UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 1999
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 12,228,204 at February 28, 1999
<PAGE>
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OPTICAL COATING LABORATORY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
January 31, October 31,
ASSETS 1999 1998
===========================================================================
(Dollars in thousands) (Unaudited)
CURRENT Cash and cash equivalents $ 14,324 $ 40,880
ASSETS Accounts receivable, net of
allowance for doubtful
accounts of $1,797 and $1,831 39,392 38,585
Inventories 21,268 25,233
Income taxes receivable 2,511
Deferred income tax assets 5,186 9,311
Other current assets 6,015 1,822
-------- --------
Total Current Assets 88,696 115,831
OTHER Deferred income taxes 536 716
ASSETS Property, plant and equipment
held for sale 531 3,183
Goodwill and other assets 23,801 4,151
PROPERTY, Land and improvements 9,116 9,116
PLANT AND Buildings and improvements 36,563 36,171
EQUIPMENT Machinery and equipment 125,376 123,261
Construction-in-progress 14,269 12,722
-------- --------
185,324 181,270
Less accumulated depreciation (94,082) (91,565)
-------- --------
Property, plant and equipment-net 91,242 89,705
-------- --------
Total Assets $204,806 $213,586
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
==========================================================================
CURRENT Accounts payable $ 6,667 $ 8,423
LIABILITIES Accrued expenses 7,883 9,935
Accrued compensation expenses 6,866 10,365
Income taxes payable 252 708
Current maturities on long-term debt 5,903 6,026
Notes payable 3,612 4,483
Deferred revenue 4,504 761
-------- --------
Total Current Liabilities 35,687 40,701
NONCURRENT Accrued postretirement health
LIABILITIES benefits and pension liabilities 2,269 2,241
Deferred revenue 1,050
Deferred income tax liabilities 8,399 3,528
Long-term debt 51,870 52,373
Minority interest 12,520
STOCKHOLDERS' Common stock, $.01 par value;
EQUITY authorized 30,000,000 shares;
issued and outstanding 12,215,000
and 12,087,000 shares 122 121
Paid-in capital 72,120 69,993
Retained earnings 33,258 31,951
Accumulated other comprehensive
income 31 158
-------- --------
Stockholders' Equity 105,531 102,223
-------- --------
Total Liabilities and
Stockholders' Equity $204,806 $213,586
======== ========
The accompanying notes are an integral part of these
financial statements.
<PAGE>
OPTICAL COATING LABORATORY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
------------------------
(Unaudited)
For the three months ended January 31, 1999 and 1998
(Amounts in thousands, except per share amounts)
1999 1998
==========================================================================
REVENUES Revenues $69,851 $53,373
Cost of Sales 48,632 36,235
------- -------
Gross Profit 21,219 17,138
COSTS AND Operating Expenses:
EXPENSES Research and development 4,644 3,821
Selling and administrative 10,193 9,488
Legal settlement, net (2,960)
In process research and
development charges 2,906
Amortization of intangibles 217 200
------- -------
Total Operating Expenses 15,000 13,509
------- -------
Income from Operations 6,219 3,629
Nonoperating Income (Expense):
Interest income 318 84
Interest expense (959) (808)
------- -------
EARNINGS Income Before Provision for Income
Taxes and Minority Interest 5,578 2,905
Provision for income taxes 3,054 1,162
Minority interest 491 147
------- -------
Net Income 2,033 1,596
Dividend on convertible redeemable 125
preferred stock ------- -------
Net Income Applicable to
Common Stock 2,033 1,471
COMPRE- Other comprehensive income (loss):
HENSIVE
INCOME Foreign currency translation
adjustment, net of tax (127) (942)
------- -------
Comprehensive income $ 1,906 $ 529
======= =======
Net Income Per Share, Basic $ .17 $ .14
======= =======
Net Income Per Share, Diluted $ .16 $ .13
======= =======
Weighted average number of common
shares used to compute basic
earnings per share 12,142 10,625
======= =======
Weighted average number of common
shares used to compute diluted
earnings per share 12,868 11,396
======= =======
The accompanying notes are an integral part
of these financial statements.
<PAGE>
OPTICAL COATING LABORATORY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(Unaudited)
For the three months ended January 31, 1999 and 1998
(Amounts in thousands) 1999 1998
============================================================================
OPERATIONS
Cash Flow From Operations:
Cash received from customers $ 53,208 $42,062
Interest received 371 51
Cash paid to suppliers and employees (40,018) (46,876)
Interest paid (523) (808)
Income taxes paid, net of refunds (836) (28)
------- -------
Net Cash Provided By (Used For)
Operations 12,202 (5,599)
------- -------
INVESTMENTS
Cash Flows From Investments:
Purchase of remaining interest in
Flex Products (30,035)
Purchase of plant and equipment (5,055) (4,261)
------- ------
Net Cash Used For Investments (35,090) (4,261)
------- ------
FINANCING
Cash Flows From Financing:
Proceeds from long-term debt 47 6,774
Repayment of long-term debt (1,401) (6,564)
Proceeds from notes payable 183
Proceeds from exercise of stock options 849 335
Proceeds from note to minority stockholder 800
Purchase of note from minority stockholder (2,400) (2,600)
Payment of dividend on preferred stock (125)
Payment of dividend on common stock (726) (636)
------- ------
Net Cash Used For Financing (3,631) (1,833)
------- ------
Effect of exchange rate changes on cash (37) (105)
------- ------
Decrease in cash and cash equivalents (26,556) (11,798)
Cash and cash equivalents at beginning
of period 40,880 15,217
------- -------
Cash and cash equivalents at end of period $14,324 $ 3,419
======= =======
<PAGE>
OPTICAL COATING LABORATORY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
-----------------------------------------------------------
(Unaudited)
For the three months ended January 31, 1999 and 1998
(Amounts in thousands) 1999 1998
============================================================================
ADJUSTMENTS
Reconciliation of Net Income To Cash Flows From Operations:
Net income $ 2,033 $ 1,596
Adjustments to reconcile net income to
net cash provided by operations:
Depreciation and amortization 2,985 2,985
Minority interest in earnings of
subsidiaries 491 147
Loss on disposal of equipment 557 210
Accrued postretirement health benefits 28 40
Other non-cash adjustments to net income 765 471
Change in:
Accounts receivable (905) (3,364)
Inventories 2,207 (2,004)
Income taxes receivable and income
taxes payable (2,454) 235
Deferred income taxes 9,158 601
Other current assets and other assets
and investments (292) (1,074)
Accounts payable, accrued expenses and
accrued compensation expenses (7,164) (6,508)
Deferred revenue 4,793 1,066
------- -------
Total adjustments 10,169 (7,195)
------- -------
Net Cash Provided By (Used For)
Operations $12,202 $(5,599)
======= =======
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
In the first quarter of 1999, the Company sold the operating assets of the
Company's manufacturing subsidiary in Germany (MMG) for $4.3 million. The
cash proceeds from the sale were received in February 1999, after the
balance sheet date. The amount receivable from the sale is included in
other current assets at January 31, 1999.
