UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ___________
Commission files number: 0-2537
OPTICAL COATING LABORATORY, INC.
(Exact name of Registrant as specified in its charter)
Delaware 68-0164244
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2789 Northpoint Parkway
Santa Rosa, California 95407-7397
(Address of principal executive offices) (Zip code)
707-545-6440
(Registrant's telephone number including area code)
Not applicable
(Former name, former address, and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes X No ____
---
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all
documents and reports required to be filed by Section 12, 13 or
15(d) of the Securities Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by a court. Yes
____ No ____
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
Indicate the number of shares outstanding of each of the
registrant's classes of common stock, as of the latest practicable
date.
TITLE OUTSTANDING
----- -----------
<PAGE>
Common Stock, $.01 par value 14,160,066 at August 31, 1999
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OPTICAL COATING LABORATORY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
JULY 31, OCTOBER 31,
ASSETS 1999 1998
(Amounts in thousands) (Unaudited)
CURRENT Cash and cash equivalents............... $120,018 $ 40,880
ASSETS Accounts receivable, net of allowance for
doubtful accounts of $1,822 and $1,831. 37,651 38,585
Inventories............................. 23,454 25,233
Income taxes receivable................. 1,234
Deferred income tax assets.............. 5,566 9,311
Other current assets.................... 2,395 1,822
------- --------
Total Current Assets................. 190,318 115,831
OTHER Goodwill................................ 16,946 910
ASSETS Deferred income tax assets.............. 716
Property, plant and equipment held for sale 503 3,183
Other assets............................ 12,934 3,241
PROPERTY, Land and improvements................... 9,088 9,116
PLANT AND Buildings and improvements.............. 37,106 36,171
EQUIPMENT Machinery and equipment ................ 129,764 123,261
Construction-in-progress................ 17,300 12,722
------- -------
193,258 181,270
Less accumulated depreciation........... (92,015) (91,565)
------- -------
Property, plant and equipment-net .... 101,243 89,705
------- -------
Total Assets..................... $321,944 $213,586
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT Accounts payable....................... $ 9,125 $ 8,423
LIABILITIES Accrued expenses....................... 8,232 9,935
Accrued compensation expenses.......... 10,128 10,365
Income taxes payable................... 235 708
Current maturities on long-term debt... 4,790 6,026
Notes payable.......................... 4,483
Deferred revenue....................... 3,676 761
------- -------
Total Current Liabilities ...... 36,186 40,701
NONCURRENT Accrued postretirement health benefits
LIABILITIES ...............and pension liabilities 2,306 2,241
Deferred revenue....................... 750
Deferred income tax liabilities........ 9,328 3,528
Long-term debt ........................ 54,935 52,373
Minority interest...................... 12,520
Commitments and contingencies
STOCKHOLDERS'Common stock, $.01 par value; authorized
EQUITY 30,000,000 shares; issued and outstanding
14,092,000 and 12,087,000 shares...... 141 121
Paid-in capital........................ 175,099 69,993
Retained earnings...................... 43,407 31,951
Accumulated other comprehensive income (208) 158
------- -------
Stockholders' Equity.................. 218,439 102,223
------- -------
Total Liabilities and Stockholders' Equity $321,944 $213,586
======== ========
The accompanying notes are an integral part of these financial
statements.
<PAGE>
OPTICAL COATING LABORATORY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
-------------------------------------------
(Unaudited)
For the three and nine month periods ended July 31, 1999 and 1998
THREE MONTHS NINE MONTHS
------------ ------------
1999 1998 1999 1998
(Amounts in thousands, except per share amounts)
REVENUES
Revenues........................... $89,864 $67,393 $243,709 $185,111
Cost of sales...................... 63,191 44,462 169,473 123,181
------- ------- -------- --------
Gross Profit.................... 26,673 22,931 74,236 61,930
COSTS AND Operating Expenses:
EXPENSES Research and development ..... 7,423 4,222 17,517 12,069
Selling and administrative.... 9,053 12,131 30,451 32,790
Amortization of intangibles... 726 200 1,523 598
Loss on asset disposal........ 934
Legal settlement, net......... (2,960)
In process research and development
charges............. 2,906
------ ------ ------ ------
Total Operating Expenses...... 17,202 16,553 50,371 45,457
------ ------ ------- ------
Income From Operations...... 9,471 6,378 23,865 16,473
Nonoperating Income (Expense):
Interest income .............. 1,192 117 1,814 282
Interest expense.............. (946) (796) (2,933) (2,531)
----- ------ ------ ------
EARNINGS Income before provision for income taxes
and minority interest............. 9,717 5,699 22,746 14,224
Provision for income taxes......... 3,498 2,246 9,235 5,571
Minority interest.................. 32 491 587
------ ----- ------- ------
Net Income...................... 6,219 3,421 13,020 8,066
Dividend on convertible redeemable
preferred stock................... 250
------ ----- ------- ------
Net Income Applicable to Common Stock
$6,219 $3,421 $13,020 $ 7,816
====== ====== ======= =======
Net Income Per Share, Basic..... $ .46 $ .28 $ 1.02 $ .70
====== ====== ======= =======
Net Income Per Share, Diluted.... $ .41 $ .27 $ .93 $ .66
====== ====== ======= =======
Weighted Average Number of Common Shares
Used to Compute Basic Earnings Per Share
13,643 12,009 12,743 11,169
====== ====== ======= ======
Weighted Average Number of Common Shares
Used to Compute Diluted Earnings Per Share
15,319 12,546 14,020 11,822
====== ====== ====== ======
The accompanying notes are an integral part of these financial
statements.
OPTICAL COATING LABORATORY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(Unaudited)
<PAGE>
For the three and nine month periods ended July 31, 1999 and 1998
THREE MONTHS NINE MONTHS
------------- -----------
(Amounts in thousands) 1999 1998 1999 1998
OPERATIONS Cash Flows From Operations:
Cash received from customers...... $57,331 $60,379 $175,875 $156,649
Interest received................. 288 120 871 238
Cash paid to suppliers and
employees.....................(50,203)(52,525)(131,462)(143,373)
Interest paid..................... (521) (1,193) (2,624) (2,614)
Income taxes paid, net of refunds. (545) (187) (721) (41)
------- ------ ------- -------
Net Cash Provided By Operations. 6,350 6,594 41,939 10,859
------- ------ ------- -------
INVESTMENTS Cash Flows From Investments:
Purchase of plant and equipment... (8,421)(3,313) (19,938) (11,639)
Purchase of remaining interest in Flex Products (30,035)
Purchase of OPKOR, net of cash acquired (305)
Proceeds from sale of MMG assets.. 4,084
Proceeds from sale of equipment... 489 1,682 216
------ ------ ------- -------
Net Cash Used For Investments... (7,932) (3,313) (44,512) (11,423)
------ ------- -------- --------
FINANCING Cash Flows From Financing:
Proceeds from secondary public
offering................... 88,920 88,920
Proceeds from long-term debt...... 14,810 1,170 24,628
Repayment of long-term debt.......(2,695) (16,094) (7,936) (29,344)
Repayment of notes payable........ (239) (248)
Proceeds from exercise of stock
options ...................... 1,208 559 3,533 6,970
Collection of note receivable from
officer ...................... 5,772
Proceeds from note to minority
stockholder .................. 800
Purchase of note from minority
stockholder .................. (2,400) (2,601)
Payment of dividend on preferred stock (208)
Payment of dividend on common stock (838) (719) (1,564) (1,355)
------ ------- ------- -------
Net Cash Provided By (Used For)
Financing.................... 86,595 4,089 81,723 (1,358)
------- ------- ------- -------
Effect of exchange rate changes
on cash ..................... 27 29 (12) (46)
------- ------- ------- -------
Increase (decrease) in cash and
cash equivalents............ 85,040 7,399 79,138 (1,968)
Cash and cash equivalents at
beginning of period......... 34,978 5,850 40,880 15,217
------- ------ ------- -------
Cash and cash equivalents at
end of period $120,018 $ 13,249 $120,018 $13,249
======== ======== ======== =======
OPTICAL COATING LABORATORY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
-----------------------------------------------
(Unaudited)
For the three and nine months ended July 31, 1999 and 1998
THREE MONTHS NINE MONTHS
------------ -----------
(Amounts in thousands) 1999 1998 1999 1998
ADJUSTMENTS Reconciliation of Net Income
To Cash Flows From Operations:
Net income...................... $6,219 $3,421 $13,020 $8,066
Adjustments to reconcile net income to net cash
provided by operations:
Depreciation and amortization... 3,972 3,384 10,470 9,499
Minority interest in earnings of
subsidiaries.................. 32 491 587
Loss on disposal of equipment .. 1,222 78 2,596 391
Accrued postretirement health
benefits.................... 7 40 62 120
Other non-cash adjustments to
net income.................. (156) (58) 531 151
Change in:
Accounts receivable............. (1,708) (397) 1,140 (2,974)
<PAGE>
Inventories..................... (2,428) (892) 130 (5,172)
Income taxes receivable and
income taxes payable......... 2,902 1,342 3,098 3,265
Deferred income tax assets and
liabilities.................. (193) 688 10,033 1,762
Other current assets and other assets
and investments............... (506) 228 (1,778) (722)
Accounts payable, accrued expenses and
accrued compensation expenses. (1,024) (815) (1,519)(5,008)
Deferred revenue................ (1,957) (457) 3,665 894
------- ----- ------ ------
Total adjustments............ 131 3,173 28,919 2,793
----- ----- ------ -----
Net Cash Provided By Operations $6,350 $6,594 $41,939 $10,859
====== ====== ======= =======
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
In the first quarters of fiscal 1999 and fiscal 1998, the Company
issued 39,914 and 39,292 shares of common stock to the OCLI
401(k)/Employee Stock Ownership Plan at fair market value to
satisfy a portion of its Company contributions.
In February 1999, the Company purchased OPKOR Inc. (OPKOR) for $9.0
million plus annual contingent payments in OCLI common stock based
on profits of the acquired entity. The initial $9.0 million was
paid in the form of $1.8 million in cash and 267,285 shares of OCLI
common stock. Cash and non-cash components of the acquisition were
as follows:
Fair value of assets acquired, including intangibles $13,615
Liabilities assumed (4,980)
-------
Initial consideration plus acquisition expenses 8,635
Fair value of OCLI common stock issued to sellers (7,200)
Cash acquired (1,130)
------
Net cash paid $ 305
========
The accompanying notes are an integral part of these financial
statements.
