SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 0-2537
OPTICAL COATING LABORATORY, INC.
(Exact name of Registrant as specified in its charter)
Delaware 68-0164244
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2789 Northpoint Parkway
Santa Rosa, California 95407-7397
(Address of principal executive offices) (Zip code)
707-545-6440
(Registrant's telephone number including area code)
Not applicable
(Former name, former address, and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a
plan confirmed by a court. Yes No
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
TITLE OUTSTANDING
Common Stock, $.01 par value 11,979,280 at May 31, 1998
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OPTICAL COATING LABORATORY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
APRIL 30, OCTOBER 31,
ASSETS 1998 1997
- - - -----------------------------------------------------------------------------
(Dollars in thousands, except per share amounts) (Unaudited)
CURRENT Cash and cash equivalents $ 5,850 $ 15,217
ASSETS
Accounts receivable, net of allowance for
doubtful accounts of $2,063 and $1,884 37,040 34,923
Inventories 26,883 22,829
Income taxes receivable 636 504
Deferred income tax assets 6,710 6,853
Other current assets 2,339 1,707
-------- --------
Total Current Assets 79,458 82,033
OTHER Other assets and investments 7,972 8,243
ASSETS
PROPERTY, Land and improvements 9,221 9,225
PLANT AND Buildings and improvements 41,847 41,944
EQUIPMENT Machinery and equipment 128,719 121,717
Construction-in-progress 10,223 9,525
-------- --------
190,010 182,411
Less accumulated depreciation (94,649) (89,194)
-------- --------
Property, plant and equipment-net 95,361 93,217
-------- --------
Total Assets $182,791 $183,493
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT Accounts payable $ 9,292 $ 14,301
LIABIL- Accrued expenses 8,283 6,854
ITIES
Accrued compensation expenses 9,149 8,752
Income taxes payable 554 339
Current maturities on long-term debt 9,594 7,888
Notes payable 362 381
Deferred revenue 2,251 900
-------- --------
Total Current Liabilities 39,485 39,415
NONCURRENT Accrued postretirement health benefits
LIABIL- and pension liabilities 2,120 2,040
ITIES
Deferred income tax liabilities 1,863 785
Long-term debt 35,682 40,975
Minority interest 12,006 13,315
STOCK- Preferred stock-Series C;
HOLDERS' 8% cumulative, convertible, redeemable;
EQUITY issued and outstanding 6,250 shares
at 10/31/97 5,559
Common stock, $.01 par value; authorized
30,000,000 shares; issued and outstanding
12,078,000 and 10,599,000 shares 121 106
Paid-in capital 68,560 55,723
Retained earnings 29,976 26,217
Cumulative foreign currency translation
adjustment (1,234) (642)
-------- --------
97,423 86,963
Note receivable from related party (5,788)
-------- --------
Common Stockholders' Equity 91,635 86,963
-------- --------
Total Liabilities $182,791 $183,493
and Stockholders' Equity ======== ========
The accompanying notes are an integral part of
these financial statements.
OPTICAL COATING LABORATORY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
For the three and six months ended April 30, 1998 and 1997
(Amounts in thousands, except per share amounts)
THREE MONTHS SIX MONTHS
1998 1997 1998 1997
REVENUES Revenues $64,345 $53,516 $117,718 $99,236
Cost of Sales 42,484 34,842 78,719 65,041
------- ------- -------- -------
Gross Profit 21,861 18,674 38,999 34,195
COSTS AND Operating Expenses:
EXPENSES Research and development 4,026 3,951 7,847 6,513
Selling and administrative 11,171 10,782 20,659 21,048
Amortization of intangibles 198 237 398 480
------- ------- ------- -------
Total Operating Expenses 15,395 14,970 28,904 28,041
------- ------- ------- -------
Income from Operations 6,466 3,704 10,095 6,154
Nonoperating Income (Expense):
Interest income 81 82 165 257
Interest expense (927) (1,027) (1,735) (2,079)
------- ------- ------- -------
EARNINGS Income Before Provision for
Income Taxes
and Minority Interest 5,620 2,759 8,525 4,332
Provision for income taxes 2,163 1,103 3,325 1,733
Minority interest 408 143 555 179
------ ------ ------ ------
Net Income 3,049 1,513 4,645 2,420
Dividend on convertiblee
redeemable preferred stock 125 187 250 427
------ ------ ------ ------
Net Income Applicable to
Common Stock $2,924 $1,326 $4,395 $1,993
====== ====== ====== ======
Net Income Per Share, Basic $0.27 $0.13 $0.41 $0.20
====== ====== ====== ======
Net Income Per Share, Diluted $0.25 $0.13 $0.38 $0.19
====== ====== ====== ======
Weighted average number of
common shares used to compute
basic earnings per share 10,903 10,069 10,767 9,927
====== ====== ====== ======
Weighted average number ofn
common shares used to computed
diluted earnings per share 11,553 10,410 11,478 10,292
====== ====== ====== ======
The accompanying notes are an integral part of these financial statements.