In the first quarter of 1999 and 1998, the Company issued 39,914 and 39,292
shares of common stock to the OCLI 401(k)/Employee Stock Ownership Plan at
fair market value to satisfy a portion of its Company contribution.
The accompanying notes are an integral part of these financial statements.
<PAGE>
OPTICAL COATING LABORATORY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
---------------------------------------------------------
For the three months ended January 31, 1999
(Unaudited)
Accumulated
Commmon Stock Other
-------------- Paid-In Retained Comprehensive
(Amounts in thousands) Shares Amount Capital Earnings Income
=============================================================================
BALANCE AT OCTOBER 31, 1998 12,087 $121 $69,993 $31,951 $ 158
Shares issued to Employee
Stock Ownership Plan 40 933
Exercise of stock options
including tax benefit 88 1 1,194
Foreign currency
translation adjustment (127)
Net Income 2,033
Dividend on common stock (726)
=============================================================================
BALANCE AT JANUARY 31, 1999 12,215 $122 $72,120 $33,258 $ 31
=============================================================================
<PAGE>
OPTICAL COATING LABORATORY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
Three Months Ended January 31, 1999 and 1998
(Unaudited)
1. GENERAL
- ------------
OCLI designs, develops and manufactures optical products incorporating
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
of optical and electro-optical systems and sells its GlareGuard. brand
ergonomic computer display products through resellers and office retailers.
OCLI's products are found in many applications including computer monitors,
flat panel displays, telecommunication systems, photocopiers, fax machines,
medical/analytical equipment and instruments, projection imaging systems,
satellite power systems and aerospace and defense systems. The Company also
manufactures precision injection molded plastic optical components that are
used in a variety of applications such as inkjet printers and point of sale
scanners. Through its wholly owned subsidiary, Flex Products, Inc. (Flex
Products), the Company designs and manufactures optical products
incorporating multi-layer and single layer 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. light
interference pigments for commercial paints.
The Condensed Consolidated Balance Sheet as of January 31, 1999, the
Condensed Consolidated Statements of Income and Other Comprehensive Income
for the three month periods ended January 31, 1999 and 1998, the Condensed
Consolidated Statement of Stockholders' Equity for the three month period
ended January 31, 1999 and the Condensed Consolidated Statements of Cash
Flows for the three month periods ended January 31, 1999 and 1998, 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 January 31, 1999 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, 1998.
The results of operations for the period ended January 31, 1999 are not
necessarily indicative of the operating results anticipated for the full
year.
2. COMPREHENSIVE INCOME
- -------------------------
In the first quarter of 1999, the Company adopted the provisions of SFAS
No. 130 "Reporting Comprehensive Income," which required the Company to
report, by major component and in total, all changes to equity from non
owner sources. The Company's Condensed Consolidated Statements of Income
has been changed to Condensed Consolidated Statements of Income and
Comprehensive Income. Comprehensive income consists of foreign currency
translation adjustments which are reported as a separate component of
equity.
Accumulated comprehensive income presented on the Condensed Consolidated
Balance Sheets and the Condensed Consolidated Statements of Stockholders'
Equity consists of cumulative foreign currency translation adjustments.
3. LEGAL SETTLEMENT
- ---------------------
On January 15, 1999, the Company announced that it had settled a lawsuit
with Optical Corporation of America and certain of its shareholders
regarding a failed merger in fiscal 1996. The Company received cash, net
of related legal expenses, of $2.9 million which was recorded as a benefit
in the first quarter of 1999.
4. DISPOSALS AND ACQUISITIONS
- -------------------------------
In the first quarter of 1999, Glas-Trosch GmbH, a privately held glass
company in Switzerland, purchased the business and operating assets
(inventory, equipment, furniture, two buildings, workforce, customer lists
and other related intangibles) of the Company's manufacturing subsidiary in
Germany (MMG) for $4.3 million. As the Company had previously recorded an
impairment loss to reduce MMG's assets to fair value on a liquidation
basis, no gain or loss was recognized on the sale. The cash proceeds from
the sale were received in February 1999 and, as a result, the amount
receivable from the sale is included in other current assets at January 31,
1999. An office building in Germany, with a carrying value of $531,000
which was not part of the sale, is being held for sale.
In connection with the sale of MMG, the Company also received $1.2 million
for a three-year covenant not to compete and $600,000 for a three-year
license and supply agreement that incorporates the use of the OCLI name.
The $1.8 million received for those contracts is being recognized as
revenue over the three-year terms of the agreements.
In December 1998, the Company acquired the 40% minority interest in Flex
Products held by SICPA Holding S.A. for $30 million bringing the Company's
ownership in Flex Products to 100%. The transaction was recorded as a
purchase in the first quarter of fiscal year 1999 based on data provided in
an independent valuation. Pursuant to this transaction, the Company
recorded a charge for in-process research and development of $2.9 million,
goodwill of $10.1 million which will be amortized over 15 years, and
identifiable intangibles of $10.1 million which will be amortized over
useful lives ranging from 11 to 15 years. Goodwill and identifiable
intangibles are included in other assets.
In addition, the Company purchased SICPA's $2.4 million dollar working
capital loan and the License and Supply Agreement between Flex Products and
SICPA that runs through October 31, 2015, was modified to increase SICPA's
minimum purchase requirements in association with Flex's commitment to put
in place additional capacity to manufacture optically variable pigment.
