UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Mark one
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended OCTOBER 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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OPTICAL COATING LABORATORY, INC.
(Exact name of registrant as specified in its charter)
COMMISSION FILE NUMBER 0-2537
DELAWARE 68-0164244
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(State or other jurisdiction of (IRS Identification No.)
incorporation or organization)
2789 NORTHPOINT PARKWAY, SANTA ROSA CALIFORNIA 95407-7397
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (707) 545-6440
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE
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(Title of each class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
At December 31, 1998, the aggregate market value of the registrant's common
stock (based upon the closing price of these shares on the NASDAQ National
Market System) held by non-affiliates, which excludes shares held by
officers and directors and the Employee Stock Ownership Plan of the
registrant (not all of whom claim to be affiliates), was approximately
$234.2 million.
At December 31, 1998, there were 12,196,558 shares of the registrant's
common stock, $.01 par value, issued and outstanding.
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the Company's Annual Meeting
of Stockholders to be held April 1, 1999 are incorporated by reference into
Part III of this Form 10-K.
The Exhibit index appears on Pages 49-51.
OPTICAL COATING LABORATORY, INC. AND SUBSIDIARIES
INDEX TO ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1998
PART I
Item 1. Business..................................................... 3
Item 2. Properties................................................... 10
Item 3. Legal Proceedings............................................ 11
Item 4. Submission of Matters to a Vote of Security Holders and
Executive Officers of the Company............................ 12
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters...................................................... 14
Item 6. Selected Financial Data...................................... 14
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 15
Item 7A. Quantitative and Qualitative Disclosures About Market Risk... 20
Item 8. Consolidated Financial Statements and Supplemental Financial
Information.................................................. 23
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure..................................... 48
PART III
Item 10. Directors and Executive Officers of the Registrant........... 48
Item 11. Executive Compensation....................................... 48
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................... 48
Item 13. Certain Relationships and Related Transactions............... 48
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K..................................................... 48
THE INFORMATION CONTAINED IN THIS REPORT INCLUDES FORWARD LOOKING
STATEMENTS WHICH ARE TYPICALLY IDENTIFIED BY THE WORDS "ANTICIPATES,"
"BELIEVES," "EXPECTS," "INTENDS," "FORECASTS," "PLANS," "FUTURE,"
"STRATEGY," OR WORDS OF SIMILAR IMPORT. VARIOUS IMPORTANT FACTORS THAT
COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED IN THE
FORWARD LOOKING STATEMENTS ARE IDENTIFIED BELOW AND IN PART II, ITEM 7 OF
THIS REPORT. ACTUAL RESULTS MAY VARY SIGNIFICANTLY BASED ON A NUMBER OF
FACTORS INCLUDING, BUT NOT LIMITED TO, PRODUCT DEVELOPMENT,
COMMERCIALIZATION AND TECHNOLOGICAL DIFFICULTIES; MANUFACTURING COSTS AND
YIELD ISSUES ASSOCIATED WITH INITIATING PRODUCTION AT NEW FACILITIES; THE
IMPACT OF COMPETITIVE PRODUCTS AND PRICING; CHANGING CUSTOMER REQUIREMENTS;
AND THE CHANGE IN ECONOMIC CONDITIONS OF THE VARIOUS MARKETS THE COMPANY
SERVES.
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
Optical Coating Laboratory, Inc., together with its consolidated
subsidiaries (the "Company"or "OCLI"), is the world's largest independent
manufacturer of optical thin film coated components used to manage light.
At its Company-owned and leased facilities located in Santa Rosa,
California, Goslar, Germany, Hillend, Scotland and Isehara, Japan, OCLI
designs, develops and manufactures multi-layer thin film coatings which
control and enhance light by altering the transmission, reflection and
absorption of its various wavelengths to achieve a desired effect such as
anti-reflection, anti-glare, electromagnetic shielding, electrical
conductivity and abrasion resistance. OCLI markets and distributes
components to original equipment manufacturers (OEMs) of optical and
electro-optical systems and sells its Glare/Guard(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, telecommunication systems, photocopiers, fax machines,
medical/analytical equipment and instruments, projection imaging systems,
satellite power systems and aerospace and defense systems. The Company also
manufactures precision injection molded plastic optical components that are
used in a variety of applications such as inkjet printers, point-of-sale
scanners and sunglasses. Precision molded plastic optics allow for the
production of aspheric surfaces, have significant cost advantages over
similar products made with glass, improve impact resistance and offer a
substantial weight advantage over glass components.
Flex Products, Inc. ("Flex" or "Flex Products"), which was a 60% owned
subsidiary of the Company until December 22, 1998 when the Company purchased
the minority shareholder's interest, manufactures thin film coatings on
plastic film using a proprietary vacuum deposition technology on large-scale,
high-speed roll coating equipment developed by OCLI in the 1980's. Flex's
principal product, optically variable pigment (OVPtm), was invented by the
Company and is used primarily as a security and anti-counterfeiting measure
on the currencies of over 55 countries around the world to prevent
counterfeiting, including the U.S. $100, $50 and $20 bills. Flex also
markets its patented ChromaFlair(R) light interference pigments to decorative
paint markets for use in automotive paints and other consumer products and
manufactures and sells energy efficient window film used for residential,
commercial and automotive energy conservation.
Through a contractual arrangement with JDS FITEL Inc. (JDS), a publicly
held Canadian company, OCLI produces optical filters for use in dense
wavelength division multiplexing (WDM) products that are marketed and
distributed by JDS. See INVESTMENTS, JOINT VENTURES, STRATEGIC ALLIANCES
AND DIVESTITURES in Item 7, Management's Discussion and Analysis of Results
of Operations and Financial Condition. WDM is the simultaneous
transmission of information on different wavelengths along the same optical
fiber and is one of the alternative technologies available to
telecommunications network providers to satisfy the demand for increased
transmission capacity resulting from the growing use of new services such
as the Internet, video and other forms of data transmission. WDM
components are the key elements in fiber optic systems that facilitate
transmission using different wavelengths. Precision thin film optical
filters are one of the elements in a WDM component that permit wavelength
discrimination.
<PAGE>
The Company operates a fully integrated coating facility, with additional
optical fabrication capability, at its wholly owned subsidiary in Hillend,
Scotland. From this platform, the Company markets a broad array of coated
products with applications in commercial, scientific and military markets
and performs research and development under scientific and U.K. Ministry of
Defense sponsorships.
Through its subsidiary in Japan, OCLI Asia, K.K., (OCLI Asia) the Company
fabricates and distributes front surface mirrors and anti-reflection
panels; distributes optical filters for satellites, dichroic filters and
other products; and provides applications engineering support for customers
in Japan. During 1998, the Company purchased the minority shareholder's
interest in OCLI Asia bringing its ownership to 100%. See INVESTMENTS,
JOINT VENTURES, STRATEGIC ALLIANCES AND DIVESTITURES in Item 7,
Management's Discussion and Analysis of Results of Operations and Financial
Condition.
Until November 1998, through its MMG Division in Goslar, Germany, the
Company operated fully integrated precision glass fabrication operations
with capability for sawing, machining, heat-treating, chemical-treating,
silk screening and etching of glass products to customer specifications.
In November 1998, Glas-Trosch GmbH, a privately held glass company in
Switzerland purchased the operating assets and the business of MMG. See
interest in OCLI Asia bringing its ownership to 100%. See Note 3 of Notes
to Consolidated Financial Statements and INVESTMENTS, JOINT VENTURES,
STRATEGIC ALLIANCES AND DIVESTITURES in Item 7, Management's Discussion
and Analysis of Results of Operations and Financial Condition.
The Company has significant investments in 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. In addition to the
manufacturing operations in Scotland and Japan, the Company also has sales
presence in Germany, France, Spain, the United Kingdom, and Asia. A
significant weakening of the currencies in Europe or Asia, in relation to
the U.S. dollar, could reduce the reported results of those operations. In
addition, a significant amount of the Company's sales are export sales
which could be subject to competitive price pressures if the U.S. dollar
was to strengthen compared to the currency of foreign competitors
MARKETS AND PRODUCTS
TELECOMMUNICATIONS. OCLI produces state-of-the-art optical bandpass filters
for use in wavelength division multiplexing (WDM) products that allow
simultaneous transmission of many telephone signals on a single optical
fiber. WDM is one of the alternative technologies available to
telecommunications network providers to satisfy the demand for increased
transmission capacity resulting from the growing use of new services such
as the Internet, video and other forms of data transmission. WDM components
are the key elements in fiber optic systems that facilitate transmission
using different wavelengths. Precision thin film optical filters are one
of the key elements in WDM components that permit wavelength
discrimination. OCLI's filters are marketed and distributed through a
contractual arrangement with JDS FITEL Inc.
OCLI also serves the telecommunications market through the production of
glass solar cell covers and thermal control mirrors for use on satellites.
The thin glass solar cell covers are coated to provide enhanced performance,
reduced temperature and protection for the photovoltaic cells. These covers
range from the simplest single layer products that improve solar transmission
to complex multi-layer designs that reflect ultraviolet and infrared solar
energy. The thermal control mirrors are used to control the temperature of
satellites. These highly efficient mirrors are used to reflect solar energy
from sensitive instrument areas and to control antenna temperature and
performance using proprietary designs on flexible substrates.
DISPLAY. The Company is a leading supplier of anti-reflection coatings to
OEMs for use on computer terminals and other cathode ray tube displays,
flat panel displays, liquid crystal displays (LCDs), touch panel displays
and similar applications, to improve the visibility of the information
displayed by reducing glare from reflected light while optimizing the
transmission of light from the display. The coatings are produced in
several configurations to meet varied customer requirements, including as
laminates with conductive qualities to reduce electromagnetic and
electrostatic discharge.
The Company also produces ergonomic enhancement products that are sold in
the computer end-user market under its GlareGuard(R) brand and on a private
label basis. The filters provide viewing comfort and health and safety
protection for computer users by improving the visibility of the
information displayed on computer display monitors.
The Company also manufactures a variety of components used in projection
display products, such as front surface mirrors used in large screen
projection televisions and dichroic color filters used in LCD and digital
light processing projector systems.
SECURITY PRODUCTS. Through Flex Products, the Company manufactures and
markets optically variable pigment (OVPtm) used in currency printing as an
anti-counterfeiting measure. Flex Product's largest customer for OVPtm is
SICPA Holding S.A., one of the world's leading manufacturers of printing
inks. Currently, over 55 countries, including the United States, have
adopted the use of ink made with OVPtm in the printing of currency and other
valued documents.
OFFICE AUTOMATION. The Company manufactures a complete line of high
quality products for office automation OEMs, including front surface
mirrors for photocopiers, document scanners, overhead projectors, facsimile
machines and laser beam printers; platen glass and photoreceptors for
photocopiers; hot and cold mirrors used in micrographic readers and
overhead projectors; color separation filters for desktop document
scanners; and precision molded plastic components used in inkjet printers.
OTHER MARKETS. The Company manufactures a wide array of filters, reflectors
and optical components for use in medical, biochemical, scientific and
analytical instruments, manufacturing process control instruments, barcode
scanners, point-of-sale scanners, focus devices in cameras and slide
projectors, instruments used to monitor blood glucose levels and
instruments used to measure color in paint pigment as well as
sophisticated, high-precision coated products and optical components to
meet the specific performance requirements of advanced scientific, space
and defense systems and products for a variety of specialty applications,
including dichroic filters for specialty stage lighting; energy control
window film for architectural applications; optically variable pigment used
in automotive paint; precision molded plastic optics for sunglasses and
anti-reflection linear polarizers for viewcams.
MANUFACTURING
The Company's initial growth came from the development of high-precision
coated products for use primarily in defense and aerospace applications and
<PAGE>
in sophisticated analytical equipment. These types of coated products are
produced by relatively costly batch processes and continue to represent a
portion of the Company's revenues. From this base, the Company has
expanded into commercial markets by designing and fabricating continuous
coating equipment capable of producing a high volume of relatively less
complex products at lower unit costs. This large-scale equipment enables
the Company to serve broad commercial markets with many of its products.
The Company has developed many of its thin film coating processes and has
designed, fabricated or significantly customized most of the coating
equipment used in production, including its continuous coaters, batch
coaters and high speed roll-to-roll coaters. The Company believes its
ability to design and build this specialized equipment, and its ability to
develop proprietary process technologies, has been an important factor in
enabling it to compete successfully. Consequently, the Company maintains an
extensive array of thin film coating equipment, glass fabrication
equipment, metrology equipment and precision injection molding equipment to
meet customer requirements for coated products, fabricated glass components
and molded plastic optics components.
The Company employs various coating processes which it has developed and
established over many years including batch coating by evaporation as its
historic coating process and batch coating by reactive metal mode
sputtering as a proprietary, patented process. The Company employs similar
evaporation and sputtering processes in its continuous, in-line coating
systems. Flex Products also employs proprietary evaporation processes and
sputtering in its high-speed, roll-to-roll coating systems. The Company and
its subsidiary operations have extensive auxiliary material preparation and
glass fabrication equipment in place which allow the Company to produce a
broad array of coated glass and plastic components and coated products for
a wide variety of applications.
The Company has developed and procured extensive state-of-the-art metrology
and test equipment to allow testing and verification of technological and
performance characteristics of its products. This capability, including
the expertise of the Company's scientific and technical staff to develop
and design specific thin film coatings to meet a customer's application
requirements, is frequently an integral aspect sought by customers in
selecting the Company as a supplier.
Through its precision polymer optics operation, whose core technology was
purchased in fiscal 1995, the Company manufactures precision injection
molded plastic optical components. Precision injection molded products
allow for the production of aspheric surfaces, have significant cost
advantages over similar products made with glass, improve impact resistance
and offer a substantial weight advantage over glass components.
RESEARCH AND DEVELOPMENT
The Company devotes substantial resources to research and development in
order to develop new and improve existing thin film products, processes and
manufacturing equipment. As a result, the Company has developed a
technological leadership position in the thin film coatings industry and
customers rely on the Company's thin film products and integration services
expertise.
The Company is developing new wavelength division multiplexing (WDM)
products and processes to expand the information carrying capability of
<PAGE>
fiber optic telecommunication networks. The emerging opportunities in this
rapidly growing market require extremely high precision interference
coating deposition technology combined with advanced fiber optic assembly
and testing technology.
The Company's research and development efforts also include the development
of products for the projection display market, including color separation
filters and various components for optical systems; working with certain
customers to provide optical systems and thin film design capabilities for
the display, telecommunications and instrumentation markets; the
development of competitive coating processes for optical components to meet
high component volume requirements; and the development of high yield
processes for complex coatings and high volume assembly capabilities. The
Company continues in its ongoing efforts to reduce and eventually eliminate
coating and cleaning materials that may be hazardous to the environment.
Flex Products' major research and development effort has been focused on
the integration of state of the art coating processes and the development
of new optically variable products with lower unit costs in order to allow
for greater penetration of the decorative pigment markets currently being
served by the Company.
Company funded research and development expenditures totaled $17.1 million,
$14.9 million and $11.7 million, or 6.7%, 6.8% and 6.2% of revenues,
during fiscal years 1998, 1997, and 1996.
PATENTS AND LICENSES
The Company believes its proprietary technology, its trade secrets and its
patents are of considerable value to its business. The Company believes
that its patents demonstrate and support its technological leadership
position, safeguard its competitive position and support existing and
potential sales volume.
The Company has 56 patents and 30 patent applications in the United States
that cover materials, processes, products and production equipment. The
Company also has patents and patent applications pending in various foreign
countries covering the same technology. Expiration dates for the Company's
various patents range from 1999 to 2017. Flex Products currently has 48
patents and 181 new patent applications pending that are separate from the
Company's patents. Expiration dates for Flex Products' patents range from
1999 to 2017. Flex Products also has patents and patent applications
pending in various foreign countries covering the same technology.
Patents expiring in fiscal years 1999 through 2001 do not encompass
technologies in which the Company is enjoying competitive advantage. The
Company, therefore, does not expect expiration of those patents to
materially affect its results of operations or financial condition.
TECHNOLOGY LICENSING
The Company selectively licenses its coating technology to other companies,
primarily for integrated, mass production applications that the Company
would not otherwise be able to provide as a manufacturer in the ordinary
course of its business. During each of the past five years, these licenses,
together with sales of equipment built for licensees in support of the
licenses, have not constituted greater than 10% of the Company's
consolidated revenues.
<PAGE>
MARKETING
The Company has established strong, long-term customer relationships and
serves a wide range of markets, including leading manufacturers of
telecommunications equipment, security ink, computers, photographic
equipment, copier products, medical instruments, home entertainment
products, and space and defense systems.
The Company's products are sold by its sales organizations, headquartered
in Santa Rosa, California and Scotland, which communicate directly with
customers' engineering, manufacturing and purchasing personnel in
determining the design, performance and cost specifications for customer
product requirements. The Company has regional sales offices in several
major cities throughout the United States and in Germany, France, Spain,
the United Kingdom and Japan. The Company has established sales
representative offices in other Asian countries to provide more integrated
marketing and sales support in these regions.
With the exception of its GlareGuard(R) product line, the Company markets
most of its standard, high volume coated products and fabricated glass
components to OEMs. Its customized, technically sophisticated products are
also marketed to OEMs in addition to defense and aerospace contractors. The
Company exports some of its products to major distributors who perform
product conversion and other value-added process steps before resale. The
Company's GlareGuard(R) product line is marketed through distributors and
dealers directly to end-users.
Flex Products sells into several significant markets with a small,
technically oriented sales organization supported by operations and
engineering personnel in a sales team approach.
The Company's ten largest customers accounted for 55%, 42% and 36% of its
revenues in 1998, 1997 and 1996. JDS, the Company's largest customer in
1998, accounted for approximately 21% of revenues in fiscal 1998. SICPA,
the Company's largest customer in 1997 and 1996 accounted for 14% of total
sales in 1998 and 1997 and 13% of total sales in fiscal 1996. Because
relatively few customers account for a substantial portion of the Company's
sales, the loss of their business could have a material adverse effect on
the Company's operating results. However, the Company believes that it has
the resources and capabilities to replace any lost business over time
through the development of new products and new applications for its
products.
Foreign sales, primarily in Europe and Asia, for fiscal years 1998, 1997,
and 1996, represented 59%, 56% and 48% of revenues. Sales by the Company's
wholly owned subsidiary in Scotland represented 5% of revenues for fiscal
years 1998, 1997 and 1996. Sales by the Company's wholly owned subsidiary
in Germany represented 6%, 8% and 13% of revenues for fiscal years 1998,
1997 and 1996. Sales by these subsidiaries were primarily to customers in
European countries. In November 1998, after the end of fiscal year 1998,
the Company sold the operating assets of its German subsidiary. See Note 3
of the Notes to Consolidated Financial Statements.
Sales by the Company's subsidiary in Japan, which began operations in the
second quarter of 1997, represented 6% and 4% of revenues for fiscal years
<PAGE>
1998 and 1997. Sales of this subsidiary were primarily to customers in
Asia.
Export sales by U.S. operations to Canada and Latin America (primarily
sales to Canada) were 21%, 9% and .1% of sales in 1998, 1997 and 1996.
Export sales by U.S. operations to Asia Pacific Countries (primarily Asian
countries) were 11%, 13% and 13% of sales in 1998, 1997 and 1996. Export
sales by U.S. operations to Europe, Middle East and Africa (primarily sales
to Europe) were 16%, 21% and 17% of sales in 1998, 1997 and 1996.
Currency fluctuations and economic factors in Canada, Europe and Asia could
materially affect the Company's future sales and results of operations.
Sales of products to the federal government, primarily under subcontracts,
accounted for 4%, 6% and 9% of revenues for the fiscal years 1998, 1997,
and 1996. The Company's cost-plus-fixed fee (CPFF) government contracts
for fiscal years 1998, 1997 and 1996 are subject to pending governmental
audit review. The audits entail, primarily, a review of costs and expenses
charged to government contracts with the focus on potential adjustments to
the allocation of general and administrative expenses. General and
administrative expense allocations to CPFF contracts were $153,000 for
1998, $274,000 for 1997, and $796,000 for 1996. The Company does not
expect pending governmental audits to result in adjustments that will have
a material impact on future operating results.
RAW MATERIALS AND SUPPLIERS
The primary raw materials used by the Company in its coating operations are
various forms of glass, germanium, fused silica and several types of
plastic and inorganic coating materials, such as magnesium fluoride,
silicon dioxide, aluminum or germanium. The Company has more than one
supplier for each of its raw materials and maintains adequate inventories
and close working relationships with its suppliers to assure a continuous
and adequate supply for production. The Company purchases special grade
flat glass under long-term arrangements from one major U.S. glass supplier.
The Company has not experienced any significant interruptions in production
due to a shortage of raw material. Substrate materials are purchased by the
Company or supplied by customers, while coating materials and their
composition are generally supplied by the Company, as they are often
considered a proprietary element of the manufacturing process.
In the Company's precision polymer optics operation, the primary raw
material used is high quality granular polycarbonite plastic base stock
that the Company procures from one principal supplier. Although the
Company has experienced price increases for this raw material, and there is
currently product supply allocation, it has been able to maintain its
supply because of the long-term customer relationship with the supplier.
Flex Products uses significant quantities of plastic film and inorganic
coating materials in the manufacture of its products. There is more than
one supplier for both materials, and Flex Products has not experienced
production interruptions due to a shortage of raw materials.
SEASONALITY
The Company's business is not seasonal in any material sense. For the last
five fiscal years, the Company has shut down significant portions of its
operations between Christmas and New Year's Day. As a result, during the
<PAGE>
last five fiscal years, normally scheduled workdays for the first fiscal
quarter have averaged 56 compared to an average of 64 for the other three
fiscal quarters. Nonetheless, the Company generally has sufficient
manufacturing capacity and the ability to schedule additional production
shifts to meet its customers' shipment requirements in any period of the
year.
BACKLOG
The Company's backlog of orders at the end of each of the last three fiscal
years ended October 31, 1998, 1997 and 1996 was as follows:
1998 1997 1996
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(In Millions)
$80.6 $62.2 $51.6
All orders in backlog at October 31, 1998 are scheduled for shipment during
1999. The amount of backlog at October 31, 1998 represents only a portion
of anticipated sales in 1999, with new orders historically comprising the
major portion of sales in a fiscal year.
Backlog consists of new orders on which shipments have not yet started
or unfilled portions of orders which are only partly completed. Some
of these orders are completed within several days of receipt, while
others are not completed for a number of months. Substantially all
orders included in backlog are subject to cancellation without
penalty; however, the Company generally has not experienced
significant order cancellations. Contractually specified delivery
dates on orders sometimes are adjusted at the request of either the
customer or the Company.
Flex Products has multi-year supply contracts with two of its customers
which include annual buy requirements with take or pay provisions. It is
the practice of Flex Products to only include specifically scheduled
shipment releases under these contracts in reported backlog.
COMPETITION
The Company believes its ability to compete successfully in its markets
depends on a number of factors, both within and outside of its control,
including the price, quality and performance of the Company's products, the
emergence of new optical standards, the ability to maintain adequate
coating capacity and sources of raw materials, the efficiency of its
manufacturing and production, the rate at which customers design the
Company's products into their products, the number and nature of the
Company's competitors in a given market, the assertion of intellectual
property rights and general market and economic conditions. The Company
attempts to position itself as the exclusive or principal supplier to most
of its key customers. To the extent competitors offer similar products to
the Company's customers, pricing pressure may result. When the Company is
unable to differentiate its product offerings, competition and related
pressure on profit margins can be intense.
The Company's competitors include several private companies whose sales of
coated products are believed to be considerably less than the Company's, as
well as coating operations that comprise only a portion of the total
business of other companies. The Company believes none of these
competitors have the wide array of technologies or coating capabilities
available at OCLI.
<PAGE>
The Company has a large number of domestic and foreign competitors for its
GlareGuard(R) anti-glare optical filters. Companies that purchase coated
glass and assemble and sell filters in competition with the Company include
Fellows, Polaroid, ACCO and 3M. The Company is the world's largest
manufacturer of anti-reflective optical filters, as measured by total
number of units produced, manufacturing filters for both GlareGuard(R)
products and private label distributors. GlareGuard(R) is one of the most
recognized brand names in its market, both domestically and
internationally.
Flex Products' position in its major market is technologically proprietary
and patent protected. In this market, and in the remainder of its
business, Flex Products competes through product innovation and customer
service. Flex's competitors include companies offering competing
products representing alternative technical approaches to meet given
market needs.
The Company responds to competition primarily on the basis of the advanced
technical characteristics and quality of its products; its ability to meet
and exceed individual customer design and performance specifications; its
dependability and capability as a manufacturer and supplier; the quality of
technical assistance and service furnished to its customers; and the
competitive pricing of its products.
EMPLOYEES
At October 31, 1998, the Company, including Flex Products, had 1,554
employees of whom 1,257 were employed domestically, 117 were employed by
the Company's operations in Hillend, Scotland; 122 were employed by the
Company's OCLI/MMG Division in Goslar, Germany; 16 were employed in the
Company's sales and administrative offices in Europe and 42 were employed
by OCLI Asia in Japan. In November, 1998, the Company sold the operating
assets of its OCLI/MMG Division. See INVESTMENTS, JOINT VENTURES, STRATEGIC
ALLIANCES AND DIVESTITURES in Item 7, Management's Discussion and Analysis
of Results of Operations and Financial Condition. At that time, the
employees of OCLI/MMG became employees of Glas-Trosch GmbH, a privately
held company in Switzerland.
The Company has not experienced work stoppages due to labor difficulties.
The Company believes its employee relations are satisfactory. None of the
Company's employees are subject to collective bargaining agreements.
OCLI attributes much of its success to its strong relationship with its
employees. The Company has instituted several employee oriented programs,
including Total Quality Management and high performance work system
practices, to enhance the quality and efficiency of its operations while
improving employee relations.
In 1987, the Board of Directors approved increases in severance benefits
for its domestic employees, not including Flex Products employees, in the
event of certain changes in control of the Company. These severance
arrangements have been extended through November 1999.
JOINT VENTURES, INVESTMENTS, ACQUISITIONS AND DIVESTITURES
Information regarding joint ventures, investments, acquisitions and
divestitures is included in Item 7, Management's Discussion and Analysis of
Results of Operations and Financial Condition and in Note 7 to the
<PAGE>
Consolidated Financial Statements filed as part of this Annual Report on
Form 10-K.
IMPACT OF YEAR 2000
The "Year 2000 Issue" is the result of computer programs that were written
using two digits rather than four digits 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 system failures or
miscalculations causing disruption 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 components: internal
business software; internal non-financial software and imbedded chip
technology; and external noncompliance by customers and suppliers. See
IMPACT OF YEAR 2000 in Item 7, Management's Discussion and Analysis of
Results of Operations and Financial Condition.
ENVIRONMENTAL
In 1988, the Company discovered ground water contamination at its
facilities in Santa Rosa, California. With the assistance of its
environmental consultants and under the regulatory guidance of the
California Regional Water Quality Control Board, the Company established a
program for reducing contaminant concentration levels to acceptable federal
and state levels. In prior years, the Company recorded accruals to cover
the future estimated cost of drilling additional extraction and monitoring
wells and considers those accruals to be adequate. The Company spent $0,
$0, and $228,000 in fiscal years 1998, 1997 and 1996 for drilling,
extraction and monitoring wells, which were charged against those accruals.
In addition, the accrual was reduced by a total of $200,000 in 1997 and
1996 as a result of approval of the Company's final remediation plan by the
California Regional Water Quality Control Board. Ongoing ground water
remediation expenses, and the cost of compliance with environmental
standards for years 1996 through 1998, have not been material to the
operations of the Company, and the Company does not expect them to be
material in the future.
ITEM 2. PROPERTIES
The Company's corporate headquarters and principal manufacturing and
research and development facilities are located on a Company-owned campus
in Santa Rosa, California. The site consists of approximately 75 acres of
land of which approximately 53 acres are occupied by existing operations,
with the remaining 22 acres currently held available for development or
sale. The site is within an industrial park area and is served by well-
developed road access and utilities. In addition, the Company leases
offices for its sales personnel located in various cities in the U.S.,
Europe and Asia.
The following table sets forth certain information concerning the Company's
principal facilities.
NO. OF LEASED/ TOTAL SITE
LOCATION BLDGS. OWNED SQ. FT. (ACRES) USE
==========================================================================
Santa Rosa, CA 12 Owned(1) 490,000 75 Optical Coating Laboratory,
Inc. and Flex Products, Inc.
corporate offices, manufac-
turing, engineering and
research and development
facilities
Santa Rosa, CA 1 Leased 23,000 -- OCLI Precision Polymer
Optics administrative offices
and manufacturing facilities
Santa Rosa, CA 1 Leased 74,000 -- Warehousing facilities
Hillend, Scotland 1 Owned(2) 56,000 16 OCLI Optical Coating
Laboratory, Ltd. adminis-
trative offices, manufac-
turing and research and
development facilities
Hillend, Scotland 1 Leased 9,000 -- OCLI Optical Coating
Laboratory, Ltd. warehousing
Isehara, Japan 2 Leased 794 -- OCLI Asia, Ltd. adminis-
trative offices and manu-
facturing facilities
(1) During fiscal 1996, the Company entered into two mortgage loan
agreements in the amount of $2.6 million and $3.0 million, respectively.
The land and buildings of two newly constructed manufacturing and office
buildings located on the Company's Santa Rosa, California campus
collateralized the loans. The term of each non-recourse loan is 15 years,
with fixed interest rates of 8% and 7.5%, respectively. Payments of
principal and interest for the loans are $25,000 and $28,000 per month,
respectively.
(2) The facility occupied by OCLI Optical Coating Laboratory, Ltd. (OCLI
Ltd.) in Scotland was constructed for the subsidiary by the Scottish
Development Agency (SDA). The facility consists of a manufacturing and
office building on a 16-acre site in an industrial park area. During
fiscal 1998, the Company paid off the remaining balance of the $3.9 million
mortgage held by SDA.
Until November 1998, the Company's MMG division occupied two manufacturing
buildings and two office buildings in Goslar, Germany. In November 1998,
the manufacturing buildings and one of the office buildings were sold and
the other office building is being held for sale.
Management believes that the Company's facilities are adequate for its
current level of business and the near-term growth requirements of the
Company and its subsidiaries.
ITEM 3. LEGAL PROCEEDINGS
Over the past several years, the Company has been engaged in litigation in
the United Kingdom (U.K.) involving infringement of a Company patent by the
U.K. companies, Pilkington PE Limited and Pilkington PLC. The Company won
its action at the Patents County Courts level but lost on appeal to the
U.K. House of Lords. In October 1998, the Company settled the claim for
approximately $850,000, most of which had been accrued in previous periods.
On March 17, 1997, Optical Corporation of America (OCA) and certain of its
directors and officers (Affiliates) commenced suit against the Company in
the Superior Court, Middlesex County, Commonwealth of Massachusetts. The
complaint arose out of a letter of intent executed by the Company and OCA
in March 1996 and an ensuing merger agreement executed by the Company and
OCA in June 1996. Under the merger agreement, the Company would have
<PAGE>
acquired OCA. The complaint sought damages for costs and expenses incurred
by OCA in pursuing the merger transaction with the Company due to the
Company's alleged negligent misrepresentations to OCA and Affiliates and
the Company's alleged breach of its letter of intent with OCA. The Company
filed counterclaims against OCA and the Affiliates based on OCA's breach of
the merger agreement and sought damages based on the difference between the
value of OCA's business to the Company and the agreed upon purchase price
under the merger agreement. In January 1999, after the end of the fiscal
year, the Company, OCA and OCA's shareholders settled the litigation.
Settlement proceeds, net of applicable legal expenses, approximated $3
million, which will be recorded as revenue in the first quarter of fiscal
1999. In addition to the cash proceeds, the Company will receive $1
million in business transaction value through product purchase discounts or
purchase of OCLI products over a period not to exceed three years. Future
business opportunities, not expected to affect Company results over the
next twelve months, were also included in the agreement.
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 fiscal 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
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. The modification to the
License and Supply Agreement provided for more attractive scheduled pricing
discounts on higher volume purchases and changed 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. On December 22, 1998, after the end of the Company's fiscal
year, the Company purchased SICPA's 40% interest in Flex Products. See
INVESTMENTS, JOINT VENTURES, STRATEGIC ALLIANCES AND DIVESTITURES in Item
7, Management's Discussion and Analysis of Results of Operations and
Financial Condition.
