.73 $.51 $(.65) $.69
Average common and
common equivalent
shares outstanding 10,301 9,510 9,023 8,795 8,636
Cash dividend paid on
common stock $1,153 $1,083 $1,075 $1,043 $967
Working capital $38,087 $28,015 $28,692 $16,251 $27,399
Total assets $172,771 $169,834 $118,879 $99,226 $91,313
Long-term debt $45,788 $47,267 $35,441 $23,110 $14,900
Convertible redeemable
preferred stock $11,309 $11,357
Stockholders' equity $68,250 $62,537 $52,037 $47,135 $52,254
Stockholders' equity
per share $6.99 $6.59 $5.79 $5.25 $6.16
Number of employees 1,362 1,407 1,162 1,107 1,000
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," "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
FISCAL 1996 COMPARED TO FISCAL 1995
REVENUES. Revenues for the Company were $189.2 million for its fiscal year
ended October 31, 1996 compared to revenues of $169.4 million for fiscal
year 1995. Excluding the revenues of Flex Products, Inc. (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 in the Company's display products
business for products used in projection display applications, higher sales
in the Company's defense and aerospace business for products used in
telecommunications applications and licensing revenue from the sale of a
coating machine. These increases were partially offset by decreased sales
in the Company's office automation and OEM display and computer aftermarket
display businesses. 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 a gross profit
percentage of 36.6% in 1995. The gross profit percentage decrease in 1996
was primarily due to lower shipments of higher margin products used in
computer display applications and start-up costs and additional fixed costs
associated with adding new manufacturing facilities and coating capacity.
These expenses were partially offset by the gross profit associated with
the sale of a coating machine. 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 profit percentage decrease was
due to start-up costs of bringing a new coating machine and manufacturing
process on line. Flex Products' gross profit margins are higher than the
rest of the Company due to the high proprietary content of its products.
RESEARCH AND DEVELOPMENT. Research and development expenditures for 1996
increased $3.3 million over research and development expenditures 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 attributable 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 decreased
$317,000 in 1996 over 1995. 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. The Company had income from operations of $12.4
million in 1996 compared to $16.6 million in 1995, resulting from the
changes in pricing and unit volume discussed above. 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 short-term
investments, primarily resulting from a time lag between the cash outlay
for investments versus the completion of financing arrangements. Interest
expense decreased $23,000 in 1996. Excluding the effect of Flex Products,
interest expense would have increased $231,000 in 1996 over 1995. The 1996
adjusted increase results from mortgage financing on two new buildings
completed in 1996. Flex Products' positive impact on interest expense is
due to capitalized interest recorded on significant capital projects 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 $636,000 as minority
interest representing 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
$7.4 million in 1995. Excluding the results of Flex Products, 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, consolidated net income
attributable to common stock was $4.2 million for 1996 compared to $6.9
million for 1995.
FACTORS AFFECTING FUTURE PERIODS. 1996 fourth quarter and full year
results were adversely affected by delays in product shipments and
additional expenses resulting from new manufacturing equipment coming on
line more slowly than scheduled. In addition, 1996 fourth quarter results
were significantly impacted by the results of the Company's German
subsidiary which has experienced weak demand for its office automation
products. The Company continues to make slow but steady progress in
addressing the manufacturing yields and throughput levels of the new
machines, and steps have been taken to lower the costs of the German
operation. In order to enhance profitability, the Company is aggressively
implementing initiatives to improve safety and manufacturing yields and
decrease cycle times on existing processes and new product development.
FISCAL 1995 COMPARED TO FISCAL 1994
REVENUES. Revenues for the Company were $169.4 million for its fiscal year
ended October 31, 1995 compared to revenues of $131.8 million in fiscal
1994. Excluding the results of Flex Products, 1995 revenue would have been
$153.8 million, an increase of $22.0 million, or 17%, over 1994.
Revenues in 1995 for fabricated glass components and precision molded
plastic optics used in office automation applications, filters used in
medical and analytical instrumentation and front surface mirrors used in
office automation and projection television applications were strong in
1995. Fiscal 1995 revenues also included higher invoicing on the Company's
contract for the coating of the X-ray space telescope project for NASA.
Revenues for the Company's Glare/Guard computer display aftermarket
business declined due to increased competition in the private label segment
and reduced product demand in several European countries.
GROSS PROFIT. Gross profit as a percent of revenue was 37.4% in 1995
compared to a gross profit percentage of 36.3% in 1994. Excluding the
results of Flex Products, 1995 gross profit as a percent of revenue would
have been 36.6% which is approximately even with the gross profit
percentage in 1994. During 1995, the Company experienced price decreases
for its office automation products in the United States and for its
GlareGuard products in the United States and Europe. 1995 gross profit
margins were maintained through higher sales volume, production efficiency
gains and manufacturing yield improvements; and for the GlareGuard product
line, through product redesign for cost reduction.
RESEARCH AND DEVELOPMENT. Research and development expenditures for 1995
increased $3.2 million compared to 1994. Excluding the results of Flex
Products, the 1995 increase would have been $2.1 million or 40%. The
increase in 1995 was due to increased research and development expenditures
relating to the development of additional continuous platform coating
capacity, development of coatings on plastic for flat panel display
applications and further development of the Company's electrochromic
technology and related products.
SELLING AND ADMINISTRATIVE. Selling and administrative expenses increased
$6.1 million in 1995 over 1994. Excluding the results of Flex Products,
the 1995 increase over 1994 would have been $3.9 million or 12%. The
increase in 1995 over 1994 was due to initial selling expenses associated
with increasing regional sales activities in the United States and Europe
and higher administrative and legal expenses.
The Company recorded amortization of intangibles of $975,000 in 1995 and
$648,000 in 1994 representing the amortization of goodwill relating to the
acquisitions of MMG and Netra.
INCOME FROM OPERATIONS. As a result of the foregoing changes in revenues
and costs and expenses, the Company had income from operations of $16.6
million in 1995 compared to $10.6 million in 1994. Excluding the results
of Flex Products, 1995 income from operations would have been $12.9 million
compared to $10.6 million in 1994, an increase of $2.3 million or 22%.
INTEREST INCOME AND EXPENSE. Interest income increased $329,000, or 97%,
in 1995 over 1994. The increase in 1995 was due to higher cash and
temporary investment balances which resulted from the Company's financing
activities during the year. Interest expense increased $332,000, or 10%,
in 1995 over 1994. The increase in interest expense for 1995 resulted from
higher debt incurred to finance the investments in additional coating
capacity and in Flex Products. Fiscal 1995 interest expense was, in part,
offset by higher capitalized interest relating to self-constructed assets.
PROVISION FOR INCOME TAXES. In 1995 and 1994, the Company's effective
income tax rate was 40.1% which approximates the statutory combined
federal, state and applicable foreign tax rates for the Company.
MINORITY INTEREST. In 1995, the Company recorded $816,000 as minority
interest representing the share of net income of Flex Products accruing its
40% stockholder for the six month period that the Company consolidated the
results of Flex Products.
NET INCOME. The Company had net income of $7.4 million in 1995 compared to
$4.6 million in 1994. Excluding the results of Flex Products, 1995 net
income would have been $5.9 million, an increase of $1.3 million or 29%
over 1994. In 1995, dividends of $462,000 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 $6.9 million for 1995.
INFLATION EFFECT. Inflation did not have a significant effect on the
operations of the Company during 1996, 1995 or 1994.
FOREIGN CURRENCY. The Company has significant investments in Germany and
Scotland. 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 and Scotland and sales
presence in several other European countries. A significant weakening of
the currencies of those countries in relation to the U.S. dollar could
reduce the reported results of those operations. 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 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's
foreign subsidiaries make sales and purchase commitments in currencies
other than their own which exposes them to currency risk on open receivable
and payable balances. The Company does not consider any of these risks to
be material.
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 1996, the California Regional
Water Quality Control Board approved the Company's final remediation plan,
thus establishing the extent of the Company's responsibility for ground
water remediation. 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. Ongoing ground water
remediation expenses for the years 1994 through 1996 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.