In February 1999, after the balance sheet date, the Company announced the
acquisition of OPKOR, Inc., an optical design and manufacturing company
specializing in precision polymer optic components and assemblies, for $9.0
million plus annual contingent payments based on profits of the acquired
entity. Consideration consisted of $1.8 million cash and 267,285 shares of
Company common stock. The acquisition will be recorded as a purchase in
the second quarter of 1999. The purchase price allocation may include a
component consisting of in-process research and development which would
result in a charge to expense in the second quarter of 1999.
5. EARNINGS PER SHARE
- -----------------------
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share computations for the three months
ended January 31, 1999 and January 31, 1998:
(Amounts in thousands, except per share amounts) 1999 1998
===========================================================================
BASIC EARNINGS PER SHARE:
Weighted average common shares outstanding 12,142 10,625
====== ======
Net income $2,033 $1,596
Less dividend on convertible redeemable preferred stock (125)
------ ------
Net income applicable to common stock $2,033 $1,471
====== ======
Net income per common share, basic $ .17 $ .14
====== ======
DILUTED EARNINGS PER SHARE:
Weighted average common shares outstanding, basic 12,142 10,625
Dilutive effect of employee stock options 726 771
------ ------
Average shares outstanding, diluted 12,868 11,396
====== ======
Net income applicable to common stock, diluted $2,033 $1,471
====== ======
Net income per share, diluted $ 0.16 $ 0.13
====== ======
Preferred stock convertible into 595,000 shares of common stock in the
first quarter of 1998 was not included in the calculation of diluted
earnings per share as the effect of increasing the denominator by those
amounts and adding back the preferred dividends would have increased
diluted earnings per share.
Options to purchase 45,000 shares of common stock at a weighted average
price of $25.89 that were outstanding during the first quarter of 1999 were
not included in the computation of diluted earnings per share because the
exercise price was greater than the average market price of the common
shares. The options, which expire in 2003, were still outstanding at
January 31, 1999.
In February 1999, the Company restructured the equity of Flex Products. As
a result of this restructuring, in order to make the option holders whole
under the provisions of Flex Products' option plan, the Company exchanged
options for the exercise of 928,200 shares of Flex Products at a weighted
average exercise price of $4.54 for options for the exercise of 324,157
shares of Company common stock at a weighted average exercise price of
$12.99. The exchange was based on the ratio of the market value per share
of Flex Products (based on an independent valuation) to the market value of
Company common stock on the date of the equity restructuring. The per
share exercise price for each converted Flex Products option was based on
the ratio of the Flex Products exercise price over the market value per
share of Flex Products multiplied by the market value per share of Company
common stock on the date of the equity restructuring.
6. RESTRUCTURING PAYMENTS
- ---------------------------
In the first quarter of 1999, $306,000 of severance and termination
benefits and $250,000 of exit costs were paid under a restructuring plan
for which $586,000 had been accrued in fiscal 1998. Remaining accrued
restructuring expenses under the plan at January 31, 1999 are $30,000.
7. LONG TERM DEBT
- -------------------
The Company has certain financial covenants and restrictions under its bank
credit arrangements and unsecured senior notes. In January 1999, the
Company and its bank executed an amendment to the Company's credit
agreement which removed the impairment loss and restructuring charges
recorded in fiscal year 1998 from the Company's financial covenants.
In February 1999, after the balance sheet date, the Company and the bank
executed an amendment to the Company's credit agreement increasing the
amount available under its revolving line of credit from $20 million to $40
million.
8. 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.
At January 31, 1998, the Company has outstanding foreign currency forward
contracts for the principal and interest payments under a $3.5 million loan
that is denominated in German marks and for the principal and interest
payments under an intercompany note receivable denominated in British
Pounds. The notional amounts, carrying amounts and fair values of the
Company's derivatives position at January 31, 1999 are included in the
table below:
ESTIMATED FAIR
NOTIONAL CARRYING VALUE OF FOREIGN
(Amounts in thousands) AMOUNT AMOUNT EXCHANGE CONTRACT
=============================================================================
Foreign currency forward
exchange contracts:
Deutsche Marks $3,865 $0 $196
British Pounds 2,948 0 163
9. INVENTORIES
- -----------------------
Inventories consisted of the following:
JANUARY 31, OCTOBER 31,
(Amounts in thousands) 1999 1998
========================================================================
(Unaudited)
Raw materials and supplies $ 6,289 $ 7,138
Work-in-process 9,896 13,148
Finished goods 5,083 4,947
------- -------
Total inventories $21,268 $25,233
======= =======
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE INFORMATION CONTAINED IN MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION INCLUDES FORWARD LOOKING
STATEMENTS WHICH ARE TYPICALLY IDENTIFIED BY THE WORDS "ANTICIPATES,"
"BELIEVES," "EXPECTS," "INTENDS," "FORECASTS," "PLANS," "FUTURE,"
"STRATEGY," OR WORDS OF SIMILAR IMPORT. VARIOUS IMPORTANT FACTORS THAT
COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED IN THE
FORWARD-LOOKING STATEMENTS ARE IDENTIFIED BELOW. ACTUAL RESULTS MAY VARY
SIGNIFICANTLY BASED ON A NUMBER OF FACTORS INCLUDING, BUT NOT LIMITED TO,
PRODUCT DEVELOPMENT, COMMERCIALIZATION AND TECHNOLOGICAL DIFFICULTIES;
MANUFACTURING COSTS AND YIELD ISSUES ASSOCIATED WITH INITIATING PRODUCTION
AT NEW FACILITIES; THE IMPACT OF COMPETITIVE PRODUCTS AND PRICING; CHANGING
CUSTOMER REQUIREMENTS; AND THE CHANGE IN ECONOMIC CONDITIONS OF THE VARIOUS
MARKETS THE COMPANY SERVES.
RESULTS OF OPERATIONS
REVENUE. Revenue for the first quarter of fiscal 1999 was $69.9 million,
an increase of $16.5 million or 31% over revenues of $53.4 million in the
first quarter of fiscal 1998. Adjusted for the effect of MMG (see
DIVESTITURES, INVESTMENTS AND ACQUISITIONS below), revenue for the first
quarter of fiscal 1999 would have increased $19.4 million or 38.5% over
revenue of $50.4 million in the first quarter of fiscal 1998. The year-to-
date 1999 revenue increase resulted from sales in the Company's
telecommunications markets which increased by $12.9 million, sales by Flex
Products which increased $5.5 million, office automation sales which
increased $1.3 million (adjusted for the effect of MMG) and a $719,000
increase in the Company's defense and aerospace sales. These increases
were offset by a decrease of $1.0 million in the Company's display
markets. All of the revenue increases and decreases were primarily due to
changes in volume.