In 1997, Flex Products filed a suit in United States District Court for the
Eastern District of Michigan alleging that BASF Corporation (BASF) and BASF
AG infringed Flex's patents covering optically variable thin film flakes
which, when mixed with paints and inks, produce color shifting visual
properties. The complaint requested that the Court enjoin BASF from
importing, making, using, selling or offering to sell the infringing
pigment in the United States. The complaint also sought damages for the
infringement, including treble damages if the infringement was intentional.
In October 1998, a settlement agreement was reached between Flex Products
and both BASF companies under which Flex has agreed to allow BASF to make,
use and sell two specific forms of a special effects pigment for use within
limited application fields in exchange for a series of payments to be based
upon BASF's revenues on the sale of those pigments.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the Company's security holders
during the three months ended October 31, 1998.
<PAGE>
EXECUTIVE OFFICERS OF THE COMPANY
The names, ages and positions of the executive officers of the Company as
of January 15, 1999 are listed below, followed by a brief description of
their business experience during at least the past five years. Officers
are appointed annually by the Board of Directors at the next regularly
scheduled meeting of the Board following the Annual Meeting of
Stockholders. There are no family relationships among these officers or
any arrangements or understandings between any officer and any other person
pursuant to which an officer was selected.
NAME AGE POSITION BUSINESS EXPERIENCE
Charles J. Abbe.......57 President, Chief Chief Executive
Executive Officer Officer since April
and Director 1998; President and
Director since
November 1997; Vice
President and
General Manager,
Santa Rosa Division
from April 1996 to
November 1997;
various senior
management positions
with Raychem Corporation
from 1989 to 1996
Craig B. Collins......43 Vice President, Vice President, Chief
Finance and Chief Financial Officer
Financial Officer since September
1997; Senior Vice
President and Chief
Financial Officer
from 1994 to 1996,
Vice President,
Financial Services
from 1991 to 1993,
and various senior
management positions
from 1984 to 1990
with Nestle Beverage
Company, a division
of Nestle Corporation
Bryant P. Hichwa......52 Vice President, Vice President, Research
Research and and Development since
Development December 1997; Director
Research and Development
from 1988 to December 1997
<PAGE>
Michael A. Kasper.....48 Vice President and Vice President and
General Manager, General Manager,
Aerospace & Aerospace &
Instrumentation Instrumentation
Division Division since
December 1997;
Director of
Operations from 1996
to December 1997;
manufacturing
engineering and
materials management
positions with
Procter & Gamble
from 1972 to 1996
Stephen E. Myers......51 Vice President and Vice President and
General Manager, General Manager,
Information Information
Industries Division Industries Division
since December 1997;
Director, Information
Industries Business
Unit from July 1996
to December 1997;
various operations
and finance management
positions with Raychem
Corporation from
1978 to 1996
Kenneth D. Pietrelli..50 Vice President, Vice President,
Corporate Services Corporate Services
since June 1993;
Corporate Materials
Manager from 1980 to
1993
James W. Seeser,Ph.D..55 Vice President and Vice President since
Chief Technical March 1986 and Chief
Officer Technical Officer
since November 1993;
General Manager,
Advanced Products
Division from 1987
to 1989; various
engineering and
engineering
management positions
from 1983 to 1986
Glenn K. Yamamoto.....47 Vice President and Vice President and
General Manager, General Manager,
Telecommunications Telecommunications
Division Division since
December 1997;
various product
line, sales and
manufacturing
management positions
from 1973 to 1997
Joseph Zils...........44 Vice President, President, Chief
Legal Counsel and Financial Officer
Corporate Secretary, and Director of Flex
OCLI; President, Chief Products, Inc. since
Financial Officer November 1997; Vice
and Director, Flex President of OCLI
Products, Inc. since June 1993;
Corporate Secretary
of OCLI since
December 1993; Legal
Counsel of OCLI
since November 1997;
General Counsel of
OCLI from 1989 to
1997
Information regarding compliance with Section 16(a) of the Securities
Exchange Act of 1934 is set forth in the definitive Proxy Statement
relating to the Company's 1998 Annual Meeting of Stockholders, which
information is incorporated herein by reference.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
=================================================
The Company's common stock trades on The Nasdaq Stock Market(sm) under the
symbol OCLI. The table below sets forth the high and low prices of the
Company's common stock during the two most recent fiscal years ended
October 31, 1998 and 1997.
1Q 2Q 3Q 4Q FY
==========================================================================
1998
High......................... 15-7/8 15-3/8 19-3/4 17-15/16 19-3/4
Low.......................... 12-1/2 12-1/2 14-5/8 15- 3/16 12-1/2
1997
High......................... 11-5/8 11-3/8 14-1/4 13-1/4 14-1/4
Low.......................... 9-1/2 9-3/8 9-3/8 12-1/8 9-3/8
DIVIDEND INFORMATION
- --------------------
Since June 1991, the Company has paid a semiannual cash dividend of $.06
per share on its common stock.
APPROXIMATE NUMBER OF HOLDERS OF COMMON STOCK
- ---------------------------------------------
There were 807 holders of record of the Company's common stock as of
December 31, 1998.
ITEM 6. SELECTED FINANCIAL DATA
================================
Years ended October 31, 1998, 1997, 1996, 1995, and 1994
(Amounts in thousands, except per share amounts)
1998(1) 1997 1996 1995 1994
=============================================================================
Revenues...................... $255,624 $217,829 $189,195 $169,417 $131,780
Net income.................... $ 7,339 $ 7,125 $ 5,196 $ 7,391 $ 4,604
Net income applicable to
common stock................ $ 7,089 $ 6,432 $ 4,236 $ 6,929 $ 4,604
Net income per share, basic... $ .62 $ .63 $ .44 $ .76 $ .51
Net income per share, diluted. $ .59 $ .60 $ .41 $ .73 $ .51
Weighted average number of
shares used to compute basic
earnings per share.......... 11,388 10,191 9,629 9,144 8,975
Weighted average number of
shares used to compute
diluted earnings per share.. 11,999 10,673 10,301 9,510 9,023
Cash dividend paid on common
stock....................... $ 1,355 $ 1,199 $ 1,153 $ 1,083 $ 1,075
Cash dividend paid per share
of common stock............. $ .12 $ .12 $ .12 $ .12 $ .12
Working capital............... $ 75,130 $ 42,618 $ 38,087 $ 28,015 $ 28,692
Total assets.................. $213,586 $183,493 $172,771 $169,834 $118,879
Long-term debt................ $ 52,373 $ 40,975 $ 45,788 $ 47,267 $ 35,441
Stockholders' equity.......... $102,223 $ 86,963 $ 79,559 $ 73,894 $ 52,037
Common stockholders' equity
per share................... $ 8.46 $ 7.68 $ 6.99 $ 6.59 $ 5.79
Number of employees........... 1,554 1,515 1,362 1,407 1,162
The Company's fiscal year ends on the Sunday closest to the last day in
October. See Note 2 of the Notes Consolidated Financial Statments.
(1) In the fourth quarter of 1998, the Company recorded an impairment loss of
$8.6 million in connection with the sale of the operating assets of its MMG
division and recorded restructuring charges of $586,000 pursuant to a plan
of restructuring approved in the fourth quarter of 1998.
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
THE INFORMATION CONTAINED IN MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION AND IN ITEM 7A., QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK, INCLUDES FORWARD LOOKING
STATEMENTS WHICH ARE TYPICALLY IDENTIFIED BY THE WORDS "ANTICIPATES,"
"BELIEVES," "EXPECTS," "INTENDS," "FORECASTS," "PLANS," "FUTURES,"
"STRATEGY," OR WORDS OF SIMILAR IMPORT. VARIOUS IMPORTANT FACTORS THAT
COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED IN THE
FORWARD LOOKING STATEMENTS ARE IDENTIFIED BELOW. ACTUAL RESULTS MAY VARY
SIGNIFICANTLY BASED ON A NUMBER OF FACTORS INCLUDING, BUT NOT LIMITED TO,
PRODUCT DEVELOPMENT, COMMERCIALIZATION AND TECHNOLOGICAL DIFFICULTIES;
MANUFACTURING COSTS AND YIELD ISSUES ASSOCIATED WITH INITIATING PRODUCTION
AT NEW FACILITIES; THE IMPACT OF COMPETITIVE PRODUCTS AND PRICING; CHANGING
CUSTOMER REQUIREMENTS; AND THE CHANGE IN ECONOMIC CONDITIONS OF THE VARIOUS
MARKETS THE COMPANY SERVES.
RESULTS OF OPERATIONS
FISCAL 1998 COMPARED TO FISCAL 1997
REVENUES. Revenues for 1998 were $255.6 million, an increase of $37.8
million or 17% over revenues of $217.8 million for 1997. The 1998 revenue
increase was due to a $38.6 million revenue increase in the Company's
telecommunications markets, a $3.6 million revenue increase by Flex
Products, Inc. (Flex Products), a $1.2 million increase in revenues in the
Company's aerospace and instrumentation markets and a $300,000 increase in
revenues in its display markets. During 1998, sales in these markets
constituted 87% of total Company sales. These revenue increases were offset
by decreased revenues in the Company's office automation markets, where
sales decreased by $5.9 million. During 1998, office automation sales
constituted 13% of total Company sales. Much of the decrease in the
Company's sales in office automation markets was due to the Company's
decision to focus its investments in other markets.
The revenue increase in telecommunications markets is primarily due to
participation in the Wavelength Division Multiplexing (WDM) market with JDS
Fitel Inc, (JDS). The increase in Flex Products' sales is primarily due to
greater shipments of security pigment in 1998.
GROSS PROFIT. Gross profit, as a percent of revenue, was 33.6% in 1998
compared to 34.3% in 1997. The 0.7% gross margin decrease in 1998 was
primarily due to increased sales of WDM products which have lower than
Company average gross margins.
RESEARCH AND DEVELOPMENT. Research and development expenditures for 1998
were $17.1 million, an increase of $2.2 million, or 15% over research and
development expenditures of $14.9 million for 1997. The 1998 increase is
primarily due to product and process development for telecommunications
products and for new products in the display market.
SELLING AND ADMINISTRATIVE. Selling and administrative expenses for 1998
were $43.9 million, an increase of $1.1 million, or 3%, over 1997 selling
and administrative expenses of $42.8 million. This increase is primarily
due to increases in legal expenses in 1998 primarily associated with a
lawsuit with OCA (settled after fiscal 1998) and a patent infringement suit
with BASF (settled in fiscal 1998). The Company was the plaintiff in both
lawsuits. See ITEM 3, LEGAL PROCEEDINGS.
IMPAIRMENT LOSS. In the fourth quarter of 1998, the Company made the
decision to dispose of its manufacturing subsidiary in Germany (MMG) in
order to focus more resources in other markets. In connection with
negotiation of the sale, independent appraisals were made of the assets and
liabilities of MMG and an impairment loss of $8.6 million was recorded to
reduce the carrying amount of MMG's assets to fair value net of disposal
costs on a liquidation basis. In November 1998, after the end of the fiscal
year, Glas-Trosch GmbH, a privately held glass company in Switzerland
purchased business and the operating assets (inventory, equipment,
furniture, two buildings, workforce, customer lists and other related
intangibles) of MMG. See INVESTMENTS, JOINT VENTURES, STRATEGIC ALLIANCES
AND DIVESTITURES below.
RESTRUCTURING EXPENSES. In the fourth quarter of 1998, the Company
finalized and announced to affected individuals, a plan of restructuring
for its administrative and sales offices in Europe. In 1998, the Company
recorded $586,000 of severance and exit costs associated with this plan
of restructuring.
AMORTIZATION OF INTANGIBLES. The Company recorded amortization of
intangibles of $805,000 in 1998 and $936,000 in 1997, primarily resulting
from amortization of goodwill for MMG (prior to disposition) and the
Company's precision polymer optics operation.
INCOME FROM OPERATIONS. As a result of the foregoing changes in revenue,
gross profit and operating expenses, the Company's income from operations
in 1998 was $14.9 million compared to $15.9 million in 1997.
INTEREST INCOME AND EXPENSE. Interest income was $769,000 in 1998 compared
to $461,000 in 1997. Net interest expense in 1998 was $3.6 million
compared to $4.0 million in 1997. 1998 net interest expense is the net
result of interest incurred of $4.3 million net of interest capitalized of
$697,000, compared to 1997 interest incurred of $4.2 million net of
interest capitalized of $219,000. The higher amount of interest
capitalized in 1998 was primarily due to new equipment in process for the
manufacture of telecommunications products.
PROVISION FOR INCOME TAXES. The Company's effective tax rate was 27.7% in
1998 compared to 37.3% in 1997. The significantly lower than combined
federal and state statutory tax rate in 1998 is primarily due to the
recognition of tax benefits for prior year losses in Germany that
previously had not been tax benefited and were realized upon the sale of
MMG. In both 1998 and 1997, the Company recognized the benefit of state
tax credits arising from the purchase of new manufacturing equipment and
federal and state research credits resulting in a lower than combined
federal and state statutory tax rate.
MINORITY INTEREST. In 1998, the Company recorded minority interest of $1.4
million compared to minority interest of $631,000 in 1997. Minority
interest represents the share of net income of Flex Products accruing to
its 40% shareholder and the portion of the operating results of OCLI Asia
attributable to its Japanese partner. During 1998, the Company purchased
the share of OCLI Asia owned by its Japanese partner and in fiscal 1999,
the Company purchased the remaining 40% interest in Flex Products from its
minority shareholder. See INVESTMENTS, JOINT VENTURES, STRATEGIC ALLIANCES
AND DIVESTITURES below.
NET INCOME. The Company had net income of $7.3 million in 1998 compared to
$7.1 million in 1997. Dividends of $250,000 in 1998 and $693,000 in 1997
were accrued on outstanding Convertible Redeemable Preferred Stock. The
1998 preferred dividend decrease was due to the conversion of the remaining
shares of Convertible Redeemable Preferred Stock into 599,000 shares of
Company common stock during 1998.
FISCAL 1997 COMPARED TO FISCAL 1996
REVENUES. Revenues for 1997 were $217.8 million, an increase of $28.6
million or 15% over revenues of $189.2 million for 1996. The 1997 revenue
increase was due to a $25.0 million revenue increase in the Company's
telecommunications markets, a $6.2 million revenue increase in its office
automation markets and a $9.2 million increase in sales by Flex Products,
Inc. (Flex Products) of optically variable pigment. During 1997, sales in
these markets totaled 53% of total Company sales. These revenue increases
<PAGE>
were partially offset by decreased revenues in the Company's display
markets, where sales decreased by $4.6 million, and decreased sales of $7.2
million in the Company's aerospace and instrumentation markets. During
1997, sales in these markets totaled 47% of total Company sales. Much of
the decrease in the Company's sales in display markets in 1997 was due to a
next generation product in which the Company elected not to participate.
The revenue increase in telecommunications markets was primarily due to
participation in the Wavelength Division Multiplexing market with JDS. The
increase in Office Automation sales was primarily due to better capacity
utilization of the Company's continuous coating platforms resulting in
yield and throughput improvements that allow the Company to better compete
in this market. The increase in Flex Products sales was due to greater
shipments of security pigment as fifteen new countries adopted the security
ink as an anti-counterfeiting device.
GROSS PROFIT. Gross profit, as a percent of revenue, was 34.3% in 1997
compared to 33.0% in 1996. The 1.3% gross margin improvement in 1997 was
primarily due to yield and throughput improvements including improvements
in the Company's new continuous coating platforms which resulted in gross
margin improvements of approximately 3.0% offset by lower than Company
average gross margins in the manufacture of WDM products which reduced
Company average gross margin by approximately 1.7%.
RESEARCH AND DEVELOPMENT. Research and development expenditures for 1997
were $14.9 million, an increase of $3.2 million, or 27% over research and
development expenditures of $11.7 million for 1996. The 1997 increase is
primarily due to increased spending by Flex Products ($2.2 million) for the
qualification of new products. Approximately $800,000 of the remaining
increase was for product and process development for telecommunications
products.
SELLING AND ADMINISTRATIVE. Selling and administrative expenses for 1997
were $42.8 million, an increase of $5.7 million or 15% over 1996 selling
and administrative expenses of $37.1 million. The 1997 increase was
primarily due to the establishment of OCLI Asia ($1.4 million), increased
selling expenses at Flex Products ($1.5 million), increased legal expenses
($1.1 million) and a restructuring charge recorded by Flex Products
pursuant to a plan approved prior to the end of fiscal year 1998
($600,000). The legal expense increase primarily resulted from a lawsuit
with SICPA Holdings S.A. and a patent infringement suit in which the
Company was the plaintiff. Both were settled in November 1997.
AMORTIZATION OF INTANGIBLES. The Company recorded amortization of
intangibles of $936,000 in 1997 and $1.1 million in 1996, primarily
resulting from amortization of goodwill relating to the acquisitions of MMG
and Netra Corporation.
INCOME FROM OPERATIONS. As a result of the foregoing changes in revenue,
gross profit and operating expenses, the Company's income from operations
in 1997 was $15.9 million compared to $12.4 million in 1996.
INTEREST INCOME AND EXPENSE. Interest income was $461,000 in 1997 compared
to $379,000 in 1996. Net interest expense in 1997 was $4.0 million
compared to $3.5 million in 1996. 1997 net interest expense is the net
result of interest incurred of $4.2 million net of interest capitalized of
$219,000, compared to 1996 interest incurred of $4.7 million net of
interest capitalized of $1.2 million. The higher amount of interest
<PAGE>
capitalized in 1996 was due to the construction of two new buildings and
the installation of two new continuous coating machines.
PROVISION FOR INCOME TAXES. The Company's effective tax rate was 37.3% in
1997 compared to 37.0% in 1996. In both years, the lower than combined
federal and state statutory effective rate is primarily due to the
recognition of state tax credits arising from the purchase of new
manufacturing equipment.
MINORITY INTEREST. In 1997, the Company recorded minority interest of
$631,000 compared to minority interest of $636,000 in 1996. 1997 minority
interest represents the share of net income of Flex Products accruing to
its 40% shareholder and the portion of the operating results of OCLI Asia
attributable to its Japanese partner. 1996 minority interest represents
only the share of net income of Flex Products accruing to its 40%
shareholder.
NET INCOME. The Company had net income of $7.1 million in 1997 compared to
$5.2 million in 1996. Dividends of $693,000 in 1997 and $960,000 in 1996
were accrued on outstanding Convertible Redeemable Preferred Stock. The 1997
preferred dividend decrease was due to the conversion of 5,750 shares of
Convertible Redeemable Preferred Stock into 555,000 shares of Company
common stock during 1997.
PRICING. The Company's revenues were not materially affected by price
increases or decreases in fiscal 1998, 1997 or 1996.
FINANCIAL CONDITION AND LIQUIDITY
In 1998, the Company's cash and cash equivalents increased by $25.7
million. Net cash provided by operations during 1998 was $25.4 million,
debt proceeds, net of repayments, provided $13.3 million, stockholders' and
minority interest holders invested a net of $5.5 million and exchange rate
variances provided $78,000. These were offset by investments in plant and
equipment of $16.3 million, payment of dividends of $1.6 million and
investments in Asia of $738,000. At fiscal year end 1998, the Company had
cash and cash equivalents totaling $40.9 million. In addition, the Company
has available domestically a $20 million revolving line of credit and
separate credit arrangements in place for the operating requirements of its
subsidiaries in Scotland and Japan. In December 1998, after the end of the
fiscal year, the Company purchased the minority shareholder's interest in
Flex for $30 million.
During 1998, the Company's working capital, excluding cash and cash
equivalents, increased $6.8 million, primarily due to increased accounts
receivable, inventory and current deferred tax assets, offset by increased
current liabilities. These increases are primarily due to increased sales
during the year, higher than Company average receivable terms for the
Company's subsidiary in Asia and tax benefits recorded in connection with
the Company's sale of MMG.
During 1998, the remaining outstanding shares of 8% Series C Convertible
Redeemable Preferred Stock were converted into 599,000 shares of common
stock of the Company.
<PAGE>
During 1998, the Company sold $30 million of Senior Notes to a group of
insurance companies. The Senior Notes carry an interest rate of 6.69% and
are due July 31, 2008. The Company used a portion of the proceeds to repay
the $8 million balance of its bank line of credit and the $3.7 million
balance of its 9.5% Scottish Development Agency building loan and replaced
its bank line of credit with a $20 million syndicated revolving credit
facility with more favorable interest rates.
During 1998, in connection with the anticipated sale of its operating
assets at MMG, the Company recorded an impairment loss of $8.6 million for
the difference between the recorded value of the assets and liabilities of
MMG and the fair market value calculated on a liquidation basis. Assets
written down include Property, Plant and Equipment of $3.8 million and
Other Assets (primarily Goodwill) of $4.4 million. Transaction costs of
approximately $400,000 were accrued.
At October 31, 1998, as a result of the impairment loss and restructuring
charges recorded in 1998, the Company was in violation of one of the
covenants under its bank credit arrangement. In January 1999, the Company
and the bank executed a waiver and amendment to the Company's credit
agreement under which a waiver was obtained for the period ended October
31, 1998. The amendment removes the effect of the impairment loss and
restructuring charges from the financial covenants so they will not affect
covenant compliance in future periods.
At October 31, 1998, the Company had outstanding capital commitments of
approximately $3 million. The Company expects to fund these commitments
from operations.
Management believes that the cash and cash equivalents on hand at October
31, 1998, 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 needs, capital expenditures,
investments in subsidiaries, debt service requirements and payment of
dividends as declared for at least the next twelve months.
OTHER MATTERS
IMPACT OF YEAR 2000. The "Year 2000 Issue" is the result of computer
programs that were written using two digits rather than four digits 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 system failures or miscalculations causing disruption 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 components: 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 $3.8 million has been spent to
date. The Company is in the implementation phase for this system and other
<PAGE>
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 the 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 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.
LITIGATION
See ITEM 3, LEGAL PROCEEDINGS.
INVESTMENTS, JOINT VENTURES, STRATEGIC ALLIANCES AND DIVESTITURES
SALE OF MMG. In the fourth quarter of 1998, the Company made the decision
to dispose of its manufacturing subsidiary in Germany (MMG). In
conjunction with negotiation of the sale, independent appraisals were made
of the assets and liabilities of MMG, and an impairment loss of $8.6
<PAGE>
million was recorded in the fourth quarter of 1998 to reduce the carrying
amount of the impaired assets to fair value, net of disposal costs on a
liquidation basis. Assets written down include Property, Plant and
Equipment of $3.8 million and Goodwill (included in Other Assets) of $4.4
million. Transaction and disposal costs of approximately $400,000 were
accrued. At October 31, 1998, the remaining carrying amount of assets to
be disposed of (inventory, equipment, furniture and three buildings in
Germany) was $4.9 million.
In November 1998, after the end of the fiscal year, Glas-Trosch GmbH, a
privately held glass company in Switzerland purchased the business and the
operating assets (inventory, equipment, furniture, two buildings,
workforce, customer lists and other related intangibles) of MMG for $4.3
million. The Company retained ownership of an office building with an
appraised value of $600,000 and accounts receivable and cash totaling $3.4
million. Third party liabilities of MMG were $4.5 million which will be
paid from the asset sale proceeds, cash on hand and collection of accounts
receivable. As the assets were sold for the recorded value, adjusted for
the impairment recorded in 1998, no gain or loss will be recognized in the
first quarter of 1999 in connection with the 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 was deferred and will be
recognized as revenue over the three-year terms of the agreements.
OCLI ASIA. In the second quarter of 1997, the Company began operating a
joint venture (Hakuto-OCLI Co., Ltd. doing business as OCLI Asia) with
Hakuto Co., Ltd. (Hakuto) in Japan. The joint venture was established to
address the rapidly changing market for OCLI's multi-layer thin film
coatings that require an expanded presence and more integrated support
within Asia. Each partner contributed cash of $800,000 for working
capital. OCLI Asia was consolidated into the Company's results of
operations and financial position as the Company had operating control.
During 1998, the Company purchased Hakuto's interest in the joint venture
for $740,000. The wholly owned subsidiary, OCLI Asia K.K., continues to do
business as OCLI Asia and remains headquartered in Shinjuku, Tokyo, with
manufacturing facilities in Isehara, Kanagawa Prefecture.
FLEX PRODUCTS, INC. Flex Products was founded as a division of the Company
in the early 1980's and was subsequently established as a joint venture in
which ICI Americas Inc. (ICIA), an affiliate of Imperial Chemical
Industries PLC owned 60% and the Company owned 40%. In 1995, the Company
acquired controlling ownership of Flex Products with the purchase of an
additional 20% interest in Flex Products from ICIA. In conjunction with
the Company's increase in ownership, the remaining 40% interest in Flex
Products was acquired by SICPA Holding S.A. (SICPA), a privately held Swiss
Corporation headquartered in Lausanne, Switzerland. SICPA is one of the
world's leading manufacturers of printing inks and a major customer of Flex
Products.
On December 22, 1998, after the end of the Company's fiscal year, the
Company purchased SICPA's 40% interest in Flex Products for $30 million
in cash, increasing its ownership to 100%. The acquisition will be
accounted for as a purchase. Allocation of the purchase price
is pending completion of an independent valuation that is currently in
process. The purchase price allocation may include a component
constituting in-process research and development, which would result
in a charge to expense in the first quarter of 1999.
In addition, Flex Products repaid its remaining working capital loan
of $2.4 million to SICPA. The fifteen-year license and supply agreement
between Flex Products and SICPA that was originally signed in November 1994
was modified to increase the minimum purchase requirements under
the agreement originally signed in November 1994 was modified to increase
the minimum purchase requirements under the agreement.
ALLIANCE WITH JDS FITEL INC. In 1997, the Company announced that it had
entered into an alliance with JDS FITEL Inc. (JDS) in order to capitalize
on the rapidly growing market for Wavelength Division Multiplexing (WDM)
products used in telecommunications applications. The alliance involves a
series of exclusive supply and distribution contracts under which OCLI will
contribute its expertise to provide optical filters for WDM's and JDS will
contribute its expertise in the design, manufacture and marketing of WDM
products. The first sales under these agreements were recognized in the
second quarter of 1997.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK. The Company's exposure to market risk for changes in
interest rates relates primarily to the Company's cash equivalents and
long-term debt obligations. Cash equivalents are readily convertible to
cash and have maturity dates of three months or less. Due to the short
maturities of cash equivalents, carrying amounts approximate fair value.
By policy, cash investments are limited to obligations of the U.S., U.K.,
German and Japanese governments, Prime Commercial Paper, Bank Repurchase
Agreements collateralized by direct obligations of the U.S., U.K., German
or Japanese governments and Savings Accounts with commercial banks.
Amounts deposited with commercial banks are also limited in amount by
financial institutions. The Company does not use derivatives or equity
investments for cash investment purposes.
As the Company's long-term debt obligations are at fixed rates, the Company
does not have cash flow exposure due to rate changes on its long-term debt.
The fair value of the Company's long-term debt is estimated based on
current interest rates offered to the Company for similar instruments.
From time to time, the Company enters into interest rate swaps primarily to
reduce its interest rate exposure from floating to fixed rate. In 1998, the
Company entered into an interest rate swap for anticipated debt refinancing
in the amount of $30 million. The purpose of the swap was 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 was completed. The
Company had designated the swap as a hedge of an anticipated transaction.
After completion of the loan refinance, $310,000 was paid under the swap
that is being recorded as an increase to interest expense over the term of
the notes. There were no interest rate swaps outstanding at October 31,
1998.
The table below presents principal (or notional) amounts and related
weighted-average interest rates by year of maturity for the Company's cash
equivalents and debt obligations at October 31, 1998.
Amounts in thousands FAIR
1999 2000 2001 2002 2003 THEREAFTER TOTAL VALUE
============================================================================
Cash equivalents
Fixed rate $38,300 $38,300 $38,300
Average rate 4.80% 4.80%
Long-term debt
Fixed rate $ 6,026 $3,663 $3,553 $8,616 $6,126 $30,435 $58,399 $59,843
Average rate 7.40% 8.03% 7.95% 7.24% 6.94% 7.01% 7.20%
FOREIGN EXCHANGE RISK. The Company has significant investments in 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 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 were 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 other of 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.
During 1998, approximately 21% of the Company's consolidated sales
constituted sales to customers in Canada and Latin America (primarily to
customers in Canada), approximately 25% of the Company's consolidated sales
constituted sales to customers in Europe, Middle East and Africa (primarily
to customers in Europe) and approximately 12% of the Company's consolidated
<PAGE>
sales constituted sales to customers in the Asian Pacific (primarily to
customers in Asia).
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 significant 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 1998, the Company entered into foreign currency forward contracts for
the principal and interest payments under a $3.1 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. The Company also entered into foreign currency forward contracts for
the principal and interest payments under an intercompany note receivable
denominated in British Pounds. Gains and losses on those contracts are
offset in consolidation.
The following table provides information about the Company's foreign
exchange forward contracts at October 31, 1998.
(In thousands except for contract rates)
FAIR
1999 2000 2001 2002 2003 THEREAFTER TOTAL VALUE
============================================================================
Deutsche marks:
Notional amount $1,026 $995 $959 $921 $224 $4,124 $345
Average contract
rate (foreign
currency/USD) 1.78 1.75 1.73 1.71 1.70 1.74
Pound sterling:
Notional Amount $ 374 $370 $368 $366 $365 $1,106 $2,948 $ 92
Average contract
rate (foreign
currency/USD) 0.63 0.64 0.64 0.65 0.65 0.64 0.64
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments
and hedging activities. The statement requires balance sheet and income
statement recognition of derivative transactions and provides limitations
and accounting requirements for hedging instruments. The statement is
effective for the first quarter of the Company's fiscal year 2000 with
earlier application encouraged. As the Company's existing derivative
contracts and policies regarding the use of derivatives require that cash
flows under financial derivatives match cash flows under existing firm
commitments, the Company does not expect adoption of SFAS 133 to affect its
results of operations or cash flows but, as the statement requires separate
presentation of the fair value of derivative instruments, the Company's
Statement of Financial Position will be affected by adoption of the
statement.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995
Except for historical information contained in this report, matters
discussed in this report are forward-looking statements that involve risks
and uncertainties. Actual results may vary significantly based on a number
of factors including, but not limited to, product development,
commercialization and technological difficulties; manufacturing costs and
yield issues associated with initiating production at new facilities; the
impact of competitive products and pricing; changing customer requirements;
and the change in economic conditions of the various markets the Company
serves.
<PAGE>
OPTICAL COATING LABORATORY, INC. AND SUBSIDIARIES
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND
SUPPLEMENTAL FINANCIAL INFORMATION
INDEX
-----
PAGE(S)
Report of Independent Auditors of Optical Coating Laboratory, Inc...... 24
Report of Independent Auditors of Flex Products, Inc................... 25
Consolidated Balance Sheets as of October 31, 1998 and 1997............ 26
Consolidated Statements of Income for the years ended October 31,
1998, 1997 and 1996.................................................. 27
Consolidated Statements of Cash Flows for the years ended October 31,
1998, 1997 and 1996................................................ 28-29
Consolidated Statements of Stockholders' Equity for the years ended
October 31, 1998, 1997 and 1996...................................... 30
Notes to Consolidated Financial Statements............................. 31
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Optical Coating Laboratory, Inc.
Santa Rosa, California
We have audited the accompanying consolidated balance sheets of Optical
Coating Laboratory, Inc. and subsidiaries (the "Company") as of October 31,
1998 and 1997, and the related consolidated statements of income,
stockholders' equity and cash flows for each of the three years in the
period ended October 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits. We
did not audit the financial statements of Flex Products, Inc., a
consolidated subsidiary for the years ended October 31, 1997 and 1996,
whose assets represent 12% of consolidated total assets at October 31,
1997, and whose total revenues for the years ended October 31, 1997 and
1996 represent 18% and 15% respectively, of consolidated revenues. The
financial statements of Flex Products, Inc. for the years ended October 31,
1997 and 1996, were audited by other auditors whose report has been
furnished to us, and our opinion, insofar as it relates to the amounts
included for Flex Products, Inc., is based solely on the report of such
other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
and the report of the other auditors provide a reasonable basis for our
opinion.
In our opinion, based on our audits and the report of the other auditors,
such consolidated financial statements present fairly, in all material
respects, the financial position of Optical Coating Laboratory, Inc. and
its subsidiaries at October 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period
ended October 31, 1998 in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
San Jose, California
December 22, 1998
(January 8, 1999 as to Note 5)
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Flex Products, Inc.