COMMITMENTS. During the first quarter of 1997, the Company initiated an
innovative program to modernize its business processes in order to reduce
cycle time and improve profitability. The program is being 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 a state-of-the-art
Enterprise Resource Planning System, selected a product and made a
commitment to a vendor for hardware and software requirements. Expected
total cost of the system, including hardware, software, training and
consulting, is approximately $4.3 million, of which the Company has
committed $1.9 million for hardware and software which is expected to be
financed under a five year operating lease with monthly payments of
approximately $50,000 commencing in the fourth quarter of 1997.
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.
ACQUISITION AND INVESTMENT TRANSACTIONS
FLEX PRODUCTS, INC. In May 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 connection with this transaction, the Company entered into a Put and
Call, Right of First Refusal and Co-Sale Agreement with SICPA pursuant to
which SICPA was granted a call option to purchase the Company's 60%
interest in Flex Products and the Company was granted a put option to sell
the Company's 60% interest in Flex Products to SICPA. The call price is
$25 million plus (i) two times the amount by which Flex Products' annual
sales immediately preceding the call exceed $23.6 million (ii) times 60%
(the Company's ownership percentage of Flex Products). The put price is $20
million plus (i) 1.5 times the same increase in Flex Products' sales (ii)
times 60%. The put and call options can be exercised at any time after May
8, 1998 and before May 8, 2003, and cannot be exercised in the event Flex
Products goes public. This agreement also provides for a right of first
refusal in favor of each party to buy the other's shares and also provides
a co-sale right which requires that on any sale of a party's shares, the
other party is allowed to participate on a pro rata basis in the sale.
The agreement with SICPA also provides conditions under which the above
mentioned put and call and right of first refusal would be terminated upon
an underwritten public offering of the securities of Flex Products.
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
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, upholding 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. 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 the 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.
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.
FINANCIAL CONDITION AND LIQUIDITY
In 1996, the Company's cash and short-term investment position increased by
$9.4 million, resulting primarily from cash generated by operations of
$20.2 million, proceeds from sale/lease-back arrangements on new equipment
of $18.9 million, new debt issuance net of repayment of $1.6 million and
proceeds from exercise of stock options of $1.7 million, offset by
investments in plant and equipment of $30.5 million, payment of dividends
on preferred stock of $960,000 and payment of dividends on common stock of
$1.2 million. At fiscal year end 1996, the Company had cash and short-term
investments totaling $16.0 million. In addition, the Company has available
domestically a $15 million revolving line of credit and separate credit
arrangements in place for the operating requirements of its subsidiaries in
Germany and Scotland.
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. The lease terms are six years with monthly
payments totaling approximately $290,000 and buyout provisions at the end
of each lease.
For the fourth quarter of 1996, Flex Products was granted a waiver for one
of its financial covenants. The Company believes Flex Products will need
continued relief under this covenant for fiscal 1997 and is in negotiations
with the lessor to obtain an amendment to the covenant.
In 1996, the Company entered into a $2.6 million mortgage loan agreement on
a newly constructed 72,000 square foot manufacturing building. The loan
carries a fixed interest rate of 8% and is repayable over 15 years in
monthly installments of approximately $25,000.
Also in 1996, the Company entered into a $3.0 million mortgage loan
agreement for a newly constructed 65,000 square foot manufacturing and
office building leased by Flex Products. The loan carries a fixed interest
rate of 7.5% and is repayable over 15 years in monthly installments of
approximately $28,000.
In 1995, cash and short-term investments decreased $13.1 million primarily
due to investments in plant and equipment of $30.9 million, the purchase of
additional equity interest and note of Flex Products totaling $15.2
million, and the purchase of Netra of $1.5 million offset by cash generated
from operations of $13.1 million, proceeds from issuance of preferred stock
of $11.4 million and proceeds from long-term debt net of debt repayment of
$9.8 million. Cash and short-term investments at the end of fiscal 1995
were $6.6 million.
During 1995, the Company increased the amount of and extended the term of
its primary bank credit agreement to provide a $30 million unsecured credit
facility comprised of a $15 million term loan and a $15 million revolving
line of credit. In addition, in connection with the Flex Products
investment transaction and to increase the equity component of the
Company's capital structure, the Company issued $12 million of 8%
Convertible Redeemable Preferred Stock.
In 1996, the Company's working capital, excluding cash and short-term
investments, increased by $647,000. Increased inventory (due to product
mix changes) and decreased accounts payable and accrued expenses
(primarily due to decreased spending and construction activity at the end
of 1996) was almost completely offset by decreased accounts receivable (due
to more aggressive collection efforts) and changes in net current tax
assets and liabilities (due to the utilization of loss carryforwards and
refunds). In 1995, the Company's working capital, excluding cash and short-
term investments, had increased by $12.4 million due primarily to the
consolidation of Flex Products and the acquisition of Netra.
Management believes that the cash on hand at October 31, 1996, 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 near-term working capital needs,
capital expenditures, debt service requirements and payment of dividends as
declared.
OPTICAL COATING LABORATORY, INC. AND SUBSIDIARIES
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND
SUPPLEMENTAL FINANCIAL INFORMATION
INDEX
PAGE(S)
Report of Independent Auditors 22
Consolidated Balance Sheets as of October 31, 1996 and 1995 23
Consolidated Statements of Income for the years ended
October 31, 1996,1995 and 1994 24
Consolidated Statements of Cash Flows for the years
ended October 31, 1996,1995 and 1994 25-26
Consolidated Statements of Common Stockholders' Equity
for the years ended October 31, 1996, 1995 and 1994 27
Notes to Consolidated Financial Statements 28
Supplemental Financial Information
(Quarterly Financial Information
for 1996 and 1995 - Unaudited) 40-41
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,
1996 and 1995, and the related consolidated statements of operations,
common stockholders' equity and cash flows for each of the three years in
the period ended October 31, 1996. 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
11% and 9%, respectively, of consolidated total assets at October 31, 1996
and 1995, and whose total revenues for the year ended October 31, 1996 and
for the period from May 1, 1995 to October 31, 1995 represent 15% and 9%,
respectively, of consolidated total revenues for the years ended October
31, 1996 and 1995. The financial statements of Flex Products, Inc. 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, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period
ended October 31, 1996 in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
San Jose, California
December 18, 1996
OPTICAL COATING LABORATORY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of October 31, 1996 and 1995
(Amounts in thousands)
ASSETS 1996 1995
CURRENT Cash and short-term investments $16,027 $ 6,602
ASSETS Accounts receivable, net of allowance for
doubtful accounts of $1,775 and $1,229 27,700 29,565
Inventories 18,701 15,886
Income taxes receivable 1,248 38
Deferred income tax assets 5,165 6,665
Other current assets 1,230 2,438
Total Current Assets 70,071 61,194
OTHER Deferred income tax assets 4,451 4,597
ASSETS Other assets and investments 10,680 12,432
PROPERTY, Land and improvements 9,200 8,651
PLANT AND Buildings and improvements 40,953 31,461
EQUIPMENT Machinery and equipment 112,326 101,586
Construction-in-progress 6,190 23,717
168,669 165,415
Less accumulated depreciation (81,100) (73,804)
Property, plant and equipment-net 87,569 91,611
Total Assets $172,771 $169,834
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT Accounts payable $ 7,199 $ 10,324