OPTICAL COATING LABORATORY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
---------------------------------------------------------
AND COMPREHENSIVE INCOME
------------------------
For the three and nine month periods ended July 31, 1999 (Amounts in
thousands, unaudited)
PREFERRED STOCK COMMON STOCK PAID-IN RETAINED
--------------- --------------
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS
- -----------------------------------------------------------------------------
BALANCE AT NOVEMBER 1, 1998 12,087 $ 121 $69,993 $ 31,951
Shares issued to Employee Stock
Ownership Plan 40 933
Exercise of stock options,
including tax benefit 243 2 4,317
Issuance of shares for acquisition 267 3 7,197
Dividend on common stock (726)
Net income 6,801
Other comprehensive income, net of taxes:
Foreign currency translation
adjustment
- -----------------------------------------------------------------------------
BALANCE AT APRIL 30, 1999 12,637 126 82,440 38,026
Exercise of stock options,
including tax benefit 105 1 3,753
Issuance of shares for offering 1,350 14 88,906
Dividend on common stock (838)
Net income 6,219
Other comprehensive income, net of taxes:
Foreign currency translation
adjustment
Comprehensive income three
months ended July 31, 1999
- -----------------------------------------------------------------------------
BALANCE AT JULY 31, 1999 14,092 $ 141 $175,099 $ 43,407
====================================
ACCUMULATED
OTHER
COMPREHENSIVE COMPREHENSIVE
INCOME INCOME
------------- -------------
BALANCE AT NOVEMBER 1, 1998 $ 158
Shares issued to Employee Stock
Ownership Plan
Exercise of stock options,
including tax benefit
Issuance of shares for acquisition
Dividend on common stock
Net income 6,801
Other comprehensive income, net of taxes:
Foreign currency translation
adjustment (432) (432)
- --------------------------------------------------------------------------
BALANCE AT APRIL 30, 1999 (274) 6,369
Exercise of stock options,
including tax benefit
Issuance of shares for offering
<PAGE>
Dividend on common stock
Net income 6,219
Other comprehensive income, net of taxes:
Foreign currency translation
adjustment 66 66
Comprehensive income three
months ended July 31, 1999
- --------------------------------------------------------------------------
6,285
-------
BALANCE AT JULY 31, 1999 $ (208) $12 654
======== =======
OPTICAL COATING LABORATORY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME (CONTINUED)
For the three and nine month periods ended July 31, 1998 (Amounts in
thousands, unaudited)
PREFERRED STOCK COMMON STOCK PAID-IN RETAINED
--------------- --------------
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS
- ----------------------------------------------------------------------------
BALANCE AT NOVEMBER 1, 1997
6 $ 5,559 10,599 $ 106 $ 55,723 $ 26,217
Shares issued to Employee
Stock Ownership Plan 39 1 555
Exercise of stock options,
including tax benefit and
note receivable from
related party 841 8 6,687
Conversion of preferred stock
to common stock (6) (5,559) 599 6 5,595
Dividend on preferred stock (250)
Dividend on common stock (636)
Net Income 4,645
Other comprehensive income, net of taxes:
Foreign currency translation
adjustment
- ----------------------------------------------------------------------------
BALANCE AT APRIL 30, 1998 - - 12,078 121 68,560 29,976
Exercise of stock options,
including tax benefit and
note receivable from
related party (45) (1) 871
Dividend on common stock (719)
Net Income 3,421
Other comprehensive income, net of taxes:
Foreign currency translation
adjustment
Comprehensive income three
months ended July 31, 1998
<PAGE>
BALANCE AT JULY 31, 1998 - $ - 12,033 $ 120 $ 69,431 $ 32,678
===============================================
The accompanying notes are an integral part of these financial
statements.
OPTICAL COATING LABORATORY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME (CONTINUED)
For the three and nine month periods ended July 31, 1998 (Amounts in
thousands, unaudited)
NOTES ACCUMULATED
RECEIVABLE OTHER
FROM RELATED COMPREHENSIVE COMPREHENSIVE
PARTY INCOME INCOME
=============================================================================
BALANCE AT NOVEMBER 1, 1997 $ (642)
Shares issued to Employee Stock
Ownership Plan
Exercise of stock options,
including tax benefit and
note receivable from
related party $(5,788)
Conversion of preferred stock
to common stock
Dividend on preferred stock
Dividend on common stock
Net Income $4,645
Other comprehensive income, net of taxes:
Foreign currency translation
adjustment (592) (592)
BALANCE AT APRIL 30, 1998 $(5,788) (1,234) 4,053
Exercise of stock options,
including tax benefit and
note receivable from
related party $5,788
Dividend on common stock
Net Income 3,421
Other comprehensive income, net of taxes:
Foreign currency translation
adjustment (34) (34)
Comprehensive income three
months ended July 31, 1998 3,387
------
BALANCE AT JULY 31, 1998 $ -- $ (1,268) $7,440
=======================================================================
The accompanying notes are an integral part of these financial
statements.
<PAGE>
OPTICAL COATING LABORATORY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
Three and Nine Month Periods Ended July 31, 1999 and 1998
(Unaudited)
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
<PAGE>
abrasion resistance. OCLI markets and distributes components
primarily to original equipment manufacturers (OEMs) of color
shifting, optical and electro-optical systems. OCLI's products are
found in many applications including computer monitors, flat panel
displays, telecommunication systems, office equipment,
medical/analytical equipment and instruments, projection imaging
systems, satellite power systems and aerospace and defense systems.
Through its wholly owned subsidiary, Flex Products, Inc. (Flex),
the Company designs and manufactures thin film coatings on flexible
substrates using high vacuum roll-to-roll processes. Flex supplies
critical pigments for use in anti-counterfeiting applications,
energy conserving window film for residential and commercial
applications and ChromaFlairR light interference pigments for
commercial paints.
INTERIM FINANCIAL INFORMATION. The Condensed Consolidated Balance
Sheet as of July 31, 1999, the Condensed Consolidated Statements of
Income for the three and nine month periods ended July 31, 1999 and
1998, the Condensed Consolidated Statements of Cash Flows for the
three and nine month periods ended July 31, 1999 and 1998 and the
Condensed Consolidated Statements of Stockholders' Equity and Other
Comprehensive Income for the three and nine month periods ended
July 31, 1999 and 1998 and have been prepared by the Company
without audit. In the opinion of management, all adjustments
consisting of normal recurring accruals, necessary to present
fairly the financial position, results of operations and cash flows
at July 31, 1999 and for all periods presented have been made.
The results of operations for the period ended July 31, 1999 are
not necessarily indicative of the operating results anticipated for
the full year.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. It is
suggested that these condensed consolidated financial statements be
read in conjunction with the financial statements and notes
included in the Company's Annual Report on Form 10-K for the year
ended October 31, 1998, and other disclosures, including Risk
Factors, included in the Company's Registration Statement on Form
S-3 (Registration No. 333-76853) filed May 21, 1999.
2. COMPREHENSIVE INCOME
- -------------------------
In the first quarter of 1999, the Company adopted the provisions of
SFAS No. 130 "Reporting Comprehensive Income," which required the
Company to report, by major component and in total, all changes to
equity from non owner sources. The Company's Condensed
Consolidated Statement of Stockholders' Equity has been changed to
Condensed Consolidated Statements of Stockholders' Equity and
Comprehensive Income. Comprehensive income consists of foreign
currency translation adjustments which are reported as a separate
component of equity.
3. LOSS ON ASSET DISPOSAL
- ----- ----------------------
<PAGE>
In the fourth quarter of fiscal 1998, due to excess capacity, the
Company removed from service and began negotiations for the sale of
a large continuous coating machine. As sales price estimates at
that time and for subsequent quarters exceeded the carrying amount
of the equipment, losses were previously not recorded. In the
second quarter of 1999, due to the need for manufacturing space,
the Company made the decision to accelerate the sale of the machine
and to sell the machine for less than book value, if necessary.
Consequently, the machine, with a carrying value of $1.4 million
was sold for $460,000 net of removal and shipping costs and the
Company recognized a loss of $934,000 in the second quarter of
fiscal 1999 on the sale of the machine.
4. LEGAL SETTLEMENT
- ---------------------
On January 15, 1999, the Company announced that it had settled a
lawsuit with Optical Corporation of America and certain of its
shareholders regarding a failed merger in fiscal 1996. The Company
received cash, net of related legal expenses, of $3.0 million,
which was recorded as a benefit in the nine month period ended July
31, 1999.
5. DISPOSALS AND ACQUISITIONS
- -------------------------------
In the first quarter of 1999, Glas-Trosch GmbH, a privately held
glass company in Switzerland, purchased the business and operating
assets (inventory, equipment, furniture, two buildings, workforce,
customer lists and other related intangibles) of the Company's
manufacturing subsidiary in Germany (MMG) for $4.3 million. As the
Company had previously recorded an impairment loss to reduce MMG's
assets to fair value on a liquidation basis, no gain or loss was
recognized on the sale. An office building in Germany, with a
carrying value of approximately $500,000, which was not part of the
sale, is being held for sale.
In connection with the sale of MMG, the Company also received $1.2
million for a three-year covenant not to compete and $600,000 for a
three-year license and supply agreement that incorporates the use
of the OCLI name. The $1.8 million received for those contracts is
being recognized as revenue over the three-year terms of the
agreements.
In December 1998, the Company acquired the 40% minority interest in
Flex held by SICPA Holding S.A. for $30 million, bringing the
Company's ownership in Flex to 100%. The transaction was recorded
as a purchase in the first quarter of fiscal year 1999 based on
data provided in an independent valuation. Pursuant to this
transaction, the Company recorded a charge for in-process research
and development of $2.9 million, goodwill of $9.8 million which
will be amortized over 15 years, and identifiable intangibles of
$10.1 million which will be amortized over useful lives ranging
from 11 to 15 years. Goodwill and identifiable intangibles are
included in other assets.
In connection with the Company's acquisition of the 40% interest in
Flex, the Company purchased SICPA's $2.4 million dollar working
capital loan and the License and Supply Agreement between Flex and
<PAGE>
SICPA that runs through October 31, 2009, was modified to increase
SICPA's minimum purchase requirements in association with Flex's
commitment to put in place additional capacity to manufacture
optically variable pigment.
In February 1999, the Company purchased OPKOR Inc. (OPKOR), an
optical design and manufacturing company specializing in precision
polymer optic components and assemblies, for $9.0 million plus
annual contingent payments in OCLI common stock based on profits of
the acquired entity. The initial $9.0 million was paid in the form
of $1.8 million in cash and 267,285 shares of OCLI common stock.
The cumulative amount of the contingent payments cannot exceed the
lower of 267,285 shares or the number of shares equal in value to
$18.0 million. Pursuant to this transaction, the Company recorded
goodwill of $7.0 million that is being amortized over an average
life of 8 years.
6. EARNINGS PER SHARE
- -----------------------
The following is a reconciliation of the numerators and
denominators of the basic and diluted earnings per share
computations for the three and nine month periods ended July 31,
1999 and 1998:
THREE MONTHS NINE MONTHS
------------ -----------
1999 1998 1999 1998
(Amounts in thousands, except per share amounts)
=============================================================================
BASIC SHARES:
Average common shares outstanding 13,643 12,009 12,743 11,169
====== ====== ====== ======
Net income $6,219 $3,421 $13,020 $8,066
Less dividend on convertible redeemable
preferred stock 250
------ ------ ------- ------
Net income applicable to common stock $6,219 $3,421 $13,020 $7,816
====== ====== ======= ======
Net income per common share, basic $ .46 $ .28 $1.02 $ .70
===== ===== ===== =====
DILUTED SHARES:
Average common shares outstanding 13,643 12,009 12,743 11,169
Dilutive effect of employee stock options 1,676 537 1,277 653
----- ----- ----- -----
Average shares outstanding, diluted 15,319 12,546 14,020 11,822
====== ====== ====== ======
Net income applicable to common stock $6,219 $3,421 $13,020 $7,816
====== ====== ======= ======
Net income per share, diluted $ .41 $ .27 $ .93 $ .66
===== ===== ===== =====
In the second quarter of fiscal 1999, the Company restructured the
equity of Flex. As a result of this restructuring, in order to
make the option holders whole under the provisions of Flex's option
plan, the Company exchanged options for the exercise of 928,200
shares of Flex at a weighted average exercise price of $4.54 per
share for options to exercise 324,157 shares of Company common
stock at a weighted average exercise price of $12.99 per share.