GROSS PROFIT. Gross profit for the first quarter of fiscal 1999 was $21.2
million, or 30.4%, of revenue compared to $17.1 million, or 32.1%, of
revenue for the first quarter of fiscal 1998. Adjusted for the effect of
MMG, gross profit for the first quarter of 1998 would have been $16.5
million, or 32.8% of revenue. The 1999 gross profit decrease as a percent
of revenue is primarily due to the increase in telecommunications sales
which have a lower gross margin than the Company average.
RESEARCH AND DEVELOPMENT. Research and development expenditures in the
first quarter of 1999 were $4.6 million compared to $3.8 million in the
first quarter of 1998. The current year-to-date increase is primarily due
to new product development and product improvement initiatives for
telecommunications products.
SELLING AND ADMINISTRATIVE. Selling and administrative expenses in the
first quarter of fiscal 1999 were $10.2 million, an increase of $705,000,
or 7%, from selling and administrative expenses of $9.5 million for the
first quarter of fiscal 1998. Adjusted for the effect of MMG, selling and
administrative expenses would have increased $1.5 million in the first
quarter of 1999 over selling and administrative expenses of $8.7 million
for the first quarter of 1998. The 1999 increase was primarily due to a
$600,000 increase in selling expenses primarily for the promotion of
optically variable pigment for consumer applications and increased general
and administrative expenses due to profit based incentive accruals.
LEGAL SETTLEMENT. In the first quarter of 1999, the Company settled a
lawsuit with Optical Corporation of America (OCA) and certain of its
shareholders regarding a failed merger in 1996. A benefit of $3.0 million
was recorded in the first quarter of 1999 for the cash proceeds from the
settlement, net of applicable legal expenses. See LITIGATION below.
IN-PROCESS RESEARCH AND DEVELOPMENT CHARGES. In the first quarter of 1999,
the Company purchased the remaining interest in Flex Products held by SICPA
Holding S.A. for $30 million. The transaction was recorded as a purchase in
the first quarter of fiscal year 1999 based on data provided in an
independent valuation. Pursuant to this transaction, the Company recorded a
charge for in-process research and development of $2.9 million. See
DIVESTITURES, INVESTMENTS AND ACQUISITIONS below.
AMORTIZATION OF INTANGIBLES. The Company recorded amortization of
intangibles of $217,000 in the first quarter of 1999 compared to $200,000
in the first quarter of 1998. Adjusted for the effect of MMG, amortization
of intangibles for the first quarter of 1998 would have been $104,000. The
1999 increase is due to amortization of goodwill and identifiable
intangibles in connection with the purchase of the remaining interest in
Flex Products which is expected to increase amortization expense by
approximately $340,000 per quarter.
INCOME FROM OPERATIONS. As a result of the foregoing changes in revenue,
gross profit and operating expenses, the Company's income from operations
was $6.2 million for the first quarter of fiscal 1999 compared to $3.6
million for the first quarter of fiscal 1998.
INTEREST INCOME AND EXPENSE. Interest income for the first quarter of
fiscal 1999 was $318,000 compared to interest income of $84,000 for the
first quarter of fiscal 1998. The increase in interest income is due to
higher average cash balances in 1999. Interest expense, net of capitalized
interest, for the first quarter of 1999 was $959,000 compared to $808,000
for the first quarter of fiscal 1998. Capitalized interest for the first
quarter of 1998 was $160,000 compared to $84,000 for the first quarter of
fiscal 1998. The capitalized interest increase in 1999 is primarily due to
the construction of capital equipment for telecommunications manufacturing.
The increase in gross interest expense is due to increased borrowings
outstanding in 1999.
PROVISION FOR INCOME TAXES AND MINORITY INTEREST. The effective income tax
rate was 54.8% for the first quarter of 1999 compared to 40.0% for the
first quarter of 1998. Adjusted for the effect of the in-process research
and development charge, for which no tax benefit was recorded, the
effective income tax rate for the first quarter of 1999 is 36%. The 1999
effective tax rate decrease is primarily due to the recognition of benefit
from foreign sales corporations and business tax credits. Minority
interest was $491,000 in the first quarter of 1999 compared to $147,000
for the first quarter of 1998. In the first quarter of 1999, minority
interest was recorded up to the date of purchase of the remaining interest
in Flex Products. In the first quarter of 1998, minority interest included
the share of net income of Flex Products accruing to its 40% shareholder
and the portion of the operating results of OCLI Asia attributable to its
Japanese partner. The Company purchased the minority interest in OCLI Asia
in the fourth quarter of fiscal 1998. The 1999 minority interest increase
is primarily due to increased profits at Flex Products.
NET INCOME APPLICABLE TO COMMON STOCK. The Company had net income
applicable to common stock of $2.0 million, or $.16 per share on a diluted
basis, for the first quarter of fiscal 1999 compared to $1.5 million, or
$.13 per share on a diluted basis, for the first quarter of fiscal 1998.
OTHER COMPREHENSIVE INCOME (LOSS). In the first quarter of 1999, the
Company adopted the provisions of SFAS No. 130 "Reporting Comprehensive
Income," which required the Company to report, by major component and in
total, all changes to equity from non owner sources. Other comprehensive
income consists of foreign currency translation adjustments which are
recorded as a separate component of equity.
LITIGATION
On January 15, 1999, the Company announced that it had settled a lawsuit
with OCA and certain of its shareholders regarding a failed merger in 1996.
Pursuant to the settlement, the Company received cash, net of legal
expenses of $3.0 million. In addition to the cash proceeds, the Company
will receive $1 million in business transaction value through product
purchase discounts or purchase of Company products over a period not to
exceed three years.
DIVESTITURES, INVESTMENTS AND ACQUISITIONS
SALE OF MMG. In the first quarter of 1999, Glas-Trosch GmbH, a privately
held glass company in Switzerland, purchased the business and operating
assets (inventory, equipment, furniture, two buildings, workforce, customer
lists and other related intangibles) of the Company's manufacturing
subsidiary in Germany (MMG) for $4.3 million. As the Company had previously
recorded an impairment loss to reduce MMG's assets to fair value on a
liquidation basis, no gain or loss was recognized on the sale. The cash
proceeds from the sale were received in February 1999, after the end of the
quarter. The amount receivable under the sale is included in other current
assets at January 31, 1999. At January 31, 1999, an office building in
Germany with a carrying value of $536,000 is held for sale.