Santa Rosa, California
We have audited the balance sheets of Flex Products, Inc. (the "Company"),
a joint venture of Optical Coating Laboratory, Inc. and SICPA Holding S.A.,
as of November 2, 1997 and November 3, 1996 and the related statements of
operations, stockholders' equity and cash flows for the years ended
November 2, 1997, November 3, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
These financial statements have been prepared on a historical basis of
accounting and do not reflect any purchase accounting adjustments recorded
by Optical Coating Laboratory, Inc. as a result of their acquisition of a
majority interest in Flex Products, Inc. as of May 8, 1995.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Flex Products, Inc. as
of November 2, 1997 and November 3, 1996, and the results of its operations
and its cash flows for the years then ended in conformity with generally
accepted accounting principles.
KPMG LLP
San Francisco, California
November 26, 1997
<PAGE>
OPTICAL COATING LABORATORY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
---------------------------
As of October 31, 1998 and 1997
(Dollars in thousands)
ASSETS 1998 1997
=============================================================================
CURRENT Cash and cash equivalents...................... $ 40,880 $ 15,217
ASSETS Accounts receivable, net of allowance for
doubtful accounts of $1,831 and $1,884........ 38,585 34,923
Inventories.................................... 25,233 22,829
Income taxes receivable........................ 504
Deferred income tax assets..................... 9,311 6,853
Other current assets........................... 1,822 1,707
-------- --------
Total Current Assets.................... 115,831 82,033
OTHER Deferred income tax assets..................... 716
ASSETS Other assets and investments................... 4,151 8,243
Property, plant and equipment held for sale.... 3,183
PROPERTY, Land and improvements.......................... 9,116 9,225
PLANT AND Buildings and improvements..................... 36,171 41,944
EQUIPMENT Machinery and equipment........................ 123,261 121,717
Construction-in-progress....................... 12,722 9,525
-------- --------
181,270 182,411
Less accumulated depreciation.................. (91,565) (89,194)
-------- --------
Property, plant and equipment-net............. 89,705 93,217
-------- --------
Total Assets............................ $213,586 $183,493
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
=============================================================================
CURRENT Accounts payable............................... $ 8,423 $ 14,301
LIABILITIES Accrued expenses............................... 9,935 6,854
Accrued compensation expenses.................. 10,365 8,752
Income taxes payable........................... 708 339
Current maturities on long-term debt........... 6,026 7,888
Notes payable.................................. 4,483 381
Deferred revenue............................... 761 900
-------- --------
Total Current Liabilities............... 40,701 39,415
NONCURRENT Accrued postretirement health benefits
LIABILITIES and pension liabilities....................... 2,241 2,040
Deferred income tax liabilities................ 3,528 785
Long-term debt................................. 52,373 40,975
Minority interest.............................. 12,520 13,315
Commitments and contingencies (Note 13)
STOCK- Preferred stock - Series C;
HOLDERS' 8% cumulative, convertible, redeemable; issued
EQUITY and outstanding 6,250 at October 31, 1997..... 5,559
Common stock, $.01 par value; authorized
30,000,000 shares; issued and outstanding
12,087,000 and 10,599,000 shares.............. 121 106
Paid-in capital................................ 69,993 55,723
Retained earnings.............................. 31,951 26,217
Cumulative foreign currency translation
adjustment.................................. 158 (642)
-------- --------
Stockholders' Equity......................... 102,223 86,963
-------- --------
Total Liabilities and Stockholders'
Equity............................... $213,586 $183,493
======== ========
The accompanying notes are an integral part of these financial statements.
<PAGE>
OPTICAL COATING LABORATORY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
Years ended October 31, 1998, 1997 and 1996
(Amounts in thousands, except per share amounts) 1998 1997 1996
=============================================================================
REVENUES Revenues.............................. $255,624 $217,829 $189,195
Cost of sales......................... 169,670 143,207 126,769
-------- -------- --------
Gross Profit.................... 85,954 74,622 62,426
COSTS AND Operating Expenses:
EXPENSES Research and development............. 17,137 14,903 11,733
Selling and administrative........... 43,926 42,836 37,145
Impairment loss...................... 8,628
Restructuring expenses............... 586
Amortization of intangibles.......... 805 936 1,146
-------- -------- --------
Total Operating Expenses........... 71,082 58,675 50,024
-------- -------- --------
Income from Operations........... 14,872 15,947 12,402
Nonoperating Income (Expense):
Interest income...................... 769 461 379
Interest expense, net................ (3,615) (4,030) (3,524)
-------- -------- --------
EARNINGS Income before Provision for
Income Taxes and Minority
Interest........................ 12,026 12,378 9,257
Provision for income taxes............ 3,336 4,622 3,425
Minority interest..................... 1,351 631 636
-------- -------- --------
Net Income...................... 7,339 7,125 5,196
Dividend on convertible redeemable
preferred stock..................... 250 693 960
-------- -------- --------
Net Income Applicable to Common
Stock......................... $ 7,089 $ 6,432 $ 4,236
======== ======== ========
Net Income Per Share, Basic.......... $ .62 $ .63 $ .44
======== ======== ========
Net Income Per Share, Diluted........ $ .59 $ .60 $ .41
======== ======== ========
Weighted average number of common
shares used to compute basic earn-
ings per share...................... 11,388 10,191 9,629
======== ======== ========
Weighted average number of common
shares used to compute diluted earn-
ings per share...................... 11,999 10,673 10,301
======== ======== ========
The accompanying notes are an integral part of these financial statements.
<PAGE>
OPTICAL COATING LABORATORY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
Years ended October 31, 1998, 1997 and 1996
(Amounts in thousands) 1998 1997 1996
==============================================================================
OPERATIONS
Cash Flows From Operations:
Cash received from customers.......... $213,634 $194,375 $191,665
Interest received..................... 684 455 258
Cash paid to suppliers and employees.. (184,805)(164,654)(165,565)
Cash paid to 401(k) Plan.............. (463) (379)
Interest paid......................... (3,112) (5,345) (5,196)
Income taxes paid, net of refunds..... (572) (4,316) (954)
-------- -------- --------
Net Cash Provided By Operations.... 25,366 20,136 20,208
-------- -------- --------
INVESTMENTS
Cash Flows From Investments:
Purchase of plant and equipment....... (16,341) (17,231) (30,530)
Purchase of minority shareholder's
interest in OCLI-Asia.............. (738)
Proceeds from sale-leaseback of new
equipment.......................... 18,940
-------- -------- --------
Net Cash Used For Investments...... (17,079) (17,231) (11,590)
FINANCING
Cash Flows From Financing:
Proceeds from long-term debt.......... 42,276 5,416 8,596
Proceeds from notes payable........... 3,978 6 8
Proceeds from exercise of stock
options............................ 7,321 2,247 1,713
Investment by minority interest holder 1,440
Repayment of long-term debt........... (32,913) (8,311) (7,019)
Repayment of notes payable............ (2,400)
Repayment of note to minority interest
holder, net of amounts borrowed.... (1,801) (76) (413)
Payment of dividend on preferred stock (208) (693) (960)
Payment of dividend on common stock... (1,355) (1,199) (1,153)
-------- -------- --------
Net Cash Provided By (Used For)
Financing........................ 17,298 (3,570) 772
-------- -------- --------
Effect of exchange rate changes on
cash............................. 78 (145) 35
-------- -------- --------
Increase (decrease) in cash and cash
equivalents...................... 25,663 (810) 9,425
Cash and cash equivalents at beginning
of year.......................... 15,217 16,027 6,602
-------- -------- --------
Cash and cash equivalents at end of
year............................. $ 40,880 $ 15,217 $ 16,027
======== ======== ========
<PAGE>
OPTICAL COATING LABORATORY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
-------------------------------------------------
Years ended October 31, 1998, 1997 and 1996
(Amounts in thousands) 1998 1997 1996
=============================================================================
ADJUSTMENTS
Reconciliation of NetIncome to Cash Flows From
Operations:
Net income............................... $ 7,339 $ 7,125 $ 5,196
Adjustments to reconcile net income to
net cash provided by operations:
Depreciation and amortization......... 13,129 12,784 13,669
Impairment loss....................... 8,628
Restructuring expenses................ 586
Minority interest in earnings of
subsidiaries......................... 1,351 631 636
Loss on disposal or abandonment of
equipment............................ 1,467 1,412 1,356
Net book value of coating machine sold 880
Accrued postretirement health benefits 200 (226) 184
Deferred income tax liabilities....... 2,858 (1,014) (468)
Other non-cash adjustments to net
income............................... (11) (97) (681)
Changes in:
Accounts receivable................. (3,363) (8,012) 1,378
Inventories......................... (2,299) (4,623) (3,030)
Income tax receivable............... 2,107 957 (719)
Deferred income tax assets.......... (3,267) 2,715 1,645
Other current assets and other
assets and investments............. (911) 136 716
Accounts payable, accrued expenses
and accrued compensation expenses.. (3,312) 9,979 (3,094)
Deferred revenue.................... (139) (346) 464
Income taxes payable................ 1,003 (1,285) 2,076
------- ------- -------
Total adjustments.................. 18,027 13,011 15,012
------- ------- -------
Net Cash Provided By Operations.. $25,366 $20,136 $20,208
======= ======= =======
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
The Company recorded capital leases of $1.2 million and $2.0 million in 1998
and 1997 to finance the hardware, software and some of the integration costs
of an Enterprise Resource Planning System for which implementation began in
1998. Lease terms run through 2004 with payments totaling approximately
$67,000 per month.
In 1998, 1997 and 1996, common stock, with an aggregate fair market value
of $86,000, $51,000 and $52,000 was awarded to the Company's outside
directors as remuneration.
During 1998, 1997 and 1996, the Company issued 39,292, 14,601 and 39,880
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.
In fiscal 1998, pursuant to a call for redemption by the Company, the 6,250
shares of 8% Series C Convertible Redeemable Preferred Stock outstanding
plus accrued dividends of $42,000 were converted into 599,000 shares of
Company common stock.
In fiscal 1997, 5,750 shares of 8% Series C Convertible Redeemable
Preferred Stock, plus accrued dividends of $74,000 were converted into
555,000 shares of Company common stock.
The accompanying notes are an integral part of these financial statements.
<PAGE>
OPTICAL COATING LABORATORY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
-----------------------------------------------
Years ended October 31, 1998, 1997 and 1996
PREFERRED COMMON
STOCK STOCK FOREIGN
---------- ---------- PAID-IN RETAINED CURRENCY
(Amounts in thousands) SHARES AMT SHARES AMT CAPITAL EARNINGS TRANS-
LATION
=============================================================================
BALANCE AT NOVEMBER 1,
1995 12 $11,357 9,489 $95 $44,461 $17,901 $ 80
Shares issued to Employee
Stock Ownership Plan 39 1 439
Exercise of stock options,
including tax benefit
and shares issued to
directors 233 2 2,319
Foreign currency trans-
lation adjustment for
the year (131)
Net income for the year 5,196
Series C preferred stock
issuance expenses (48)
Dividend on preferred stock (960)
Dividend on common stock (1,153)
=============================================================================
BALANCE AT OCTOBER 31,
1996 12 11,309 9,761 98 47,219 20,984 (51)
Shares issued to Employee
Stock Ownership Plan 15 159
Exercise of stock options,
including tax benefit
and shares issued to
directors 268 3 2,524
Conversion of Series C
preferred stock to
common stock (6) (5,750) 555 5 5,821
Foreign currency trans-
lation adjustment for
the year (591)
Net income for the year 7,125
Dividend on preferred stock (693)
Dividend on common stock (1,199)
=============================================================================
BALANCE AT OCTOBER 31,
1997 6 5,559 10,599 106 55,723 26,217 (642)
Shares issued to Employee
Stock Ownership Plan 39 555
Exercise of stock options,
including tax benefit
and shares issued to
directors 967 10 9,659
Shares surrendered for
payment of withholding
taxes (117) (1) (1,539)
Conversion of Series C
preferred stock to
common stock (6) (5,559) 599 6 5,595
Foreign currency
translation adjustment
for the year 800
Net income for the year 7,339
Dividend on preferred stock (250)
Dividend on common stock (1,355)
=============================================================================
BALANCE AT
OCTOBER 31, 1998 0 $ 0 12,087 $121 $69,993 $31,951 $158
=============================================================================
The accompanying notes are an integral part of these statements.
<PAGE>
OPTICAL COATING LABORATORY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended October 31, 1998, 1997 and 1996
(Amounts in thousands, except per share amounts)
1. GENERAL
- ------------
NATURE OF OPERATIONS. OCLI designs, develops and manufactures multi-layer
thin film coatings which control and enhance light by altering the
transmission, reflection and absorption of its various wavelengths to
achieve a desired effect such as anti-reflection, anti-glare,
electromagnetic shielding, electrical conductivity and abrasion resistance.
OCLI markets and distributes components to original equipment manufacturers
(OEMs) of optical and electro-optical systems and sells its 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, telecommunication systems,
photocopiers, fax machines, medical/analytical equipment and instruments,
projection imaging systems, satellite power systems and aerospace and
defense systems. The Company also manufactures precision injection molded
plastic optical components that are used in a variety of applications such
as inkjet printers, point-of-sale scanners and sunglasses. Through its
wholly 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 and
ChromaFlair. light interference pigments for commercial paints.
USE OF ESTIMATES. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results may differ from those
estimates.
2. SIGNIFICANT ACCOUNTING POLICIES
- ------------------------------------
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include
the accounts of the Company and its wholly and majority owned subsidiaries.
All significant intercompany accounts and transactions have been
eliminated. The Company's fiscal year ends on the Sunday closest to the
last day in October. For convenience purposes, the Company has designated
October 31 as its fiscal year end. Fiscal years 1998 and 1997 were 52-week
years and fiscal year 1996 was a 53-week year.
INVESTMENTS. Cash and cash equivalents are comprised of cash, bank
repurchase agreements and short-term commercial paper readily convertible
to cash. Cash equivalents are carried at cost that approximates market
value. For purposes of the Statements of Cash Flows, all highly liquid cash
equivalents with an original maturity of three months or less are
considered cash equivalents.
REVENUE RECOGNITION. Revenue from sales of manufactured products (under
standard product sale and fixed price supply contracts) is recognized when
the products are shipped to the customer. Revenue for service contracts
(whether fixed price or cost reimbursement) is recognized as services are
performed. The Company occasionally enters into long-term contracts under
which revenue is recognized on a percentage of completion basis.
<PAGE>
INVENTORIES. Inventories are stated at the lower of cost, on a first-in,
first-out basis, or market. Work-in-process inventories related to fixed-
price contracts are stated at the accumulated cost of material, labor and
manufacturing overhead, less the estimated cost of units delivered. To the
extent total costs under fixed-price contracts are estimated to exceed the
total sales price, charges are made to current operations to reduce
inventoried costs to net realizable value. In addition, if future costs
are estimated to exceed future revenues, an allowance for losses equal to
the excess is provided by a charge to current operations. The Company did
not have any material estimated loss contracts in the periods presented.
PROPERTY, PLANT AND EQUIPMENT. Property, plant and equipment are stated at
cost. Estimated service lives range from 5 to 45 years for buildings and
improvements and from 3 to 10 years for all other property, plant and
equipment. Buildings and improvements and substantially all equipment are
depreciated using accelerated methods.
Assets under capital lease constitute computer equipment and enterprise
resource planning software for leases commencing in 1997 and 1998, which
are being amortized on a straight-line basis from the date of service.
Amortization lives are four years for the equipment and six years for the
software. The gross cost of assets under capital lease is included in
machinery and equipment and was $3,638,000 and $2,037,000 at October 31,
1998 and 1997. Amortization began in fiscal 1998 when assets were placed
in service. Accumulated amortization for assets under capital lease is
included in accumulated depreciation and was $205,000 at October 31,1998.
RESEARCH AND DEVELOPMENT. Research and development costs are charged to
operations in the period incurred. The cost of equipment used in research
and development activities that has alternative uses is capitalized as
equipment and not treated as an expense of the period. Such equipment is
depreciated over estimated lives of 5 years.
FOREIGN OPERATIONS. The financial position and operating results of foreign
operations are consolidated using the local currency as the functional
currency. Local currency assets and liabilities are translated at the rate
of exchange to the U.S. dollar on the balance sheet date, and the local
currency revenues and expenses are translated at average rates of exchange
to the U.S. dollar during the period. Resulting translation gains or
losses are included in stockholders' equity as cumulative foreign currency
translation adjustment. Foreign currency transaction gains and losses,
which have not been material, are reflected in operating results.
INCOME TAXES. Income taxes include provisions for temporary differences
between earnings for financial reporting purposes and earnings for income
tax purposes under the guidelines of SFAS No. 109, "Accounting for Income
Taxes". Tax credits are taken as a reduction of current income tax
provisions when available.
EARNINGS PER SHARE. In 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
applicable to common stock by the weighted average number of common shares
outstanding. Diluted earnings per share is computed by dividing net income
applicable to common stock by the weighted average number of common shares
<PAGE>
and the potential dilution of convertible securities, stock options and
warrants. The earnings per share presentation for 1997 and 1996 were
restated to conform to the new statement.
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share computations for 1998, 1997 and 1996:
(Amounts in thousands, except per share amounts) 1998 1997 1996
=============================================================================
BASIC EARNINGS PER SHARE:
Weighted average common shares outstanding...... 11,388 10,191 9,629
====== ====== =====
Net income...................................... $7,339 $7,125 $5,196
Less dividend on convertible redeemable
preferred stock............................... 250 693 960
------ ------ ------
Net income applicable to common stock........... $7,089 $6,432 $4,236
====== ====== ======
Net income per common share, basic.............. $ 0.62 $ 0.63 $ 0.44
====== ====== ======
DILUTED EARNINGS PER SHARE:
Weighted average common shares outstanding, basic 11,388 10,191 9,629
Dilutive effect of employee stock options....... 611 482 672
------ ------ -----
Average shares outstanding, diluted............. 11,999 10,673 10,301
====== ====== ======
Net income applicable to common stock........... $7,089 $6,432 $4,236
====== ====== ======
Net income per share, diluted................... $ 0.59 $ 0.60 $ 0.41
====== ====== ======
Preferred stock convertible into 303,000, 595,000 and 1,143,000 shares of
common stock in 1998, 1997 and 1996 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 67,500 shares of common stock at a weighted average
price of $17.35 that were outstanding during 1998, options to purchase
65,500 shares of common stock at a weighted average price of $12.96 that
were outstanding during 1997 and options to purchase 12,000 shares of
common stock at a weighted average price of $17.38 that were outstanding in
1996 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.
RECLASSIFICATIONS. Certain reclassifications have been made to prior year
data to conform to the current year presentation.
FAIR VALUE OF FINANCIAL INSTRUMENTS. For certain of the Company's
financial instruments, including cash and cash equivalents, accounts
receivable, accounts payable, accrued expenses, accrued compensation
expenses and notes payable, the carrying amounts approximate fair value due
to their short maturities. The Company's long-term debt is carried at book
<PAGE>
value. If revalued based on borrowing rates currently available to the
Company for bank loans of similar terms and maturities, the fair value of
the Company's long-term debt would exceed carrying value by approximately
$1.4 million.
NEW ACCOUNTING PRINCIPLES. In 1997, the Financial Accounting Standards
Board issued SFAS No. 130, "Reporting Comprehensive Income," which requires
enterprises to report, by major component and in total, all changes in
equity from non owner sources. The statement is effective for the first
quarter of the Company's fiscal year 1999. The effect of adoption of the
statement is limited to the form and content of the Company's financial
disclosure and will not impact the Company's results of operations, cash
flow or financial position.
In 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information,"
which establishes annual and interim reporting standards for a public
company's operating segments and related disclosures about its products,
services, geographic areas and major customers. The statement is effective
for the Company's fiscal year 1999 annual report and will require 1999
comparative disclosures for interim reports in the following fiscal year.
Adoption of the statement affects the Company's disclosures and will not
impact the Company's results of operations, cash flow or financial
position.
In 1998, the Financial Accounting Standards Board issued SFAS No. 132,
"Employers' Disclosures about Pensions and Other Postretirement Benefits,"
which revises employers' disclosures about pension and other postretirement
benefit plans to standardize disclosure requirements for pensions and other
postretirement benefits to the extent practicable, requires additional
information on changes in the benefit obligations and fair values of plan
assets and eliminates certain disclosures. The statement is effective for
the Company's fiscal year 1999 annual report with restatement of prior year
disclosures required if the information is readily available. Adoption of
the statement affects the Company's disclosures and will not impact the
Company's results of operations, cash flow or financial position.
In 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments
and hedging activities. The statement requires balance sheet and income
statement recognition of derivative transactions and provides limitations
and accounting requirements for hedging instruments. The statement is
effective for the first quarter of the Company's fiscal year 2000 with
earlier application encouraged. As the Company's existing derivative
contracts and policies regarding the use of derivatives require that cash
flows under financial derivatives match cash flows under existing firm
commitments, the Company does not expect adoption of SFAS 133 to affect its
results of operations or cash flows but, as the statement requires separate
presentation of the fair value of derivative instruments, the Company's
Statement of Financial Position will be affected by adoption of the
statement.
3. IMPAIRMENT LOSS
- --------------------
In fiscal year 1997, the Company adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of." The statement addresses the accounting for the impairment of long-
<PAGE>
lived assets and long-lived assets to be disposed of, certain identifiable
intangibles and goodwill related to those assets and establishes guidance
for recognizing and measuring impairment losses and requires that the
carrying amount of impaired assets be reduced to fair value.
In the fourth quarter of 1998, the Company made the decision to dispose of
its manufacturing subsidiary in Germany (MMG). In conjunction with
negotiation of the sale, independent appraisals were made of the assets and
liabilities of MMG, and an impairment loss of $8.6 million was recorded in
the fourth quarter of 1998 to reduce the carrying amount of MMG's assets to
fair value, net of disposal costs on a liquidation basis. Assets written
down include Property, Plant and Equipment of $3.8 million and Goodwill
(included in Other Assets) of $4.4 million. Transaction and disposal costs
of approximately $400,000 were accrued. At October 31, 1998, the remaining
carrying amount of assets to be disposed of (inventory, equipment,
furniture and three buildings in Germany) was $4.9 million. MMG's net
sales were $16.5 million, $18.1 million and $19.8 million and MMG's net
income (loss), excluding the impairment loss in 1998, was $1.2 million,
($163,000) and ($1.4) million in fiscal years 1998, 1997 and 1996.
In November 1998, after the end of the fiscal year, Glas-Trosch GmbH, a
privately held glass company in Switzerland purchased the business and the
operating assets (inventory, equipment, furniture, two buildings,
workforce, customer lists and other related intangibles) of MMG for $4.3
million. The Company retained ownership of an office building with an
appraised value of $600,000 and accounts receivable and cash totaling $3.4
million. Third party liabilities of MMG were $4.5 million which will be
paid from the asset sale proceeds, cash on hand and collection of accounts
receivable. As the assets were sold for the recorded value, adjusted for
the impairment recorded in 1998, no gain or loss was recognized in the
first quarter of 1999 in connection with the 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 was deferred and will be
recognized as revenue over the three-year terms of the agreements.
4. RESTRUCTURING CHARGES
- --------------------------
During the fourth quarter of 1998, the Company finalized and announced to
affected individuals a plan of restructuring for its administrative and
sales offices in Europe. The Company recorded $328,000 of severance and
termination benefits and $258,000 of exit costs associated with this plan
of restructuring. The restructuring will eliminate five administrative and
sales positions in Europe. Exit costs include costs of closing down
administrative and sales offices in Europe and lease termination costs.
The restructuring plan is scheduled for completion by April 1, 1999.
5. LONG-TERM DEBT
- --------------------
Long-term debt, including current maturities, at October 31, 1998 and 1997
consisted of the following:
(Amounts in thousands) 1998 1997
=============================================================================
Unsecured senior notes. Interest at 6.69% payable semi-
annually.
Principal payable in annual installments of $4.3 million
commencing July 31, 2002 through 2008.................... $30,000
Unsecured senior notes. Interest at 7.8% payable semi-
annually.
Principal payable in annual installments of $1.1 million
commencing July 31, 2002 through 2008.................... 8,000
Unsecured senior notes. Interest at 8.71% payable semi-
annually.
Principal payable in annual installments of $1.6 million
commencing June 1, 1999 through 2002..................... 6,400
Mortgage payable. Interest at 8%. Collateralized by a
72,000 sq. ft. building and related land. Principal and
interest payments of $25,000 per month through 2011...... 2,314 $ 2,422
Mortgage payable. Interest at 7.5%. Collateralized by a
65,000 sq. ft. building and related land leased to Flex
Products. Principal and interest payments of $28,000
per month through 2011................................... 2,647 2,821
Unsecured bank note. Interest at 5.6%. Quarterly principal
and interest payments of approximately $300,000 through
December 2002............................................ 3,661 4,568
Bank loans of OCLI/MMG Division with interest rates ranging
from 4.5% to 7.5%. Payable in semiannual and annual
installments through 2020. Partly collateralized by
mortgages on OCLI/MMG Division land and buildings and
liens on equipment. $2.7 million is payable from the
proceeds of assets sold in November 1998, and $371,000
is payable when the office building is sold.............. 3,120 3,618
Unsecured senior notes. Interest at 8.71% payable semi-
annually.
Principal payable in annual installments of $3.6 million
from 1998 through 2002. Refinanced in July 1998.......... 14,400
Unsecured bank term loan. Variable interest rates averaging
6.8% at October 31, 1997, payable quarterly, with semi-
annual principal payments of $2 million. Refinanced in
July 1998................................................ 10,000
Unsecured borrowings under bank line of credit. Variable
interest rate averaging 6.7% at October 31, 1997, payable
quarterly or specified duration period. Principal due
upon expiration on April 28, 2000........................ 5,000
Scottish Development Agency building loan, with a conditional
interest moratorium from February 1, 1995 through January
31, 1998 with interest at 9.5% thereafter. Semiannual
principal payments of approximately $100,000 are payable
through January 1998 with subsequent payments of $331,000,
comprising principal and interest, through 2006.
Collateralized by the land and building of the Company's
Scottish subsidiary...................................... 3,877
Land improvement assessment. Interest at an average rate of
7.2%. Principal and interest payable in semiannual install-
ments of $77,000 through 1998............................ 150
Present value of obligations under capital leases at imputed
interest rates from 8.0% to 9.5% payable in monthly
installments through 2004................................ 2,257 2,007
------ ------
58,399 48,863
Less current maturities .................................... (6,026) (7,888)
------ ------
Total long-term debt, net of current maturities....... $52,373 $40,975
======= =======
<PAGE>
Annual debt maturities and capital lease payments for the ensuing five
years are as follows:
YEAR PAYMENT
=============================================================================
(Amounts in thousands)
1999 $ 6,026
2000 3,663
2001 3,533
2002 8,616
2003 6,126
Thereafter 30,435
-------
$58,399
=======
The Company has a $20 million revolving line of credit. The revolving line
of credit carries a commitment fee of .2% to .3% per year on the unused
portion of the facility depending on the Company's leverage ratio and
expires on July 31, 2003. The Company has a surety bond for $903,000 to
satisfy the Company's workers' compensation self-insurance requirements.
The surety bond carries a fee of 1% per year.
During 1997, the Company replaced its 8%, $5 million note payable to
private parties with a 5.6% bank note. Payments of principal and interest
under the new note are denominated in German marks and are approximately
$300,000 per quarter through December 2002.
During 1998 and 1997, the Company recorded capital leases totaling
$1,061,000 and $2,037,000 to finance the hardware, software and
integration costs of a new computer system that is to be fully implemented
in 1999. Lease terms run through February 2002 with payments totaling
approximately $67,000 per month.
The Company's subsidiary in Scotland has a credit arrangement of up to
approximately $490,000 at market interest rates and has outstanding letters
of credit of approximately $330,000 to guarantee import duties. There were
no borrowings under the credit arrangement in fiscal years 1998 or 1997.
The Company's subsidiary in Japan has various credit facilities with a
local bank with interest at 1.24% to 1.625% per year. Borrowing under
these facilities totaled $4.5 million at October 31, 1998. These credit
facilities are used for working capital requirements in Asia and will
expire in May 1999.
The Company has certain financial covenants and restrictions under its bank
credit arrangements and the unsecured senior notes. At October 31, 1998,
as a result of the impairment loss and restructuring charges recorded in
1998, the Company was in violation of one of the covenants under its bank
credit arrangement. In January 1999, the Company and the bank executed a
waiver and amendment to the Company's credit agreement under which a waiver
was obtained for the period ended October 31, 1998. The amendment removes
the effect of the impairment loss and restructuring charges from the
financial covenants so they will not affect covenant compliance in future
periods.
6. 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 significant 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 1998, the Company entered into foreign currency forward contracts for
the principal and interest payments under a $3.7 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.
<PAGE>
The Company also entered into foreign currency forward contracts for
the principal and interest payments under an intercompany note receivable
denominated in British Pounds. Gains and losses on those contracts are
offset in consolidation.
In 1998, the Company entered into an interest rate swap for anticipated
debt refinancing in the amount of $30 million. The purpose of the swap was
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 was
completed. The Company had designated the swap as a hedge of an
anticipated transaction. After completion of the loan refinance, $310,000
was paid under the swap that is being recorded as an increase to interest
expense over the term of the notes.
The notional amounts, carrying amounts and fair values of the Company's
derivatives position at October 31, 1998 are included in the table below:
ESTIMATED
FAIR VALUE
OF FOREIGN
NOTIONAL CARRYING EXCHANGE
(Amounts in thousands) AMOUNT AMOUNT CONTRACT
=============================================================================
Foreign currency forward exchange contracts:
Deutsche Marks................................ $4,124 $ -- $345
British Pounds................................ $2,948 $ -- $92
7. INVESTMENTS
- -----------------
FLEX PRODUCTS, INC. Flex Products was founded as a division of the Company
in the early 1980's and was subsequently established as a joint venture in
which ICI Americas Inc. (ICIA), an affiliate of Imperial Chemical
Industries PLC owned 60% and the Company owned 40%. In 1995, the Company
acquired controlling ownership of Flex Products with the purchase of an
additional 20% interest in Flex Products from ICIA. In conjunction with
the Company's increase in ownership, the remaining 40% interest in Flex
Products was acquired by SICPA Holding S.A. (SICPA), a privately held Swiss
Corporation headquartered in Lausanne, Switzerland. SICPA is one of the
world's leading manufacturer of printing inks and a major customer of Flex
Products.
In 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 fiscal 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 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. The modification to the License
and Supply Agreement provided for more attractive scheduled pricing
discounts on higher volume purchases and changed 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 loans
from SICPA.
On December 22, 1998, after the end of the Company's fiscal year, the
Company purchased SICPA's 40% interest in Flex Products for $30 million
in cash, increasing its ownership to 100%. The acquisition will be
accounted for as a purchase. Allocation of the purchase price
is pending completion of an independent valuation that is currently in
process. The purchase price allocation may include a component
constituting in-process research and development, which would result
in a charge to expense in the first quarter of 1999.
<PAGE>
In addition, Flex Products repaid its remaining working capital loan of
$2.4 million to SICPA. The fifteen-year license and supply agreement
between Flex Products and SICPA that was originally signed in November
1994 was modified to increase the minimum purchase requirements under
the agreement.
OCLI ASIA. In the second quarter of 1997, the Company began operating a
joint venture (Hakuto-OCLI Co., Ltd. doing business as OCLI Asia) with
Hakuto Co., Ltd. (Hakuto) in Japan. The joint venture was established to
address the rapidly changing market for OCLI's multi-layer thin film
coatings that require an expanded presence and more integrated support
within Asia. Each partner contributed cash of $800,000 for working
capital. OCLI Asia was consolidated into the Company's results of
operations and financial position as the Company has operating control.
During 1998, the Company purchased Hakuto's interest in the joint venture
for $740,000 in cash. The wholly owned subsidiary, OCLI Asia K.K.,
continues to do business as OCLI Asia and remains headquartered in
Shinjuku, Tokyo, with manufacturing facilities in Isehara, Kanagawa
Prefecture.
SALE OF MMG. In the fourth quarter of 1998, the Company made the decision
to dispose of its manufacturing subsidiary in Germany (MMG) in order to
focus more resources on other markets. See Note 3, IMPAIRMENT LOSS.
GOODWILL. At October 31, 1998, other assets and investments include
$600,000 of goodwill for OCLI Asia that is being amortized over fifteen
years.
8. STOCKHOLDERS' EQUITY
- --------------------------
STOCKHOLDER RIGHTS PLAN. On December 16, 1997, the Company's Board of
Directors approved a new Stockholder Rights Plan (the "Plan") to succeed
the Stockholder Rights Plan first adopted on November 25, 1987. Under the
terms of the Plan, which expires in November 1999, the Company declared a
dividend of preferred stock purchase rights which only become exercisable,
if not redeemed, ten days after a person or group has acquired 20% or more
of the Company's common stock or the announcement of a tender offer which
would result in a person or group acquiring 30% or more of the Company's
common stock. Under certain circumstances, the plan allows stockholders,
other than the acquiring person or group, to purchase the Company's common
stock or the common stock of the acquirer at an exercise price of half the
market price. On December 15, 1998, the Board of Directors approved an
amendment to the Plan which deletes or modifies references to "Continuing
Directors" in order to comply with recent changes in Delaware law.