The exchange was based on the ratio of the market value per share
of Flex (based on an independent valuation) to the market value of
<PAGE>
Company common stock on the date of the equity restructuring. The
per share exercise price for each converted Flex option was based
on the share of Company common stock on the date of the equity
restructuring.
On May 26, 1999, the Company completed a public offering for the
sale of 1,350,000 shares of OCLI common stock for proceeds, net of
offering fees and expenses of $88.9 million.
Options to purchase 4,500 shares of common stock at a weighted
average price of $84.72 that were outstanding during the third
quarter of 1999 and options to purchase 71,000 shares of common
stock at a weighted average price of $35.50 that were outstanding
during the nine month period ended July 31, 1999 were not included
in the computation of diluted earnings per share because the
exercise price was greater than the average market price of the
common shares. The options, which expire in 2006, were still
outstanding at July 31, 1999.
7. RESTRUCTURING PAYMENTS
- ---------------------------
In fiscal 1998, the Company accrued $586,000 of restructuring
expenses, all of which were paid prior to April 30, 1999.
8. LONG-TERM DEBT
- -------------------
The Company has certain financial covenants and restrictions under
its bank credit arrangements and unsecured senior notes. In
January 1999, the Company and the bank executed an amendment to the
Company's credit agreement which removed the impairment loss and
restructuring charges recorded in fiscal year 1998 from the
Company's financial covenant calculation.
In February 1999, the Company and the bank executed an amendment to
the Company's credit agreement increasing the amount available
under its revolving line of credit from $20 million to $40 million.
In March 1999, the Company replaced the credit facilities of its
subsidiary in Japan with an $8.3 million two year revolving credit
facility of which $4.9 million is outstanding at July 31, 1999.
The term of the facility expires on March 15, 2001 with principal
to be paid by that date. Interest at the Tokyo Interbank Offer
Rate plus 1.25 percent (currently 1.6% per year) is payable
quarterly. In addition, the Japanese subsidiary has a $1.7 million
accounts receivable discounting facility under which there were no
borrowings at July 31, 1999.
9. FINANCIAL DERIVATIVES AND HEDGING
- --------------------------------------
The Company from time to time enters into derivative transactions
in order to hedge foreign currency risk on existing commitments,
open receivables, payables and debt instruments when the currency
risk is considered material to the Company. In addition, the
Company may enter into interest rate swaps or similar instruments
in order to reduce interest rate risk on its debt instruments. The
Company does not enter into derivatives for trading purposes.
<PAGE>
At July 31, 1999, the Company had outstanding foreign currency
forward contracts for the principal and interest payments under a
$3.0 million loan denominated in German marks and for the principal
and interest payments under an intercompany note receivable
denominated in British Pounds. The notional amounts, carrying
amounts and fair values of the Company's derivative position at
July 31, 1999 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 $3,352 $ 0 $(30)
British Pounds 2,760 0 136
On August 10, 1999, the Company paid off the $3.0 million loan
denominated in German marks and terminated the foreign exchange
contract. The Company recorded approximately $100,000 of expense
in connection with the early repayment and the termination of the
foreign exchange contract.
10. INVENTORIES
- ------------------------
Inventories consisted of the following:
JULY 31, OCTOBER 31,
(Amounts in thousands) 1999 1998
(Unaudited)
============================================================================
Raw materials and supplies $ 6,172 $ 7,138
Work-in-process 13,879 13,148
Finished goods 3,403 4,947
------- -------
Total inventories $23,454 $25,233
======= =======
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
CERTAIN STATEMENTS UNDER THE CAPTIONS, "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS", "RISK
FACTORS" AND ELSEWHERE IN THIS FILING ON FORM 10-Q ARE
"FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION 27A OF
THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") AND
SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED (THE
"EXCHANGE ACT"). THESE FORWARD-LOOKING STATEMENTS INCLUDE, BUT ARE
NOT LIMITED TO, STATEMENTS ABOUT OUR PLANS, OBJECTIVES,
EXPECTATIONS AND INTENTIONS AND OTHER STATEMENTS CONTAINED IN THIS
FILING ON FORM 10-Q THAT ARE NOT HISTORICAL FACTS. WHEN USED IN
THIS FILING ON FORM 10-Q, THE WORDS "EXPECT," "ANTICIPATE,"
"INTEND," "PLAN," "BELIEVE," "SEEK," "ESTIMATE" AND SIMILAR
EXPRESSIONS ARE GENERALLY INTENDED TO IDENTIFY FORWARD-LOOKING
STATEMENTS. BECAUSE THESE FORWARD-LOOKING STATEMENTS INVOLVE RISKS
AND UNCERTAINTIES, THERE ARE IMPORTANT FACTORS THAT COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED OR IMPLIED
BY THESE FORWARD-LOOKING STATEMENTS, INCLUDING OUR PLANS,
OBJECTIVES, EXPECTATIONS AND INTENTIONS AND OTHER FACTORS DISCUSSED
<PAGE>
UNDER "RISK FACTORS" AND IN INFORMATION CONTAINED IN OUR PUBLICLY
AVAILABLE FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION. WE
ASSUME NO OBLIGATION TO UPDATE SUCH FORWARD-LOOKING STATEMENTS OR
TO UPDATE THE REASONS ACTUAL RESULTS COULD DIFFER MATERIALLY FROM
THOSE ANTICIPATED IN SUCH FORWARD-LOOKING STATEMENTS.
OVERVIEW
We are a worldwide leader in optical thin film coating technologies
with over 50 years of experience developing thin film coating
processes for government and industry. We have built a portfolio
of products that incorporate high performance optical thin films
used to manage light.
Our products control, enhance and modify the behavior of light by
utilizing its reflection, absorption and transmission properties to
achieve commercially important effects such as high reflectivity,
anti-glare, spectral filtering and color shifting. By integrating
superior process capabilities with advanced product design, we
provide complete optical solutions that address a range of end-
market applications.
TELECOMMUNICATIONS. We manufacture and sell optical components for
fiber optic communications systems including WDM products. We also
sell optical components used on satellites for solar power
generation, thermal control and other functions.
LIGHT INTERFERENCE PIGMENTS. Through Flex, we manufacture and sell
optically variable pigments used to prevent counterfeiting of the
world's currencies and other value documents and for use in paints
for automobiles and other consumer products.
DISPLAY. We manufacture and sell optical components used in
cathode ray tube (CRT) displays, flat panel displays and projection
display products such as large-screen projection televisions and
business projection systems. We are also developing optical
components for next generation computer monitors.
AEROSPACE AND INSTRUMENTATION. We manufacture and sell optical
components, including precision polymer optics, used in defense and
aerospace products, automated data collection products, and
medical, scientific and analytical instruments.
OFFICE AUTOMATION. We manufacture and sell optical components,
including precision polymer optics, for scanners, printers and
other office products.
RESULTS OF OPERATIONS
REVENUES. Revenues for the third quarter of fiscal 1999 were $89.9
million, an increase of $22.5 million or 33% over revenues of $67.4
million in the third quarter of fiscal 1998. Revenues for the first
nine months of fiscal 1999 were $243.7 million, an increase of
$58.6 million, or 32%, over revenues of $185.1 million in the first
nine months of fiscal 1998. In the first quarter of fiscal 1999, we
sold the assets of our manufacturing subsidiary in Germany (MMG)
and, in the second quarter of fiscal 1999, we purchased an optical
design and manufacturing company, OPKOR Inc. (OPKOR). See
<PAGE>
"Divestitures, Investments and Acquisitions" below. Adjusted for
OPKOR in fiscal 1999 and MMG in fiscal 1998, revenues for the third
quarter of fiscal 1999 would have increased $25.1 million, or 39%,
over revenues of $64.2 million in the third quarter of fiscal 1998
and revenues for the first nine months of fiscal 1999 would have
increased $67.2 million or 38% over revenues of $175.7 million for
the first nine months of 1998. The adjusted revenue increase in the
third quarter of fiscal 1999 over the same period of last year was
a result of increased revenues of $18.0 million in our
telecommunications markets, increased revenues of $5.4 million in
our light interference pigment markets, increased revenues of $3.2
million in our display markets and increased revenues of $216,000
in our office automation markets, offset by decreased revenues of
$1.7 million in our aerospace and instrumentation markets. The
adjusted revenue increase for the first nine months of 1999
compared to the same period of last year resulted from increased
revenues of $44.9 million in our telecommunications markets,
increased revenues of $17.8 million in our light interference
pigment markets, increased revenues of $3.1 million in our display
markets, increased revenues of $589,000 in our office automation
markets and increased revenues of $751,000 in our aerospace and
instrumentation markets. All of the revenue increases and
decreases were primarily due to changes in volume.
GROSS PROFIT. Gross profit for the third quarter of fiscal 1999
was $26.7 million, or 29.7% of revenues, compared to $22.9 million,
or 34.0% of revenues, for the third quarter of fiscal 1998. Gross
profit for the first nine months of fiscal 1999 was $74.2 million,
or 30.5% of revenues, compared to $61.9 million, or 33.5% of
revenues, for the first nine months of fiscal 1998. Adjusted for
OPKOR in fiscal 1999 and MMG in fiscal 1998, gross profit for the
third quarter of 1999 would have been $26.5 million, or 29.7% of
revenues, compared to gross profit of $22.0 million, or 34.3% of
revenues, for the third quarter of 1998 and gross profit for the
first nine months of fiscal 1999 would have been $74.0 million, or
30.5% of revenues, compared to gross profit of $59.6 million, or
33.9% of revenues, for the first nine months of fiscal 1998. The
1999 gross profit percentage decrease is primarily due to the
increase in sales in our telecommunications business which has
gross margins lower than our average.
RESEARCH AND DEVELOPMENT. Research and development expenditures in
the third quarter of 1999 were $7.4 million or 8.3% of revenues
compared to research and development expenditures in the third
quarter of 1998 of $4.2 million or 6.3% of revenues. Research and
development expenditures for the first nine months of 1999 were
$17.5 million or 7.2% of revenues compared to $12.1 million or 6.5%
of revenues for the first nine months of fiscal 1998. MMG's and
OPKOR's research and development expenditures were not material.
The third quarter and year to date increase in 1999 over the same
periods of last year is primarily due to expenditures for
telecommunications product development.
SELLING AND ADMINISTRATIVE. Selling and administrative expenses in
the third quarter of fiscal 1999 were $9.1 million compared to
$12.1 million for the third quarter of fiscal 1998. Adjusted for
OPKOR in fiscal 1999 and MMG in fiscal 1998, selling and
administrative expenses would have been $8.9 million for the third
<PAGE>
quarter of fiscal 1999, a decrease of $1.8 million, or 17%,
compared to selling and administrative expenses of $10.7 million in
the third quarter of fiscal 1998 and selling and administrative
expenses would have been $30.2 million for the first nine months of
fiscal 1999, an increase of $1.3 million, or 5%, compared to
selling and administrative expenses of $28.8 million for the first
nine months of fiscal 1998. The fiscal 1999 adjusted third quarter
decrease is primarily due to lower legal expenses in 1999. The
fiscal 1999 adjusted year to date increase is due to increased
sales and marketing expenses ($1.7 million) in the first two
quarters of 1999 offset by decreased legal expenses.