LIABILI- Accrued expenses 6,566 9,515
TIES Accrued compensation expenses 7,057 6,559
Income taxes payable 1,823
Current maturities on long-term debt 4,981 3,344
Notes payable 3,112 3,339
Deferred revenue 1,246 98
Total Current Liabilities 31,984 33,179
NON- Accrued postretirement health benefits
CURRENT and pension liabilities 2,308 2,150
LIABILI- Deferred income tax liabilities 1,804 2,239
TIES Long-term debt 45,788 47,267
Commitments and contingencies (Note 10)
Minority interest 11,328 11,105
Convertible redeemable preferred stock 11,309 11,357
COMMON Common stock, $.01 par value; authorized
STOCK- 30,000,000 shares; issued and outstanding
HOLDERS' 9,761,000 and 9,489,000 shares 98 95
EQUITY Paid-in capital 47,219 44,461
Retained earnings 20,984 17,901
Cumulative foreign currency
translation adjustment (51) 80
Common Stockholders' Equity 68,250 62,537
Total Liabilities and
Stockholders' Equity $172,771 $169,834
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, 1996, 1995 and 1994
(Amounts in thousands,
except per share amounts) 1996 1995 1994
REVENUES Revenues $189,195 $169,417 $131,780
Cost of sales 126,769 106,009 84,001
Gross Profit 62,426 63,408 47,779
COSTS AND Operating Expenses:
EXPENSES Research and development 11,733 8,401 5,229
Selling and administrative 37,145 37,462 31,341
Amortization of intangibles 1,146 975 648
Total Operating Expenses 50,024 46,838 37,218
Income from Operations 12,402 16,570 10,561
Nonoperating Income (Expense):
Interest income 379 667 338
Interest expense (3,524) (3,547) (3,215)
EARNINGS Income Before Provision for
Income Taxes
and Minority Interest 9,257 13,690 7,684
Provision for income taxes 3,425 5,483 3,080
Minority interest 636 816
Net Income 5,196 7,391 4,604
Dividend on convertible
redeemable preferred stock 960 462
Net Income Applicable
to Common Stock $ 4,236 $ 6,929 $ 4,604
Net Income Per Common and
Common Equivalent Share $ .41 $ .73 $ .51
Weighted average number of
common shares used to
compute earnings per share 10,301 9,510 9,023
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, 1996, 1995 and 1994
(Amounts in thousands,
except per share amounts) 1996 1995 1994
OPERA- Cash Flows From Operations:
TIONS Cash received from customers $191,665 $162,568 $133,125
Interest received 258 733 268
Cash paid to suppliers
and employees (165,565) (139,489) (112,341)
Cash paid to ESOP+ (406) (947)
Interest paid (5,196) (3,730) (2,567)
Income taxes paid, net of refunds (954) (6,625) (986)
Net Cash Provided By Operations 20,208 13,051 16,552
INVEST- Cash Flows From Investments:
MENTS Purchase of plant and equipment (30,530) (30,911) (8,821)
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 (11,590) (47,573) (8,821)
FINANCING Cash Flows From Financing:
Net proceeds from issuance
of preferred stock 11,357
Proceeds from long-term debt 8,596 21,542 4,005
Proceeds from issuance of
senior notes 18,000
Proceeds from notes payable 8 494 283
Proceeds from exercise of
stock options 1,713 1,627 16
Repayment of long-term debt (7,019) (11,700) (11,327)
Repayment of notes payable (388) (400)
Repayment of note to
minority stockholder,
net of amounts borrowed (413)
Payment of dividend on
preferred stock (960) (462)
Payment of dividend on common stock (1,153) (1,083) (1,075)
Net Cash Provided By Financing 772 21,387 9,502
Effect of exchange rate changes on cash 35 74 146
Increase (decrease) in cash and
short-term investments 9,425 (13,061) 17,379
Cash and short-term investments at
beginning of year 6,602 19,663 2,284
Cash and short-term investments
at end of year $16,027 $6,602 $19,663
OPTICAL COATING LABORATORY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended October 31, 1996, 1995 and 1994
(Amounts in thousands) 1996 1995 1994
ADJUST- Reconciliation of Net Income
MENTS To Cash Flows From Operations:
Net income $5,196 $7,391 $4,604
Adjustments to reconcile
net income to net cash
provided by operations:
Depreciation and amortization 13,669 10,261 7,635
Minority interest in earnings
of Flex Products 636 816
Net book value of coating
machine sold 880
Loss on disposal or abandonment
of equipment 1,356 914 634
Accrued postretirement
health benefits 184 238 76
Deferred income tax liabilities (468) 2,515 (1,650)
Other non-cash adjustments
to net income (681) 46 (98)
Change in:
Accounts receivable 1,378 (3,792) (973)
Inventories (3,030) (2,391) 1,572
Income tax receivable (719) (76) 2,045
Deferred income tax assets 1,645 (2,237) 275
Other current assets and other
assets and investments 716 (1,547) (312)
Accounts payable, accrued
expenses and accrued
compensation expenses (3,094) 2,807 1,230
Deferred revenue 464 (538) (28)
Income taxes payable 2,076 (1,356) 1,542
Total adjustments 15,012 5,660 11,948
Net Cash Provided
By Operations $20,208 $13,051 $16,552
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
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 1996, 1995 and 1994, common stock, with an aggregate fair market value
of $52,000, $30,000 and $20,000 was awarded to the Company's outside
directors as remuneration.
During 1996, the Company issued 39,880 shares of common stock to its
Employee Stock Ownership Plan (ESOP+) 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 COMMON STOCKHOLDERS' EQUITY
Years ended October 31, 1996, 1995 and 1994
<TABLE>
<S> <C> <C> <C> <C> <C>
Foreign
Common Stock Paid-in Retained Currency
(Amounts in thousands) Shares Amount Capital Earnings Translation
BALANCE AT NOVEMBER 1, 1993 8,972 $90 $39,930 $8,526 $(1,411)
ACTIVITY Exercise of stock options and
IN FISCAL warrants, including tax benefit
1994 and shares issued to directors 6 37
Foreign currency translation
adjustment for the year 1,336
Net income for the year 4,604
Dividend on common stock (1,075)
BALANCE AT OCTOBER 31, 1994 8,978 90 39,967 12,055 (75)
ACTIVITY Shares issued on purchase of Netra 165 1 1,584
IN FISCAL Shares issued to Employee Stock
1995 Ownership Plan 82 1 794
Exercise of stock options,
including tax benefit and
shares issued to directors 264 3 2,116
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 9,489 95 44,461 17,901 80
ACTIVITY Shares issued to Employee Stock
IN FISCAL Ownership Plan 39 1 439
1996 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
Dividend on preferred stock (960)
Dividend on common stock (1,153)
BALANCE AT OCTOBER 31, 1996 9,761 $98 $47,219 $20,984 $(51)
</TABLE>
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, 1996, 1995 and 1994
(Amounts in thousands, except per share amounts)
1. GENERAL
NATURE OF OPERATIONS. Optical Coating Laboratory, Inc. (OCLI) designs,
develops and manufactures thin film coated products which control and
enhance light by altering the transmission, reflection and absorption of
its various wavelengths to achieve a desired effect. 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 their products including computers, photocopiers, LCD
and digital light processing projector systems, document scanners, point-of-
sale scanners, instruments and satellites. OCLI sells its Glare/Guard
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.
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. At October 31, 1996, the Company had
significant deferred tax assets related to operating losses available for
carryforward. 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.
Under tax regulations, realization of tax benefits per period will be
limited and full realization will depend on future taxable income over a
number of years. As discussed in Note 10, the Company is subject to an
asserted claim for lost profits made in the United Kingdom by a U.K.
company relating to a court enforced injunction and finding for the Company
that has been reversed by a higher court. The Company has ground water
contamination at its facility in Santa Rosa, California. The Company has
established a program for reducing contaminant concentration levels to
acceptable federal and state levels under the regulatory guidance of the
California Regional Water Quality Control Board. Based upon the extensive
tests conducted and advice of environmental consultants, the Company
believes that the recorded liability for completion of the ground water
remediation plan is sufficient and that the annual cost of maintaining
compliance with environmental standards related to the above matter will
not have a material adverse effect on the Company's business, financial
position or future operating results.
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. Fiscal year 1996 was a 53 week year and fiscal years
1995 and 1994 were 52 week years.
INVESTMENTS. Cash and short-term investments are comprised of cash, bank
repurchase agreements and short-term commercial paper readily convertible
to cash. Short-term investments are carried at cost which approximates
market value. For purposes of the Statements of Cash Flows, all highly
liquid short-term investments with a maturity of three months or less are
considered cash equivalents.