PREFERRED STOCK. The Company has authorized 100,000 shares of preferred
stock at $.01 par value of which 10,000 shares were designated Series A
Preferred Stock in connection with the Company's Stockholder Rights Plan.
None of the Series A Preferred Stock is issued. Additionally, 15,000
shares were designated Series B Preferred Stock, of which 8,350 shares were
issued and subsequently converted to common stock on call for redemption.
None of the Series B Preferred Stock is currently issued and outstanding.
In 1995, as part of the financing of the acquisition of a controlling
interest in Flex Products, the Company issued 12,000 shares of 8% Series C
Convertible Redeemable Preferred Stock (the "Series C Preferred Stock") in
consideration for $1,000 per share. The Series C Preferred Stock was
convertible into common stock at any time by the holders at a conversion
price of $10.50 per common share (subject to adjustment in certain
<PAGE>
circumstances). The Series C Preferred Stock was redeemable at the option
of the Company commencing two years from the date of issuance (if the
Company's common stock is trading at $17 per share or more for any 20
consecutive day period) and, after three years, unconditionally, at 108% of
the purchase price per share, declining to 100% over four years. The
holders of the Series C Preferred Stock were entitled to receive a
cumulative annual dividend of $80 per share, which was payable quarterly
and had preference to any other dividends paid by the Company.
In fiscal 1997, 5,750 shares of the Company's 8% Series C Convertible
Redeemable Preferred Stock, plus accrued dividends, were converted into
approximately 555,000 shares of common stock.
In fiscal 1998, the Company called for redemption the remaining shares of
8% Series C Convertible Redeemable Preferred Stock. The remaining 6,250
shares plus accrued dividends, were subsequently converted by the holders
into approximately 599,000 shares of common stock.
9. EMPLOYEE STOCK OPTION PLANS
- --------------------------------
Pursuant to the terms of the Company's employee stock option plans, an
aggregate of 2,330,441 shares of Company common stock has been issued or
reserved for issuance upon the exercise of options granted to qualified
employees. Options are granted with exercise prices equal to the market
price of the Company's common stock at the date of grant.
Information with respect to stock options outstanding and options
exercisable at October 31, 1998 is as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------- -----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
EXERCISE PRICES AT 10/31/98 LIFE PRICE AT 10/31/98 PRICE
============================================================================
$6.125-$8.375 127,250 1.15 $6.68 127,250 $ 6.68
$9.625-$10.75 773,311 2.98 $10.25 504,089 $10.34
$12.125-$14.325 504,820 4.05 $13.92 44,852 $12.60
$15.00-$19.00 100,500 4.66 $17.10 0
--------- -------
1,505,881 676,191
========= =======
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 turned in 117,296 shares for payment of
withholding taxes. The $5.8 million exercise price of the options was paid
with a full recourse promissory note that was repaid with interest at 7.5%
in the third quarter of 1998.
In May 1997, the Board of Directors approved a stock option repricing
program under which stock options with exercise prices above $14.00 per
share were repriced to the then current market value of the Company's
common stock of $9.63. A total of 162,000 shares, with exercise prices
ranging from $14.13 per share to $17.38 per share, were exchanged under
this program. The exchange of such options is presented in the following
table as cancellations and subsequent grants.
<PAGE>
Stock option activity for the three years ended October 31, was:
WEIGHTED
NUMBER OF AVERAGE
SHARES EXERCISE PRICE
==========================================================================
BALANCE AT NOVEMBER 1, 1995 1,531,800 $ 7.47
Granted 546,450 11.81
Exercised (229,800) 7.45
Canceled (13,200) 9.16
- --------------------------------------------------------------------------
BALANCE AT OCTOBER 31, 1996 1,835,250 8.75
Granted 708,800 10.48
Exercised (268,849) 8.52
Canceled (272,792) 12.53
- --------------------------------------------------------------------------
BALANCE AT OCTOBER 31, 1997 2,002,409 8.88
Granted 509,000 14.86
Exercised (964,424) 7.61
Canceled (41,104) 12.56
BALANCE AT OCTOBER 31, 1998 1,505,881 11.64
==========================================================================
EXERCISABLE AT OCTOBER 31, 1998 676,191 $9.80
==========================================================================
The Company's subsidiary, Flex Products, a non-public company, has a non-
qualified stock option plan. After taking into account a one hundred to
one stock split in 1998, at October 31, 1998 the plan had 1,000,000 shares
of common stock authorized for issuance against 10,000,000 shares
outstanding of Flex Products to key members of Flex Products' management.
The options have vesting periods from two to four years with five-year
terms. At October 31, 1998, Flex Products' outstanding options were
exercisable at prices ranging from $4.39 to $4.89, with weighted average
remaining lives of 3.29 years.
Flex Products' stock option activity for the three years ended October 31,
was:
WEIGHTED
NUMBER OF AVERAGE
SHARES EXERCISE PRICE
============================================================================
BALANCE AT NOVEMBER 1, 1995
Granted 1,027,100 $4.44
Exercised
Canceled
- ----------------------------------------------------------------------------
BALANCE AT OCTOBER 31, 1996 1,027,100 4.44
Granted 20,000 4.89
Exercised
Canceled (44,600) 4.43
- ----------------------------------------------------------------------------
BALANCE AT OCTOBER 31, 1997 1,002,500 4.47
Granted 370,000 4.67
Exercised
Canceled (444,300) 4.48
- ----------------------------------------------------------------------------
BALANCE AT OCTOBER 31, 1998 928,200 4.55
============================================================================
EXERCISABLE AT OCTOBER 31, 1998 341,710 $4.44
============================================================================
In 1997, the Company adopted the disclosure requirements of SFAS 123 that
provide for the disclosure of pro forma net earnings and net earnings per
share as if the fair value method of accounting had been adopted at the
beginning of fiscal 1996. If compensation expense had been determined for
stock options granted in 1998, 1997 and 1996 using the fair value method at
the date of grant, consistent with the provisions of SFAS 123, the
Company's pro forma net earnings and earnings per share would have been as
follows:
(Amounts in thousands, except per share amounts) 1998 1997 1996
=============================================================================
Net income as reported ............................ $7,339 $7,125 $5,196
Pro forma compensation adjustment.................. (1,669) (1,597) (997)
------ ------ ------
Pro forma net income per share................ $5,670 $5,528 $4,199
====== ====== ======
Basic earnings per share:
Net income per share, as reported................ $ 0.62 $ 0.63 $ 0.44
Pro forma compensation adjustment................ (0.15) (0.16) (0.10)
------ ------ ------
Pro forma net income per share................. $ 0.47 $ 0.47 $ 0.34
====== ====== ======
Diluted earnings per share:
Net income per share, as reported................ $ 0.59 $ 0.60 $ 0.41
Pro forma compensation adjustment................ (0.14) (0.15) (0.10)
------ ------- ------
Pro forma net income per share................ $ 0.45 $ 0.45 $ 0.31
====== ====== ======
The weighted average fair value of options granted during 1998, 1997 and
1996 was $5.75, $5.60 and $6.25, respectively. The weighted average fair
value of Flex Products' options granted during 1998, 1997 and 1996 was
$1.06, $1.39 and $0.83. The fair value of each option grant is estimated on
the date of grant using the Black-Scholes option pricing model with the
following weighted average assumptions used for grants in 1998, 1997 and
1996:
1998 1997 1996
============================================================================
COMPANY OPTIONS:
Expected dividend yield............................ 0.8% 0.7% 0.7%
Expected volatility................................ 43.0% 59.0% 59.0%
Risk-free interest rate............................ 5.7% 5.5% 5.6%
Expected term (years).............................. 4 5 5
FLEX PRODUCTS OPTIONS:
Expected dividend yield (not applicable)
Expected volatility (not applicable)
Risk-free interest rate............................ 5.5% 6.2% 6.1%
Expected term (years).............................. 5 6 4
INCOME TAXES
- ------------
The provision for income taxes consisted of:
(Amounts in thousands) 1998 1997 1996
============================================================================
CURRENT:
Federal......................................... $2,722 $2,537 $2,120
State........................................... 916 225 309
Foreign......................................... 129 116 (149)
------ ------ ------
3,767 2,878 2,280
------ ------ ------
DEFERRED:
Federal......................................... (258) 1,061 1,535
State........................................... (612) 598 (369)
Foreign......................................... 439 85 (21)
------ ------ ------
(431) 1,744 1,145
------ ------ ------
$3,336 $4,622 $3,425
====== ====== ======
The reconciliation of the effective income tax rate to the federal
statutory rate was as follows:
1998 1997 1996
============================================================================
Statutory federal income tax rate................... 34.0% 34.0% 34.0%
State taxes, net of federal tax benefit............. 4.0 5.7 7.1
Foreign losses not previously benefited............. (8.8)
Foreign income taxes at rates different
than U.S. statutory rates......................... 0.8 (0.5) 4.8
Business tax credits (state tax
credits net of federal tax effect)................ (2.3) (2.9) (10.3)
Tax benefit from foreign sales corporation.......... (3.8) (2.7) (1.7)
Non-deductible expenses, primarily foreign losses... 2.5 4.2 3.3
Other............................................... 1.3 (0.5) (0.2)
---- ---- ----
Effective tax rate.............................. 27.7% 37.3% 37.0%
==== ==== ====
DEFERRED TAX ASSETS (LIABILITIES). The Company's deferred tax assets and
liabilities at October 31, 1998 and 1997 under SFAS 109 arise from the
following temporary differences in accounting for financial versus tax
reporting purposes:
(Amounts in thousands) 1998 1997
============================================================================
CURRENT:
Valuation reserves and accruals not deductible
for tax purposes until paid or utilized........... $4,060 $5,527
Intercompany profit eliminated for financial
reporting purposes which is taxable currently..... 263 266
Domestic net operating losses available
for carryforward.................................. 4,599 983
Asset valuation difference between financial and
tax reporting basis due to purchase accounting.... 73 131
Other............................................... 316 (54)
------ ------
Total deferred tax assets......................... 9,311 6,853
------ ------
NONCURRENT:
Domestic net operating losses available for carry-
forward........................................... 1,627 2,678
Foreign net operating losses available for carry-
forward........................................... 751 2,686
Tax depreciation greater than financial reporting
depreciation...................................... (5,500) (3,920)
Intangible assets, difference between financial and
tax reporting basis and periods................... (459) (816)
Burden and interest on self-constructed assets ex-
pensed for tax purposes and depreciated for
financial reporting purposes...................... (816) (555)
Costs required to be capitalized under the uniform
capitalization tax rules which are deducted for
financial reporting purposes...................... 309 169
Liability for postretirement health benefits not
deductible for tax purposes until paid............ 967 747
State tax credits eligible for carryforward......... 1,353 614
Other............................................... (293) 296
----- ------
(2,061) 1,899
Less valuation allowance............................ (751) (2,684)
------ ------
(2,812) (785)
------ ------
Total deferred tax balances....................... $6,499 $6,068
====== ======
As a result of the sale of the assets of its MMG division and the resulting
impairment loss in 1998, the Company recognized tax benefits relating to
certain foreign operating losses that had not been tax benefited in prior
periods. The Company has provided a valuation allowance related to the
deferred tax asset resulting from the remaining operating loss carry-
forwards of certain of its other foreign subsidiaries until the
realization of tax benefits resulting from those losses is determined to be
more likely than not. The 1998 valuation allowance decrease is
attributable to the change in the deferred tax asset resulting from foreign
operating loss carryforwards.
At October 31, 1998, the Company has domestic net operating loss carry-
forwards of $17.2 million. If not used, $4.0 million will expire in 2006,
$3.6 million will expire in 2007, and $9.6 million will expire in 2018.
The Company has California Manufacturers' Investment Credit carryforwards
of $867,000 and California Research Credit carryforwards of $485,000.
If not used, a portion of those credit carryforwards will expire between
2006 and 2008.
Income taxes have not been provided on approximately $6.8 million of
unremitted earnings of the Company's subsidiary in Scotland. The Company
intends to continue to reinvest these amounts in the subsidiary's
operations. Should any of these amounts be distributed to the Company, any
taxes on these distributions would be substantially offset by foreign tax
credits.
11. EMPLOYEE BENEFIT PLANS
- ----------------------------
U.S. OPERATIONS. The Company has a 401(k)/Employee Stock Ownership Plan
(ESOP) defined contribution retirement plan for its non-Flex Products
employees and a 401(k) plan with a Company match for the employees of Flex
Products. Company contributions for non-Flex Products employees are a
combination of a 401(k) matching contribution of 25% of the first 6% of
employee contributions plus a contribution to the ESOP plan based on the
Company's proportional share of pre-tax profits. Prior to fiscal 1997, all
Company contributions to non-Flex employees were to the ESOP and were
determined under a profit sharing formula. Company contributions for Flex
Products employees are 75% of the first 6% of employee contributions.
Company matching contributions to the 401(k) plans are funded in cash.
Company contributions to the ESOP are contributed in cash for the purchase
of Company common stock or are contributed in the form of original issued
shares of Company common stock. In fiscal 1998, 1997 and 1996, the Company
contributed and charged to operations $1,740,000, $1,211,000 and $787,000
as contributions to its U.S. retirement plans.
<PAGE>
SCOTTISH OPERATIONS. The Company's Scottish subsidiary maintains a
contributory defined benefit pension program covering most of its
employees. Benefits are primarily based on years of service and
compensation. The program is funded in conformity with the requirements of
applicable U.K. government regulations. Plan assets are invested in fixed
interest and balanced fund units that are primarily comprised of corporate
equity securities.
The funded status of the plan at October 31, 1998 and 1997 is as follows:
(Amounts in thousands) 1998 1997
==========================================================================
Plan assets at fair value .......................... $ 8,504 $ 7,617
Projected benefit obligation........................ (10,387) (8,856)
------- -------
Plan assets greater (less) than projected benefit
obligation........................................ (1,883) (1,239)
Unrecognized net loss............................... 2,204 1,842
Unrecognized transition asset being amortized over
19 years.......................................... (381) (423)
------- -------
Prepaid (accrued) pension cost included in other
assets (accrued expenses)..................... $ (60) $ 180
======= =======
At October 31, 1998, 1997 and 1996, the projected benefit obligations
include accumulated benefit obligations of $9,236,000, $8,043,000 and
$5,658,000 of which $9,232,000, $8,006,000, and $5,643,000 are vested.
A discount rate of 7% was used in determining the present value of the
projected benefit obligation. The expected long-term rate of return on
assets was 9% and the assumed rate of increase in future compensation
levels was 5%.
The net pension expense for the Company's Scottish subsidiary recorded in
1998, 1997 and 1996 included the following components:
(Amounts in thousands) 1998 1997 1996
============================================================================
Service-cost benefits earned during the period...... $ 565 $ 415 $ 364
Interest cost on projected benefit obligation....... 636 506 474
Actual return on plan assets........................ (766) (616) (674)
Net amortization and deferral....................... 46 (13) 163
----- ----- -----
Net pension expense........................... $ 481 $ 292 $ 327
===== ===== =====
12. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
- -------------------------------------------------
The Company sponsors a contributory defined benefit postretirement plan for
its U.S. operations which provides medical, dental and life insurance
benefits to employees who meet age and years of service requirements prior
to retirement and who agree to contribute a portion of the cost. The
Company has the right to modify or terminate these benefits at any time.
The Company's contribution is a set amount per retiree depending on the
retiree's years of service and dependent status at the date of retirement
and the age of the retiree and dependents when benefits are provided. The
retiree pays cost increases.
The postretirement plan's benefit obligation was as follows for the years
ended October 31, 1998 and 1997:
(Amounts in thousands) 1998 1997
============================================================================
Accumulated postretirement benefit obligation:
Retirees............................................ $1,134 $1,017
Fully eligible plan participants ................... 170 341
Other active plan participants...................... 947 810
------ ------
Total accumulated postretirement benefit
obligation unfunded 2,251 2,168
Unrecognized loss................................... (111) (168)
------ ------
Accrued postretirement benefit obligation..... $2,140 $2,000
====== ======
The following components were included in net periodic postretirement
benefit cost for the years ended October 31, 1998, 1997, and 1996:
(Amounts in thousands) 1998 1997 1996
============================================================================
Service-cost benefits earned during the period...... $ 79 $ 71 $ 69
Interest cost on accumulated post retirement benefit
obligation........................................ 166 165 141
Net amortization and deferral....................... (7) 10 55
----- ----- -----
Net postretirement benefit cost............... $ 238 $ 246 $ 265
===== ===== =====
Because the Company has established a maximum amount it will pay per
retiree under the plan, health care cost trends do not affect the
calculation of the accumulated benefit obligation or the net postretirement
benefit cost. The weighted average discount rate used in determining the
accumulated benefit obligation was 6.75% in 1998 and 8.0% in 1997 and 1996.
13. CONTINGENCIES AND COMMITMENTS
- -----------------------------------
LITIGATION. Over the past several years, the Company has been engaged in
litigation in the United Kingdom (U.K.) involving infringement of a Company
patent by the U.K. companies, Pilkington PE Limited and Pilkington PLC. The
Company won its action at the Patents County Courts level but lost on
appeal to the U.K. House of Lords. In October 1998, the Company settled the
claim for approximately $850,000, most of which had been accrued in
previous periods.
On March 17, 1997, Optical Corporation of America (OCA) and certain of its
directors and officers (Affiliates) commenced suit against the Company in
the Superior Court, Middlesex County, Commonwealth of Massachusetts. The
complaint arose out of a letter of intent executed by the Company and OCA
in March 1996 and an ensuing merger agreement executed by the Company and
OCA in June 1996. Under the merger agreement, the Company would have
acquired OCA. The complaint sought damages for costs and expenses incurred
by OCA in pursuing the merger transaction with the Company due to the
Company's alleged negligent misrepresentations to OCA and Affiliates and
the Company's alleged breach of its letter of intent with OCA. The Company
filed counterclaims against OCA and the Affiliates based on OCA's breach of
the merger agreement and sought damages based on the difference between the
value of OCA's business to the Company and the agreed upon purchase price
under the merger agreement. In January 1999, after the end of the fiscal
year, the Company, OCA and OCA's shareholders settled the litigation.
Settlement proceeds, net of applicable legal expenses approximated $3
million, which will be recorded as revenue in the first quarter of fiscal
1999. In addition to the cash proceeds, the Company will receive $1
million in business transaction value through product purchase discounts or
purchase of OCLI products over a period not to exceed three years. Future
business opportunities, not expected to affect Company results over the
next twelve months, were also included in the agreement.
<PAGE>
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 fiscal 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
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. The modification to the
License and Supply Agreement provided for more attractive scheduled pricing
discounts on higher volume purchases and changed 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. On December 22, 1998, after the end of the Company's fiscal
year, the Company purchased SICPA's 40% interest in Flex Products.
In 1997, Flex Products filed a suit in United States District Court for the
Eastern District of Michigan alleging that BASF Corporation (BASF) and BASF
AG infringed Flex's patents covering optically variable thin film flakes
which, when mixed with paints and inks, produce color shifting visual
properties. The complaint requested that the Court enjoin BASF from
importing, making, using, selling or offering to sell the infringing
pigment in the United States. The complaint also sought damages for the
infringement, including treble damages if the infringement was intentional.
In October 1998, a settlement agreement was reached between Flex Products
and both BASF companies under which Flex has agreed to allow BASF to make,
use and sell two specific forms of a special effects pigment for use within
limited application fields in exchange for a series of payments to be based
upon BASF's revenues on the sale of those pigments.
CONCENTRATIONS OF CREDIT RISK. The Company grants credit to customers,
subject to credit approval, for most of its sales. At October 31, 1998,
accounts receivable from customers in foreign countries was $21 million,
or 54%, of accounts receivable with approximately $8 million receivable
from customers in Asia and approximately $13 million receivable from
customers in Europe and other countries.
OPERATING LEASE AGREEMENTS. The Company and its subsidiaries lease
computer equipment, manufacturing space and warehouse space. The operating
lease payments are recorded as rental expense and totaled $7,104,000,
$6,351,000 and $4,881,000 for 1998, 1997 and 1996. Future minimum operating
lease payments amount to $24.9 million, and for the years 1999 through 2003
are $6,665,000 $5,845,000, $5,178,000, $3,020,000 and $777,000 under
operating lease agreements in effect at October 31, 1998.
EMPLOYMENT AGREEMENTS. The Company has approved employment agreements for
officers and employment assurance agreements for certain management and
technical employees, as well as increases in severance benefits for full-
time employees, to be effective in the event of certain changes in control
of the Company. These agreements are currently effective through 1999.
14. INFORMATION ON OPERATIONS
- -------------------------------
INVENTORIES. Inventories as of October 31, 1998 and 1997 consisted of:
(Amounts in thousands) 1998 1997
===========================================================================
Raw materials and supplies ............................. $ 7,138 $ 7,541
Work-in-process ........................................ 13,148 12,308
Finished goods.......................................... 4,947 2,980
------- -------
Total inventories................................. $25,233 $22,829
======= =======
INTEREST. Interest expense and amounts capitalized were as follows for the
years ended October 31, 1998, 1997 and 1996:
(Amounts in thousands) 1998 1997 1996
============================================================================
Interest costs incurred.......................... $4,312 $4,249 $4,696
Less amounts capitalized......................... 697 219 1,172
------ ------ ------
Net interest expense....................... $3,615 $4,030 $3,524
====== ====== ======
SALES INFORMATION. Significant customers and sales to the federal
government were as follows:
The Company's largest customer in 1998 accounted for 21% of consolidated
revenues. The Company's largest customer in 1997 and 1996 accounted for 14%
and 13% of consolidated revenues.
Sales of products and services to the federal government, primarily under
subcontracts, were 4%, 6% and 9% of net revenues in 1998, 1997 and 1996.
Certain of these contracts are subject to cost review by various
governmental agencies. Management believes that adjustments, if any, will
not be material to the operating results of the Company.
FOREIGN OPERATIONS. Certain information regarding the Company's domestic
and foreign revenues is as follows:
(Amounts in thousands)
CANADA EUROPE ASIA
UNITED AND AND AND ELIMI-
STATES OTHER(1) OTHER(1) OTHER(1) NATIONS TOTAL
=============================================================================
FISCAL YEAR ENDED OCTOBER 31, 1998:
Domestic revenues and
revenue of foreign
operations $106,019 $29,664 $14,924 $(1,056) $149,551
Export sales from
the U.S. $54,528 40,224 27,890 (16,569) 106,073
Transfers between
regions (598) (5,930) (11,097) 17,625
-------- ------- ------ ------- ------- -------
Revenues from customers $105,421 $54,528 $63,958 $31,717 $ -- $255,624
======== ======= ======= ======= ======= ========
FISCAL YEAR ENDED OCTOBER 31, 1997:
Domestic revenues and
revenues of foreign
operations $98,025 $31,411 $ 8,295 $(2,709) $135,022
Export sales from
the U.S. $19,571 45,855 30,023 (12,642) 82,807
Transfers between
regions (2,709) (6,669) (5,973) 15,351
------- ------- ------- ------- ------- --------
Revenues from customers $95,316 $19,571 $70,597 $32,345 $ -- $217,829
======= ======= ======= ======= ======= ========
FISCAL YEAR ENDED OCTOBER 31, 1996:
Domestic revenues and
revenues of foreign
operations $99,543 $38,795 $ (815) $137,523
Export sales from
the U.S. $ 1,640 34,106 $25,296 (9,370) 51,672
Transfers between
regions (815) (9,370) 10,185
------- ------ ------- ------- ------ --------
Revenues from customers $98,728 $1,640 $63,531 $25,296 $ -- $189,195
======= ====== ======= ======= ====== ========
Transfers between regions represent intercompany sales of products and
intercompany compensation for services.
(1) Other sales, which constitute less than 10% of consolidated sales, are
aggregated by region based on geographic proximity.
<PAGE>
Certain information regarding the Company's operations by region is as
follows:
UNITED ELIMI-
(Amounts in thousands) STATES EUROPE JAPAN NATIONS TOTAL
=============================================================================
FISCAL YEAR ENDED OCTOBER 31, 1998:
Income (Loss) from operations $ 22,972 $(7,083) $ (689) $ (328) $ 14,872
======== ======= ====== ======= ========
Identifiable assets $208,733 $21,773 $9,077 $(25,997) $213,586
======== ======= ====== ======== ========
FISCAL YEAR ENDED OCTOBER 31, 1997:
Income (Loss) from operations $ 16,206 $ 385 $ (316) $ (328) $ 15,947
======== ======= ======= ======== ========
Identifiable assets $170,443 $32,646 $5,570 $(25,166) $183,493
======== ======= ====== ======== ========
FISCAL YEAR ENDED OCTOBER 31, 1996:
Income (Loss) from operations $ 12,812 $ (410) $ -- $ -- $ 12,402
======== ======= ====== ======== ========
Identifiable assets $146,869 $59,715 $ -- $(33,813) $172,771
======== ======= ====== ======== ========
COMPONENTS OF EARNINGS. Components of earnings (loss) before provision for
income taxes and minority interest were as follows:
(Amounts in thousands) 1998 1997 1996
=============================================================================
Domestic........................................ $20,436 $12,587 $10,796
Foreign......................................... (8,410)(1) (209) (1,539)
------- ------- -------
$12,026 $12,378 $ 9,257
======= ======= =======
(1) In the fourth quarter of 1998, the Company recorded an impairment loss
of $8.6 million in connection with the sale of the operating assets of its
MMG division and recorded restructuring charges of $586,000 pursuant to a
plan of restructuring approved in the fourth quarter of 1998. See Notes 3
and 4 of Notes to Consolidated Financial Statements.
<PAGE>
OPTICAL COATING LABORATORY, INC. AND SUBSIDIARIES
SUPPLEMENTAL FINANCIAL INFORMATION
----------------------------------
(Unaudited)
Results of operations for each quarter of fiscal 1998 were as follows:
(Amounts in thousands, except per share data)
THREE MONTHS ENDED
---------------------------------
JAN 31, APR 30, JUL 31, OCT 31, FISCAL
1998 1998 1998 1998(1) 1998(1)
============================================================================
Revenues $ 53,373 $64,345 $67,393 $70,513 $255,624
Gross profit 17,138 21,861 22,931 24,024 85,954
Income (Loss) before provision
for income taxes and minority
interest 2,905 5,620 5,699 (2,198) 12,026
Net income (loss) 1,596 3,049 3,421 (727) 7,339
Net income applicable to common
stock $ 1,471 $ 2,924 $ 3,421 $ (727) $ 7,089
======== ======= ======= ======= ========
Net income per share, basic $ .14 $ .27 $ .28 $ (.06) $ .62
======== ======= ======= ======= ========
Net income per share, diluted $ .13 $ .25 $ .27 $ (.06) $ .59
======== ======= ======= ======= ========
Weighted average number of common
shares used to compute basic
earnings per share 10,625 10,903 12,009 12,061 11,388
======= ======= ======= ======= =======
Weighted average number of common
shares used to compute diluted
earnings per share 11,396 11,553 12,546 12,546 11,999
======= ======= ======= ======= =======
Results of operations for each quarter of fiscal 1997 were as follows:
(Amounts in thousands, except per share data)
THREE MONTHS ENDED
----------------------------------
JAN 31, APR 30, JULY 31, OCT 31, FISCAL
1997 1997 1997 1997 1997
============================================================================
Revenues $45,720 $53,516 $59,997 $58,596 $217,829
Gross profit 15,521 18,674 19,790 20,637 74,622
Income before provision for
income taxes and minority
interest 1,573 2,759 3,912 4,134 12,378
Net income 907 1,513 1,994 2,711 7,125
Net income applicable to
common stock $ 667 $ 1,326 $ 1,853 $ 2,586 $ 6,432
======= ======= ======= ======= ========
Net income per share, basic $ .07 $ .13 $ .18 $ .25 $ .63
======= ======= ======= ======= ========
Net income per share, diluted $ .07 $ .13 $ .17 $ .23 $ .60
======= ======= ======= ======= ========
Weighted average number of
common shares used to compute
basic earnings per share 9,777 10,069 10,372 10,541 10,191
======= ======= ======= ======= ========
Weighted average number of common
shares used to compute diluted
earnings per share 10,165 10,410 11,135 11,148 10,673
======= ======= ======= ======= ========
(1) In the fourth quarter of 1998, the Company recorded an impairment loss
of $8.6 million in connection with the sale of the operating assets of its
MMG division and recorded restructuring charges of $586,000 pursuant to a
plan of restructuring approved in the fourth quarter of 1998. See Notes 3
and 4 of Notes to Consolidated Financial Statements.
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to Paragraph G(3) of the General Instructions to Form 10-K, the
information called for in Part III, Items 10, 11, 12 and 13 of Form 10-K is
omitted since the Company will file with the Securities and Exchange
Commission, not later than 120 days after the close of the fiscal year
ended October 31, 1998, a definitive proxy statement pursuant to Regulation
14A in connection with its 1998 Annual Meeting of Stockholders. The
information contained under the caption "Executive Officers of the
Registrant" in Part I of this Form 10-K is incorporated by reference into
Item 10.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) 1. CONSOLIDATED FINANCIAL STATEMENTS:
The following consolidated financial statements of Optical Coating
Laboratory, Inc. are included in Item 8:
PAGE(S)
Independent Auditors' Reports..................... 24-25
Consolidated Balance Sheets....................... 26
Consolidated Statements of Income................. 27
Consolidated Statements of Cash Flows............. 28-29
Consolidated Statements of Common Stockholders'
Equity......................................... 30
Notes to Consolidated Financial Statements........ 31
Supplemental Financial Information................ 47
(A) 2. FINANCIAL STATEMENT SCHEDULES
The following consolidated financial statement schedules are
included in Item 14(d):
Schedule II - Valuation and Qualifying accounts... 52
All other schedules have been omitted since the required information is not
present or not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the
consolidated financial statements or the accompanying notes.
<PAGE>
(A) 3. LISTING OF EXHIBITS
The following are filed as Exhibits to this Annual Report on Form 10-K. The
numbers refer to the Exhibit Table of Item 601 of Regulation S-K.
EXHIBIT
NO. DESCRIPTION
============================================================================
3.1 Restated Certificate of Incorporation. Incorporated by reference to
Exhibit (4)(a) of the Registrant's Form 10-Q for the quarter ended
July 31, 1988.
3.2 By-Laws. Incorporated by reference to Exhibit (3)(b) of the
Registrant's Form 8-K under Item 5 dated November 20, 1987.
4.0 Stockholder Rights Agreement between the Registrant and ChaseMellon
Shareholder Services L.L.C. dated December 16, 1997. Incorporated by
reference to Exhibit 4.1 of the Registrant's Form 10-K for the year
ended October 31, 1997.
4.1 Form of Note Purchase Agreement dated as of July 30, 1998 for the
private placement of $30 million of 6.69% Senior Notes due July 31,
2008 with Modern Woodman of America, American Life and Casualty
Insurance Company, Massachusetts Mutual Life Insurance Company,
Baystate Health Systems, Inc. and Principal Life Insurance Company.
Incorporated by reference to Exhibit 4.1 of the Registrant's Form
10-Q for the quarter ended July 31, 1998.
4.2 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. Incorporated by reference to Exhibit 4.0 of the
Registrant's Form 10-Q for the quarter ended July 31, 1998.
4.3* Waiver and First Amendment, dated as of January 8, 1999 and
effective as of October 31, 1998, 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.
4.4 Secured Promissory Note between Optical Coating Laboratory, Inc. and
Aid Association for Lutherans dated November 8, 1995. Incorporated
by reference to Exhibit 4.8 of the Registrant's Form 10-K for the
year ended October 31, 1995.
4.5 Capital Equipment Lease Agreement dated as of February 20, 1996
between Optical Coating Laboratory, Inc. and Fleet Credit
Corporation. Incorporated by reference to Exhibit 4.10 of the
Registrant's Form 10-K for the year ended October 31, 1996.
4.6 Capital Equipment Lease Agreement dated as of June 19, 1996 between
Flex Products, Inc. and Fleet Credit Corporation. Incorporated by
reference to Exhibit 4.11 of the registrant's Form 10-K for the year
ended October 31,1996.
4.7 Credit Agreement dated as of May 20, 1997 between Optical Coating
Laboratory, Inc. as Borrower and ABN AMRO Bank N.V. as bank.