In connection with the sale of MMG, the Company also received $1.2 million
for a three-year covenant not to compete and $600,000 for a three-year
license and supply agreement that incorporates the use of the OCLI name.
The $1.8 million received for those contracts is being recognized as
revenue over the three-year terms of the agreements.
INVESTMENT IN FLEX PRODUCTS. In the first quarter of 1999, the Company
acquired the interest in Flex Products held by SICPA Holding S.A. for $30
million bringing the Company's ownership in Flex to 100%. The transaction
was recorded as a purchase in the first quarter of fiscal year 1999 based
on data provided in an independent valuation. Pursuant to this transaction,
the Company recorded a charge for in-process research and development of
$2.9 million, goodwill of $9.7 million which will be amortized over 15
years, and identifiable intangibles (included in other assets) of $10.1
million which will be amortized over useful lives ranging from 11 to 15
years.
In addition, the Company purchased SICPA's $2.4 million dollar working
capital loan and the License and Supply Agreement between Flex Products and
SICPA that runs through October 31, 2015, was modified to increase SICPA's
minimum purchase requirements in association with Flex's commitment to put
in place additional capacity to manufacture optically variable pigment.
PURCHASE OF OPKOR, INC. In February 1999, after the end of the first
quarter, the Company announced the acquisition of OPKOR, Inc., an optical
design and manufacturing company specializing in precision polymer optic
components and assemblies, for $9 million plus annual contingent payments
based on profits of the acquired entity. Consideration will consist of
$1.8 million in cash with the remainder to be paid in Company common stock.
The acquisition will be recorded as a purchase in the second quarter of
fiscal 1999. The purchase price allocation may include a component
consisting of in-process research and development which would result in a
charge to expense in the second quarter of 1999.
FINANCIAL CONDITION
In fiscal 1999, the Company's cash and short-term investments decreased by
$26.6 million. $30.0 million was used to purchase the minority interest in
Flex Products, $5.1 million was invested in plant and equipment, $1.4
million was used to pay down debt, $700,000 was used to pay dividends and
$2.4 million was used to purchase a portion of Flex Products' working
capital loan from SICPA. These expenditures were offset by $12.2 million
of cash generated by operations and stockholder investments of $849,000.
In the first quarter of 1999, the Company's working capital, excluding cash
and short-term investments, increased $4.4 million. This increase was
primarily due to decreases to accounts payable, accrued expenses and
accrued compensation expenses of $7.3 million, increases to other current
assets of $4.1 million and increases to accounts receivable of $800,000
offset by increases to deferred revenue of $3.7 million and decreases to
inventories of $4.0 million. The decreases to accounts payable, accrued
expenses and accrued compensation expenses is primarily due to payment of
year end compensation accruals, funding of the Company's 401(k)/ESOP plan
and payment of restructuring accruals. The increase in other current
assets is primarily due to amounts receivable for the sale of operating
assets of MMG. The accounts receivable increase is consistent with
increased sales.
The deferred revenue increase is primarily due to invoicing provisions for
optically variable pigment. Approximately half of the inventory decrease
results from the sale of MMG assets while the remainder results from higher
sales in the first quarter of 1999.
In January 1999, the Company and its bank executed an amendment to the
Company's credit agreement which removed the impairment loss and
restructuring charges recorded in fiscal year 1998 from the Company's
financial covenants.
In February 1999, after the balance sheet date, the Company and the bank
executed an amendment to the Company's credit agreement increasing the
amount available under its revolving line of credit from $20 million to $40
million.
In the first quarter of 1999, inventories of optically variable pigment at
Flex Products were reduced to help satisfy demand that exceeded
manufacturing capacity for the period. Existing backlog and projected
orders at Flex Products are expected to fill available capacity for
optically variable products for the remainder of fiscal 1999. The Company
has initiated a capacity expansion at Flex Products which is expected to
come on-line in the second half of fiscal year 2000. The estimated cost of
this expansion is approximately $14 million for which the Company had firm
commitments outstanding of approximately $4.0 million at January 31, 1999.
Management believes that the cash on hand at January 31, 1999, cash
anticipated to be generated from future operations, and available funds
from revolving credit arrangements will be sufficient for the Company to
meet its working capital, capital expenditure, acquisition and debt service
requirements and dividend payments 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.
The Company has identified its Year 2000 risk in three categories: internal
business software; internal non-financial software and imbedded chip
technology; and external noncompliance by customers and suppliers.
INTERNAL BUSINESS SOFTWARE. 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
(ERP System) which the software vendor has indicated is Year 2000
compliant. The total estimated hardware, software and installation cost of
the ERP System is $4.3 million of which $3.9 million has been spent to
date. The Company is in the implementation phase for this system and other
ancillary financial systems with full implementation scheduled for
September 30, 1999. Based on this schedule, the Company expects to be in
full compliance with its internal financial systems before the year 2000.
However, if due to unforeseen circumstances, the implementation is not
completed on a timely basis, the Year 2000 could have a material impact on
the operations of the Company. Contingency plans have been established in
a few areas where the Company feels there is some risk that the system will
not be implemented before Year 2000. Those plans include adapting some of
the Company's currently existing systems to be Year 2000 compliant. The
cost of making those adaptations are not expected to be material and will
be expensed in the period incurred.
INTERNAL NON-FINANCIAL SOFTWARE AND IMBEDDED CHIP TECHNOLOGY. The Company
has taken an inventory of all of its non-financial software and equipment
that may be affected by the Year 2000, has identified the non-financial
software and equipment that is critical to its operations and is in the
process of assigning the method of determining Year 2000 compliance or
noncompliance (i.e., testing vendor certification, etc.) for each item that
is critical to the operation of the Company. The Company does not, at this
time, have sufficient data to estimate the cost of achieving Year 2000
compliance for its non-financial systems. 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. Since
the Company is in the information-gathering phase, the Company does not
currently have a contingency plan in place for its internal non-financial
software and imbedded chip technology. Full Year 2000 compliance for the
Company's internal non-financial software and imbedded chip technology is
scheduled for September 30, 1999.