OPTICAL COATING LABORATORY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the three and six months ended
April 30, 1998 and 1997
(Amounts in thousands)
THREE MONTHS SIX MONTHS
1998 1997 1998 1997
OPERA- Cash Flows From Operations:
TIONS
Cash received from customers $54,208 $46,911 $96,270 $88,552
Interest received 67 71 118 235
Cash paid to suppliers
and employees (43,644) (39,236) (90,391) (81,047)
Cash paid to OCLI
401(k)/ESOP Plan (112) (116) (241) (147)
Interest paid (613) (1,024) (1,421) (2,450)
Income taxes paid,
net of refunds 174 (856) 146 (907)
------ ------ ------ ------
Net Cash Provided
By Operations 10,080 5,750 4,481 4,236
------ ------ ------ ------
INVEST- Cash Flows From Investments:
MENTS Purchase of plant
and equipment (4,065) (3,547) (8,326) (6,625)
------ ------ ------ ------
Net Cash Used
For Investments (4,065) (3,547) (8,326) (6,625)
FINANCING Cash Flows From Financing:
Proceeds from long-term debt 3,044 9,818
Repayment of long-term debt (6,686) (1,437) (13,250) (1,918)
Proceeds from notes payable
Repayment of notes payable (192) (1,234) (9) (1,644)
Proceeds from exercise of 304 71 638 167
stock options
Proceeds from note to minority
stockholder 800 484
Purchase of note from minority
stockholder (2,600)
Investment by minority
stockholder 1,017 1,017
Payment of dividend
on preferred stock (83) (187) (208) (427)
Payment of dividend
on common stock (636) (586)
------ ------ ------ ------
Net Cash Used
For Financing (3,613) (1,770) (5,447) (2,907)
------ ------ ------ ------
Effect of exchange rate
changes on cash 29 (27) (75) (269)
------ ------ ------ ------
Increase (decrease)
in cash and short-term
investments 2,431 406 (9,367) (5,565)
------ ------ ------ ------
Cash and cash equivalents at
beginning of period 3,419 10,056 15,217 16,027
------ ------ ------ ------
Cash and cash equivalents
at end of period $5,850 $10,462 $5,850 $10,462
====== ====== ====== ======
OPTICAL COATING LABORATORY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Unaudited)
For the three and six months ended
April 30, 1998 and 1997
(Amounts in thousands)
THREE MONTHS SIX MONTHS
1998 1997 1998 1997
ADJUST- Reconciliation of
MENTS Net Income To Cash
Flows From Operations:
Net income $3,049 $1,513 $4,645 $2,420
Adjustments to
reconcile net income
to net cash provided
by operations:
Depreciation and
amortization 3,130 3,066 6,115 6,312
Minority interest
in earnings
of subsidiaries 408 143 557 179
Loss on disposal
of equipment 321 168 529 210
Accrued postretire-
ment health benefits 40 70 80 86
Deferred income tax
liabilities 34
Other non-cash
adjustments to
net income (264) (68) 207 41
Change in:
Accounts receivable 787 (1,078) (2,577) (5,089)
Inventories (2,276) (3,465) (4,280) (4,064)
Income tax
receivable 1,600 (742) 1,693 110
Deferred income
tax assets 473 194 1,040 (104)
Other current assets
and other
assets and
investments 124 41 (950) (505)
Accounts payable,
accrued expenses
and accrued
compensation
expenses 2,315 5,455 (4,193) 4,003
Deferred revenue 285 (700) 1,351 (531)
Income taxes payable 88 1,153 230 1,168
------ ------ ------ ------
Total adjustments 7,031 4,237 (164) 1,816
------ ------ ------ ------
Net Cash Provided
By Operations $10,080 $5,750 $4,481 $4,236
====== ====== ====== ======
The accompanying notes are an integral part of
these financial statements.