Incorporated by reference to Exhibit 4.2 of the Registrant's form
10-Q for the quarter ended April 30, 1997.
9 Not applicable.
10.0 Registrant's Employee Stock Ownership Plan (OCLI ESOP+), as amended.
Incorporated by reference to Exhibit (10)(c) of the Registrant's
Form 10-K for the year ended October 31, 1988.
<PAGE>
EXHIBIT
NO. DESCRIPTION
============================================================================
10.1 Registrant's 1998 Incentive Compensation Plan. Incorporated by
reference to Exhibit 99 of the Registrant's Form S-8 dated December
14, 1998. (1)
10.2 Registrant's 1996 Incentive Compensation Plan. Incorporated by
reference to Exhibit A of the Registrant's Proxy Statement dated
March 8, 1996. (1)
10.3 Registrant's 1995 Incentive Compensation Plan. Incorporated by
reference to Exhibit A of the Registrant's Proxy Statement dated
March 10, 1995. (1)
10.4 Registrant's 1993 Incentive Compensation Plan. Incorporated by
reference to Exhibit A of the Registrant's Proxy Statement dated
March 8, 1993. (1)
10.5 Registrant's 1992 Incentive Compensation Plan. Incorporated by
reference to Exhibit A of the Registrant's Proxy Statement dated
March 8, 1992. (1)
10.6 Registrant's 1991 Incentive Compensation Plan. Incorporated by
reference to Exhibit A of the Registrant's Proxy Statement dated
February 25, 1991. (1)
10.7 Form of Directors' and Officers' Indemnification Agreement.
Incorporated by reference to Exhibit (10)(j) of the Registrant's
Form 10-K for the year ended October 31, 1987. (1)
10.8 Form of Change in Control Employment Agreements between the
Registrant and its Executive Officers dated November 20, 1997.
Incorporated by reference to Exhibit 10.7 of Registrant's Form 10-K
for the year ended October 31, 1997. (1)
10.9 Form of Employment Assurance Agreements between the Registrant and
its key technical and professional employees dated as of November
20, 1997. Incorporated by reference to Exhibit 10.8 of Registrant's
Form 10-K for the year ended October 31, 1997. (1)
10.10*Settlement agreement between the Registrant, SICPA Holding S.A. and
Flex Products, Inc. dated November 27, 1997. (Confidential treatment
has been requested on portions of this document.)
10.11*Second Amendment to the License and Supply Agreement by and between
Flex Products, Inc. and SICPA Holding S.A. dated December 22, 1998.
(Confidential treatment has been requested on portions of this
document.)
10.12 Agreement by and between JDS FITEL Inc. and Optical Coating
Laboratory, Inc. dated February 1, 1997. Incorporated by reference
to Exhibit 10.12 of Registrant's Form 10-K for the year ended
October 31, 1997. (Confidential treatment has been requested on
portions of this document.)
10.13 First Amendment, dated February 2, 1997, to Agreement by and Between
JDS FITEL, Inc. and Optical Coating Laboratory, Inc. dated February
1, 1997. Incorporated by reference to Exhibit 10.13 of Registrant's
Form 10-K for the year ended October 31, 1997. (Confidential
treatment has been requested on portions of this document.)
10.14 Second Amendment, dated June 1, 1997, to Agreement by and Between
JDS FITEL, Inc. and Optical Coating Laboratory, Inc. dated February
1, 1997. Incorporated by reference to Exhibit 10.14 of Registrant's
Form 10-K for the year ended October 31, 1997. (Confidential
treatment has been requested on portions of this document.)
10.15*1999 Management Incentive Plan (1)
11 Not applicable
12 Not applicable
<PAGE>
EXHIBIT
NO. DESCRIPTION
============================================================================
13 Not applicable
16 Not applicable
18 Not applicable
21* Subsidiaries of the Registrant
22 Not applicable
23* Independent Auditors' Consent and Report on Schedules-Deloitte &
Touche LLP
23* Independent Auditors' Consent-KPMG LLP
24 Not applicable
27* Financial Data Schedule for the year ended October 31, 1998
28 Not applicable
99 Not applicable
* An asterisk designates items not previously filed.
(1) Designates management contracts or compensatory plan arrangements
required to be filed as exhibits pursuant to Item 14(c) of Form 10-
K.
(b) Reports on Form 8-K
(1) Form 8-K filed November 18, 1998 reporting under Item 5 the
Registrant's announcement that it has sold the assets of its MMG
Division in Germany.
(2) Form 8-K filed December 22, 1998 reporting under Item 5 the
Registrant's announcement that it has signed a definitive
agreement to acquire the 40% interest in Flex Products, Inc. held
by SICPA Holding S.A.
OPTICAL COATING LABORATORY, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS (S-X, RULE 12-09)
-----------------------------------------------------------------
(AMOUNTS IN THOUSANDS)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- -------- -------- -------- -------- --------
ADDITIONS
----------------
BALANCE AT CHARGED TO CHARGED DEDUCTIONS BALANCE
BEGINNING COSTS AND TO OTHER AMOUNTS AT END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS CHRGD OFF PERIOD
- ----------- --------- -------- -------- ---------- ---------
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Year ended October 31, 1998 $1,884 568 (36)(a) 585 $1,831
====== ==== ======= ===== ======
Year ended October 31, 1997 $1,775 $642 $(31)(a) $ 502 $1,884
====== ==== ======= ===== ======
Year ended October 31, 1996 $1,229 $674 $ (7)(a) $ 121 $1,775
====== ==== ======= ===== ======
(a)The 1998, 1997 and 1996 balances consist of recoveries and foreign
currency translation effects.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
DATE: JANUARY 29, 1999 OPTICAL COATING LABORATORY, INC.
BY: /S/CRAIG B. COLLINS
----------------------------
Craig B. Collins
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
SIGNATURE TITLE DATE
============================================================================
/S/CHARLES J. ABBE PRESIDENT, CHIEF EXECUTIVE OFFICER
- ------------------------- AND DIRECTOR
Charles J. Abbe (Principal Executive Officer) JANUARY 29, 1999
/S/CRAIG B. COLLINS VICE PRESIDENT, FINANCE JANUARY 29, 1999
- ------------------------- AND CHIEF FINANCIAL OFFICER
Craig B. Collins (Principal Financial Officer)
/S/HOLLY D. NEAL CORPORATE CONTROLLER JANUARY 29, 1999
- ------------------------- (Principal Accounting Officer)
Holly D. Neal
/S/HERBERT M. DWIGHT, JR. CHAIRMAN OF THE BOARD JANUARY 29, 1999
- -------------------------
Herbert M. Dwight, Jr.
/S/JOHN MCCULLOUGH DIRECTOR JANUARY 29, 1999
- -------------------------
John McCullough
/S/ DOUGLAS C. CHANCE DIRECTOR JANUARY 29, 1999
- -------------------------
Douglas C. Chance
/S/ SHOEI KATAOKA DIRECTOR JANUARY 29, 1999
- -------------------------
Shoei Kataoka
/S/JULIAN SCHROEDER DIRECTOR JANUARY 29, 1999
- -------------------------
Julian Schroeder
/S/RENN ZAPHIROPOULOS DIRECTOR JANUARY 29, 1999
- ------------------------
Renn Zaphiropoulos
<PAGE>
EXHIBIT 4.4
WAIVER AND FIRST AMENDMENT TO CREDIT AGREEMENT
THIS WAIVER AND FIRST AMENDMENT TO CREDIT AGREEMENT ("Waiver
and Amendment"), dated as of January 8, 1999, effective as of
October 31, 1998, 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 (the "Credit Agreement")
pursuant to which the Banks have extended certain credit
facilities to the Company.
B. The Company has reported to the Agent and the Banks the
existence of a certain default under the Credit Agreement. The
Company has requested that the Banks waive such default and agree
to certain amendments of the Credit Agreement.
C. The Banks are willing to waive such default under the
Credit Agreement, and to amend the Credit Agreement, subject to
the terms and conditions of this Waiver and 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. Defaults and Waiver.
(a) For purposes of this Waiver and Amendment, the
"Existing Default" shall mean the default existing on this date
under Section 9.01(c) of the Credit Agreement, solely as a
consequence of a breach of the negative covenant set forth at
Section 8.16 of the Credit Agreement for the fiscal quarter ended
October 31, 1998 and solely to the extent such default may have
arisen from the loss incurred by the Company on the sale of the
assets of the MMG Division of its Subsidiary, OCLI Optical
Coating Laboratory GmbH.
(b) Subject to and upon the terms and conditions
hereof, the Banks hereby waive the Existing Default.
(c) Nothing contained herein shall be deemed a waiver
of (or otherwise affect the Agent's or the Banks' ability to
enforce) any other default or Event of Default, including without
limitation (i) any default or Event of Default as may now or
hereafter exist and arise from or otherwise be related to the
Existing Default (including without limitation any cross-default
arising under the Credit Agreement by virtue of any matters
resulting from the Existing Default), and (ii) any default or
Event of Default arising at any time after the Effective Date and
which is the same as any of the Existing Default.
3. Amendments to Credit Agreement.
(a) Section 1.01 of the Credit Agreement shall be
amended by adding the following defined term thereto in
appropriate alphabetical order:
"MMG Loss" means the loss in the amount of
$9,214,000 (comprised of an impairment charge of
$8,628,000 and a restructuring charge of $586,000)
incurred by the Company during the fiscal quarter
ended October 31, 1998 in connection with the sale of
the assets of the MMG Division of its Subsidiary OCLI
Optical Coating Laboratory GmbH.
(b) Section 1.01 of the Credit Agreement shall be
amended by amending the defined term "Fixed Charge Coverage
Ratio" in its entirety to read as follows:
"Fixed Charge Coverage Ratio" means, for the
date of determination, the ratio of the Company's (i)
EBIT for the four quarter period ending on such date
to (ii) the sum of its consolidated (x) net interest
expense for the four quarter period ending on such
date plus (y) current portion of long term debt,
calculated on a prospective basis for the four quarter
period beginning on such date of determination. In
calculating the Fixed Charge Coverage Ratio, (a)
Indebtedness of Flex Products covered by Section
8.06(j) to the extent it is owed to SICPA or to a
third person who is making the credit extension in
lieu of SICPA and the interest expense allocated to
such Indebtedness shall be excluded, and (b) for the
fiscal quarters ending on January 31, 1999, April 30,
1999 and July 31, 1999, the MMG Loss shall be excluded
from the determination of EBIT.
(c) Section 1.01 of the Credit Agreement shall be
amended by amending the defined term "Leverage Ratio" in its
entirety to read as follows:
"Leverage Ratio" means, for the date of
determination, the ratio of Funded Debt as such date
to the Company's EBITDA for the four quarter period
ending on such date. In calculating the Leverage
Ratio,
(a) Indebtedness of Flex Products covered by
Section 8.06(j) to the extent it is owed to SICPA or
to a third person who is making the credit extension
in lieu of SICPA and the interest expense allocated to
such Indebtedness shall be excluded, and (b) for the
fiscal quarters ending on January 31, 1999, April 30,
1999 and July 31, 1999, the MMG Loss shall be excluded
from the determination of EBITDA.
4. Representations and Warranties. The Company hereby
represents and warrants to the Agent and the Banks as follows:
(a) Other than the Existing Default, no Default or
Event of Default has occurred and is continuing.
(b) The execution, delivery and performance by the
Company of this Waiver and 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 Waiver and 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) Subject to the Existing Default, all
representations and warranties of the Company contained in the
Credit Agreement are true and correct on and as of the Effective
Date and 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 Waiver and
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.
5. Effective Date. This Waiver and Amendment will become
effective as of October 31, 1998 (the "Effective Date"), provided
that each of the following conditions precedent is satisfied on
or before January 8, 1999:
(a) The Agent has received from the Company and the
Majority Banks a duly executed original (or, if elected by the
Agent, an executed facsimile copy) of this Waiver and Amendment.
(b) All representations and warranties contained
herein are true and correct on and as of the date hereof.
6. Reservation of Rights. The Company acknowledges and
agrees that neither the Agent's nor the Banks' forbearance in
exercising their rights and remedies in connection with the
Existing Default, nor the execution and delivery by the Agent and
the Banks of this Waiver and Amendment, shall be deemed (i) to
create a course of dealing or otherwise obligate the Agent or the
Banks to forbear or enter into waivers under the same, similar or
any other circumstances in the future, or (ii) to waive,
relinquish or impair any right of the Agent or the Banks to
receive any indemnity or similar payment from any Person or
entity as a result of any matter arising from or relating to the
Existing Default.
7. 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
Waiver and Amendment. This Waiver and Amendment shall be deemed
incorporated into, and a part of, the Credit Agreement. This
Waiver and Amendment is a Loan Document.
(b) This Waiver and Amendment shall be binding upon
and inure to the benefit of the parties hereto and to the Credit
Agreement and their respective successors and assigns. No third
party beneficiaries are intended in connection with this Waiver
and Amendment.
(c) This Waiver and Amendment shall be governed by and
construed in accordance with the law of the State of California.
(d) This Waiver and 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 Waiver and Amendment, together with the
Credit Agreement, contains the entire and exclusive agreement of
the parties hereto with reference to the matters discussed herein
and therein. This Waiver and Amendment supersedes all prior
drafts and communications with respect thereto. This Waiver and
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 Waiver and
Amendment shall be deemed prohibited by or invalid under any
applicable law, such provision shall be invalidated without
affecting the remaining provisions of this Waiver and 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 Waiver and Amendment.
IN WITNESS WHEREOF, the parties hereto have executed and
delivered this Waiver and Amendment as of the date first above
written.
OPTICAL COATING LABORATORY, INC.
By: /S/JEFFREY M. RYAN
Title: Assistant Treasurer
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION, as Agent
By: /S/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
Title: Managing Director
ABN AMRO BANK N.V.
By: /S/MATHEW HARVEY
Title: Vice President
By: /S/IAN S. HISERT
Title: Assistant Vice President
EXHIBIT 10.10
SETTLEMENT AGREEMENT
This Agreement (including all exhibits and schedules, the
"Agreement") is made and entered into as of this 19th day of November 1997,
by and among SICPA Holding S.A., a company organized and existing under the
laws of Switzerland ("SICPA"), Optical Coating Laboratory, Inc., a
corporation organized and existing under the laws of the State of Delaware
("OCLI"), Flex Products, Inc., a corporation organized and existing under
the laws of the State of Delaware ("Flex"), Herbert M. Dwight, Jr., John
McCullough, James Seeser (Messrs. Dwight, McCullough and Seeser
collectively, the "OCLI Designated Directors"), Maurice A. Amon and Eduardo
Beruff (Messrs. Amon and Beruff collectively, the "SICPA Designated
Directors").
RECITAL
WHEREAS the undersigned parties to this Agreement desire to
compromise and settle that certain litigation entitled SICPA Holding S.A.
v. Optical Coating Laboratory, Inc., Herbert M. Dwight, Jr., John
McCullough, James Seeser and Flex Products, Inc., including counterclaims
entitled Optical Coating Laboratory, Inc. and Flex Products, Inc. v. SICPA
Holding S.A., Maurice A. Amon and Eduardo Beruff, in the Court of Chancery
of the State of Delaware in and for New Castle County, C.A. No. 15129 (the
"Litigation");
NOW THEREFORE, in consideration of the premises, and other good
and valuable consideration, the receipt of which is hereby acknowledged,
SICPA, OCLI , Flex, the SICPA Designated Directors and the OCLI Designated
Directors hereby agree as follows:
ARTICLE I
DEFINITIONS; INTERPRETATION
Section 1.01. Definitions. Except as otherwise specified herein
or as the context may otherwise require, the following terms have the
respective meanings set forth below for all purposes of this Agreement, and
the definitions of such terms are equally applicable both to the singular
and plural forms of such terms and to the masculine, feminine and neuter
genders of such terms. The definition of terms in this Agreement is not
intended to and shall not be construed to affect the construction of
similar terms in other agreements involving the Parties.
"Addendum No. 1" means that certain Addendum No. 1 to OCLI/SICPA
Agreement made and entered into by and between OCLI and SICPA, dated as of
May 1, 1997.
"Agreement" has the meaning set forth in the preamble of this
Agreement.
"Assigned Principal Amount" shall have the meaning set forth in
Section 3.02.
"Business Day" means a day other than a Saturday, Sunday, U.S.
federal legal holiday or Swiss national holiday.
"Common Stock" shall include any shares of Flex of any class or
series, which has no preference or priority in the payment of dividends or
in the distribution of assets upon any voluntary or involuntary
liquidation, dissolution or winding up of Flex and which is not subject to
redemption by Flex, and if at any time there shall be more than one such
class or series, all such shares, irrespective of class or series
designation, shall be treated as one class for purposes of calculating a
Flex Equity Interest.
"Effective Date" means the date first above written.
"Equity Ratio" means the ratio of the Flex Equity Interest of
OCLI divided by the Flex Equity Interest of SICPA.
"Financial Advisor" means the managing underwriter(s) or
placement agent(s) engaged to sell or place securities, including debt and
equity securities
"Flex" has the meaning set forth in the preamble of this
Agreement.
"Flex Equity Interest" of a person means the quotient of (i) the
number of shares of the Common Stock of Flex beneficially owned by such
person on the date of calculation, divided by (ii) the aggregate number of
shares of the Common Stock of Flex beneficially owned by OCLI and SICPA on
the date of calculation.
"Joint Acquisition Agreement" means that certain Agreement made
and entered into by and between OCLI and SICPA, dated as of December 13,
1994.
"Litigation" has the meaning set forth in the Recital of this
Agreement.
"Note Ratio" means the ratio of (i) the amount that is the sum of
the outstanding principal balance of the OCLI Note plus the unpaid balance
of the Assigned Principal Amount, divided by (ii) the amount that is the
remainder of the outstanding principal balance of the SICPA Note minus the
unpaid balance of the Assigned Principal Amount.
"OCLI" has the meaning set forth in the preamble of this
Agreement.
"OCLI Designated Directors" has the meaning set forth in the
preamble of this Agreement.
"OCLI-Flex License Agreement" means that certain License
Agreement made and entered into by and between OCLI and Flex, dated
December 19, 1988.
"OCLI Note" means that certain Multiple Advance Promissory Note,
Series 1997-II, No. 1, dated June 5, 1997, of the maximum principal amount
of $9,420,000 made by Flex to OCLI.
"OCLI's Proportionate Share" means the percentage obtained by
dividing (i) the unpaid balance of the Assigned Principal Amount by
(ii) the outstanding principal amount of the SICPA Note.
"OVI" means optically variable ink.
"OVP" means optically variable pigment.
"Parties" means OCLI, SICPA, Flex, the OCLI Designated Directors
and the SICPA Designated Directors.
"Public Offering" means a sale by Flex of any shares of Common
Stock in an underwritten public offering registered under the Securities
Act of 1933.
"Put-Call Agreement" means that certain Put and Call, Right of
First Refusal and Co-Sale Agreement by and between OCLI and SICPA, dated as
of May 8, 1995.
"Retained Principal Amount" shall have the meaning set forth in
Section 3.02.
"SICPA" has the meaning set forth in the preamble of this
Agreement.
"SICPA Designated Director" has the meaning set forth in the
preamble of this Agreement.
"SICPA-Flex License Agreement" means that certain License and
Supply Agreement by and among Flex and SICPA, dated December 2, 1994.
"SICPA Note" means that certain Multiple Advance Promissory Note,
Series 1997-II, No. 2, dated June 5, 1997, of the maximum principal amount
of $6,280,000 made by Flex to SICPA.
Section 1.02. Interpretation. All references in this Agreement
to designated Sections, Articles, Exhibits and Schedules are to the
designated sections and articles of and exhibits and schedules to this
Agreement, unless otherwise specified. The headings and captions used in
this Agreement are for convenience of reference only and do not define,
limit or describe the scope or intent of the provisions of this Agreement.
The terms "includes" or "including" are intended to be inclusive rather
than exclusive.
ARTICLE II
RELEASES; DISMISSAL
Section 2.01. Releases. Effective on the Effective Date, each
of OCLI, SICPA, Flex, each of the OCLI Designated Directors and each of the
SICPA Designated Directors hereby unconditionally releases and discharges
each of the other Parties and each of the predecessors, parents,
subsidiaries, corporate affiliates, officers, directors, employees,
stockholders, agents, attorneys, successors, assigns, heirs, administrators
and executors of each of the respective Parties from any and all claims,
causes of action, counterclaims or third party claims arising out of or in
any way relating to the subject matter of the Litigation, whether known or
unknown, which was, or could have been, asserted in the Litigation, now and
forever.
Section 2.02. Dismissal of Litigation. Promptly following the
Effective Date, but in no event later than the third Business Day following
the Effective Date, the Parties shall cause their respective counsel to
file such documents and take such other steps as may be necessary to cause
the Litigation to be dismissed, with prejudice.
ARTICLE III
COVENANTS
Section 3.01. Deletion of Put-Call. Effective upon the
Effective Date, SICPA and OCLI hereby agree to amend the Put-Call Agreement
to delete Section 6 of the Put-Call Agreement.
Section 3.02 Assignment of a Portion of SICPA Note Payments.
Effective upon the Effective Date, SICPA hereby assigns to OCLI the right
of SICPA to receive payments of principal and interest in respect of that
portion of the SICPA Note that is equal in principal amount to
$2,600,000.00 (the "Assigned Principal Amount") in consideration of the
payment by OCLI to SICPA of the amount of $2,600,000.00 (the "Purchase
Price"). OCLI shall pay the Purchase Price to SICPA on the Effective Date
by wire transfer of immediately available funds to an account designated by
SICPA. SICPA retains the right to receive payments of principal and
interest in respect of the remainder of the principal amount of the SICPA
Note. The right to receive all payments of interest on the Assigned
Principal Amount that are accrued but unpaid through but excluding the
Effective Date shall be and remain the property of SICPA. From and
including the Effective Date, all payments by Flex of interest accruing in
respect of the SICPA Note shall be allocated (i) to OCLI, in an amount
equal to the portion of such interest payment allocable to the remaining
unpaid balance of the Assigned Principal Amount and (ii) to SICPA, the
remainder. From and including the Effective Date, all payments of
principal on the SICPA Note shall be allocated (i) until the Equity Ratio
is first equal to or greater than the Note Ratio, to OCLI, in reduction of
the remaining unpaid balance of the Assigned Principal Amount, to the
extent necessary to cause the Equity Ratio to be equal to the Note Ratio,
and thereafter and at all other times (ii) (a) to OCLI, an amount equal to
OCLI's Proportionate Share of such payments, and (b) to SICPA, the
remainder, provided, that, in all events, OCLI's right to receive any
allocation of payments of principal on the SICPA Note shall cease when the
unpaid balance of the Assigned Principal Amount is reduced to zero (i.e.,
once OCLI has been allocated the amount of $2,600,000.00 of principal
payments). Flex shall, and SICPA hereby directs Flex to, make all payments
of principal and interest in respect of the SICPA Note in accordance with
the allocations set forth in this Section 3.02.
Section 3.03. Working Capital Loans.
(a) Effective upon the Effective Date, OCLI and SICPA agree to
amend the Joint Acquisition Agreement by adding the
following at the end of Section 3.d. thereof:
"Notwithstanding anything to the contrary in this
Section 3.d., SICPA shall have no obligation to provide
any Working Capital Loan to Flex from and after the
first date on which SICPA owns less than twenty percent
(20%) of the common stock of Flex (treating all classes
of Flex common stock as one class for purposes of this
calculation)."
(b) Subject to the approval of Flex's Financial Advisor, which
approval OCLI and Flex shall use good faith efforts to
obtain, Flex will, and OCLI will cause Flex to, use the
proceeds of any debt financing by Flex or sale of equity
securities (or rights exercisable for equity securities) by
Flex to redeem Flex's Series C Preferred Stock held by SICPA
and to repay the principal of Working Capital Loans (as
defined in the Joint Acquisition Agreement) held by SICPA
(with any redemption of Series C Preferred Stock or
repayment of Working Capital Loans to be made to OCLI and
SICPA on a pro rata basis in accordance with the proportions
of the Series C Preferred Stock and Working Capital Loans,
as the case may be, then held by each of OCLI and SICPA).
Section 3.04. SICPA-Flex License Agreement. On the Effective
Date, each of SICPA and Flex shall execute and deliver to the other the
Amendment to SICPA-Flex License Agreement attached hereto as Exhibit A and
incorporated by reference herein.
Section 3.05. Public Offering by Flex. In the event, at any
time, Flex shall undertake an initial Public Offering, OCLI and Flex will
take all necessary actions to permit SICPA, at SICPA's sole election, to
sell a portion of the shares of the Common Stock of Flex then held by SICPA
in such Public Offering at Flex's sole cost and expense (other than any
underwriting discounts or commissions allocable to the shares of Common
Stock sold by SICPA in such Public Offering and other than the fees and
disbursements of any counsel retained solely by SICPA), provided that the
number of shares of Flex Common Stock that SICPA shall be permitted to sell
in any such Public Offering shall be the number of shares that is not more
than the lesser of (i) twenty-five percent (25%) of the total number of
shares sold in such Public Offering and (ii) ten percent (10%) of Flex's
Common Stock issued and outstanding immediately prior to the Public
Offering.
Section 3.06. SICPA Registration Rights. Flex shall provide to
SICPA the registration rights (the "Registration Rights") set forth in
Exhibit B attached hereto and incorporated by reference herein.
Section 3.07. Flex Certificate of Incorporation. On the
Effective Date, Flex shall cause to be filed with the Secretary of State of
Delaware the Second Amended and Restated Certificate of Incorporation of
Flex attached hereto as Exhibit C and incorporated by reference herein. In
connection therewith, in order to minimize the number of shares of Class B
Common Stock (as defined in Exhibit C) that might be issued or issuable
pursuant to the exercise of employee stock options, Flex and OCLI agree
promptly following the Effective Date to use their best efforts to obtain
an amendment to Flex's permit from the California Commissioner of
Corporations covering Flex's Stock Option Plan to allow options to be
granted under the Plan that are exercisable for shares of Class A Common
Stock. In the event such a permit is obtained, OCLI and Flex agree that
all options granted under the Plan to acquire Class B Common Stock shall be
in an aggregate amount not to exceed 10% of Flex's issued and outstanding
Class B Common Stock at the time of grant of the options. In addition,
OCLI and Flex will make good faith reasonable efforts to cause the holders
of employee stock options exercisable to acquire Class B Common Stock to
convert such options to options exercisable to acquire Class A Common
Stock. In the event such a permit cannot be obtained, options to purchase
shares of Class B Common Stock in excess of 10% of the then issued and
outstanding Class B Common Stock may be granted under the Plan, and in that
event Flex agrees that it will exercise its right under the Plan to either
purchase from optionees options that are about to be exercised or purchase
shares of Class B Common Stock issued to optionees such that at no time
will there be shares of Class B Common Stock issued to optionees or former
optionees that exceed 10% of the issued and outstanding Class B Common
Stock. If, at any time, Flex shall undertake a Public Offering, OCLI, Flex
and SICPA will take all necessary action to cause Flex to file with the
Secretary of State of Delaware a further amended and restated Certificate
of Incorporation of Flex to delete from Flex's Certificate of Incorporation
all shareholder supermajority approval requirements effective upon the
closing of such Public Offering.
Section 3.08. Audit Committee. Effective upon the Effective
Date, the by-laws of Flex shall be amended to add to Flex's by-laws the
provisions of the By-Law Amendment attached as Exhibit D hereto and
incorporated by reference herein.
Section 3.09. OCLI-Flex License Agreement. On the Effective
Date, each of OCLI and Flex shall execute and deliver the Amendment to
OCLI-Flex License Agreement attached hereto as Exhibit E and incorporated
by reference herein.
Section 3.10. Flex's Future Operations. OCLI desires to have
better access to the use of Flex's roll-to-roll coating technology for
applications other than color-shifting pigments and other existing and
planned products of Flex and other than in security, anticounterfeiting and
solar control fields, in a manner that is fair to Flex, including through
revisions to the OCLI-Flex License Agreement that would permit OCLI, on a
shared, non-exclusive basis with Flex, to manufacture, use and sell
products using such roll-to-roll technology other than existing products of
Flex or extensions thereof and planned products for the security and
anticounterfeiting fields and for solar control. SICPA desires to preserve
for Flex exclusive rights to use roll-to-roll coating technology in the
manufacture, use and sale of color-shifting pigments and other existing and
planned products of Flex or extensions thereof and in the security and
anticounterfeiting fields and for solar control. Promptly following the
Effective Date, OCLI and SICPA agree to negotiate in good faith in an
effort to reach mutual agreement concerning the desires of OCLI and SICPA
set forth in this Section 3.10.
Section 3.11. Product Acceptance. Promptly following the
Effective Date, OCLI, SICPA and Flex will engage in good faith negotiations
involving the senior management and senior technical personnel of each of
OCLI, SICPA and Flex in an effort to resolve by mutual agreement the
acceptance by SICPA of OVP produced by Flex utilizing Flex's Beta III
equipment (and to resolve disputes concerning invoices for such product)
and to formulate on an expeditious basis a mutually agreeable objective
standard for measuring the acceptance criteria of OVP, in each case using
reasonable efforts and satisfying the requirements of SICPA's customers for
OVI. Flex shall not be deemed to have waived any rights it has under the
SICPA-Flex License Agreement based upon its agreement to negotiate in
accordance with this Section 3.11, but Flex hereby agrees not to exercise
any rights it may have pertaining to the subject matter of this Section
3.11 (i) with respect to the colors of green-to-blue and magenta-to-green,
for a period of thirty (30) days following the Effective Date and (ii) with
respect to the colors of Liberty Green (green-to-magenta), green-to-
magenta, gold-to-green and blue-to-red, for a period of four (4) months
following the Effective Date.
Section 3.12. Fourth Fiscal Quarter Orders. SICPA shall not make
any change to decrease below an aggregate of 1,590 kilograms the quantity
of OVP ordered by SICPA for Flex's current fourth fiscal quarter (i.e. for
the months of August, September and October 1997).
Section 3.13. Marketing Campaigns. OCLI and SICPA will consult
in good faith at SICPA's request to address and to cause Flex to address
significant sales opportunities for OVI, it being understood that SICPA
will have the burden of persuading OCLI whether or not to cooperate in
pursuing any such opportunity.
Section 3.14. Additional OVP Production Facilities. OCLI, Flex
and SICPA agree to negotiate in good faith, at SICPA's request, concerning
the establishment of an additional facility for the manufacture of OVP in
order to satisfy the demonstrated requirements of SICPA's customers and on
terms and conditions to be mutually agreed by OCLI, Flex and SICPA.
Section 3.15. Representations and Warranties True on the
Effective Date. The representations and warranties of each of the
respective Parties contained in Article IV shall be true and accurate on
the Effective Date as though made on the Effective Date.
Section 3.16. Strategic Technical Advisory Committee. Effective
upon the Effective Date, SICPA and OCLI hereby agree to amend and replace
Section 3.h. of the Joint Acquisition Agreement as follows:
"h. Strategic Technical Advisory Committee. Flex has
established a Strategic Technical Advisory Committee ("STAC").
The STAC shall consist of three (3) representatives appointed by
OCLI, three (3) representatives appointed by Flex, and two (2)
representatives appointed by SICPA. The STAC shall oversee
Flex's ongoing research and development activities, shall perform
those duties enumerated in the License Agreement and the Research
Development and Engineering Agreement described in Section 7.a.5.
and shall implement all of the provisions of the Memorandum of
Alliance between SICPA S.A. and Flex, dated March 9, 1993 and of
the Joint Venture Agreement between Flex and SICPA Industries of
America, Inc., dated as of July 1, 1993. The STAC shall meet at
least quarterly. The agenda for such meetings shall include, but
not be limited to, a review of intellectual property positions
and strategies and long-term supply and demand issues. If, at
any time, SICPA shall own less than twenty percent (20%) of
Flex's then issued and outstanding common stock (treating all
shares of Flex's common stock as one class for purposes of this
calculation), Flex shall have the option of whether or not to
continue the operation of STAC, provided that Flex shall
reinstate the Committee described in Section 1.1.1(b) of the
License and Supply Agreement by and among Flex and SICPA, dated
December 2, 1994, prior to amendment, in the event that Flex
elects to discontinue the operation of STAC."
Section 2.b. of Addendum No. 1 is deleted effective upon the
Effective Date.