EXTERNAL NONCOMPLIANCE BY CUSTOMERS AND SUPPLIERS. The Company is in the
process of identifying and contacting its critical suppliers, service
providers and contractors to determine the extent to which the Company's
interface systems are vulnerable to those third parties' failure to
remediate their own Year 2000 issues. It is expected that full
identification will be completed by April 30, 1999. To the extent that
responses to Year 2000 readiness are unsatisfactory, the Company intends to
change suppliers, service providers or contractors to those that have
demonstrated Year 2000 readiness. However, the Company cannot be certain
that it will be successful in finding such alternative suppliers, service
providers and contractors. The Company does not currently have any formal
information concerning the Year 2000 compliance status of its customers but
has received indications that most of its customers are working on Year
2000 compliance. In the event that any of the Company's significant
customers and suppliers do not successfully and timely achieve Year 2000
compliance, and the Company is unable to replace them with new customers or
alternate suppliers, the Company's business or operations could be
adversely affected.
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,
the change in economic conditions of the various markets the Company serves
and Year 2000 issues.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no significant changes in market risk since October 31,
1998.
<PAGE>
INDEPENDENT ACCOUNTANTS' REVIEW
The January 31, 1999 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.
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors
and Stockholders of
Optical Coating Laboratory, Inc.
Santa Rosa, California
We have reviewed the accompanying condensed consolidated balance sheet of
Optical Coating Laboratory, Inc. and subsidiaries as of January 31, 1999,
and the related condensed consolidated statements of income and
comprehensive income and of cash flows for the three-month periods ended
January 31, 1999 and 1998 and the related condensed consolidated statement
of stockholders' equity for the three-month period ended January 31, 1999.
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 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, 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, 1998, 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 22,
1998 (January 8, 1999 as to Note 5), we expressed an unqualified opinion on
those consolidated financial statements based on our audit. In our
opinion, the information set forth in the accompanying condensed
consolidated balance sheet as of October 31, 1998 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
February 18, 1999
<PAGE>
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,
1998.
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
No disclosure required.
ITEM 5. OTHER INFORMATION
No disclosure required.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
1. (4.0) Second Amendment, dated as of January 31, 1999 to Credit
Agreement dated as of July 31, 1998 among the Registrant, Bank of
America National Trust and Savings Association, as Agent, Letter of
Credit Issuing Bank and The Other Financial Institutions Party
Thereto.
2. (4.1) Third Amendment, dated as of February 26, 1999 to Credit
Agreement dated as of July 31, 1998 among the Registrant, Bank of
America National Trust and Savings Association, as Agent, Letter of
Credit Issuing Bank and The Other Financial Institutions Party
Thereto.
3. (15) Letter of Deloitte & Touche LLP regarding unaudited interim
financial information.
4. (27) Financial Data Schedule for the three months ended January 31,
1999.
Reports on Form 8-K filed for the three months ended January 31, 1999.
None
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
OPTICAL COATING LABORATORY, INC.
March 17, 1999 By: /s/ CRAIG B. COLLINS
- ---------------- -----------------------------------------
Date Craig B. Collins, Vice President, Finance
and Chief Financial Officer
<PAGE>
SECOND AMENDMENT TO CREDIT AGREEMENT
------------------------------------
THIS SECOND AMENDMENT TO CREDIT AGREEMENT ("Amendment"), dated as of
January 31, 1999, is entered into by and among OPTICAL COATING LABORATORY,
INC. (the "Company"), the several financial institutions party to the
Credit Agreement (collectively, the "Banks"), and BANK OF AMERICA NATIONAL
TRUST AND SAVINGS ASSOCIATION, as agent for itself and the Banks (the
"Agent") and as letter of credit issuing bank.
RECITALS
--------
A. The Company, Banks, and Agent are parties to a Credit Agreement
dated as of July 31, 1998, as amended by a Waiver and First Amendment to
Credit Agreement dated as of January 8, 1999, effective as of October 31,
1998 (as so amended, the "Credit Agreement") pursuant to which the Banks
have extended certain credit facilities to the Company.
B. The Company has requested that the Banks agree to certain
amendments of the Credit Agreement.
C. The Banks are willing to amend the Credit Agreement, subject to
the terms and conditions of this Amendment.
NOW, THEREFORE, for valuable consideration, the receipt and adequacy
of which are hereby acknowledged, the parties hereto hereby agree as
follows:
1. Defined Terms. Unless otherwise defined herein, capitalized
terms used herein shall have the meanings, if any, assigned to them in the
Credit Agreement.
2. Amendments to Credit Agreement.
(a) Section 1.01 of the Credit Agreement shall be amended by
amending the defined terms "Applicable Fee Percentage" and "Applicable
Margin" in their entirety to read as follows:
"Applicable Fee Percentage" means 0.200%, and
"Applicable Margin" means 0.750% for Offshore Rate Loans and
0.000% for Base Rate Loans, in each case until two Business Days
after receipt by the Agent of the Compliance Certificate
delivered pursuant to subsection 7.02(b), together with the
financial statements referred to in subsection 7.01(a), for the
Company's fiscal quarter ending January 31, 1999; thereafter the
Applicable Fee Percentage and the Applicable Margin shall mean
the percentage specified below for each opposite the applicable
Leverage Ratio as set forth below:
Applicable Margin
-----------------------
Applicable Fee Offshore Base Rate
Leverage Ratio Percentage Rate Loans Loans
- -------------- -------------- ---------- ---------
Less than 1.50 to 1.00 0.200% 0.750% 0.000%
Greater than or equal
to 1.50 to 1.00 but less
than 2.00 to 1.00 0.250% 0.825% 0.000%
Greater than or equal
to 2.00 to 1.00 0.300% 1.125% 0.000%
<PAGE>
Each subsequent change in the Applicable Fee Percentage and the
Applicable Margin shall take effect two Business Days after receipt by the
Agent of the Compliance Certificate delivered pursuant to Section 7.02(b),
together with the financial statements referred to in subsection 7.01(a) or
7.01(b), as applicable; provided, however, that if the Compliance
Certificate required to be delivered pursuant to subsection 7.02(b) and the
financial statements required to be delivered pursuant to subsection
7.01(a) or 7.01(b), as applicable, are not delivered when required
thereunder, the Leverage Ratio shall, until two Business Days after receipt
of such items, be deemed to be greater than or equal to 2.00 to 1.00.