OPTICAL COATING LABORATORY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
For the six months ended
April 30, 1998
(Amounts in thousands)
<TABLE>
<CAPTION> NOTE
RECEIVABLE
FOREIGN FROM
PREFERRED STOCK COMMON STOCK PAID-IN RETAINED CURRENCY RELATED
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS TRANSLATION PARTY
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT 6 $5,559 10,599 $106 $55,723 $26,217 $(642)
NOVEMBER 1, 1997
Shares issued to
Employee Stock
Ownership Plan 39 1 555
Exercise of stock
options,including
tax benefit and
interest accrued
on note receivable
from related party 841 8 6,687 ($5,788)
Conversion of
preferred stock
to common stock (6) (5,559) 599 6 5,595
Foreign currency
translation
adjustment (592)
Net Income 4,645
Dividend on preferred (250)
stock
Dividend on common (636)
stock
- - - -----------------------------------------------------------------------------------------------
BALANCE AT
APRIL 30, 1998 0 $0 12,078 $121 $68,560 $29,976 ($1,234) ($5,788)
===============================================================================================
</TABLE>
OPTICAL COATING LABORATORY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three and Six Months Ended April 30, 1998 and 1997
(Unaudited)
1. GENERAL
OCLI designs, develops and manufactures multi-layer thin film coatings which
control and enhance light by altering the transmission, reflection and
absorption of its various wavelengths to achieve a desired effect such as
anti-reflection, anti-glare, electromagnetic shielding, electrical
conductivity and abrasion resistance. OCLI markets and distributes components
to original equipment manufacturers ("OEMs") of optical and electro-optical
systems and sells its GlareGuard(R) brand ergonomic computer display products
through resellers and office retailers. OCLI's products are found in many
applications including computer monitors, flat panel displays, telecommuni-
cation systems, photocopiers, fax machines, medical/analytical equipment
and instruments, projection imaging systems, satellite power systems
and aerospace and defense systems. Through its 60% owned subsidiary, Flex
Products, Inc. ("Flex Products"), the Company designs and manufactures
thin film coatings on flexible substrates using high vacuum roll-to-roll
processes. Flex Products supplies critical pigments for use in anti-
counterfeiting applications, energy conserving window film for residential,
commercial, and automotive applications, photoreceptor components for copiers
and ChromaFlair(R) light interference pigments for commercial paints.
The Condensed Consolidated Balance Sheet as of April 30, 1998, the Condensed
Consolidated Statements of Income for the three and six month periods ended
April 30, 1998 and 1997, the Condensed Consolidated Statement of Stockholders'
Equity for the six month period ended April 30, 1998 and the Condensed
Consolidated Statements of Cash Flows for the three and six month periods
ended April 30, 1998 and 1997, have been prepared by the Company without
audit. In the opinion of management, all adjustments consisting of normal
recurring accruals, necessary to present fairly the financial position,
results of operations and cash flows at April 30, 1998 and for all periods
presented have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. It is suggested that these
condensed consolidated financial statements be read in conjunction with the
financial statements and notes included in the Company's Annual Report on
Form 10-K for the year ended October 31, 1997.
The results of operations for the period ended April 30, 1998 are not
necessarily indicative of the operating results anticipated for the full year.
In the first quarter of 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 128, "Earnings Per Share," which required the
Company to replace its presentation of primary earnings per share with a
presentation of basic earnings per share and requires dual presentation of
basic and diluted earnings per share on the face of the income statement.
Basic earnings per share is computed by dividing net income by the weighted
average number of common shares outstanding. Diluted earnings per share
under the new statement includes the potential dilution of convertible
securities, stock options and warrants. The difference between basic
earnings per share and diluted earnings per share reported by the Company
is the dilutive effect of stock options outstanding. The earnings per share
presentation for 1997 was restated to conform to the new statement.
2. FINANCIAL DERIVATIVES AND HEDGING
The Company, from time to time, enters into derivative transactions in order
to hedge foreign currency risk on existing commitments, open receivables,
payables and debt instruments when the currency risk is considered material
to the Company. In addition, the Company may enter into interest rate
swaps or similar instruments in order to reduce interest rate risk on its
debt instruments. The Company does not enter into derivatives for trading
purposes.
In the second quarter of 1998, the Company entered into foreign currency
forward contracts for the principal and interest payments under a $4.1
million loan that is denominated in German Marks. The transaction is
designated as a hedge of a foreign currency commitment. Gains and losses
on the contract are recorded as an adjustment to interest expense over the
life of the loan.
In the second quarter of 1998, the Company entered into an interest rate swap
for anticipated debt refinancing in the amount of $30 million. The purpose of
the swap is to fix the reference rate for the debt at 5.71% to eliminate the
Company's exposure to interest rate fluctuations until the loan refinance is
completed. The Company has designated the swap as a hedge of an anticipated
transaction and will record the gain or loss on the transaction as an
adjustment to interest expense over the term of the loan.