Section 3.17. OCLI Services. OCLI and SICPA agree that it would
be desirable to administer the operations of Flex in a manner that permits
Flex to take advantage of certain common facilities, resources and
technologies between the operations of OCLI and Flex in a manner that is
cost effective for Flex and improves the value of Flex for all of its
shareholders. From and after the Effective Date, SICPA agrees that OCLI
may, without having to obtain shareholder approval from SICPA pursuant to
the provisions of Section VII.(xiv) of Flex's Second Amended and Restated
Certificate of Incorporation, take actions to implement these desired
objectives through the integration of Flex's administrative and research
and development operations with OCLI's administrative and research and
development operations, provided, that such actions (i) do not impair the
long term prospects of Flex or the ability of Flex to become an independent
public company, (ii) are implemented on commercially reasonable terms that
are fair to Flex, (iii) are no more costly to Flex than would be the case
if Flex provided the relevant service itself or obtained such service from
an unaffiliated third party, and (iv) will serve the best interests of all
of Flex's shareholders. It is understood that OCLI will consult in advance
with SICPA concerning OCLI's plan in connection with the settlement of the
Litigation to implement a restructuring of the administrative operations of
Flex in accordance with this Section 3.17. For purposes of determining
whether such restructuring satisfies the foregoing clause (iii), the cost
results for Flex of such restructuring shall be considered in the
aggregate.
Section 3.18. Confidentiality. The provisions and terms of this
Agreement shall be summarized in a press release to be mutually agreed by
OCLI, SICPA and Flex (the "Approved Press Release"). Except as may be
specifically disclosed in the Approved Press Release, the Parties and their
respective counsel shall keep and maintain confidential all terms and
provisions of this Agreement, the course, substance, details and
particulars of all settlement negotiations and all terms and conditions of
the settlement of the Litigation, and they shall not disclose any of the
provisions or terms of such settlement or this Agreement except as may be
required by applicable law after prior consultation with OCLI, Flex and
SICPA, and then only to the extent required by applicable law following
best efforts by the disclosing Party to secure confidential treatment of
any information required to be disclosed. In addition, the Parties agree
that the Amendment to SICPA-Flex License Agreement attached hereto as
Exhibit A and the Amendment to OCLI-Flex License Agreement attached hereto
as Exhibit E each contain sensitive confidential financial information that
shall be kept and maintained confidential and shall not be disclosed by any
Party except with the prior written consent (i) of SICPA as to the
Amendment to SICPA-Flex License Agreement, or (ii) of OCLI as to the
Amendment to OCLI-Flex License Agreement, which consent in each case may be
withheld in the sole discretion of SICPA or OCLI, as the case may be,
provided, that, in the event that OCLI or Flex determines that it is
required by U.S. federal securities law to file with the Securities and
Exchange Commission ("SEC") a copy of the Amendment to SICPA-Flex License
Agreement, then OCLI or Flex, as the case may be, shall be permitted to
make such filing but only after making best efforts to obtain confidential
treatment from the SEC of the Amendment to SICPA-Flex License Agreement to
the maximum extent possible (including, without limitation, as to pricing
and quantity terms).
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
Section 4.01. Representations and Warranties of OCLI, Flex and
SICPA. Each of OCLI, Flex and SICPA hereby represents and warrants to the
other Parties that as of the date of this Agreement (and, for purposes of
Section 3.15, as of the Effective Date):
(a) Organization. It is a corporation or, in the case of SICPA,
a societe annonyme, duly organized, validly existing and in
good standing under the laws of its jurisdiction of
incorporation. It is duly licensed, registered or qualified
to do business and is in good standing in all jurisdictions
in which the character or nature of its business requires it
to be so licensed, registered or qualified and the failure
to be so licensed, registered or qualified would have a
material adverse effect on its business.
(b) Authority; Enforceability. It has the corporate power and
authority to enter into this Agreement and to carry out its
obligations hereunder. The execution and delivery of this
Agreement and the consummation and performance of the
transactions contemplated hereby have been duly authorized
by all necessary corporate action and no other proceeding on
its part is necessary to authorize the consummation or
performance of the transactions contemplated hereby. This
Agreement is legal, valid, binding and enforceable against
it in accordance with its terms, subject to applicable
bankruptcy, insolvency and similar laws affecting creditors'
rights generally, and subject to general principles of
equity (regardless of whether enforcement is sought in a
proceeding in equity or at law).
(c) Consents. No consent, waiver, approval, authorization,
exemption, registration, license or declaration of or by, or
filing with, any other person or any national, federal,
state or local governmental or regulatory agency, bureau or
authority within or without the United States is required
with respect to it, other than those which have been
obtained, in connection with (i) the execution, delivery or
enforceability of this Agreement or (ii) the consummation or
performance of the transactions contemplated hereby.
(d) No Breach. The execution and delivery of this Agreement by
it and the consummation and performance of the transactions
provided for hereby does not and will not (i) conflict with
or result in any breach or violation of, or loss of benefit
under, any provision of its charter, certificate or articles
of incorporation, by-laws or other governing documents or
(ii) violate, conflict with or result in the breach of, or
loss of benefit under, or constitute a default or an event
which with notice, lapse of time, or both, would constitute
a default or event of default under (A) the terms of any
contract to which it is a party or by which it is bound, or
(B) any judgment, statute, law, ordinance, rule or
regulation or order of any governmental authority applicable
to it.
(e) No Litigation. There is no action, suit, proceeding,
inquiry or investigation, at law or in equity, or before any
court, public board or body pending, or to its knowledge
threatened, involving it, wherein an unfavorable decision,
ruling or finding would (i) materially and adversely affect
the transactions contemplated by this Agreement or
(ii) adversely affect the validity or enforceability of this
Agreement or any document necessary to consummate or perform
the transactions contemplated hereby.
Section 4.02. Representations and Warranties of OCLI-Designated
Directors and SICPA-Designated Directors. Each of the OCLI-Designated
Directors and the SICPA-Designated Directors hereby represents and warrants
to the other Parties that as of the date of this Agreement (and, for
purposes of Section 3.15, as of the Effective Date):
(a) Capacity. He has the legal capacity to enter into this
Agreement and to carry out his obligations hereunder and is
not suffering from any disability or impediment that
diminishes such legal capacity. This Agreement is legal,
valid, binding and enforceable against him in accordance
with its terms, subject to applicable bankruptcy, insolvency
and similar laws affecting creditors' rights generally, and
subject to general principles of equity (regardless of
whether enforcement is sought in a proceeding in equity or
at law).
(b) No consent, waiver, approval, authorization, exemption,
registration, license or declaration of or by, or filing
with, any other person or any national, federal, state or
local governmental or regulatory agency, bureau or authority
within or without the United States is required with respect
to him, other than those which have been obtained, in
connection with (i) the execution, delivery or
enforceability of this Agreement or (ii) the consummation or
performance of the transactions contemplated hereby.
(c) No Breach. The execution and delivery of this Agreement by
him and the consummation and performance of the transactions
provided for hereby does not and will not violate, conflict
with or result in the breach of, or loss of benefit under,
or constitute a default or event of default under (i) the
terms of any contract to which he is a party or by which he
is bound, or (ii) any judgment, statute, law, ordinance,
rule or regulation or order of any governmental authority
applicable to him.
(d) No Litigation. There is no action, suit, proceeding,
inquiry or investigation, at law or in equity, or before any
court, public board or body pending, or to his knowledge
threatened, involving him, wherein an unfavorable decision,
ruling or finding would materially and adversely affect the
transactions contemplated by this Agreement or adversely
affect the validity or enforceability of this Agreement or
any document necessary to consummate or perform the
transactions contemplated hereby.
ARTICLE V
MISCELLANEOUS
Section 5.01. GOVERNING LAW. THIS AGREEMENT SHALL BE CONSTRUED
IN ACCORDANCE WITH, AND GOVERNED BY, THE LAWS OF THE STATE OF DELAWARE
WITHOUT REGARD TO CONFLICTS OF LAWS PROVISIONS.
Section 5.02. Waivers and Amendments. No waiver shall be deemed
to have been made by any Party of any of its rights under this Agreement
unless the same shall be in writing and is signed on its behalf by an
authorized person. Any such waiver shall constitute a waiver only with
respect to the specific matter described in such writing and shall in no
way impair the rights of the Party granting such waiver in any other
respect or at any other time. Except as specifically provided herein, this
Agreement shall not be amended or modified except by an instrument in
writing signed by each Party.
Section 5.03. Costs and Expenses. Each of the Parties to this
Agreement shall bear its own expenses incurred in connection with the
negotiation, preparation, execution, closing and performance of this
Agreement.
Section 5.04. Successors. This Agreement shall be binding upon
and inure to the benefit of the Parties and their respective heirs and
successors.
Section 5.05. No Third Party Rights. This Agreement is intended
to be solely for the benefit of the Parties and is not intended to confer
any benefits upon, or create any rights in favor of, any person other than
the Parties.
Section 5.06. Counterparts. This Agreement may be executed in
any number of counterparts, each of which shall be deemed an original, but
all of which together shall constitute a single instrument.
Section 5.07. Entire Agreement. This Agreement sets forth the
entire understanding and agreement between the Parties as to the matters
covered herein and supersedes and replaces any inconsistent prior
understanding, agreement or statement of intent, in each case, written or
oral, expressly addressed by this Agreement.
Section 5.08. Further Assurances. Each of the Parties hereby
agrees to execute and deliver all such other and additional instruments and
documents and to do all such other acts and things as may be reasonably
necessary more fully to effectuate this Agreement and consummate the
transactions contemplated herein.
Section 5.09. Notices. All notices to be delivered hereunder
shall be in writing and shall be sent by (i) hand delivery, against written
receipt thereof (ii) registered or certified mail, return receipt
requested, (iii) reputable overnight courier service, with receipt of
delivery acknowledged, or (iv) telecopier, to the other Parties at the
addresses shown below. Any such demand, notice or communication hereunder
shall be deemed to have been given on the date received or on the date
delivered and refused:
If to OCLI:
Optical Coating Laboratory, Inc.
2789 Northpoint Parkway
Santa Rosa, California 95407-7397
Telecopier: 707-525-6840
Attention: President
with a copy to:
General Counsel
Optical Coating Laboratory, Inc.
2789 Northpoint Parkway
Santa Rosa, California 95407-7397
Telecopier: 707-525-6840
If to Herbert M. Dwight, Jr.:
Mr. Herbert M. Dwight, Jr.
Optical Coating Laboratory, Inc.
2789 Northpoint Parkway
Santa Rosa, California 95407-7397
Telecopier: 707-525-6840
If to John McCullough:
Mr. John McCullough
Optical Coating Laboratory, Inc.
2789 Northpoint Parkway
Santa Rosa, California 95407-7397
Telecopier: 707-525-6840
If to James Seeser:
Dr. James Seeser
Optical Coating Laboratory, Inc.
2789 Northpoint Parkway
Santa Rosa, California 95407-7397
Telecopier: 707-525-6840
If to Flex:
FLEX Products Inc.
1402 Mariner Way
Santa Rosa, California 95407-7370
Telecopier: 707-525-7725
Attention: President
with a copy to:
General Counsel
Optical Coating Laboratory, Inc.
2789 Northpoint Parkway
Santa Rosa, California 95407-7397
Telecopier: 707-525-6840
If to SICPA:
SICPA Holding S.A.
Avenue de Florissant 41
1008 Prilly
Switzerland
Telecopier: 011-41-21-627-5505
Attention: President
with a copy to:
Linda J. Soldo
Cleary, Gottlieb, Steen & Hamilton
2000 Pennsylvania Avenue, N.W.
Washington, D.C. 20006-1801
Telecopier: 202-974-1999
If to Maurice A. Amon:
Mr. Maurice A. Amon
SICPA Holding S.A.
Avenue de Florissant 41
1008 Prilly
Switzerland
Telecopier: 011-41-21-627-5915
If to Eduardo Beruff:
Mr. Eduardo Beruff
SICPA Industries of America, Inc.
8000 Research Way
Springfield, Virginia 22153
Telecopier: 703-440-2157
The address for any Party set forth above may be changed by written notice
to the other Parties in accordance with this Section 5.09.
IN WITNESS WHEREOF, the Parties have set their hands as
of the date first above written.
OPTICAL COATING LABORATORY, INC.
By: /s/JOSEPH ZILS
-----------------------------------
Name: Joseph Zils
Title: Vice President,
General Counsel
and Corporate Secretary
FLEX PRODUCTS, INC.
By: /s/HERBERT M. DWIGHT, JR.
-----------------------------------
Name: Herbert M. Dwight, Jr.
Title: Chairman of the Board and
Chief Executive Officer
SICPA HOLDING S.A.
By: /s/MAURICE A. AMON
----------------------------------
Name: Maurice Amon
Title: Vice Chairman of the Board
By: /s/HANS J. LOLIGER
----------------------------------
Name: Hans J. Loliger
Title: Chief Executive Officer
HERBERT M. DWIGHT, JR.
/s/HERBERT M. DWIGHT, JR.
-------------------------
JOHN McCULLOUGH
/s/JOHN MCCULLOUGH
-------------------------
JAMES SEESER
/s/JAMES SEESER
-------------------------
MAURICE A. AMON
/s/MAURICE A. AMON
--------------------------
HANS J. LOLIGER
/s/HANS J. LOLIGER
-------------------------
EDUARDO BERUFF
/s/EDUARDO BEFUFF
------------------------
EXHIBIT A
AMENDMENT TO SICPA-FLEX LICENSE AND SUPPLY AGREEMENT
FIRST AMENDMENT TO
LICENSE AND SUPPLY AGREEMENT
BY AND BETWEEN
FLEX PRODUCTS, INC.
AND
SICPA HOLDING S.A.
NOVEMBER 19, 1997
FIRST AMENDMENT TO
LICENSE AND SUPPLY AGREEMENT
FIRST AMENDMENT TO AGREEMENT dated November 19, 1997, by and between
Flex Products, Inc., a Delaware corporation ("Flex") and SICPA HOLDING
S.A., a Swiss corporation ("SICPA").
W I T N E S S E T H:
WHEREAS, Flex and SICPA are currently parties to a License and Supply
Agreement dated as of December 2, 1994 providing for the purchase and sale
of optically variable pigment ("OVP") (the "1994 Agreement");
WHEREAS, Flex and SICPA wish to amend the 1994 Agreement by means of
this First Amendment to the 1994 Agreement;
NOW, THEREFORE, in consideration of the mutual agreements hereinafter
set forth, the parties hereby agree as follows:
Section 1.1.1(b) shall be amended and replaced to read in full as
follows:
The parties agree to use the "STAC" referenced in Section 3.16
of the Settlement Agreement, dated November 19, 1997, by and between
SICPA, Flex, OCLI and the other parties named therein, during the
term of this Agreement, to implement all of the provisions of the
Memorandum of Alliance and the Joint Venture Agreement, copies of
which are attached hereto as Exhibits I and J, respectively. In the
event the STAC is discontinued the parties agree to re-establish the
Committee pursuant to the original provisions of Section 1.1.1(b)
prior to this Amendment. The parties agree that, notwithstanding the
existing terms of the Memorandum of Alliance and the Joint Venture
Agreement to the contrary, the Memorandum of Alliance and the Joint
Venture Agreement shall remain in effect during the Term of this
Agreement, and the parties shall execute such amendments thereto
which may be proper to extend the length of the respective terms of
the Memorandum of Alliance and the Joint Venture Agreement to conform
to length of the Term (as such term is defined in Section 13 below).
Section 3 of the 1994 Agreement shall be amended and replaced to read
in full as follows:
3. Changes to Price and Quantity. During the period from
March 1, 2000 through June 30, 2000 and the period March 1, 2005
through June 30, 2005, the parties shall discuss what the price and
quantity terms of this Agreement shall be for the period 11/1/2000
through 10/31/2005 and 11/1/2005 through 12/31/2009 respectively. In
the event that the parties cannot agree to any other provisions, the
price for OVP shall be the price set forth in Section 4, as adjusted
by Section 5.6 for periods after 10/31/2000, the minimum and maximum
quantities for the period 11/1/2000 through 10/31/2005 shall be the
same as for the year ended 10/31/2000, and the minimum and maximum
quantities for the period 11/1/2005 through 12/31/2009 shall be the
same as for the year ended 10/31/2005 (prorated on a month-for-month
basis for the period from 11/1/2009 to 12/31/2009).
Section 4.3 of the 1994 Agreement shall be amended and replaced to
read in full as follows:
4.3 Price Adjustment. The price per kilogram set shall be as
set forth below without adjustment pursuant to Sections 4.2 and 5.6
from November 1, 1997 through October 31, 2000:
Base Price/Kg (before
increases pursuant to
Purchases per Year Sections 4.2 and 5.6)
[CONFIDENTIAL INFORMATION]
The table set forth in 5.1(a) of the 1994 Agreement shall be amended
and replaced to read in full as follows:
5.1 Minimum Annual Purchases.
5.1(a) Minimum Purchases Necessary to Maintain Exclusive
License. The parties agree that SICPA shall purchase from Flex
minimum amounts of OVP set forth below for the periods indicated:
Year Minimum Maximum
[CONFIDENTIAL INFORMATION]
Section 14 of the 1994 Agreement shall be amended and replaced
to read in full as follows:
14. Liquidated Damages for Cancellation or Breach.
SICPA acknowledges: (i) that the price specified for the sale of OVP
in Section 4.3 above is based on the commitment of SICPA to
purchase the entire minimum quantity specified hereunder;
(ii) that Flex has advised SICPA that the price specified is
substantially below the price that Flex would normally charge for
the OVP and is being specially allowed by Flex as a concession to
help SICPA develop the market for its inks using OVP; and (iii)
that Flex has further advised SICPA that Flex's binding itself
to SICPA on an exclusive basis for the Exclusive Products and
the Fields during the Term will cause Flex to forego the opportunity
to pursue other business opportunities for the commercial
exploitation of OVP manufactured by it. The parties agree that if
SICPA were to breach its covenant to purchase the minimum quantity
of OVP during the Term, the resulting damages would be
impracticable or extremely difficult to determine, because of
Flex's inability to establish with certainty the magnitude and
extent of the opportunities lost due to its exclusive commitment
to the SICPA Parties hereunder. Because of this difficulty the
parties agree that, in the event of the termination of this
Agreement because of such breach or in the event SICPA cancels
this Agreement before the Term expires or fails to purchase the
minimum amount of OVP required to be purchased during any of
the periods running from 1/1/1995 through 10/31/2000, 11/1/2000
through 10/31/2005 or 11/1/2005 through 12/31/2009, SICPA shall
pay damages to Flex as follows:
The "OVP Shortfall" for the period shall be calculated by
subtracting the aggregate amount of OVP purchased during the
entirety of such period from the sum of the minimum purchase
requirements for the entire period. The damages shall then
be calculated from the following table:
OVP Shortfall Damages
[CONFIDENTIAL INFORMATION]
For example, if this Agreement is terminated during the second
period 11/1/2000-10/31/2005 and total purchases over the second
period were [CONFIDENTIAL INFORMATION] kg less than the minimum
(so the OVP shortfall is [CONFIDENTIAL INFORMATION] kg), the
amount of liquidated damages for the second five-year period would be
[CONFIDENTIAL INFORMATION] plus [CONFIDENTIAL INFORMATION] or
[CONFIDENTIAL INFORMATION] plus liquidated damages for the third
period based upon the OVP Shortfall for that period. The OVP
Shortfall for the third period 11/1/2005-12/31/2009 will be based
upon the minimum quantities in effect for annual periods after
11/1/2000, i.e., [CONFIDENTIAL INFORMATION] kg. Unless the parties
otherwise agree pursuant to Section 3, the minimum quantities
would be [CONFIDENTIAL INFORMATION] kg per year and the OVP
Shortfall for the period 11/1/2005-12/31/2009 would be
[CONFIDENTIAL INFORMATION] kg.
Section 17 of the 1994 Agreement shall be amended and replaced to
read in full as follows:
17. Notices. All notices hereunder shall be in writing and
shall be deemed to have been given either (i) when received, if
delivered in person or transmitted by tested telex or facsimile, or
(ii) three business days after having been mailed by registered or
certified mail addressed as follows:
To Flex: Flex Products, Inc.
1402 Mariner Way
Santa Rosa, California 95407-7370
Attn: Michael Sullivan
FAX: (707) 525-7725
To SICPA: SICPA Holding S.A.
Avenue de Florissant 41
1008 Prilly
Switzerland
Attention: President
FAX: 41-21-627-5505
or to such changed address as such party may have fixed by notice
provided that any notice of change of address shall be deemed to have
been given when received.
IN WITNESS WHEREOF, each of the parties hereto has caused this
Amendment to be duly executed, and intends this Agreement to be effective,
as of the date first set forth above.
FLEX PRODUCTS, INC., a Delaware corporation
By /s/HERBERT M. DWIGHT, JR.
SICPA HOLDING S.A., a Swiss corporation
By /s/MAURICE A. AMON
By /s/HANS J. LOLIGER
EXHIBIT B
REGISTRATION RIGHTS
1. Demand Registrations
a. Requests for Registration.
(i) Subject to the terms and conditions hereof, at any time and
from time to time after the date of the first Public Offering of Flex
Common Stock SICPA may request in writing registration under the
Securities Act of 1933, as amended (the "Securities Act"), of all or
part of its Common Stock (any such requested registration is
hereinafter referred to as a "Demand Registration"). The number of
Demand Registrations SICPA shall be entitled to request shall be two
(2).
(ii) An SEC registration of Common Stock shall not be counted as
a Demand Registration for purposes of the limit in Section 1.a.(i) of
this Exhibit B until such registration has become effective (unless
such Demand Registration has not become effective due solely to the
fault of SICPA). Each request for a Demand Registration shall specify
the approximate number of shares of Common Stock requested to be
registered and the anticipated per share price range for such
offering.
(iii) If, in connection with any Demand Registration, the
managing underwriter(s) to Flex in connection with such SEC
registration advises Flex in writing that, in its opinion, the number
of shares of Common Stock to be registered would materially and
adversely affect the success or price of the offering, then the number
of shares to be included in such Demand Registration shall be reduced
to the number recommended by such managing underwriter(s). Any such
reduction shall be effected by (1) first reducing or eliminating the
number of shares of Common Stock (if any) requested to be included in
such registration by any shareholders of Flex other than SICPA and (2)
then, if and to the extent further reductions are necessary, by
reducing the number of shares of Common Stock requested to be included
therein by SICPA. If by such reduction the number of shares of Common
Stock included in such registration for SICPA represents less than
one-third of the total number of shares requested to be registered by
SICPA, then such registration shall not be counted against the number
of Demand Registrations to which SICPA is entitled under Section
1.a.(i) hereof.
b. Best Efforts. Flex shall promptly and diligently use its best
efforts to effect the registration under the Securities Act of the Common
Stock which Flex has been so requested to register by SICPA. Flex shall
use its best efforts to effect such registration on whichever registration
form the Board of Directors of Flex shall determine in its discretion is
appropriate in accordance with the intended method of disposition of such
shares; provided, however, that Flex shall use its best efforts to effect
such registration on SEC Form S-3 (or any successor form to Form S-3) if so
requested by SICPA unless (1) Form S-3 (or any successor form to Form S-3)
is not available for such offering, (2) the aggregate net offering price
(after deducting any underwriting discounts and commissions) of the shares
to be so registered is less than $1,000,000, or (3) Flex shall notify SICPA
that, in the good faith judgment of the Board of Directors of Flex, it
would not be in the best interests of Flex and its stockholders for a Form
S-3 registration to be effective at that time.
c. Restrictions on Demand Registrations. Flex's obligation to use
its best efforts to effect a Demand Registration pursuant to this Section 1
is subject to each of the following limitations, conditions, qualifications
and provisions:
(i) Flex will not be obligated to effect any Demand Registration
within any time period (not to exceed six months) requested by the
managing underwriter(s) of any previous registered offering of Common
Stock.
(ii) Flex shall be entitled to postpone the filing of any
registration statement otherwise required to be prepared and filed by
Flex pursuant to any Demand Registration for a reasonable period of
time, but not in excess of 90 days, if Flex determines in its
reasonable judgment and in good faith that the registration and
distribution of Common Stock under such Demand Registration would have
an adverse effect on any pending or proposed equity or debt financing,
acquisition, merger, consolidation, tender offer, corporate
reorganization or similar transaction involving Flex or would require
premature disclosure thereof. In such event, Flex shall promptly give
SICPA written notice of such determination, containing a general
statement of the reasons for such postponement. If Flex shall so
postpone the filing of a registration statement, SICPA shall have the
right to withdraw the Demand Registration by giving written notice to
Flex within twenty (20) days after receipt of the postponement notice.
In the event of such withdrawal, such Demand Registration shall not be
counted for purposes of determining the number of Demand Registrations
to which SICPA is entitled under Section 1.a.(i) of this Exhibit B.
(d) Selection of Underwriters. Flex shall have the right to select
the managing underwriter(s) for any Demand Registration, subject to SICPA's
approval, which approval will not be unreasonably withheld.
2. Piggyback Registrations
a. Right to Piggyback. Subject to the limitations set forth in
Section 2.b. of this Exhibit B, at any time and from time to time after the
date of the first Public Offering of Flex Common Stock whenever Flex
proposes to register under the Securities Act any Common Stock, Flex will
give prompt written notice to SICPA of its intention to effect such a
registration and will use its best efforts to include in such registration
all shares of Common Stock with respect to which SICPA gives Flex written
request for inclusion therein within fifteen (15) days after the receipt of
Flex's notice (any such requested inclusion is hereinafter referred to as a
"Piggyback Registration").
b. Restrictions on Piggyback Registrations. Flex's obligation to
use its best efforts to effect any registration pursuant to this Section 2
is subject to each of the following limitations, conditions, qualifications
and provisions:
(i) If, at any time before or after giving written notice
pursuant to this Section 2 of its intention to register shares of
Common Stock and prior to the effective date of the registration
statement filed in connection with such registration, Flex shall
determine for any reason not to proceed with such registration, Flex
may give written notice of such determination to SICPA and thereupon
shall be relieved of its obligation to use its best efforts to
register any shares of Common Stock in connection with such
registration, but without prejudice to the rights of SICPA to request
that such registration be effected as a Demand Registration pursuant
to the terms and conditions of Section 1.
(ii) If, in the written opinion of the managing underwriter(s) of
Flex in connection with any registration pursuant to this Section 2,
the distribution of the additional securities requested to be included
in such registration by SICPA ("Piggyback Shares") would materially
and adversely affect the success or the price of the offering, then
the number of shares to be included in such registration shall be
reduced to the number recommended by such managing underwriter(s).
Any such reduction shall be effected by (1) first reducing or
eliminating the number of shares of Common Stock (if any) requested to
be included in such registration by any shareholders of Flex other
than SICPA, and (2) then, if and to the extent further reductions are
necessary, by reducing the number of Piggyback Shares.
(iii) Flex shall not be obligated to effect any Piggyback
Registration of Common Stock under this Section 2 incidental to the
registration of any shares of Common Stock (A) filed on SEC Form S-4
or any successor form thereto, (B) in connection with any merger,
consolidation, acquisition, exchange offer, recapitalization or other
reorganization of Flex or (C) in connection with any offering of
securities made solely to stockholders of Flex.
c. Selection of Underwriters. Flex shall have the right to select
the managing underwriter(s) for any Piggyback Registration, which selection
will be made by Flex in its sole discretion.
3. Holdback Agreements
SICPA agrees not to effect any public sale or distribution of Common
Stock during the seven (7) days prior to, and the ninety (90) day period
beginning on, the effective date of any Demand Registration or any
Piggyback Registration, as the case may be (except as part of such
registration), unless Flex and the underwriter(s) managing the registered
offering otherwise agree to a shorter period.
4. Registration Procedures
a. Flex's Efforts. Whenever SICPA requests that its shares of
Common Stock be registered pursuant to this Agreement, Flex will use its
best efforts to effect the registration and the sale of such shares in
accordance with the intended method of disposition thereof, and pursuant
thereto Flex will as expeditiously as possible:
(i) prepare and file with the SEC a registration statement with
respect to such shares of Common Stock and use its best efforts to
cause such registration statement to become effective (provided that,
before filing a registration statement or prospectus or any amendments
or supplements thereto, Flex will furnish to the counsel of SICPA such
registration statement and copies of all such other documents proposed
to be filed);
(ii) prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus used in
connection therewith as may be necessary to keep such registration
statement effective for a period of not less than ninety (90) days,
and comply with the provisions of the Securities Act with respect to
the disposition of all shares of Common Stock covered by such
registration statement during such period and until the earlier of
such time as all of such shares of Common Stock have been disposed of
in accordance with the intended methods of disposition by SICPA set
forth in such registration statement or the expiration of sixty (60)
days after such registration statement becomes effective, SICPA being
hereby required promptly to inform Flex in writing when the
distribution of such securities pursuant to such registration
statement has been completed);
(iii) furnish to SICPA such number of conformed copies of
such registration statement, each amendment and supplement thereto,
the prospectus included in such registration statement (including each
preliminary prospectus) and such other documents as SICPA may
reasonably request in order to facilitate the disposition of the
shares of Common Stock owned by SICPA;
(iv) use its best efforts to register or qualify such shares of
Common Stock under such other securities or blue sky laws of such
jurisdictions as SICPA may reasonably request and do any and all other
acts and things which may be reasonably necessary or advisable to
enable SICPA to consummate the disposition of Common Stock in such
jurisdictions (provided that Flex will not be required to (A) qualify
generally to do business in any jurisdiction where it would not
otherwise be required to qualify but for this subparagraph, (B)
subject itself to taxation in any such jurisdiction or (C) consent to
general service of process in any such jurisdiction);
(v) use its best efforts to list all such shares of Common Stock
on each securities exchange or quotation service on which similar
securities issued by Flex are then listed, if any;
(vi) provide a transfer agent and registrar for all such shares
of Common Stock not later than the effective date of such registration
statement;
(vii) enter into such customary agreements (including
underwriting agreements in customary form) and take all such other
actions as SICPA may reasonably request in order to expedite or
facilitate the disposition of such shares of Common Stock (including,
without limitation, effecting a stock split or a combination of shares
applicable to all shareholders of Flex equally);
(viii) make available for inspection by SICPA, any
underwriter(s) participating in any disposition pursuant to such
registration statement, and any attorney, accountant or other agent
retained by SICPA or the underwriter(s), all financial and other
records, pertinent corporate documents and properties of Flex, and
cause Flex's officers, directors, employees and independent
accountants to supply all information reasonably requested by SICPA or
the underwriter(s), or any attorney, accountant or agent of SICPA or
the underwriter(s) in connection with such registration statement;
(ix) otherwise use its best efforts to comply with all applicable
rules and regulations of the SEC, and make available to its security
holders, as soon as reasonably practicable, an earnings statement
covering the period of at least twelve months beginning with the first
day of Flex's first full calendar quarter after the effective date of
the registration statement, which earnings statement shall satisfy the
provisions of Section 11(a) of the Securities Act;
(x) in the event of the issuance of any stop order suspending
the effectiveness of a registration statement, or of any order
suspending or preventing the use of any related prospectus or
suspending the qualification of any shares of Common Stock included in
such registration statement for sale in any jurisdiction, Flex will
use its best efforts promptly to obtain the withdrawal of such order;
(xi) obtain a cold comfort letter from Flex's independent public
accountants in customary form and covering such matters of the type
customarily covered by cold comfort letters as SICPA may reasonably
request; and
(xii) promptly notify SICPA: (A) when any registration
statement, any pre-effective amendment, the prospectus or any
prospectus supplement related thereto or post-effective amendment to
such registration statement has been filed, and, with respect to such
registration statement or any post-effective amendment, when the same
has become effective; (B) of any request by the SEC for amendments or
supplements to such registration statement or the prospectus related
thereto or for additional information; (C) of the issuance by the SEC
of any stop order suspending the effectiveness of such registration
statement or the initiation of any proceedings for that purpose; (D)
of the receipt by Flex of any notification with respect to the
suspension of the qualification of any of the shares of Common Stock
for sale under the securities or blue sky laws of any jurisdiction or
the initiation of any proceeding for such purpose; and (E) of the
existence of any fact of which Flex becomes aware which results in
such registration statement, the prospectus related thereto or any
document incorporated therein by reference containing an untrue
statement of a material fact or omitting to state a material fact
required to be stated therein or necessary to make any statement
therein in light of the circumstances under which they were made not
misleading; and, in the case of the notification relating to an event
described in clause (E) hereof, Flex shall promptly prepare and
furnish to SICPA and each underwriter, if any, a reasonable number of
copies of a prospectus supplemented or amended so that, as thereafter
delivered to the purchasers of any such Common Stock, such prospectus
shall not include an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to
make the statements therein in the light of the circumstances under
which they were made not misleading.
b. SICPA's Efforts. SICPA shall cooperate with Flex in the
registration of any shares of Common Stock owned by SICPA by (1) furnishing
promptly to Flex such information regarding SICPA, the distribution of the
shares to be registered and any other information that Flex may reasonably
request in connection with the registration and (2) completing and
executing all questionnaires, powers of attorney, underwriting agreements
and other documents reasonably required in connection with the
registration. SICPA hereby agrees that, upon receipt of any notice of the
happening of: (x) any event of the kind described in clause (C) of Section
4.a.(xii), SICPA will discontinue its disposition of shares of Common Stock
pursuant to the registration statement relating to such shares until the
stop order shall have been lifted or rescinded; (y) any event of the kind
described in clause (D) of Section 4.a.(xii), SICPA will discontinue its
disposition of shares of Common Stock pursuant to the registration
statement relating to such shares in the jurisdiction with respect to which
the suspension of the qualification of any of the shares for sale has
occurred, until the suspension shall have been lifted or rescinded; and (z)
any event of the kind described in clause (E) of Section 4.a.(xii), SICPA
will discontinue its disposition of shares of Common Stock pursuant to the
registration statement relating to such shares until the receipt by SICPA
of the copies of the supplemented or amended prospectus contemplated by
Section 4.a.(xii) and, if so directed by Flex, will deliver to Flex (at
Flex's expense) all copies, other than permanent file copies, then in the
possession of SICPA of the prospectus relating to such shares of Common
Stock. In the case of a Demand Registration, if the disposition by SICPA
of its shares of Common Stock is discontinued pursuant to the foregoing
sentence, unless Flex extends the period of effectiveness of the
registration statement by the number of days during the period from and
including the date of the giving of such notice to and including the date
when either (I) the stop order or suspension of qualification shall have
been lifted or rescinded or (II) SICPA shall have received copies of the
supplemented or amended prospectus contemplated by Section 4.a.(xii), as
the case may be, and unless SICPA continues to participate in such
registration as extended, then SICPA shall be entitled to another Demand
Registration and such discontinued or extended registration shall not be
counted against the number of Demand Registrations to which SICPA is
entitled under Section 1.a.(i) hereof.