REVENUE RECOGNITION. Revenue from sales of manufactured products and from
sales under fixed-price contracts is recorded at the time deliveries are
made or work is performed. Revenue from cost reimbursement contracts is
recorded as work is performed.
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.
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 year 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 under 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, adopted by the Company in fiscal 1992. Tax credits are taken as a
reduction of current income tax provisions when available.
EARNINGS PER SHARE. Earnings per common and common equivalent share assumes
dilutive stock options outstanding were exercised at the beginning of the
year or the date of grant, whichever is later. Fully diluted earnings per
share is 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.
3. LONG-TERM DEBT
Long-term debt, including current maturities, at October 31, 1996 and 1995
consisted of the following:
(Amounts in thousands) 1996 1995
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 borrowings under revolving
bank line of credit repaid in 1996. 2,000
Unsecured bank term loan. Variable
interest rates averaging 6.5%
at October 31, 1996, payable
quarterly. Principal payable
semiannually as follows:
Payment Dates Amounts
April 1997 $1,000,000
Each October and
April thereafter $2,000,000 13,000 14,500
Mortgage payable. Interest at 8%.
Collateralized by a 72,000 sq. ft.
newly constructed building and related
land. Principal and interest payments0
of $25,000 per month through 2011. 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. 2,945
Land improvement assessment. Interest at
an average rate of 6.75%.
Principal and interest payable
in semiannual installments of
$77,000 through 1998. 276 401
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. 3,996 4,026
Notes 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 of approximately $420,000
through 2003. 6,188 7,721
Bank loans of MMG with interest rates
ranging from 4.5% to 8.0%. Payable in
semiannual and annual installments through 2005.
Partly collateralized by mortgages on MMG
land and buildings and liens on equipment. 3,760 3,050
Present value of obligations under capital
leases at an imputed interest rate of 8.0%
payable in monthly installments through 2004. 81 913
50,769 50,611
Less current maturities (4,981) (3,344)
Total long-term debt,
net of current maturities $45,788 $47,267
Annual long-term debt maturities and capital lease payments for the ensuing
five years are as follows:
YEAR PAYMENT
(Amounts in thousands)
1997 $4,981
1998 10,204
1999 9,414
2000 7,322
2001 5,294
Thereafter 13,554
$50,769
The Company has a $30 million unsecured credit facility comprised of a $15
million term loan and a $15 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 an
incremental credit facility to cover a surety letter for approximately $3.1
million issued to secure 50% of the Company's notes payable arising from
the purchase of MMG. The Company also has a letter of credit for
approximately $775,000 to satisfy the Company's workers' compensation self-
insurance requirements. The surety commitment and letter of credit
facilities carry a fee of 1.25% per year.
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 duty. There were
no borrowings under the credit arrangement in fiscal years 1996 or 1995.
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. The lease terms are six years with monthly
payments totaling approximately $290,000 and buyout provisions at the end
of each lease.
For the fourth quarter of 1996, Flex Products was granted a waiver for one
of its financial covenants. The Company believes Flex Products will need
continued relief under this covenant for fiscal 1997 and is in negotiations
with the lessor to obtain an amendment to the covenant.
The Company has certain financial covenants and restrictions under its bank
credit arrangements and the unsecured senior notes.
4. ACQUISITIONS
FLEX PRODUCTS, INC. In May 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%. 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.
Pursuant to the terms of the Stock and Note Purchase Agreement dated May 1,
1995, by and among the Company, SICPA Holding S.A. (SICPA), ICIA, ICIAH and
Flex Products, the Company acquired an 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. In conjunction with the Company's
increase in ownership, ICIA's remaining 40% interest in Flex Products was
acquired by 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. SICPA also acquired
the balance of the note. The incremental investment in Flex Products was
recorded as a purchase transaction.
The funding for the purchase of the additional equity interest and note of
Flex Products, totaling $15.4 million, came from a $4 million draw down
from the Company's existing bank line of credit and from the issuance of
$12 million in convertible redeemable preferred stock in a private
placement.
The following pro forma consolidated results of operations for 1995 and
1994 include the operating results of Flex Products, assume that effective
tax rates were consistent with statutory rates and incorporate the effect
of financing the transaction:
(Amounts in thousands) 1995 1994
Revenue $181,389 $154,288
Net income before change in accounting principle 7,847 4,550
Net income applicable to common stock 6,887 3,521
Net income per common and common equivalent share $.72 $.39
In connection with this transaction, the Company entered into a Put and
Call, Right of First Refusal and Co-Sale Agreement with SICPA pursuant to
which SICPA was granted a call option to purchase the Company's 60%
interest in Flex Products and the Company was granted a put option to sell
the Company's 60% interest in Flex Products to SICPA. The call price is
$25 million plus (i) two times the amount by which Flex Products' annual
sales immediately preceding the call exceed $23.6 million (ii) times 60%
(the Company's ownership percentage of Flex Products). The put price is $20
million plus (i) 1.5 times the same increase in Flex Products' sales (ii)
times 60%. The put and call options can be exercised at any time after May
8, 1998 and before May 8, 2003, and cannot be exercised in the event Flex
Products completes a public offering. This agreement also provides for a
right of first refusal in favor of each of SICPA and the Company to buy the
other's shares and also provides a co-sale right which requires that on any
sale of a party's shares, the other party is allowed to participate on a
pro rata basis in the sale.
The Agreement with SICPA also provides conditions under which either party
may cause Flex Products to have an initial public offering of its common
stock.
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
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, upholding 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. 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
the 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.
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, 1996, other assets and investments includes $6.9
million of goodwill, of which $5.9 million is attributed to the purchase of
MMG and is being amortized over fifteen years and $1.0 million is
attributed to the purchase of Netra and is being amortized over five years.
5. STOCKHOLDERS' EQUITY
STOCKHOLDER RIGHTS PLAN. In November 1987, the Company adopted a
Stockholder Rights Plan which expires in November 1997, under which 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 having a
market value of twice the exercise 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 May 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 by 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.
6. INCENTIVE COMPENSATION PLANS, STOCK OPTION PLANS AND WARRANTS
Under the Company's incentive compensation and employee stock option plans,
options have been granted to purchase the common stock of the Company at
prices equal to 100% of the market price of the Company's common stock at
the date of grant. At October 31, 1996, outstanding options were
exercisable at prices ranging from $6.125 to $17.375 per share. Options
expire five and ten years from the date of grant.
Changes in options, shares reserved for issuance and options available for
future grants under these plans were as follows:
SHARES
SUBJECT TO AVAILABLE
OUTSTANDING FOR FUTURE
RESERVED OPTIONS GRANTS
BALANCE AT NOVEMBER 1, 1993 1,505,492 1,090,679 414,813
Granted 819,900 (819,900)
Exercised for cash (2,884) (2,884)
Canceled (3,300) (564,100) 560,800
BALANCE AT OCTOBER 31, 1994 1,499,308 1,343,595 155,713
Authorized and reserved 600,000 600,000
Granted 474,500 (474,500)
Exercised for cash (261,295) (261,295)
Canceled (25,000) 25,000
BALANCE AT OCTOBER 31, 1995 1,838,013 1,531,800 306,213
Authorized and reserved 950,000 950,000
Granted 546,450 (546,450)
Exercised for cash (229,800) (229,800)
Canceled (13,200) 13,200
BALANCE AT OCTOBER 31, 1996 2,558,213 1,835,250 722,963
EXERCISABLE AT OCTOBER 31, 1996 1,015,934
The weighted average exercise price of the exercisable options at October
31, 1996 was $7.60 per share.