The notional amounts, carrying amounts and fair values of the Company's
derivatives position at April 30, 1998 are included in the table below:
NOTIONAL CARRYING ESTIMATED
(Amounts in thousands) AMOUNT AMOUNT FAIR VALUE
- - - ----------------------------------------------------------------------------
Foreign currency forward exchange
contracts:
Deutsche marks $4,648 $4,648 $47
Interest rate swap $30,000 ($96,000)
3. NOTE RECEIVABLE FROM RELATED PARTY
In the second quarter of 1998, the Company's Chairman of the Board and former
Chief Executive Officer exercised options for 770,666 shares of common stock
of the Company and surrenderred 117,296 shares for payment of withholding
taxes. The $5.8 million exercise price of the options was paid with a three
year, full recourse promissory note with principal and interest, at 5.39%,
payable in April, 2001. The note is secured by a security agreement covering
the 770,666 shares of the Company's common stock.
4. INVENTORIES
Inventories consisted of the following:
APRIL 30, OCTOBER 31,
(Amounts in thousands) 1998 1997
(Unaudited)
Raw materials and supplies $8,741 $ 7,541
Work-in-process 13,753 12,308
Finished goods 4,389 2,980
------- -------
Total inventories $26,883 $22,829
======= =======
5. ACCRUED EXPENSES
Accrued expenses consisted of the following
APRIL 30, OCTOBER 31,
(Amounts in thousands) 1998 1997
(Unaudited)
Workers' compensation reserve $ 772 $ 555
Ground water remediation reserve 759 759
Other accrued liabilities 6,752 5,540
------ ------
$8,283 $6,854
====== ======
PART I. FINANCIAL INFORMATION
ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF MATERIAL CHANGES IN
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 SIGNIFI-
CANTLY BASED ON A NUMBER OF FACTORS INCLUDING, BUT NOT LIMITED TO, PRODUCT
DEVELOPMENT, COMMERCIALIZATION AND TECHNOLOGICAL DIFFICULTIES; MANUFACTURING
COSTS AND YIELD ISSUES ASSOCIATED WITH INITIATING PRODUCTION AT NEW
FACILITIES; THE IMPACT OF COMPETITIVE PRODUCTS AND PRICING; CHANGING
CUSTOMER REQUIREMENTS; AND THE CHANGE IN ECONOMIC CONDITIONS OF THE VARIOUS
MARKETS THE COMPANY SERVES.
RESULTS OF OPERATIONS
REVENUE. Revenue for the second quarter of fiscal 1998 was $64.3 million, an
increase of $10.8 million, or 20%, over revenues of $53.5 million in the
second quarter of fiscal 1997. Revenue for the first six months of fiscal
1998 was $117.7 million, an increase of $18.5 million, or 19%, over revenues
of $99.2 million in the first six months of 1997. The quarter and
year-to-date revenue increases were primarily due to increased sales in
the Company's telecommunications markets ($11.0 million increase in the
second quarter of 1998, $19.5 million increase for the first six months of
1998), increased sales in the Company's display markets ($1.7 million
increase in the second quarter of 1998, $1.2 million increase for the first
six months of 1998) offset by decreased sales in the Company's office
automation and other markets of $1.7 million in the second quarter of 1998
and $3.0 million for the first six months of 1998. Sales by the Company's
60% owned subsidiary, Flex Products, Inc. (Flex Products), decreased $147,000
in the second quarter of 1998 but increased $818,000 for the first six months
of 1998. The Company's sales changes over the same periods of last year were
primarily due to volume changes.
The increase in telecommunications sales is primarily due to the Company's
participation with its partner, JDS FITEL Inc. (JDS), in the growing market
for wavelength division multiplexing (WDM) products and to the expanding
market for space satellites.
GROSS PROFIT. Gross profit for the second quarter of fiscal 1998 was $21.9
million, or 34.0% of revenue, compared to $18.7 million, or 34.9% of revenue,
for the second quarter of fiscal 1997. Gross profit for the first six months
of fiscal 1998 was $39.0 million, or 33.1% of revenue, compared to $34.2
million, or 34.5% of revenue, for the first six months of fiscal 1997. The
1998 gross margin decreases for the second quarter and year-to-date 1998
periods is due to higher than Company average material cost content in the
Company's new WDM business.
RESEARCH AND DEVELOPMENT. Research and development expenditures in the second
quarter of 1998 and the second quarter of 1997 were $4.0 million. Research
and development expenditures for the first six months of 1998 were $7.8
million compared to $6.5 million for the first six months of 1997. In the
second quarter of 1998, Flex Products spent approximately $400,000 less on
research and development than in the same period of 1997 due to customer
acceptance of new products in the second quarter of 1998. The remaining
second quarter and year-to-date increase is primarily due to new product
development of products in the telecommunications and display markets.