LOSS ON ASSET DISPOSAL. In the second quarter of fiscal 1999, we
sold one of our continuous coating machines that had previously
been taken out of service due to excess capacity. A loss of
$934,000 is reflected in our operating expenses for the first nine
months of fiscal 1999 in connection with this sale.
LEGAL SETTLEMENT. In the first quarter of fiscal 1999, we settled
a lawsuit with Optical Corporation of America (OCA) and certain of
its stockholders regarding a failed merger. A benefit of $3.0
million is reflected in our operating expenses for the first nine
months of fiscal 1999 for the cash proceeds from the settlement,
net of applicable legal expenses.
IN-PROCESS RESEARCH AND DEVELOPMENT CHARGES. In the first quarter
of fiscal 1999, we purchased the 40% interest in Flex held by SICPA
for $30.0 million. The transaction was recorded as a purchase in
the first quarter of fiscal 1999. In connection with the
transaction, a $2.9 million charge for in-process research and
development is reflected in our operating expenses for the first
nine months of fiscal 1999.
AMORTIZATION OF INTANGIBLES. We recorded amortization of
intangibles of $726,000 in the third quarter of fiscal 1999
compared to $200,000 in the third quarter of fiscal 1998 and $1.5
million in the first nine months of fiscal 1999 compared to
$598,000 for the first nine months of fiscal 1998. Adjusted for
MMG in 1998 and OPKOR in 1999, our intangible amortization would
have been $496,000 in the third quarter of fiscal 1999, $104,000 in
the third quarter of fiscal 1998, $1.2 million in the first nine
months of fiscal 1999 and $313,000 in the first nine months of
fiscal 1998. The adjusted increase in the third quarter and year
to date periods of fiscal 1999 is due to amortization of goodwill
and identifiable intangibles in connection with the purchase of
SICPA's interest in Flex.
INCOME FROM OPERATIONS. As a result of the foregoing changes in
revenue, gross profit and operating expenses, our income from
operations was $9.5 million for the third quarter of fiscal 1999
compared to $6.4 million for the third quarter of fiscal 1998 and
$23.9 million for the first nine months of fiscal 1999 compared to
$16.5 million for the first nine months of fiscal 1998.
INTEREST INCOME AND EXPENSE. Interest income for the third
quarter of fiscal 1999 was $1.2 million compared to interest income
of $117,000 for the third quarter of fiscal 1998. Interest income
for the first nine months of fiscal 1999 was $1.8 million compared
<PAGE>
to interest income of $282,000 for the first nine months of fiscal
1998. The increase in interest income in the quarter and year to
date periods of 1999 is due to higher cash balances in 1999.
Interest expense, net of capitalized interest, for the third
quarter of fiscal 1999 was $946,000 compared to $796,000 for the
third quarter of fiscal 1998. Interest expense, net of capitalized
interest, for the first nine months of 1999 was $2.9 million
compared to $2.5 million for the first nine months of fiscal 1998.
Capitalized interest for the third quarter of fiscal 1999 was
$156,000 compared to $158,000 for the third quarter of fiscal 1998.
Capitalized interest for the first nine months of fiscal 1999 was
$402,000 compared to $506,000 for the first nine months of fiscal
1998. [H1]The capitalized interest decrease in fiscal 1999 was
primarily due to construction-in-progress that was put into service
during the first quarter of 1999.
PROVISION FOR INCOME TAXES AND MINORITY INTEREST. Our effective
income tax rate was 36.0% for the third quarter of fiscal 1999
compared to 39.4% for the third quarter of fiscal 1998. Our
effective income tax rate was 40.6% for the first nine months of
fiscal 1999 compared to 39.2% for the first nine months of fiscal
1998. Adjusted for the effect of the in-process research and
development charge, for which no tax benefit was recorded, our
effective income tax rate for the first nine months of fiscal 1999
would have been 36.0%. The quarter and year-to-date 1999 adjusted
tax rates are lower than the statutory rate due to the realization
of benefits from foreign sales corporations and business tax
credits in 1999. Minority interest was zero in the third quarter
of fiscal 1999 compared to $32,000 in the third quarter of fiscal
1998 and $491,000 in the first nine months of 1999 compared to
$587,000 in the first nine months of fiscal 1998. In the first
nine months of fiscal 1999, minority interest was recorded up to
the date of purchase of the remaining interest in Flex Products,
Inc. (Flex). In the third quarter and first nine months of fiscal
1998, minority interest represents the share of net income of Flex
accruing to its 40% stockholder, SICPA, and the portion of
operating results of OCLI Asia attributable to its Japanese
partner. We purchased the minority interest in OCLI Asia in the
fourth quarter of fiscal 1998.
NET INCOME APPLICABLE TO COMMON STOCK. We had net income applicable
to common stock of $6.2 million, or $.41 per share on a diluted
basis, for the third quarter of fiscal 1999 compared to $3.4
million, or $.27 per share on a diluted basis, for the third
quarter of fiscal 1998. We had net income applicable to common
stock of $13.0 million, or $.93 per share on a diluted basis, for
the first nine months of fiscal 1999 compared to $7.8 million, or
$.66 per share on a diluted basis, for the first nine months of
fiscal 1998.
FINANCIAL CONDITION AND LIQUIDITY
On May 26, 1999, we completed a public offering for the sale of
1,350,000 shares of OCLI common stock. The proceeds of the
offering, net of discounts, offering fees and estimated expenses,
were $88.9 million.
<PAGE>
As of July 31, 1999 we had cash and cash equivalents totaling
$120.0 million, an increase of $79.1 million from $40.9 million as
of October 31, 1998. The cash increase is due to the $88.9 million
proceeds from the aforementioned public offering, cash provided by
operations of $41.9 million, proceeds from asset sales of $5.8
million and proceeds from stock option exercises of $3.5 million
offset by $30.0 million cash used to purchase the minority interest
in Flex, capital expenditures of $19.9 million, debt repayments in
excess of proceeds of $6.8 million, $2.4 million used to purchase
Flex's working capital note from Flex's minority shareholder,
$305,000 used to purchase OPKOR and $1.6 million of dividends paid.
In the first nine months of fiscal 1999, our working capital,
excluding cash and short-term investments, decreased $136,000 from
$34.3 million to $34.1 million. This decrease was primarily due to
decreased inventory of $1.8 million, decreased accounts receivable
of $934,000, increased payables and accruals of $1.2 million and
increased deferred revenue of $2.9 million offset by current
maturities and bank notes payable decreases of $5.7 million and net
tax account decreases of $2.1 million. The year to date inventory
decrease is primarily due to the sale of MMG assets. The fiscal
year-to-date accounts receivable decrease is due to the collection
of MMG accounts receivable ($3.1 million) offset by increased
receivables consistent with higher third quarter 1999 sales. The
deferred revenue increase is primarily due to invoicing provisions
for light interference pigment.
In January 1999, we executed amendments to our credit agreement
increasing the amount available under our revolving line of credit
from $20.0 million to $40.0 million and removing the impairment
loss and restructuring charges recorded in fiscal 1998 from our
financial covenants. In July 1999, we executed an amendment to
decrease the amount available under our revolving line of credit
from $40.0 million to $25.0 million.
In March 1999, we replaced the credit facilities of our subsidiary
in Japan with a two-year revolving credit facility with a Japanese
bank of approximately $8.7 million. The term of the facility
expires on March 15, 2001 with principal to be paid by that date.
Interest at the Tokyo Interbank Offer Rate plus 1.25 percent
(currently 1.6% per year) is payable quarterly. In addition, our
Japanese subsidiary has a $1.7 million accounts receivable
discounting facility under which there were no borrowings at July
31, 1999.
In the first nine months of fiscal 1999, demand for light
interference pigment exceeded capacity resulting in an inventory
decrease of $3.4 million at Flex to satisfy excess demand.
Existing backlog and projected orders at Flex are expected to fill
available capacity for light interference pigment for the remainder
of fiscal 1999. We have initiated a capacity expansion at Flex
that is expected to begin production in the second half of fiscal
2000. The estimated cost of this expansion is $19.9 million for
which we have firm purchase commitments outstanding of
approximately $5.6 million. Including commitments for the above
<PAGE>
expansion, as of July 31, 1999, our total capital commitments are
approximately $7.9 million.
We believe that cash on hand at July 31, 1999, cash anticipated to
be generated from future operations, and available funds from
revolving credit arrangements will be sufficient for us to meet our
working capital, capital expenditure, acquisition and debt service
requirements and dividend payments as declared for at least the
next twelve months.
IMPACT OF YEAR 2000
The "Year 2000 Issue" is the result of computer programs that were
written using two digits rather than four digits to define the
applicable year. If our 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.
We have identified our 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 fiscal 1997, as part of a
business modernization program intended to reduce cycle time and
improve profitability, we purchased an Enterprise Resource Planning
System (ERP system) that the software vendor has indicated is Year
2000 compliant. The total hardware, software and installation cost
of the ERP system was $4.0 million, all of which had been spent as
of July 31, 1999. We are in the implementation phase for this
system and other ancillary financial systems with full
implementation scheduled for September 30, 1999. Based on this
schedule, we expect to be in full compliance with our 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 our
operations. Contingency plans have been established in a few areas
where we feel there is some risk that the system will not be
implemented before the Year 2000. Those plans include adapting
some of our 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. We
have taken an inventory of our non-financial software and equipment
that may be affected by the Year 2000, and we are in the process of
testing those items that we believe are critical to our operations.
At this time, we estimate the cost of Year 2000 testing and
remediation of our non-financial software and equipment to be
approximately $350,000. Full Year 2000 compliance for our internal
non-financial software and imbedded chip technology is scheduled
for September 30, 1999. However, if due to unforeseen
circumstances, we are unable to achieve Year 2000 compliance for
our major non-financial systems and imbedded chip technology, the
<PAGE>
Year 2000 could have a material impact on our operations. We are
currently working on contingency plans to address unforeseen issues
that may arise with internal non-financial software and imbedded
chip technology.
EXTERNAL NON-COMPLIANCE BY CUSTOMERS AND SUPPLIERS. We have
identified and contacted our critical suppliers, service providers
and contractors to determine the extent to which our interface
systems are vulnerable to those third parties' failure to remediate
their own Year 2000 issues. We are continuing to monitor the
progress of third parties that are critical to our business;
however, we cannot be assured that customers' and suppliers'
representations are accurate or that they will reach Year 2000
compliance in a timely manner. If we determine that the progress
of specific suppliers, service providers or contractors toward Year
2000 compliance is insufficient, we intend to change to other
providers that have demonstrated Year 2000 readiness. However, we
cannot be assured that we will be successful in finding such
alternative suppliers, service providers and contractors. In the
event that any of our significant customers and suppliers are not
successful or timely in achieving Year 2000 compliance and we are
unable to replace them with new customers or alternate suppliers,
our business or operations could be adversely affected.
DIVESTITURES, INVESTMENTS AND ACQUISITIONS
SALE OF MMG. In the first quarter of fiscal 1999, Glas-Trosche
GmbH, a privately held company in Switzerland, purchased the
business, operating assets and other related intangibles of MMG for
$4.3 million. We retained ownership of an office building with an
appraised value of approximately $500,000 and accounts receivable
and cash totaling $3.4 million. Third party liabilities of MMG
were $4.5 million, which were paid from the asset sale proceeds,
cash on hand and collection of accounts receivable. Since the
assets were sold for the recorded value, adjusted for the
impairment loss recorded in fiscal 1998, no gain or loss was
recognized in connection with the sale.