7. INCOME TAXES
The provision for income taxes consisted of:
(Amounts in thousands) 1996 1995 1994
CURRENT:
Federal $2,120 $3,617 $2,174
State 309 964 516
Foreign (149) 609 58
2,280 5,190 2,748
DEFERRED:
Federal 1,535 626 249
State (369) (586) 281
Foreign (21) 253 (198)
1,145 293 332
$3,425 $5,483 $3,080
The reconciliation of the effective income tax rates to the federal
statutory rates was as follows:
1996 1995 1994
Statutory federal income tax rate 34.0% 34.0% 34.0%
State taxes, net of federal tax benefit 7.1 6.3 6.9
Foreign income taxes at rates different
from U.S. statutory rates 4.8 3.6 0.7
Business tax credits (state tax
credits net of federal tax effect) (10.3) (3.0)
Tax benefit from export sales corporation (1.7) (1.0) (1.3)
Adjustment of prior year provisions 3.1 0.2 (0.2)
Effective tax rate 37.0% 40.1% 40.1%
DEFERRED TAX ASSETS (LIABILITIES). The Company's deferred tax assets and
liabilities at October 31, 1996 and 1995 under SFAS 109 arise from the
following temporary differences in accounting for financial versus tax
reporting purposes:
(Amounts in thousands) 1996 1995
CURRENT:
Valuation reserves and accruals not deductible
for tax purposes until paid or utilized $ 4,112 $ 4,700
Intercompany profit eliminated for financial
reporting purposes which is taxable currently 440 570
Domestic net operating losses available
for carryforward 521 896
Asset valuation difference between financial and
tax reporting basis due to purchase accounting 189 254
State tax credits eligible for carryforward related
to purchased equipment 118
Other (215) 245
Total deferred tax assets (liabilities) 5,165 6,665
NONCURRENT:
Domestic net operating losses available
for carryforward 4,655 4,838
Foreign net operating losses available
for carryforward 2,273 1,245
Tax depreciation greater than financial
reporting depreciation (2,825) (3,169)
Intangible assets, difference between
financial and tax reporting
basis and periods (858) (1,204)
Burden and interest on self-constructed
assets expensed for tax purposes and
depreciated for financial reporting
purposes (548) (659)
Plant and equipment written off for
financial reporting purposes,
depreciable for tax purposes 308 497
Valuation reserves and accruals not
deductible for tax reporting
purposes until utilized or paid (21) 136
Costs required to be capitalized under
the uniform capitalization
tax rules which are deducted for
financial reporting purposes 389 781
Liability for postretirement health
benefits not deductible for
tax purposes until paid 690 674
State tax credits eligible for
carryforward related to purchased equipment 678 419
Other 98 (42)
4,839 3,516
Less valuation allowance (2,192) (1,158)
2,647 2,358
Total deferred tax balances $7,812 $9,023
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 1996 valuation allowance increase is primarily
due to losses reported in 1996 by certain of those subsidiaries.
The Company has recognized benefits in 1996, 1995 and 1994 for research and
development tax credits and, in 1996, for California manufacturers
investment credit.
Income taxes have not been provided on approximately $9.2 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 an Employee Stock Ownership Plan (ESOP+),
a defined contribution plan, for its non-Flex Products Santa Rosa employees
and a 401(k) plan with a Company match for the employees of Flex Products.
Company matching contributions to ESOP+ are determined by a profit sharing
formula with additional contributions, if any, determined by the Company's
Board of Directors. Company matching contributions to Flex Products'
401(k) plan are 75% of the first 6% of employee contributions under the
plan. The Company follows the policy of funding Company contributions as
accrued. Company contributions to ESOP+ are made in the form of the
Company's common stock or in the form of cash to purchase the Company's
common stock. Company contributions under Flex Products' 401(k) plan are
paid in cash. The Company contributed to ESOP+ and charged to operations
$580,000, $1,225,000 and $950,000 in 1996, 1995 and 1994. Contributions to
Flex Products' 401(k) plan were $207,000 for 1996 and $84,000 for the six
months May through October 1995.
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, 1996, 1995 and 1994 is as
follows:
(Amounts in thousands) 1996 1995 1994
Plan assets at fair value $6,704 $5,464 $4,971
Projected benefit obligation (6,250) (5,575) (4,820)
Plan assets greater (less) than
projected benefit obligation 454 (111) 151
Unrecognized net loss 301 870 640
Unrecognized transition asset
being amortized over 19 years (453) (473) (521)
Prepaid pension cost included
in other assets $ 302 $ 286 $ 270
At October 31, 1996, 1995 and 1994, the projected benefit obligations
include accumulated benefit obligations of $5,658,000, $5,344,000 and
$4,621,000 of which $5,643,000, $5,323,000 and $4,602,000 are vested.
A discount rate of 8.5% 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 5.5%.
The net pension expense recorded in 1996, 1995 and 1994 included the
following components:
(Amounts in thousands) 1996 1995 1994
Service-cost benefits earned during the period $ 364 $ 313 $ 275
Interest cost on projected benefit obligation 474 439 317
Actual return on plan assets (674) (318) (479)
Net amortization and deferral 163 (160) 92
Net pension expense $ 327 $ 274 $ 205
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, 1996, 1995 and 1994:
(Amounts in thousands) 1996 1995 1994
Accumulated postretirement benefit obligation:
Retirees $1,058 $1,012 $ 894
Fully eligible plan participants 336 243 175
Other active plan participants 756 744 590
Total accumulated postretirement
benefit obligation (unfunded) 2,150 1,999 1,659
Unrecognized loss (279) (227) (91)
Accrued postretirement
benefit obligation $1,871 $1,772 $1,568
The following components were included in net periodic postretirement
benefit cost for the years ended October 31, 1996, 1995 and 1994:
(Amounts in thousands) 1996 1995 1994
Service-cost benefits earned during the period $ 69 $ 50 $ 59
Interest cost on accumulated postretirement
benefit obligation 141 133 120
Amortization and deferral 55
Net postretirement benefit cost $265 $183 $179
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 1996, 7.25% in 1995 and 8.0% in
1994.
10. CONTINGENCIES AND COMMITMENTS
U.K. PATENT INFRINGEMENT SUIT. 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.
CONCENTRATIONS OF CREDIT RISK. The Company grants credit to customers,
subject to credit approval, for most of its sales. At October 31, 1996,
accounts receivable from customers in foreign countries, primarily in
Europe and Asia, were $16.1 million, constituting 58% of accounts
receivable.
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 $4,881,000,
$2,481,000 and $2,186,000 for 1996, 1995 and 1994. Future minimum operating
lease payments amount to $23.1 million, and for the years 1997 through 2001
are $5,343,000, $4,215,000, $4,068,000, $3,822,000 and $3,745,000 under
operating lease agreements in effect at October 31, 1996. 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 1997.
11. INFORMATION ON OPERATIONS
INVENTORIES. Inventories as of October 31, 1996 and 1995 consisted of:
(Amounts in thousands) 1996 1995
Raw materials and supplies $7,483 $7,330
Work-in-process 8,797 7,527
Finished goods 2,421 1,029
Total inventories $18,701 $15,886
ACCRUED EXPENSES. Accrued expenses at October 31, 1996 and 1995 consisted
of the following:
(Amounts in thousands) 1996 1995
Workers' compensation reserve $ 659 $ 937
Ground water remediation reserve 659 1,187
Other accrued liabilities 5,248 7,391
Total accrued expenses $6,566 $9,515
INTEREST. Interest expense and amounts capitalized were as follows for the
years ended October 31, 1996, 1995 and 1994:
(Amounts in thousands) 1996 1995 1994
Interest costs incurred $4,696 $4,326 $3,372
Less amounts capitalized 1,172 779 157
Net interest expense $3,524 $3,547 $3,215
SALES INFORMATION. Significant customers and sales to the federal
government were as follows:
The Company's largest customer in 1996 is also a 40% owner of Flex
Products. Sales to this customer were 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 second largest customer in
1996 is also an approximate 10% common stockholder. Sales to this customer
accounted for approximately 5% of sales in 1996, 8% of sales in 1995 and 7%
of sales in 1994.
Sales of products and services to the federal government, primarily under
subcontracts, were 9%, 10% and 11% of net revenues in 1996, 1995 and 1994.