SELLING AND ADMINISTRATIVE. Selling and administrative expenses in the
second quarter of fiscal 1998 were $11.2 million, an increase of $388,000,
or 4%, compared to selling and administrative expenses of $10.8 million for
the second quarter of fiscal 1997. Selling and administrative expenses for
the first six months of fiscal 1998 were $20.7 million, a decrease of
$389,000 compared to selling and administrative expenses of $21.0 million
for the first six months of fiscal 1997. The increase in selling and
administrative expenses for the second quarter of 1998 compared to the
second quarter of 1997 was primarily due to increased legal expenses. The
decrease in selling and administrative expenses for the first six months
of 1998 compared to the first six months of 1997 was primarily due to
decreased selling expenses in the U.S. and Europe of approximately $1.4
million and decreased administrative expenses at Flex Products of
approximately $400,000, offset by increased selling and administrative
expenses in Asia of approximately $700,000 and increased legal
expenses of approximately $700,000.
AMORTIZATION OF INTANGIBLES. The Company recorded amortization of intangibles
of $198,000 in the second quarter of 1998, $237,000 in the second quarter of
1997, $398,000 for the first six months of 1998 and $480,000 for the first six
onths of 1997, primarily resulting from amortization of goodwill. Most of
the 1998 decrease was due to exchange rate changes.
INCOME FROM OPERATIONS. As a result of the foregoing changes in revenue,
gross profit and operating expenses, the Company's income from operations
was $6.5 million for the second quarter of fiscal 1998 compared to $3.7
million for the second quarter of fiscal 1997 and $10.1 million for the
first six months of 1998 compared to $6.2 million for the first six
months of 1997.
INTEREST INCOME AND EXPENSE. Interest income for the second quarter
of fiscal 1998 was $81,000 compared to interest income of $82,000 for the
second quarter of fiscal 1997. Interest income for the first six months
of fiscal 1998 was $165,000 compared to $257,000 for the first six months
of 1997. Interest expense, net of capitalized interest, for the second
quarter of 1998 was $927,000 compared to $1.0 million for the second quarter
of fiscal 1997. Interest expense, net of capitalized interest, for the first
six months of 1998 was $1.7 million compared to $2.1 million for the first
six months of 1997. Capitalized interest for the second quarter of 1998 was
$262,000 compared to $68,000 for the second quarter of fiscal 1997.
Capitalized interest for the first six months of 1998 was $348,000 compared
to $118,000 for the first six months of 1997.
PROVISION FOR INCOME TAXES AND MINORITY INTEREST. The effective income
tax rate was 38.5% for the second quarter of 1998 and 39.0% for the first
six months of 1998 compared to 40.0% for the comparative periods of 1997.
The change in the effective tax rate is primarily due to the recognition of
benefit from foreign sales corporations. Minority interest was $408,000 in
the second quarter of 1998 and $555,000 for the first six months of 1998
compared to $143,000 for the second quarter of 1997 and $179,000 for the
first six months of 1997. Minority interest represents the share of net
income of Flex Products accruing to its 40% stockholder and the portion of
operating results of OCLI Asia attributable to its Japanese partner.
NET INCOME APPLICABLE TO COMMON STOCK. The Company had net income applicable
to common stock of $2.9 million, or $.25 per share, on a diluted basis, for
the second quarter of fiscal 1998 compared to $1.3 million, or $.13 per share
on a diluted basis, for the second quarter of fiscal 1997. The Company had
net income applicable to common stock of $4.4 million, or $.38 per share on
a diluted basis, for the first six months of 1998 compared to $2.0 million, or
$.19 per share on a diluted basis, for the first six months of 1997.
In 1998, the Company implemented Statement of Financial Accounting Standards
No. 128 which requires dual presentation of basic and diluted earnings per
share. Basic earnings per share does not reflect the dilution of common stock
equivalents such as stock options and warrants. Diluted earnings per share
includes potential dilution of convertible securities, stock options and
warrants. The earnings per share presentation for 1997 was restated to
reflect this change.
LITIGATION
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 without SICPA's consent was prohibited by Flex Products'
articles of incorporation as well as by certain contractual provisions
between the Company and SICPA. In 1998, the Company announced that it had
completed final negotiations for the settlement of the litigation with SICPA.
Under the terms of the settlement, the Company and SICPA have agreed to
modify their co-ownership agreement to enable OCLI to more effectively manage
the day-to-day operations of Flex Products, to allow for public financing of
Flex Products'operations and to modify the License and Supply Agreement
between Flex Products and SICPA to provide for more attractive scheduled
pricing discounts on higher volume purchases and to change the scheduled
order patterns to be consistent with the Company's fiscal quarters. In
addition, the Company purchased $2.6 million of Flex Products' working
capital loan from SICPA.
IMPACT OF FOREIGN OPERATIONS, EXPORT SALES, FOREIGN CURRENCY AND HEDGING
The Company has significant investments in Germany, Scotland and Japan.