In connection with the sale of MMG, we 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 under those contracts is
being recognized as revenue over the three-year terms of the
agreements.
INVESTMENT IN FLEX. In December 1998, we purchased SICPA's 40%
interest in Flex for $30.0 million in cash, increasing our
ownership to 100%, and we purchased SICPA's $2.4 million working
capital loan. This transaction was recorded as a purchase in the
first quarter of fiscal 1999. As a result, we recorded a charge
for in-process research and development of $2.9 million, goodwill
of $9.8 million that is being amortized over 15 years and
identifiable intangibles (included in other assets) of $10.1
million that are being amortized over useful lives ranging from 11
to 15 years. The License and Supply Agreement between Flex and
SICPA that runs through October 31, 2009 was modified to increase
SICPA's minimum purchase requirements in association with Flex's
<PAGE>
commitment to put in place additional capacity to manufacture light
interference pigments.
PURCHASE OF OPKOR INC. In February 1999, we purchased OPKOR, an
optical design and manufacturing company specializing in precision
polymer optic components and assemblies, for $9.0 million plus
annual contingent payments in our common stock based on profits of
the acquired entity. The initial $9.0 million was paid in the form
of $1.8 million in cash and 267,285 shares of our common stock.
The cumulative amount of the contingent payments cannot exceed the
number of shares equal in value to $18.0 million. This transaction
was recorded as a purchase in the second quarter of fiscal 1999
and, as a result, we recorded goodwill and related intangibles of
$7.1 million that are being amortized over an average life of 8
years.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no significant changes in market risk since October
31, 1998.
RISK FACTORS
WE RELY HEAVILY ON JDS UNIPHASE FOR THE DESIGN, PACKAGING,
ASSEMBLY, TESTING, DISTRIBUTION, SALES AND MARKETING OF CERTAIN OF
OUR TELECOMMUNICATIONS PRODUCTS.
. We rely on JDS Uniphase to design, package, assemble,
distribute, sell and market our products. Under the terms of our
agreements, JDS Uniphase has primary responsibility for the
design, packaging and assembly of WDM products covered by these
agreements. JDS Uniphase also has exclusive sales, marketing and
distribution responsibilities for such products. If JDS Uniphase
is unable to successfully distribute, market and sell our
products, we may be unable to find a substitute distribution,
marketing or sales partner or develop these capabilities
ourselves. We also rely on JDS Uniphase for significant financial
and technical contributions to these programs.
. We lack control over management decisions. We share with JDS
Uniphase the responsibility for making certain management
decisions as they relate to the WDM products covered by the
agreements. Certain decisions are made by a management committee
that has equal representation from JDS Uniphase and ourselves.
Our interests may not always be aligned. If we disagree with JDS
Uniphase on specific matters or general program direction, a
neutral party will make the decision. Such a decision may not be
in our best interests.
. Our share of profits could be reduced. Under our agreements with
JDS Uniphase, if the majority of the WDM products covered by the
agreements incorporate wavelength discrimination components not
originating from us, our share of the profits under the
agreements will be significantly reduced. In addition, we share
any losses incurred under the agreements.
. JDS Uniphase can terminate our agreements or fail to perform.
JDS Uniphase can terminate the agreements without cause beginning
in 2015. If JDS Uniphase terminates the agreements or fails to
<PAGE>
provide adequate resources to the program, we cannot be certain
that we could obtain substitute resources or a substitute partner
to commercialize our products.
. JDS merged with Uniphase. We cannot be certain what effect, if
any, this merger will have on us.
WE RELY EXCLUSIVELY ON SICPA'S USE OF OUR LIGHT INTERFERENCE
PIGMENTS TO PRODUCE OPTICALLY VARIABLE INK FOR THE SECURITY MARKET.
We have a strategic alliance with SICPA for the marketing and sale
of our light interference pigments used in connection with
currency, stamps, credit cards, passports and other specified value
documents. Under a license and supply agreement, we rely
exclusively on SICPA to market and sell these products worldwide.
We currently do not plan to develop our own marketing and sales
organization for our light interference pigments for use in
connection with such value documents. SICPA has the right to
terminate the agreement if we breach it. If SICPA terminates our
agreement or if it is unable to successfully market and sell our
light interference pigments for the applications covered by the
agreement, our business may be harmed and we may be unable to find
a substitute marketing and sales partner or develop these
capabilities ourselves. Also, if SICPA fails to meet its minimum
purchase requirements under the agreement for any reason, our
operating results would be adversely affected.
WE MUST KEEP PACE WITH CHANGING TECHNOLOGICAL AND CUSTOMER
REQUIREMENTS TO REMAIN COMPETITIVE.
The market for our products, particularly in the telecommunications
and display markets, is characterized by the existence of many
competing technologies, rapid technological change, frequent new
product introductions and enhancements, changes in customer demands
and evolving industry standards. Our existing products could be
rendered obsolete if we fail to remain competitive in any of these
ways. We have also found that the life cycles of our products are
difficult to estimate, primarily because they may vary according to
the particular application or vertical market segment. We believe
that our future success will depend upon our ability to continue to
enhance our current product line while we develop and introduce new
products that keep pace with competitive and technological
developments. We also must introduce these products in a timely
manner to meet our customers' changing needs. These developments
require us to continue to make substantial product development
investments. Because of these and other market conditions, we can
not be certain that we will be able to make the technological
improvements or the research investments necessary to offer our
products in a timely or effective manner.
We expect that new technologies will emerge as competition in the
telecommunications equipment industry increases and the need for
higher and more cost-effective bandwidth transmission expands. If
alternatives to our thin film filter-based products, such as
products based on planar waveguide, fiber grating or any other
technologies, are adopted by our customers, our telecommunications
business would suffer.
<PAGE>
The light interference pigments market is also susceptible to
changing technology and customer requirements. Growth in the demand
for our ChromaFlairR product within the consumer markets will
depend upon our ability to develop a more cost-effective process to
manufacture our light interference pigment products. Also, the
trend toward electronic currency, such as pre-paid or "smart
cards," may decrease the market for our light interference pigments
used on paper currency.
WE DEPEND ON THE TELECOMMUNICATIONS INDUSTRY FOR GROWTH IN THE
SALES OF OUR WDM AND SATELLITE PRODUCTS.
Our ability to grow our WDM and satellite products businesses
depends in part on the continued growth and success of the
telecommunications industry. Recently, telecommunications markets
around the world have been deregulating and opening to global
competition. This deregulation generally has resulted in increased
competition and demand for telecommunications products and
services. Additionally, the growing volume of data, voice and video
traffic has increased bandwidth demand. These trends have driven
increased demand for our WDM and satellite products. However, such
trends may not continue in a manner that is favorable to us.
The rate at which long distance carriers and other fiber optic
network operators have built new fiber optic networks or installed
new systems in their existing fiber optic networks has fluctuated
in the past and may continue to fluctuate in the future. These
fluctuations may result in reduced demand for new or upgraded fiber
optic systems that utilize our products. We can not be certain that
technological or other developments in the telecommunications
industry will favor growth in the markets served by our products.
Moreover, as the telecommunications industry consolidates and
realigns to accommodate technological and other developments, there
is a risk that certain of our customers and telecommunication
service providers may consolidate or align themselves together in a
manner adverse to our business interests.
Growth of our satellite component business depends on growth in the
number of satellite launches. In 1999, 2000, 2003 and 2004, the
number of launches per year are expected to decrease from 1998
figures. Continuation of this trend would have an adverse effect on
our satellite business.
WE DEPEND ON THE PROJECTION DISPLAY AND FLAT PANEL DISPLAY MARKETS
FOR GROWTH IN THE SALES OF OUR DISPLAY PRODUCTS.
Our ability to grow our display products business depends
significantly on the continued growth and success of the projection
and flat panel display markets. Advances in the technology used in
computer monitors, televisions, conference room projectors and
other display devices have led to increased demand for flat panel
displays and projection displays. We cannot be certain that growth
in these markets will continue or that technological or other
changes in this industry will result in continued growth. In
addition, the display market is subject to pricing pressure,
consolidation and realignment as industry participants try to
position themselves to take advantage of the changing competitive
landscape. There is a risk that any consolidations and realignments
<PAGE>
may adversely affect our business, and pricing pressure will
adversely affect our operating results.
WE DEPEND ON OUR OEM CUSTOMERS FOR THE SALE OF OUR PRODUCTS AND FOR
INFORMATION RELATING TO THE DEVELOPMENT OF NEW PRODUCTS.
We sell a substantial portion of our products to a relatively small
number of original equipment manufacturers (OEMs). The timing and
amount of sales to these customers ultimately depend on sales
levels and shipping schedules for the OEM products into which our
products are incorporated. We have no control over the shipping
dates or volume of products shipped by our OEM customers, and we
cannot be certain that our OEM customers will continue to ship
products that incorporate our products at current levels or at all.
Failure of these OEMs to achieve significant sales of products
incorporating our products and fluctuations in the timing and
volume of such sales could be harmful to our business. In addition,
failure of our OEM customers to inform us of changes in their
production needs in a timely manner can hinder our ability to
effectively manage our business.
In addition, we rely on our OEM customers to inform us of
opportunities to develop new products that serve end user demands.
If our OEM customers do not present us with market opportunities
early enough for us to develop products to meet end user needs in a
timely fashion or if the OEMs fail to anticipate end user needs at
all, we may fail to develop new products or modify our existing
products for our end user markets. In addition, if our OEM
customers fail to accurately anticipate end user demands, we may
spend resources on products that are not commercially successful.
ACQUIRING COMPLEMENTARY COMPANIES WILL EXPOSE US TO ADDITIONAL
RISKS.
From time to time, we intend to acquire companies with products and
services complementary to our own that we believe can help us
commercialize our products quickly and efficiently. These
acquisitions and any future acquisitions will expose us to
increased risks and costs, including the following:
. failure to retain customers;
. integrating new operations and technologies;
. assimilating and retaining new personnel; and
. diverting financial and management resources from existing
operations.
We may not be able to generate sufficient profits from any of these
acquisitions to offset the associated acquisition costs. We will
also be required to maintain uniform standards of quality and
service, controls, procedures and policies. We may have difficulty
assimilating and maintaining uniformity over OPKOR's operations
because it is located in Rochester, New York, which is far from our
California headquarters. Our failure to maintain any of these
standards may hurt relationships with customers, employees and new
<PAGE>
management personnel. In addition, our future acquisitions may
result in additional stock issuances that could be dilutive to our
stockholders.
WE MAY NOT BE ABLE TO ENTER INTO STRATEGIC ALLIANCES TO EFFECTIVELY
COMMERCIALIZE OUR PRODUCTS.
As we develop optical products, we often rely on strategic
alliances with other companies in a particular market to
commercialize our products in a timely or effective manner. Our
current strategic alliance partners provide us with assistance in
the marketing, sales and distribution of our diverse line of
products. We may be unable to find appropriate strategic alliances
in markets in which we have little experience, which could prevent
us from bringing our products to market in a timely manner, or at
all. In our decorative pigments business, we may form alliances
that would help us penetrate the automotive and other industries.
If we do not enter into effective alliances, our ChromaFlairR
products may not achieve satisfactory market penetration.
OUR FAILURE TO MANAGE GROWTH COULD ADVERSELY AFFECT US.