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. Foreign sales for the years ended October 31, 1996,
1995 and 1994 were as follows:
(Amounts in thousands) 1996 1995 1994
Export sales by U.S. operations:
To Asian countries $24,911 $21,305 $15,012
To European and other countries 26,761 16,012 4,243
51,672 37,317 19,255
Foreign sales by European operations 38,795 42,840 40,241
Total foreign sales $90,467 $80,157 $59,496
Identifiable assets of the Company's foreign operations were $37.7 million
at October 31, 1996, $43.2 million at October 31, 1995 and $43.3 million at
October 31, 1994.
DOMESTIC AND FOREIGN INCOME (LOSS). The Company's domestic and foreign
income (loss) before income taxes was as follows for the years ended
October 31, 1996, 1995 and 1994:
(Amounts in thousands) 1996 1995 1994
Domestic $10,885 $12,867 $ 8,311
Foreign (1,628) 823 (627)
Total $ 9,257 $13,690 $ 7,684
CHANGES IN ACCOUNTING PRINCIPLES. In October 1995, the Financial Accounting
Standards Board issued SFAS No. 123, "Accounting for Stock-Based
Compensation," which requires the Company to adopt the disclosure
provisions of the accounting standard for fiscal year 1997. Pursuant to
the new standard, companies are encouraged, but are not required, to adopt
the fair value method of accounting for employee stock-based transactions.
Companies are also permitted to continue to account for such transactions
under Accounting Principles Board Opinion No. 25 (APB 25), "Accounting for
Stock Issued to Employees," but would be required to disclose pro forma net
income and earnings per share in a note to the financial statements as if
the Company had applied the new method of accounting. The Company expects
to continue to account for its employee stock compensation plans in
accordance with the provisions of APB 25. Accordingly, SFAS No. 123 is not
expected to have any impact on the Company's results of operations or
financial position.
In March 1995, the Financial Accounting Standards Board issued SFAS No.
121, Accounting for the Impairment of Long-Lived Assets, which requires the
Company to adopt the accounting and disclosure provisions of the accounting
standard for fiscal year 1997. The new standard 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. The Company has not assessed the effect, if any, of
adopting SFAS 121.
OPTICAL COATING LABORATORY, INC. AND SUBSIDIARIES
SUPPLEMENTAL FINANCIAL INFORMATION
(Unaudited)
Results of operations for each quarter of fiscal 1996 were as follows:
Three months ended JAN 28, APR 28, JUL 28, OCT 31,
(Amounts in thousand, 1996(1) 1996(1) 1996(1) 1996(1) 1996
except per share data)
Revenues $43,911 $48,451 $48,772 $48,061 $189,195
Cost of sales 29,495 30,652 33,353 33,269 126,769
Gross profit 14,416 17,799 15,419 14,792 62,426
Operating Expenses:
Research and development 2,388 2,622 2,934 3,789 11,733
Selling and administrative 9,107 10,094 8,109 9,835 37,145
Amortization of
intangibles 287 278 284 297 1,146
Total operating expenses 11,782 12,994 11,327 13,921 50,024
Income from operations 2,634 4,805 4,092 871 12,402
Other income (expense):
Interest income 74 65 52 188 379
Interest expense (911) (812) (829) (972) (3,524)
Income before provision for
income taxes and minority
interest 1,797 4,058 3,315 87 9,257
Provision (benefit) for
income taxes 754 1,705 1,117 (151) 3,425
Minority interest 303 282 165 (114) 636
Net income 740 2,071 2,033 352 5,196
Dividend on convertible
redeemable preferred stock 240 240 240 240 960
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 shares
outstanding
(in thousands) 10,119 10,158 10,550 10,358 10,301
(1) Reflects the consolidation of Flex Products, Inc., a 60% owned
subsidiary.
OPTICAL COATING LABORATORY, INC. AND SUBSIDIARIES
SUPPLEMENTAL FINANCIAL INFORMATION
(Unaudited)
Results of operations for each quarter of fiscal 1995 were as follows:
Three months ended JAN 31, APR 30, JUL 31, OCT 31,
(Amounts in thousand, 1995 1995 1995(1) 1995(1) 1995
except per share data)
Revenues $35,993 $41,487 $47,289 $44,648 $169,417
Cost of sales 21,352 25,923 29,536 29,198 106,009
Gross profit 14,641 15,564 17,753 15,450 63,408
Operating Expenses:
Research and development 1,387 1,632 2,546 2,836 8,401
Selling and administrative 9,244 9,390 9,707 9,121 37,462
Amortization of intangibles 171 304 213 287 975
Total operating expenses 10,802 11,326 12,466 12,244 46,838
Income from operations 3,839 4,238 5,287 3,206 16,570
Other income (expense):
Interest income 226 196 127 118 667
Interest expense (920) (991) (974) (662) (3,547)
Income before provision for
income taxes and minority
interest 3,145 3,443 4,440 2,662 13,690
Provision for income taxes 1,321 1,445 1,866 851 5,483
Minority interest 443 373 816
Net income 1,824 1,998 2,131 1,438 7,391
Dividend on convertible
redeemable preferred stock -- -- 222 240 462
Net income applicable to
common stock $ 1,824 $ 1,998 $ 1,909 $ 1,198 $ 6,929
Net income per common
and common equivalent
share $.20 $.21 $.20 $.12 $.73
Weighted average number of
common shares outstanding
(in thousands) 9,025 9,377 9,557 10,066 9,510
(1) Reflects the consolidation of Flex Products, Inc., a 60% owned
subsidiary.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
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, 1996, a definitive proxy statement pursuant to Regulation
14A in connection with its 1997 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.EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) 1. CONSOLIDATED FINANCIAL STATEMENTS:
The following consolidated financial statements are included in
Item 8:
PAGE(S)
Independent Auditors' Report 22
Consolidated Balance Sheets 23
Consolidated Statements of Income 24
Consolidated Statements of Cash Flows 25-26
Consolidated Statements of Common
Stockholders' Equity 27
Notes to Consolidated Financial Statements 28
Supplemental Financial Information 40-41
(A) 2. FINANCIAL STATEMENT SCHEDULES
The following consolidated financial statement schedules are
included in Item 14(d):
Schedule II - Valuation and Qualifying accounts 46
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 Rights Agreement between Registrant and First Interstate Bank of
California dated November 25, 1987. Incorporated by reference to
Exhibit (4) of the Registrant's Form 10-K for the year ended October
31, 1987.
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 Second Amended and Restated Credit Agreement dated as of May 24,
1995 between Optical Coating Laboratory, Inc. and Bank of America
NT&SA. Incorporated by reference to Exhibit (4)(b) of the
Registrant's Form 10-Q for the quarter ended July 31, 1995.
4.8 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.
4.9 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.
9 Not applicable.
Exhibit
No. Description
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 Registrant's 1987 Incentive Compensation Plan. Incorporated by
reference to Exhibit A of the Registrant's Proxy Statement dated
February 19, 1987. (1)
10.7 Registrant's 1984 Incentive Stock Option Plan. Incorporated by
reference to Exhibit (10)(d) of the Registrant's Form 10-K for the
year ended October 31, 1985. (1)
10.8 Registrant's 1983 Incentive Stock Option Plan. Incorporated by
reference to Exhibit (10)(d) of the Registrant's Form 10-K for the
year ended October 31, 1983. (1)
10.9 Registrant's 1982 Incentive Stock Option Plan. Incorporated by
reference to Exhibit A of Proxy Statement of Registrant dated March
1, 1982. (1)
10.10 Registrant's Directors' and Officers' Liability and Corporate
Reimbursement Insurance Policy. Incorporated by reference to Exhibit
(10)(i) of the Registrant's Form 10-K for the year ended October 31,
1987. (1)
10.11 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)
10.12 Employment Agreements between Registrant and its Executive Officers.
Incorporated by reference to Exhibit (10)(k) of the Registrant's
Form 10-K for the year ended October 31, 1987. Second Amendment
thereto incorporated by reference to Exhibit (28)(a) of the
Registrant's Form 10-Q for the quarter ended January 31, 1992. Third
Amendment thereto incorporated by reference to Exhibit 10.13 of the
Registrant's Form 10-K for the year ended October 31, 1993. (1)
10.13 Form of Fourth Amendment to Employment Agreements between Registrant
and its Executive Officers dated November 20, 1995. Incorporated by
reference to Exhibit 10.12 of the Registrant's Form 10-K for the
year ended October 31, 1995. (1)
Exhibit
No. Description
10.14 Form of Employment Assurance Agreements between Registrant and its
key technical and professional employees. Incorporated by reference
to Exhibit (10)(l) of the Registrant's Form 10-K for the year ended
October 31, 1987. Form of Amendment thereto incorporated by
reference to Exhibit (28)(b) of the Registrant's Form 10-Q for the
quarter ended January 31, 1992. (1)
10.15 Form of Amendment to Employment Assurance Agreements between
Registrant and its key technical and professional employees dated
November 20, 1995. Incorporated by reference to Exhibit 10.14 of the
Registrant's Form 10-K for the year ended October 31, 1995.(1)
10.16 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.