5. Registration Expenses
For purposes of this Exhibit B, "Registration Expenses" shall mean all
expenses incident to Flex's performance of or compliance with this Exhibit
B, including without limitation, (i) all registration and filing fees, (ii)
fees and expenses of compliance with securities or blue sky laws, (iii)
printing expenses, messenger and delivery expenses, (iv) fees for listing
the securities to be registered on securities exchanges or on the National
Association of Securities Dealers automated quotation system, (v) fees and
disbursements of counsel for Flex and all independent certified public
accountants, underwriters and other persons retained by Flex, and
(vi) underwriting discounts or commissions. All Registration Expenses will
be borne by Flex, except that (i) any underwriting discounts or commissions
with respect to shares of Common Stock included either in any Demand
Registration or in any Piggyback Registration will be borne by and
allocated to SICPA in proportion to its shares so registered, (ii) SICPA
shall bear the expense of the fees and disbursements of any counsel
retained solely by SICPA and (iii) in the case of any Demand Registration,
SICPA shall bear a portion of the Registration Expenses (other than any
Registration Expenses of the type described in clauses (i) and (ii), which
are to be determined in accordance with clauses (i) and (ii)), which
portion shall be allocated to SICPA in proportion to its shares so
registered.
6. Indemnification
a. By Flex. Flex agrees to indemnify and hold harmless, to the
fullest extent permitted by law, SICPA and each of SICPA's officers and
directors and each person, if any, who controls SICPA within the meaning of
the Securities Act (each such person being hereinafter referred to as an
"Indemnified Party"), against any losses, claims, damages, liabilities and
expenses, joint or several, to which such Indemnified Party may become
subject under the Securities Act or otherwise, insofar as such losses,
claims, damages, liabilities or expenses (or actions or proceedings in
respect thereof) arise out of or are based upon (i) any untrue statement of
any material fact contained in any registration statement under which such
shares of Common Stock were registered under the Securities Act, any
preliminary prospectus or final prospectus included therein, or any
amendment thereof or supplement thereto, or any document incorporated by
reference therein, or (ii) any omission to state therein a material fact
required to be stated therein or necessary to make the statements therein
not misleading, and Flex will reimburse such Indemnified Party for any
legal or other expenses reasonably incurred by it, as and when incurred, in
connection with investigating or defending any such loss, claim, liability,
action or proceeding; provided, however, that Flex shall not be liable in
any such case to the extent that any such loss, claim, damage, liability
(or action or proceeding in respect thereof) or expense arises out of or is
based upon or is caused by (A) an untrue statement or alleged untrue
statement or omission or alleged omission made in such registration
statement, any such preliminary prospectus, final prospectus, amendment or
supplement in reliance upon and in conformity with written information
furnished to Flex by or on behalf of such Indemnified Party expressly for
use in the preparation thereof, or (B) such Indemnified Party's failure to
deliver a copy of such registration statement, prospectus, amendment or
supplement after Flex has furnished such Indemnified Party with such number
of copies of the same as such Indemnified Party may reasonably request.
Such indemnity shall remain in full force and effect regardless of any
investigation made by or on behalf of such Indemnified Party and shall
survive the transfer of such securities by such Indemnified Party.
b. By SICPA. Flex may require, as a condition to including any of
SICPA's shares of Common Stock in any registration statement filed pursuant
to Section 1 or 2 hereof, that Flex shall have received an undertaking
reasonably satisfactory to it from SICPA to indemnify and hold harmless (in
the same manner and to the same extent as set forth in paragraph (a) of
this Section 6) Flex, each director of Flex, each person named as or about
to become a director of Flex, each officer of Flex and each other person,
if any, who controls Flex within the meaning of the Securities Act, with
respect to any statement in or omission from such registration statement,
any preliminary prospectus or final prospectus included therein, or any
amendment thereof or supplement thereto, if such statement or omission was
made in reliance upon and in conformity with written information expressly
furnished to Flex by or on behalf of SICPA for use in the preparation of
such registration statement, preliminary prospectus, final prospectus,
amendment or supplement; provided, however, that such indemnity shall be
limited to the amount of the net proceeds received by SICPA from the sale
of shares of Common Stock pursuant to such registration statement, except
in the case of any material misstatement or omission knowingly and
willfully made by SICPA in written information expressly furnished to Flex
or the underwriters by or on behalf of SICPA for use in the preparation of
such registration statement, preliminary prospectus, final prospectus,
amendment or supplement, as to which no such limitation shall apply. Such
indemnity shall remain in full force and effect regardless of any
investigation made by or on behalf of Flex or any such director, officer or
controlling person and shall survive the transfer of such securities by
SICPA.
c. Procedural Matters. A party from whom indemnity shall be sought
pursuant to the provisions of this Section 6 shall not be liable with
respect to such indemnity under paragraph (a) or (b) of this Section 6
unless the indemnified party shall have given written notice to such
indemnifying party of the nature of such claim promptly after receipt by
such indemnified party of notice of the commencement of any action or
proceeding involving such claim; provided, however, that the failure of any
indemnified party to give notice as provided herein shall not relieve such
indemnifying party from any liability which it may have to such indemnified
party (X) otherwise than on account of this Section 6 or (Y) except to the
extent that the failure to give such notice shall have been materially
prejudicial to such indemnifying party. Unless in the reasonable judgment
of the indemnified party a conflict of interest between such indemnified
and indemnifying parties may exist with respect to such claim, the
indemnifying party shall be entitled to participate in and to assume the
defense of any such claim, jointly with any other indemnifying party
similarly notified, to the extent that it may wish, with counsel reasonably
satisfactory to such indemnified party, and after notice from the
indemnifying party to such indemnified party of its election so to assume
the defense thereof, the indemnifying party shall not be liable to such
indemnified party for any legal or other expenses subsequently incurred by
the indemnified party in connection with the defense thereof. In the case
of conflict of interest as set forth above, the indemnifying party shall
pay the reasonable fees and expenses of one counsel for all parties
indemnified by such indemnifying party with respect to such claim. In no
event will the indemnifying party be subject to any liability for any
settlement made by any indemnified party without its consent.
7. Participation in Underwritten Registrations
SICPA may not participate in any registration hereunder which is
underwritten unless SICPA (a) agrees to sell its securities on the basis
provided in any underwriting arrangements approved by the person or persons
entitled to approve such arrangements and (b) completes and executes all
questionnaires, powers of attorney, indemnities, underwriting agreements
and other documents required under the terms of such underwriting
arrangements.
8. Definitions
Unless otherwise defined herein, all capitalized terms shall have the
meaning ascribed thereto in the Settlement Agreement to which these
Registration Rights are an Exhibit.
9. Assignment
SICPA may assign its rights and duties hereunder to any person who
acquires from SICPA shares of Common Stock.
EXHIBIT C
SECOND AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
FLEX PRODUCTS, INC.
JOSEPH C. ZILS, Secretary of FLEX PRODUCTS, INC., a corporation
organized and existing under the laws of the State of Delaware, hereby
certifies as follows:
A. The name of the corporation is FLEX PRODUCTS, INC. FLEX
PRODUCTS, INC. was originally incorporated in the State of Delaware under
the same name, and the original Certificate of Incorporation of the
corporation was filed with the Delaware Secretary of State on October 28,
1988.
B. Pursuant to Sections 242 and 245 of the General Corporation Law
of the State of Delaware, this Restated Certificate of Incorporation
restates and integrates and further amends the provisions of the
Certificate of Incorporation of this corporation.
C. This Second Amended and Restated Certificate of Incorporation was
duly adopted by the Board of Directors with approval by the stockholders of
the corporation by the necessary number of shares as required by statute.
D. The text of the Certificate of Incorporation as heretofore
amended or supplemented is hereby restated and further amended to read in
its entirety as follows:
I.
NAME
The name of the corporation is FLEX PRODUCTS, INC. (the
"Corporation").
II.
AUTHORIZED BUSINESS
The nature of the business or purposes to be conducted or promoted by
the Corporation is to engage in any lawful act or activity for which
corporations may be organized under the General Corporation Law of Delaware
(the "Delaware Law").
III.
CAPITAL STOCK
1. This Corporation is authorized to issue two classes of shares
designated respectively as "Common Stock" and one class of shares
designated as "Preferred Stock," and referred to herein as Class A Common
Stock or Class A Common shares, Class B Common Stock or Class B Common
shares and Preferred Stock or Preferred shares, respectively. The number
of shares of Class A Common Stock is 20,000,000, the number of shares of
Class B Common Stock is 12,500,000 and the number of shares of Preferred
Stock is 1,000. Each share of Class A Common Stock, Class B Common Stock
and Preferred Stock shall have a par value of $.01. Each share of common
stock of this Corporation, par value $.01, formerly issued and outstanding
immediately prior to the effective time of this Second Amended and Restated
Certificate of Incorporation is by this means reclassified and changed into
100 shares of Class B Common Stock, and the stated capital of this
Corporation shall be increased accordingly by an appropriate transfer from
earned surplus.
2. The Preferred shares may be issued from time to time in one or
more series. Except for the Series B Preferred Stock and the Series C
Preferred Stock, the rights, privileges and preferences of which are set
forth in Section III.3 and III.4 below, respectively, the Board of
Directors is hereby authorized to fix or alter the dividend rights,
dividend rate, conversion rights, voting rights, rights and terms of
redemption (including sinking fund provisions), the redemption price or
prices, and the liquidation preferences of any wholly unissued series of
Preferred shares, and the number of shares constituting any such series and
the designation thereof, or any of them; and to increase or decrease the
number of shares of any series subsequent to the issue of shares of that
series, but not below the number of shares of such series then outstanding.
In case the number of shares of any series shall be so decreased, the
shares constituting such decrease shall resume the status in which they had
prior to the adoption of the resolution originally fixing the number of
shares of such series.
3. Of the Preferred shares, a total of 12 are designated as Series B
Preferred Stock, with the specific rights, privileges and preferences as
follows:
a. Voting Rights. Except as otherwise provided in Sections
III.3.f and III.3.g below, the holders of Series B Preferred shares shall
have no voting rights.
b. Redemptions.
i. Mandatory Redemptions. The Corporation will redeem all
or such lesser number of its Series B Preferred shares (or fractions
thereof), as, whenever and to the full extent that funds became lawfully
available therefor (but only to the extent of current or retained earnings
determined in accordance with generally accepted accounting principles
consistently applied) at a price per share of $150,000 (the "Redemption
Price"). The Corporation shall not declare or pay dividends on, make any
other distributions on, or redeem or purchase or otherwise acquire for
consideration any shares of any other class or series of its capital stock
other than a redemption of shares of Series C Preferred Stock until such
time as all Series B Preferred shares have been redeemed. If the funds of
the Corporation legally available for redemption of Series B Preferred
Stock at the time of any such redemption are insufficient to redeem the
Series B Preferred shares in full, those funds which are legally available
shall be used to redeem the maximum number legally possible of shares or
fractions thereof of Series B Preferred Stock.
ii. Determination of Number of Redeemable Shares. The
number of shares to be set forth in the redemption notice described in
Section III.3.b.iii below to be redeemed from each holder of Series B
Preferred Stock in redemptions under this Section III.3.b will be the
number of shares determined, as nearly as practicable to the nearest full
share, by multiplying the total number of Series B Preferred shares to be
redeemed times a fraction, (1) the numerator of which is the total number
of outstanding Series B Preferred shares then held by such holder and
(2) the denominator of which is the total number of Series B Preferred
shares then outstanding.
iii. Notice of Redemption. Notice of any redemption of
Series B Preferred Stock pursuant to this Section III.3.b specifying the
time and place of redemption and the redemption price will be mailed by
certified or registered mail, return receipt requested, to each holder of
record of Series B Preferred Stock at the address of such holder shown on
the Corporation's records, not more than 60 days nor less than 30 days
prior to the date on which such redemption is to be made. If less than all
Series B Preferred Stock owned by a holder is then to be redeemed, the
notice will also specify the number of shares and the certificate numbers
thereof which are to be redeemed. Upon mailing any such notice of
redemption, the Corporation will become obligated to redeem on the date of
redemption specified therein all Series B Preferred Stock specified
therein. In case less than all Series B Preferred Stock represented by any
certificate are redeemed in any redemption pursuant to this Section
III.3.b, a new certificate will be issued representing the unredeemed
Series B Preferred Stock without cost to the holder thereof.
iv. Method of Redemption. If on, prior to or after any
date fixed for redemption of the Series B Preferred Stock, the Corporation
shall deposit, with any bank or trust company in the State of California,
as a trust fund, a sum sufficient to redeem, as of the date fixed for
redemption thereof, the shares called for redemption, with irrevocable
instructions and authority to the bank or trust company to pay, on or after
the date fixed for redemption, the redemption price of the shares to their
respective holders upon surrender of their share certificates, then from
and after the later of the date fixed for redemption or the date of
deposit, but not until such date, the shares so called shall be redeemed
and dividends shall cease to accrue after the date fixed for redemption.
The deposit shall constitute full payment of the shares to their holders,
and from and after the date of the deposit the shares shall no longer be
outstanding, and the holders thereof shall cease to be stockholders with
respect to such shares, and shall have no rights with respect thereto
except the right to receive from the bank or trust company payment of the
redemption price of the shares without interest, upon the surrender of
their certificates therefor. If the holders of Series B Preferred shares
so called for redemption shall not have claimed, at the end of six months
from the date fixed for redemption, any funds so deposited, such bank or
trust company shall thereupon pay over to the Corporation such unclaimed
funds, and such bank or trust company shall thereafter be relieved of all
responsibility in respect thereof to such holders, and such holders shall
look only to the Corporation for payment of the redemption price.
c. Conversion. The Series B Preferred shares shall not be
convertible.
d. Reacquired Shares. Any Series B Preferred shares purchased
or otherwise acquired by the Corporation in any manner whatsoever shall be
retired and cancelled promptly after the acquisition thereof. All such
shares shall, upon their cancellation, become authorized but unissued
Preferred shares and may be reissued as part of a new series of Preferred
Stock to be created by resolution or resolutions of the Board of Directors,
subject to the conditions and restrictions on issuance set forth herein.
e. Liquidation, Dissolution, Winding Up or Merger, etc. upon
any liquidation (voluntary or otherwise), dissolution or winding up of the
Corporation, no distribution shall be made to the holders of shares of any
other class or series of capital stock until all then outstanding Series B
Preferred shares shall have been redeemed (the "Series B Liquidation
Preference"); provided however, that the Series B Liquidation Preference
may only be paid out of, and only ranks prior to all other classes and
series of stock to the extent of current or retained earnings determined in
accordance with generally accepted accounting principles consistently
applied.
f. Ranking. Except as set forth in Section III.4.f with
respect to the Corporation's Series C Preferred Stock, the Series B
Preferred Stock shall rank prior to all other series and classes of the
Corporation's capital stock as to the payment of dividends and the
distribution of assets, but only to the extent provided herein, and the
Corporation may not create any series or class of capital stock ranking
prior to or, as to the Series B Liquidation Preference or the preference of
the Series B Preferred Stock as to dividends and distributions, on a parity
with the Series B Preferred Stock unless the terms of any such series or
class shall first be approved by not less than 66 2/3% of the outstanding
shares of Series B Preferred Stock, voting separately as a class.
g. Amendment. The Certificate of Incorporation of the
Corporation shall not be further amended in any manner which would
materially alter or change the powers, preferences or special rights of the
Series B Preferred Stock so as to affect them adversely without the
affirmative vote of the holders of not less than 66 2/3% of the outstanding
Series B Preferred shares, voting separately as a class.
h. Fractional Shares. Series B Preferred Stock may be issued
in fractions of a share, which shall entitle the holder thereof, in
proportion to such holder's fractional shares, to exercise voting rights,
receive dividends, participate in distributions and to have the benefit of
all of the rights of holders of shares of Series B Preferred Stock.
4. Of the Preferred shares, a total of 10 are designated Series C
Preferred Stock, with the specific rights, privileges and preferences as
follows:
a. Voting Rights. Except as otherwise provided in Section
III.4.f and III.4.g below, the holders of Series C Preferred Shares shall
have no voting rights.
b. Redemptions.
i. Mandatory Redemption. The Corporation will redeem, at
a price per share of One Hundred Fifty Thousand Dollars ($150,000) (the
"Redemption Price") as soon as, whenever, and to the full extent that funds
become lawfully available therefor after February 1, 1998 (but only to the
extent of current or retained earnings determined in accordance with
generally accepted accounting principles consistently applied) shares of
Series C Preferred Stock (or fractions thereof). The Corporation shall not
declare or pay dividends on, make any other distributions on, or redeem or
purchase or otherwise acquire for consideration any shares of any other
class or series of its capital stock other than a redemption of shares of
Series B Preferred Stock until such time as all shares of Series C
Preferred Stock have been redeemed. If the funds of the Corporation
legally available for redemption of Series C Preferred Stock at the time of
any such redemption are insufficient to redeem the shares of Series C
Preferred Stock in full, those funds which are legally available shall be
used to redeem the maximum number legally possible of shares (or fractions
thereof) of Series C Preferred Stock.
ii. Determination of Number of Redeemable Shares. The
number of shares to be set forth in the redemption notice described in
Section III.4.b.iii below to be redeemed from each holder of Series C
Preferred Stock in redemptions under this Section III.4.b will be the
number of shares determined, as nearly as practicable to the nearest share,
by multiplying the total number of shares of Series C Preferred Stock to be
redeemed times a fraction, (i) the numerator of which is the total number
of outstanding shares of Series C Preferred Stock then held by such holder
and (ii) the denominator of which is the total number of shares of Series C
Preferred Stock then outstanding.
iii. Notice of Redemption. Notice of any redemption of
Series C Preferred Stock pursuant to this Section III.4.b specifying the
time and place of redemption and the redemption price will be mailed by
certified or registered mail, return receipt requested, to each holder of
record of Series C Preferred Stock at the address of such holder shown on
the Corporation's records, not more than sixty (60) nor less than thirty
(30) days prior to the date on which such redemption is to be made. If
less than all Series C Preferred Stock owned by a holder is then to be
redeemed, the notice will also specify the number of shares and the
certificate numbers thereof which are to be redeemed. Upon mailing any
such notice of redemption, the Corporation will become obligated to redeem
on the date of redemption specified therein all Series C Preferred Stock
specified therein. In case less than all Series C Preferred Stock
represented by any certificate is redeemed in any redemption pursuant to
this Section III.4.b, a new certificate will be issued representing the
unredeemed Series C Preferred Stock without cost to the holder thereof.
iv. Method of Redemption. If on, prior to or after any
date fixed for redemption of the Series C Preferred Stock, the Corporation
shall deposit, with any bank or trust company in the State of California,
as a trust fund, a sum sufficient to redeem, as of the date fixed for
redemption thereof, the shares called for redemption, with irrevocable
instructions and authority to the bank or trust company to pay, on or after
the date fixed for redemption, the redemption price of the shares to their
respective holders upon surrender of their share certificates, then from
and after the later of the date fixed for redemption or the date of
deposit, but not until such date, the shares so called shall be redeemed
and dividends shall cease to accrue after the date fixed for redemption.
The deposit shall constitute full payment of the shares to their holders,
and from and after the date of the deposit the shares shall no longer be
outstanding, and the holders thereof shall cease to be stockholders with
respect to such shares, and shall have no rights with respect thereto
except the right to receive from the bank or trust company payment of the
redemption price of the shares without interest, upon the surrender of
their certificates therefor. If the holders of shares of Series C
Preferred Stock so called for redemption shall not have claimed, at the end
of six (6) months from the date fixed for redemption, any funds so
deposited, such bank or trust company shall thereupon pay over to the
Corporation such unclaimed funds, and such bank or trust company shall
thereafter be relieved of all responsibility in respect thereof to such
holders, and such holders shall look only to the Corporation for payment of
the redemption price.
c. Conversion. The shares of Series C Preferred Stock shall
not be convertible.
d. Reacquired Shares. Any shares of Series C Preferred Stock
purchased or otherwise acquired by the Corporation in any manner whatsoever
shall be retired and cancelled promptly after the acquisition thereof. All
such shares shall upon their cancellation become authorized but unissued
shares of Preferred Stock and may be reissued as part of a new series of
Preferred Stock to be created by resolution or resolution of the Board of
Directors, subject to the conditions and restrictions on issuance set forth
herein.
e. Liquidation, Dissolution, Winding Up or Merger, etc. Upon
any liquidation (voluntary or otherwise), dissolution or winding up of the
Corporation, no distribution shall be made to the holders of shares of any
other class or series of capital stock until all then outstanding shares of
Series C Preferred Stock shall have been redeemed (the "Series C
Liquidation Preference"); provided, however, that the Series C Liquidation
Preference may only be paid out of, and only ranks prior to all other
classes and series of stock to the extent of, current or retained earnings
determined in accordance with generally accepted accounting principles
consistently applied.
f. Ranking. Except as set forth in Section III.3.f. with
respect to the Corporation's Series B Preferred Stock, the Series C
Preferred Stock shall rank prior to all other series and classes of the
Corporation's capital stock as to the payment of dividends and the
distribution of assets, but only to the extent provided herein, and the
Corporation may not create any series or class of capital stock ranking
prior to or, as to the Series C Liquidation Preference or the preference of
the Series C Preferred Stock as to dividends and distributions, on a parity
with the Series C Preferred Stock unless the terms of any such series or
class shall be approved by not less than sixty-six and two-thirds percent
(66 2/3%) of the outstanding shares of Series C Preferred Stock, voting
separately as a class.
g. Amendment. The Certificate of Incorporation of the
Corporation shall not be further amended in any manner which would
materially alter or change the powers, preferences or special rights of the
Series C Preferred Stock so as to affect them adversely without the
affirmative vote of the holders of not less than sixty-six and two-thirds
percent (66 2/3%) of the outstanding shares of Series C Preferred Stock,
voting separately as a class.
h. Fractional Shares. Series C Preferred Stock may be issued
in fractions of a share which shall entitle the holder thereof, in
proportion to such holder's fractional shares, to exercise voting rights,
receive dividends, participate in distributions and to have the benefit of
all of the rights of holders of shares of Series C Preferred Stock.
5. Each share of the Class A Common Stock, par value $.01 (the
"Class A Common Stock), and each share of the Class B Common Stock, par
value $.01 per share (the "Class B Common Stock"), of the Corporation
shall, except as otherwise provided in this paragraph 5, be identical in
all respects and shall have equal rights and privileges.
a. Voting Rights. Holders of Class A Common Stock shall be
entitled to one vote for each share of such stock held, and holders of
Class B Common Stock shall be entitled to ten votes for each share of such
stock held on all matters presented to such stockholders. Except as may
otherwise be required by the laws of the State of Delaware or in the
instrument creating or evidencing any class or series of Preferred Stock,
the holders of shares of Class A Common Stock and the holders of shares of
Class B Common Stock shall vote with the holders of Preferred stock, if
any, as one class with respect to the election of directors and with
respect to all other matters to be voted on by stockholders of the
Corporation (including, without limitation, any proposed amendment to this
Certificate that would increase the number of authorized shares of Class A
Common Stock, of Class B Common Stock or of any class or series of stock
(but not below the number of shares thereof then outstanding), and no
separate vote or consent of the holders of shares of Class A Common Stock,
the holders of shares of Class B Common Stock or the holders of shares of
Preferred Stock shall be required for the approval of any such matter.
b. Conversion Rights. Each share of Class B Common Stock shall
be convertible, at the option of the holder thereof, into one share of
Class A Common Stock. Any such conversion may be effected by any holder of
Class B Common Stock by surrendering such holder's certificate or
certificates for the Class B Common Stock to be converted, duly endorsed,
at the office of the Corporation or any transfer agent for the Class B
Common Stock, together with a written notice to the Corporation at such
office that such holder elects to convert all or a specified number of
shares of Class B Common Stock represented by such certificate and stating
the name or names in which such holder desires the certificate or
certificates for Class A Common Stock to be issued. If so required by the
Corporation, any certificate for shares surrendered for conversion shall be
accompanied by instruments of transfer, in form satisfactory to the
Corporation, duly executed by the holder of such shares or the duly
authorized representative of such holder. Promptly thereafter, the
Corporation shall issue and deliver to such holder or such holder's
nominees, a certificate or certificates for the number of shares of Class A
Common Stock to which such holder shall be entitled as herein provided.
Such conversion shall be deemed to have been made at the close of business
on the date of receipt by the Corporation or any such transfer agent of the
certificate or certificates, notice and, if required, instruments of
transfer referred to above, and the person or persons entitled to receive
the Class A Common Stock issuable on such conversion shall be treated for
all purposes as the record holder or holders of such Class A Common Stock
on that date. A number of shares of Class A Common Stock equal to the
number of shares of Class B Common Stock outstanding from time to time
shall be set aside and reserved for issuance upon conversion of shares of
Class B Common Stock. Shares of Class B Common Stock that have been
converted hereunder shall remain treasury shares to be disposed of by
resolution of the Board of Directors. Shares of Class A Common Stock shall
not be convertible into shares of Class B Common Stock.
c. Dividends. Subject to paragraph d. of this paragraph 5,
whenever a dividend is paid to the holders of Class A Common Stock, the
Corporation also shall pay to the holders of Class B Common Stock a
dividend per share at least equal to the dividend per share paid to the
holders of the Class A Common Stock. Subject to paragraph d. of this
paragraph 5, whenever a dividend is paid to the holders of Class B Common
Stock, the Corporation shall also pay to the holders of the Class A Common
Stock a dividend per share at least equal to the dividend per share paid to
the holders of the Class B Common Stock. Dividends shall be payable only
as and when declared by the Board of Directors.
d. Share Distributions. If at any time a distribution on the
Class A Common Stock or Class B Common Stock is to be paid in Class A
Common Stock, Class B Common Stock or any other securities of the
Corporation (hereinafter sometimes called a "share distribution"), such
share distribution may be declared and paid only as follows:
(i) a share distribution consisting of Class A Common Stock
to holders of Class A Common Stock and Class B Common Stock, on an equal
per share basis; or to holders of Class A Common Stock only, but in such
event there shall also be a simultaneous share distribution to holders of
Class B Common Stock consisting of shares of Class B Common Stock on an
equal per share basis:
(ii) a share distribution consisting of Class A Common Stock
and Class B Common Stock, respectively, to holders of Class A Common Stock
and Class B Common Stock, respectively, on an equal per share basis;
(iii) a share distribution consisting of Class B Common
Stock to holders of Class B Common Stock only, but in such event there
shall also be a simultaneous share distribution to holders of Class A
Common Stock consisting of shares of Class A Common Stock on an equal per
share basis; and
(iv) a share distribution consisting of any class of
securities of the Corporation other than Common Stock, to the holders of
Class A Common Stock and the holders of Class B Common Stock, on an equal
per share basis.
The Corporation shall not reclassify, subdivide or combine one
class of its Common Stock without reclassifying, subdividing or combining
the other class of Common Stock, on an equal per share basis.
e. Liquidation and Mergers. Subject to the prior payment in
full of the preferential amounts to which any Preferred Stock is entitled,
the holders of Class A Common Stock and the holders of Class B Common Stock
shall share equally, on a share for share basis, in any distribution of the
Corporation's assets upon any liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary, after payment or provisions
for payment of the debts and other liabilities of the Corporation. Neither
the consolidation or merger of the Corporation with or into any other
corporation or corporations nor the sale, transfer or lease of all or
substantially all of the assets of the Corporation shall itself be deemed
to be a liquidation, dissolution or winding up of the Corporation within
the meaning of this subparagraph e.
IV.
DIRECTORS
The number of directors which will constitute the whole Board of
Directors of the Corporation shall be specified or determined in the manner
provided in the Bylaws of the Corporation.
V.
STOCKHOLDER MEETINGS, RECORDS
Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. The books of the Corporation may be
kept (subject to any provision contained in the Delaware Law) outside the
State of Delaware at such place or places as may be designated from time to
time by the Board of Directors or in the Bylaws of the Corporation.
VI.
CUMULATIVE VOTING
At all elections of directors of the Corporation, each holder of stock
entitled to vote for the election of directors shall be entitled to as many
votes as shall equal the number of votes which (except for this provision
as to cumulative voting) he would be entitled to cast for the election of
directors with respect to his shares of stock multiplied by the number of
directors to be elected by him, and he may cast all of such votes for a
single director or may distribute them among the number to be voted for, or
for any two or more of them as he may see fit.
VII.
SUPERMAJORITY PROVISIONS
The consent of holders of at least 67% of the then issued and
outstanding Common Stock of the Corporation shall be required, either in
writing or by vote at a meeting of stockholders called for the purpose, in
order to do or effect any of the following:
i. Amendments to the Second Restated Certificate of
Incorporation (other than for purposes of authorizing additional shares of
Class A Common Stock to be issued in an underwritten initial public
offering registered pursuant to the Securities Act of 1933, as amended, or
to be issued upon the exercise of stock options granted in accordance with
Section VII.x. hereof), any Certificate of Designations or the Bylaws of
the Corporation.
ii. Material changes in or departures from the nature of the
Corporation's business of manufacturing or selling products made by
depositing one or more layers of materials onto flexible substrates by
Roll-to-Roll Coating. For this purpose, "Roll-to-Roll Coating" shall mean
the serial steps of (1) the unwinding of a flexible substrate from a first
roll, (2) the deposition of one or more layers of materials onto the
flexible substrate and (3) the winding of the substrate onto a second roll,
provided that "Roll-to-Roll Coating" shall not include the deposition of
more than one layer of material to an area of the substrate during any
period that the substrate is motionless.
iii. Merger or consolidation or other corporate reorganization.
iv. Sale of all or substantially all of the Corporation's assets
and business.
v. Redemptions of any of the Corporation's capital stock, other
than its Series B Preferred shares, and other than from any stockholders
holding more than 5% of the Corporation's voting capital stock.
vi. Unbudgeted borrowings or assumptions of liabilities in
excess of US $2,000,000 in any single transaction or related group of
transactions, unless the Corporation shall have provided prior written
notice to each of its stockholders describing any such proposed transaction
in detail as approved by the Corporation's Board of Directors and
requesting approval of the proposed transaction with specific reference to
this Section VII.vi. and no stockholder shall have objected to such
proposed transaction within ten (10) days after receipt of such notice (in
which event, such proposed transaction may be consummated, without further
stockholder approval, in accordance with the detailed description of such
transaction contained in the notice).
vii. Unbudgeted long term lease obligations or material capital
expenditures, or other material contracts, which obligate the Corporation
to expenditures of over US $1,000,000 per year, or US $2,500,000 in the
aggregate, unless the Corporation shall have provided prior written notice
to each of its stockholders describing any such proposed transaction in
detail as approved by the Corporation's Board of Directors and requesting
approval of the proposed transaction with specific reference to this
Section VII.vii. and no such stockholder shall have objected to such
proposed transaction within ten (10) days after receipt of such notice (in
which event, such proposed transaction may be consummated, without further
stockholder approval, in accordance with the detailed description of such
transaction contained in the notice).
viii. The licensing or sale of any of the Corporation's
technology, any joint ventures, or shared research and development
projects, for uses involving the manufacture or sale of products made by
depositing one or more layers of materials onto flexible substrates by
Roll-to-Roll Coating.
ix. The issuance of any shares of the capital stock of the
Corporation, other than in an underwritten initial public offering of Class
A Common Stock registered pursuant to the Securities Act of 1933, as
amended, except upon the exercise of stock options granted in accordance
with Section VII.x hereof and except upon the exercise of warrants or other
securities convertible into Class A Common Stock, provided, that the number
of shares of Class A Common Stock issued in the aggregate upon all such
exercises may not reduce by more than seven percent (7%) the percentage of
ownership held of record by any stockholder of the Corporation on October
31, 1997 of the Class A Common Stock and Class B Common Stock, taken
together as one class for purposes of this calculation, issued and
outstanding on October 31, 1997.
x. The adoption of a stock option plan or other program
conferring rights to acquire shares of the Corporation's capital stock,
except for adoption of an employee stock option plan pursuant to which
options granted to purchase shares of the Corporation's Common Stock shall
conform to the following: (A)(x) all options granted under such a
permitted plan shall be in an aggregate amount not to exceed 20% of the
Corporation's aggregate issued and outstanding Class A Common Stock and
Class B Common Stock at the time of grant of the options, (y) shares of
Class B Common Stock issued upon exercise of options granted under such a
permitted plan shall not exceed 10% of the Corporation's issued and
outstanding Class B Common Stock at any time, and (z) all options granted
under such a permitted Plan may be granted to employees and consultants but
not directors of the Corporation. (B) All such options shall be
exercisable at an exercise price no less than fair market value on the date
of grant, and shall permit the option recipient to have the options vest no
more rapidly than ratably over a four-year period from the date of grant,
or in the alternative shall not permit the recipient to retain, free from
the Corporation's right of repurchase, any shares purchased by the option
recipient upon exercise of the option except pursuant to a vesting schedule
whereby the Corporation's right to repurchase such shares shall expire no
faster than ratably over a four-year period from the date of the grant.