The recent accelerated growth of our business has placed, and is
expected to continue to place, a strain on our limited personnel,
management and other resources. In particular, the growth of our
telecommunications business related to fiber optic networks and our
light interference pigments business related to security and value
documents has required us to allocate significantly increased
amounts of manufacturing capabilities, personnel and other
resources to those markets. In addition, our ability to manage and
allocate resources is complicated by the number, diversity and
complexity of our product lines. Our management, personnel,
systems, procedures and controls may be inadequate to support our
existing and future operations. If required to manage future
growth, the implementation of management systems can be time
consuming and costly. In order to manage future growth effectively,
we will need to attract, train, integrate, motivate, manage and
retain employees successfully to continue to improve our
operational, financial and management systems.
WE MUST MANAGE OUR MANUFACTURING OPERATIONS AND FACILITIES
EFFECTIVELY TO MEET CHANGING CAPACITY REQUIREMENTS.
We currently manufacture all of our products at our facilities in
Santa Rosa, California, Hillend, Scotland, Atsugi, Japan and
Rochester, New York. We are currently experiencing manufacturing
capacity constraints and we are in the process of expanding our
manufacturing capacity at some of these facilities. In addition,
many of our customers have requested that we build manufacturing
capabilities that are near or on their facilities to provide just-
in-time production capabilities. If our plans to expand our
manufacturing capacity are not implemented on a timely basis, we
could face production shortfalls. In addition, we may be required
to make additional capital investments in new or existing
manufacturing facilities. Rapid increases in production levels to
meet unanticipated demand could result in higher costs for
components and subassemblies and higher overtime costs and other
expenses. These higher expenditures could lower our profit margins.
<PAGE>
Further, if production is increased rapidly, there may be decreased
manufacturing yields, which may also lower our margins.
In order to meet forecasted demand, we will need to increase our
manufacturing capability for light interference pigments. We
currently intend to begin operating our third light interference
pigment production machine in the middle of 2000. In the past, we
have experienced significant problems during the initial phases of
operating a new machine, which required us to take substantial
write-offs of inventory and incur substantial expenses to solve
these problems. If we encounter similar problems with this new
machine, our production capability and our operating results will
suffer.
Many of our machines are the only manufacturing sources for
particular products and are running at or near capacity. We do not
have plans to develop redundancy for much of our production
capability. Therefore, a breakdown or catastrophic damage to
certain machines would severely and adversely affect our business.
In addition, it can take up to two years to replace certain
production machines.
We are expanding our manufacturing capabilities and expending
capital in anticipation of a level of customer orders that may not
be achieved. If demand falls below our forecast, we could have
excess production or excess capacity. Excess production could
result in higher inventories of our products. If we were unable to
sell these inventories, we would be forced to write off such
inventories as obsolete products. Excess manufacturing capacity
could lead to higher production costs and lower margins.
We have in the past and may in the future experience difficulties
in the management of our manufacturing facilities located overseas
because of the distance from our headquarters and difference in
time zone. To the extent that we expand our overseas manufacturing
capabilities, these issues will be increased.
OUR OPERATING RESULTS MAY FLUCTUATE.
Our quarterly revenues and bookings are likely to fluctuate
significantly in the future due to a number of factors, many of
which are outside our control. Factors that could affect our
revenues and bookings include the following:
. variations in the size or timing of orders and shipments of our
products;
. new product introductions by competitors;
. delays in introducing new products or components;
. delays of orders forecasted by our customers;
. just in time manufacturing processes and consignment inventory
for key customers that may delay the scheduling of orders;
. delays in planned manufacturing capacity upgrades;
<PAGE>
. delays by our customers in the completion of upgrades of
telecommunications infrastructure;
. variations in capital spending budgets of telecommunications
service providers; and
. delays in obtaining regulatory approval for commercial
deployment of certain telecommunications and other products.
A significant portion of our operating expenses are relatively
fixed in nature. Changes in revenue may cause significant
fluctuations in our operating results from quarter to quarter.
To achieve our revenue objectives, we depend on obtaining orders
for shipment in the same quarter. Furthermore, our agreements with
our customers generally do not contain binding purchase commitments
and provide that our customers may change delivery schedules and
cancel orders within specified timeframes without significant
penalty. We generally recognize revenue upon shipment of products
to the customer except in the case of JDS Uniphase, where we
recognize revenue upon shipment by JDS Uniphase to their customers.
Refusal of customers or end users to accept shipped products,
returns of shipped products or delays or difficulties in collecting
accounts receivable could result in significant charges against
income. We may be unable to obtain sufficient orders in any
quarter, or anticipate the cancellation or deferral of such orders
in a quarter.
We have experienced and expect to continue to experience
seasonality in our business. Our sales have been affected by a
seasonal decrease in demand in the last quarter of each calendar
year, which coincides with the first quarter of our fiscal year,
due to year-end fluctuations in orders and operations of our
customers, a fewer number of workdays during the winter holiday
season, and the significant seasonality of consumer electronics
products for which we provide components. We expect this trend to
continue, although other trends may emerge. These trends, or other
fluctuations in the timing of customer orders, may cause quarterly
or annual fluctuations.
WE ARE DEPENDENT ON A SMALL NUMBER OF CUSTOMERS IN CERTAIN
INDUSTRIES.
We believe that a substantial majority of our revenues will
continue to be derived from sales to a relatively small number of
customers for the foreseeable future. In addition, we believe that
sales to these customers will be focused on a small number of
applications. The loss of a significant customer for any reason or
reduced production by a customer, could result in a significant
loss of revenue. In addition, some of our products are sold to
customers in industries, such as consumer products, that experience
significant fluctuations in demand based on economic conditions,
consumer demand and other factors that are beyond our control.
There can be no assurance that we will be able to increase or
maintain our levels of sales in periods of economic stagnation or
downturn. In the past, OEMs have reduced the amount of purchases of
<PAGE>
our products in an effort to reduce their costs in response to
economic crises.
WE ARE DEPENDENT ON KEY SUPPLIERS OF RAW MATERIALS.
We manufacture all of our products using materials procured from
third-party suppliers. Certain of these materials are obtained from
a single source and others are available from limited sources. In
addition, some of the components are custom parts produced to our
specifications. For example, we currently rely on Corning
Incorporated to supply a special grade microsheet flat glass that
is used in some of our products. Other materials are procured from
single-source suppliers even though other suppliers are available.
Any interruption in the operations of vendors of single-sourced
materials could adversely affect our ability to meet our scheduled
product deliveries to customers. Delays in key component or product
deliveries may occur due to shortages resulting from a limited
number of suppliers, the financial or other difficulties of such
supplier or a limitation in component product availability. If we
are unable to obtain a sufficient supply of materials from our
current sources, we could experience difficulties in obtaining
alternative sources quickly or in altering product designs to use
alternative materials. Resulting delays or reductions in product
shipments could damage customer relationships. Further, a
significant increase in the price of one or more of these materials
could have a material adverse effect on our operating results.
In addition, we are an extremely large consumer of electricity.
Unforeseen increases in the cost of electricity or interruptions or
reductions in our current supply of electricity could materially
affect our ability to manufacture our products in a cost-effective
or timely manner.
THE SALES CYCLE FOR OUR PRODUCTS IS LENGTHY AND SUBJECT TO DELAYS
BEYOND OUR CONTROL, WHICH MAY ADVERSELY IMPACT OUR RESULTS OF
OPERATIONS.
The sales cycle associated with our products typically is lengthy,
often lasting three to fifteen months. Our customers usually
conduct significant technical evaluations of our products prior to
the commitment of capital and other resources. In addition,
purchasing decisions may be delayed because of our customers'
internal budget approval procedures. Furthermore, end users of our
products may have lengthy testing and approval processes that will
delay purchases of our products by our customers. For example,
countries adopting security measures for their currency often will
consider and test alternatives to our light interference pigments
prior to making a purchasing decision. Because of the lengthy sales
cycle and the large size of customers' orders, if orders forecasted
for a specific customer for a particular quarter do not occur in
that quarter, our operating results for that quarter could be
materially adversely affected.
WE ARE DEPENDENT ON KEY PERSONNEL WITH EXPERTISE IN THE MANAGEMENT
OF LIGHT.
Due to the specialized nature of our business, we are highly
dependent on the continued service of, and on the ability to
<PAGE>
attract and retain, qualified engineering, sales, marketing and
senior management personnel in the area of light management. The
competition for such personnel is intense. The loss of any key
employees or management could have a material adverse effect on our
business and operating results. In addition, if we are unable to
hire additional qualified personnel as needed, we may not be able
to adequately manage and complete our existing sales commitments
and to bid for and execute additional sales. We may not be able to
continue to attract and retain the qualified personnel necessary
for the development of our business.
We must provide significant training for our growing employee base
due to the highly specialized nature of our technological expertise
in the area of light management and thin film optical coating. Our
current engineering personnel may be inadequate, and we may fail to
assimilate and train new employees successfully. Highly skilled
employees with the education and training that we require,
especially employees with significant experience and expertise in
thin film optical coating and fiber optics, are in high demand.
Once trained, our employees may be hired by our competitors.
We do not have "key person" insurance coverage for the loss of any
of our employees. Any officer or employee of our company can
terminate his or her relationship with us at any time. Except for
three employees of our OPKOR Inc. subsidiary, none of our employees
are bound by any non-competition agreements with us.
OUR PRODUCTS ARE SUBJECT TO GOVERNMENTAL AND INDUSTRY REGULATIONS,
CERTIFICATIONS AND APPROVALS.
The commercialization of our products may be delayed or made more
costly due to required government and industry approval processes.
In the past, the United States federal government has attempted to
restrict the export of our satellite-related products to certain
foreign countries for reasons of national security. Development of
applications for our ChromaFlairR products may require significant
testing that could delay our sales. For example, certain uses in
cosmetics may be regulated by the Food and Drug Administration,
which has extensive and lengthy approval processes. Durability
testing by the automobile industry of our pigments used with
automotive paints can take up to three years. If we change a
product for any reason including technological changes or changes
in the manufacturing process, prior approvals or certifications may
be invalid and we may need to go through the approval process
again. Additionally, some of our telecommunications products may
need to obtain Bellcore certification. This certification process
can last six months or longer. If we are unable to obtain these or
other government or industry certifications in a timely manner, or
at all, our results could be adversely affected.
THERE ARE MANY RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS.
We expect sales to customers outside of the United States to
continue to represent a significant percentage of our revenues for
the foreseeable future. International sales are subject to a number
of risks, including the following:
. changes in foreign government regulations and standards;
<PAGE>
. export license requirements, tariffs, taxes and other trade
barriers;
. requirements or preferences of foreign nations for domestic
products;
. fluctuations in currency exchange rates relative to the U.S.
dollar;
. difficulty in collecting accounts receivable;
. difficulty in managing foreign operations; and
. political and economic instability.
If our customers or end users of our products are impacted by
currency devaluations or general economic crises, such as the
economic crisis currently affecting many Asian and Latin American
economies, their ability to purchase our products could be
materially adversely affected. Payment cycles for international
customers typically are longer than those for customers in the
United States. Foreign markets for our products may develop more
slowly than currently anticipated for a variety of reasons. These
reasons include environmental issues, economic downturns, the
availability of favorable pricing for other communications services
or the availability and cost of related equipment.
WE HAVE SIGNIFICANT EXPOSURE TO FOREIGN INVESTMENTS.
We have significant capital investments in Scotland and Japan. We
record changes in the value of those countries' currencies relative
to the U.S. dollar as direct charges or credits to equity. In
addition to our manufacturing operations in Scotland and Japan, we
also have a 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, our export sales could be subject to
competitive price pressures if the U.S. dollar was to strengthen
compared to the currency of foreign competitors.