10.17 Acquisition Agreement between Henning Von Birkhahn and Ingo Mertens
and the Registrant's German subsidiary, OCLI Optical Coating
Laboratory GmbH, dated December 31, 1992 for the acquisition by the
Registrant of MMG MinnahYtte Maschinelle Glasbearbeitung GmbH.
Incorporated by reference to Exhibit 2A of Registrant's Form 8-K
dated December 31, 1992.
10.18 Stock and Note Purchase Agreement by and among OCLI, SICPA Holdings
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.
10.19 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)
10.20*1997 Management Incentive Plan (1)
11* Computation of earnings (loss) per share for the years ended October
31, 1996, 1995 and 1994.
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, 1996 $1,229 $674 $(7)(a) $121 $1,775
Year ended
October 31, 1995 $1,810 $369 $136(a) $1,086 $1,229
Year ended
October 31, 1994 $1,817 $667 $85(a) $759 $1,810
ALLOWANCE FOR INTERCOMPANY PROFIT
IN INVENTORY:
Year ended
October 31, 1996 $1,316 $-0- $-0- $300 $1,016
Year ended
October 31, 1995 $1,166 $150 $-0- $-0- $1,316
Year ended
October 31, 1994 $1,130 $36 $-0- $-0- $1,166
VALUATION RESERVES FOR INVENTORY:
Year ended
October 31, 1996 $616 $1,496 $-0- $-0- $2,112
Year ended
October 31, 1995 $765 $-0- $-0- $149 $616
Year ended
October 31, 1994 $826 $-0- $-0- $61 $765
(a)The 1995 balance consists primarily of amounts recorded in connection
with the acquisition of Flex Products. The 1996 and 1994 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, 1997 OPTICAL COATING LABORATORY, INC.
By: /s/Joseph C. Zils
Joseph C. Zils
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, President,
Chief Executive Officer
(Principal Executive and
/s/Herbert M. Dwight, Jr Operating Officer) January 29, 1997
Herbert M. Dwight, Jr.
/s/John McCullough Director and Vice President January 29, 1997
John McCullough
Vice President, General Counsel,
Corporate Secretary
and Chief Financial Officer
/s/Joseph C. Zils (Principal Financial Officer) January 29, 1997
/s/Douglas C. Chance Director January 29, 1997
Douglas C. Chance
/s/Shoei Kataoka Director January 29, 1997
Shoei Kataoka
/s/Julian Schroeder Director January 29, 1997
Julian Schroeder
/s/Renn Zaphiropoulos Director January 29, 1997
Renn Zaphiropoulos
OPTICAL COATING LABORATORY, INC. AND SUBSIDIARIES
EXHIBIT 11. COMPUTATION OF EARNINGS PER SHARE
Years Ended October 31, 1996, 1995 and 1994
(Amounts in thousands,
except per share data) 1996 1995 1994
PRIMARY SHARES:
Average common shares outstanding 9,629 9,144 8,975
Common equivalent shares outstanding 672 367 48
10,301 9,511 9,023
Net income $5,196 $7,391 $4,604
Less dividend on preferred stock 960 462
Net income applicable to common stock $4,236 $6,929 $4,604
Net income per common and common
equivalent share, primary $.41 $.73 $.51
FULLY DILUTED SHARES:
Average common shares outstanding 9,629 9,144 8,975
Common equivalent shares outstanding 685 456 70
Potential dilution of preferred stock * 553
10,314 10,153 9,045
Net income applicable to common stock $4,236 $6,929 $4,604
Add back dividend on preferred stock * 462
Net income for calculating fully diluted
earnings per share $4,236 $7,391 $4,604
Net income per common and common
equivalent share, fully diluted $.41 $.73 $.51
*Excluded because the result would be anti-dilutive.
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.
OPTICAL COATING LABORATORY, INC. AND SUBSIDIARIES
EXHIBIT 21. SUBSIDIARIES OF THE REGISTRANT
Optical Coating Laboratory, Inc. was incorporated in Delaware in 1948. The
Company was reincorporated in California in 1963 and again reincorporated
in Delaware November 2, 1987.
Optical Coating Laboratory, Inc. has the following subsidiaries:
PERCENT OF PLACE OF
SUBSIDIARY NAME OWNERSHIP INCORPORATION
OCLI International Service Corporation 100% California
OCLI Foreign Sales Corporation 100% Guam
OCLI Optical Coatings Limited 100% Scotland
OCLI Optical Coating Laboratory GmbH 100% Germany
MMG Glastechnik GmbH 100% Germany
OCLI Monitor Produkte GmbH 100% Germany
OCLI Optical Coatings Espana S.A. 100% Spain
Optical Coating Laboratory B.V. 100% Netherlands
Optical Coating Laboratory EURL 100% France
Optical Coating Laboratory Srl 100% Italy
OCLI Monitor Products Srl 100% Italy
Flex Products, Inc. 60% Delaware
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULE
We consent to the incorporation by reference in Registration Statements No.
33-41050, No. 33-26271, No. 33-12276, No. 33-48808, No. 33-65132, No. 33-
60891 and 33-13013 of Optical Coating Laboratory, Inc. on Form S-8 and
Registration Statements No. 33-61177 and No. 33-65319 on Form S-3 of
Optical Coating Laboratory, Inc. of our report dated December 18, 1996,
appearing in this Annual Report on Form 10-K of Optical Coating Laboratory,
Inc. for the year ended October 31, 1996.
Our audits of the consolidated financial statements referred to in our
aforementioned report also included the financial statement schedule of
Optical Coating Laboratory, Inc., listed in Item 14(a)(2). The financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits. In our
opinion, the financial statement schedule, when considered in relation to
the basic financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
DELOITTE & TOUCHE LLP
San Jose, California
January 29, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-END> OCT-31-1996
<CASH> 16,027
<SECURITIES> 0
<RECEIVABLES> 27,700
<ALLOWANCES> 1,775
<INVENTORY> 18,701
<CURRENT-ASSETS> 70,071
<PP&E> 168,669
<DEPRECIATION> 81,100
<TOTAL-ASSETS> 172,771
<CURRENT-LIABILITIES> 31,984
<BONDS> 0
0
11,309
<COMMON> 47,317
<OTHER-SE> 20,933
<TOTAL-LIABILITY-AND-EQUITY> 172,771
<SALES> 189,195
<TOTAL-REVENUES> 189,195
<CGS> 126,769
<TOTAL-COSTS> 126,769
<OTHER-EXPENSES> 50,024
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,524
<INCOME-PRETAX> 9,257
<INCOME-TAX> 3,425
<INCOME-CONTINUING> 5,196
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,196
<EPS-PRIMARY> .41
<EPS-DILUTED> .41
</TABLE>
1997 MANAGEMENT INCENTIVE PLAN
Page 1
OBJECTIVES
The objectives of the Optical Coating Laboratory, Inc. (OCLI) Fiscal Year
1997 Management Incentive Plan (MIP) are:
To motivate key OCLI managers to achieve Fiscal Year (FY) 1997
financial objectives; and
To reward key OCLI managers and employees who contribute
significantly towards the achievement of OCLI's financial and
operational objectives.