Changes in the value of those countries' currencies relative to the U.S.
dollar are recorded as direct charges or credits to equity. The Company
also has manufacturing operations in Germany, Scotland and Japan and sales
presence in other European and Asian countries. A significant weakening of
the currencies in Europe or Asia in relation to the U.S. dollar could reduce
the reported results of those operations. In addition, a significant amount
of the Company's sales are export sales which could be subject to competitive
price pressures if the U.S. dollar was to strengthen compared to the currency
of foreign competitors.
The Company does, from time to time, enter into purchase, sales or debt
arrangements denominated in currencies other than its functional currency
which exposes the Company to currency risk on open receivable and payable
balances. The Company is also exposed to exchange risk on open intercompany
balances that some of the foreign subsidiaries have with the Company and its
subsidiaries. The Company has not entered into contracts to hedge any of
these risks, and the Company does not consider its net exposure on these
items to be material. The Company will, from time to time, enter into
currency contracts (such as forwards or options) in order to manage the
currency risk on open balances or commitments. In the second quarter of 1998,
the Company entered into foreign currency forward contracts for the principal
and interest payments under a $4.1 million loan that is denominated in
German Marks. See FINANCIAL DERIVATIVES AND HEDGING TRANSACTIONS below.
For the first six months of 1998, 27% of the Company's consolidated sales
constituted sales to customers in Europe and 13% of the Company's consolidated
sales constituted sales to customers in Asia. During 1998, the Company has
experienced an overall decline in sales mix from sales to customers in Asia
(from 14% of consolidated sales for the first six months of 1997 to 13% for
the first six months of 1998) and a decline in sales mix from sales to
customers in Europe (from 37% of consolidated sales for the first six months
of 1997 to 27% for the first six months of 1998). The Company attributes
the decline in the Asian sales mix to growth in other geographic markets and
attributes the decline in the European sales mix to shifts in the Company's
markets. Due to the Company's investments in Europe and Asia and the
geographic mix of the Company's sales, changes in economic conditions in
Europe and Asia could materially affect the Company's future operations.
FINANCIAL DERIVATIVES AND HEDGING TRANSACTIONS
The Company, from time to time, enters into derivative transactions in order
to hedge foreign currency risk on existing commitments, open receivables,
payables and debt instruments when the currency risk is considered material
to the Company. In addition, the Company may enter into interest rate swaps
or similar instruments in order to reduce interest rate risk on its debt
instruments. The Company does not enter into derivatives for trading
purposes.
In the second quarter of 1998, the Company entered into foreign currency
forward contracts for the principal and interest payments under a $4.1
million loan that is denominated in German Marks. The transaction is
designated as a hedge of a foreign currency commitment. Gains and losses
on the contract are recorded as a net reduction or increase to interest
expense over the life of the loan.
In the second quarter of 1998, the Company entered into an interest rate swap
for anticipated debt refinancing in the amount of $30 million. The purpose
of the swap is to fix the reference rate for the debt at 5.71% to eliminate
the Company's exposure to interest rate fluctuations until the loan refinance
is completed. The Company has designated the swap as a hedge of an
anticipated transaction and will record the gain or loss on the transaction
as a net reduction or increase to interest expense over the life of the loan.
FINANCIAL CONDITION
In 1998, the Company's cash and short-term investment position decreased by
$9.4 million. $8.3 million was invested in plant and equipment, $3.4 million
was used to pay down debt, $844,000 was used to pay dividends and $2.6
million was used to purchase a portion of Flex Products' working capital loan
from SICPA. These expenditures were offset by $4.5 million of cash generated
by operations, stockholder investments of $639,000 and working capital loans
from SICPA to Flex Products of $800,000.
In 1998, the Company's working capital, excluding cash and short-term
investments, increased $6.7 million, primarily due to increased accounts
receivable ($2.1 million) and increased inventories ($4.1 million).
Approximately half of the increase in inventories results from inventory
increases in anticipation of new product demand. The remaining inventory
increase and the accounts receivable increase is due to increased sales and
bookings in 1998.
During 1998, the remaining shares of the 8% Series C Convertible Redeemable
Preferred Stock were converted into 599,000 shares of common stock of the
Company.
Management believes that the cash on hand at April 30, 1998, cash anticipated to
be generated from future operations 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, for at least the next twelve months.
IMPACT OF YEAR 2000
The "Year 2000 Issue" is the result of computer programs that were written
using two digits rather than four to define the applicable year. If the
Company's computer programs with date-sensitive functions are not Year 2000
compliant, they may recognize a date using "00" as the year 1900 rather than
the Year 2000. This could result in a system failure or miscalculations
causing disruptions of operations, including, among other things, a temporary
inability to process transactions, send invoices or engage in similar normal
business activities.