WE MAY NOT BE ABLE TO ADEQUATELY PROTECT OR ENFORCE OUR
INTELLECTUAL PROPERTY RIGHTS.
Our success and ability to compete are significantly dependent on
our proprietary technology. We rely on a combination of patent,
trade secret, copyright and trademark laws and contractual
restrictions to establish and protect proprietary rights in our
products. Our pending patent applications may not be granted. Even
if they are granted, the claims covered by the patents may be
reduced from those included in our applications. Any patent might
be subject to challenge in court and, whether or not challenged,
might not be broad enough to prevent third parties from developing
equivalent technologies or products. We have entered into
confidentiality and invention assignment agreements with our
employees, and we enter into non-disclosure agreements with some of
our suppliers, distributors and customers so as to limit access to
and disclosure of our proprietary information. These statutory and
<PAGE>
contractual arrangements may not prove sufficient to prevent
misappropriation of our technology or to deter independent
third-party development of similar technologies. In addition, the
laws of some foreign countries might not protect our products or
intellectual property rights to the same extent as do the laws of
the United States. Protection of our intellectual property might
not be available in every country in which our products might be
manufactured, marketed or sold.
WE MAY BE SUBJECT TO FUTURE CLAIMS OF INFRINGEMENT OF INTELLECTUAL
PROPERTY RIGHTS OF THIRD PARTIES.
We may in the future receive notices of claims of infringement of
other parties' patent, trademark, copyright and other intellectual
property rights. Any such claims, even those without merit, could
be time consuming to defend, result in costly litigation, divert
management's attention and resources or cause us to enter into
unfavorable royalty or licensing agreements. The assertion of such
claims could have a material adverse effect on our business.
OUR INDUSTRIES ARE HIGHLY COMPETITIVE WITH MANY ESTABLISHED
COMPETITORS, WHO MAY INCLUDE OUR CUSTOMERS, STRATEGIC ALLIANCE
PARTNERS AND SUPPLIERS.
The markets for our products are intensely competitive and
characterized by rapidly changing technology. We currently
experience competition from numerous companies in each of the
markets in which we participate.
In the fiber optic communications market, we face competition from
E-Tek Dynamics, Inc. and DiCon Fiberoptics, Inc., as well as other
WDM component vendors for the sale of WDM products. In the optical
switch markets, we will compete with these same companies, and
potentially with JDS Uniphase, our strategic partner for our WDM
business. In the satellites market, we compete with Pilkington
Aerospace, a division of Pilkington plc.
We face competition with our light interference pigments in the
security and value documents market from alternative technologies
such as holograms, embedded threads and watermarks. In the
decorative applications market for our light interference pigments,
we compete with providers of lower cost, lower performance special
effects pigments such as BASF AG and Merck KGaA. These companies
are also important customers for decorative pigments.
In the display market, we have a large number of domestic and
foreign competitors for our Glare/GuardR anti-glare optical
filters. Companies that purchase coated glass and assemble and sell
filters in competition with us include Fellowes Manufacturing
Company, Polaroid Corporation, ACCO Brands, Inc. and Minnesota
Mining and Manufacturing Company (3M). Certain of these companies
purchase private label products from us for resale in competition
with our Glare/GuardR product line. In the flat panel display
market, we face competition from Japanese coating companies such as
Nidek Co., Ltd., Toppan Printing Co., Ltd. and Tore. In projection
display components, our competition includes Viratec Thin Films,
Inc., Balzers and Leybold Group, Nitto Optical Co., Ltd., Nikon
Corporation and Fuji Photo-Optical.
<PAGE>
Competitors in any portion of our business are also capable of
rapidly becoming competitors in other portions of our business. Our
existing and potential customers are often our current and
potential competitors. These companies may develop or acquire
additional competitive products or technologies in the future and
thereby reduce or cease their purchases from us. Additionally, we
compete with large, diversified companies such as BASF and Merck
KGaA that are also our suppliers. We may also face competition in
the future from these and other parties that develop fiber optic
components based upon the technologies similar to or different from
the technologies employed by us.
We expect competition in general to intensify substantially,
particularly in the expanding telecommunications and special
effects pigments markets. We further expect competition to be
broadly based on varying combinations of manufacturing capacity,
ability to deliver products on time, and technical features, each
of which may render our existing products non-competitive, obsolete
or unmarketable. The development of new high-precision products is
a complex and uncertain process requiring high levels of innovation
and highly skilled assembly and manufacturing processes, as well as
the accurate anticipation of technological and market trends. Many
of our competitors have substantially greater financial, technical,
manufacturing, marketing and other resources with which to develop
new technologies and to promote their products. We may be unable to
identify, develop, manufacture, market or support new or enhanced
products successfully or on a timely basis. We also may be unable
to respond effectively to product announcements by competitors,
technological changes or emerging industry standards. We also face
competition from numerous smaller companies.
WE FACE RISKS RELATING TO THE YEAR 2000 ISSUE.
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 our computer programs with date-sensitive
functions are not Year 2000 compliant, they may recognize a date
using "00" as 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.
We have identified our Year 2000 risk in three components: internal
business software; internal non-financial software and imbedded
chip technology; and external noncompliance by customers and
suppliers. We are in the process of installing an enterprise
resource planning system and we currently expect to be in full
compliance with our 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 our operations. If we are unable to
achieve Year 2000 compliance for our major non-financial systems,
the Year 2000 could have a material impact on our operations.
Any failure of third-party networks, systems or services upon which
our business depends could have a material adverse impact on our
<PAGE>
business. We also rely on other systems and services that third
parties provide to our customers. As a result, the success of our
plan to address Year 2000 issues depends in part on parallel
efforts being undertaken by other third parties. We have begun to
identify and initiate communications with third parties whose
networks, systems or services are critical to our business to
determine the status of their Year 2000 compliance. We cannot
assure you that all such parties will provide accurate and complete
information, or that all their networks, systems or services will
achieve full Year 2000 compliance in a timely fashion. In the event
that any of our significant customers and suppliers do not
successfully and timely achieve Year 2000 compliance, and we are
unable to replace them with new customers or alternate suppliers,
our business or operations could be adversely affected.
Although we believe that all of our current products are Year 2000
compliant, we cannot be certain that there will not be claims
against us, particularly since we have been in business for over
50 years. The outcome and the costs involved in defending such
claims could have an adverse effect on our business. In addition,
responding to customer inquiries regarding Year 2000 issues has
created a burden on our internal resources.
OUR MANUFACTURING FACILITIES ARE CONCENTRATED IN AN AREA
SUSCEPTIBLE TO EARTHQUAKES.
Our headquarters and most of our manufacturing facilities are
concentrated in an area where there is a risk of significant
earthquake activity. Substantially all of the production equipment
that currently accounts for our revenues, as well as planned
additional production equipment, is or will be located in a known
earthquake zone. In addition, much of our plant and equipment was
built a number of years ago and are not in compliance with current
seismic codes. We cannot predict the extent of the damage that our
facilities and equipment would suffer in the event of an earthquake
or how such damage would affect our business. We currently maintain
earthquake insurance in the amount of $20.9 million with a
deductible of five percent of insured value. However, we cannot be
certain if this type of insurance will be available in the future
at reasonable rates, or at all, or if this insurance will be
sufficient to cover all damages that we may suffer as a result of
an earthquake.
OUR BUSINESS IS SUBJECT TO THE RISKS OF PRODUCT RETURNS, PRODUCT
LIABILITY AND PRODUCT DEFECTS.
Products as complex and precise as ours frequently contain
undetected errors or flaws, especially when first introduced or
when new versions are released. The occurrence of errors could
result in product returns and other losses to us or to our
customers. Some of our products are used in applications that have
severe consequences if our products or the products in which our
products are incorporated should fail. Such failure also could
result in the loss of or delay in market acceptance of our
products. Due to the recent introduction of some of our products,
we have limited experience with the problems that could arise with
these products.
<PAGE>
Our purchase agreements with our customers typically contain
provisions designed to limit our exposure to potential product
liability claims. However, the limitation of liability provision
contained in our purchase agreements may not be effective as a
result of federal, state or local laws or ordinances or unfavorable
judicial decisions in the United States or other countries. We have
not experienced any material product liability claims to date, but
the sale and support of our products entails the risk of such
claims. In addition, any failure by our products to properly
perform could result in claims against us by our customers. We
maintain insurance to protect against certain claims associated
with the use of our products, but our insurance coverage may not
adequately cover any claim asserted against us. In addition, even
claims that ultimately are unsuccessful could result in our
expenditure of funds in litigation and loss of management time and
resources.
OUR MANUFACTURING PROCESSES MAY EXPOSE US TO ENVIRONMENTAL
LIABILITIES.
We are subject to various federal, state, local and foreign
environmental laws and regulations, including those governing the
use, discharge and disposal of hazardous substances in the ordinary
course of our manufacturing process. In the past, we have found
ground water contamination at our facilities and have had to spend
substantial amounts of money to contain and monitor the
contamination. Although we believe that our current manufacturing
operations comply in all material respects with applicable
environmental laws and regulations, environmental legislation has
been enacted and may in the future be enacted or interpreted to
create environmental liability with respect to our facilities or
operations. We cannot be certain that environmental claims will not
be asserted against us in the future.
SOME ANTI-TAKEOVER PROVISIONS MAY AFFECT THE PRICE OF OUR COMMON
STOCK.
The Board of Directors has the authority to issue up to 100,000
shares of preferred stock and to determine the rights, preferences
and privileges of those shares without any further vote or action
by the stockholders. Of these 100,000 shares, 10,000 shares are
currently designated "Series A Preferred Stock" in connection with
our stockholders' rights plan described below, and 15,000 shares
were designated "Series B Cumulative Convertible Preferred Stock,"
of which 6,650 shares remain available for future issuance. The
rights of the holders of common stock may be adversely affected by
the rights of the holders of any preferred stock that may be issued
in the future. Some provisions of our certificate of incorporation
and bylaws could have the effect of making it more difficult for a
third party to acquire a majority of our outstanding voting common
stock. These include provisions that limit the ability of
stockholders to take action by written consent, call special
meetings, remove a director for cause, amend the by-laws or approve
a merger with another company.
We are subject to the provisions of Section 203 of the Delaware
General Corporation Law, an anti-takeover law. In general, the
statute prohibits a publicly-held Delaware corporation from
<PAGE>
engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder,
unless the business combination is approved in a prescribed manner.
For purposes of Section 203, a "business combination" includes a
merger, asset sale or other transaction resulting in a financial
benefit to the interested stockholder, and an "interested
stockholder" is a person who, together with affiliates and
associates, owns (or within three years prior, did own) 15.0% or
more of the corporation's voting stock.
We have a stockholders' rights plan, commonly referred to as a
"poison pill," that makes it difficult, if not impossible, for a
person to acquire control of us without the consent of our Board of
Directors.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1996
Except for historical information contained in this report, matters
discussed in this report are forward-looking statements that
involve risks and uncertainties. Actual results my vary
significantly based on a number of factors including, but not
limited to, product development, commercialization and
technological difficulties; manufacturing cost, yield and
throughput issues associated with initiating production at new
facilities; the impact of competitive products and pricing;
changing customer requirements and buying patterns; timely
availability and acceptance of new products; change in economic
conditions of the various markets that we serve; and Year 2000
issues.
INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors
and Stockholders of
Optical Coating Laboratory, Inc.
Santa Rosa, California
We have reviewed the accompanying condensed consolidated balance
sheet of Optical Coating Laboratory, Inc. and subsidiaries as of
July 31, 1999, and the related condensed consolidated statements of
income and of cash flows for the three-month and nine-month periods
ended July 31, 1999 and 1998 and the related condensed consolidated
statement of stockholders' equity and comprehensive income for the
nine-month periods ended July 31, 1999 and 1998. These financial
statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by
the American Institute of Certified Public Accountants. A review
of interim financial information consists of applying analytical
review procedures to financial data and making inquiries of persons
responsible for financial and accounting matters. It is
substantially less in scope than an audit in accordance with
generally accepted auditing standards, the objective of which is
<PAGE>
the expression of an opinion regarding the financial statements
taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications
that should be made to such condensed consolidated financial
statements for them to be in conformity with generally accepted
accounting principles.
We have previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet of Optical
Coating Laboratory, Inc. and subsidiaries as of October 31, 1998,
and the related consolidated statements of income, stockholders'
equity, and cash flows for the year then ended (not presented
herein); and in our report dated December 22, 1998 (January 8, 1999
as to Note 5), we expressed an unqualified opinion on those
consolidated financial statements based on our audit. In our
opinion, the information set forth in the accompanying condensed
consolidated balance sheet as of October 31, 1998 is fairly stated,
in all material respects, in relation to the consolidated balance
sheet from which it has been derived.
Deloitte & Touche LLP
San Jose, California
August 19, 1999
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There have been no material changes in legal proceedings since
those reported in the Registrant's Form 10-K for the year
ended October 31, 1998.
ITEM 2. CHANGES IN SECURITIES
Effective February 22, 1999, the Company acquired all the
outstanding shares of OPKOR Inc., an optical design and
manufacturing company specializing in precision optic components
and assemblies, for $1.8 million in cash and 267,285 shares of
common stock of the Company issued to the former stockholders of
OPKOR. The shares of common stock were issued pursuant to an
exemption from registration under Section 4(2) of the Securities
Act of 1933, as amended. Of the 267,285 shares issued, 138,000
shares were subsequently registered for resale on May 21, 1999
under the Company's Registration Statement on Form S-3
(Registration No. 333-76853).
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
No disclosure required.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
No disclosure required.
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
4.0 Fourth Amendment, dated as of May 25, 1999 to Credit Agreement
dated as of July 31, 1998 among the Registrant, Bank of
America National Trust and Savings Association, as Agent,
Letter of Credit Issuing Bank and The Other Financial
Institutions Party Thereto.
15 Letter of Deloitte & Touche LLP regarding unaudited interim
financial information.
27 Financial Data Schedule for the three months ended July 31,
1999.
(b) Reports on Form 8-K filed for the three months ended July 31,
1999:
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
OPTICAL COATING LABORATORY, INC.
September 14, 1999 By: /s/ CRAIG B. COLLINS
- ----------------------- -------------------------
Date Craig B. Collins, Vice
President, Finance and Chief
Financial Officer
(Principal Financial Officer)
<PAGE>
FIFTH AMENDMENT TO CREDIT AGREEMENT
-----------------------------------
THIS FIFTH AMENDMENT TO CREDIT AGREEMENT ("Amendment"),
dated as of July 30, 1999, is entered into by and among OPTICAL
COATING LABORATORY, INC. (the "Company"), the several financial
institutions party to the Credit Agreement (collectively, the
"Banks"), and BANK OF AMERICA, N.A. (formerly known as BANK OF
AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION), as agent for
itself and the Banks (the "Agent") and as letter of credit
issuing bank.
RECITALS
--------
A. The Company, Banks, and Agent are parties to a Credit
Agreement dated as of July 31, 1998, as amended by a Waiver and
First Amendment to Credit Agreement dated as of January 8, 1999,
effective as of October 31, 1998, a Second Amendment to Credit
Agreement dated as of January 31, 1999, a Third Amendment to
Credit Agreement dated as of February 26, 1999, and a Fourth
Amendment to Credit Agreement dated as of May 11, 1999 (as so
amended, the "Credit Agreement") pursuant to which the Banks have
extended certain credit facilities to the Company. Immediately
prior hereto, ABN AMRO Bank N.V. has assigned all of its
Commitment and other rights and obligations under the Credit
Agreement to Bank of America, N.A.
B. The Company has requested that the amount of the
Commitments be reduced under the Credit Agreement and that the
Banks agree to a certain amendment of the Credit Agreement.
C. The Banks are willing so to amend the Credit Agreement,
subject to the terms and conditions of this Amendment.
NOW, THEREFORE, for valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the parties hereto
hereby agree as follows:
1. Defined Terms. Unless otherwise defined herein,
capitalized terms used herein shall have the meanings, if any,
assigned to them in the Credit Agreement.
2. Amendments to Credit Agreement.
(a) Section 9.01(e)(i)(A) of the Credit Agreement shall be
amended by deleting the amount "$2,000,000" and inserting
"$3,000,000" in place thereof.
(b) Schedule 2.01 of the Credit Agreement shall be amended
and restated in its entirety to read as set forth in Schedule
2.01 attached hereto.
3. Representations and Warranties. The Company hereby
represents and warrants to the Agent and the Banks as follows:
(a) After giving effect to this Amendment, no Default
or Event of Default has occurred and is continuing.
(b) The execution, delivery and performance by the
Company of this Amendment have been duly authorized by all
necessary corporate and other action and do not and will not
require any registration with, consent or approval of, notice to
or action by, any Person (including any Governmental Authority)
in order to be effective and enforceable. The Credit Agreement
as amended by this Amendment constitutes the legal, valid and
binding obligations of the Company, enforceable against it in
accordance with its respective terms, except as enforceability
may be limited by applicable bankruptcy, insolvency, or similar
laws affecting the enforcement of creditors' rights generally or
<PAGE>
by equitable principles relating to enforceability, without
defense, counterclaim or offset.
(c) After giving effect to this Amendment, all
representations and warranties of the Company contained in the
Credit Agreement are true and correct on and as of the date
hereof, except to the extent such representations and warranties
expressly refer to an earlier date, in which case they are true
and correct as of such earlier date.
(d) The Company is entering into this Amendment on the
basis of its own investigation and for its own reasons, without
reliance upon the Agent and the Banks or any other Person.
4. Effective Date. This Amendment will become effective
as of the date first above written, or, if later, the date on
which the Agent has received from the Company and the Banks a
duly executed original (or, if elected by the Agent, an executed
facsimile copy) of this Amendment.
5. Reservation of Rights. The Company acknowledges and
agrees that the execution and delivery by the Agent and the Banks
of this Amendment shall not be deemed to create a course of
dealing or otherwise obligate the Agent or the Banks to enter
into amendments under the same, similar or any other
circumstances in the future.
6. Miscellaneous.
(a) Except as herein expressly amended, all terms,
covenants and provisions of the Credit Agreement are and shall
remain in full force and effect and all references therein and in
the other Loan Documents to such Credit Agreement shall
henceforth refer to the Credit Agreement as amended by this
Amendment. This Amendment shall be deemed incorporated into, and
a part of, the Credit Agreement. This Amendment is a Loan
Document.
(b) This Amendment shall be binding upon and inure to
the benefit of the parties hereto and their respective successors
and assigns. No third party beneficiaries are intended in
connection with this Amendment.
(c) This Amendment shall be governed by and construed
in accordance with the law of the State of California.
(d) This Amendment may be executed in any number of
counterparts, each of which shall be deemed an original, but all
such counterparts together shall constitute but one and the same
instrument. Each of the parties hereto understands and agrees
that this document (and any other document required herein) may
be delivered by any party thereto either in the form of an
executed original or an executed original sent by facsimile
transmission to be followed promptly by mailing of a hard copy
original, and that receipt by the Agent of a facsimile
transmitted document purportedly bearing the signature of a Bank
or the Company shall bind such Bank or the Company, respectively,
with the same force and effect as the delivery of a hard copy
original. Any failure by the Agent to receive the hard copy
executed original of such document shall not diminish the binding
effect of receipt of the facsimile transmitted executed original
of such document of the party whose hard copy page was not
received by the Agent, and the Agent is hereby authorized to make
sufficient photocopies thereof to assemble complete counterparty
documents.
(e) This Amendment, together with the Credit
Agreement, contains the entire and exclusive agreement of the
<PAGE>
parties hereto with reference to the matters discussed herein and
therein. This Amendment supersedes all prior drafts and
communications with respect thereto. This Amendment may not be
amended except in accordance with the provisions of Section 11.01
of the Credit Agreement.
(f) If any term or provision of this Amendment shall
be deemed prohibited by or invalid under any applicable law, such
provision shall be invalidated without affecting the remaining
provisions of this Amendment or the Credit Agreement,
respectively.
(g) The Company covenants to pay to or reimburse the
Agent, within five Business Days after demand, for all costs and
expenses (including reasonable Attorney Costs) incurred in
connection with the development, preparation, negotiation,
execution and delivery of this Amendment.
IN WITNESS WHEREOF, the parties hereto have executed and
delivered this Amendment as of the date first above written.
OPTICAL COATING LABORATORY, INC.
By: /s/ Jeffrey M. Ryan
---------------------------------
Name: Jeffrey M. Ryan
---------------------------------
Title: Assistant Treasurer
---------------------------------
BANK OF AMERICA, N.A. (formerly known as Bank of America National
Trust and Savings Association), as Agent
By: /s/ T. McComas
---------------------------------
Name: T. McComas
---------------------------------
Title: Vice President
---------------------------------
BANK OF AMERICA, N.A. (formerly known as Bank of America National
Trust and Savings Association), as Issuing Bank and as a Bank
By: /s/ T. McComas
---------------------------------
Name: T. McComas
---------------------------------
Title: Vice President
---------------------------------
SCHEDULE 2.01
-------------
COMMITMENTS AND PRO RATA SHARES
-------------------------------
Bank Commitment Pro Rata Share
- ---- ---------- --------------
Bank of America, N.A. $25,000,000 100%
TOTAL $25,000,000 100%
<PAGE>
LETTER REGARDING UNAUDITED INTERIM FINANCIAL INFORMATION
To the Board of Directors and Stockholders of
Optical Coating Laboratory, Inc.
Santa Rosa, California
We have made a review, in accordance with standards established
by the American Institute of Certified Public Accountants, of the
unaudited interim financial information of Optical Coating
Laboratory, Inc. and subsidiaries for the periods ended July 31,
1999 and 1998, as indicated in our report dated August 19, 1999;
because we did not perform an audit, we expressed no opinion on
that information.
We are aware that our report referred to above, which is included
in your Quarterly Report on Form 10-Q for the quarter ended July
31, 1999, is incorporated by reference in Registration Statement
No. 33-41050, No. 33-26271, No. 33-12276, No. 33-48808, No. 33-
65132, No. 33-60891, No. 333-13013, No. 333-69159 and No. 333-
86527 on Forms S-8 and Registration Statement No. 33-61177, No.
33-65319 and No. 333-76853 on Form S-3.
We also are aware that the aforementioned report, pursuant to
Rule 436(c) under the Securities act of 1933, is not considered a
part of the Registration Statement prepared or certified by an
accountant or a report prepared or certified by an accountant
within the meaning of Sections 7 and 11 of that Act.
September 14, 1999
<PAGE>
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