ADMINISTRATION
The Human Resources Department, in coordination with the Finance &
Accounting Department, will administer the MIP under the direction of the
Chairman of the Board and President of OCLI (Plan Administrator).
ELIGIBILITY
Employees in Salary Grades 11 and above, or equivalent (for non-US
subsidiaries), are eligible to participate in the MIP. MIP participants
are not eligible for "Spot" bonuses or "Superior Merit" bonuses.
Concurrent participation in any other type of bonus program requires the
approval of the Plan Administrator.
Bonus awards are calculated annually based on OCLI's and the Divisions'
financial results and on each participant's individual performance during
the plan year. The plan year is defined as the fiscal year beginning
November 4, 1996 and ending October 31, 1997.
Employees who are newly hired, promoted or transferred into or out of
eligible positions and those who move from one eligibility level to another
will receive pro rata bonus awards based on actual base pay earned during
the plan year in the eligible positions.
In addition, participants who leave OCLI during the plan year under any of
the following conditions may be eligible for pro rata bonus awards:
participants who retire under the provisions of one of the Company's
retirement plans or the Social Security Act; or
Page 2
1997 MANAGEMENT INCENTIVE PLAN
a disabled participant or the spouse or legal representative of a
deceased participant.
Participants leaving the Company under any conditions other than those
outlined above are not eligible for bonus awards for the plan year in which
they leave.
APPROVED BONUS POOL
The Board of Directors approved a combined quantitative and qualitative
bonus pool totaling $1,232,000 which is a function of actual OCLI
Consolidated and Division Return on Asset (ROA) Performance (defined on
Page 3) versus budgeted ROA Performance. The qualitative portion of the
pool is a fixed maximum of $246,400 based on Individual Performance
(defined on Page 4).
The size of the approved pool at budgeted performance was based on the
number of participants, salary grades and actual salaries at the beginning
of the plan year and budgeted OCLI Consolidated and Division ROA
Performance. A bonus pool will be accrued and distributed as a function of
OCLI's Consolidated and Divisional ROA Performance relative to budget plus
a straight line accrual for the qualitative portion. The pool will not be
adjusted due to a change in the composition of the participants due to
hirings, terminations, salary increases or promotions. As the composition
of the plan participants changes due to the addition or deletion of
individuals or changes in salary grades or salaries, individual
participant's pro rata percentage of the distribution will change
accordingly (i.e., the total amount of the pool at a given level of ROA
performance is fixed).
The pro rata percentages for each participant at the beginning of the plan
year by salary grade are shown below.
TARGET BONUS OPPORTUNITY
AS A PERCENT OF BASE SALARY EARNED
SALARY GRADE PERCENT
CEO 35%
Vice Presidents 25%
Level 14 20%
Level 13 15%
Level 12 15%
Level 11 10%
Page 3
1997 MANAGEMENT INCENTIVE PLAN
BONUS DETERMINATION
Performance levels attained in the following areas determine the extent to
which participants in this incentive plan are eligible for cash awards.
OCLI Consolidated ROA Performance -- OCLI must achieve a minimum
of 60% of budgeted Return on Assets (ROA) Performance to qualify for
OCLI Consolidated ROA Performance awards.
OCLI Consolidated ROA Performance for the plan year is calculated
by dividing net after tax earnings by average assets.
- Net after tax earnings is defined as OCLI's consolidated
net after tax earnings for the plan year, as certified by the
Company's independent auditors, including appropriate accruals for
all incentive awards estimated to be payable for that plan year.
- Average assets is defined as the average of the four
quarter's average consolidated total assets. A quarter's average
consolidated total assets is defined as the total assets, as
reported on OCLI's consolidated balance sheet at the beginning of
each quarter plus the total assets as reported on OCLI's balance
sheet at the end of each quarter, divided by two.
Division ROA Performance -- Divisions must achieve a minimum of
70% of planned Return of Assets (ROA) Performance to qualify for
Division ROA performance awards.
Division ROA Performance for the plan year is calculated by
dividing net after tax earnings by average assets.
- Net after tax earnings is defined as the Division's
consolidated net after tax earnings for the plan year, as
determined by the Company's Chief Financial Officer, including
appropriate accruals for all incentive awards estimated to be
payable for that plan year.
- Average assets is defined as the average of the four
quarter's average division total assets. A quarter's division
total average assets is defined as the total assets, as reported on
the Division's balance sheet at the beginning of each quarter plus
the total assets as reported on the Division's balance sheet at the
end of each quarter, divided by two.
Page 4
1997 MANAGEMENT INCENTIVE PLAN
Individual Performance -- Individual performance is defined as
each participant's performance rating for the plan year.
Individual performance awards are separate from payments based
upon ROA performance, and may be paid, in part or in whole, based on
OCLI's and the Divisions' performance and/or ability to pay. Such
payments are subject to the approval of the Plan Administrator.
Multiplier -- A compounding multiplier of 10% for each 10%
increment that ROA Performance exceeds budgeted ROA target is applied
to calculate the bonus pool available. Any impact due to this
multiplier's effect will be applied to the quantitative portion of the
MIP payouts. The formula allows for interpolation between the 10%
ranges.
PERFORMANCE WEIGHTING
The percent of target bonus opportunity (see Page 2) is broken down by the
following performance measures.
MIP PERFORMANCE WEIGHTING MATRIX
DIVISION
PERFORMANCE CORPORATE GENERAL DIVISION
MEASURE STAFF MANAGERS MANAGEMENT
OCLI
Consolidated ROA 80% 20% 10%
Performance
Division
ROA 0% 60% 70%
Performance
Individual
Qualitative 20% 20% 20%
Performance
(Pool)
TOTAL 100% 100% 100%
Page 5
1997 MANAGEMENT INCENTIVE PLAN
The Individual Qualitative Performance is a maximum of 20% of the planned
target pay-out. Any unallocated amounts go to a discretionary pool to be
allocated back to MIP participants and all other employees at the
discretion of the Plan Administrator or rolled over into the subsequent
plan year. In no case will any unallocated amounts be rolled over for more
than one year.
BONUS CALCULATION
Bonus awards are based on the following thresholds and targets. The scales
allow for interpolation between percentage points.
OCLI CONSOLIDATED AND DIVISION ROA PERFORMANCE
THRESHOLD
(QUANTITATIVE BONUS POOL
ENTITY BEGINS ACCRUING AT) TARGET
Santa Rosa Division 3.71% ROA 5.30% ROA
Hillend Technical Division TBD TBD
MMG Division TBD TBD
OCLI Consolidated 2.28% ROA 3.8% ROA
All Division participants are included in the plan for their Division. The
MMG and Hillend Technical Division plans will be an addendum to this
document.
RECOMMENDED POTENTIAL INDIVIDUAL PERFORMANCE BONUS PAYOUT AS A PERCENT OF
TARGET INDIVIDUAL PERFORMANCE BONUS OPPORTUNITY (QUALITATIVE PORTION)
INDIVIDUAL NEEDS FULLY
PERFORMANCE IMPROVEMENT EFFECTIVE SUPERIOR
% of Individual
Performance Opportunity 0 - 19 20 - 79 80 - 100
Page 6
1997 MANAGEMENT INCENTIVE PLAN
BONUS PAYMENT
Bonus award payments will be approved by the Plan Administrator following
the certification of OCLI's Consolidated Financial Statements by an
independent auditor. Payments will be distributed to eligible participants
during the second payroll in January, 1998.
AMENDMENTS
The Board of Directors of OCLI reviews the Company's incentive compensation
plans annually to ensure equability both within the Company and in relation
to current economic conditions. The Board of Directors reserves the right
to amend, suspend, terminate or make exceptions to this plan at any time.
The effects of any unusual and material accounting or non-recurring
transactions may be excluded from the bonus calculations with the approval
of the Plan Administrator. For example, performance objectives may be
adjusted to reflect major acquisitions and/or divestitures during the plan
year.