During 1997, as part of a business modernization program intended to reduce
cycle time and improve profitability, the Company purchased an Enterprise
Resource Planning System. The software vendor has indicated that the new
system is Year 2000 compliant, and the Company's implementation schedule
provides for full implementation on a worldwide basis for all of its
financial and business systems before the Year 2000. However, if the
implementation is not completed on a timely basis, the Year 2000 could have a
material impact on the operations of the Company.
The Company has a plan to formally communicate with its significant suppliers
and contractors to determine the extent to which the Company's interface
systems are vulnerable to those third parties' failure to remedy their own
Year 2000 issues. The Company does not currently have any information
concerning the Year 2000 compliance status of its customers. In the event
that any of the Company's significant customers and suppliers do not
successfully and timely achieve Year 2000 compliance, the Company's business
or operations could be adversely affected.
The Company is gathering data to assess the impact of the Year 2000 on its
non-financial systems such as manufacturing equipment, security equipment,
etc. The Company does not, at this time, have sufficient data to estimate
the cost of achieving Year 2000 compliance for its non-financial systems but
does not expect those costs to have a material impact on its results of
operations and cash flows. If the Company is unable to achieve Year 2000
compliance for its major non-financial systems, the Year 2000 could have a
material impact on the operations of the Company.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1996
Except for historical information contained in this report, matters discussed
in this report are forward-looking statements that involve risks and
uncertainties. Actual results may vary significantly based on a number of
factors including, but not limited to, product development, commercialization
and technological difficulties, manufacturing costs and yield issues
associated with initiating production at new facilities, the impact of
competitive products and pricing, changing customer requirements and the
change in economic conditions of the various markets the Company serves.
INDEPENDENT ACCOUNTANTS' REVIEW
The April 30, 1998 condensed consolidated financial statements included in
this filing on Form 10-Q have been reviewed by Deloitte & Touche LLP,
independent accountants, in accordance with established professional
standards and procedures for such a review.
The report of Deloitte & Touche LLP commenting on their review follows.
INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors
and Stockholders of
Optical Coating Laboratory, Inc.
Santa Rosa, California
We have reviewed the accompanying condensed consolidated balance sheet of
Optical Coating Laboratory, Inc. and subsidiaries as of April 30, 1998, and
the related condensed consolidated statements of income and cash flows for
the three-month and six-month periods ended April 30, 1998 and April 30, 1997
and the related condensed consolidated statement of stockholders' equity for
the six-month period ended April 30, 1998. These financial statements are
the responsibility of the Company's management. We were furnished with the
report of other accountants on their review of the interim financial
information of Flex Products, Inc. (a consolidated subsidiary) for the three
and six month periods ended April 30, 1997, whose total revenues constituted
17% of consolidated total revenues for the six-month period ended April 30,
1997. We conducted our review in accordance with standards established by
the American Institute of Certified Public Accountants. A review of interim
financial information consists of applying analytical review procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit in
accordance with generally accepted auditing standards, the objective of
which is the expression of an opinion regarding the financial statements
taken as a whole. Accordingly, we do not express such an opinion.
Based on our review and the report of other accountants, we are not aware
of any material modifications that should be made to such condensed
consolidated financial statements for them to be in conformity with generally
accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Optical Coating Laboratory, Inc.
and subsidiaries as of October 31, 1997, and the related consolidated
statements of income, stockholders' equity, and cash flows for the year then
ended (not presented herein); and in our report dated December 19, 1997, we
expressed an unqualified opinion on those consolidated financial statements
based on our audit and the report of other auditors on their audit of Flex
Products, Inc. (a consolidated subsidiary). In our opinion, based on our
audit, and the report of other auditors, the information set forth in the
accompanying condensed consolidated balance sheet as of October 31, 1997 is
fairly stated, in all material respects, in relation to the consolidated
balance sheet from which it has been derived.
Deloitte & Touche LLP
San Jose, California
May 20, 1998
INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors
and Stockholders of
Flex Products, Inc.
Santa Rosa, California
We have reviewed the balance sheet of Flex Products, Inc. as of May 3, 1997
and the related statements of operations and cash flows for the three-month
and six month periods ended May 3, 1997 and April 30, 1996. These financial
statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
These financial statements have been prepared on a historical basis of
accounting and do not reflect any purchase accounting adjustments recorded by
Optical Coting Laboratory, Inc. as a result of their acquisition of a
majority interest in Flex Products, Inc. as of May 8, 1995.
Based on our review, we are not aware of any material modifications that
should be made to the financial statements referred to above for them to be
in conformity with generally accepted accounting principles.