(b) Schedule 2.01 of the Credit Agreement shall be amended
and restated in its entirety to read as set forth in Schedule 2.01 attached
hereto.
3. Representations and Warranties. The Company hereby represents
and warrants to the Agent and the Banks as follows:
(a) No Default or Event of Default has occurred and is continuing.
(b) The execution, delivery and performance by the Company of
this Amendment have been duly authorized by all necessary corporate and
other action and do not and will not require any registration with, consent
or approval of, notice to or action by, any Person (including any
Governmental Authority) in order to be effective and enforceable. The
Credit Agreement as amended by this Amendment constitutes the legal, valid
and binding obligations of the Company, enforceable against it in
accordance with its respective terms, except as enforceability may be
limited by applicable bankruptcy, insolvency, or similar laws affecting the
enforcement of creditors' rights generally or by equitable principles
relating to enforceability, without defense, counterclaim or offset.
(c) All representations and warranties of the Company contained
in the Credit Agreement are true and correct on and as of the date hereof,
except to the extent such representations and warranties expressly refer to
an earlier date, in which case they are true and correct as of such earlier
date.
(d) The Company is entering into this Amendment on the basis of
its own investigation and for its own reasons, without reliance upon the
Agent and the Banks or any other Person.
4. Effective Date. This Amendment will become effective as of the
date first above written, or, if later, the date on which each of the
following conditions precedent is satisfied:
(a) The Agent has received from the Company and each of the
Banks a duly executed original (or, if elected by the Agent, an executed
facsimile copy) of this Amendment.
(b) The Agent has received from the Company a copy of a
resolution passed by the board of directors of such corporation, certified
by the Secretary or an Assistant Secretary of such corporation as being in
full force and effect on the date hereof, authorizing the execution,
delivery and performance of this Amendment.
(c) The Agent has received from the Company, (i) for the
account of each Bank, an amount equal to 0.10% times the amount of the
excess of (x) such Bank's Commitment after giving effect hereto, over (z)
such Bank's Commitment as in effect prior to the effectiveness hereof,
representing payment in full of a non-refundable amendment fee and (ii) for
the account of the Agent, an arrangement fee in the amount set forth in a
certain letter pertaining hereto between the Agent and the Company, which
amounts the Company hereby covenants to pay to the Agent on demand.
5. Reservation of Rights. The Company acknowledges and agrees that
the execution and delivery by the Agent and the Banks of this Amendment
shall not be deemed to create a course of dealing or otherwise obligate the
Agent or the Banks to enter into amendments under the same, similar or any
other circumstances in the future.
6. Miscellaneous.
(a) Except as herein expressly amended, all terms, covenants and
provisions of the Credit Agreement are and shall remain in full force and
effect and all references therein and in the other Loan Documents to such
Credit Agreement shall henceforth refer to the Credit Agreement as amended
by this Amendment. This Amendment shall be deemed incorporated into, and a
part of, the Credit Agreement. This Amendment is a Loan Document.
(b) This Amendment shall be binding upon and inure to the
benefit of the parties hereto and their respective successors and assigns.
No third party beneficiaries are intended in connection with this
Amendment.
(c) This Amendment shall be governed by and construed in
accordance with the law of the State of California.
(d) This Amendment may be executed in any number of
counterparts, each of which shall be deemed an original, but all such
counterparts together shall constitute but one and the same instrument.
Each of the parties hereto understands and agrees that this document (and
any other document required herein) may be delivered by any party thereto
either in the form of an executed original or an executed original sent by
facsimile transmission to be followed promptly by mailing of a hard copy
original, and that receipt by the Agent of a facsimile transmitted document
purportedly bearing the signature of a Bank or the Company shall bind such
Bank or the Company, respectively, with the same force and effect as the
delivery of a hard copy original. Any failure by the Agent to receive the
hard copy executed original of such document shall not diminish the binding
effect of receipt of the facsimile transmitted executed original of such
document of the party whose hard copy page was not received by the Agent,
and the Agent is hereby authorized to make sufficient photocopies thereof
to assemble complete counterparty documents.
(e) This Amendment, together with the Credit Agreement and the
letter referenced in Section 4(c)(ii) hereof, contains the entire and
exclusive agreement of the parties hereto with reference to the matters
discussed herein and therein. This Amendment supersedes all prior drafts
and communications with respect thereto. This Amendment may not be amended
except in accordance with the provisions of Section 11.01 of the Credit
Agreement.
(f) If any term or provision of this Amendment shall be deemed
prohibited by or invalid under any applicable law, such provision shall be
invalidated without affecting the remaining provisions of this Amendment or
the Credit Agreement, respectively.
(g) The Company covenants to pay to or reimburse the Agent,
within five Business Days after demand, for all costs and expenses
(including reasonable Attorney Costs) incurred in connection with the
development, preparation, negotiation, execution and delivery of this
Amendment.
IN WITNESS WHEREOF, the parties hereto have executed and delivered
this Amendment as of the date first above written.
OPTICAL COATING LABORATORY, INC.
By: /s/ JEFFREY M. RYAN
-------------------------------
Name: Jeffrey M. Ryan
-------------------------------
Title: Assistant Treasurer
-------------------------------
<PAGE>
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION, as Agent
By: /s/ JAMES P. JOHNSON
-------------------------------
Name: James P. Johnson
-------------------------------
Title: Managing Director
-------------------------------
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION,
as Issuing Bank and as a Bank
By: /s/ JAMES P. JOHNSON
-------------------------------
Name: James P. Johnson
-------------------------------
Title: Managing Director
-------------------------------
ABN AMRO BANK N.V.