(C) All of such option grants shall further provide for a right of first
refusal for the Corporation to purchase any of the shares offered for sale
by the option recipient or, if the Corporation should decline, then its
stockholders other than the option recipient, each pro rata to its
stockholdings, with the right to oversubscribe for any shares not purchased
by the other stockholders.
xi. The adoption of an annual budget, or the adoption of any
changes thereto, which anticipates a loss (provided, that for purposes of
determining whether an annual budget anticipates a loss, up to $1 million
of extraordinary losses shall be ignored) or which calls for capital
expenditures in excess of the total Operating Cash Flow for the year just
concluded and as projected for the current year, and the adoption of any
budget which allocates less funds to optically variable pigment research
and development for the current year than 3% of the optically variable
pigment sales for the preceding year. "Operating Cash Flow" for this
purpose shall mean the total of operating earnings, depreciation and
amortization.
xii. Any declaration of dividends or other stockholder
distributions.
xiii. Any election to dissolve the Corporation except where
grounds for an involuntary dissolution exist, or where the electing
stockholder has first offered its shares to the other stockholders at a
price to be negotiated or determined by a neutral appraisal, and the other
stockholders have rejected the offer to purchase the electing stockholder's
shares.
xiv. The execution of any contract or entering into of any
agreement between the Corporation and a stockholder or affiliate of a
stockholder.
VIII.
PREEMPTIVE RIGHTS
Except as provided below in this Article VIII, the Corporation shall
not offer, issue or sell, or enter into any agreements or commitments
pursuant to which it may become obligated to issue, any shares of its
Common Stock or any warrants, options or other securities convertible into
shares of its capital stock, unless the Corporation shall first offer to
sell to each of the holders of its Common Stock, on the same terms and
conditions and at the same price, all such securities proposed to be
offered by the Corporation, each pro rata to its proportionate ownership of
such stock. Each holder of Common Stock, without right of assignment,
shall have the right to purchase up to its pro rata interest of the shares
proposed to be offered by the Corporation. Such offer shall remain
outstanding for at least 30 days following the date of notice. The
foregoing preemptive rights shall not apply to the issuance by the
Corporation of (1) any stock options or stock bonuses to any employees,
directors or consultants of the Corporation or any stock sold to any
employees of the Corporation pursuant to an employee stock purchase plan;
(2) shares of stock issued pursuant to the exercise of any stock options
granted to employees, directors or consultants of the Corporation; or
(3) any shares of the Common Stock of the Corporation which are offered and
issued in an underwritten initial public offering and registered pursuant
to the Securities Act of 1933, as amended.
IX.
REGISTERED AGENT
The address of the Corporation's registered office in the State of
Delaware is Corporation Trust Center, 1209 Orange Street, Wilmington, New
Castle County, 19801. The name of the Corporation's Registered Agent at
such address is The Corporation Trust Company.
X.
LIMITATION OF LIABILITY OF DIRECTORS
A director of the Corporation shall not be liable to the Corporation
or its stockholders for monetary damages for breach of fiduciary duty as
director except for liability which, by express provision of Delaware Law
cannot be eliminated. Any repeal or amendment of the provisions of this
Article X shall not adversely affect any right or protection of any
director in respect of any act or omission occurring prior to the time of
such repeal or amendment.
XI.
INDEMNIFICATION
The Corporation is authorized to provide indemnification to the
fullest extent permitted by Section 145 of the General Corporation Law of
Delaware, as the same may be amended and supplemented, to any and all
persons whom it shall have power to indemnify under said section, and to
advance expenses, as is provided in such section, including reasonable
attorney's fees, of any and all such persons, through Bylaw provisions, by
agreement or otherwise.
IN WITNESS WHEREOF, this Restated Certificate of Incorporation has
been signed under the seal of the Corporation on November 19, 1997.
(Seal)
/s/JOSEPH C. ZILS
Joseph C. Zils, Secretary
EXHIBIT D
By-Law Amendment
Audit Committee. The Board of Directors shall appoint an Audit
Committee, the responsibility of which shall be (i) to review with
management and the corporation's independent public accountant the scope of
services required by its audit, significant accounting policies, and audit
conclusions regarding significant accounting estimates, (ii) to review with
management and the corporation's independent public accountant their
assessments of the adequacy of internal controls, and the resolution of
identified material weaknesses and reportable conditions in internal
controls, including the prevention or detection of management override or
compromise of the internal control systems, (iii) to review with management
and the corporation's independent public accountant the institution's
compliance with applicable laws, (iv) to discuss with management the
selection and termination of the corporation's independent public
accountant and any significant disagreements between the accountants and
management, (v) to oversee the internal audit function, and (vi) such other
duties as the Board of Directors may designate. The Audit Committee shall
maintain minutes and other relevant records of its meetings, shall meet at
any time upon the request of any member of the Board of Directors and shall
make a report to the full Board of Directors at the meeting of the Board of
Directors next succeeding any meeting of the Audit Committee. The
composition of the Audit Committee shall be one director designated by
SICPA, one director designated by OCLI, and one member of senior management
of the corporation who is not otherwise employed by either SICPA or OCLI.
This provision may not be amended unless and until the corporation
consummates an underwritten public offering of its common stock registered
under the Securities Act of 1933.
EXHIBIT E
FIRST AMENDMENT TO LICENSE AGREEMENT
BY AND BETWEEN
OPTICAL COATING LABORATORY, INC.
AND
FLEX PRODUCTS, INC.
NOVEMBER 19, 1997
FIRST AMENDMENT TO LICENSE AGREEMENT
FIRST AMENDMENT TO LICENSE AGREEMENT, made and entered into this 19th
day of November, 1997, by and between Optical Coating Laboratory, Inc., a
Delaware corporation, having its principal office at 2789 Northpoint
Parkway, Santa Rosa, California 95402-7397 (hereinafter referred to as
"OCLI") and Flex Products, Inc., a Delaware corporation, having its
principal place of business at 1402 Mariner Way, Santa Rosa, California
95407-7370 (hereinafter referred to as "FLEX").
W I T N E S S E T H:
WHEREAS, OCLI and FLEX are currently parties to a License Agreement
dated as of December 19, 1988 (the "License Agreement"); and
WHEREAS, OCLI and Flex wish to amend the License Agreement.
NOW, THEREFORE, in consideration of the promises and mutual covenants
herein contained, OCLI and FLEX agree as follows:
Section 2.2 of the License Agreement is hereby amended and replaced to
read in full as follows:
2.2. License to OCLI. FLEX hereby grants to OCLI, in
perpetuity, a worldwide and nontransferable (except such transfers as
are provided for in Section 7.3 hereof as to OCLI) license and right
under the FLEX TECHNOLOGY and FLEX RIGHTS exclusively in the OCLI
FIELD and nonexclusively in the SHARED FIELD; and FLEX hereby further
grants (subject to clause (ii) below) to OCLI, in perpetuity, a
worldwide license and right under the FLEX TECHNOLOGY and FLEX RIGHTS
(i) (A) on a transferable basis, to manufacture and subsequently sell
on an exclusive basis products by means of multi-layer automatic
continuous coating ("MAC") technology on rolls of extruded sheet
aluminum and (B) on a nontransferable basis (except as provided below)
to manufacture and subsequently sell on a nonexclusive basis
antireflective film for display devices using roll-to-roll coating,
and (ii) on an exclusive and nontransferable basis to manufacture and
subsequently sell products within the United States which, but only
for so long as, FLEX may neither manufacture nor sell under the laws
of the United States, provided, however, that such license under this
Section 2.2(ii) shall continue (but on a nonexclusive basis) for as
long as necessary to allow OCLI to complete performance of any
contract entered into during the period of the exclusive license. The
rights granted pursuant to Section 2.2(i)(B) may be sublicensed by
OCLI, without the right to further sublicense or transfer on the part
of the sublicensee, for the limited purpose of manufacturing for OCLI;
provided, however, that any such sublicense shall contain reasonable
confidentiality covenants and restrictions on use of the licensed
technology to prevent competition with FLEX; and further provided that
OCLI shall give SICPA notice of any such sublicense promptly after
execution.
Article IV of the License Agreement is hereby amended and replaced to
read in full as follows:
ARTICLE IV
ROYALTIES
4.1. FLEX Running Royalties. FLEX shall pay OCLI running
royalties as set forth below based on Net Sales of FLEX:
Contract Year (Commencing December 19, 1988)
Royalty
One 10% of Net Sales during
year one
Two 8% of Net Sales during
year two
Three 6% of Net Sales during
year three
Four 5% of Net Sales during
year four
Five and thereafter 4% of Net Sales during
year five and any
year thereafter
Royalty payments, in accordance with this Section 4.1, shall,
regardless of the TERM, continue to be paid by FLEX until such time as
cumulative royalties equal to Thirteen Million Seven Hundred Thousand
Dollars ($13,700,000) have been paid by FLEX to OCLI, at which time
the license granted to FLEX under this Agreement shall be fully paid
up. FLEX shall have the right at any time to accelerate the payment
of the foregoing royalties.
4.2 OCLI Running Royalties. OCLI shall pay to FLEX running
royalties based on sales by OCLI and its affiliates of products
pursuant to the license granted under Section 2.2(i)(B) as follows:
Annual Net Sales Royalty
Up to $6,000,000 0%
$6,000,000 to $8,000,000 3%
Greater then $8,000,000 2%
Royalty payments, in accordance with this Section 4.2, shall,
regardless of the TERM, continue to be paid by OCLI until October 31,
2007. OCLI shall also pay, at its sole cost and expense, all research
and development costs incurred after October 31, 1997 relating to the
technology covered by the license granted under Section 2.2(i)(B).
4.3. Net Sales Determination. Net Sales shall be as determined
in accordance with United States generally accepted accounting
principles applied on a consistent basis.
4.4. Royalty Payments Due. Royalty payments by FLEX shall be
paid quarterly based upon financial statements for the respective
periods, such quarterly payments to be due and payable forty-five (45)
days and ninety (90) days after the close of each of the first three
fiscal quarters and the fourth quarter, respectively. Royalty
payments by OCLI shall be paid annually ninety (90) days after the
close of OCLI's fiscal year.
4.5. Maintenance of Records. FLEX and OCLI shall keep, as long
as the obligation to pay royalties continues, true and accurate
records, files and books of account containing all of the data
reasonably required for the full computation and verification of the
amounts to be paid and the information to be given in the statements
provided for herein. FLEX shall, during usual business hours, permit
representatives designated by OCLI, at OCLI's expense and by prior
arrangement, adequately to inspect the same for the purpose of
determining the amounts payable to OCLI pursuant to this Article IV.
OCLI shall, during usual business hours, permit representatives
designated by FLEX, at FLEX's expense and by prior arrangement,
adequately to inspect the same for the purpose of determining the
amounts payable to FLEX pursuant to this Article IV.
4.6. Finance Charge for Payments Past Due. Without prejudice to
any other rights and remedies, in law or in equity, or under the
provisions hereof, to which either party may be entitled, each party
shall pay an amount to the other party from the date due to the date
of payment upon any and all amounts overdue and payable hereunder at a
rate or rates which are one percent (1%) per year above the prime
interest rate or rates prevailing at the Bank of America, San
Francisco, California, from time to time during the period that any
such amounts are overdue, provided that if such rate or rates shall be
in excess of any legal limit thereon, then the rate shall be reduced
to the highest rate legally allowed.
4.7. Payment in U.S. Currency. All amounts payable hereunder
shall be paid in United States Dollars, and shall be made at such
places within the United States as OCLI may direct in writing from
time to time.
4.8. Single Royalty Payment. FLEX and OCLI shall only be
required to make one royalty payment on any unit of product.
4.9. Allocation of Royalties for Products Incorporating AR
Products. Royalties due under Section 4.2 for products manufactured
and sold under the license granted to OCLI pursuant to Section
2.2(i)(B) shall be based on Net Sales of antireflective film by OCLI
and its affiliates to non-affiliated customers. In the event
antireflective film manufactured under the license granted pursuant to
Section 2.2(i)(B) is incorporated as a component into other products
which are then sold by OCLI, the royalties due under Section 4.2 for
the antireflective film utilized in the manufacture of such other
products shall be based upon the weighted average price of
antireflective film sold by OCLI to non-affiliated customers during
the annual period for which royalties are due. In the event there are
no sales of antireflective film by OCLI to non-affiliated customers
during such annual period, the royalty due under Section 4.2 shall be
determined by multiplying the Net Sales of such other products by a
fraction the numerator of which is the cost of manufacture of the
antireflective film utilized in the manufacture of such other products
and the denominator is the total cost of manufacture of the components
of such other products. For the purpose of this section, "cost" shall
be determined in accordance with generally accepted cost accounting
standards utilized by OCLI in the performance of United States
government contracts.
IN WITNESS WHEREOF, OCLI and FLEX have caused this First Amendment to
License Agreement to be executed by their duly authorized officers and
representatives as of the date set forth above.
OPTICAL COATING LABORATORY, INC.
By /s/Joseph Zils
FLEX PRODUCTS, INC.
By /s/Herbert M. Dwight, Jr.
EXHIBIT 10.11
_________________________________
SECOND AMENDMENT TO
LICENSE AND SUPPLY AGREEMENT
by and between
FLEX PRODUCTS, INC.
and
SICPA HOLDING S.A.
_________________________________
December 22, 1998
SECOND AMENDMENT TO
===================
LICENSE AND SUPPLY AGREEMENT
============================
SECOND AMENDMENT TO AGREEMENT dated December 22, 1998,
by and between Flex Products, Inc., a Delaware corporation
("Flex") and SICPA HOLDING S.A., a Swiss registered company
("SICPA").
W I T N E S S E T H:
WHEREAS, Flex and SICPA are currently parties to a
License and Supply Agreement dated as of December 2, 1994
and amended as of November 19, 1997 providing for the
purchase and sale of optically variable pigment ("OVP") (as
amended, the "1994 Agreement");
WHEREAS, Flex and SICPA wish to further amend the 1994
Agreement by means of this Second Amendment to the 1994 Agreement;
NOW, THEREFORE, in consideration of the mutual
agreements hereinafter set forth, the parties hereby agree as follows:
Section 1.1.1(b) shall be amended and replaced to read
in full as follows:
The Memorandum of Alliance by and between SICPA
and Flex, dated March 9, 1993, and the Joint
Venture Agreement by and between SICPA and Flex,
dated July 1, 1993, and any committees established
pursuant thereto are terminated. The parties
agree to establish a new committee (the
"Committee") which shall meet at least twice
yearly to review prevailing market conditions and
trends and consider possible joint product
development efforts.
Section 3 of the 1994 Agreement shall be amended and
replaced to read in full as follows:
3. Changes to Price and Quantity. During
the period from March 1, 2001 through June 30,
2001 and the period March 1, 2005 through
June 30, 2005, the parties shall discuss what
the price and quantity terms of this Agreement
shall be for the period 11/1/2001 through
10/31/2005 and 11/1/2005 through 12/31/2009
respectively. In the event that the parties
cannot agree to any other provisions, the price
for OVP shall be the price set forth in
Section 4, as adjusted by Section 5.6 for the
period ended 10/31/2001, the minimum and maximum
quantities for the period 11/1/2001 through
10/31/2005 shall be the minimum and maximum
quantities for periods from and after 11/1/2001
(as set forth in Section 5.1(a)), and the
minimum and maximum quantities for the period
11/1/2005 through 12/31/2009 shall be the same
as for the year ended 10/31/2005 (prorated on a
month-for-month basis for the period from
11/1/2009 to 12/31/2009).
Section 4.3 of the 1994 Agreement shall be amended and
replaced to read in full as follows:
4.3 Price Adjustment. The price per kilogram shall be as
set forth below without adjustment pursuant to Sections 4.2
and 5.6 from November 1, 1997 through October 31, 1999:
Base Price/Kg (before
increases pursuant to
Purchases per Year Sections 4.2 and 5.6)
------------------- ---------------------
[CONFIDENTIAL TREATMENT REQUESTED]
The price per kilogram shall be as set
forth below without adjustment pursuant to
Sections 4.2 and 5.6 from November 1, 1999
through October 31, 2001:
Base Price/Kg (before
increases pursuant to
Year Sections 4.2 and 5.6)
-------- ---------------------
[CONFIDENTIAL TREATMENT REQUESTED]
The table set forth in 5.1(a) of the 1994 Agreement
shall be amended and replaced to read in full as follows:
5.1 Minimum Annual Purchases.
5.1(a) Minimum Purchases Necessary to
Maintain Exclusive License. The parties agree
that SICPA shall purchase from Flex minimum
amounts (each a "Minimum") of OVP set forth
below for the periods indicated:
Year Minimum Maximum
-------- --------- ---------
[CONFIDENTIAL TREATMENT REQUESTED]
In addition, for the periods shown below, SICPA shall
also purchase the following amounts (the "Incremental
Amounts") of OVP, in addition to the Minimums, as set forth
below for the periods indicated:
Year Incremental Amounts
-------- -------------------
[CONFIDENTIAL TREATMENT REQUESTED]
Section 14 of the 1994 Agreement shall be amended and
replaced to read in full as follows:
14. Liquidated Damages for Cancellation or
Breach. SICPA acknowledges: (i) that the price
specified for the sale of OVP in Section 4.3
above is based on the commitment of SICPA to
purchase the entire minimum quantity specified
hereunder; (ii) that Flex has advised SICPA that
the price specified is substantially below the
price that Flex would normally charge for the
OVP and is being specially allowed by Flex as a
concession to help SICPA develop the market for
its inks using OVP; and (iii) that Flex has
further advised SICPA that Flex's binding itself
to SICPA on an exclusive basis for the Exclusive
Products and the Fields during the Term will
cause Flex to forego the opportunity to pursue
other business opportunities for the commercial
exploitation of OVP manufactured by it. The
parties agree that if SICPA were to breach its
covenant to purchase the minimum quantity of OVP
during the Term the resulting damages would be
impracticable or extremely difficult to
determine, because of Flex's inability to
establish with certainty the magnitude and
extent of the opportunities lost due to its
exclusive commitment to the SICPA Parties
hereunder. Because of this difficulty the
parties agree that, in the event of the
termination of this Agreement because of such
breach or in the event SICPA cancels this
Agreement before the Term expires or fails to
purchase the minimum amount of OVP required to
be purchased during any of the periods running
from 1/1/1995 through 10/31/2001, 11/1/2001
through 10/31/2005 or 11/1/2005 through
12/31/2009, SICPA shall pay damages to Flex as
follows:
The "OVP Shortfall" for the period shall be
calculated by subtracting the aggregate amount
of OVP purchased during the entirety of such
period from the sum of the Minimum purchase
requirements for the entire period. The damages
shall then be calculated from the following
table:
OVP Shortfall Damages
------------- -------
[CONFIDENTIAL TREATMENT REQUESTED]
For example, if this Agreement is terminated during the
second period 11/1/2001-10/31/2005 and total purchases
over the second period were [CONFIDENTIAL TREATMENT
REQUESTED] kg less than the Minimum(so the OVP
Shortfall is [CONFIDENTIAL TREATMENT REQUESTED]kg), the
amount of liquidated damages for the second five-year
period would be [CONFIDENTIAL TREATMENT REQUESTED]or
[CONFIDENTIAL TREATMENT REQUESTED]plus liquidated
damages for the third period based upon the OVP
Shortfall for that period. The OVP Shortfall for the
third period 11/1/2005-12/31/2009 will be based upon
the Minimum quantities in effect for annual periods
after 11/1/2001, i.e., [CONFIDENTIAL TREATMENT
REQUESTED] kg. Unless the parties otherwise agree
pursuant to Section 3, the Minimum quantities would be
[CONFIDENTIAL TREATMENT REQUESTED] kg per year and the
OVP Shortfall for the period 11/1/2005 - 12/31/2009
would be [CONFIDENTIAL TREATMENT REQUESTED] kg.
In addition to liquidated damages for OVP
Shortfalls, SICPA shall pay the sum of [CONFIDENTIAL
TREATMENT REQUESTED] per kilogram for Incremental
Amounts of OVP not purchased as required pursuant
to Section 5.1(a)(the "Incremental Liquidated Damages").
Incremental Liquidated Damages shall be payable
within 30 days of the end of any period during
which Incremental Amounts of OVP were not
purchased as required pursuant to Section
5.1(a). The maximum amount of Incremental
Liquidated Damages shall be [CONFIDENTIAL
TREATMENT REQUESTED]. Notwithstanding anything
to the contrary in this Agreement, such
Incremental Liquidated Damages shall be the sole
remedy for Flex in the event that SICPA fails to
purchase the Incremental Amounts required
pursuant to Section 5.1(a), and Flex shall have
no other remedy under this Agreement with
respect to such failure to purchase Incremental
Amounts including, without limitation, no right
to terminate this Agreement pursuant to Section
15 and no right to take any action or invoke any
remedy under Section 5.1(a).
In partial consideration for the increases
in quantities of OVP, pricing for OVP and
liquidated damages over the 1994 Agreement, Flex
hereby agrees to increase its capacity for the
production of OVP. This undertaking is set
forth in detail in that certain Capital
Equipment Request presented to the Flex Board of
Directors on November 19, 1998, a copy of which
has been delivered to representatives of SICPA
who were present as Directors. In the event
Flex is unable to fulfill its obligations to
deliver OVP as required by this agreement, the
quantities of OVP required to be purchased by
SICPA pursuant to Section 5.1(a) shall be as set
forth in the 1994 Agreement prior to this Second
Amendment and the provisions of Exhibit E
attached hereto, which replaces the Exhibit E
attached to the 1994 Agreement, shall become
effective.
Section 17 of the 1994 Agreement shall be amended and
replaced to read in full as follows:
17. Notices. All notices hereunder shall
be in writing and shall be deemed to have been
given either (i) when received, if delivered in
person or transmitted by tested telex or
facsimile, or (ii) three business days after
having been mailed by registered or certified
mail addressed as follows:
To Flex: Flex Products, Inc.
1402 Mariner Way
Santa Rosa, California 95407-7370
Attn: President
FAX: (707) 525-7725
To SICPA: SICPA Holding S.A.
Avenue de Florissant 41
1008 Prilly
Switzerland
Attention: President
FAX: 41-21-627-5505
or to such changed address as such party may
have fixed by notice provided that any notice of
change of address shall be deemed to have been
given when received.
A new Section 26 shall be added to the 1994
Agreement as set forth below:
26. Press Releases and Public Announcements. The
parties to this Agreement shall keep confidential all terms
and provisions of this Agreement except as may be required
by applicable law. Neither party shall issue any press
release or make any public announcement relating to the
subject matter of this Agreement without the prior written
approval of the other party; provided, however, that any
party may make any public disclosure it is required to make
by applicable law or any listing or trading agreement
concerning its publicly-traded securities (in which case the
disclosing party shall prior to such disclosure, consult
with the non-disclosing party concerning the manner and
content of such disclosure, using good faith best efforts to
mutually agree on the content, manner and timing of such
disclosure and shall furnish copies of the intended
disclosure to the non-disclosing party prior to making the
disclosure allowing a reasonable time for such consultation,
and any such disclosure shall only be made to the extent
required by applicable law. In the event that OCLI or Flex
determines that it is required by U.S. federal securities
laws to file with the Securities and Exchange Commission
(the "SEC") a copy of this Agreement or any amendment
hereto, then OCLI or Flex, as the case may be, shall be
permitted to make such filing but only after making best
efforts to obtain confidential treatment from the SEC to the
maximum extent possible (including, without limitation, as
to pricing and quantity terms).
IN WITNESS WHEREOF, each of the parties hereto has
caused this Amendment to be duly executed, and intends this
Agreement to be effective, as of the date first set forth
above.
FLEX PRODUCTS, INC., a Delaware
corporation
By _______________________________
SICPA HOLDING S.A., a Swiss
corporation
By _______________________________
EXHIBIT 10.15
OPTICAL COATING LABORATORY, INC.
1999 MANAGEMENT INCENTIVE PLAN DOCUMENT
OBJECTIVES
- ----------
The objectives of the Optical Coating Laboratory, Inc. (OCLI) Fiscal Year
1999 Management Incentive Plan (MIP) are:
. To motivate key OCLI managers and employees to achieve Fiscal Year
(FY) 1999 financial objectives; and
. To reward key OCLI managers and employees who contribute significantly
towards the achievement of OCLI's financial and operational objectives.
PLAN PRINCIPLES AND DESIGN
- --------------------------
The MIP is designed so that achievement of Plan goals offers participants
competitive compensation for the at-risk portion of their total
compensation. Surpassing Plan goals and delivering outstanding results
offers participants the opportunity to earn a substantially higher bonus.
The Plan is written to concentrate on financial goals. There are quarterly
and annual financial goals, matching those in the 1999 Annual Operating
Plan, that total 100% of the target bonus opportunity. 50% of the target
bonus opportunity will be based on Company Operating Profits (COP). This
is an annual target with a possible prepayment of up to / of the target
prepaid each quarter for 100% plan attainment. 50% of the target bonus
opportunity will be eligible to be paid annually based on Return on Net
Assets (RONA).
The bonus awards are calculated quarterly and annually based on OCLI's and
the Divisions' financial results. The plan year is defined as the fiscal
year beginning November 2, 1998 and ending October 31, 1999.
ELIGIBILITY
- -----------
Employees in Salary Grades 70 and above, or equivalent (for non-US
subsidiaries), are eligible to participate in the MIP. MIP participants
are not eligible for "Superior Merit" bonuses unless approved by the Plan
Administrator. Concurrent participation in any other type of bonus program
requires the approval of the Plan Administrator.
BONUS OPPORTUNITY
- -----------------
The bonus opportunity for each participant by salary grade as a percentage
of base salary is shown below.
TARGET BONUS OPPORTUNITY
AS A PERCENT OF BASE SALARY EARNED
TOTAL
SALARY GRADE PERCENT
- ------------ -------
CEO 50%
Vice Presidents 35%
Level 85 20%
Level 80 15%
Level 75 15%
Level 70 10%
BONUS PAYMENTS
- --------------
Annual bonus award payments will be approved by the Plan Administrator
following the certification of OCLI's Consolidated Financial Statements by
an independent auditor. Payments will be distributed to eligible
participants during the second payroll in January, 2000. Quarterly bonus
payments (approved by the plan administrator) will be paid within 10 days
of the quarterly financial announcements.
ADMINISTRATION
- --------------
The Human Resources Department, in coordination with the Finance &
Accounting Department, will administer the MIP under the direction of the
CEO of OCLI (Plan Administrator).
Employees who are newly hired into eligible positions will receive pro rata
bonus awards based on actual base pay earned during the plan year in the
eligible positions. Employees who are promoted or transferred into or out
of eligible positions and those who move from one eligibility level to
another will receive bonus awards based on their eligibility status, rate,
and division as of the last day of the quarter.
In addition, participants who leave OCLI during the plan year under any of
the following conditions may be eligible for pro rata bonus awards:
. Participants who retire under the provisions of one of the Company's
retirement plans or the Social Security Act; or
. A disabled participant or the spouse or legal representative of a
deceased participant.
Participants leaving the Company under any conditions other than those
outlined above are not eligible for bonus awards for the plan quarter or
year in which they leave.
AMENDMENTS
- ----------
The Board of Directors of OCLI reviews the Company's incentive compensation
plans annually to ensure equity both within the Company and in relation to
current economic conditions. The Board of Directors reserves the right to
amend, suspend, terminate or make exceptions to this plan at any time. The
effects of any unusual and material accounting or non-recurring
transactions may be excluded from the bonus calculations with the approval
of the Plan Administrator. For example, performance objectives may be
adjusted to reflect major acquisitions and/or divestitures during the plan
year.
<PAGE>
OPTICAL COATING LABORATORY, INC. AND SUBSIDIARIES
EXHIBIT 21. SUBSIDIARIES OF THE REGISTRANT
-------------------------------------------------
Optical Coating Laboratory, Inc. was incorporated in Delaware in 1948. The
Company was reincorporated in California in 1963 and again reincorporated
in Delaware November 2, 1987.
As of October 31, 1998, Optical Coating Laboratory, Inc. had the following
subsidiaries:
PERCENT OF PLACE OF
SUBSIDIARY NAME OWNERSHIP INCORPORATION
=============== ========== =============
OCLI International Service Corporation........... 100% California
OCLI Foreign Sales Corporation................... 100% Guam
OCLI Optical Coating Laboratory, Ltd............. 100% Scotland
OCLI Optical Coating Laboratory GmbH............. 100% Germany
MMG Glastechnik GmbH............................. 100% Germany
Netra Corporation................................ 100% California
OCLI Optical Coatings Espana, S.A................ 100% Spain
OCLI Optical Coating Laboratory B.V.............. 100% Netherlands
OCLI Optical Coating Laboratory EURL............. 100% France
OCLI Optical Coating Laboratory, Srl............. 100% Italy
Flex Products, Inc............................... 100% Delaware
OCLI Asia K.K.................................... 100% Japan
<PAGE>
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULE
We consent to the incorporation by reference in Registration Statements No.
33-41050, No. 33-26271, No. 33-12276, No. 33-48808, No. 33-65132, No. 33-
60891, No. 33-13013 and No. 333-69157 of Optical Coating Laboratory, Inc.
on Forms S-8 of our report dated December 22, 1998, appearing in this
Annual Report on Form 10-K of Optical Coating Laboratory, Inc. for the year
ended October 31, 1998.
Our audits of the consolidated financial statements referred to in our
aforementioned report also included the financial statement schedule of
Optical Coating Laboratory, Inc., listed in Item 14(a)(2). The financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits. In our
opinion, the financial statement schedule, when considered in relation to
the basic financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
Deloitte & Touche LLP
San Jose, California
January 29, 1999
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
To the Board of Directors and Stockholders
Optical Coating Laboratory, Inc.:
Re:Registration Statements No. 33-41050, No. 33-26271, No. 33-12276, No.
33-48808, No. 33-65132, No. 33-60891, No. 33-13013 and No. 333-69157 on
Forms S-8.
We consent to the incorporation by reference in the registration statements
referred to above of Optical Coating Laboratory, Inc. of our report dated
November 26, 1997 relating to the balance sheets of Flex Products, Inc. as
of November 2, 1997 and November 3, 1996, and the related statements of
operations, stockholders' equity and cash flows for the years then ended,
which report appears in the October 31, 1998 annual report on Form 10-K of
Optical Coating Laboratory, Inc.
KPMG LLP
San Francisco, California
January 29, 1999
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