The balance sheet as of November 2, 1997 was audited by us, and we expressed
an unqualified opinion on it in our report dated November 26, 1997, but we
have not performed any auditing procedures since that date.
KPMG Peat Marwick LLP
San Francisco, California
May 14, 1998
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There have been no material changes in legal proceedings since those
reported in Registrant's Form 10-K for the year ended October 31, 1997.
ITEM 2. CHANGES IN SECURITIES
No disclosure required.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
No disclosure required.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of Stockholders was held on March 31, 1998.
(b) The management nominees for director listed in the proxy statement were
elected as follows:
NOMINEES FOR DIRECTOR VOTES FOR VOTES WITHHELD
Herbert M. Dwight, Jr. 9,208,536 167,021
Charles J. Abbe 9,239,211 136,346
Douglas C. Chance 9,237,506 138,051
Shoei Kataoka 9,223,741 151,816
John McCullough 9,194,197 181,360
Julian Schroeder 9,238,171 137,386
Renn Zaphiropoulos 9,234,433 141,124
(c) The ratification of the appointment of Deloitte & Touche LLP as the
independent auditors of the Company for the year ending October 31, 1998.
For 9,280,773
Against 43,435
Abstain 51,349
Broker Non-Vote 1,292,311
ITEM 5. OTHER INFORMATION
No disclosure required.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
1. (11)* Computation of earnings per share for the three and six month periods
ended April 30, 1998 and 1997.
2. (15)* Letter of Deloitte & Touche LLP regarding unaudited interim financial
information.
3. (27)* Financial Data Schedule for the three months ended April 30, 1998.
Reports on Form 8-K filed for the three months ended April 30, 1998
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Optical Coating Laboratory, Inc.
June 12, 1998 By: /S/CRAIG B. COLLINS
Date Craig B. Collins, Vice President, Finance
and Chief Financial Officer
OPTICAL COATING LABORATORY, INC. AND SUBSIDIARIES
EXHIBIT 11. COMPUTATION OF EARNINGS PER SHARE
For the three and six months
ended April 30, 1998 and 1997
(Amounts in thousands,
except per share amounts)
THREE MONTHS SIX MONTHS
1998 1997 1998 1997
BASIC SHARES:
Average common shares outstanding 10,903 10,069 10,767 9,927
====== ====== ====== =====
Net income $3,049 $1,513 $4,645 $2,420
Less dividend on preferred stock (125) (187) (250) (427)
------ ------ ------ ------
Net income applicable
to common stock $2,924 $1,326 $4,395 $1,993
====== ====== ====== ======
Net income per
common share, basic $0.27 $0.13 $0.41 $0.20
====== ====== ====== ======
DILUTED SHARES:
Average common shares
outstanding 10,903 10,069 10,767 9,927
Dilutive effect of employee
stock options 650 341 711 365
Potential dilution of
preferred stock * * * *
------ ------ ------ ------
11,553 10,410 11,478 10,292
====== ====== ====== =====
Net income applicable
to common stock $2,924 $1,326 $4,395 $1,993
Add back dividend on ====== ====== ====== ======
preferred stock * * * *
------ ------ ------ ------
Net income for calculating
diluted earnings per share $2,924 $1,326 $4,395 $1,993
====== ====== ====== ======
Net income per share, diluted $0.25 $0.13 $0.38 $0.19
====== ====== ====== ======
*ANTI-DILUTIVE
EXHIBIT 15. LETTER REGARDING UNAUDITED INTERIM FINANCIAL INFORMATION
To the Board of Directors and Stockholders
of Optical Coating Laboratory, Inc.
Santa Rosa, California
We have reviewed, in accordance with standards established by the American
Institute of Certified Public Accountants, the unaudited interim financial
information of Optical Coating Laboratory, Inc. and subsidiaries for the
periods ended April 30, 1998 and 1997 as indicated in our report dated May
20, 1998. Because we did not perform an audit, we expressed no opinion on
that information.
We are aware that our report referred to above, which is included in your
Quarterly Report on Form 10-Q for the quarter ended April 30, 1998, is
incorporated by reference in Registration Statements No. 33-41050,
No. 33-26271, No. 33-12276, No. 33-48808, No. 33-65132, No. 33-60891 and
No. 333-13013 on Forms S-8, Registration Statement No. 33-61177 and
No. 33-65319 on Form S-3.
We are also aware that the aforementioned report, pursuant to Rule 436(c)
under the Securities Act, is not considered a part of the Registration
Statement prepared or certified by an accountant or a report prepared or
certified by an accountant within the meaning of Sections 7 and 11 of that
Act.
Deloitte & Touche LLP
San Jose, California
June 15, 1998
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