By: /s/ DIANNE D. BARKLEY
-------------------------------
Name: Dianne D. Barkley
-------------------------------
Title: Group Vice President
-------------------------------
By: /s/ JEFFREY A. FRENCH
-------------------------------
Name: Jeffrey A. French
-------------------------------
Title: Group Vice President & Director
--------------------------------
SCHEDULE 2.01
-------------
COMMITMENTS
-----------
AND PRO RATA SHARES
-------------------
Bank Commitment Pro Rata Share
- ---- ----------- --------------
Bank of America National
Trust and Savings Association $22,000,000 55%
ABN AMRO Bank N.V. $18,000,000 45%
----------- ----
TOTAL $40,000,000 100%
=========== ====
<PAGE>
BANK OF AMERICA
BANK OF AMERICA NT8SA
555 California Street, 41st Floor
San Francisco, CA 94104-1502
February 26, 1999 James P. JOHNSON
Managing Director
CREDIT PRODUCTS 3838
Direct Dial: (415) 622-6177
Optical Coating Laboratory, Inc FAX: (415) 622 4585
2789 Northpoint Parkway
Santa Rosa, California 95407-7397
Attention: Jeffrey M. Ryan, Assistant Treasurer
RE: THIRD AMENDMENT TO CREDIT AGREEMENT DATED AS OF JULY 31, 1998
AMONG OPTICAL COATING LABORATORY, INC. (THE "COMPANY"), THE
FINANCIAL INSTITUTIONS PARTY THERETO (THE "BANKS"), AND BANK OF
AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, AS AGENT FOR
ITSELF AND THE BANKS (THE "AGENT") AND LETTER OF CREDIT ISSUING
BANK, AS AMENDED BY A WAIVER AND FIRST AMENDMENT DATED AS OF
JANUARY 8, 1999, EFFECTIVE AS OF OCTOBER 31, 1998, AND BY A SECOND
AMENDMENT DATED AS OF JANUARY 31, 1999 (AS SO AMENDED, THE "CREDIT
AGREEMENT")
Dear Jeff:
Pursuant to your letter dated February 18, 1999 to the Agent, you
have requested certain amendments to the Credit Agreement to permit
certain debt by a Subsidiary and the Company's guaranty thereof. The
Banks are willing to agree to such amendments, subject to the terms and
conditions of this letter amendment agreement (this "Amendment").
The Credit Agreement shall be amended by amending and restating
Schedule 8.06 ("Certain Indebtedness") and Schedule 8.09 ("Contingent
Obligations") to the Credit Agreement in their entirety to read as set
forth in such schedules attached hereto. The Indebtedness listed on
Schedule 8.06 hereto shall be deemed to be permitted under subsection
8.06(c) of the Credit Agreement and the Contingent Obligations listed
on Schedule 8.09 hereto shall be deemed to be permitted under
subsection 8.09(c) of the Credit Agreement.
The execution and delivery by the Majority Banks of this Amendment
shall not create a course of dealing or obligate any Bank to enter into
other amendments under any other circumstances in the future. Except as
herein expressly amended, all terms, covenants and provisions of the
Credit Agreement are and shall remain in full force and effect and all
references therein and in any other documents or instruments given in
connection therewith to the Credit Agreement shall henceforth refer to
the Credit Agreement as amended by this Amendment. This Amendment shall
be deemed incorporated into, and a part of, the Credit Agreement, and
is a Loan Document.
This Amendment shall be effective as of the date hereof upon delivery
to the Agent of counterparts executed by the Company and the Majority
Banks. This Amendment may be executed in any number of counterparts,
<PAGE>
each of which shall be deemed an original, but all such counterparts
together shall constitute but one and the same instrument. Capitalized
terms used in this Amendment and not defined in it shall have the
meanings assigned to them in the Agreement.
RE: OPTICAL COATING LABORATORY, INC.
February 26, 1999
Page 2
Sincerely,
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION, as Agent
By: /s/ JAMES P. JOHNSON
----------------------------------------
James P. Johnson, Managing Director
AGREED TO AS OF THE DATE FIRST ABOVE WRITTEN:
- --------------------------------------------
OPTICAL COATING LABORATORY, INC.
By: /s/ JEFFREY M. RYAN
--------------------------------------
Name: Jeffrey M. Ryan
--------------------------------------
Title: Assistant Treasurer
--------------------------------------
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION,
As Issuing Bank and as a Bank
By: /s/ JAMES P. JOHNSON
--------------------------------------
Name: James P. Johnson
--------------------------------------
Title: Managing Director
--------------------------------------
ABN AMRO BANK N.Y.
By: /s/ GINA M. BRUSATORI
--------------------------------------
Name: Gina M. Brusatori
--------------------------------------
Title: GVP
--------------------------------------
By: /s/ R. CLAY JAULUM
--------------------------------------
Name: R. Clay Jaulum
--------------------------------------
Title: SVP
-------------------------------------
<PAGE>
LETTER REGARDING UNAUDITED INTERIM FINANCIAL INFORMATION
EXHIBIT 15.
To the Board of Directors
and Stockholders of
Optical Coating Laboratory, Inc.
Santa Rosa, California
We have made a review, in accordance with standards established by the
American Institute of Certified Public Accountants, of the unaudited
interim financial information of Optical Coating Laboratory, Inc. and
subsidiaries for the periods ended January 31, 1999 and 1998, as indicated
in our report dated February 18, 1999; 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 indicated in your
Quarterly Report on Form 10-Q for the quarter ended January 31, 1999 is
incorporated by reference in Registration Statement No. 33-41050, No. 33-
26271, No. 33-12276, No. 33-65132, No. 33-60891, No. 333-13013 and No. 333-
69157 on Forms S-8 and Registration Statement No. 33-61177 and No. 33-65319
on Forms S-3.
We also are aware that the aforementioned report, pursuant to Rule 436(c)
under the Securities Act of 1933, 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
March 17, 1999
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-END> JAN-31-1999
<CASH> 14,324
<SECURITIES> 0
<RECEIVABLES> 39,392
<ALLOWANCES> 1,797
<INVENTORY> 21,268
<CURRENT-ASSETS> 85,513
<PP&E> 185,324
<DEPRECIATION> 94,082
<TOTAL-ASSETS> 204,806
<CURRENT-LIABILITIES> 35,687
<BONDS> 0
0
0
<COMMON> 72,242
<OTHER-SE> 33,289
<TOTAL-LIABILITY-AND-EQUITY> 204,806
<SALES> 72,810
<TOTAL-REVENUES> 72,810
<CGS> 48,631
<TOTAL-COSTS> 48,631
<OTHER-EXPENSES> 17,960
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 959
<INCOME-PRETAX> 5,578
<INCOME-TAX> 3,054
<INCOME-CONTINUING> 2,033
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,033
<EPS-PRIMARY> .17
<EPS-DILUTED> .16
</TABLE>
